Mexican powerhouses set to unleash mayhem, but can they pin down the Lone Star State?

By Angel AbcedeSenior Editor/Content Development Coordinator, CSP; Full Article courtesy of Convenience Store News.

If neither the brute force of Britain’s Fresh & Easy nor the hipster lure of Japan’s Famima!! could captivate eclectic Californians, why would Mexico’s two formidable but unremarkable convenience-and-fuel retailers fare any better farther south in the state that still remembers the Alamo?

OXXO, the convenience-first powerhouse based in Monterrey, Nuevo León; and state-run fuel monopoly PEMEX, based in Mexico City, each has test sites up and running in Texas. And each has announced plans to build hundreds more—900 over 10 years, in the case of OXXO.

Brand recognition in these increasingly Mexican and Latino border towns and Gulf Coast markets may drive such braggadocio. However, sources say even flat-out success may not be their only compelling interest in the move.

The question is: For these companies, will Texas be a rose or a thorn?

Both OXXO and PEMEX face daunting barriers in the United States. For OXXO, Texas law forbids companies from both manufacturing and selling alcohol. OXXO’s parent, FEMSA, owns a 20% share in Amsterdam-based Heineken.

For PEMEX, the recent fall in crude prices has essentially grounded new investment, and for both PEMEX and OXXO, the energy bust has led to hardship in border towns across the Rio Grande. However, if they can navigate through these challenges, both have the resources to wage an impressive ground game in the North—wall or no wall.

OXXO

For c-store retailers, the chain to watch is OXXO, with its history of building quickly, developing distribution and learning from its internal cross-channel resources, including drug stores and foodservice.

OXXO’s scale is intimidating. The retail giant comes in at 14,061 stores, including more than 1,200 built last year—a staggering number, considering leading U.S. chains typically build 20-30 tops.

A year ago, OXXO officials testified before a Texas House committee, saying it planned to open 900 stores in the next 10 years—yes, 90 a year, promising to invest more than $860 million in the state and create more than 6,000 jobs. The legislative and legal efforts have yet to change liquor regulations, and in a year’s time, the company has built only two proof-of-concept stores, one each in the border towns of Eagle Pass and Laredo.

Despite the dormancy, a former Texas retailer who ran c-stores in those very markets says OXXO is under tremendous pressure to diversify. “They produce an enormous amount of cash,” he says, speaking to CSP under condition of anonymity. “They’ve got to worry about the concentration of risk, having everything in one economy in an underdeveloped country.”

OXXO’s parent company, FEMSA (Formento Económico Mexicano), is essentially a beverage and retail conglomerate. In addition to shares in Heineken and its OXXO convenience chain, FEMSA’s assets are considerable:

  • It is the second-largest Coca-Cola bottler, with its Coca-Cola FEMSA producing one out of every 10 bottles of Coca-Cola in the worl
  • The company owns Coca-Cola in the Philippines.
  • Last year it bought Farmacias Farmacon, a pharmacy chain of more than 200 stores based in Mexico.
  • In 2014, it bought majority ownership of Monterrey-based Gorditas Doña Tota, a 200-store fast-food chain.

In its investor communications, the company defines its retail trajectory as “small box”-focused, alluding to format interchangeability.

“The company wants to diversify,” the retailer says. “It’s not that they’re waking up and saying, ‘C-stores in Texas—that’ll be easy.’ They want to deploy elsewhere, [in case] Mexico ever goes into crisis.”

Formidable Competition

With the drivers behind any march north evident, the next big questions would be if and how Mexican chains would succeed, potentially at the expense of existing U.S. competitors. Joseph Bona, president of MoseleyBona Retail, Franklin, Mass., has done extensive work developing and improving retail concepts in Mexico. He sees opportunity for success, but only if the new entrants thoroughly examine both the existing retail landscape and what they’re bringing to the table.

Both Mexican brands, Bona says, definitely provide some sense of familiarity for Texans who have either moved from Mexico or travel back and forth. That said, the newbies will face two other combatants who share that same brand affinity: San Antonio-born H-E-B and Irving, Texas-based 7-Eleven. Both chains are strong in Texas and the Southwest, along with having well-established businesses in Mexico.

“They have already learned how to adjust and adapt to serve both Mexican and U.S. markets,” Bona says, “and how to be successful in both.”

