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1997
Mexican Consumer Behavioral Changes due to the Peso Devaluation
by Paul Herbig
Abstract
This manuscript examines consumer behavioral changes which occurred as a result of the December 1994 Mexican peso devaluation.
Introduction
"Workers do not bargain for increased wages merely because it gives them pleasure to see larger numbers on their paychecks. They are concerned . . . with what their paychecks will buy.”1
With these words Leonard Woodcock could easily have been referring to the demoralized state of the Mexican workers who, after riding high on the wave of benefits derived from an energetic entrance into the international trade forum, were left to face the harsh realities of growing unemployment and skyrocketing inflation rates. Only recently accustomed to flooding across the borders into the United States in search of high quality goods with a blatant disregard for the sometimes higher prices to be paid, many Mexican consumers in late December 1994 saw their way of shopping and living drastically altered. This traumatic change for the middle and upper classes, however, was nothing compared to the suffering which the lower socioeconomic stratums were forced to endure. The dramatic turn of events in consumer spending patterns, which will be explored in depth, can be best attributed to the economic crisis stemming from the December 1994 devaluation of the Mexican peso. It was this economic earthquake within the Mexican financial system which caused the transformation of Mexican society from a booming, developing country into an unstable shadow of the country it was two years ago.
In the period prior to the 1994 devaluation of the national currency, Mexico was viewed as the tiger of Latin America: a vast market to be exploited and admitted into the elite group of developed countries headed by the United States. With a numerous and young population (nearly 70 percent under the age of thirty), the number of inhabitants in Mexico had already surpassed 87 million in 1991.2 In 1995, it was estimated at 93,985,848, with a growth rate of 1.9 percent per year.3 Of this colossal group, seven out ten people made their residences in towns and cities, with Mexico City, Guadalajara and Monterrey playing the role of key urban centers and housing approximately one-third of the country's population.4 Currently, 48.10 percent of total national sales take place in Mexico City; 9.03 percent occur in Monterrey, and 8.52 percent are transacted in Guadalajara (with the remaining 34.35 percent distributed among other cities and towns in the country). In a somewhat similar manner, the greatest amount retail sales take place in the supermarkets and convenience stores of the three previously mentioned cities.5
Some of the most important players in the development of a new, highly-developed market were the upper and upper-middle income sectors of the Mexican population, estimated at 10 percent and 7 percent respectively or 15 million people in total. This new brand of sophisticated consumer Is younger and better-educated than other segments of the population. Often equipped with a university education, they are economically active and work in professional and managerial positions, many have traveled abroad and most are familiar with U.S. television and programming and advertising.6 For this particular fragment of the population, imports were novelty items which reinforced their elevated social status since they were willing to pay top-dollar for quality goods.7 This group represented the Mexican version of the American dream.
Due to Mexico’s proximity to the United States, Mexican consumers, particularly those residing in the northern region of the country in cities like Monterrey, had an easy access to American goods. These people did not limit themselves to the select goods which might be imported into Mexican territory to be put on the shelves of local stores; instead, they ventured into the United States in search of variety, quality, and, at times, even better prices. In the pre-devaluation period, Juan Antonio Lara described McAllen's Plaza Mall’s full parking lots and halls full of eager Christmas shoppers from Monterrey who hoped to take advantage of sales. These Mexican consumers often failed to be preoccupied with the possibility of having to face a thorough custom’s inspection before being allowed back onto Mexican soil and the import taxes that the process entails. They were willing to complain about the procedure which oftentimes had a duration of two to three hours, but not enough to cause them to shop in their own country.8
One might be led to believe that the goods which these consumers were buying in the United States were infinitely different than those offered in Mexico, but, in reality, they were frequently identical. With the opening of many American stores in Mexico, one might also have expected these to substitute the pilgrimage to the shopping malls in cities like McAllen and Laredo, but they did not. The new commercial zone located on Highway 93 in McAllen was booming, and, despite the opening of new hotels that raised the count to 35, hotel rooms were extremely difficult to come by.9 The only other factor which at times seemed to limit the Mexican consumers’ visits and purchases in the American border cities was the reduced franquicia, or amount that could be exempt from paying import taxes. This amount was reduced in December of 1992, from 150 dollars to a mere 50 dollars. This amount seems even scrawnier when compared to the 400 dollar allotment permitted by the United States government.10 The change in the value of merchandise exempted from import taxes changed the purchasing tendencies of many Mexicans as exposed when retailers saw their sales decrease by up to 60 percent after the new law was implemented. A substantial amount of this shrinkage was caused by the altered behavior of Mexicans living on the border who habitually acquired many of their goods, including grocery items, in American territory. Francisco Mendivil Estrada, President of the Chamber of Commerce in Nogales, Sonora, declared that these actions ought to be made more flexible for border residents until the government can assure the adequate national supply of quality Mexican merchandise at reasonable prices.11
Another factor which helped mold the representative Mexican consumer spending is a reflection of the traditional characteristics of the culture which include a fatalistic nature. The consumer generally positions himself/herself as the victim of fate (and villainous marketing and publicity departments) who is “forced” to make purchases independently of his/her free will. They blatantly refuse to recognize that their purchases are often so frequent and commonplace that the motives behind each purchase are no longer analyzed to avoid wasting time.12 This mentality makes possible the completion of the cycle typified by the general Mexican tendency of living beyond one’s means, a situation illustrated even by the country’s own government.
