U.S. investors back away from Mexico

April 02, 1995|By Jay Hancock | Jay Hancock,Sun Staff Writer

To understand why home improvement chain Hechinger Co. is suspending plans for stores in Mexico, consider that a basic Stanley-brand hammer would now sell there for 40 pesos. That's almost two days' wages for an average Mexican.

Consider that construction of Mexican shopping centers, where

the new stores would be, has nearly stopped. Consider that interest rates approaching 100 percent have quashed home sales, the spark of solvency for any home improvement chain.

"It's going to be real difficult for a U.S. company to ever go down there and open stores until that situation gets under control," said W. Clark McClelland, executive vice president of Landover-based Hechinger.

For big U.S. retailers, Mexico recently was a rich promise on the border of fulfillment. The North American Free Trade Agreement, a growing Mexican middle class and a bubbling Mexican economy prompted chain after U.S. chain last year to announce ventures there.

Now Mexico is what it has been for decades: a big market with long-term potential.

The peso's plunge is the frequently cited reason. Peso prices for imports into Mexico have risen by as much as 100 percent since December.

U.S. operators go outside Mexico for large portions of their dresses, shirts, perfumes, chain saws and other goods.

Import inflation is causing deep erosion of their sales. In addition, lenders are leery of financing imports because the loans would be repaid with pesos of uncertain value.

But Mexican difficulties for U.S. retailers go beyond exchange rates.

"The peso problem is frankly the least of our worries," said Henry J. Rusman, a spokesman for J. C. Penney Co., which will open two Mexican stores next month.

For one thing, monetary chaos has shocked the country's economy. Even demand for Mexican-made merchandise has dropped.

"The recession will be very hard during this year and perhaps part of the next year," said Walter Fraschetto, a partner in the Mexico City office of the consultancy Arthur Andersen. "The people right now are buying only the things they really need."

In addition, new trade barriers have obscured the NAFTA vision of seamless commerce between the United States and Mexico. To improve its trade balance and bolster the peso, Mexico has installed exacting import-paperwork requirements, higher tariffs and other speed bumps for many products originating outside of North America.

That doesn't violate NAFTA, which restricts tariffs only on goods made on the continent. But it confounds retailers, who expected Mexico to be relatively open to all imports.

Mexico is "probably the toughest place to get goods into right now, outside of the Middle East and Russia," said Josh Chanin, a manager in Ernst & Young's retail consulting group in New York.

It's particularly hard on apparel sellers, such as JCPenney, that are buying in the Far East. Penney, which originally said it would open seven Mexican stores, is still "evaluating" the crisis' effect on its plans, Mr. Rusman said.

Besides its 90 million consumers and seeming progress toward first-world status, Mexico's proximity was inviting to U.S. retailers.

Wal-Mart, Kmart and JCPenney have been running out of U.S. room. Breaching the border offered not only the opportunity for new customers, but also the opportunity to weave Mexican stores into U.S. networks of warehouses and trucking routes. That would save money and help pricing and profit margins.

"Anybody who talked publicly about going into Mexico was thinking about integrating the supply chain in the United States," said Robin Lanier, a vice president with the International Mass Retail Association, a Washington-based trade group.

Mexico's new trade barriers, she said, have made that impossible. "You lose economies of scale if you have to have duplicate warehouses," she said. "That's a real hit."

Several U.S. merchandise chains are scrapping or shrinking Mexico expansion plans announced last year and previously.

Wal-Mart recently has been the most aggressive American chain south of the border. The company owns 67 Mexican stores in a 50/50 joint venture with Cifra S.A., Mexi- co's country's biggest retailer. Many are restaurants and smaller discount stores, but 11 are huge Wal-Mart discount-grocery stores and 22 are Sam's Club membership warehouses.

The plan this year was to open 13 more Sam's and 12 Wal-Marts. All but two are on hold.

Southwestern discount chain 50-off Inc. intended to enter Mexico this year with five stores. It pulled back after sales in its U.S. stores near the border plummeted. Kmart proceeded with two )) openings this year but is unsure of future expansion.

Companies with stores already open or about to open are making the best of it. Some are seeking more Mexican merchandise.

"The demand from our customer has shifted to everyday, basic goods, and we have been able to get those goods in Mexico," said Geraldo Ruiz, a Wal-Mart spokesman.

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