Mexico: BBB Foods a hidden gem in Hard-Discount retail
- DRC Discount Retail Consulting GmbH
- Jun 5
- 7 min read
Updated: Jul 4
Discount Retail Chain BBB Foods Inc. (NYSE:TBBB) is a well-positioned company which could benefit from developing a hard retail market in Mexico. The company has significant tailwinds in its focus on lower-income groups with a strong portfolio of private label brands. Tiendas 3B operates efficiently, according to the unit economics comparison.
About Tiendas 3B (BBB Foods)
Tiendas 3B is a fast-growing chain of discount grocery stores in Mexico that targets cost-conscious consumers and offers high-value goods. Its business model focuses on offering essential goods at competitive prices while leveraging operational efficiencies and effective supply chains.
With a strong presence in underserved markets and growing consumer demand for affordable options, Tiendas 3B is well-positioned to take advantage of demographic trends and economic pressures. Its focus on small format stores allows for expansion in urban and rural areas with lower overhead costs, providing significant room for growth and margin expansion.
The company offers food and non-food private label products, which make up 45% of all products. These products are sourced mainly from local suppliers, of which there are a small number, hence the strong link between them and Tiendas 3B. These products are cheaper compared to the branded ones. About 49% of the products are classic foreign brands, which are often imported from the USA, and 6% of the products are so-called Spot products, which change every 2 weeks. Mexico is the second-largest importer of processed foods from the US. These imported products make it susceptible to the strength of the Mexican peso, which has been weakening for a long time. The higher prices at which Tiendas 3B purchases will be reflected in the prices to end customers in 8 to 18 months due to inventory maintenance. The limited supply of products then increases their turnover.
Specificities of the Mexican market
Mexican consumers are quite selective and susceptible to changes in the prices of basic food due to high inflation and high interest rates. Consequently, these consumers often seek out discount chains to go beyond the discount. Digitalizing the shopping experience (apps) can serve to increase their satisfaction. Tiendas 3B operates an app where groceries can be purchased, and delivery times can be selected. The grocery sector is the main driver of CPI inflation compared to the US, where shelter (imputed rent) is the largest contributor to CPI changes. In addition, Mexico ranks among the countries with the highest poverty rate in Latin America (at 36.2% as of 2022, according to World Bank data).
The Mexican market is filled with discount chains, with hard discount chains (such as Tiendas 3B) being significantly less prevalent compared to Poland and Germany. Penetration of this type of retail store was about 2.3% in 2022, compared to less than 24% in Germany (mainly due to the Aldi network) and even less than 34% in Poland.
Typical customer and stores
The company's primary target group is lower-to-middle-income working-class people due to its presence in densely populated urban areas and suburban areas. Tiendas 3B is expanding into the outskirts of major cities, where it has the potential to expand sales due to the lower penetration of traditional discount chains. Branches are often located near bus stops, metro stations and in busy locations within walking distance so that there is no need to use a car and customers can buy the essentials.
Ideal for Tiendas 3B are spaces of 350-400 m2, which are created and maintained in the same concept. In addition, for faster inventory turnaround, the company builds the stores to be well-connected to the infrastructure. In addition, for this reason, Tiendas 3B is also building logistics centers to speed up the delivery of goods. The fast inventory turnaround and less need to hold cash give room for new stores to open faster without having to increase debt. Tiendas 3B has about 2,634 stores open as of Q3 2024, and expects that with the current population growth it could reach 12,000 more. In my opinion, a supporting aspect is the possible deportation of migrants from the US, which would increase demand in these stores due to the fact that they are people from lower-income groups.
Tiendas 3B is the fastest-growing hard discount food chain in terms of number of retail outlets. The stores growth CAGR between 2019 and 9M2024 is 20.3%, with a projected addition of 500 per year from 2025.
For the full year, the company plans to open 380-420 new stores, which corresponds to a planned investment of Peso 1.4-1.6 billion. This translates to MXN 3.9 million. MXN 2.5 million per store. With a target of opening 500 stores per year from 2025, the company needs to spend approximately Mexican peso 1.95 billion per year on this CAPEX alone. Accounting for the impact of inflation and the "safety cushion", I expect that the CAPEX spent on store construction could be Peso 2.15 billion, Peso 2.32 billion and Peso 2.51 billion in 2026, 2027 and 2028, respectively. If the company generates what it did in the first 9 months of 2024 on operating cash flow, it will have no problem financing this expansion. Moreover, with negative net debt.
