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MEXICO ON THE GO

Developers, retailers ride a sustained economic boom

By Debra Hazel

After a decade of economic turmoil, a revival in Mexico is keeping shopping center developers and retailers busy — south and north of the border.

The recovery has spurred growing consumer demand that has, in turn, spawned the construction of shopping centers and lured U.S. and European chains such as H.E. Butt Grocery (HEB), The Home Depot, Wal-Mart Stores and Zara. In the opposite direction, Mexico is exporting its own products and concepts, such as children’s entertainment chain Kids City, to the United States.

“As Mexico has gone through structural, political and economic reforms, suddenly [citizens] have a job, with a public pension,” said Richard Katzman, executive director of Insignia/ESG, Mexico City, a commercial real estate services firm. “They have a regular paycheck, so they can get credit. You get people in the system, so they have disposable income and become shoppers.”

H.E. Butt Grocery’s store in Tampico, Mexico. The chain is Texan, but 80 percent of the merchandise is Mexican.

Of all the fiscal turnarounds in history, Mexico’s may qualify as one of the most dramatic. In late 1994 the devaluation of the Mexican peso marked the beginning of a major economic crisis, resulting in skyrocketing inflation, massive debt and a loss of investor confidence. Now, eight years later, the economy is humming.

Within the past several years, Mexico has undergone major structural changes, starting with its 1994 signing of the North American Free Trade Agreement. Loans from the United States have been repaid, in some cases 17 years early. Inflation, running well over 100 percent annually at the height of the 1990s crisis, is now below 5 percent, and exports have helped lead the country out of recession over the past few years, creating a growing middle class.

The year 1997 proved to be a turning point, with retail sales in Mexico totaling 899.8 billion pesos ($93.3 billion), up from 658.3 billion pesos in 1996. Nonfood sales rose 79 percent in that period, according to global market research firm Euromonitor International.

Perhaps most significant to financiers, Mexico has been given investment-grade status by all the major rating agencies.

“Mexico looks like the United States did from a population standpoint after World War II,” said Robert Baer, president of Rockwood Asociados, a subsidiary of Rockwood Realty, a New York City-based real estate investment bank with investments and offices in Mexico. “There’s a growing per capita income, so now there is opportunity to build retail.”

Marking a significant shift in strategy, major U.S. financial institutions, including American International Group, General Electric Capital Corp. and Prudential Financial, have taken note, looking to invest in retail.

“Prior to 1992 Mexico had no real estate capital market to speak of,” Katzman said. “We’re 10 years into the creation of a real estate market from ground zero.”

Though the industrial market was the first to develop, the shopping center industry has really taken off in the past five years, with the construction of regional malls, neighborhood centers, entertainment projects and factory outlets.

“Real estate has been an excellent business for Mexico, even in the middle of the problems,” said Eduardo Bross, president and general director of Mexico City-based developer Planigrupo. His family-owned company, originally a homebuilder, developed its first shopping center, Plaza Fiesta Arboledas, in Guadalajara more than 20 years ago. Recently, the firm completed the renovation of several of its regional malls and strip centers, which are anchored by HEB, Wal-Mart and some cinemas. The firm, whose investment partners include Kimco Realty Corp. and Rockwood Realty, plan several more HEB-anchored projects, Bross said.

Regional mall development has thus far been concentrated around the major cities — Guadalajara, Mexico City, Monterrey — with tourist meccas Cancún and Tijuana seeing some growth.

There are some challenges for mall developers, however.

“We have [department stores Servicios] Liverpool and Palacio de Hierro, but they are not willing to open as many stores, so we go with a grocery or hypermarket, perhaps a cinema,” said Luis Llaca, a retail specialist at the Mexico City office of Cushman & Wakefield. Servicios Liverpool and Palacio de Hierro are not only department stores, but in some instances they build the shopping centers that they anchor, not unlike their U.S. counterparts in the early years of the shopping center industry.

U.S. anchors in Mexico include J.C. Penney, which entered the country in the mid-1990s and now has six stores there. Sears was also there, for decades, although in 1997 it sold the bulk of its majority interest in its Mexican stores to Mexican conglomerate Grupo Carso (which also operates the Sanborns video and software chain, El Globo bakeries and apparel chain Mixup). U.S.-based Sears now maintains only a very small financial stake in the 43 Sears de Mexico stores.

Demographics still favor the discounters and supermarkets. Entering Mexico in 1991 through the acquisition of local chain Cifra, Wal-Mart now operates 569 stores under many banners. In addition to Wal-Mart Supercenter, it owns discounters Bodega Aurrera and Superama, restaurants Vips and El Porton, and apparel chains Ragazzi and Suburbia. Sales last year totaled $9.6 billion. Over the next 18 months, the company plans to open 67 units under its various banners around the country, at a cost of 6 billion pesos.

