During 2017 the global financial environment had a less volatile behavior than the previous year, although with some moments of uncertainty such as the renegotiation of the North American Free Trade Agreement, inflation and interest rates in the United States and Mexico.
Economic Outlook 2017
During 2017, although with some episodes of uncertainty, such as the renegotiation of the North America Free Trade Agreement, inflation and interest rates in the United States of America and in Mexico, the world financial environment had a less volatile behavior than during the preceding year.
U.S. economy grew by 2.3% during 2017, triggered by a 6.7% increase in consumption of durable goods, due to the expansion of wages and the low unemployment level, as well as to an increase in private investment of 3.2%. The Federal Reserve continued stabilizing its monetary policies, increasing its rate by 75 base points during 2017, closing the reference rate at 1.50%, forecasting some pressure on inflation by the strength of the U.S. internal economy and the tax reform.
In Mexico, Gross Domestic Product growth was at 2.0%, slightly lower than 2016. Primary activities and services were able to counteract marginal decrease of industrial activities, resulting mainly from a lower oil production. A 3.8% growth of formal employment and 7.5% in remittances in Mexican peso terms, favored growth of domestic consumption by over 3%. Inflation was at 6.8% throughout the year, due to increased oil and gas prices, as well as foodstuffs during the year.
The Mexican peso revalued against the U.S. dollar by 5.2% in 2017, closing at an exchange rate of $19.70, with a maximum parity of $22.00 at the beginning of said year.
The commercial deficit decreased as a result of an impulse in exports to the United States, which increased by 8.1% and were able to compensate an increase in oil deficit, which reached U.S. $18,402 million in 2017. In turn, the Banco de México continued its restrictive monetary policies to control inflation, increasing five times the reference rate during 2017, going from 5.75% to 7.25%.
The manufacturing platform, fundamental for our exports, expected investments for the coming years in the energy and infrastructure sectors, and the expectation of a reasonable renegotiation of the NAFTA, strengthen the country in the face of future domestic and external challenges, but all of this might experience changes in view of the uncertainty of the political moment.
Grupo Sanborns
Sales increased by 4.6% thanks to the product mix for all formats. We continued with the credit strategy and the development of proprietary brands at Sears, and we began the integrated stores and space efficiency improvement at Sanborns.
2017 was a year of challenges, in particular during the last quarter of the year due to the damages resulting from the Mexico City earthquakes, considering that over 40% of our stores are located within the Metropolitan area. The first days, 28 stores were kept closed during their inspection; all of them reopened without having experienced damages. However, serious damages at the Galerías Coapa shopping mall gave rise to the permanent closure of the Sanborns and Sears stores at that mall, the latter being the fourth most important store nation-wide.
An increase in consolidated net sales was 4.6%, reflecting the product mix and a good performance during the first nine months of the year. Newly-remodeled stores at Sears Oaxaca and Angelópolis contributed positively, as well as the opening of new stores at Portal San Ángel and Querétaro La Victoria. We also observed increased sales during the entire year at Promotora Musical and in other formats.
Throughout the year in Sears we continued working on the construction of our own brands.
At Sears, we are continuing to work in the creation of proprietary brands and in strengthening our distribution and logistics capabilities. The Sears Distribution Center was not operating at full capacity during the third quarter of the year, after the earthquake. It was necessary to focus all our efforts on the restoration of the flow of merchandise, which was resolved at the end of the year.
In credit, direct discounts were expanded, being more conservative for the interest-free month promotions, to counteract the increase in uncollectible accounts. With these strategies, we are seeking to improve the collection indicators.
With respect to Sanborns, the trend for recorded music and video sales continued downwards, while the book supply experienced the consolidation of some editing firms. Therefore, during the year our goal was to maintain profitability through space efficiency improvement, strengthening the higher value-added categories and sales. In addition, we began opening formats adapted from Sanborns to more integrated ones at Sears, in an attempt to supplement merchandise and offer restaurant services.
At Promotora Musical, six iShops were opened during the year, in addition to remodeling another six stores for a renewed image. At MixUp, we continued with the strategy of improving product mix with the introduction of more accessories in the technology and entertainment categories.
On the other hand, our e-commerce strategies have had a continuing evolution program in the webpages and apps for each format, supplemented by the development of the marketplace at ClaroShop, thereby increasing product volume and on-line purchase services and with the possibility of “click-and-collect” by picking up or returning products at the stores.
Finally, the Company continues to be financially strong, maintaining a solid capital structure, healthy debt profile and adequate liquidity that will enable us to continue with our strategies.
Six iShop stores were opened during the year, and another six stores were remodeled to leave them with a new image.
The ecommerce has had a program of continuous evolution in the pages and applications of each format.
Regarding sustainability issues, the Fundación Carlos Slim carries out over 90 programs and projects in 13 different areas, including: education, employment, health, sports, culture and the environment, thus reaching over 45 million beneficiaries in Mexico and other Latin American countries. In 2017, particularly relevant for the Foundation was the “México Unido” [“Mexico United”] initiative for repairing the damages caused by the September earthquakes. During the emergency stage, the Group as a whole, and with the outstanding work by its businesses and its volunteers, we gave an immediate response to the basic needs of the affected population, by supplying basic staples, camping tents, blankets and mats, water purifiers and telecommunications.
For the reconstruction and transformation stage, we launched an invitation and call so that for every Mexican peso received, the Foundation would contribute five more. We had the response of over 217 thousand donors, who deposited their trust in us, with which donations were received for $412.4 million to which $2,061.8 million were added by the Foundation. The proceeds were used in reconstruction of houses, health and education infrastructure, and the rescue of the cultural heritage. As established since the beginning, we have accounted month by month, with full transparency, on the acts and the application of the resources in the Foundation webpage.
Due to all of the foregoing, we are looking at 2018 optimistically. We are aware that this will bring about major challenges in Mexico, both economically and politically, but we feel motivated to continue improving on the results obtained for 2017. I am again expressing my recognition to our clients and suppliers for their support, as well as all the employees in our Group, thanking for their efforts, commitment and dedication.
Sincerely yours,
Lic. Carlos Slim Domit
Chairman of the Board of Directors of
Grupo Sanborns, S.A.B. de C.V.