Between the fast-approaching 2014 FIFA World Cup and the 2016 Olympic Games, Brazil is positively basking in the global spotlight. Overall retail sales are expected to climb as a result of the sporting events, driven by influxes of wealthy tourists and an increase in domestic spending.
There are many reasons for luxury executives to feel optimistic about the local luxury market. Despite a slowing economy and high inflation, the long-term prospects remain positive. Euromonitor International forecasts that the country will become the world’s fifth largest consumer market in 2023, with total consumer expenditure reaching US$2.7 trillion in 2030.
Its luxury market is set to grow by approximately 30% in the five years to 2018, with additional value sales of US$1.4 billion. This growth will place Brazil among the top 15 luxury goods markets in the world (ranked 14th by 2018), overtaking both Taiwan and Australia.
“ Brazil’s luxury market is set to grow by approximately 30% in the five years to 2018 ”
At a time of heavy pressure in developed economies and in a move to reduce reliance on Chinese performance, retail sales in Latin America have become a lynchpin of growth for many multinational luxury brands. Latin America is now also the fastest growing region in the world in terms of luxury outlets.
These brands have everything to play for. New luxury shopping malls, a sophisticated shopping culture and a young, aspirational middle-class combine to make Latin America one of the industry’s key growth prospects. At the same time, there has been dramatic growth in social media, opening up new platforms for luxury brands to engage with consumers.
In line with the rest of Latin America, Brazil generally has a youthful population. The median age in 2012 was 28, compared with 38 in North America and 40 in Western Europe. These demographics fall further into luxury’s favour, with the wealthiest consumers falling into the 35-44 age group.
“ Brazil remains the wealthiest country in Latin America ”
Brazil remains the wealthiest country in Latin America based upon ultra high net worth population. The country is home to 4,640 UHNW individuals with a combined wealth of $865 billion, though this figure decreased slightly between 2012 and 2013. GDP saw modest growth during this period however that was offset by the 10% decline in equity markets and the 31% devaluation in the Brazilian Real (Wealth-X).
As the largest market in Latin America and one of the world’s major emerging economies, considering the size of Brazil, the luxury market has so far been underperforming. This is mainly because major luxury brands have not extended their presence beyond the three main cities of Rio de Janeiro, Brasilia and São Paulo, with second-tier cities remaining largely untapped.
The small footprint of luxury brands outside São Paulo (and to a lesser extent Rio de Janeiro) also explains why Brazil’s luxury goods market is comparatively small. At the end of 2013 the luxury goods market in Brazil was valued at US$4.7 billion, having increased by 5.5% (year-on-year current prices) on 2012 figures.
The JK Iguatemi Mall in São Paulo
This figure represents just over a quarter of all luxury spending in Latin America and 1.5% of global spend. While the 5.5% increase outpaced the global market (+3.1%), these figures were almost US$0.5 billion short on Mexico, which grew by more than 13% over the same period.
Brazilians spend less than half as much on luxury goods as Russians, for example, even though Brazil’s economy is bigger. Indeed, Brazil is still outside the top 15 luxury goods markets in the world, according to the latest data from Euromonitor International.
However, as the retail environment in first-tier cities matures, development is becoming increasingly focused on less saturated second- and third-tier markets, where rising incomes are fuelling demand.
Shopping malls mean big business in Brazil.
“ Brazilians spend less than half as much on luxury goods as Russians ”
They offer consumers respite from hot (and damp) weather, as well as security while they shop, not to mention an unrivalled choice of brands. In São Paulo and Rio de Janeiro, malls now account for nearly half of all retail sales.
Of the 77 new shopping malls set to open by the end of 2015, 48 will be in small and mid-sized urban areas. Some of these cities are hosts for the FIFA Football World Cup and will be at the centre of national attention. Growing retail sophistication at home is also encouraging social class A and B consumers to do more of their shopping domestically.
The JK Iguatemi Mall in São Paulo is a big new attraction, for example. Labels such as Burberry, Coach and Kors could start to see a significant upside from the emergence of a new middle ground in luxury. However, whilst these growth drivers are being put in place, Brazil’s economic slowdown teamed with ultra-high import tariffs is creating a barrier for brands and consumers alike.
