Economic Outlook 2019
Throughout 2019, the global environment experienced an economic slowdown, partly caused by the uncertainty arising from trade tensions between the United States of America and China.
In particular, the U.S. economy grew 2.3% in the year, as the result of a higher level of consumption of goods in the order of 3.7%, partially affected by a lower level of fixed investment, whose annual growth dropped from 5.1% in 2018 to only 1.8% in the period. Considering the above, the Federal Reserve of the United States of America adjusted the base interest rate downwards three times during the year, so that at the end of 2019 this indicator stood between 1.75% and 2.00%.
As for the performance of the Mexican economy, the country’s Gross Domestic Product recorded a 0.1% drop, following the decrease of 4.9% observed in the formation of fixed capital, the 1.5% cut in government consumption, and the slowdown in private consumption, which expanded by only 0.6% in the year compared to a 2.3% growth in 2018.
The exchange rate between the Mexican Peso and the U.S. Dollar stood at Ps. 18.93 per US$ at the end of 2019, showing a variation of Ps. 0.72 during the year, with the minimum parity between these currencies being Ps. 18.75 per US$ in the year. This effect on exchange rate parity is primarily a product of the spread observed between the interest rates of the risk-free bonds of Mexico and the United States of America, together with the ratification last December of the new free trade agreement between Mexico, the United States of America and Canada by the U.S. House of Representatives.
The inflation rate in 2019, meanwhile, stood at 2.83%, compared to 4.83% in the previous year. In particular, the non-core inflation rate expanded to 0.59% due to a slight 0.2% increase in the price of low-octane gasoline, with the price growing 15.4% in 2018. The core inflation stood at 3.59% in the year.
The 2018 trade balance deficit of US$13.618 billion was offset by the 2019 surplus in that balance of US$5.820 billion. The oil balance was in deficit in the amount of US$21.222 billion in 2019, which is US$ 1.938 billion lower than in 2018. The non-oil balance showed a surplus, expanding by US$17.5 billion to US$27.042 billion at the end of the year. Manufacturing exports, which comprise the most representative sector of the economy, grew 3.4% in the year, while there was a drop in imports in general, with an 8.9% reduction in capital goods being observed, an effect attributed to the lower level of investment in the Mexican economy.
The Government budget balance showed a deficit for Ps. 398.356 billion, equivalent to 1.6% of the country’s Gross Domestic Product, while budgeted government revenue expanded by 1.6% in real terms from the previous year, with a reduction of 0.1% in real terms as the result of cuts to current public sector spending. The primary balance showed a surplus of 1.1% of the Gross Domestic Product. In order to compensate for the lower tax collection resulting from the negative effect of the economic slowdown, the Mexican government used Ps. 121.227 billion from the Budget Income Stabilization Fund, which was equivalent to 0.5% of GDP.
The COVID-19 pandemic that started in China and has expanded to the rest of the world has adversely impacted economic performance and created uncertainty in financial markets. This health crisis has also slowed the global economy, raising the threat of a broad recession. The value of the U.S. Dollar against other currencies has been significantly increased while the price of the oil barrel declined significantly to levels not seen over the past 18 years.
Grupo Sanborns
As in previous years, Grupo Sanborns continued to show its commitment to improving the customer service and shopping experience in 2019, both in physical stores and through e-commerce in each of its store formats. The result of this policy is the 3.0% growth observed in consolidated sales, which reached Ps. 53.288 billion. It is worth mentioning that our continuation of segmentation and regionalization strategies, mainly for the benefit of Sears and Sanborns, represented one of the key actions in the year. This has meant reducing the lines of some products in order to have a more adequate handling of products with respect to each store, region and specific segment of the operation.
In the Sears stores, total sales expanded by 0.1% in the year. This growth is mainly explained by the extraordinary effect caused by the FIFA World Cup in 2018, an event that favored the sale of electronic products category in that year. In the case of hardware products, Craftsman in the United States experienced some corporate changes that caused brand-specific sourcing problems, which were quickly resolved. The home appliances and furniture categories expanded due to the inventory optimization strategy, in which various studies on demand were key to the execution of this strategy. We recorded significant growth in the Fast Fashion category through the branding that was carried out. We also allocated resources from our investment program towards the purchase of a new technology platform, which is focused on solving key aspects of Sears’ logistics, point of sale and online sales, an initiative scheduled to be implemented around the middle of 2020 and designed to be extended to Sanborns and Other Formats that the Company operates. This technology is expected to generate valuable and detailed information regarding sales by product and customer.
