While Mexico is evolving into a promising site for retail expansion by U.S. based firms, the country’s full potential cannot be realized until economic conditions improve and crime is contained.

The dramatic evolution of the retail landscape over the past 20 years has been driven by a number of factors such as education, the shift in the age composition of the population, and the emergence of the middle class. The main catalyst behind the emergence of the Mexican retail landscape has been the significant growth of the middle class, with a substantial demographic shift from a “have and have not” socio-economic composition to a more socially tiered structure. The middle class continues to grow both in numbers and in disposable income due primarily to a stable financial industry that has reintroduced the availability of credit (car loans, Visa/Master Card and now mortgages).

Second, the population base has become better educated and is much younger.   This has created a significant retail paradigm shift from a largely local informal retail industry to one that is formal, and is structured increasingly toward power centers and enclosed shopping centers comprising of large anchor tenants, food courts, cinemas and the standard assortment of adjacent in-line retailers.

Mexico’s young and growing population base is consumption minded.  The population growth is projected to continue to occur until the year 2040 when it is expected to begin to level off at 140 million people.  The majority of this growth over the next 40 years is expected to occur in the middle class.

For years the number of new retail franchises entering Mexico was largely limited to a handful of U.S. based retailers.  Even then, their geographic distribution in Mexico was largely concentrated on Mexico City, Guadalajara and Monterrey. As the country has stabilized economically together with the emergence of a strong middle class, retail chains (particularly U.S. based) have been expanding their store counts into secondary and even tertiary level cities.  The QSR and Casual Dining sectors have taken the lead in expansion of their brands across the country.

The current economic climate has significantly reduced the rate of expansion within and to Mexico, largely due to the poor value of the Peso. However, the country does maintain a stable financial sector and a better, younger educated population base, which will yield the country stronger returns on investment, development and retail expansion as the country rebounds out of the recession.

From a logistical, manufacturing and distribution perspective, Mexico has the infrastructure in place (centrally) to all major and secondary cities for the quick distribution of goods and services.

The free trade zones or maquiladora offer tax incentives for companies to establish presence and manufacture products.  Mexico’s large and growing manufacturing sector, together with established logistic hubs has opened up a gateway of trade with Asia.

To coincide with the most recent downturn in the economy, there has been significant upturn in the drug cartel violence across the country over the past three years.  An issue which was once confined to the border cities, the crime as it relates to the drug cartels has spread across all parts of the country.

To compound the “safety issue“and negative perception/concerns of Mexico, the tourist areas are also being hit hard with violence (killings, assaults) against tourists.  Mexico is the 8th largest tourist destination place in the world and has felt a significant slowdown in the tourism industry due to the current global economic crisis, but perhaps more importantly the escalation in tourist focused violence.

-George Anderson

Based in Toronto, Ontario, George Anderson is Vice President of Market Analytics for NAI Global, and works closely with retailers and financial institutions using geodemographic analyses to identify and evaluate markets for expansion around the globe.