Mexico’s E-commerce Business

Unique conditions set up double digit growth

By Sergio L. Ornelas, Editor MEXICONOW

E-commerce is quickly becoming the new standard in the way people purchase goods. This is a trend that nobody in business of any type, anywhere, can afford to ignore.

Global merchandise E-commerce will handily surpass US$1 Trillion in 2016, growing at a sustained 15% or more per year. Many analysts say E-commerce will account for 30% of all retail sales in the U.S. by 2030.

Amazon, the largest player in the E-commerce industry that recently opened operations in Mexico, saw its stock price increase from about US$285 in early 2015 to US$685 in mid-December (AMZN: NASDAQ). Amazon’s market capitalization is valued at over US$300 billion, which is higher than GM’s, Ford’s, Honda’s and Daimler’s…combined!

Amazon’s Asian counterpart, China’s Alibaba Group became the largest initial public offering (IPO) ever, shattering all records at US$25 billion (BABA: NYSE) in late 2014. It is currently valued at about US$213 billion.

And there are also “smaller” competitors in the E-commerce industry such as eBay (U.S.), JD (China), Otto (Germany), Cnova (France), Tesco (UK), Zalora (Singapore) and Rakuten (Japan). Large traditional retailers such as Wal-Mart, Best Buy and Costco are inching their way into the E-commerce wave as well.

Indeed, shopping behavior is in a like lightning evolution mode as we have come a long way since the Sears’ catalogue.

By now, most consumers with a credit card or checking account have purchased something online, yet most people don’t give it a second thought to what happens after they click the cart “buy” button of their computer, tablet or smartphone.

The E-commerce trend affects all aspects of the supply chain of retail and logistics operations including the size and location of stores and distribution centers.

Please note that our discussion in this piece is about E-commerce of physical goods, not about the overall E-commerce marketplace, which includes services, traveling, media, search engines, and social networking among other web modalities.

In this article we will review the current state and potential of merchandise E-commerce in Mexico and its impact on the value chain and logistics real estate space.

We will also briefly discuss some interesting facts of the global E-commerce business, including the dark side of Amazon.

From tortoise to hare?

Exhibit #1 sourced from Euromonitor shows the forecast for global E-commerce retail sales, which are predicted to go from about US$1 trillion in 2015 to US$1.5 trillion in 2018.

On-line retailers continue to expand geographically and physical retailers are entering the virtual channels resulting in double-digit growth in global sales, although, it is a slightly declining growth rate as shown in the graph.

Mexico had a slow start embracing E-commerce and in spite of many obstacles, its future of online purchasing experience is bright.

To put things in an unfair perspective, recognizing the enormity of the economic difference between the U.S. and Mexico, let’s compare retail E-commerce in these two markets.

The current annual sales value of E-commerce retailers in the U.S. is about US$294 billion with approximately 200 million users and an average annual per capita purchase of US$1,700.

In Mexico, annual merchandise retail sales reached approximately US$5.5 billion from about 15 million buyers for an average annual purchase of US$487.

During the 2015 “Black Friday” day alone, US buyers purchased goods online worth over US$1.6 billion.

Almost 30% of all Americans made an online purchase of goods while in Mexico only 12% of the total population did.

Mexico currently has the lowest percentage of digital buyers among major Latin American countries, with only 22% of 68 million Internet users buying online.

From a digital retail perspective, Mexico is certainly a unique case. From a slow and late start in E-commerce Mexico is at the threshold of strong and sustained growth. Analysts predict that by 2019 online buyers will reach 24 million and that total E-commerce retail sales will more than double from current levels.

It is certainly not a coincidence that Amazon just landed in Mexico opening a 650,000 square feet fulfillment center, as Amazon calls its distribution centers, 30 minutes north of Mexico City.

Juan Carlos Garcia, Amazon Mexico General Director said: “This is the most ambitious and important international launching for Amazon in the last 20 years. We are coming in with a big-bang, we did not want to just test the waters with a few product categories or gradually reach the Mexican market.”

Please see Exhibit #2 with the recent past and projection through 2019 for E-commerce goods retail sales in Mexico. It is expected that there will be an average annual sustained growth of 25% for the next four years to break the US$10 billion mark in 2018 and reach over US$12 billion by 2019 (Figures are constant 2014 US$ for inflation and rate of exchange).

ATKearney’s 2015 Global Retail E-commerce index ranks countries according to their market size and growth potential.

The consulting firm indicated: “Unranked in 2013, Mexico took 17th place in 2015 as the country’s e-commerce market grows rapidly thanks to a young, connected population that is increasingly willing to shop online.”

“Research has shown that Mexican online shoppers today are looking primarily for bargains or doing information gathering. Services such as travel make up a large portion of online sales in Mexico, a sign of a market early in its development, as consumers appear more comfortable spending money online for intangible items rather than physical goods. Online shoppers are still wary of delivery in Mexico”, the ATKearney report said.

