Retail giant grows in stature: little guys may get forced out as monolithic Walmex expands. (Spotlight).

In a retail sector battered by a weak national economy, analysts are still counting on one trend, or, more to the point, the strength of one giant. "Wal-mart will continue to corner the market," said Gaspar Quijano, an analyst with Vector Casa de Bolsa.

Among members of the Mexican Association of Self-Service Stores (Antad), which includes 102 retail chains--but not Wal-Mart de Mexico--2002 was a humbling year. Sales among self-service retail stores that make up the core of Antad's membership decreased 1.8% in 2002 compared to the previous year. Specialty and department stores fared better, but overall sales growth among Antad members was a modest 1.5%.

SHADES OF THE BAD OLD DAYS

Analysts and industry leaders say under-employment, inflation, stagnant salaries and cautious consumers were to blame. The president of Antad is calling the results for 2002 the worst since 1997, when Mexico was still recovering from the devaluation of the peso and the ensuing national crisis.

"Consumption, as it's reflected in our results, frankly is very disturbing and falls far from where we predicted it would be at the start of the year," said Antad President Luis Santana Castillo. "The combination of a reduction in real salaries because of greater inflation and the fact that new jobs haven't been created is having a tremendous influence."

Even Wal-Mart de Mexico, the conglomeration of superstores and restaurants better known as Walmex, acknowledged the "diverse economic negatives" battering Mexico's economy. Those negatives did not stop Walmex from posting 2002 year-end sales of 106 billion pesos, a 13% increase over 2001. Operating profits increased 17%.

"There are two clear groups: WalMart and the rest of the market," Quijano said.

Although there are only 75 Wal-Mart Supercenters in Mexico, Walmex controls a total of 597 business locations thanks to other chains that include Superama supermarkets, Suburbia clothing stores, the diner-style restaurant Vips, and the mega-retail stores Sam's Club and Bodega Aurrera.

"Wal-Mart will continue to report good results and will continue to grow at a good pace," Quijano said. "The basis of its success is a rapid economy of scale, which others try to imitate. But with the size that Wal-Mart brings now, it's difficult to catch up."

The country's second-leading retailer, Controladora Comercial Mexicana, has taken some aggressive measures to regain its lost market share, adopting some of Wal-Mart's tactics in the process. Finishing 2002 with a flourish, Comerical Mexicana won the lucrative Christmas-bonus shopping contract from the Mexico City government. When Walmex won the same contract in 2001, it accounted for 8% of the goliath's December sales. The value of the capital's aginaldo, or Christmas bonus, is valued at roughly US$100 million.

MUSICAL CHAIRS--TRYING NOT TO GET SQUEEZED OUT

"Everyone is worried about the economy and the name of the game for other chains (besides Walmex) is survival and the ability to maintain the same market share," Quijano said. "This is a big accomplishment, not to lose your portion of the market."

Comercial Mexicana's decision to buy Auchan Mexico, effective this year, should boost its sales by 5%.

The buy-out was a small one in terms of market share. But the departure of Auchan, a 42-year-old French retail company with outlets in 14 countries, may signal just how cutthroat the Mexican retail market has become, according to analyst Mauricio Brocado of IXE Casa de Bolsa.

"International players may need to bring all their resources or pull out," Brocado said. "Without centers of distribution and without a big presence in cities, it's difficult to compete."

Brocado stopped short of predicting further mergers in the retail sector, noting that hard economic times make it difficult to attract good offers. Mexico City-based Grupo Gigante and Organizacion Soriana of Monterrey should not be counted out as contenders for second place in sales behind Wal-Mart, Brocado said. None of the large national chains enjoy the same economies of size as Wal-Mart, the single largest employer in a nation of 101 million people.

STANDING APART

Brocado pointed out that Wal-Mart reported receiving more than 500 million shoppers in 2002--the equivalent of five visits from every Mexican. At the Mexican Stock Exchange, Walmex remains the second-largest stock in terms of sales and market capitalization. Only Telmex is larger in this regard. Walmex now stands literally on its own after leaving Antad in October of last year. The association's new ethics policy forbids the kind of comparative price displays that Walmex uses on its shelves.

Santana Castillo said the association stepped in to moderate competitive pricing practices after accusations were traded among members about misleading and inaccurate information. He insists the position was not against Walmex and that the door remains open if Walmex wants to return. However, Walmex appears uninterested in the invitation to return to Antad, which continues to champion legal and political causes that favor retailers. Without Wal-Mart, the association's portion of the retail sales market declined from 35% to 19%.

"I may be accused of lacking patriotism, but I believe that Antad came out the loser with the departure of Wal-Mart," Quijano said. "Wal-Mart doesn't need an Antad, clearly. I think it's the other way around."

Santana Castillo said the association, whose members command about 6,000 stores and employ 270,000 people, will continue to have a strong influence over the national economy, inflation and the buying power of consumers. And the statistics and estimates provided by the business association continue to be a reference point for retail industry watchers.

The 2003 forecast calls for a 3% increase in sales among association members. Broken down among three retail store categories, the forecast calls for a sales increase of 1.7% at general auto-service stores, 6.9% for department stores, and 6.2% for specialized retailers. A drop in the peso's value during the first quarter of 2003 already has cast some doubt over the original Antad estimate.

WAITING ON REFORM

The outcome of mid-year congressional elections could be a crucial moment for the future prosperity of the retail sector, according to Santana Castillo. The industry stands to benefit from current proposals to reform the country's laws governing labor, the electrical industry and government accounting--initiatives whose approval or defeat depends on the balance of power in Congress.

"The elections could guarantee that in a relatively short time you could see the structural reforms the country needs" in order to attract investment, Santana Castillo said.

Reforms aside, the retail sector has attracted a good deal of investment in recent years. Antad estimated its members added roughly 500,000 square meters of floor sales space in 2002, more than a 5% increase. Mexico's enormous off-the-books economy leaves the retail sales industry with enormous opportunities for growth and to capture a greater market share. A surge in unemployment, however, could always drive more people into the untaxed, unregulated informal economy.

SHOPLIFTER IN AISLE THREE

Small, organized bands of robbers continue to sap the industry's strength, according to Santana Castillo. In response. Antad supports efforts to more aggressively prosecute and penalize shoplifters, who evade strong punishment by stealing small amounts.

The association's ideas for bringing greater efficiency to the industry include the creation of paper-less government receipts and a new comprehensive Internet catalogue of inventories and prices. Antad's forecast for 3% growth comes with some caveats, Santana Castillo noted.

For the prediction to come true, Mexico must create between 300,000 and 400,000 new jobs and achieve a steady inflation rate in line with 2002. "If we don't see these conditions, the results will definitely be very similar to last year," Santana Castillo said.

Morgan Lee is a correspondent for the Albuquerque journal and a Mexico City-based freelance writer.