Mexico: Competition for e-commerce space grows
January 11, 2018
This year will see further expansion of e-commerce in Mexico, with US based giant Amazon stepping up its presence in a fight for market share with competitors including Mercado Libre and Walmart de México. How online sales are regulated is also becoming a potentially major issue in Mexico’s ongoing renegotiation of the North American Free Trade Agreement (Nafta), its free trade agreement with the US and Canada.
The evidence points to continuing strong growth for e-commerce in Mexico. According to data from various sources compiled by Mexico’s national statistics institute (Inegi), the total value of e-commerce in the country in 2015 was M$257bn (US$14.96bn), up by 59% on the preceding year. This overall figure included both business-to-consumer (B2C) and business-to-business (B2B) transactions. This meant Mexico had a 14.3% share of all e-commerce in Latin America, making it the second-largest market after Brazil. A separate Inegi survey showed just over a quarter of total wholesale trade and just over 6% of total retail trade is now conducted online. Seven out of ten internet users had made a digital purchase in the preceding quarter. For those online, device penetration was high, with almost half of internet users owning three different types of devices (smartphone, tablet, and computer). Significantly, three out of five Mexican internet shoppers said they had purchased goods from overseas in the preceding year, mostly from the US.
According to consultancy AT Kearney, “A boom in e-commerce is coming to Mexico.” The consultancy argues that the growth potential for e-commerce in the country is greater than in Spain, Chile, and even Brazil. Growth is being driven by three factors: growing internet usage, supportive regulatory reforms, and the falling cost of smartphones. Over half of Mexico’s population of just under 130m is now online. Expanding at a rate of 6.7% per annum, this community of internet users should total 84.9m or 67.4% of the population by 2019. AT Kearney predicts the value of B2C online sales will achieve a compound annual growth rate (CAGR) of 26% and to expand to more than US$40bn by 2019. Within that total, retail will account for US$14.5bn; but there will also be significant value in service sectors such as banking, insurance, and travel.
Regulatory changes have played a significant part in boosting e-ecommerce. Looking back, it is now clear that the current government’s telecommunications and broadcasting reforms, introduced in June 2013, have boosted the emerging industry. A 2012 report from the Organisation for Economic Co-operation and Development (OECD) had argued that Mexico’s telecoms sector was an oligopoly, charging excessively high prices and therefore reducing the country’s competitiveness. The reforms introduced a much more powerful regulator – the Instituto Federal de Telecomunicaciones (IFT) – and forced the dominant telecoms firm, locally-owned América Móvil (controlled by Mexican entrepreneur Carlos Slim, one of the world’s ten richest individuals), to allow network access to some of its competitors at regulated rates. They also played a part in attracting market entry by new deep-pocketed players, such as US-based AT&T, which arrived in Mexico in 2014. As a result, there has been significant reduction in broadband and mobile internet tariff rates, with falls of over 25% in many cases. Lower tariffs have not so far been an impediment to significant new investment in the country’s telecoms and broadband infrastructure. All this encourages more people to spend more time online, and to dedicate an important proportion of that time to shopping.
Worldpay, a global payments company, argues that Mexico will experience “an e-commerce revolution”: over the next five years with online retail sales set to double in value while ‘m-commerce’ (sales via smartphones) is set to quadruple over the same period. It predicts an overall CAGR of 17%, taking total e-commerce sales to just under US$40bn by 2021 (this is more conservative than the AT Kearney projections). Worldpay also predicts there will be a large shift in payment methods, with credit cards giving way to online bank transfers. Juan D’Antiochia, Worldpay general manager for Latin America, says online sales in Mexico currently represent less than 10% of all retail sales, meaning that there is very significant scope for growth.
According to a survey by the Asociación Mexicana de Internet (Amipci), a local internet sector lobby, Mexican online shoppers principally use the internet to purchase apparel and accessories (42% of respondents); sports and wellness products (28%); computers (24%); digital downloads (22%); electronics (20%); furniture (20%); jewellery and accessories (18%); and video games (16%). The survey did not cover travel-related purchases (such as airfares or package holidays). Other research shows that purchases vary by device. Most bank transactions are conducted on desktop computers, as are airplane ticket purchases and hotel reservations. E-magazines and videos are mostly purchased on tablets. Smartphone users use their devices mainly for taxis or ride-sharing services, to download music, and to order food. The profile of internet shoppers is that they are young (seven out of ten are aged 22 to 44) and urban (almost nine out of ten live in cities). Just over half (54%) are male.