Indeed, according to Mexico’s Internet Association (AMIPCI), of the total amount spent in Q1-2015 by Mexicans online, 61% were travel related purchases.

Event tickets represented 8% of the non-travel purchases. The leading goods bought online were consumer electronics, PC’s and PDA’s accounting for 40% of the goods retail sales. Please seeExhibit #3.

Brick & Mortar vs. The Cloud

According to a projection by Goldman Sachs, global overall retail sales will reach US$15 trillion in 2016 and about 7% of that amount will correspond to online sales. These figures are up from 2007 when they were posted at US$10 trillion and 5% respectively.

For 2018, this forecast indicates that online sales will be at 8.3% and in-store sales will have a 91.7% share of global retail.

So the trend is clear, virtual sales are gaining ground growing at a double digit pace versus sales of physical locations’ growth of about 3% to 4%.

What is the impact of this trend in the real estate footprint of retailers?

Evidently, in the future, the ratio between retail space for in-store sales, and logistics space for online sales will continue to shift in favor of the latter.

Let’s rely on a study by Prologis Research to see how and why this plays out, we quote: “Retailers generate an average of US$400 – 450 of annual sales per square foot of retail. Using this assumption, a retailer with US$1 billion of sales would need approximately 2.5 million square feet of retail space. Our research indicate that distribution centers for brick & mortar retailers each support about US$2,500 – 3,500 of annual sales per square foot on average. This means that a US$1 billion retailer requires approximately 300,000 – 350,000 square feet of logistics space.”

“By comparison, our research finds that logistics facilities used by E-commerce retailers each support about US$1,000 of annual sales per square foot on average. Hence, a US$1 billion E-commerce retailer would need approximately one million square feet of logistics space.”

Please see Exhibit #4 illustrating this case where E-commerce operators need three times more logistics space than in-store retailers, but they enjoy the luxury of having zero store space costs.

The Prologis study explains: “A retailer’s decision to shift from in-store to online is driven by a customer service perspective, but significant real estate cost savings can be an incidental benefit.”

That is right, in Mexico for example, logistics rents range between US$3 – 5 per square foot per year compared to about US$15 – 30 for retail.

E-commerce will certainly boost the demand for space in Mexico. In developed markets E-commerce accounts for approximately 10% of the total new logistics space developed.

But nothing is linear any more…consider for example that both brick-and-mortar leaders and pure-play online behemoths are learning that the future of the industry is not merely online, but rather in creative omnichannel offerings that link online and physical shopping.

Meaning, ideally, that: it’s a best practice to combine and give continuity to their supply chain with features such as true product representation in websites, same pricing across the full E-commerce platform and physical stores, same warranty and return conditions among other omni-offers across marketing channels.

Like a famous wall in Eastern Europe, the barriers between Brick&mortar and E-commerce are already coming down. Brick&mortar stalwarts such as Wal-Mart and Home Depot continue to expand their online offerings, while online leaders like Amazon are stepping into physical markets.

Expect those retailers that can manage to merge online and offline setups most seamlessly could prove to be the big winners.

Omnichannelism thrives.

For the consumer, being omniscient is perceiving and understanding all product options through his or her electronic devise, and deciding what brand to purchase and how and where: at the physical store or at the store’s website or at a multi product distributor’s website.

The omnichannel concepts are not exclusively for retailers, they certainly apply to most businesses such as service professionals and even public institutions; anybody that has a customer, user, any type of counterpart, should become omniscient to succeed in the digital age.

Amazon’s dark side

Argentina’s “MercadoLibre” is the oldest and largest E-commerce merchant in Mexico and in Latin America. Ignacio Caride, the General Director in Mexico for the firm, said that MercadoLibre was able to adapt its business model to survive in Mexico’s toddler E-commerce market, and that they are now ready to compete with the likes of Amazon and Wal-Mart.

But Amazon is not the traditional competitor that you may expect.

Before we get rude with Amazon let’s praise its business model.

The firm started 20 years ago with the objective of being the largest bookstore on Earth, but soon expanded its product offering to an assortment that practically fulfills any and all consumers’ needs.

Amazon has the largest product lines of all categories, available at a simple click of the cart button in a no-nonsense and agile shopping experience, with speedy delivery and best of all, at really low competitive prices.

Amazon learned well some key merchandising solutions from Wal-Mart. Besides offering low prices the firm invests a big portion of its profits improving its own operations. It developed for example new E-commerce technologies that allow the consumer to pay purchases with credit card reward points, or suggest your next purchase according to your consumer profile.

Amazon also invests heavily in its fulfillment centers to improve customer service and speed of deliveries. In many cities in the U.S. for example, Amazon delivers the same day the online order is placed.

In the U.S. and other parts of the world, Amazon is the standard for E-commerce buyers; it is well embedded in consumers as a habit, similar to Google.

Amazon is so dominant in E-commerce that it is darn close to meriting the tag of “Monopoly”.

