Mexico’s Retail Sector in a State Of Flux

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January 2014 witnessed massive changes in Mexico’s retail sector. Retailers like Grupo Comercial Chedraui SAB and Grupo Sanborns SAB retreated as same-store sales across the nation decreased. Chedraui, retreated 1%to 40.42 pesos (approx. US$3) while Carlos Slim’s Sanborns dropped 0.8% to 26.23 pesos (approx. US$2). Stores that had opened up in Mexico and were operational for less than a year also experienced loss as their sales fell 0.4% in December.

One of the main reasons behind the drop of sales and fluctuating retail sector is the higher sales taxes. Part of a major tax reform passed by the Mexican Congress, the new taxes add to the value of things like toys, clothes and electronics, driving their prices up and customers away.

 In fact, many have started crossing the border to the U.S. to purchase from its stores despite having Mexican branches of the likes of Wal-Mart and Office Depot. However, even these are experiencing the same low sales as local stores. Wal-Mart de Mexico alone fell 0.9% in January to 32.32 pesos (US$2.4). Meanwhile, Office Depot sold its 50% share to its Mexican partner Grupo Gigante for 8.78 million pesos (US$690.2 million). Expecting lower sales in the future, Office Depot decided to take up Grupo Gigante on its offer to purchase their share in the Mexican market and utilise those funds in a merger with OfficeMax.

With a number of stores exiting the retail sector and others struggling with losses, numerous cities are feeling the effects of the tax reforms. The most affected to date are those like Ciudad Juárez, which are in the north along the U.S.-Mexico border. With 40% of their residents owning U.S. visas, a considerable percentage of their sales is traveling away. This could mean that their businesses may close and unemployment will prevail.

However, Mexico needs the tax reforms. Chris Wilson from the Woodrow Wilson Center in Washington D.C. said, “Mexico needs to raise revenue so that it has a sustainable source of income for everything that government does.” With the potentially profitable state owned oil producer PEMEX facing corruption and inefficiency, Mexico doesn’t have much tax revenue. Another cause for the lack of tax funds is the larger informal sector that doesn’t pay taxes fully.

Fraud is also affecting the government’s ability to get taxes, especially since the country has two different tax rates.  “Some companies … make it look like they were making purchases in the border region when in reality they were making those purchases in other parts of Mexico,” Wilson said. “By doing that they had to pay less taxes.”

There is a silver lining though. Business Monitor International forecasts that the development of organised retail infrastructure can grow the country’s retail sales. In its latest reports for Q1 2014, it details that factors like more women in the workforce, an increase in formal sector jobs, and rises in wages will boost the retail segment by 17.4% between 2013 and 2017.

Provisions of the new tax reforms will take effect in the beginning of 2014 while those related to maquilas’ imports will begin in 2015.

And yet, Comercial Mexicana reported retail companies interested in buying its operation. It is expected that no big retail in Mexico could pass regulatory clearance. Then, who are these mystery shoppers?  HEB, Cencosud, Falabella and Carrefour are on the press. I wonder if Tesco, Costco, Kroger, Metro AG, Aldi,Target or REWE would have some interest. What do you think?

Topics:  Foreign Investment, Mexico, Retailers

Published In: General Business Updates, International Trade Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Alberto Esenaro, Alberto Esenaro | Attorney Advertising

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