How the food and beverage retail sector is structured in Mexico
The food and beverage retail trade is made up of economic agents dedicated, totally or partially, to the sale without transformation of food and beverages to final consumers. It does not include restaurants, inns, lunch shops, and other establishments that prepare food and beverage products in Mexico.
According to the technology used, the economic agents are classified in three distribution channels: modern, electronic and traditional. The services provided in the different channels are not considered substitutes for each other.
The modern channel is made up of chains of self-service stores that intensively use technology to manage inventory and record sales and payments, in addition to having professional management, a wide variety of products, and high sales volumes; their service hours are extensive, since they hire employees to cover different shifts.
The modern channel chains provide consumers with consistency, quality, and diversity in their products, so they impose higher standards on their suppliers than those usually found in the traditional channel. In addition, hygiene and safety regulations -such as Mexican Official Standards (NOM), NMX standards, and TIF certification- are more specific in this channel than in the traditional one. This implies that producers who wish to market their products in this channel incur additional costs to the traditional channel to ensure product homogeneity, crop coordination, classification, packaging, and centralized product dispatch.
Most retail chains have developed logistical distribution processes to increase their productivity, which are more complex as the scale of operation of the chain grows.
The chains organize their stores in formats according to the socioeconomic segment of the customers they are targeting, variety of products, additional services they want to offer in the store (for example, parking, fast food or ATMs), sales area, number of employees, among other factors. The formats do not have a precise delimitation.
The store, supermarket, hypermarket, and megamarket formats all have common characteristics that attract middle- and high-income customers, so when they are close enough, they exert some competitive pressure on each other. In contrast, discount stores and express warehouses are more austere, smaller-area establishments that offer a smaller variety of products, focusing on lower-income customers, so they do not compete directly - they do not exert strong competitive pressure with the store, supermarket, hypermarket, and megamarket.
There are 79 retail chains operating in the country, each with 20 stores or more, covering 119 store brands. Only three large chains operate nationally: Walmart, Soriana, and Chedraui, although the latter has no presence in some states, mainly in the north. The remaining 76 chains have a regional presence.
Walmart is the chain with the largest presence, with more stores, supermarkets, hypermarkets, and megamarkets than Soriana, which is the second chain with more stores of these formats. Walmart is also the chain with the most discount stores and express stores, slightly ahead of Tiendas 3B, which is the second chain with the most establishments of this type.
The chains generally concentrate their operations on specific formats; however, Walmart, Casa Ley, and, to a lesser extent, Soriana and La Comer are the main chains that have entered into both the store, supermarket, hypermarket, and megamarket operations and the discount store and express store operations.
The modern channel expanded rapidly after Mexico's entry into the General Agreement on Tariffs and Trade in 1986; the enactment of the new Foreign Investment Law in 1993; and the entry into force of the North American Free Trade Agreement in 1994. Schwentesius and Gómez (2006) point out that the number of large retail establishments -supermarkets, hypermarkets and megamarkets- more than doubled between 1993 and 2001.
Between 2009 and April 2019, the opening of discount stores and express stores quadrupled, surpassing the bodega, supermarket, hypermarket and megamarket formats. The growth of discount stores and express stores began in 2006 when Walmart began operating this format.
The convenience stores are smaller than the previous formats and have less variety of products. Generally, this format satisfies impulse purchases, although an important source of income for this type of business is the provision of services such as telephone top-ups and service charges. The only chain of convenience stores present in all the states is FEMSA with the Oxxo brand and it is the one with the most establishments.
Convenience stores have also grown rapidly in recent years. Among the most important chains, Oxxo is the one with the greatest dynamism.
In the last years, the remarkable dynamism of the modern channel has happened simultaneously to the irruption of the electronic channel, in which some of the economic agents of the modern channel participate through the online sale of their products, but also other new players.
The modern and electronic channels have differences related to the technologies to display, order, and deliver the products to the consumers; however, the electronic channel is affecting the operation of the retail sector, including the physical stores, as well as the modification of the consumers' habits.
In Mexico and the world, the growth of the electronic channel is possibly accelerating as a result of health policies of confinement derived from the Covid-19 pandemic. There is evidence that confinement has induced the adoption of online shopping habits by people who previously did not.
The electronic channel is made up of companies that design and manage business models that use the Internet so that their customers order products, even though payment is not necessarily online. The type of purchase is defined by the medium through which the order is placed, so orders by phone, fax or hand-operated e-mail are not part of e-commerce.
