Hoping to take advantage of substantial eCommerce growth in Mexico, along with a re-worked NAFTA trade agreement between the United States and Mexico, Amazon has followed up its colossal $13+ billion purchase of Whole Foods with news that it plans on opening a one million square foot distribution center in Mexico, close to the capital.
The one-million square foot facility is set to be built in 2018 in the Tepotzotlan municipality some 25 miles from Mexico City, adding to its two existing 500,000 square foot distribution centers already operational in Mexico. Once the new facility is up and running it will reportedly service one million deliveries a day across the country, including big ticket items such as furniture.
Opening a Mexican distribution center of such size shows Amazon is committed to the market and the country’s long-term online growth. The fulcrum for any sustainable, cost-effective entry into a new or developing online market is distribution. Distribution is key, not least because it brings online retail companies closer to their customers. It is also a question of costs. Having a local, or at least in-country, distribution center means cheaper shipping costs for Amazon to the growing online market in Mexico and vastly reduced return costs, which can detrimentally impact any online retailer’s bottom-line.
Mexico’s eCommerce sales are growing at almost 25 percent annually and are now worth almost $14 billion a year. Online sales for major retailers have increased from one percent of total sales to nearly 20 percent over the last five years. Amazon, for its part, more than doubled its sales in Mexico last year up to $253 million. The move is seen as another move in Amazon’s ongoing global battle of the giants with Walmart in the US and Alibaba in Asia.
A number of factors are contributing to the rise of online retail in Mexico, including more payment options and increased smartphone adoption. In addition, a higher-volume localized distribution approach, represented by a new mega-distribution facility in Mexico, certainly fits in with increased customer loyalty derived from faster shipping, cheaper and less problematic returns, more product offerings, and a slicker online retail experience for the consumer.
Apart from online consumer reticence in Mexico because of such security concerns as credit card and mail fraud, the company is hoping that doubts as to whether ordered products will even arrive at their destinations will be assuaged with the faster shipping that a larger distribution infrastructure will provide.
Taxes and government regulation is always a major factor for any retailer seeking to penetrate a new market. Mexico is no different. Indeed, Amazon’s expansion move comes at a time when there are political efforts to change the North American Free Trade Agreement between the United States and Mexico. Hoped for changes include increasing the value of online tax-free products from the current $50 limit to $800.
Amazon’s entry into any new market resembles a military invasion of a country – get the logistics set up properly before the sales and marketing shock troops arrive en masse! In short, get the distribution logistics in place first and then attack the market. Additionally, Amazon has shown with its acquisition of Whole Foods and other business ventures that it is more than prepared to take an initial extensive financial hit to establish itself in new and developing markets, such as Mexico.
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