Processed products outlets in Mexico are dominated by supermarkets with a 42.4% market share and wholesalers & distributors with a 33.5% share. The latter serve among others, small retailers and the hotel, restaurant and institution (HRI) foodservice industry.
Walmart leads the retail sector with close to 2,200 stores, followed by Soriana with 885 and Comercial Mexicana with 200. They dominate the market basically through price competitiveness.
There are about ten regional supermarket chains in Mexico including Casa Ley, S-mart and Mz; it is a relatively small number compared to the U.S. where there are almost 300. The regional chains compete with fresh and natural products, premium brands and regional goods.
Price clubs such as Sam’s and Costco carry a good variety of imported processed food products and compete with price but sell relatively larger lots.
In the convenience store category, Oxxo of Femsa (The second largest Coca-Cola bottler in the world) leads with 11,000 establishments and a niche market share of 77%.
If you notice a quasi-monopolistic pattern in this description you are right. And the same goes for the supply side of processed food.
Indeed, the consolidation of the supply and distribution links of the processed food value chain is a phenomenon that is slowly but surely squeezing mid and small size operators at the retail end as we as at the processing side.
This development will ultimately affect the consumers in price and quality.
Mexico needs to diversify the processed food value chain. One initiative would be the formation of “Purchasing cooperatives” or “Co-ops”, as they exist in the U.S. They act as marketing and production catalyzers for the small and mid-size producers and retailers, by providing negotiating power as a group with larger volumes while helping spread costs and risks of the transactions.
Marketing cooperatives are found in every region of the United States and handle most types of farm products. The importance of these cooperatives to particular commodity sectors varies. Cooperatives account for 86% of total farm value of all milk marketed in the United States; 40% of the grains and oilseeds; and 20% of the farm value of all fruits and vegetables.
There are also Co-ops for retailers that provide purchasing leverage for the smaller operators and also serve important functions such as quality assurance and certification of produce and food products.
Another tool to strengthen the small and medium producers and retailers is to ease import requirements which currently have absurd red-tape constraints. Please see the related article on this subject in this issue.
Agile imports would provide an element of competition and price checking against dominant producers and retailers to level the field for small and mid-size operators, ultimately benefiting the consumers.
The frozen enchilada
In Mexico, unlike the auto, electronics and aerospace industries which are largely export oriented, the processed food industry is focused on the domestic market.
Nevertheless, and although exports accounted for less than 6% of the total processed food output, it is by no means a negligible amount.
As shown in Exhibit #7, in 2014 Mexico exported US$8.26 billion of processed foods, of which almost 70% was shipped to the U.S. making Mexico the second largest supplier of processed food to its northern neighbor; and from whom, Mexico got the most part of its US$10.1 billion imports.
Mexico’s main exports include cane sugar, baked goods, chocolate and confectionary.
Although imports have been on the rise in the last few years, there are important barriers to entry Mexico’s processed food market for foreign made goods. For example, domestic processors are often more aware of evolving market trends and are quicker to adjust to demand. Mexicans are also very brand loyal to domestic producers, making it difficult for new comers to gain market share.
And even if U.S. food products are regarded as high-quality, Mexicans tend to base their purchase decisions on quantity more than quality.
And moreover, as of late, the strengthening of the dollar versus the peso has significantly discouraged imports, which will drop at least 10% in 2015 from 2014.
But going south to north is a completely different story. Mexico has a great opportunity to significantly increase exports to the U.S. as not only the exchange rate is extremely favorable but the Mexican ancestry population north of the border is 34 million strong and has reached almost 11% of the total in the U.S.
And if you add another 20 million Hispanics in the U.S. from other Latin countries with similar taste preferences as Mexicans, and a few million Americans who like Mexican food then you are talking about a huge market, close to 100 million individuals. If this seems like an exaggeration, go ask Chipotle and Taco Bell.
There is a HUGE, IMMENSE market potential for Mexican made processed foods in the U.S.
And of course, we have the usual trading ingredients in Mexico’s exports competitive recipe such as low-cost manufacturing, free trade agreements, logistics and many other spicy etcetera’s for a fantastic successful dish.
Yes, Mexico has made a great job in attracting FDI to supply the domestic market, but it has not made a good job in developing a much stronger processed food exporting base.
It could be a powerhouse that would easily triple processed food exports in less than a decade. Let’s fill in the U.S. supermarkets’ frozen food sections with enchiladas!
By Sergio L. Ornelas, Editor MEXICONOW