E-commerce expansion in Mexico provides another platform for domestic consumption

The Mexican economy has remained healthy due to high levels of manufacturing and trade, with the domestic market also playing an increasingly critical role in GDP expansion on the back of rising incomes. As Mexicans become better connected, both in terms of ICT use and global trade, domestic consumption is displaying new patterns through e-commerce. The rise of online shopping has resulted in growing competition among retailers and more choices for consumers. However, while mobile and fixed internet penetration has established a sufficient consumer base for e-commerce activities to thrive, the industry’s long-term growth will depend on enlarging Mexico’s middle class and widening financial inclusion.

Setting the Scene

According to the “E-commerce Study in Mexico 2017”, published by the Mexican Internet Association (Asóciacion Mexicana de Internet, AIMX), the value of the domestic e-commerce market grew by 28.3% in 2016, equalling MXN329.9bn ($17.8bn). This continues a trend seen over several years, as the value of the budding market was just MXN24.5bn ($1.3bn) in 2009.

A key component of expansion has been the up-take of internet and mobile data across the country. According to third-quarter 2017 figures from the Federal Institute for Telecommunications, there were a total of 111.9m mobile phone lines in Mexico, a 2.2% increase over the same period of 2016. More importantly, there were over 80.5m mobile data subscriptions – up 15.8% year-on-year. Rising use of internet-enabled smartphones, in particular, has allowed a growing number of Mexicans to access online retail platforms. From mid-2013 – when reform of the telecommunications sector began – to the third quarter of 2017, mobile subscriptions increased by 7.5%, while mobile data connections rose by 193.6%.

Disposable Income

Although e-commerce expansion is steadily overcoming hurdles to access, another issue is the level of disposable income locals have to spend on non-necessities. Between 2000 and 2016 Mexico’s GDP per capita increased from $6721 to $8209, according to the World Bank. However, this metric peaked at $10,453 in 2014, meaning Mexicans have been feeling a pinch over the last four years. The drop was mostly driven by a fall in the value of the peso, prompted by reduced oil revenues and uncertainty around Mexico’s relationship with the US since the latter’s presidential election in late 2016.

This speaks to the financial environment of the Mexican consumer, as the majority of the population remains highly exposed to economic downturns that can affect buying power. “Consumption is a key long-term driving force of the economy. However, the notion of a middle class in Mexico is limited; it has been created by financial institutions and its growth is driven by lending,” Cédric Desplats-Redier, director-general at BNP Paribas Personal Finance, told OBG. “Wage inequality in the country demonstrates how there is very little real disposable income in certain social classes. If this issue is not managed, there could be a credit crisis in the long term.”

Wage Disparities

It is for this reason that e-commerce expenditure continues to be skewed towards the higher-income segments of the population. According to a survey of 1019 consumers conducted by AIMX, Mexican online shoppers spent an average of MXN6920 ($374) between May and July 2017 across multiple categories, excluding travel. This was up from MXN6535 ($353) in the same months of 2016. Per the categorical breakdown, travel displayed the highest online expenditure by far, at an average of MXN7023 ($380) for the period. AIMX noted that 42% of those surveyed belonged to the AB socio-economic level, with an additional 48% included in the C+ and C segments, meaning that only a small percentage of low-income households engage in e-commerce.

Under these conditions, the growth of online shopping over the coming years will likely be driven by high-value buyers, as it appears that the recent macroeconomic uncertainty has not significantly affected the luxury retail market, with the e-commerce segment being particularly resilient. The main influencing factor for e-commerce is the country’s sustained growth and solid economic forecast, which, in spite of the challenges, remain largely positive.

Regional Comparison

While the industry certainly has room to expand further in the country, especially among segments of the population earning less than top salaries, Mexico already plays a sizeable role in the region’s e-commerce consumption. According to data complied by research firm eMarketer, e-commerce sales in Latin America reached nearly $50bn in 2016, and sales are forecast to be worth close to $80bn by 2019. Online sales in the region are driven by Brazil, which accounted for onethird of total purchases in 2016, at $17bn, followed by Mexico at $7bn and Argentina at $5bn.

One reason for the considerable gap in sales volumes between Mexico and Brazil is linked to the penetration of local banking services, with access to electronic banking, in particular, perhaps representing a more important driving force for e-commerce development than internet access. Only 39% of Mexicans had a bank account in 2017, compared to 68% of Brazilians, according to a March 2018 report by AIMX. While online retail sales in Brazil are expected to account for around two and a half times those in Mexico in 2019, the percentage of Brazilians with internet access was 60% in 2017, compared to 64% in Mexico. Therefore, broadening the appeal and utilisation of e-commerce over the long term will likely require a higher level of formal banking penetration, but for the time being, Mexican e-commerce platforms have been able to create alternative payment options, such as cash payments made to physical agencies.

Security Concerns

In addition to increasing financial inclusion, the industry is up against the issue of online security. Mexican e-commerce operators continue to battle with the negative perceptions associating online transactions with lax security and credit card fraud. This feeling was reinforced by a recent cyberattack in April 2018 in which hackers stole millions of dollars from several banks. The case led the central bank to establish a cybersecurity unit to improve the sector’s security protocols.

Nevertheless, the case underlined pre-existing fears of many Mexican internet users who have so far refrained from shopping online. The National Commission for the Defence and Protection of Users of Financial Services (Comisión Nacional para la Defensa y Protección de Usuarios de Servicios Financieros, CONDUSEF) reported that between January and September 2017 the number of online fraud cases related to banking operations surpassed 2.5m, a 102% increase relative to the same period of 2016. One positive result, however, has been CONDUSEF’s ability to deal with the complaints, 90% of which are resolved favourably for buyers, according to media reports. Yet, only security improvements for online banking transactions will be able to transform e-commerce into a mainstream consumption channel.

Infrastructure Needs

Other operational elements will also require improvements for e-commerce retailers to expand their reach. Although large urban centres such as Mexico City and Monterrey have adequate transport routes and warehousing capacity to support the logistics aspect of e-commerce, servicing other areas of the country – especially the southern regions – remains a challenge.

“Although certain areas are witnessing growth, there needs to be sufficient city or country-wide infrastructure for e-commerce to become a dominant force in the retail and logistics sectors,” Sergio Ayala, director-general of Gifan International, a distribution company, told OBG. Addressing the logistics and security aspects of online retail will be critical if the industry is to be successful in enticing new buyers. At the moment, though, online platforms in Mexico are likely to grow by deepening interactions with shoppers already at ease with online transactions.