But it is a different type of monopoly than AT&T and IBM were, or Telmex and Pemex still are. Unlike the old monopolies that seek to exploit the customers, Amazon is a monopoly of the digital era that is in complicity with the consumer to perpetuate low prices in return for their preference. But as the company gets larger and larger, it gets more power to possibly control consumer behavior.

And in so doing, it crushes the competition to become dominant in many fields. For instance, Amazon has a quasi-monopoly of the book market in the U.S. and utilizes bullying and price wars to get rid of competitors.

The firm has a history of price undercutting competitors to either eliminate them or buying them cheap after a squeeze, such as was the case of E-commerce firms Zappos (shoes) and Diapers (baby products).

Amazon’s threat as a power monopoly is not about prices to the consumer, its threat is in the consumer behavior field, where possibly a single player may dictate to the market what products to purchase, potentially inhibiting the benefits of healthy competition that promotes product innovation and diversification, stronger supply chains, job opportunities and expansion of the marketplace among many other benefits of markets immersed in competition.

On the other hand, some think it might be absurd to consider that Amazon may reach extreme market control in the infinitely ample world of virtual business, and with such strong competitors both on land as in the cloud.

Mexico will be a good laboratory to see how the entry of Amazon shakes or reinforces the market.

In principle, Amazon should give an important boost to the confidence of Mexicans to purchase physical products; but will the current E-commerce leader in Mexico and others be an easy prey for the giant?

Exhibit #5 shows the leading E-commerce sites by visitors in Mexico before Amazon set foot on Mexican soil. It will be very interesting to see how this piece looks a year from now.

The bumps on the road

The main obstacle to E-commerce in Mexico is evidently the informal economy and the low degree of bank penetration and financial instruments of the population.

Almost 30% of Mexico’s economically active population does not pay taxes and has little or zero access to bank services.

There are only 21 credit cards per 100 inhabitants in Mexico compared to 93 per 100 in Brazil, and over 500 per 100 in the U.S.


According to AMIPCI, 78% of online transactions are paid electronically with credit / debit cards, PayPal, bank transfer and other types of instruments accepted through the Internet; but 22% still rely on offline payments such as cash on delivery or prepayments made at convenience stores such as 7-Eleven and Oxxo.

And many of the few with credit / debit cards are hesitant to store their information with online merchants because of security concerns. In a survey by AMIPCI, 77% of respondents gave security as the main reason for not storing their information online.

Deliveries used to be a large concern among Mexican online shoppers as most online retailers used independent contractors for deliveries and product return and refund policies were limited.

But Mexico has made important gains in terms of logistics, there are many global operators including DHL, Fedex, UPS, Estafeta and other independents.

Amazon made an alliance with DHL so customers can pick up their goods at one of DHL’s 360 stores in Mexico. DHL indicated that only 10% of their home deliveries are from online purchases, but they expect this to double by the end of 2017.

Delivering in the middle and upper class neighborhoods and business areas of the major cities in Mexico is not hard. But smaller cities and many areas are tough to reach.

In a nutshell, in Mexico, the delivery person cannot just place the package outside the door and leave as they do in the U.S.

And yes, drone deliveries are out of the question in Mexico.

Conclusion

In E-commerce, since customers have to take a leap of faith in your product, prices must be lower, but it is here precisely where omnichannel concepts are of great help.

It is in the subject of trust that E-commerce merchants in Mexico need to work on for E-commerce to become a truly big industry. Trust and faith not only in the product, but also on the payment which should be secured, and later on the delivery, and if needed on reverse logistics of a return, looking for repair, replacement or refund.

There is undoubtedly a huge potential for E-commerce in Mexico to the benefit of consumers, distribution buildings real estate developers and logistics operators among others.

In-store shopping commits the buyer to finalize the purchase on site, while online purchases are oftentimes exercises of unfulfilled experiences and intents.

Anything can spook an online sale and make the prospect abandon his or her virtual shopping cart, some abandonment reasons include: the merchant’s requirement to open a permanent account, unexpected high shipping costs and problems with the payment process are among the most common casualties.

Global abandonment of shopping carts is about 50% of all intended transactions. About US$4 trillion worth of potential purchases are “abandoned” in online shopping carts every year.

But when was the last time you abandoned you cart full of merchandise at a Wall-Mart store before going through the register? Most likely, hardly ever.

So who is more committed in a ham and eggs breakfast…the pig or the chicken?

Driving and shopping for in-store items requires quite some time, driving risk and fuel costs, among others; while online shopping is traffic-free, convenient and less costly all-around.

In a metaphor, before checking out, the in-store purchase is the swine and the online deal is the poultry.

But it sure seems that after checkout and once the payment is made, and if the case is that a defect appears in your ordered item, it is the other way around!

Try returning a camera at a mall store in comparison to a return through an E-commerce website, where packaging, filling of forms, telephone calls, shipping costs forth and back and uncertainty loom. Reverse logistics are a lot more benign at physical stores than online.

We need to reduce the bumps and make E-commerce stronger and more trustful in Mexico. Alas, this is one of those things that you can’t order at Amazon and get delivery overnight.