Total sales in Sanborns decreased 0.3% in 2019, which is explained by the positive effect that the FIFA World Cup had on sales in 2018, as previously mentioned, especially in the successful sale of the commemorative sticker album at the Books and Magazines department at Sanborns stores. On its part, the sale of discs and videos, has been affected by a higher consumption of digital products, which in turn has benefitted from, and has been optimized by, the realization of promotions. Based on the above, we have made adjustments in these departments based on sales efficiency indicators per square meter and per store. Likewise, we have released new spaces with the aim of introducing gourmet products and reinforcing those categories of best sale, such as pastry, chocolate shop and sweets. In addition, we relocated a Sanborns store in the center of the country and closed three units that did not meet the expected levels of profitability.
In regard to Promotora Musical, it recorded a sales growth of 14.9%. This expansion resulted from the startup of operations of 17 new iShop stores and the remodeling of three units to renew its image. Despite the fact that we face a higher level of competition in the market – competitors who market brands of low-cost telephony equipment –, we consider that we have an advantage because the quality of our brands, the coverage of our stores, our better customer service and service orientation represent advantages that differentiate us from the competition. This year, we continue to operate AppleCare memberships and to conduct team loyalty and redemption programs, as well as realizing promotions and offering consumer-accessible payment methods. These actions produced very good results in the past in terms of sales volume, also driven by the releases made at the end of the year. As for MixUp, the format continued to execute the strategy of optimizing the mix of products, with the introduction of a wider range of technology accessories and entertainment platforms.
Our proprietary credit card operation for our three main store formats, including accounts receivable, showed a greater market penetration and fueled the operation of physical stores as well as e-commerce. The credit portfolio continues to show healthy performance, with the overdue period greater than 90 days reduced compared to the previous year thanks to better collection management, controlled credit granting to customers, and a better balance between promotions and discounts granted.
As for our e-commerce initiatives, the Sears and Sanborns web sites and Apps have had a continuous evolution, being complemented by the digital development of ClaroShop. At the end of December 2019, online sales accounted for about 2.0% of consolidated sales and showed double-digit annual growth. Currently, we have various initiatives throughout the operation, which involve a greater volume of products and services offered in the market, both proprietary and owned by third parties, as well as promotions and offers made only in the e-commerce channel, various means of payment, improvements in the security of transactions, and speed in the physical delivery of the products.
Finally, the Company continues to demonstrate financial strength, maintaining a strong capital structure, a healthy debt profile, and adequate liquidity, which will allow it to continue strategic investments. In 2019 we acquired 33.27% of Miniso Mexico. This transaction has allowed the Company to diversify its portfolio of low-cost variety items, which includes cosmetics, stationery, toys, kitchen utensils, decoration, travel items, bags and luggage, through which we will participate in the growth of this successful store format.
In terms of sustainability, the Carlos Slim Foundation operates 96 programs and projects in 13 different areas, including those related to education, employment, health, sports, the environment and culture. These programs reach millions of people in Mexico and other Latin American countries.
Of particular importance to the Foundation is the Mexico Unido initiative aimed at addressing the damage caused by the earthquakes of September 2017. During the emergency phase, the Group’s companies and their volunteers responded immediately to the basic needs of thousands of affected people, by distributing groceries, tents, blankets, mats, water treatment plants and telecommunications. Since then the reconstruction and construction has continued with the resources obtained from our call to action, in which, for each weight received the Foundation contributed five additional weights. We had the response of more than 217 thousand donors who placed their trust with us, contributing donations totaling Ps. 412.4 million, to which Ps. 2.0618 billion more were added by the Foundation. These resources have been used to rebuild homes, and for health, education, infrastructure, popular markets and for rescuing buildings with a cultural heritage value. As was established at the beginning of this project, the actions carried out under the program and the application of the resources collected are reported with total transparency each month on the Foundation’s website.
Currently, in the face of the health emergency caused by COVID-19, Grupo Carso, including its subsidiary company Grupo Sanborns and the Carlos Slim Foundation, is carrying out recovery support to the affected population. The Foundation will allocate Ps. 1 billion towards three initiatives: Health, Distance Learning, and the COVID-19 Carso Protocol for the protection of employees and clients.
Sincerely,
Carlos Slim Domit
Chairman of the Board of Directors of
Grupo Sanborns, S.A.B. de C.V.