Although the outlook is encouraging for online retailers, Mexico also has some obstacles that are holding back growth in e-commerce. One of the major issues is the lack of logistics infrastructure in many parts of the country, limiting the ability of online retailers to deliver to the consumer’s home address. Outside the main cities retailers must pay high freight insurance premiums. As a consequence many retailers offer in-store pickup or delivery to FedEx pick-up points. Fear of online fraud and mistrust of online payments systems is another important factor, coupled with a cultural preference for cash payments. In some cases there is also a lack of clear cost advantages in online shopping. This may explain why the Amipci survey suggested that only 32% of Mexicans who are connected to the internet are currently using it for shopping, a lower ratio than Brazil (40%) or the US (76%). There is also evidence of a strong ‘Ropo effect’ in the country: the acronym stands for ‘research online, purchase offline’. Mexicans appear to do this particularly for clothing and grocery purchases, less so for less customised products such as TV sets or mobile phones.
Various e-commerce analysts say that Mexican retailers need to do a lot more to encourage growth in online transactions. Many websites still fall short, lacking full product descriptions, photographs of products from various different angles, or adequate consumer feedback and online chat options. Despite a patchy field, there are a number of examples of good practice in particular areas. Locally based online retailer Linio stands out for providing detailed and clear product information. Sanborns, the restaurant, pharmacy, and department store retail chain, has a strong online offer and is particularly good at cross-selling its different products. On the other hand, Mexican retailers do offer more payment options, perhaps of necessity because of the difficulties posed by low customer trust, worries over fraud, and the fact that many informally employed Mexicans do not have bank accounts. Customers of Oxxo convenience stores can pay cash to complete previously lodged Mercado Libre orders, while Amazon.com.mx allows the use of pre-loaded cash accounts. PayPal is one of the most popular payment systems in use.
Growing international interest in the country’s e-commerce sector is already shaking up the industry. One of the pioneers, department store El Puerto de Liverpool (Liverpool), Mexico’s largest department store chain, which carried out the first e-commerce transaction in Mexico in 1997, is now struggling to keep up with bigger players such as Mercado Libre (the Latin American online marketplace platform originally launched in Argentina), Amazon, and Walmart (both US-based global e-commerce giants). Amazon arrived in Mexico in 2015; in 2017 it stepped up the pressure by launching its ‘Prime’ membership offer (where members pay an annual fee to qualify for zero-transport cost deliveries and premium products). Liverpool does not accept cash payments (a big disadvantage in a country where more than half the population still does not have a bank account). It offers free shipping, but deliveries can take over five days (compared with one day for Amazon). Its marketing spend is being dwarfed by that of its rivals. Its share price has been on a downward trend. According to Credit Suisse analyst Antonio González, “El Puerto de Liverpool’s business model is largely threatened. Investors should no longer think about e-commerce in Mexico as a phenomenon that will affect share prices in the distant future. The future for e-commerce is now.” A related issue for the industry as a whole is how combined bricks and mortar plus online retailers (such as Liverpool and Walmart) can compete against the lower costs of their online-only rivals (such as Mercado Libre and Amazon).
As competition for the Mexican e-commerce market heats up, regulation within Nafta is becoming a hot topic. In the context of the ongoing Nafta renegotiations, the US government has taken a decidedly protectionist line in industries where Mexico may have a competitive advantage (such as automobile assembly). In contrast, however, it favours much freer trade in e-commerce, where US companies may hold the upper hand. The key issue concerns the amount of tax-free international online shopping that is allowed by national legislation. The value point at which imports are tax-free is known as the ‘de minimis threshold’ (DMT).
At present, US online consumers can buy up to US$800 worth of tax-free foreign products per annum; in Mexico the DMT is US$50, and in Canada it is even lower at only US$16. US negotiators are lobbying for Canada and Mexico to allow higher online tax-free purchases; it is likely that this would benefit US companies. There are already plans by US investors to build a Mexico-focused e-commerce distribution centre at the Phoenix-Mesa Gateway Airport in the border state of Arizona in the US. Of the top ten global e-commerce companies in 2016, five were based in the US (Amazon, Apple, Walmart, Liberty Interactive and Macy’s). Three were from China. None were from either Canada or Mexico. But arguments for and against raising the DMT are complex. A study by Canadian think-tank, CD Howe Institute, suggests that even if US companies might benefit disproportionately, a higher DMT reduces customs costs and improves the efficiency of small and medium sized-enterprises (SMEs). The study suggests that if both Canada and Mexico were to raise their DMT to US$200, this would generate extra revenues of US$508m for Canada and US$86m for Mexico.
Perhaps wary of excessive dominance of the local market by US e-commerce giants, this year the Mexican government signed an agreement with Alibaba, the China-based online retailer. Under its terms the Chinese company will promote its e-commerce, digital payments and logistics expertise to Mexican SMEs, and encourage them to develop their sales to China. The battle for e-commerce market share in Mexico may just be beginning.
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