Last year, women’s specialty retailer Ann announced the opening of its first LOFT store in the second largest Latin American economy, Mexico. This was the retailer’s first venture in the country, which offers a huge pool of value and fashion conscious buyers. The company believes that its success in U.S. and Canada is an indicator that it can succeed in Mexico as well, if it targets the market properly. Given that LOFT is a relatively cheaper brand as compared to Ann Taylor, has a bigger casual apparel variety and encompasses a wider customer demographic, it was understandably the preferred brand for Mexico. Although we expect Ann’s management to talk about its debut performance in Mexico in its Q4 fiscal 2014 earnings call, we think it’s worthwhile to analyse LOFT’s long term prospects in the market.
Mexico is the eleventh most populous country in the world and close to 60% of its population is in the 15-54 years age group, which is LOFT’s target market. The ‘middle class’ of the country is growing, which paints a pleasing picture for relatively expensive brands that are associated with a luxurious lifestyle. However, the market is getting competitive with a number of casual as well as luxury brands extending their reach in the country, and this can keep a check on LOFT’s growth.
Our price estimate for ANN stands at $36.64, which is just ahead of the current market price.
See our complete analysis for ANN
Why Mexico Looks Good For LOFT
Improving affordability and lifestyle awareness: Mexico has become an attractive market for foreign apparel retailers due to consumers’ rising disposable incomes, clear interest in fashion and soaring adoption of online shopping. Between 2003-2009, about 17% of the total Mexican population entered the middle class consumer group, and close to 40% of the total population was middle class in 2013. Every year, more people are able to afford a better lifestyle, that bodes well for LOFT, which is not as expensive as some of the other luxury brands but is associated with a similar lifestyle. With improving education standards, and a growing proportion of affluent working mothers in the population, the influence of American and European lifestyle has increased. This in turn has fueled the demand for American clothing. Buyers have also shown great interest in popular luxury brands mainly because of the status symbol associated with them.
Growth in online retailing: E-commerce sales in Mexico have been growing in double digits for some time now, driven by increasing Internet penetration, the use of smartphones, flexible payment methods and friendly return policies. Interestingly, apparel has been among the most popular categories sold online, which is likely to continue in the future. Overall, Euromonitor expects apparel sales in Mexico to grow strongly for the next few years driven by rapid expansion of specialty retailers in an eager market.
Why It Does Not
Competition from domestic counterparts: As an apparel market, Mexico has been among the first choice expansion destinations for several U.S. retailers. In 2013, teen apparel retailer, Aeropostale began expanding its retail stores in the region and saw good customer response. In the same year, American Eagle Outfitters extended its retail presence in the country with stores in the third largest Latin American mall, Sta Fe. One of the largest U.S. apparel retailers, Gap Inc, entered the country in 2012 and has been performing well since. With many apparel retailers rushing to Mexico, it is clear that the market holds tremendous potential for American players. However, it also sheds light on the fact that competition in the market will intensify in the next few years, and LOFT will be on the back-foot given that it has been a little late in entering the market.
Luxury retailers are also expanding: Neither is LOFT a direct competitor of casual apparel brands, nor is it taking luxury brands head on. However, given that there is no clear segmentation in the Mexican apparel market, LOFT is in fact competing with every retailer. Therefore, in addition to casual retailers, luxury retailers also present a formidable competitive threat for LOFT. A number of luxury brands in the country are expanding in large cities such as Guadalajara, Monterrey, Cancun and Queretaro, where they can acquire a sizable share of affluent buyers’ spending. This is a big concern for LOFT, given that it does not have the first mover’s advantage.
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