U.S. Retailers Rethink Rush to Expand in Mexico : Economy: Some like J.C. Penney and Wal-Mart had grand plans. Now they aren’t so sure.

What’s bad news for Mexican consumers is bad news for U.S. retailers who were eyeing Mexico’s emerging middle class.

Responding to a peso devaluation and an economic crisis in Mexico that has dashed short-term expectations of big profits there, U.S. retailers are re-examining expansion plans and are poised to slam the brakes on their rush to Mexico.

Until Mexico’s economic crisis, economists saw the U.S. retailing industry as the biggest short-term beneficiary of the North American Free Trade Agreement, which freed business from Mexican trade restrictions.

To be sure, retail chains that announced grand expansion plans after NAFTA was approved are still touting the long-term potential of Mexico. But they are preparing to retrench on short-term commitments if sales fall sufficiently short of expectations.

J.C. Penney, for example, had planned to enter the Mexican market by opening seven stores between 1995 and 1997. Construction of its first two stores--one in Monterrey and one in Leon--is nearly completed, and the company plans to proceed with the store openings in May, officials say.

But after that, “There are no firm dates for other store openings because decisions on further expansion will depend on the state of the (Mexican) economy,” said Duncan Muir, a Penney spokesman. “We may have to make other plans if the situation deteriorates further.”

Wal-Mart also plans further review before it decides whether to fully implement an ambitious expansion plan that called for 25 new stores in 1995. Wal-Mart, the largest retail chain in the U.S., has already opened 33 stores in Mexico since establishing a presence in that country in 1991.

“Right now, we’re closely monitoring the economic situation,” said spokesman Gerardo Ruiz. “However, Wal-Mart has a long-term commitment to Mexico.”

Kmart opened its first two Mexican stores in 1994 and plans to open five more this year. “We haven’t changed those plans, but we’re watching the Mexican situation very closely,” said spokeswoman Teri Kula.

The caution contrasts sharply with the go-go attitudes that have led to heavy U.S. retail expansion in Mexico in the last three years.

Lured by the promise of a more prosperous Mexican consumer and encouraged by the free-trade agreement, U.S. merchants were expected to boldly accelerate their southward expansion.

But despite last week’s pledge of U.S. loan guarantees, Mexico’s sudden economic slide means the consumer is poorer--and that changes the immediate outlook of expansion-minded U.S. merchants, according to economists and retail industry analysts.

“Considering Mexico’s trends--a relatively young population and a growing middle class in an expanding economy--there was a lot of short-term potential,” said Mauro Leos, vice president of Cimex-Wefa, a consulting firm that specializes on the Mexican economy. “The situation has changed, and I expect retailers to cut back their expansion plans.”

Leos said the devaluation would significantly reduce the spending power of the Mexican consumer. He now projects a 2% to 3% decline in 1995 Mexican consumer spending, compared to the 3.8% increase he had predicted prior to the crisis.

The Mexican government is requiring retailers to hold the price line on merchandise produced in Mexico, because the costs of those goods have been devaluated along with the peso. The government is willing to negotiate with retailers in setting prices for imported raw materials.

But the government is allowing U.S. retailers to raise prices on finished imported goods, commensurate with cost increases linked to the peso devaluation.

While the devaluation has created uncertainty among U.S. firms with Mexican operations, it has disrupted a major deal sought by PriceCostco, the Kirkland, Wash.-based warehouse store operator.

PriceCostco and San Diego-based Price Enterprises have abandoned their effort to sell their combined 50% stake in their Mexican chain to a joint venture partner in Mexico.

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