Cashing in.

Optimistic Mexican consumers shrug off the wave of negative economic news

Veterans of multiple economic debacles and devaluations, Mexican consumers are notoriously edgy: The first sign of financial instability and they yank their purse strings tight. But in January, despite media bombardments warning of declining economic prospects due to a possible recession in the United States, Mexican daily Reforma's January Consumer Confidence Index dipped only mildly, falling 1.13% compared to the robust December posting. The index remains above levels from previous months.

A closer look confirms that healthy employment and wages are cultivating vibrant domestic growth in spite of an uncertain external environment. According to the Reforma consumer index, expectations for an improved employment situation grew by 0.75% in January, and while income expectations stayed the same as December, that still means 61% of Mexicans see a modest-to-big boost in pay this year. Expectations for the acquisition of electronic services (pay television, Internet, mobile phones) perked up 1.75%.

What pulled the overall consumer index down slightly were sagging perceptions of the year's prospects for lower inflation and credit card rates. But despite that pessimistic edge, the Mexican consumer foresees a bright 12 months ahead.

"There is great optimism among Mexicans due to the entrance of [President Vicente] Fox," says Vicente Licona Galdi, director of leading public opinion research firm Indemerc-Harris Interactive. "He's got a huge popularity rating; everyone, even the priistas, believe they're going to have better employment, salaries, housing, and so on." Of a dozen marketing firms contacted by an analyst from research firm Orbis Publications, none reported detecting a conservative shift in consumer behavior, at least not yet.

"Mexicans react with caution very quickly [when the purchasing environment changes], but it's still too soon to see any evidence of that," says Enrique Penella, marketing director of AC Nielsen, the country's leading consumer research firm.

There may be some basic reasons why consumers seem ready to shrug off bad inflation and interest rate news. Inflation will still be in single digits this year, even if the government doesn't manage to wrestle it down to 6.5%. And it will still be on the decline. As for interest rates, consumer behavior has evolved in many ways since the free-spending days of 1994, and it may be years before households routinely go into debt in the name of consumption. In general, most purchases, big and small, are made with cash. Credit remains scarce thanks to still-wobbly banks, and consumers are still cautious about taking on credit when available because of high interest rates.

In lieu of scarce bank credit, most chains offer financing plans and their own credit cards. The most visible trend is a rash of sales promising "six months with no interest fees," which retailers offer in conjunction with such financial groups as American Express and Banamex on everything from spirits to living room sets.

BANNER YEAR FOR BIG BUYS

Throughout 2000, consumption was the watchword for the Mexican economy. Real wage increases, a strong peso and low inflation sparked a purchasing wave that helped power the economy forward by more than 7%. But despite the furious retail numbers that rang in month after month, AC Nielsen's basic basket of consumer goods (with items like shampoo, toothpaste, and clothing) showed only modest growth in 2000 -- slower than that of 1998 and 1999. Why would demand for mass-consumption goods slacken in the midst of a buying spree?

According to AC Nielsen's Penella, 1998 and 1999 were catch-up years for basic household goods, meaning that Mexicans were returning to pre-crisis consumption patterns, effectively fleshing out their pantries and medicine cabinets. Once a household has its shelves stocked with the essentials, the room for growth diminishes--a family can use only so much shampoo.

But while families have filled their basic basket needs, pent-up demand has consumers making all of those long-delayed big-ticket purchases, such as a new car or television, furniture or white goods. In 2000, car sales surged an explosive 27.9% over the prior year, according to the Mexican Automotive Industry Association (Amai). What's more, luxury carmaker BMW posted the highest sales growth (not including newcomers Peugeot and Volvo), a 67.0% increase. Detroit's big three, meanwhile, posted impressive, but below-the-curve growth.

Through November, according to The National Statistics Institute, furniture sales rose an annualized 16% and department sales 13%, while overall retail sales rose 10%. Basic goods, meanwhile, lagged. In the same period, supermarkets turned in an 8% increase, corner grocery stores 7%, pharmacies 7%, and clothing 0%, all under-performing the overall index.

The economy is growing slower in 2001 than it did in 2000, so the big-ticket buys should calm down a bit, though in addition to rising real wages, consumers should benefit from bank loan expansion--for the first time since the 1995 recession--to keep such purchases healthy.

On the basic goods side, while households may have stocked their shelves with the essential items, consumer products companies are pushing to get their own brands on every family's list of indispensable goods.

Jeffrey Wright is editor of the Mexico 2001 Country Report, an annual B2B assessment of Mexico's political, economic and business environment. This article was drawn from that report.

                        Mexican consumer breakdown
Low (D-/E)     8%
Middle (C+/C) 28%
High (A/B)    64%
Source: AC Nielsen
                 % penetration of household goods in 2000
            Low-Income High-Income
CD Player      33.1        84.9
Telephone      35.2       100.0
Stereo         38.1        86.5
VCR            30.8        91.7
Color TV       80.9        99.8
Microwave       8.8        92.2
Blender        19.4        84.7
B/W TV         28.2        12.9
Video Games     7.1        45.9
Car            16.9        98.3
PC              3.1        67.4

* Socio-economic classes 

A/B 

Head of household: Undergraduate or above Executives of mid-to large-sized firms Own house or luxury apartment

Monthly household income: +48,000 pesos

C+

Head of household: Undergraduate or above Executives, managers, top professionals Own house or apartment

Monthly household income: 19,200 to 48,000 pesos

C

Head of household: Highschool graduate Small business owners, teachers, professionals May rent or own house or apartment

Monthly household income: 6,400 to 19,200 pesos

D+

Head of household: Junior high or less Taxi drivers, street vendors, day laborers, tradesmen May rent or own house or apartment, but unlikely to have heated water, many appliances, or other conveniences

Monthly household income: 4,000 to 6,400 pesos

E

Head of household: Less than junior high Unemployed, under-employed Rent or squat, unlikely to have flooring, hot water or drainage

Monthly household income: Less than 1,600 pesos