Nafta: A Green Light For Red Tape

It was a retailer's nightmare. Government inspectors made a surprise visit to Wal-Mart Stores Inc.'s new Supercenter in Mexico City and found thousands of products improperly labeled or lacking instructions in Spanish. The store was ordered shut for 72 hours. Company officials scrambled to correct the oversights, quickly enlisting U.S. Ambassador James R. Jones to relay his concern to top government officials. After just 24 hours, the store reopened, but Wal-Mart and other American retailers in Mexico got the message: The free-trade agreement may have opened the doors to Mexico, but don't expect to be welcomed with open arms.

It's a powerful lesson for foreign retailers venturing into Mexico. U.S. companies figured they could conquer retailing quickly, but instead the sector can sometimes be as prickly as a cactus. To varying degrees, Wal-Mart, Kmart, Price Club, and Radio Shack have all run into hassles. Mexico's army of bureaucrats, steeped in protectionist habits, is plaguing them with mountains of paperwork, ever changing regulations, customs delays, and tariffs of up to 300% on low-priced Chinese imports favored by the discounters. To make matters worse, Mexican retail sales have been sluggish because of a yearlong recession.

With so many obstacles strewn on the NAFTA highway, some U.S. retailers are slowing their pace of expansion. "Our original plan was to have 200 stores throughout Mexico by July of 1995," says Guido Pentsy, director of Radio Shack de Mexico, a joint venture that is 49%- owned by Forth Worth-based Tandy Corp. and 51% by Mexican retailer Grupo Gigante. The company has 49 stores now, says Pentsy, "but we're on standby. We're being much more careful." Since it opened in Mexico in 1992, Radio Shack has had border-crossing and tariff headaches with many of its products.

Wal-Mart's recent brush with over-zealous inspectors has sobered company officials. The 200,000-square-foot Supercenter store that was raided carries around 80,000 products. Each is to be labeled in Spanish indicating the country of origin, content, and instructions, and in some cases, an import permit number. Inspectors charged that 11,700 pieces of merchandise lacked such labels. Wal-Mart executives say many of the targeted goods--40% or more--were purchased from a local distributor. Regulators insist that the retailer has ultimate responsibility for labeling.

WARRING FACTIONS? Although it publicly stands by its hard line, the Secretariat for Trade & Industrial Promotion (Secofi) is smarting from the incident. It's the agency that spearheaded NAFTA and is run by Jaime Serra Puche, one of Mexico's highest-profile Cabinet members. Sources say the Wal-Mart raid may have been the result of warring factions inside Secofi: While one department was talking to the company about labeling, another staged the surprise raid. Wal-Mart officials would not comment. But the U.S. Chamber of Commerce in Mexico is gently chiding the usually pro-foreign investor office with a "statement of common concern."

If any retailer can overcome the red tape, it's Wal-Mart. The company is sticking to plans with joint-venture partner, Cifra, Mexico's top retailer. The venture has opened three Wal-Mart Supercenters in Mexico City and Monterrey and will inaugurate a fourth in Guadalajara in August. The partners also operate 12 warehouse-style Sam's Clubs in Mexico City, Monterrey, Guadalajara, and three other cities. Plans call for another 10 this year. But Mexico's vagaries, plus the premium on well-situated retail space, have raised the hurdle.

Kmart Corp., which just opened its first two stores in Mexico City in May, has had its own run-in with bureaucracy. While the stores were under construction, inspectors ordered one site shut down for lack of an environmental impact study. When executives showed they had conducted such a study, officials allowed the site to reopen a day and a half later. "But we had sent the 1,700 workers home....Construction was disrupted for eight days," says Juan Suberville, general director of Kmart de Mexico.

As lower NAFTA tariffs encourage more imports, American retailers are likely to run into more obstacles. But as Mexican consumers get used to the convenience of hypermarkets and discount prices, it will be harder and harder to stem the retail invasion from the north.

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