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MEXICO CITY-In the newest wave of U.S. retailers heading south, department stores are readying plans to enter the Mexican market, bringing consumers an embarrassment of riches.

Dillard Department Stores has joined forces with the powerful joint venture formed by Wal-Mart Stores and Cifra, Mexico's leading retailer, to open four Dillard stores by the end of 1996. Dillard will hold 50% of the new joint venture while Wal-Mart and Cifra together control the rest.

Saks Fifth Avenue also plans to open its first non-U.S. store in Mexico City in the winter of 1996, while J.C. Penney Co. will open two stores in March in a first step toward operating seven stores in Mexico by the end of the decade.

The newcomers hope to capitalize on the name recognition their stores have among middle- and upper-class Mexicans who go to Texas to shop.

"We have a lot of experience in dealing with shoppers from Mexico," said a Penney official. "We have 22 stores along the border and we estimate some $100 million in annual sales to Mexican shoppers."

For decades, Mexican consumers have crossed the border or flown to Houston or New York for spending sprees on apparel, household appliances, electronics and cosmetics that were unavailable in Mexico's formerly closed economy.

Even after the borders opened to imports, Mexicans continued to shop in the U.S., where prices are at least 30% cheaper and the selection is broader.

These moves have spurred existing chains to gear up. Palacio de Hierro, Mexico's most upscale department store chain, is said to be looking for help in updating both its image and its stores, but has not taken any further steps so far.

During its two-week seasonal promotion for young people last month, it tried a new agency, Merino y Asociados, which produced snappy MTV-style ads with no voiceover for cable TV and cinema. (Teran Publicidad remains agency of record.)

But the most aggressive response has come from Sears Roebuck de Mexico, which began advertising on national TV for the first time last month and is planning to grow from 47 stores now to 100 by the year 2000. Many of those will be in smaller cities, where Sears is often the only department store.

In major cities, Sears will continue to open its upscale format, introduced about five years ago in an effort to attract wealthier customers and update its stodgy image. This format offers more luxury products, including fashion clothing and upscale cosmetics.

"The Sears concept is very solid," said Andres Ehrli, VP-sales & marketing. "We need to continue creating a new face and a new concept, but we're the same store."

Sears expects to spend about $23.5 million on advertising and marketing next year, a 30% increase from 1994, said Mr. Ehrli.

In the first stage, Sears has been promoting specials in each of its major departments. In the past, Sears has always handled its advertising in-house, but hired Young & Rubicam for the new campaign. Y&R is also developing a separate image campaign to break in January.

Sears' 50 years of operating in Mexico gives the company an advantage over the incoming competition, since its name is well-known and associated with high-quality U.S. imports, particularly in home appliances and furnishings. Some analysts question whether the new stores' name recognition in the U.S. will be enough to draw a sufficient number of shoppers in Mexico.

They also point to existing confusion among consumers about the new price clubs and superstores that straddle the suburbs of large Mexican cities.

"The average middle-class Mexican, let's say, an accountant who has been to the U.S. once or twice in his life, doesn't know the difference between Saks Fifth Avenue and Target Stores," said Gaspar Quijano Paredes, a retail analyst at Vector Casa de Bolsa, a Mexico City brokerage house.

Some retailers know that they have to educate consumers about what they offer. "We don't claim our brand is known, we don't take that for granted," said Juan Suberville, CEO of Kmart Mexico, a joint venture between Kmart and El Puerto de Liverpool, a Mexican retailer that operates upscale department stores.

Kmart, for example, uses TV advertising for about two weeks after a new store opening, daily radio spots, brochures delivered to homes every two weeks, newspaper ads on weekends and weekly promotions called Kmartes, Spanish for K-Tuesday.

Local shop Arredondo de Haro y Asociados creates the ads.

The new department store retailers acknowledge that they will have to create some kind of marketing effort to communicate their positioning to Mexican consumers, but add it's still early.

Neither Penney's nor Dillard have chosen an ad agency.

"You want to get customers to visit the store," said G. William Haviland, Dallas-based president, Dillard's Mexican division. The chain will rely heavily on newspaper inserts and catalogues as well as publicity surrounding the opening of malls, he said.

The stores all will be patterned after their flagship stores. "We will go in with apparel, accessories, cosmetics and soft home products," said Dillard's Mr. Haviland. "The challenge will be more in assortment*.*.*.* differences in style and acceptance, especially the color and size change."

But foreign retailers may have to make more changes than that. Stores may have to provide credit themselves for big-ticket items. Even Kmart and Mexican hypermarket chains are now offering their own credit cards. Upscale Mexican department stores like Liverpool and Palacio de Hierro regularly tie their promotions to credit.

In addition, department stores in Mexico offer a much broader range of goods than apparel, accessories and cosmetics.

Liverpool, for example, stocks nearly 10 times as many different items, from specialty foods to home appliances, as a U.S. department store.

The sudden influx of department stores raises questions about how many the Mexican market can sustain. The Mexican Association of Market Research Agencies estimates that Mexico's high-income segment represents just 8.8% of the market, while the middle class accounts for just 32.1%.

"We have to be careful of saturation," said Christine Aimar, retail analyst at Baring Research. Mexico City. "I don't know how many more Liverpools can be opened in Mexico City."

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