E-commerce is transforming retail trade, including food and beverage marketing, as well as consumer habits. Consumers are increasingly buying in the e-channel: in 2018, retail sales in this channel grew by 35%, higher than those observed in China and Canada (27% and 21%, respectively). However, this does not imply that this channel is a substitute for physical stores in terms of competition analysis.
For example, consumers who go to stores are willing to travel a certain distance to buy, while in e-commerce part of the value proposition of the service consists of moving the products to where the consumer is. In terms of infrastructure, the business model of modern channel stores involves having shelves to display merchandise, while in online stores products are displayed on Internet pages or applications.
In Mexico, the electronic commerce of food and beverages is growing rapidly, since it increased 44% between 2017 and 2018. However, it was still incipient at least before the onset of the Covid-19 pandemic: food and beverages account for only 5% of e-commerce, and 0.01% of total food and beverage sales. The latter proportion is lower than that seen in other countries: in the United Kingdom, online food and beverage sales accounted for 10-15% of all food and beverage sales in 2014, while in the United States of America (USA) in 2018 and China in 2016, they accounted for about 3%.
Some chains in the modern channel have made incursions into e-commerce, taking advantage of their infrastructure, and incorporating innovations. Walmart's extensive network of stores probably made it the first chain to enter the electronic channel, remaining in July 2019 as the retail chain that most sells food and beverages through this channel.
The economic agents that participate in the electronic channel do so through different business models, which are differentiated by their degree of vertical integration. Within the wide range of existing business models, the following stand out:
Vertically integrated companies. They buy from producers and manufacturers, to sell online the products to the final consumer. Home delivery can be with their own employees or through third parties. Large retail chains participate in this model.For physical store chains, online sales allow them to compete for customers whose remoteness or other circumstances make them unlikely to visit the stores.
Multi-sided digital platforms or marketplaces are intermediaries that facilitate interaction between sellers and buyers. For example, Amazon and Mercado Libre.
Digital platforms or marketplaces whose intermediary function is to offer a logistic service of purchase and immediate delivery of products offered by establishments of the modern channel. For example, Cornershop, Jüsto, and Rappi offer a service in which the staff of the retail chains do not participate in the delivery of the products, nor do they hire delivery service providers.
Starting with Covid-19, some digital mobility platforms, such as Uber, Cabify, Pronto or Beat, also began to offer the service of sending basic necessities, which could be used by small businesses that do not have home delivery service. In this business model, delivery is usually faster.
A single company can engage in more than one of these business models. For example, Walmart currently operates its own online store, participates in Rappi, and, in addition, has a platform on its own website.
The lack of a network of physical stores can complicate the entry of new e-commerce companies in all food and beverage segments, mainly perishable products that can lose their quality and freshness when traveling long distances. Also, the expansion of the e-marketplace can be hindered by access to investment or technology that needs to be made. However, these obstacles are not insurmountable, as some new players have entered the food and beverage retail e-marketplace, in addition to those already established in the modern channel.
For example, Amazon and Mercado Libre recently entered as marketplaces - intermediaries between sellers and buyers of non-perishable food and beverages - taking advantage of the user base already built up by the sale of other types of products. This user base, in turn, could impact competition in the modern channel when these new entrants also develop networks of physical stores; for example, Amazon in the United States has established technology-intensive physical stores (Amazon Go).
The digital platform model with the intermediary function of offering the service of purchase and immediate home delivery of food and beverages became important in 2015, with the entry into the Mexican market of Cornershop and Rappi, although the latter focuses more on the delivery of prepared food and beverages. These platforms buy and deliver general grocery products, including perishables. Cornershop is the platform that markets most food and beverages.
The delivery times of the platforms that operate Amazon, Mercado Libre, Cornershop and Rappi are different, so not all platforms compete directly with each other in this dimension. Amazon and Mercado Libre bring producers directly closer to consumers, so to some degree they compete more for the supply of non-perishable products with modern channel chains. On the other hand, the services of Cornershop and Rappi are used as complements by the retail chains, since the latter resort to third party platforms in addition to developing their own.
The platforms have the advantage of allowing greater transparency and price comparability, as well as reducing distribution costs. Another advantage of the platforms is that the more buyers use them, the more sellers will want to exhibit their products on them and vice versa -what is called indirect network effects- so as they grow they tend to attract more users on both sides of the platform. However, these network effects can make it difficult for new platforms to enter or expand, because they make it easier for the market to be dominated by a single agent. In addition, the attempt to replicate the user network requires time to gain a reputation, as well as considerable capital expenditure.
