Aug. 19 (Bloomberg) -- As crowds of people make their way through the twisting aisles of one of Mexico City’s largest street markets on a Sunday morning, customers fight for room to peruse everything from blenders to mobile phones to jeans.
These shoppers are choosing cheaper, tax-free, used or contraband merchandise over visiting shopping malls or department stores like Sears, owned in Mexico by billionaire Carlos Slim’s Grupo Sanborns SAB. Competition from so-called informal vendors is part of the reason Mexico’s retail association reported an increase of only 0.7 percent in same-store sales in July, missing the 1 percent average increase estimate of analysts compiled by Bloomberg.
Retailers are seeing growth slacken as Latin America’s largest economy after Brazil struggles to pull consumer sentiment and spending out of the doldrums. Gross domestic product will rise as much as 2.8 percent this year, down from a previous forecast of 3.3 percent, the central bank said last week. This means retailers are unlikely to see a significant pickup in annual sales growth until next year, when confidence improves, said Banco Ve Por Mas SA analyst Juan Elizalde.
“The informal economy is one of the main competitors to these department stores,” Elizalde said in a phone interview. “The clients are evaluating the new reality of their pockets, and it’s much cheaper to buy used appliances at a market, if it’s good quality, than pay it by installments in Elektra or Famsa,” he said. He was referring to two other retailers, Grupo Elektra SAB -- owned by billionaire Ricardo Salinas -- and Grupo Famsa SAB.
Jose Ramon Ortiz, a 62-year-old taxi driver, said he now almost exclusively shops for used appliances in the San Felipe de Jesus market. Amid the sprawling center of commercial stands held up by wire fencing and plastic-tarp roofing in a low-income neighborhood in northeastern Mexico City, Ortiz was almost drowned out by merchants calling out to customers through speakers. The scent of roasting corn hung in the air.
“Salaries are just too low,” Ortiz said as he tested a used Sharp microwave on sale for 500 pesos ($38) by heating a cup of water. “This would be over 1,000 pesos at any store, and if you pay in installments, you better pray it doesn’t break before you’re done paying for the whole thing.” He eventually haggled the price of the microwave down to 450 pesos.
The average daily wage of Mexican workers increased 4.3 percent in June from a year earlier to 282.59 pesos, according to data from the Mexican Social Security Institute. That has just outpaced inflation, which climbed to 4.07 percent in July.
Mexico’s culture of street vendors and open-air markets dates back to prehispanic times, when vendors sold clothing and commodities at a tianguis -- a word still used today for itinerant markets that pop up once a week in different Mexico City neighborhoods.
The Mexican retail association complains that informal vendors are more likely to traffic in stolen or pirated goods. While some vendors get their products from wholesale markets, such as Mexico City’s Supply Center for produce and other food, the National Chamber of Cargo Trucking estimated that 8 percent of informal goods are stolen from trucks.
While government officials have attempted for decades to move people to the formal economy, including clearing streets of vendors, the practice remains stubbornly entrenched. Almost six out of 10 people labored in Mexico’s informal sector as of June, according to the national statistics center.
The off-the-books businesses can help employ people who are struggling to feed their families. About 45.5 percent of Mexicans were below the poverty line as of 2012, according to the latest data from Coneval, a government institute that evaluates public policy.
And with economic growth still sluggish, Mexican consumers are willing to opt for cheaper goods than for the consistency that formal retailers provide. While Mexico’s benchmark IPC index had gained 5 percent this year through yesterday, most retailers have underperformed. The biggest, Wal-Mart de Mexico SAB, had gained 0.6 percent, while Sanborns and Elektra shares had each dropped 20 percent.
Wal-Mart de Mexico rose 0.2 percent to 34.55 pesos at the close today in Mexico City trading. Sanborns climbed 0.3 percent to 22.15 pesos, and Elektra added 1.8 percent to 363.56 pesos.
A press official for Sanborns declined to comment. Elektra representatives didn’t reply to requests for comment.
“We have the advantage that our clients identify our stores with savings,” Wal-Mart said in an e-mailed statement. “We’re optimistic about the second half the year and hope to have the best commercial offering for the end-of-year season.”
Wal-Mart said July same-store sales in Mexico increased by 0.8 percent after an 0.2 decrease a month earlier, though still below a 2 percent growth estimate by Credit Suisse Group AG. The company is hampered by the need to clear out obsolete inventory before introducing new products, Credit Suisse analyst Antonio Gonzalez said in an report this month.
A tax overhaul implemented by President Enrique Pena Nieto this year is also weighing on retailers. It boosted the rate on sales in border towns and some coastal states and applied it to additional products, as part of an effort to reduce Mexico’s reliance on oil proceeds. Informal vendors, meanwhile, pay no sales tax on their transactions with consumers.
Slim’s retail chain Sanborns said its stores along the border and those in states such as Quintana Roo, which includes popular tourist locations such as Cancun and Playa del Carmen, experienced a 6 percent decrease in sales in the first half of the year as a consequence of the new measures, the company said in a conference call last month.
Sanborns, which operates restaurants alongside convenience stores that sell an assortment of items from luggage to TVs to Apple Inc. products, also ran 80 Sears stores as of the end of last year, using Sears Holdings Corp.’s brand under a licensing agreement, according to the annual report by Slim’s company.
The sales tax increased on Jan. 1 to 16 percent from 11 percent and was unified throughout the country. In the past, Mexico had kept the sales tax along the border lower than the rest of the nation for decades to give consumers incentive to buy products at home rather than cross into states like Texas, which charges as little as 6.25 percent in sales tax, and Arizona, at as little as 5.6 percent. In Mexico’s Caribbean and Pacific coastal states, the reduced tax rate had been used to entice tourists to spend at stores, hotels and restaurants.
The Pena Nieto tax increases helped drag consumer confidence to the lowest level in almost four years in January, and the gauge remains below year-ago levels, Elizalde said. The reticence to spend has also held back borrowing rates. Consumer loan growth decelerated to 8.6 percent in the 12 months through June, less than half the annual pace for a similar period the previous year, Credit Suisse’s Gonzalez said.
That’s bad news for department stores like Elektra and Sears, which count on interest payments from credit cards and installment plans to boost profits.
While the government says a bill signed into law earlier this year will encourage lending in the country and give banks more power to recover collateral in Mexico, the retail environment isn’t optimal.
“From now on we’re going to see slower growth in the credit portfolios of all these companies,” said Luis Willard, an analyst at Corporativo GBM SAB. “The growth is going to come in a very slow and gradual manner.”
Commercial costs for Elektra, which sells products from electronics to motorcycles, increased 13 percent in the second quarter because of promotions, Vector Casa de Bolsa SA analyst Gaspar Quijano said in a July note. Other Mexican retailers such as El Puerto de Liverpool SAB and Sanborns also saw their profit margins shrink this quarter from a year earlier.
The Mexican economy has a “good outlook” for the rest of 2014, Banco de Mexico Governor Agustin Carstens said last week. The central bank’s lower growth forecast for this year is due to a first-quarter expansion that fell short of estimates as well as weakness in domestic demand, he said.
Even promotions in the second half of the year tied to El Buen Fin -- the Mexican equivalent of Black Friday -- and the Christmas holidays won’t produce encouraging year-over-year growth, Elizalde said.
“The improvement will be closely tied to the moment people are a little more confident to spend,” Elizalde said. “Positive results will come in 2015.”
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