Investing in Mexico in the retail sector has its perils and success is not for everybody.
The retailer of electronic products Best Buy announced on Tuesday, November 24, that it would leave the Mexican market. In a statement, the company announced that its branches will stop providing service from December 31. Its online store will continue to operate until its inventory is exhausted.
In 2020, eight Best Buy locations have already had to close. The decision capitulates 13 years of activities in the country and leaves several questions:
Is Mexico a bad country to invest in? Or is Best Buy another victim of the economic contraction caused by the COVID-19 pandemic? Or were errors in previous years the cause of this closure?
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Best Buy disappointed the expectations of many
On Reddit Mexico, hundreds of users commented on how the brand was far from being what it represented in the United States.
For some users, the store prices were far from the cheapest on the market. Others pointed out that, unlike the United States, where Best Buy targeted the working class, the company in Mexico primarily targeted the middle-class market, without an offering that would differentiate itself from the many department stores that already exist in the country.
El Buen Fin 2020 (the Mexican equivalent of Black Friday) failed to make up for a year that ended up giving this retailer the coup de grace, which has more than a thousand branches in the United States.
Is Amazon the smoking gun?
As is customary among retail analysts around the world, many journalists in Mexico point to Amazon as the smoking gun. This North American retailer was unable to resist the onslaught of its rival company in the country.
Pointing out Amazon as the main culprit is a simplistic explanation. The e-commerce giant is only five years old in a country that is far from fully digitized.
Investing in Mexico requires a the right approach
The failure of Best Buy in Mexico is a story more similar to the failure of Taco Bell than the bankruptcy of Border Books, the bookstore that had to close due to the boom in the United States in the sale of online and electronic books from Amazon.
In Mexico, e-commerce is on the rise and has been underpinned by COVID-19, but it is far from representing a significant proportion of sales. Mexicans do not have blind loyalty to Amazon, which competes with other international and local retailers, such as Liverpool, Coppel, Mercado Libre, and Walmart.
It is true that with only five years of operations in Mexico, Amazon Mexico has already surpassed other companies that were pioneers of e-commerce in the country, but the secret of its success has been the company’s ability to adapt to the Mexican market. And that is why many local companies have managed to survive the presence of the e-commerce giant in this pandemic, such as Coppel or Elektra, while Best Buy must pack their bags in a decision that will cost the company 111 million dollars, more than $ 36 million in inventory carryover, according to reports from the company’s chief financial officer Matt Bilunas.
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First mistake: market segmentation
In Mexico, Best Buy bet on the Mexican middle class who shop at malls. This led it to compete with department stores with a similar offer and price, which also offer other types of products. Geek users who are early adopters of online shopping did not find anything interesting in this specialized electronics store and were disappointed by the online shopping experience and prices.
Instead, Amazon Mexico has preferred to expand its market segment with a marketing strategy that highlights how inexpensive it is to buy online.
In online sales, Coppel follows Amazon. This Mexican retailer also focuses on the popular classes and stands out for its payment facilities.
Coppel’s competitor Elektra has also entered online sales, showing good results despite its reputation for granting usurious credits.
In summary: although the middle class in Mexico is the one with the greatest purchasing power, the purchasing power of the popular sectors in the country should not be underestimated. The most successful companies in Mexico have been able to attract this segment.
Second mistake: variety
When it began operations in 2015, Amazon highlighted the variety of its stock. This variety was also adapted to the Mexican market, which was emphasized when he presumed that his store even sold an avocado holder.
Mexicans also find a greater variety of products in marketplaces such as Mercado Libre, as well as in places specialized in technology where small businesses try to compete with a unique offer.
Third mistake: no payment facilities
Another point in common that the main companies in Mexico share are payment facilities. This characteristic is part of the success of retailers such as Liverpool, Elektra, Sanborns, Coppel, regardless of the segment to which they sell.
At Best Buy, Mexicans did not find any interesting payment facility, except for Banamex cardholders.
Investing in Mexico: Is it really easy?
Investors often say that investing in Mexico is easy due to everything successful in the United States twenty years ago will be successful in the country.
This is partially true since foreign companies need to understand the Mexican market well to succeed, as Walmart did in the beginning and as Amazon does now.
The departure of Best Buy from the country will leave lessons for retailers who desire to invest in Mexico in the retail sector.