Market share and competition
The market share estimate was calculated as a ratio of annualized Q3 2024 sales and the retail industry's 2023 sales size estimate (Source: Statista). For Wal-Mart De Mexico S.A.B. de C.V. (OTCPK:WMMVF), (Walmart Mexico) it is calculated in aggregate with branches in both discount chains and hard discount chains. In comparison, the Tiendas Neto chain with currently 1,600 stores is missing due to lack of data. This business is held entirely by its founder Hugo Salinas Sada.
Finance - Unit Economics
For fast-growing and expanding companies, a key indicator is how well they can manage their unit costs, or whether the new units are generating revenue efficiently and whether they are competing if they are in similar locations.
Tiendas 3B is showing sustained quarter-on-quarter growth in revenues per store, indicating growing unit economics. Ordinary revenues per store are lower because the company offers cheaper goods in its stores. The sales of El. Puerto de Liverpool's (LIVEPOLC-1) sales are affected by leasing revenues, which is why the per-unit conversion is higher. Walmart Mexico (Walmex) includes sales from both discount stores and hard discount stores in the calculation.
When converted per m2, we see a similar trend as when converted to a whole store. Companies in the discount chain sector are achieving higher sales per m2, however, the quarter-on-quarter change trend for Tiendas 3B is gradually increasing.
On the positive side, Tiendas 3B also compares favourably within the hard discount chains with Dollar General Corporation (DG), Dollar Tree, Inc. (DLTR) and Five Below, Inc. (FIVE) from the US, against which it achieves higher sales per m2, even without taking purchasing power parity into account.
Margins
In the hard discount retail sector, margins are very low due to the large representation of private labels and the focus on only the essentials. This is confirmed by comparison with traditional discount chains within the Mexican market. In addition, Tiendas 3B's margins are under pressure due to expansion, which increases fixed and operating costs.
Margins vs. hard retail stores in the U.S.
The table below shows that Tiendas 3B also has lower margins compared to similar companies in the U.S. A major reason for this is the effect of the Mexican peso on imported goods from the U.S. However, at the net margin level, despite geographic headwinds and a strong growth phase, the company shows competitive margins.
Working Capital - Days Inventory Outstanding
A key indicator affecting capital requirements in retail is inventory turnover. Tiendas 3B adheres to strict inventory management and by spreading out its distribution centers, it can efficiently deliver goods to stores, thereby reducing the lead time. Compared to most U.S. "dollar stores," Tiendas 3B can handle inventory more efficiently, reducing capital requirements. On the other hand, compared to a traditional discount retailer, a hard retailer Tiendas 3B has a longer turnaround time mainly due to the higher rate of branded product sales in a traditional discount retailer.
Competitive advantage
Tiendas 3B takes the route of using leases and direct ownership of real estate to finance new stores. Companies such as Soriana (SORIANAB) and GC Chedraui (CHDRAUIB) have developed real estate divisions of their business. In contrast, the discount chain Walmart Mexico has a similar approach to Tiendas 3B. The use of leases gives the company the flexibility to evaluate a possible relocation, assuming the store is underperforming.
It also has the advantage of localizing the supply chain. Most products are manufactured by local suppliers who have strong ties with the company. For example, if these suppliers need to make an investment, Tiendas 3B will provide them with guarantees. This makes it possible to control the cost structure and this translates into good unit economics.
Valuation
Tiendas 3B is referred to among analysts as the Aldi of Latin America. This can be seen in the valuation. Tiendas 3B, as a company operating mainly in Mexico, trades at a valuation multiple comparable to US companies. The absence of a geographic premium is primarily replaced by the US listing, where investors count on a liquidity premium to firms listed in Mexico. However, the valuation mainly incorporates growth prospects for expansion after Mexico.
*BF = Blended Forward, valuation multiples comparison. Source: Bloomberg Finance L.P.
Valuation vs. 6M Average Historical Multiple
The company's stock is trading near the 6M historical average today on virtually all the methods listed.
Risks
The main risk factors to identify are high wages growth and a potential tariff war with the U.S. which could influence strength of Mexican Peso and imported product prices. Risks related to the company's growth could be slower opening of new stores or slowing down same-store sales.
Conclusion
Tiendas 3B is the pioneer in the hard-discount market in Mexico. Its position is giving it the opportunity to benefit from market penetration growth. Negative net debt and strong cash flows help the company to reach its growth targets and benefit the most in an interesting market. Moreover, the founder and CEO is an experienced ex-JP Morgan investment banker who covered BIM Birlesik Magazalar and used it as an inspiration.
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