Gallardo talks about the visible divide that exists between the 60% of the population that is working class with jobs that cannot be done remotely and the 40% of business class citizens who have the privilege of working from home. In the less economically stable areas of Mexico, Gallardo has noticed that there are far more people ignoring shelter in place recommendations than their wealthy counterparts.
Ryan Morfin: Welcome to Non-Beta Alpha I’m Ryan Morfin. On today’s episode, we have Miguel Diaz Gallardo the CEO of Bacabes, an eCommerce retailer in Mexico City. Today. He’s going to share a little bit about what’s going on economically in Mexico, as well as how they’re handling the Coronavirus. This is Non-Beta Alpha.
Miguel. Welcome to the show.
Miguel Diaz Guy…: Thanks for having me, Ryan. It’s a pleasure.
Ryan Morfin: Well you’re calling in from Mexico City and part of our Covid insights series. We’ve been talking to friends from around the world who are in the business community; talking about some of the insights that can share about what’s happening with the Coronavirus in their country. So we’d love to hear a little bit about what’s going on on the ground in Mexico City with Coronavirus.
Miguel Diaz Guy…: Sure. Fantastic. Well, you know, in Mexico, the first thing I think we need to give some context to the issue. I mean, just to understand what’s going on in terms of COVID-19. Mexico is a country where about 60% of the working population actually works in the informal sector. And that means basically that they don’t, they don’t have access to the public health system. They don’t pay taxes, you know. And it’s also important to understand that this 60% of working population, they live on a daily basis. That means basically that they need to go out to the streets and sell. They sell tacos, they clean the houses of people, they work in the construction sector building, building things. So they cannot stop, right? Because they don’t have things like savings or things like that. So it’s this part of the population it’s really hard to- I mean, they simply cannot perform their work at home, so they have to go out.
And I think that the relevant thing about this is that Mexico, the Mexican government decided to implement the so-called Sentinel model, which means that the government is performing very, very few Covid tests. Since this started, the first case in Mexico was I think the last week of February. And since then in Mexico, we have performed only 90,000 tests overall. This is lower than the number of daily tests performing the US. The government claims that this is enough to measure the trend of the pandemic, but the numbers, it’s a very small sample and we know for a fact that there are more cases out there and more people dying from this, from COVID-19.
Ryan Morfin: So have people, and I think we’re probably two to three weeks ahead of Mexico from kind of the, the curve, the pandemic curve. Have people been following similar types of social distancing norms where they stay home from work? I know you just mentioned 6% of the population can’t afford to do that, but the people who can, have you’ve seen the business community stay home and try to work remotely?
Miguel Diaz Guy…: Yeah, the 40% definitely. When you go around the high end neighborhoods in Mexico City, the people is on a lock down. Voluntary lock down, because there isn’t an enforced lock down in Mexico. But if you go out, and I’m a business owner I sell shirts and men’s ware, like this one. My warehouse is in a poor neighborhood in Mexico City. I was there last week and people vary, like I told you, it’s how they’re working in manufacturing plants, in distribution centers of grocery. People that are like having a normal kind of a normal life, right. And you can see Google made public an analysis by country on mobility and Mexico mobility hasn’t you decreased as much as of course Spain and Italy, but not even close to Argentina or Chile or Peru. What we need to hear is not that it hasn’t stopped. I think we can see a problem there in the future, because then there’s the poor people that is going to get sick, actually it’s happening now in Mexico City. The two main alcaldías, or neighborhoods, affected are two of the poorest alcaldías in the city. So we could have a problem there in the near future.
Ryan Morfin: That’s very interesting. Have a lot of the factories been closed voluntarily, or are they being forced to close by the government?
