Ann Expands LOFT In Mexico – What You Need To Know

Adding fuel to its international expansion strategy, women’s specialty retailer, Ann Inc (NYSE:ANN), recently announced the opening of its first LOFT store in Mexico, the second largest economy in Latin America. The pilot LOFT store has been launched in Queretaro and more stores are planned for Mexico City later this year. After its successful international debut in Canada back in 2012, this is the first occasion when Ann has decided to enter a new market. The retailer believes that its brand image in North America is quite strong, which will help it establish a strong retail network in Mexico as well. Ann’s Mexican LOFT stores will offer products similar to its U.S. stores, including women’s apparel and accessories, petite collection and the signature “LOFT Style” closet. ^[1]

Our price estimate for ANN stands at $38, which is just above the current market price.

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Why LOFT Before Ann Taylor?

Given that Mexican buyers have a strong affinity for stylish and value-for-money products, launching LOFT instead of Ann Taylor seems a sensible move. Unlike Ann Taylor, LOFT mainly caters to women’s casual attire needs at lower prices than the company’s namesake brand. Products offered by LOFT include casual separates, dresses, tops, weekend wear, shoes and accessories. On the other hand, Ann Taylor mostly offers professional attire at relatively higher prices, and hence targets a limited audience of more affluent buyers.

In Mexico however, the company is looking at a huge audience of value conscious customers. Mexico is the eleventh most populous country in the world and close to 60% of its population is in the 15-54 years age group that encompasses the target demographic for LOFT. ^[2] Moreover as a division, LOFT contributes a significantly higher value to the company than Ann Taylor, which further supports Ann’s strategy to expand LOFT ahead of Ann Taylor in Mexico. We believe that the retailer might persist with LOFT’s expansion for a while before introducing its mainline brand in the region.

Is the Retail Landscape Competitive?

As an apparel market, Mexico has been among the first choice expansion destinations for several U.S. retailers. Last year, teen apparel retailer, Aeropostale (NYSE:ARO) began expanding its retail stores in the region and saw good customer response. In the same year, American Eagle Outfitters (NYSE:AEO) extended its retail presence in the country with stores in the third largest Latin American mall, Sta Fe. ^[3] One of the largest U.S. apparel retailers, Gap Inc (NYSE:GPS), entered the country in 2012 and has been performing well since. ^[4]

With many apparel retailers rushing to Mexico, it is clear that the market holds tremendous potential for American players. However, it also sheds light on the fact that competition in the market will intensify in the next few years. While Mexican buyers will ultimately benefit from this competitive landscape, retailers might find it hard to grow their sales at a healthy pace after a few years. Although LOFT isn’t a direct competitor to the aforementioned players, there is a significant overlap between their target customer group. Moreover, even luxury brands are rapidly expanding in large cities such as Guadalajara, Monterrey, Cancun and Queretaro. ^[5] Therefore, we believe that LOFT will face some competitive headwinds from casual and luxury retailers going forward, given that it lacks the first-mover advantage. Although the brand’s growth is likely to be strong during its initial expansion phase, it might slow down significantly in the years to come.

What does the Market Hold?

Mexico’s retail landscape is getting competitive mainly because of its huge market potential, that is backed by rising disposable incomes, clear interest in fashion and soaring adoption of online shopping. Between 2003-2009, about 17% of the total Mexican population entered the “middle class” consumer group, and close to 40% of the total population was “middle class” in 2013. ^{[6] [7]} This clearly indicates that now more consumers can afford to spend on relatively expensive brands such as LOFT.

With improving education standards, and a growing proportion of  affluent working mothers in the population, the influence of American and European lifestyle has increased. This in turn has fueled the demand for American clothing. Buyers have also shown great interest in popular luxury brands mainly because of the status symbol associated with them.

E-commerce sales in Mexico have been growing in double digits for some time now, driven by increasing Internet penetration, the use of smartphones, flexible payment methods and friendly return policies. Interestingly, apparel has been among the most popular categories sold online, which is likely to continue in the future. Overall, Euromonitor expects apparel sales in Mexico to grow strongly for the next few years driven by rapid expansion of specialty retailers in an “eager” market. While this paints a pleasing picture for LOFT’s future in the country, the company needs to plan its expansion carefully to consistently gain market share and dilute the competitive threat. ^[5]

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More Trefis Research

1. Ann Inc. Furthers Strategic International Expansion With Entry Into Mexico, Ann Inc., Oct 7 2014 [↩]
2. Mexico Demographics Profile 2014, IndexMundi, July 2014 [↩]
3. American Eagle Outfitters Launches Second Store in Sta Fe Mexico; Third Store in Guadalajara, Business Wire, Jun 3 2013 [↩]
4. Gap Inc. Opens First Store in Mexico, Gap Inc., Sept 7 2012 [↩]
5. Apparel and Footwear in Mexico, Euromonitor, Jul 2014 [↩] [↩]
6. Mexican Middle Class grows over past decade, The World Bank, Nov 13 2102 [↩]
7. Clases Medias En Mexico, INEGI, Jun 2013 [↩]