Also, three of the top 25 U.S. c-store chains have a strong presence in Texas and other border states: 7 Eleven; CST Brands, San Antonio; and the Stripes chain, which was bought about two years ago by Dallas-based Energy Transfer Partners. As “highly competitive formats,” Bona describes 7-Eleven as mastering a low-cost operating model, CST in the process of developing a new format and Stripes as having crafted a well-recognized food offer in its Laredo Taco Company. In addition, he says, H-E-B, which has a long history of innovative formats, just announced a new convenience concept with gasoline.

“When you add some of the other regional players, notably [Lake Jackson, Texas-based] Buc-ee’s, who have the world’s largest c-store and are known for great restrooms, there will certainly be no shortage of highly successful competitors in that region,” Bona says, “whether the OXXO brand is known and recognized or not.”

With consumers already frequenting their favorite places to shop for food, fuel and convenience, Bona says, “OXXO will need to at least be on par if not better than those they will inevitably compete with, if they’re going to break consumer habits.”

No Cultural Givens

Carrying brand success into a new market, even for highly recognized logos, is still a difficult task, says Carlos E. Garcia, senior vice president of GfK, New York. Garcia, a researcher and marketing consultant who specializes in Spanish-speaking consumers, says while a strong Mexican brand such as OXXO can evoke nostalgia and respect, simply building a store will not guarantee traffic.

“The moment Hispanics cross the border, they’re confronted with a range of opportunity,” Garcia says. “Part of the process of coming to America is learning new brands traits, benefits and … developing new relationships with brands and retail outlets.”

Consumers don’t forget their old lives, Garcia says, but it doesn’t mean they’ll simply drop the brands they’ve become accustomed to when a Mexican brand crosses over to the United States.

“Loyalty is tricky,” Garcia says. “If a product or store is not much better or is worse than what they can find in American products, then no thank you.”

Opening the Floodgates

OXXO has certainly tried to lay the groundwork for groundbreaking ceremonies, but thus far, Texas courts and lawmakers have essentially put away the welcome mat. In 2014, a Texas appeals court upheld a decision to bar OXXO’s license to sell alcohol, saying FEMSA’s partial ownership of Heineken violates its cross-ownership rules. In spring 2015, it asked Texas lawmakers to reverse the law, but the committee reviewing the measure failed to take a vote on it.

If the law changes or OXXO alters its ownership structure, the chain’s potential is enormous, according to David Bishop, managing partner of Balvor, Barrington, Ill. His consultancy has done work in Mexico, and he underscores OXXO’s ability to produce and produce quickly.

“This is a company that took 20 years to get to their first 1,000 stores. Now they’re at 14,000,” he says. “Through the mid-2000s, they were opening more than 1,000 stores a year. That’s three a day.”

Bishop admits a different capital structure exists in Latin America vs. the United States, but he describes OXXO as “highly mechanized, disciplined retailers” who are adept at building stores and creating an efficient supply chain. “If you ask who is OXXO like in the U.S., you’d say QuikTrip,” he says. “They’re disciplined in their growth strategies and in entering new markets.”

And like Tulsa, Okla.-based QuikTrip, OXXO fields a network of distribution centers—15, according to Bishop—handling multiple deliveries a week, with a separate fleet visiting two or three times a week to deliver temperature-sensitive goods.

With its ownership of the Gorditas Doña Tota chain, Bishop expects OXXO to leverage that foodservice knowledge, much in the way retailers in the United States initially partner with an established fast-food chain before going out on their own. OXXO has also retained banking relationships with its customers, having developed more than a half-dozen partnerships with South American banks so that its stores can provide financial services.

“With those core capabilities, they look at the U.S. market and see a lot of fragmentation,” Bishop says. “Like Casey’s, which said a new distribution center will support 500 stores, OXXO can put a new distribution center in Texas or New Mexico and support 800 stores.”

Part of the complex flux going on in Mexico is the slow, painful deregulation of fuel coupled with the merger of convenience and gasoline, which are still separate businesses to the point of having disparate retail technologies. Both OXXO and PEMEX are  grappling with that chaos.

PEMEX

Last December, PEMEX (Petróleos Mexicanos) opened its first of five planned c-store fueling locations in Houston as part of an ongoing push to develop new revenue streams and make the state-run energy company more viable. By all accounts, the pumps, forecourt and canopy, even the large, well-stocked stores, have the look and feel of any new U.S. convenience facility.

What’s difficult to draw from this privately held oil company is any relevant history as a c-store retailer, because much of its focus—at least in terms of public documentation—is upstream. Historically, U.S. oil companies have had their ups and downs with retail, and they’ve recently opted to sell off assets to focus on exploration and production. The focus with PEMEX today appears to be the government’s intent to make it a global competitor.