Another possible barrier to entry comes from the dual role that some platforms play simultaneously as supplier and competitor, being able to identify the products that sell the most and use that information in an anti-competitive way. This could happen, for example, if a platform with substantial power created its own brand of the best-selling products on its platform and competed against its own users, displacing them from the market.
In Mexico, another important obstacle to the expansion of the electronic channel has to do with the difficulty for customers to have modern means of payment for transactions. In 2018, only 12% of purchases of 500 pesos or more were made with a debit or credit card. The predominance of cash as a means of payment affects the expansion of e-commerce and even commerce in general, because of the costs of moving cash. Potential consumers also have little confidence in paying online because of fear of fraud, distrust of providing online banking information, and lack of knowledge that you can pay in cash.
E-commerce can have two effects: on the one hand, it can decrease sales of some products in physical stores; on the other hand, it can add sales that otherwise would not take place. The latter is due to the fact that e-commerce improves the shopping experience, since customers access products from anywhere and in less time, without being subject to schedules, and it also facilitates comparability.
The study by the Federal Economic Competition Commission estimated an econometric model, based on Pozzi (2013), to determine the impact of e-commerce on total retail sales in Mexico. The results indicate that the opening of the electronic channel by supermarket chains has expanded total food and beverage sales by 2.4%. This expansion effect varies depending on the chain, as not all have been equally effective in selling their products online; for example, the availability of the electronic channel expanded Walmart's sales by 4.3% and Chedraui's by 3.6%.
Despite the expansion of the modern and electronic channels, the traditional channel continues to be the main destination of Mexican family spending on food and beverages: in 2018, 78% of family spending on food and beverages went to purchases in the traditional channel, 19% in the modern one and only 0.01% in the electronic one.
The traditional channel is made up of grocery stores, miscellaneous stores, and specific stores of the sector (collections, butcher stores, poultry stores, etc.), as well as public markets, on wheels, and tianguis. Generally, the stores of the traditional channel are small, so they have a limited assortment. Many times, they are businesses that are managed by the owner and his family.
Castillo, Machuca, and Ayala (2018) found, for a sample of establishments in the Guadalajara metropolitan area, that the sales area of the grocery stores was 28 square meters (m2 ) on average and that 3.2 people worked in each business. In 2019, the average number of people employed in the convenience, grocery, and miscellaneous stores was 1.7.55.
Labor productivity in this channel, that is, the value of all goods and services produced or marketed by a worker in an establishment, is 4.2 times less than that of the modern channel. The stores are supplied both by supply centers, markets, and wholesale stores, and by large companies that deliver products directly to the store (i.e., boxed bread, dairy products, cold meats, soft drinks, beer, and snacks).
The establishments of the traditional and modern channels are not substitutes for each other. The modern channel offers more product assortment and presentations, as well as more flexible hours and additional services such as parking, payment of utilities, cash withdrawal, and the possibility of paying with various payment methods. However, the recent introduction of low-cost mobile devices by aggregators has allowed some establishments in the traditional sector to offer alternative payment methods to cash (i.e. credit and debit cards, vouchers, points, or contactless technology).
In 2019, the traditional channel was made up of just over one million economic units that employed 1.9 million people. As for public and specialized markets, there are 329 in Mexico City alone.
The traditional channel offers some advantages to consumers, such as proximity, which is a relevant decision factor for families without a car, or whose income or physical capacity only allows them to make daily purchases. Consequently, families in lower-income deciles tend to spend more on this channel.
In fact, many families in the first income deciles do not have access to the modern channel: 1,592 municipalities (i.e., 65% of the total) do not have stores with warehouses, supermarkets, hypermarkets, and megamarkets or discount stores and express stores; municipalities in which more than 17 million people live.
However, the population that does not have access to the modern canal exceeds that figure, because even though a person might reside in a municipality with a modern canal store, the store is not necessarily close enough to justify the trip to go shopping. In many cases, car use is related to access to the modern canal.
Within the traditional channel, grocery stores capture the largest proportion of spending, mainly from lower-income families. When comparing by product type, the traditional channel is the most relevant in the purchase of almost all food and beverage product categories, such as fresh vegetables; tortillas and corn derivatives; beef and beef entrails; and poultry.
By Mexicanist, Sources: Cofece, Study of competition in the modern food and beverage retail channel