All of these variables and concerns took a back seat, however, when the devaluation of the Mexican peso in December 1994 shattered the fantasy of economic well-being for many. “Mexico, under the guidance of new President Ernesto Zedillo, entered 1995 in the midst of severe financial crisis . . . an overvalued exchange rate and widening current account deficits created an imbalance that ultimately proved unsustainable."13 Forced to modify the exchange rate policy, the government allowed the Mexican peso to float freely which resulted in an immediate 30 percent to 40 percent loss in value of the currency in regard to the American dollar. Despite the implementation of an emergency economic plan which calls for federal budget cuts and privatization of more industries, the Mexican economy and people took a severe beating.14 On June 12, 1996, in Toronto, Canada, President Zedillo spoke to a select group of Canadian newspaper editors regarding the true effects of the devaluation on the Mexican economy. He admitted that the real cost of the Mexican crisis during 1994 and 1995 had totaled seventy billion dollars. He also explained that, according to the calculations of the Banco de Mexico, the country lost the equivalent of eight percent of its Gross Domestic Product only a day after the devaluation of the country’s currency.15 A financial shake-up of this proportion is sure to have devastating effects on the people of any country; the situation in Mexico is made even more difficult since it still suffers from many of the imperfections of a developing country such as a particularly uneven distribution of income.
One of the key aspects damaged by the country’s financial situation was the buying power of the Mexican people’s salaries which has seen a reduction of over twenty percent from September 1994. The four raises in the national salaries since the devaluation have proven insignificant and insufficient when faced with a rapidly escalating inflation rate; this is not the case simply for the minimum wage earners, but rather for the country as a whole. From September 1994 to September 1996, the minimum wage increased 47.6 percent while inflation rose 84.5 percent. The same effect may be observed in the manufacturing industry where the average worker’s real wages have decreased 23.2 percent. The most heavily affected sectors thus far have been the textile, leather, and paper industries.16
According to Amadéo Garza Treviño, Director of the Chamber of Commerce in Nuevo León, the contraction in the real wages stems from the government’s sole focus on controlling the inflation and exchange rates. He believes that, instead of the current strategy, the government should try to find new, more lucrative sources of employment for Mexican workers. Luis Enrique Grajeda, Director of the Consejo Patronal in Nuevo León, expressed that he is of the opinion that the government could aid in the economic recuperation by cutting down its size by fifty percent. This would result in lower taxes, considering that a great deal of this money goes to support the country’s intricate bureaucratic system. This course of action would liberate funds to aid the people without causing inflationary problems.17 These actions, along with the government’s current emergency plan, should bring about some long-term improvement for the people. Unfortunately, however, in the short-term, the changes could adversely affect the population. Hector Lários Santillán, President of the Consejo Coordinador Empresarial, strongly supports the government’s decision to privatize industries and liberate the control of prices, even in basic goods such as milk, corn flour and tortillas. He believes that the companies have thus far exercised a great deal of social responsibility in trying to absorb the greatest amount of costs possible, but these are climbing to levels which will soon make the companies inoperable. Although he understands that further price increases in items such as milk could lead to social unrest, a further increment in prices to fit the real supply and demand levels is a necessary evil.18
It has been estimated that the quality of living in Mexico has decreased at least to the level held in 1990, but now with a population ten percent larger.19 Between April and June of 1996, the average monthly purchases of Mexican families totaled 5,143 pesos, which results in an 11.1 percent decrease from 1994.20 As could be expected, some of the first areas to receive budget cuts for the typical Mexican family include entertainment, vacation travel, private doctors, and private school tuition.21 Due to this abrupt change in expenditures, 10,000 restaurants closed their doors in 1995, and a thousand more have done the same during 1996. José Manuel Delgado Téllez, President of the National Chamber of Restaurateurs and Condimented Foods, blames these figures, as well as the 12 percent decline in sales for the first semester of 1996, on the reduced buying power of Mexican society.22