In that light, net losses upward of $30 billion have put PEMEX in a cash crunch, one that officials earlier this year call a temporary “liquidity issue” resulting from the oil-price collapse and the depreciation of the country’s currency.

Since 1938, when President Lázaro Cárdenas expelled all foreign oil companies and founded PEMEX, constitutional decree allowed the company sole control of Mexico’s energy sector from exploration to the pump. By today’s accounts, the entire infrastructure falls below levels achieved in other countries, from untapped natural resources to subpar refining capabilities.

Nationalizing the oil industry, says Garcia of GfK, was initially a “point of pride and independence. Now they have to rebuild that image, but having no competition—or essentially a captive audience—they haven’t developed the marketing and public-relations expertise they need.”

PEMEX’s foray into the United States comes amid a flurry of change, all stemming from the slow deregulation of the country’s oil industry. Rob Gallo, senior principal consultant for Impact 21, Lexington, Ky., who has also done work in Mexico, calls the process slow and complex, with PEMEX eventually losing at least some of its monopoly to foreign investment. As a result, PEMEX needs to test its brand by competing in new markets such as Texas, where culture, demographics and economics align.

Even if PEMEX were to come in as a major oil vs. c-store retailer, Gallo says, it could quickly command a presence by doing fuel deals to expand its brand without purchasing the property.

“PEMEX’s financial situation will remain highly linked to Mexico’s [fragile economy] for a while,” Gallo says. “Energy reform will be gradual but largely positive for PEMEX, as it will likely give the company financial flexibility through budgetary and investment independence.

Talking Texas

The other player in the whole question of Mexico’s retail expansion is Texas itself, Gallo of Impact 21 says. Despite the oil bust, most parts of Texas are economically strong, and it has always been a business-friendly state. “I can tell you that there are operators down [in Mexico] that have plans to operate new-to-industry retail in the Texas market,” Gallo says.

Multiple factors can allow a new player to thrive in the Lone Star state.

“Those who are in Texas recognize the market is strong,” Gallo says. “You can take share based on competitive advantage; some will do it with foodservice, some price value, and others will have more cultural ties and lifestyle appeal.”

That raises new questions for OXXO and PEMEX: How will they enter the United States?

Bona of MoseleyBona only offers more questions: Will it be stand-alone c-stores with food or without? With a partner or going it alone? Will they cross the border with their own trucks from their own distribution centers or build their own here? Will OXXO get approval to sell beer? And until that gets resolved, what will they do? With PEMEX, questions of quality and trust may be issues. Do they enter with the PEMEX brand or perhaps create a new one?

With both lacking a clearly defined and focused strategy, it’s easy for Bona to parallel the companies with Tesco and its failed Fresh & Easy attempt. “They underestimated the competitiveness of the U.S. market, the size and scale of who competes for convenience and the growing food-to-go category,” he says.

OXXO is in the early stages of developing a proprietary food-to-go offer, he says, but will it be competitive enough for the U.S. market, both in terms of offer and operations? “The risks of experimenting here when so many other competitors are working on second-, third- and fourth-generation iterations of their current offers, formats and designs make the challenge that much more difficult.”

In OXXO’s defense, Bona says, it “[employs] highly motivated, well-educated teams with strong analytical skills and focus, so I imagine that they will have done their homework … as did Tesco.”

Success will ultimately lie in that entry concept, Garcia says, whether culture is a part of the equation or not. “It’s about what they have inside, finding things you can’t find anywhere else,” he says.

Latinos overindex on c-stores, Garcia says, because they have less access to transportation or not enough money for two cars. They’re often left paying higher prices at c-stores because of it. OXXO could come in with a low-price strategy combined with an enhanced service offer the demographic may find compelling, he says.

Believing OXXO has an edge over PEMEX on the retail front, Garcia says, “If they find a model and come across with a product mix, pricing strategy and merchandising approach that’s meaningful, they can kick some butt.”


Growing Hispanic Makeup

The Hispanic population in Texas grew faster than that of whites and African-Americans from 2010 to 2014, according to the U.S. Census Bureau, putting the total number of Hispanics in the state in 2014 at 10.4 million—comparable to the white population at 11.7 million.

Demographic

2010

2014

Percent increase

Total Texas population

25.1 million

26.9 million

7.2%

White

11.4 million

11.7 million

2.5%

African-American

2.9 million

3.2 million

8.6%

Hispanic

9.5 million

10.4 million

9.4%

Source: U.S. Census



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