beyondbrics

Who wants to bet on the future of Mexico’s domestic economy? With private-sector economists revising down their 2011 growth forecasts, the number of takers may be starting to dwindle. But Aureos is piling on the chips.

This week, the private equity fund management company announced that it had bought a majority participation in Handell, a Mexican outfit that imports and distributes some of the world’s leading brands of toys.

Toys, in particular the sorts of brands that Handell imports – Disney, Hello Kitty, Bratz, Sponge Bob and Word Wrestling Entertainment (WWE), among others – are not a straightforward market.

They tend to rely on the middle classes, which have the necessary resources to buy what often turn out to be expensive products. Sales are also highly seasonal, with the bulk of them coming during the Christmas period, and many quiet months in between.

But Aureos, which now has US$1.3bn under management and presence in about 50 countries, believes it has spotted an opportunity in Mexico’s young population and growing middle class.

As Miguel Angel Olea, Aureos’ managing partner in Mexico, told beyondbrics: “There are lots of young people in Mexico, and they are going to school, completing their studies and getting their first job. The numbers are there”.

He’s right. Behind the huge frustrations stemming from the lack of structural reforms in the last decade, and from the resulting disappointing economic growth, big changes have taken place in the Mexican household.

The most important of them is that low interest rates and low inflation have helped to create a much larger middle class. One estimate, for example, suggests that as many as 13m of Mexico’s 25m families have total monthly incomes of between 8,000 pesos ($645) and 20,000 pesos: in 1995, there were just 5m.

That new and aspiring middle class could become Handell’s next customers. Aureos did not reveal how much it invested in the import and distribution company. But it did say the capital injection would be used to expand existing operations and, importantly, to diversify its toy portfolio to provide less expensive product lines.

As a press release on Tuesday put it, “demographic changes are now creating an opportunity to respond to lower-income families’ increasing disposable income”.

The key to the idea is Handell’s impressive distribution network in Mexico, which reaches not only the more expensive retail outlets such as department stores and luxury goods’ stores, but also the growing number of Wal-Mart stores around the country.

None of this is quite the “bottom of the pyramid” economics that produced so much excitement in Mexico prior to the 2008-9 crisis. But it does serve as a reminder that there are important long-term demographic trends at work in Mexico, and that businesses should not lose sight of them.

Related reading:
Mexico scores on competitiveness, beyondbrics
Mexico: adios foreign investment caps, beyondbrics
“Made in Mexico” gains ground on China, beyondbrics
“Hecho en México” v “Made in China”: round 2, beyondbrics
Regulation: Media wars give hope of more choice, FT
Investing in Mexico 2011, FT Special Report
Mexico Trade and Investment, FT Special Report