The weakened buying power of Mexican salaries could only have resulted in a changed pattern of consumer spending, even in non-luxury items. Traditionally, one of the key areas of Mexican consumer spending is consumables. Placing a heavy importance on the quality and quantity of their meals, Mexicans consume a large breakfast early in the morning, a hardy afternoon meal, and a light supper. It is therefore not surprising to learn that "food is expensive in relation to income—the average family spends 35% of its income on food", a percentage which decreases significantly for upper and upper-middle class consumers, "but easily accounts for the greatest proportion of food spending in Mexico."23 It is, after all, the upper classes, approximately 10% of the population, which account for 50 percent of the total purchases (not restricted solely to food items) in the country, while another 60 percent of the country’s inhabitants purchase a mere 22 percent.24
Nielsen, a market research firm headed by Sergio Radwanski and Arturo García Castro, maintains a constant surveillance of 90 items including consumables, domestic-use, hygiene, and beauty products, as well as medicines. With the purpose of supplying the most current information, they assess the inventory levels, reactions to promotional campaigns, and brand penetration registered in 2,500 stores throughout the country. Their findings are also backed-up by a panel of four thousand families who are audited weekly to discover the break-down of their expenses. Nielsen's services have proven vital in deciphering the consumer expenditure habits of the Mexican population both prior to and after the devaluation of the national currency. While for hygiene and beauty products the lowest point in consumer spending took place in December of 1995, Nielsen determined that the lowest overall point in consumer spending in 1995 was chronicled in August and September. In this period the unitary sales decreased 7.3 percent, to contribute to the 2 percent contraction recorded for the year.25
To abate the harsh blow on the sales levels, companies turned to their more economical lines, strengthening them and increasing their production. This action gave Mexicans access to basic products which may have otherwise been converted suddenly into luxury items. In 1995, 45 percent of Mexican families resorted to the purchase of more economical brands of toilet paper (30 percent), cooking oil (29 percent), shampoo (24 percent), rice, and beans. In addition, many companies resorted to realigning their distribution channels and to using more sales promotions in an attempt to maintain their sales and attract more clients.26
On the other hand, the population noticeably changed their purchasing habits of goods whose life span can somehow be prolonged or rationed. For these, they avoided the substitution of their preferred brands by simply making their purchased items last longer. Sales of toothbrushes decreased by 11 percent, while an 8.2 percent decrement was recorded for razor blades. Similarly, instant coffee became an item to be reserved for special occasions.27
One sector whose sales appeared nearly a lost cause was the alcohol and liquor industry. Even during the traditional peak selling season of December, the industry reported a 14 percent decrease in sales. In the period between June 1995 and July 1996, the only product which showed a slight increase in consumption was tequila. Meanwhile, rum, brandy, vodka, and whisky sales fell 4,11, 9, and 40 percent, respectively.28
A geographical sector of particular interest and relevance in the study of altered consumer spending habits in Mexico is Mexico City. With 48.1% percent of the national sales concentrated in one metropolis, the consumer activity in Mexico City, if not necessarily representative of the entire Mexican population, represents an undoubtedly important market. The city’s sales represent, after all, 43.06 percent of retail sales and 52.70 percent of wholesale transactions in the country. The retail purchases can be divided by type of products purchases into machinery (26.5 percent), groceries and drinks (23.5 percent), audio records and toys (8.6 percent), and others (41.1 percent).29
The entire retail industry, however, has been ravaged by the times of economic hardship. According to the Instituto Nacional de Estadística, Geografía e Informática’s Automated Central Information System, there exist over 250 thousand members in this sector weathering the heavy blows of a still declining buying power. Sales in Mexico City decreased 1.9 percent in June of 1996, for a total contraction in local commerce of 13 percent in the first semester of the year in comparison to the same period in 1995. This denotes that the 16.4 million people who live in the region have yet to better their buying power.30
The sales registered in Mexico City in June 1995, however, showed somewhat erratic behavior as final consumers chose to purchase vehicles and furniture rather than the basic goods from supermarkets. In contrast, the areas which presented further decreases in sales for the month were clothing and shoes, groceries, records, toys, gifts, and paper supplies; once again, only the gas stations and pharmacies have managed to maintain their same sales level since 1994. The rest have watched their business activity plummet by up to 40 percent. To add to the tragic situation lived by the thousands of people involved in the sector, the dropping sales levels have resulted in layoffs for many employees. For every 100 people employed in the retail business in 1995, 88 workers remain in 1996.31
