The Mexican Retail Environment - Report Example

In March 1002, Kmart Corporation has signed a joint-venture agreement with El Puerto de Liverpool, S.A. de C.V. Kmart is considered the second largest discount store chain in United States, operating businesses in Canada, Czech Republic, Slovakia, St. Thomas and St. Croix. In 1992, Kmart’s average sales per square foot is $184 US compared to Wal-Mart’s $275 US. In the same year, Kmart’s net income is half of Wal-Mart’s. El Puerto de Liverpool is one of the oldest retail store chains in Mexico; the company is founded in 1847, originally targeting upper income segment consumers. Since 1988, major retail department stores have expanded their business into Mexico, including companies such as Wal-Mart, Price Club, Dillards and JCPenney. As a result, these retail stores dramatically changed the competitive landscape in the Mexico retail industry. El Puerto de Liverpool felt they did not have the resources, skills and competitive advantage to cope up in the discount retail market segment, which its anticipates as the fastest growing segment in the future. The Mexican retail environment is different from those of the United States or Canada. The reasons may be broken down into employment practices, culture, education and economic status. In 1993, an estimated 38% of the population is under the age of 15, and 30% of the population is in the labour force. Many of the unemployed are involved in the underground economy. In reality, most of the children were not in school receiving their education, but earning money in the labour market to help increase household income. As a result, majority of store service personnel are poorly educated with low income wages. Consequently, this has created difficulties in complying with U.S training standards. The minimum wage in Mexico is $3.94 a day or $1250 per year in 1993. One of the areas which the Mexican retail environment holds similarly with Canada or United States, is its liking for American goods. Mexicans admire American culture, along with its products and its advertising style. Thus, this has created perceptions that products manufactured in the US are better than those produced locally. In 1992, an average Mexican spends nearly 39% of their income in food, drink and tobacco; followed by transportation & communication, furniture & household goods and clothing. With low income per capital, a large majority of Mexicans do not own appliances such as refrigerators. Logically, Mexicans shop daily from street vendors with small quantities or volumes of food. Also Mexicans perceive that frozen foods are not as good as fresh foods. In contrast with the United States retail environment, Americans usually shop for a week’s grocery, with certain amounts of frozen foods ranging from poultry to vegetables. Traditionally, women are considered a ineffective wives or mothers if meals are not prepared daily. Frozen foods do not fit this traditional image. Also the segment who can afford to purchase frozen food, usually prefer fresh food in cooking, since they have maids who shop from street vendors daily. Kmart’s Super Kmart Center consists of a large variety of frozen food products, which it needs to alter match Mexicans’ shopping behaviour. The recruitment process and training programs of employees could be another obstacle in building a Super Kmart Center in Mexico. As mentioned above, the educational level in Mexican is generally low, which makes it difficult to maintain training standards and ethics. Kmart’s training is done through videos and guidebooks, and it is designed to cater to high school educational levels. Kmart’s top management is wondering how effective the method of training in Mexico is. From a cultural aspect, Mexicans traditionally follow a hierarchical corporate structure, in which top management has the absolute power and authority over decision making. Basically the middle managers follow the top manager’s order, and employees at the bottom have neither decision power nor the right to correct a manager’s errors or omissions. It is considered rude if a subordinate corrects or questions a superior’s order. Mexicans usually referr to proper authority or hierarchy in cases of conflict. The Mexican’s working attitude which is strongly influenced by culture, is completely opposed to Kmart’s beliefs and practice. Kmart encourages their associates to take charge, be customer friendly and leverage on opportunities to be innovative. In the recruitment of top mangers and store managers, Kmart also has to make a few critical considerations. Kmart does not know whether to hire U.S. managers or Mexican managers. U.S managers have more expertise in operating a business, but Mexican managers have a clearer grasp of culture. However returning Mexican managers may often display an attitude of superiority in front of the local Mexican, because they have been living in the States as expatriates, making them different. The Super Kmart Center in the U.S. offers low price, high quality products, and Kmart believes the super center is a consumer’s one stop shopping destination. Services from dry cleaning, optical center, photo center, banking, hair salon are among Kmart’s service and product offerings. Kmart needs to judge if majority of Mexicans needs the dry cleaning services or photo center, when refrigerators are absent in most houses. The bottom line is assessing whether the Mexican has the disposable income to shop at Kmart. Merchandise distribution is another issue; that is, with poor infrastructure of roads, the delivery time can be delayed. Moreover, there is he absence of distribution centers in Mexico which can supply low quantity goods or sold out goods. Kmart USA implements a strategy that ensures that goods are supplied within 48 hours to the store shelves, with their 19 distribution centers. Apparently, Kmart de Mexico has trouble achieving this strategy. Another consideration is the Electronic Data Interchange system which is crucial in success of big retail chain. The system would enable top managers in the U.S. to monitor the sales and stock levels. The data would also let managers analyse sales, design promotion ideas, negotiate with suppliers, and designing floor space. This current system is not present in the Mexico Kmart yet, because labelling bar codes is expensive for Mexican suppliers. Since NAFTA has been passed, many U.S. firms started expanding their business to Mexico or vice versa. American products can now flow into Canada or Mexico without high import duties. There are many ways to utilize this system, from low price big quantity which Wal-Mart practices, or delivering quality goods that allows one to be more competitive. Other than the pricing factor, firms need to address economic conditions, culture, human resources and logistics. Even though NAFTA provides cheaper costs in importing goods, it is still expanding business into other nations; it is imperative that all the external environments need to be evaluated. The problem in Kmart de Mexico is how the joint venture will survive the Mexican market. Top managers need to deal with hiring, merchandise sourcing, training, corporate culture and viable product offerings. There are few alternatives to deal with Kmart’s issues. Alternatives include copying the exact Super Center approach from the U.S; adapting to the Mexican culture and style of retail; or implementing a mix of American and Mexican style of retailing. The first alternative is to replicate the U.S Super Center, where Mexican associates and consumers will adapt the U.S. retail mode. The hiring and training will be dealt with American style, and the product offerings in the store will be same as those found in U.S. stores. The second option is to customize the retail based on local tastes and needs. Hiring Mexican managers, using Mexican ways of managing employees and corporate structure. Also the products offerings will be more suitable to the local needs. A last option is to implement both American and Mexican styles of retail, by optimizing the best qualities from both worlds. The management style of Kmart U.S. may be incorporated with information about local Mexicans’ purchasing behaviour, tastes and needs. Kmart should be innovative in adapting local customs, and study which are market driven practices and products. The decision criteria should be the success of the joint-venture with sales and net income as performance indicators. If both sales and net income have achieved their best as determined by the market, then this joint-venture ma either be a success or a failure. In the early project stage, one store in the concentrated market will be enough to be the test project. In order to protect the Kmart image, and prevent confusion of consumers, one testing store is the safer approach. This store could be used to help determine what products to offer, which method of management is more effective, local community reputation, and how to generate or stimulate sales. Eighteen months of research and experimenting should allow clear conclusios ; also this duration could last through political, economic, social or any uncontrollable external environment. The timing of Kmart entering the Mexican market could not be any worse, Kmart is on the verge of bankruptcy, and in the middle of restructuring in the U.S. Kmart should of stay put on this investment, and concentrate on restructuring and rebuilding Kmart in the U.S. It cannot afford to spend both human and financial resources in expansion. The investment in Mexico is not in the shareholder’s best interest. Shareholders want their stock value to be what used to be, not gambling into quick expansion while main market is under apparent vulnerability. Shareholders may want risk-managed expansion, once the company has achieved reasonable stability and profitability. Read More