What do Mexican companies: Telcel, Estafeta and Cemex have in common? They are in very different industries: cellular telephony, express packages and cement and each face different competitive landscapes. However, their common characteristic is that they have been very successful in fending off their respective competitors—all of them large multinational corporations.

How have these Mexican corporations succeeded against other strong global players? A key element in their competitive stance is an effective leverage of the unique aspects of Mexico's distribution channels.

Consider Telcel in the cellular phone industry. The early years of cellular phones in Mexico were characterized by fierce competition among service providers. Participants battled with the usual array of competitive weapons: service plans, price, coverage and phone features. However, it was only after Telcel introduced pre-paicl phone services that it succeeded in obtaining a leading market position. Mastering the complexities of pre-paid card distribution in Mexico drove this leadership.

Pre-paid is today the dominant service mode in Mexico with over 23 million subscribers, compared with less than 5 million of post-paid users. These subscribers spend on average about US $12/month of pre-paid services. However, the most frequently used denomination of pre-paid cards is for US $10. Thus, at least 25 million times a month a pre-paid phone user needs to purchase a card somewhere in Mexico.

BANKING ON THE CORNER STORE

In a very short time frame, Telcel developed a superb distribution network, which now has more than 400,000 points of sale (POS) throughout the country. A Telcel customer needs only to walk to the nearest mom-and-pop store to purchase a new card or purchase a new card from any of the ubiquitous yellow Telcel street vendors.

Distribution costs to these POS is indeed expensive, but provides a superb barrier against smaller competitors as other cell phone providers (given distribution cost scale economics) have much higher cost.

The convenience of "recharging" their phones at 400,000 locations is Telcel's key competitive advantage for this client segment. Other participants have been unable to replicate this distribution coverage/cost and are constrained to serve only the smaller post-paid customers segment. Telcel's dominance of the distribution channel is so strong that they have effectively locked out other players from this channel.

GLOBAL BOYSTAKE A BEXITING

Consider Estafeta, a local express package provider. Global players, such as FedEx, UPS and DHL, dominate the express package industry. For years they have espoused the convenience and value of door-to-door service.

Faced with such formidable competitors, Estafeta decided to follow a different tack and grow by developing wholly owned and/or franchised service centers. These service centers leverage the same characteristics that worked for Tel eel, namely capitalizing on the unique distribution needs of Mexico and its fragmented network of an average of one POS per 130 Mexicans (see chart below). Mexicans prefer to walk to the their nearby store for most of their purchases.

An Estafeta service center provides this same level of convenience, and by avoiding the "last mile" can take pick-ups until 6 p.m. rather than the 4 p.m. cutoff usually offered for home/office pick-up service. In addition, Estafeta's service centers can also serve as a delivery location. For many homes in Mexico, streets are not well marked or numbered. By offering "will call" service at their locations, Estafeta can tap on those clients who have hard-to-reach homes.

Currently, Estafeta has more than five times the service locations of UPS, FedEx and DHL combined. More than 50% of all Estafeta's volume is picked up or dropped at these service centers. For Estafeta, the savings in pick-up and delivery expenses (which account for about 30% of the total express service costs) have been passed on to their clients. With lower prices and a tailor-made level of service for this market, Estafeta has a commanding share of the domestic express package service in Mexico. Fragmented Distribution

A SECTOR CEMENTED

Finally look at Cemex, the cement producer. In Mexico, Cemex faces Cementos Apasco, owned by Holcim-the secondlargest cement producer in the world. A very fragmented distribution network also distributes cement in Mexico with more than 20,000 outlets selling bagged cement (most of the cement in Mexico is sold bagged rather than bulk).

Over the last few years Cemex has built a network of over 2,000 affiliated cement retailers' points of sale, which are collectively called Construrama. These POS can order cement via Internet, receive POS support and provide Cemex with an edge over Cementos Apasco. Subsequently, Cemex enjoys a leading share in this most profitable market segment.

Faced with limited coverage with the fragmented cement POS, Apasco has decided to focus on the more institutional channel—the concrete producers. Cemex efforts to exploit the fragmented channel have given them an ongoing competitive advantage in the marketplace.

KNOWING THE MARKET

These three model companies recognized the characteristics of the fragmented distribution channels in Mexico and developed a unique business system to leverage and build lasting competitive advantages. Other, less knowledgeable participants failed to recognize this channel fragmentation and sought to pursue business models prevalent in more developed markets.

While these are Mexican market examples, many other countries share similar channel fragmentation where companies can leverage this channel characteristic to build strong competitive positions. These fragmented channels will most likely continue to exist despite the inroad of mass merchants in the region, such as Wal-Mart, Carrefour and Ahold.

The number of small mom-and-pop stores in Mexico continues to grow, in part encouraged by local consumer goods companies such as soft drinks distributor KOF Ferma or Bimbo, the leading bread producer. These companies actively encourage the start-up and growth of small retailers since they recognize the threat that mass merchants pose on their margins, thus encouraging the growth of small POS.

For example, KOF Femsa has sponsored the opening of more than 50,000 new POS in their soft drink territories in Mexico over the last few years, an effort that has yet to be emulated by other more multinational consumer companies in Mexico.

Fragmented channels provide unique opportunities for companies who recognize the advantages of effective channel control and the strong barrier of entry against other industry players. Channel management as a competitive differentiator is most commonly seen with companies that deal with consumer goods; however, many other industries, as diverse as cellular telephones and cement, can effectively leverage channel characteristics to build sustainable competitive advantage.

Copyright American Chamber of Commerce of Mexico A.C. Mar 2004 | Carlos N. Lukac is managing director of the management consulting firm Bain & Company Mexico Inc. and can be reached at carlos.lukac@bain.com.

THIS ARTICLE WAS FIRST PUBLISHED IN BUSINESS MEXICO, MARCH 2004 A PUBLICATION OF AMERICAN CHAMBER OF COMMERCE OF MEXICO.