Tuesday, October 27, 2009

Brazil: The Allure of the Underdog

Often the least explored of the BRIC markets, Brazil has potential for the luxury goods sector that is steadily increasing.

Brazil is a relative newcomer to global trade — a status that has put it in an almost unique position during the global economic crisis. Less involved in exports than other BRIC markets, its large, emerging economy has been more protected and in comparison unscathed by the crisis.

The country’s high net-worth individuals have also suffered less by contrast to those of other BRIC markets. Capgemini/Merrill Lynch’s 2009 World Wealth Report counted 131,000 HNWIs in the Brazilian market in 2008 versus 143,000 the year before. This decline of 8.4% is nevertheless lower than China ’s decline of 11.8% and the average global drop of 19.5%; and much less dramatic than Russia ’s decrease of 28.5% and India ’s of 31.6% (although these falls were on the back of sharp increases the year before.)

This relative stability among Brazil ’s high earners is one factor that is clearly pushing the country further up the agenda for many international brands. “The global financial crisis has affected markets that have become very important to the luxury sector,” says Carlos Ferreirinha, director of São Paulo-based MCF Consultoria. “Luxury brands are now looking more closely at Brazil as a potential new market, although only a handful are yet to start development here.”

Hana Ben-Shabat, a partner at management consultancy AT Kearney, also notes that companies are keeping a closer eye on Brazil . The country came top of its annual Retail Apparel Index, which examines emerging markets with the most potential for the fashion retail sector. “ Brazil is not as big as the Asian markets but now that brands have conquered China , they are looking for other destinations in recognition that the majority of growth is going to come from emerging markets.”

“Overall, Brazilians value fashion — shown in the higher levels of disposable income they spend on fashion,” she adds. “There are a large number of aspirational consumers and we’ve already seen luxury players entering the market. The characteristics resemble a market ready for luxury.”

Compared to some other BRIC markets, however, Brazil has some catching up to do. Based on the market and financial performance of 220 of the world’s leading luxury goods companies and brands, Bain & Company’s 2008 study of the global luxury market values the Brazilian luxury goods market at €1.3 billion ($1.9 billion), that is smaller than China’s (€4.5 billion or $6.6 billion) and Russia’s (€3.6 billion or $5.3 billion) but larger than India’s (€0.6 billion or $0.9 billion). On the other hand, it is the market where the greatest growth is expected, with an uplift of 35% for the luxury sector over the next five years forecasted by Bain & Company. A further fifty luxury brands are likely to take advantage of this opportunity and to enter the Brazilian market by 2013, according to the study’s estimates, driven by growth promising to be higher than in other BRIC markets.

Any such fulfilled potential will come from the increasing access to disposable income among the majority of Brazilian consumers, in addition to rising interest in what Brazilians call “pleasure consumption” . High-end food items and beverages, luxury cars, cruises and designer clothing all fall into this category offering local and global luxury brands opportunity.

"Luxury tourism and fashion are the two areas where the market can excel," remarks Marco Fidelis,

director of Prestige Consultoria. "In the fashion sector, for example, five key flagships have opened in the last twenty months: Gucci, Diesel, Chanel, Marc Jacobs, and most recently, Hermes."


Marc Jacobs recently opened São Paulo store in Rua Haddock Lobo

Until recently, however, Brazil has not been a priority for market development among international luxury brands. “One barrier,” says MCF’s Ferreirinha, “is that the luxury market is concentrated in São Paulo and other cities have not emerged as strong, potential luxury markets.”

For fashion brands, São Paulo remains the only serious market. “If your business model is sustainable and can be successful by targeting just a small slice of the market — the 0.2% of wealthy individuals in São Paulo captured by (luxury mall) Daslu — then you can do well,” explains Andrea Jansen, former marketing director at jewellers H.Stern, one of Brazil ’s luxury success stories. “Until the Brazilian middle class is better established and becomes more active in consumption, this is the market for luxury fashion brands.”

Another major obstacle is cost. Brazil remains an expensive market in which to operate, not least because high import and local taxes drive up retail prices to a prohibitive level for the country’s cosmopolitan luxury consumers. “Retail prices are always at least double that for the same product in the US market and higher again than prices in Europe ,” says Ferreirinha.

French luxury group Hermès, which finally opened the doors to its Brazilian store in mid-September, usually prefers to go it alone in new markets. After years of deliberation, however, it has teamed up with a local partner to make the numbers work in Brazil .

The company is working with a new breed of investor in Brazil — owner of São Paulo ’s luxury retail shopping mall Cidade Jardim. Its investment in an international luxury brand is part of a growing trend among luxury shopping centre developers. Iguatemi's owner, for example, has invested in New York designer Carolina Herrera. Rather than wait for the brand to come to them, developers are seizing the initiative, entering traditional franchise agreements as well as paving the way for future joint ventures.

British luxury powerhouse Burberry is also readying itself for further expansion in Brazil but plans to take on the market directly. It has now regained control of its franchise operation to manage its business there from 2010, integrating it into its newly created Americas market region. CEO Angela Ahrendts is no stranger to the opportunities afforded by emerging economies and in May this year noted that China and Brazil offered Burberry the most potential, replacing Russia and Dubai from the previous year.

In whichever manner brands enter Brazil , having a local representative is imperative, according to Paola Le Gargasson, director of Brasilia-based consultancy Quartier du Luxe: “International brands really do have to open an office within Brazil to represent them commercially, even if they have a partner here.”

Perhaps more promising than the fashion industry is Brazil ’s luxury tourism market. At the moment, home-grown brands rule.

“ Brazil ’s luxury tourism sector has very few international brands,” remarks Nicolas Peluffo, managing director of Ponta dos Ganchos, a resort opened in December 2001 near the southern city of Florianópolis . “Today, apart from some international players, local companies have taken the lead and expanded almost competition free.”

Fidelis says: "At moment We have just seven hotels that are members of The Leading Hotels of the World but this number is likely to increase. This segment is becoming professionalized very quickly with new training courses in place."


Hotel Unique, São Paulo

Peluffo, who is also head of the recently-founded Brazilian Luxury Travel Association, adds that, “the cost of construction, land and labour are significantly lower than North America and Europe , therefore requiring less investment for setting up new businesses. The tourism luxury boom is already happening in some areas and the result will be noticed in about five years from now when the region will be booming with new properties being launched and demand driven this way as never before.”

His confidence is echoed across the sector. Both local and international brands already in the market acknowledged early on that the global financial crisis might not have the devastating effect seen elsewhere. According to a study by market research firm GfK Brasil (part of Germany’s GfK Group) and MCF Consultoria, between November 2008 and February 2009, only 14% of the 102 companies surveyed thought their businesses would be seriously affected, whereas 34% thought they wouldn’t be impacted at all.

Brazil is clearly not a market to enter casually. Aside from the operational challenges, also to contend with are the unique characteristics of local consumers. Brazilians don’t always see the need to buy international brands, nor do they automatically equate international with luxury. Ruth Marshall Johnson, consumer insights editor at trends forecaster WGSN, remarks: “There is a collective memory that luxury is European at heart, but also a strong sense of national identity and the idea that Brazil can build its own luxury sector from scratch.”

Long the underdog of the BRIC markets, Brazil will remain a mix of opportunity and obstacles for some time to come. Consequently, luxury firms will have to gauge their approach according to the capacity of the country’s main urban market to accommodate them as well as the pace at which the middle classes become a formidable segment to target.

by Angela Rumsey

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