2.2 Mexico environment analysis:
a) Overview:
Mexico's economy is a mixture of state-owned industrial plants (notably oil), private manufacturing and services, and both large-scale and traditional agriculture. In the 1980s Mexico experienced severe economic difficulties: the nation accumulated large external debts as world petroleum prices fell; rapid population growth outstripped the domestic food supply; and inflation, unemployment, and pressures to emigrate became more acute. Growth in national output, however, appears to be recovering, rising from 1.4% in 1988 to 3.9% in 1990. The US is Mexico's major trading partner, accounting for two-thirds of its exports and imports. After petroleum, border assembly plants and tourism are the largest earners of foreign exchange. The government, in consultation with international economic agencies, is implementing programs to stabilize the economy and foster growth. In 1991 the government also plans to begin negotiations with the US and Canada on a free trade agreement.

* GDP: $236 billion, per capita $2,680; real growth rate 3.9% (1990)

* Inflation rate (consumer prices): 30% (1990)

* Unemployment rate: 15-18% (1990 est.)

* Budget: revenues $44.3 billion; expenditures $55.2 billion, including capital expenditures of $7.8 billion (1989)

* Exports: $26.8 billion (f.o.b., 1990); commodities--crude oil, oil products, coffee, shrimp, engines, cotton; partners--US 66%, EC 16%, Japan 11%

* Imports: $29.8 billion (c.i.f., 1990); commodities--grain, metal manufactures, agricultural machinery, electrical equipment; partners--US 62%, EC 18%, Japan 10%

* External debt: $96.0 billion (1990)

* Industrial production: growth rate 5.3% (1989); accounts for 27% of GDP
b) The retail sector:

In the turbulent period since Mexico has liberalized its economy, much research has been done on the changes in the agricultural and industrial sectors of the country. While these sectors have experienced the most dynamic and sometimes devastating transformations, researchers have continuously overlooked the retail sector. This is a pity, because the retail sector in Mexico has a great affect on people’s daily lives. It provides employment, and is a sector that many Mexicans have daily contact with as they buy food, clothing, and other essential goods. To examine the effect of Wal-mart in Mexico it is crucial to first explore the opening of the Mexican economy in respect to the retail food sector. Then it is necessary to discuss the overwhelming success of Wal-mart and the response of Mexican retailers. This leads to an examination of the changes to the economic and cultural landscape that can be expected with the continuing success of Wal-mart de Mexico.

Until the mid 1980s, Mexican supermarkets were comparatively small and funded with domestic Mexican capital. However, when Mexico joined the General Agreement on Tariffs and Trade (GATT) in 1986, international retailers noticed that GATT-inspired revisions of the Mexican commercial code stimulated an increase in imported goods to Mexican retailers’ shelves. In the early 1990s, The North American Free Trade Agreement (NAFTA) surfaced in policy discussions, and international retailers began to vigorously pursue business opportunities in Mexico. It was clear that the Mexican market was going to become more accessible to foreign direct investment, and international retailers wanted to be ready.

The Mexican market was desirable for a number of reasons. First, it was geographically appealing because it was close to the U.S. Secondly, the country offered a large market of 100 million people. Retailers were enthused because even though Mexico contained a lot of poor people, it had a relatively large middle class. Mexico was also ideally suited for supermarkets because it was rapidly becoming urbanized. The urban sector had tripled in three decades, and 74% of the country lived in a city. Not only did the urban areas provide the group of consumers with the greatest purchasing power, but urbanization was also an indicator of future success in the supermarket sector (Hinkelman 1994). Historically, supermarkets have experienced growth as populations become more urban (Chavez 2002).

Another indicator of growth potential was the large informal sector. Many Mexican consumers bought their groceries and miscellaneous goods at street and open air markets, or through door to door sales. Foreign retailers felt poised to compete with this sector. Furthermore, under tight trade policies, Mexican middle class consumers had been starved of the Japanese TV’s, electronics, watches, and other goods that American consumers took for granted. The demand was large, and smuggling had filled the void. One area of Mexico City, Tepito, achieved country-wide fame as a market where consumers could buy goods that were either too expensive or simply unavailable (Oster 1989). Foreign retailers wanted to capitalize on the lifting of trade restrictions to provide Mexicans with aisles of the goods currently sold as contraband.
However, there are still a lot of risks for Wal-mart when entering Mexico market. Some critics scoffed that Wal-Mart was too American a company. While its retailing practices were well suited to America, they would not work in other countries where infrastructure was different, consumer tastes and preferences vary and where established retailers already dominated. These are indeed three major challenges for Wall-Mart at that time. This giant retailer is famous for its efficient distribution system in the US. In contrast, due to the poor infrastructure, crowed roads, and a lack of leverage with local supplier in Mexico, Wal-Mart faced with huge obstacle replicating that system. Consequently, many of goods could not or would not deliver directly to Wal-Mart’s stores or distribution centers, resulted in stocking problems and raised costs and prices, which could limit its ability to gain market share. On the other hand, Mexican has different consumer tastes and preferences. Popular items in US may not sell well in Mexico, such as ice skates, riding lawn mowers, leaf blowers, fishing tackle. In addition local dominated retailer like Groupo Aurrera – the largest retail discount chain and restaurant operator in Mexico, owned by the commercial group Cifra - could create difficulties for Wal-Mart in competing for market share. Resident custom is also a trouble. As mentioned above, most of Mexican buy groceries and miscellaneous goods at street and open air market, or through door or door sales which is a routine habit that is not easily to change.
In summary, Mexico is a potential market for retailer like Wal-Mart. However, the giant has to find a suitable international strategy to overcome challenges and take advantage of great opportunities the market offers.