Miguel Diaz Guy…: So the government separated businesses into essential business and non essential businesses and they encourage non essential businesses to close. Essential businesses are basically grocery stores, supermarkets, drug stores, things to be able to buy food and, and survive during the crisis. E-commerce is as well, by the way. You can operate warehouses of eCommerce or eCommerce sites. The government on the other hand is not enforcing the closure of the stores and offices. There are companies still working normally in Mexico City. One of the main examples is one of the biggest groups in Mexico, Grupo Salinas, which owns TV Azteca for instance, the second biggest TV company in Mexico, they’re still working. Some department stores are still working. It’s not a mandatory, but most companies, especially those international businesses, international corporations are on a voluntary lock down. We closed stores, we closed offices, and people are in a lock down. Those that can.
Ryan Morfin: And you’re the CEO and founder Bacabes, which is a men’s eCommerce store, which I did go to the website, I will be ordering some, some clothes there for sure. But where do you guys produce them in Mexico? Are they produced in Asia? Where are the clothes produced?
Miguel Diaz Guy…: So we produce in Mexico, but we import the cotton, the fabrics, from China. We’re seeing a disruption in the supply chain, for sure. The textile manufacturers are closed. They are non essential, so my producer is closed at the moment. Surely we will suffer an effect on the supply chain from that from there.
Ryan Morfin: Yeah, that’s where I was going with that, the supply chains and in the US where we’re really focused on one supply chain in particular, which is food. Have the supermarkets been well-stocked? Do you guys feel comfortable with the food access? And then what percentage of Mexicans maybe have a garden in the back or have other ways to have local food produced?
Miguel Diaz Guy…: Agriculture is essential. A distribution of food is essential, and grocery stores and supermarkets are essential. Basically the supply of food is secure. There are no shortages and anything related to food. Beers are not essential so you can see a shortage of beer in Mexico, and that’s causing some issues, people are upset about that. But in terms of food, it’s just fine and I don’t see any issues there in terms of food.
Ryan Morfin: Since you brought up beer, are Mexicans upset that it’s called the Corona virus? There was some conversation on late night TV here in the US, we’re going to have to get a new brand for America’s favorite beer Corona.
Miguel Diaz Guy…: Yeah. No, and they will, Corona will have some issues about the name, right. They may be thinking about changing their names.
Ryan Morfin: Sorry to interrupt you. You were going to say the other thing before I interrupted, I apologize.
Miguel Diaz Guy…: Oh, no, no, don’t worry. About your second question, not many people have a garden or something to self produce. It’s not common here, especially in the cities. Another important thing by the way, is that Mexico City has like 30% of total COVID cases in Mexico. It’s very concentrated in Mexico City. Here density is huge. People live in small apartments and there’s no space to produce our own food supplies.
Ryan Morfin: Do you see that traffic is going down or do you think it’s because mobility is still high that there’s still traffic in the highways?
Miguel Diaz Guy…: It’s definitely going down. Traffic is going down for sure. But again, when you go to these places, not high end neighborhoods, traffic is super low, but then in other places of Mexico City, you can see not close to a normal traffic because that’s not true, but maybe according to the numbers, 40-50% of regular traffic, which is a lot. I believe compared to other countries.
Ryan Morfin: For a lot of the employees of a lot of these companies in that 40% that have jobs and they pay into the government tax program, is there a concept of unemployment, like we have here where you can file for unemployment insurance to get money during unemployment?
Miguel Diaz Guy…: Yeah, there is, but it doesn’t work as efficient as you guys. Apparently, we haven’t seen numbers related to that. So after COVID, we know because the government has said, that we just lost the number of employments that were generated during the whole of 2019. We will see a crisis in employment, but generally speaking, we didn’t have the resources. The government has also been very clear that they won’t put any money to bail out companies. They’re trying to use this strategy of giving money directly to people, but giving money directly to people that are not in the formal sector. Most of them are not also in the formal banking system, so they don’t have bank accounts so the government has to do that in cash, which is very complicated and you can get a lot of corruption there. So yeah, we have it, but it’s not as structured as in the US. In that area we will see, I guess, a lot of problems in the near future in Mexico.
Ryan Morfin: And the health system is a nationalized health system. Is that right? So it’s a health system run by the government.