The chain’s presence has been a boon for consumers.

“The Everyday Low Prices campaign [introduced in 1999] … is forcing our competitors to lower their prices,” said a Wal-Mart de México spokesman.

Texas-based HEB crossed the border in 1997 and now operates 19 supermarkets in the country’s northeast. Stores average about 95,000 square feet, with the company building an additional 30,000 square feet of small shop space around them.

Forum Culiacán is one of two regional malls under construction in the country’s north by Mexico City developer Gicsa.

HEB did not enter the market to bring U.S. goods to Mexico, however. About 80 percent of its items are of local origin, with only 20 percent imported. In fact, the company brings more Mexican goods to the United States than vice versa.

HEB had been eyeing Mexico since 1989.

“Food historically has been stable,” said Richard Ellwood, director of construction at HEB Mexico, Monterrey. “During the tumultuous periods, our company did well. Everybody’s got to eat.” HEB’s plans call for one more unit this year and four to six stores next year.

That doesn’t mean that developing in Mexico is easy. Retailers in more mature markets often are astonished at the lack of demographic data available to determine optimal sites.

“In Mexico we don’t have the amount of information you have in the States,” said Fernando Bravo Visconti, project director for Frisa, Naucalpan, Mexico. Originally a residential builder, the 45-year-old company entered commercial real estate some 25 years ago and now has 14 centers, including malls and strips, mostly in Mexico City.

Mexico City provides its own challenges. It is the nation’s capital, with 22 million people in the metro area. The population density cries out for more retail, but it also makes finding locations difficult. For projects that do get built, however, the rewards are high. The primary trade area for Frisa’s Mundo E, a regional mall in the city, is 2.4 million people, for instance, while the secondary market is 4 million people.

“That’s just for one center in one area of Mexico City,” Bravo noted. Not surprisingly, the mall is scheduled for an expansion in 2003.

Other regions are promising as well.

“We find a virgin market in the north of the country,” said Carlos Aparicio a spokesman for Mexico City developer Gicsa. The firm is also building two regional malls there: Forum Culiacán, in Sinaloa, which will feature Sears and the first Liverpool department store in the area, as well as some cinemas and restaurants; and Forum San Pedro, a mall anchored by Palacio de Hierro that is scheduled to open in Monterrey in the next two years.

Like their U.S. counterparts, Mexican developers are keen to liven up their malls with entertainment.

“We need to draw the people to our centers,” said Miguel Bordes, director at Servicios Liverpool, which hopes to expand the areas around its upcoming stores/centers in Metepec (suburban Mexico City) and Monterrey to include skating rinks and coffee bars. “Entertainment makes a longer stay for customers in the centers.”

But challenges remain, in the overall economy and for retailers in particular. The standard of living is low, with 20 percent of income earners accounting for 55 percent of the nation’s income, according to the CIA World Factbook 2001. Many live below the poverty line. Even as the economy stabilizes, growth will be slow, Bordes observed.

Moreover, retail sales increases were fueled by credit card company offers of no-interest purchases for up to two years, analysts note. Bills have to be paid eventually, though, and some observers expect sales to slow through 2002.

There is also a significant learning curve on Mexico’s differing tax laws.

“You can’t just run a business out of the market,” HEB’s Ellwood said, explaining that non-Mexican players must have their people on the ground to make a go of it.

Many foreigners still approach Mexico with outdated ideas about the country, expecting a backward nation.

“It’s funny; they don’t even know where Mexico is,” said Sergio Bringas Linage, marketing director of the upcoming Los Atrios mixed-use complex in Mexico City. Grupo Sordo Madaleno, a pioneer in the Mexican shopping center industry, is developing the project. The firm also recently announced plans to co-develop an outlet center with U.S.-based Chelsea Property Group, only the second such project in the country.

But all in all, the market holds promise, both for domestic players and those from other countries.

“The strength of the economy has been built around currency and free trade,” Insignia/ESG’s Katzman said. “We have more fiscal responsibility, and the foundations here are much more solid. That allows for a quicker evolution of the market.”

Consequently, the arguably most dramatic economic turnaround in recent history continues to impress.

“It’s a totally different country,” said Frisa’s Bravo. “With 135 percent inflation [in the mid-1990s], we couldn’t do anything. Right now it’s totally different. The economy is really strong. Everybody is looking south of the border.”

A comprehensive analysis of the Mexican and Central American retail real estate markets will be among the highlights of ICSC’s first Mexico & Central America Business Forum and Exposition, to be held July 17–19 at the Presidente Inter-Continental Hotel in Mexico City. Other sessions will cover capital sourcing, exchange rates and legal issues pertaining to the region. The meeting will also include a trade exposition and tours of local shopping centers. For more information, contact Noemí Rios at (646) 728-3605 or nrios@icsc.org

 

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