Mexican E-Commerce Grows, but Requires Some Coaxing

12.04.2016 By: The Wall Street Journal

MEXICO CITY—While online shopping gains traction in Mexico thanks to wider Internet access and smartphone use, a dearth of credit cards and reluctance among large swaths of the population to pay for goods online are prompting Web retailers to look for creative solutions.

Online shopping represents just about 2% of the country’s roughly $203 billion in annual retail sales, according to consulting firm Euromonitor International, even as the segment’s sales have increased more than fourfold in the past five years and are expected to double again by 2020.

Payment via Internet remains a challenge for a country with just 22.6 million credit cards in a population of 119.5 million, and despite programs to expand financial inclusion, online retailers find it worthwhile to cater to customers who still prefer to use cash.

Amazon.com Inc., which launched full-fledged Mexican operations in June, began to offer gift cards in December that can be bought for cash at thousands of Oxxo convenience stores operated by beverage and retail giant Femsa, as Fomento Economico Mexicano is better known. The Seattle-based online retailer also reached an agreement to accept Oxxo’s own prepaid cards. In two years, Oxxo, which has more than 13,000 stores across the country, has placed with consumers two million of the cards associated with accounts at Citigroup Inc. unit Banamex. “We’re acknowledging there’s a big opportunity among the unbanked,” said Amazon Mexico country manager Juan Carlos García, who noted that more than 80% of consumers in Mexico still prefer to buy with cash. “We had been preparing this. Unfortunately it wasn’t ready before the launch” in June, he said.

With its strategy in Mexico, Amazon joins regional rivals. Linio, one of Latin America’s largest online stores with operations in eight countries, accepts PayPal, cash-on-delivery and cash payments at Oxxo stores, as well as credit and debit cards. Latin American eCommerce leader MercadoLibre has a PayPal-like payment system called MercadoPago, and in Mexico also allows for payment at Oxxo and other retail outlets. Linio Chief Executive Andreas Mjelde, who is based in Mexico City, sees cash-on-delivery as a way to reassure first-time clients, saying that after one or two such purchases they often switch to paying online. “It breaches the gap of the lack of trust that the average Latin American has to shopping online,” he said.

More than half of Mexicans over the age of 6 use the Internet, but while 85% of users access social networks, only a quarter use the Internet to make purchases, according to a survey by the Mexican Internet Association.

Retailers take hope from the rapid growth of smartphone use, which jumped 40% in 2015, according to the Competitive Intelligence Unit. The telecommunications research firm estimated that Mexicans would have close to 75 million smartphones and 20 million tablets by the end of 2015, with penetration likely to expand more this year.

“Soon a majority of the population in all our markets will be able to shop online,” Mr. Mjelde said. “By 2020 there won’t be any limit to Latin America in terms of Internet penetration or payments.

With roughly 98% of Mexico’s retail sales conducted at physical stores, the main competition for online sellers is not each other but rather traditional retail, he said. Bricks-and-mortar retailers are also stepping up their e-commerce efforts. Department store chain El Puerto de Liverpool invested $36 million in three years to upgrade its online platform, offering free delivery and more than one million online products.

Wal-Mart de Mexico, the country’s biggest retailer and one of the top three in online sales, is banking on e-commerce to provide one percentage point of the 7% annual sales growth it needs to meet its target of doubling its business over the next decade. Mary Valencia, vice president of e-commerce at Wal-Mart de Mexico, said consumers appreciate the greater number of products that can be offered online and the ease with which they can compare prices. Often, customers will see a product in a store, and then go online to check against others before making a purchase, she said. Wal-Mart also allows customers to pay for Internet purchases at its store checkouts.

The increased competition in e-commerce comes as traditional retailers are riding a recovery thanks to employment and wage growth, as well as record-low inflation. Last year through November, same-store sales of Mexican retailers were ahead 6.5%, compared with a 0.9% gain in the same period of 2014, according to retail association Antad.

As e-commerce competition heats up, logistics play an increasing role.

While Amazon’s existing Mexican customers were able last year to switch seamlessly to its Mexico store, Mr. Garcia said, the retailer is taking advantage of its newly established local presence to offer enhanced services such as rapid delivery times.

The bulk of online sales, according to retailers, is still in Mexico’s biggest cities such as Mexico City, Guadalajara and Monterrey. At the same time, several note that there is relatively strong online demand in midsize cities and more remote states, where there are fewer stores and less merchandise on offer. Electronic goods such as flat-screen televisions and videogames are particularly popular among online shoppers, although Amazon is also seeing demand for books, DVDs and CDs—and ”even vinyl records,” Mr. Garcia said, “which sounds pretty retro but they’re selling.”