Miguel Diaz Guy…: Right. And it’s managed from the federal government. The public health system is not, I would say, developed. Actually the private, the private hospitals sign a deal with the Mexican government to provide services to those people that have access to the public health system. You’re seeing now private hospitals in Mexico City, some of them, not all of them, but some of them, receiving people from the public health system. This is something that we’ve never seen before. This initiative was, was pushed by the private sector now.
Ryan Morfin: It was an issue in 2019, and I don’t know if it’s still an issue, and that’s it tap dancer on a touchy issue, but like immigration into the US and kind of the movement of people from Mexico to the US. One of the things that we were seeing last year was a constant stream of people from Central America. And has that stream continued? And, or, do you see that it’s slowing down? Was it slowing down last year and now it stopped? Or does are still people migrating through Mexico right now?
Miguel Diaz Guy…: Yeah, so I was reading that people keep coming to Mexico and that’s going to be an issue also. But the truth is that in the public agenda, we stopped talking about that. You’re right that in in 2019, that was something that we were listening to in the news basically every day. I haven’t listened about that much, but I just read some article in newspaper that migration from Central America keeps coming and, and that’s going to be more problematic for Mexico.
Ryan Morfin: Yeah. Some of the countries like Guatemala and Nicaragua are not doing a great job at containing this at all, so they’re potentially bringing infection rates with them, unfortunately. It seems that President Lopez Obrador and Trump have come to some type of path forward with the trade agreement. What was the dialogue or the mindset in the Mexican business community before COVID started about the trade arrangement that was reached between North America, the trade agreement.
Miguel Diaz Guy…: Still I haven’t seen an analysis, a full analysis of the new terms of this trade agreement. What I’ve been hearing and people have been hearing here in Mexico is that the new terms actually benefit a lot the United States and not necessarily Mexico. I personally believe that having a trade agreement with the US and Canada is necessary basically, almost in whichever terms that got out of there in the deal. But, we will see it right now. Let’s see what happens, because Mexico depends a lot on certain industries that will be severely hit by COVID-19. Like oil, like tourism, like manufacturing, especially in the automotive sector and textile sector, and also remittances from Mexicans working in the US so I think the economy will be severely damaged.
We’ll see also what happens when apparently the trade agreement starts in July, and American companies are pushing Mexico to put manufacturers, for example in the automotive sector, in the essential part of the business so they can go back to work and activate the supply chain. So yeah, let’s see what happens. I think it’s what I’ve heard in terms of eCommerce that is my area of expertise. That is going to be a, an interesting agreement, but we’ll increase the competition because it will be easier for Mexicans to buy a product from eCommerce sites in the US so that probably will be- I mean, it’s nice to have competition, and for us it will push us to work harder and add more value to our customers here in Mexico.
Ryan Morfin: That’s an interesting point that it’s going to increase the trade. You know, I think one thing that we’re starting to hear about in the US is that, to quote several governors, never again, will we let our supply chain be so far from home on critical items, like pharmaceuticals or medical supplies. We’re pretty upset about some of the ways that China’s treated American companies that want to bring supplies back to the US, they’ve kind of blocked them. I think there’s a huge opportunity for Mexico, Canada, and the US to nearshore back a lot of this manufacturing. For whatever reason, I think Mexico is going to be the big winner in that as Americans and American business start to shun China for their behavior during the crisis. But have you guys heard anything about that or is that on the dialogue there in Mexico at all?
Miguel Diaz Guy…: Yeah. I heard that argument and I totally agree with it. Actually, Mexican manufacturers have lost a lot of competitiveness against China manufacturers simply because China is cheaper, right? This could balance the equation in favor of Mexico. I’ve heard the argument and I totally agree. I agree with it. The thing is that Mexico, in my opinion, the development of the country needs to be more into the commercial side of the business, instead of, I mean, we’ve been manufacturing our whole life, our whole history. We’ve been strong manufacturers, but you know that the real margins of a business is not in the manufacturer side. And this is why I’m doing what I’m doing, why I’m starting up a company with a tech basis in Mexico. I believe that we need to add value in the other part of the supply chain, which is the part that actually adds value to an economy instead of just being manufacturing. But yeah, we are manufacturers and that’s definitely going to help in the short term.
