Increasingly, Mexico’s channel landscape is evolving rapidly, and multinationals will need to reassess whether their current channel strategies capitalize on the market’s potential and maximize sales growth and profitability. With the expansion of modern retail, the growth of e-commerce, and changing competitive drivers for local distributors, senior executives will need to reevaluate and pressure-test their current channel strategies. FrontierView research helps clients to identify the right distribution model; learn how to leverage e-commerce; build sound processes to find, vet, and manage partners; and plan for future channel transitions.
In this first blog post, the focus will be on the key company-specific and market/industry-specific factors to consider before choosing an appropriate distribution model for your Mexico business. FrontierView has developed a comprehensive analytical framework to help multinationals identify the most suitable channel structure for their businesses in Mexico:
Company-specific factors to take into account for your channel design
- Sales growth horizon: Working through distributors will allow you to build broad geographic coverage relatively quickly, while a direct approach will take longer but will cement a more lasting presence. Most multinationals pursue a more direct relationship with key accounts and retailers in the Mexican market while still leveraging distributors to attain a national presence
- Customer reach: Wide regional divergences within Mexico mean that heavy investments in logistics capabilities are necessary if a company decides to go direct. Despite the higher capital commitment required to go direct, companies that have the financial muscle choose this option mainly because of the upside opportunities associated with full control of the sales force, direct relationships and interaction with key clients, and the possibility of greater growth over the medium- to long-term
- Value-added services: Companies selling sophisticated products, particularly those that require a significant service component, have to consider a predominantly direct or hybrid channel strategy. This is a growing requirement for multinationals in the B2B space
- Market access: Multinationals need to evaluate whether local distributors will have improved access to potential new customers, given stronger market knowledge and relationships with key customers and retailers. The ROI of a full, direct national presence is not clear-cut in Mexico due to the heavy concentration of sales opportunities in a few key metropolitan areas and wide dispersing of the rest of the market throughout the country
Market-specific factors to take into account for your channel design
- Customer demands: Customer demands from the channel can make a fully direct or fully indirect model impractical or unprofitable for some segments, forcing multinationals to pursue hybrid models if they sell to a wide diversity of industry or consumer segments
- Client size and dispersion: Multinationals rely on wholesalers and distributors to reach customers in geographically-dispersed areas, while focusing on serving key accounts directly. Modern retail is more prevalent in geographically concentrated regions, while traditional retail is stronger in more rural or semi-rural regions in Mexico
- MNC bargaining power: While in most industries multinationals have strong bargaining power when dealing with distributors, Mexico’s top-heavy industry consolidation gives key accounts significant leverage. Companies in the pharmaceutical sector in particular must confront the significant market power of traditional distributors
- Operating environment: Mexico offers notorious security and corruption challenges for multinationals, which diverge wildly from one geography to the next, creating significant barriers to normal operations for many multinationals
- Competitors’ strategies: If competitors are selling directly into specific segments or markets and margins are low, companies will find it difficult to offer competitive prices through distributors, unless they have a significant manufacturing cost advantage. Likewise, if competitors meet certain customer demands through a specific channel, new entrants will also likely need to meet these demands through their channel structure
Our research goes into greater in-depth on common channel structures for industries, as well as best practices for channel design in Mexico. The next blog post will focus on the fast-growing e-commerce channel opportunity in Mexico.
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