As a consequence of the increased unemployment, the battered residents of Mexico City have even less money on hand to purchase the goods whose prices continue a seemingly endless climb. Without a warning, their quality of living deteriorates daily. On February 16, 1996, for example, a new increase in prices, of approximately 15 cents to one peso, was registered for sweet bread due to the liberalization of the sugar prices. Observing the prices of sweet bread in the panaderías, or bread shops, of Mexico City, one could detect the change in prices; these converted the products into luxury items for the majority of the city’s consumers who had, until now, vastly enjoyed an elevated consumption.32
Another aspect of consumer habits which changed drastically due to the depressed economic situation in the entire country is where people shop. In the upper-classes, food items are often bought by the female head of the household in major supermarkets, import stores, and other small establishments. In their selection of a shopping establishment they are often swayed by a good location, prices, brand names, service, and level of prestige. The lower social stratum, on the other hand, are more prone to cultivate their own produce and shop at the local mercado (market) or government stores.33 It is also these people who are prone to do away with superfluous purchases, sometimes eliminating even shampoo and toothpaste from their shopping lists.34 In 1995, however, the I.S.S.S.T.E. government stores experienced a dramatic increase in sales. Suddenly they found that 20 percent more was being sold in consumables while sales increases of 17 percent and 14 percent each were also noted for domestic-use and hygiene and beauty products.35
According to a survey of four hundred people in Monterrey, Nuevo León, conducted by the newspaper El Norte, consumers’ visits to supermarkets and the cost of their purchases have decreased considerably due to the difficult economic situation. The vast majority (74 percent) claim to purchase less products now than prior to December 1994, and 69 percent have been forced to eliminate some products from their shopping lists. The products of which most people reduced their purchases are household cleaners, cold cuts, canned goods, red meat, and snack foods (including candies). In addition, price and quality are of nearly equal importance now in the selection of goods. This has made 65 percent of the consumers consulted change brands in order to take advantage of a special promotion or sale price. Since money is harder to come by, the household purchases are now separated into several visits per week or per every two weeks. Also, due to the higher costs involved in the procurement of goods in convenience stores, 45 percent of the people polled admitted to having reduced their visit to this sort of establishments.36
The augmented level of frequency in visits to the supermarket and the reduced amount of money spent per purchase have created a new dilemma for store owners. Having observed the heartbreaking transition since the first months of 1995 when the initial effects of the financial crisis had not yet been felt, the executives of the major supermarkets in the Monterrey metropolitan area must be prepared to attend to the needs of an increased number of visitors which results in higher costs for the store. This causes a great inconvenience considering that the sales generated rake in considerably less money than before which, in the worst situations, results in losses for the store.37
Unfortunately, for the Mexican consumers and the international companies who had longed to target the market, the results of economic activity in 1996 were not very promising. According to Javier Bonilla, Secretary of Labor, the registered loss of buying power continued in 1996. The damage was less than in 1995, with only a five percent deterioration in the Mexican buying power.38 Nielsen’s findings, however, tell a different story. In the period from January to July of 1996, no significant changes were noted in the consumption habits of the Mexican population as they continue to do without many items. Powdered milk, for example, suffered a 47 percent increase in price from 1995 to 1996 which resulted in a 14 percent sales decrease. A similar scenario is true for instant coffee, fruit juices, and cereals, among many others. Domestic-use products did not note an improvement in sales either with a general decline of between 6 and 16 percent; a similar fate was shared by hygiene and beauty products with further sale decrements of 3 to 21 percent.39
