A KALEIDOSCOPE OF CHALLENGES AND OPPORTUNITIES
In an environment of surprising significant growths and slowdowns, Mexico is one of the regional economies remaining somewhat constant. This is worth mentioning, since it has been achieved despite the fact that the Mexican economy has been shaken by oil production, oil prices, the United States growth, and the financial volatility of international markets. Although at first sight and from a macroeconomics perspective it might seem only weakly active, both Mexican society and government have been forced to make adjustments here and there so as to maintain the relative stability of LatAm’s second largest economy.
A SLOWING ECONOMIC ENVIRONMENT
The reality is clear: in the 2014-2015 period, Mexico has slowed down. On July 9th of the current year, the IMF reduced its estimated growth for Mexico from the already reduced 3% it had anticipated in April, to 2.4%. Among other things, this reduction was related to the weakness shown in the first months of 2015 by the economy of the United States, Mexico’s most important commercial partner.
Although lower than expected, Mexico’s growth is headed up by manufacturing exports —largely the result of the two-digit increase, for the fifth consecutive year, in the automobile sector. However, local demand has not kept pace: private consumption is burdened by consumers’ low trust levels and scarce wage growth. Nonetheless, private investment has seemed to be more active in the past few months.
Foreshadowing a longer-lasting drop in oil prices, the Mexican government announced a 2015 budget cut equivalent to 0.7% of the GDP and is planning an additional cut in public expenditure for 2016. The lower public expenditure will slow the pace of economic growth, despite the trust that disciplined tax practices will bring economic benefits.
Growth has been lower than expected, and there has not been a strong connection between growth and the reduction of poverty. The latter might be the result of the circumstances prevailing in the labor market: in recent years, not enough employment opportunities have been created, nor have there been jobs paying adequate wages. In addition, the labor force has increased, due to demographic changes, balanced migration to the US, and more female participation in the workforce, all of which the Mexican economy has failed to absorb. There is a positive aspect, both government transfers, particularly in urban zones, and a lower dependency rate have contributed to the improvement of some poverty indexes in the country.
REFORMS FOR GROWTH
The Mexican government has made progress in its structural reforms agenda, specifically in the labor and education areas, competition laws, the financial sector, telecommunications and laws for the energy sector, all of which are aimed at increasing productivity, competitiveness and the potential growth of Mexico in the international arena. Today, the administration is devoted to the implementation of these reforms. Opening the energy sector to private investment is especially promising for promoting growth, for it is expected to lead to an increase in oil and gas production and to provide cheaper energy supplies to Mexican industry. Assessing the distributive impact of these reforms, the regulations associated with them, and their implementation will be important, but their nature endows them with strong potential to drive Mexico’s growth.
Thus, an acceleration of economic activity is expected for 2017. On the one hand, it’s not anticipated that public expenditure will be reduced again; on the other, the gradual growth of US demand will support a continuous and strong performance of manufacturing exports. This is expected to result in a gradual recovery of private consumption and investment.
ELECTIONS, CONSUMERS, AND BRANDS
The first half of 2015 is a good example of the dynamism in the market during the period we’re evaluating. Midterm elections became the main character not only in the political, but also in the social scenario. The different political parties reflected — though by means of blaming one another, rather than presenting proposals — society’s concern about topics such as security, income, and corruption. Mexican consumers, who have an essentially short-term view, think in even more immediate terms thanks to the 24/7 messaging they’re receiving about overly-simple solutions to complex social issues.
The ever-changing environment leads Mexican consumers to appreciate particularly three basic features: convenience, accessibility, and playfulness. In the face of change, Mexican society prefers brands’ prioritizing “making life easier and more bearable” over other engagement messages. The brands with the most marked growth in the last year definitely prove this. The cases of Oxxo and Tecate, the two Top Risers of the portfolio, are worth highlighting.
Oxxo is and has been the epitome of accessibility and convenience in Mexico. With over 12 thousand stores and an opening pace of a new branch every eight hours, the brand is emerging as the largest retail chain in this region. The geographical expansion of Oxxo and the variety of products it offers have made it a widely known brand, capable of generating a meaningful difference that has led to exponential growth not only in terms of sales floor but also in the minds of consumers.
The Tecate brand has managed to base its growth on a communication so powerful that it has transcended to an iconic status in the minds of Mexican consumers. Through creative campaigns with messages for “the Mexican macho”, Tecate has become a real cultural happening: a playful escape that has led its most recent campaign, featuring Sylvester Stallone, to become part of Mexico’s pop culture. Tecate has created differentiation, salience, and meaningfulness by presenting itself as a friend to consumers, an ally in their best moments.
The learnings brought about by Oxxo, Tecate, and some other Mexican ranking champions are crystal clear: in an ever- changing environment, Mexican consumers prefer brands that help them keep pace, acting as important buffers against uncertainty, and making them forget their difficulties. The secret is to become a close ally wh