In the fuels wholesale and retail world, the chance to grow your business by even a few percentage points would be considered a significant one. To gain a substantial market share in a growing economy is a major achievement. In this context, expansion into Mexico could represent a major opportunity to grow in an otherwise static or declining business environment.
The Mexican market has many attractive features, including a demand growth of 25 percent since 2000 and hydrocarbon consumption rates of only 40 percent of the average reported by the Organization for Economic Co-operation and Development (OECD)1. A few companies have already found ways to put aside initial doubts and make significant investments in this space. However, apart from some domestic groups and some speculative investors, few international oil companies (IOCs) have made bold strides to enter the country.
What has led to this caution and are the obstacles to entering the Mexican market insurmountable?
Firstly, we cannot deny that economic or growth risks exist. Since the US presidential election, the Mexican economy has suffered from an uncertainty premium, and the latest NAFTA negotiations are only adding to these. There is the political risk represented by the upcoming 2018 Mexican elections, which has seen statements from popular opposition parties that they will reverse the energy reforms if elected. Price reforms are still incomplete, and while prices are currently above free-market rates, these reforms reduce the ability of new market participants to use pricing as a lever to drive volume and gain market share.
These macro-risks are difficult to accommodate. They limit investment returns to short-term horizons and encourage risk-sharing with partners that can shoulder some of the costs, potentially putting off more risk averse investors.
Other risks are more manageable. For example, the Mexican fuels retail market uses a full-service model that makes the self-service models used in developed markets harder to replicate. Significantly, it reduces the volume of convenience store sales and increases labor costs.
We believe new digital models of engagement can help overcome this challenge and actually encourage up- and cross-selling, which has previously relied on training expenditure for convenience clerks. For example, some companies are looking at using smartphone technology (which has a high penetration amongst the urban driving population) to allow passengers to order convenience goods from their car to be delivered while their gas is being dispensed. Such models provide an opportunity to use relatively low-skilled staff in the fetch and deliver model, as opposed to costly training of staff to manage a convenience store.
There is a history of under-pumping and credit card fraud at retail sites, which leads to a higher than average use of cash, even for an economy that has not fully embraced electronic payment methods. We believe this represents a significant advantage for multinational brands to develop the market and trade on an “honesty premium” compared to local players. It requires actively rooting out bad behaviors in franchise owners and zero tolerance for fraud.
Security concerns are still a challenge and not something a foreign investor can directly influence. What is often missed, though, is the highly-regional variability of this risk. Retail site selection and good local knowledge are also imperative to getting this balance right.
Finally, logistics can be a barrier. With open season bidding for logistics capacity in effect, there is the opportunity to start investing in logistics capacity, but, crucially, it is the development of local logistics providers that will further build-out this part of the market.
In our next blog, we will focus on why, despite these risks, investors have still braved the Mexican retail fuels market, and ask what can be learned from their decisions.
1 Mexico Country Report, International Energy Agency © 2017 OECD/IEA