Even more alarming, however, are the indications that the inflationary rate problem is not yet under control. With a price augmentation of 1.25 percent during October 1996 alone, the times of sudden and drastic price changes have not yet passed. Some of the basic consumption products most affected by the latest pricing changes are soft drinks, automobile parts, and long distance telephone services. Others which experienced the change are some fruits and vegetables, gasoline, red meat, medicines, beans, fish, and shoes, among other products. This last increase in prices raised the total inflation during the first ten months of 1996 to 21.9 percent. Among the cities most affected by the inflation in October were León, Jacona and Mexico City. Notwithstanding the bad news, there were some signs of hope for the Mexican population as this month's increase has been the smallest since the devaluation in December of 1994.40
Although the prices may finally be ending their seemingly endless escalation, the people's inability to pay the current high prices may not change as quickly. Their deteriorated buying power still showed no signs of improvement during October 1996. Flour has officially registered a loss of acquisition of 55.5% since December of 1994. Other products that have had to bear the hardest blows in regard to a loss of acquisition are oranges (54.7 percent), eggs (48.0 percent), cooking oil (45.8 percent), cookies (43.1 percent), and beans (41.6 percent loss). Whereas a daily minimum wage in December 1994 bought nearly 9 Kilograms of flour, as of the end of 1996, it could only purchase 4 Kilograms. A similar situation occurs with the sale of eggs of which one could buy 3.9 Kilograms with one day's worth of minimum wages before the devaluation; now, the same amount of money will buy 2 Kilograms. Even more difficult to acquire these days, however, are new durable goods such as televisions, stoves, and refrigerators. According to information provided by the Procuraduría Federal del Consumidor, in order to purchase a standard refrigerator, one needs between four and twelve monthly minimum wages. Likewise, between three and ten monthly minimum wages are required to acquire a television set, and between three and five are necessary for a stove.41
To aid in the recuperation of the Mexican population's buying power, the country needs to generate more adequate sources of employment. Despite the latest statistics which show a strong re-entrance into the labor force for many Mexicans, the real salary of workers has decreased by 27.5 percent in the last two years. Edgardo Ayala, teacher and investigator of the economics department at the Universidad Autónoma de Nuevo León, believes that the reduced Mexican buying power may be an effect of the generation of a different kind of employment from that which was lost by many workers after the devaluation. While the employees who were laid-off may have been carrying out tasks for a middle range salary, the jobs which are being created now are mostly lower salary ones such as construction. Until the correct types of employment are made available, Mexican families will have to continue to carry out their special emergency strategies such as working more, saving less, substituting expensive items with less expensive ones, and not paying debts and taxes.42
In the first week of November, 1996, the rate of inflation had already been registered at .69 percent. The largest increment was once again reported in consumables (1.74 percent), as well as in clothing (1.35 percent) and housing (.11 percent).43 Surprisingly enough, the continuing rises in prices have again made more economically sound the purchase of some products in the United States. Items such as Johnson's Shampoo, Alberto VO5 Shampoo, Lady Speed Stick, Tabasco Sauce, Peach Gerber, and Royal Gelatin, as well as potatoes and chicken, have shown a continued saving of anywhere from several cents to a few pesos if bought outside the country.44 For now, these do not represent a justifiable reason for Mexican consumers to turn to the United States as the shopping haven which will save them from high prices stemming from extreme inflationary problems, but, without a prompt solution to the dilemma, shopping in the United States may soon be a rational alternative for Mexican consumers.
Is the financial crisis over in Mexico? No. In December, 1996, according to the plan established by the Alliance for Economic Growth, consumers were hit with an average increase of 10 percent in public transportation as well as in power and light.45 The internal market is still far from recuperated, and the Mexican families will not be returning to the previous consumption habits anytime soon. For the United States and other lions waiting to pounce on the Mexican market, this manifests an exorbitant change of plans. For now, Mexico will continue its strong program of export promotions in an attempt to improve its still weakened economic situation, and the Mexican people will continue to struggle and do without many goods. As with any still-blooming democracy, there are many problems to be solved before the masses can enjoy the intoxicating benefits of a permanently high standard of living. In the trajectory, there will be highs and lows, like the current one. What will Mexico and her people do during these times? It may be best to listen to the advise of Dean Rusk, ex-United States Secretary of State. “When you solve a problem, you ought to thank God and go on to the next one.”
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