Ryan Morfin: What’s your view? Before the coronavirus, it was about 11% of global commerce was eCommerce. Now the number is somewhere over 90% because of the fact that there’s really nothing opened to go shop with. What do you think the return to the old model or the old allocation? How long is that going to take? Do you think it’s going to change, people’s kind of fundamental buying patterns and they’re going to want to spend more money online versus going into a store?
Miguel Diaz Guy…: That’s a very, very good question. First in Mexico, it’s 2%, not 10, not 11, right? So it’s only 2% of total retail sales are completed via eCommerce. So we’re in the spot that you guys in the US where 10 years ago, something like that. We were 10 years behind is another way of putting it. Certainly COVID-19 will accelerate the eCommerce and will basically accelerate also the debt of traditional brick and mortar retail. Now, at this point in time, we’re seeing some categories going through the roof and some categories really hurt, like all the categories related to travel. Of course, clothing, those categories are suffering now. But in general, eCommerce is growing fast. The most important thing I believe is what you just mentioned, consumer behavior is going to change. I believe so.
The purchase drivers may not be the same ones that were before COVID. In terms of men’s wear, for instance, people were looking for a nice fit, looking for price, looking for design, looking for personal attention, and a brand like ours could provide that to our customers. But probably in the near future, I expect these drivers to change a bit and customers probably will start putting security and safety first. So maybe we will see… What I expect is probably going back to more generalist retailers like Amazon, or here in Latin America Mercado Libre, instead of going to specialized things. That could be a change that I probably foresee, but definitely consumer behavior is going to change. I’m sure about that.
Ryan Morfin: Yeah, we think it’s going to change here in the U S as well. I think there’s really no guidelines being given by the US government right now about how restaurants should behave and open back up, how retailers should behave to open back up, you know, what are the guidelines? what if somebody comes into a store and is coughing all over a shirt, what do you do with that shirt? Do you leave it on the rack? Do you go put it in a UV closet? It’s an interesting time.
I would say that from Wall Street’s standpoint Mexico put on a big hedge for the oil prices a few years ago, and it’s going to pay off in a big way, but it’s going to be exciting to see. I think Pemex did a good job of hedging their oil production, whereas Saudi Arabia and Russia destroying each other. I think it’s going to be at least a bright spot for Mexico. What are some of the things that you feel optimistic about with how Mexico is either handling it or just the resilience of the Mexican people?
Miguel Diaz Guy…: I feel optimistic for many reasons, actually. First there is the demographic bones that we have. We are a very young country. It’s our average age is 27 years old. That and we have 120 million people, so we have many young people ready to work and produce. And that’s good. I see definitely most of the industry’s becoming digital. This transition being accelerated as I mentioned, Mexico was not digitalizing fast enough in many industries. Not only retail, but banking, health, et cetera. This crisis will accelerate the transition into digital. I’m convinced that digitalization of any industry produces basically… Puts a democratization into the consumer behavior. More people have access to those products or services if the industry is digitalized.
We could see, for instance, more Mexicans receiving a formal education because it will be easier with digital with an [inaudible 00:25:23] industry or things like that. Digitalization of industries is definitely good for Mexico will be good for Mexico. That gives me optimism. Now, on the other hand, we should be very careful to handle this crisis because it could be catastrophic. We don’t have the resources of other countries like the US or European countries to put into the economy again. We need to take care of ourselves here, trying not to let many businesses… Helping people that will be unemployed to recover rapidly or this could become, I would say catastrophic for the new term in Mexico.
Ryan Morfin: Well, Miguel, we appreciate you coming on the show and we’d love to check back in with you in a few weeks to see how things have evolved. We hope that you and your family stay safe and definitely appreciate your time.
Miguel Diaz Guy…: Thank you for inviting me. It’s been really nice. I enjoyed talking to you, Ryan.
Ryan Morfin: Miguel, hope to see you in Mexico City at some point. Thank you. Bye bye.
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