Customers first: Mexico's No. 3 supermarket chain focuses on service in order to compete.

On the shelves at Comercial Mexicana, the third-largest supermarket chain in Mexico, there are signs that tell the buyer how much cheaper the item is in comparison to the price of its most aggressive competitor, retail giant Wal-Mart. The competition is that fierce.

Not only that, each store is strategically located, and each item is carefully placed to give the client the feeling that she's doing more than just the week's shopping. "Not only do I find what I want, but everything is so attractive that I end up buying things I had no intention of buying," says Sara Alvarado, a Mexican housewife doing her shopping at one of the stores.

Following the tough price war after the 1999 introduction of Wal-Mart's low-price system, today the struggle among retailers is centered on getting the consumer to pay more attention. "In the future, the most important thing won't be price but the service you can give the client and how good her shopping experience is," says Mauricio Brocado, director of research at investment firm Actinver.

Controladora Comercial Mexicana --which runs the supermarket chain and a restaurant chain--this year will invest US$400 million to open 21 stores, remodel another 10 and open the doors at six restaurants. "Last year was the best year in the history of Comercial Mexicana: We had the best sales and profit margins. We are very optimistic; we believe there's a great opportunity for growth," says Francisco Martinez de la Vega, director of finance and administration for Comercial Mexicana.

In 2006, the enterprise had sales of $4.22 billion and this year it's expecting that figure to grow by 10%. But in order to get there, it had to undergo a restructuring after the heavy hit it took following the arrival of U.S. behemoth Wal-Mart. "In the past, Comercial Mexicana was accustomed to average sales growth rates of 10%, but from 2000 to 2003 we grew very little. In fact, we closed down unproductive stores," Martinez says. It wasn't until 2004 that the chain started growing again.

Price war. "Our promotion strategy was very worn out and things started to go very badly. The consumer viewed us as expensive compared to Wal-Mart and the company's numbers started to go down," Martinez says. "The priority of not being expensive is a central topic. Our managers compare prices against Wal-Mart in all stores and, if they have a problem, we have to change prices."

To reduce costs and maintain low prices Comercial Mexicana had to have a distribution infrastructure, and to improve and centralize its logistics. This year it will complete a $17 million distribution center just for frozen foods. "[This facility] give suppliers an exact delivery of their merchandise to the group's operators, and it gives Comercial Mexicana maximum advantage with its providers and efficiency in the supply," says Fernando Gomez Da Costa, general director of Comercializadora Tangamanga de la Metropolis, a dairy producer that supplies the chain.

Over the next few years, Comercial Mexicana will also have two important allies: increasing consumer purchasing power, and the push toward more credit purchases. By 2020, the industry is expecting an additional 14 million consumers due to a combination of economic conditions and demographic growth. "All of these variables, and a young population that is joining the labor force--young people who will start marrying and requiring home appliances--generates a commercial dynamic that could be very positive," says Rafil Arguelles, vice president of corporate affairs for Wal-Mart Mexico.

The competition is on the lookout. This year, Wal-Mart will invest $967 million in Mexico to open 125 self-service and department stores and 35 restaurants, a 12% jump in store space. In 2006, the National Association of Self-Service and Department Stores reported a total investment of $1.40 billion among its member chains, which until May did not include Wal-Mart. The figure underscores a feverish competition, because it includes new establishments, remodeling and conversions in the formats of stores.

MARISOL RUEDA * MEXICO CITY