LEON, Mexico — Mexico’s leather goods industry hopes to grow 10 percent to $1.8 billion this year as booming exports offset sluggish domestic sales, industry observers said.
However, they noted profits will fall as Mexico’s peso continues to tumble against the U.S. dollar, making key raw-material imports more costly.
As falling oil prices and growing political scandals take the shine off Mexico’s economy, its volatile currency has slid to 15 per dollar compared to about 12 per dollar about a year ago.
“The peso is out of control,” Jose Franco, owner of cowboy boots label Joe Boots, said during the Sapica footwear and leather goods fair ended here last week.
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Franco added that the price of feedstocks including livestock are up 10 to 12 percent on average.
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“For the past four to five years, the peso has been stable but now it’s really fallen out of the government’s hands. It could close the year at 16 [per dollar],” he said.
Mexican leather goods producers import roughly 60 percent of raw materials and processing chemicals from Italy, Brazil or South Africa. And as local shoppers pare consumption, they are having a hard time passing on the cost hikes.
“We are going to miss our profit targets,” Franco said, adding that the peso’s weakness is also altering the value of post-dated purchasing contracts (such as those to be paid in 45 days), triggering brand-supplier rows and adding market friction.
All said, Franco noted exports should grow more than 10 percent to $1.1 billion as the U.S. economic recovery spurs demand for Mexican staples including Texan cowboy boots. The U.S. accounts for 75 percent of Mexican exports while Europe, Asia and Latin America take up the rest, Franco said.
Franco said exports will be key to lifting this year’s fortunes at a time when local consumption is turning weaker and more uncertain.
New reports pinning Mexican GDP growth at 3 percent (from 3.25 percent) have spooked consumers who are increasingly cynical that make-or-break energy and other reforms will bring much-vaunted economic benefits.
Despite the headwinds, the shoe industry — which mainly exports leather footwear — remains upbeat, saying it could gain over 4 percent to 270 million pairs in 2017, according to industry lobby Ciceg’s new president Javier Plascencia.
Plascencia noted subvalued Chinese and Asian imports have plummeted 50 percent since the government introduced a protectionist aid package last October, helping boost the industry’s fortunes. In 2015, the sector will also raise exports to make up for slumping local sales. According to Plascencia, foreign sales should chalk in a 12 percent gain to 29 million pairs, up from a 2.3 percent increase in 2013 when the industry lost 16 million pairs to Asian rivals.
Mexico’s footwear brands, which manufacture for the likes of Nike and Steve Madden, will work to lift sales to top markets in the U.S., Colombia and Canada, as well as niche markets in England or Germany, Plascencia added.
During Sapica’s 72nd edition, which saw the rollout of an Exporters pavilion, foreign-buyer numbers surged 36 percent to 125 year-on-year, led by U.S. brands including Deckers and Wolverine.
“Deckers wants to double production to 60 million pairs by 2020 and they could move as much as 10 percent of that production to Mexico,” said one Sapica executive.
Apart from taking advantage of the lower peso, the U.S. firms and several top global brands came to the Aztec nation looking for “high quality” and more fashion-centric Mexican suppliers, the executive said, adding that a growing chunk of international buyers are looking at fast-fashion sourcing opportunities following an industry restructuring to better meet those needs.
Edgar Carrillo, commercial manager of exotic leather goods firm Cuadra, agreed the peso’s decline is denting margins but insisted 2015 will be good sales-wise.
“We can’t depend on global macroeconomics to pace our growth,” he said. “We need to work internally, produce more quality, adjust inventories and improve supplier negotiations.”
The right “product engineering” mix to boost product/quality ratios will also be pivotal to lifting this year’s fortunes, he added.
However, Mexican firms must lift productivity and upgrade manufacturing and enterprise technology to boost economies of scale, Carillo added.
While some products match Italy or Spain’s quality, management could also be streamlined.
“We need better marketing and management training and to believe in ourselves and what we do,” Carillo added. “We need more professionalization.”