“ Much of Brazil’s growth in luxury expenditure has been driven by consumer credit ”
Much of Brazil’s growth in luxury expenditure has been driven by consumer credit, which has been rising rapidly as the country’s “new” middle-class embraces consumer credit with enthusiasm. Over the 2007-2012 period, consumer credit in Brazil grew at an average annual rate of 9.7% in real terms.
However, signs of strain are starting to show, including increases in non-performing consumer loans as well as a rising number of bounced cheques. As of June 2013, around 5% of Brazilian consumer loans were 90 days overdue, twice the rate in India and higher than in Mexico, South Africa and Russia, according to Fitch Ratings.
Brazil’s consumption boom, driven by consumer credit growth, has effectively contributed to rising inflation as demand for goods outpaced the economy’s ability to supply them. But this is now the start of a vicious cycle as high inflation is starting to inhibit consumer spending growth, and also to some extent helping to slow the country’s consumer credit boom.
Louis Vuitton, JK Iguatemi Mall
As one of the world’s major economies and one of the BRIC markets, Brazil is a key country for many would-be luxury investors. However, navigating its complex business procedures and the high costs involved in trading in the country are a daunting and off-putting prospect for many luxury brands and retailers, not to mention the cost implication for the end user.
The same luxury handbag can often cost 50% more in São Paulo than in New York, for example. A strong currency and a loosening of visa restrictions are already transforming Brazilians into avid international shoppers, with many choosing to shop abroad.
This disparity is unlikely to change significantly in the short to medium term, despite the efforts of some global brands to align prices in Europe and the US more closely with those in other markets.
Despite Brazil’s booming middle-class and demand for international brands, very few are well-established due to these high operational costs and import tariffs. For example, the time needed for companies to prepare, file and pay taxes in Brazil is the longest in the world. As a result, FDI intensity in Brazil was 2.5% of total GDP in 2012, below the 4.2% average in Latin America.
“ The same luxury handbag can often cost 50% more in São Paulo than in New York ”
Demand for luxury goods has been rising steadily in Brazil (6.9% CAGR over 2008-2013), so operating at a higher price point is not a disadvantage in the larger cities and partly explains why foreign brands have become so visible at the top end.
However, expanding into secondary and tertiary locations with upmarket stores charging high-end prices is more challenging, and the shift in momentum within Brazilian retail to these smaller locations is allowing domestic retailers to gain an advantage in terms of growth.
Urgent reform is needed from the Brazilian government in order to simplify the procedures involved in conducting business in the country. Currently Brazil ranks 116th of 189 economies in the ease of doing business listing issued by The World Bank. The country sits between Guyana and the Dominican Republic, ranked more difficult than Lebanon, Kuwait and the Ukraine.
“ Value sales of women’s clothing in Brazil amounted to US$1.4 billion in 2013 ”
Economic empowerment and financial independence among Brazilian women has been a key driver of growth within the apparel business. Value sales of women’s clothing in Brazil amounted to US$1.4 billion in 2013, making it the world’s 11th largest designer women’s clothing market, in line to overtake Spain as early as 2014, falling into the world’s top 10.
Within this group practicality and value for money still rank highly when it comes to making purchases, therefore designer brands that offer a premium image but with affordable price points have been faring well. This also makes celebrity endorsement and designer collaborations popular marketing strategies.
Brazil’s new middle-class tends to view Western brands as badges of social standing, which is especially visible among male consumers. Value sales of designer menswear in Brazil are set to overtake those of Canada by 2017. Though the market for men’s designer fashion remains comparatively underdeveloped compared to that of women, suggesting much opportunity.
The higher and rapidly growing purchasing power of young, upwardly mobile males makes menswear a lucrative category. In fact, average disposable income per male remained more than double that of female consumers in Brazil in 2013.
Furthermore, twenty- and thirty-somethings are investing more in their personal appearance than previous generations. As a result, they are spending more on beauty and personal care than ever before. In 2011, average per capita spend on men’s grooming products in Brazil overtook that of the US.
However, menswear remains undeveloped in Brazil by international standards, despite high and rapidly growing purchasing power. Targeting men – in terms of portfolio mix and marketing – is arguably the biggest opportunity for leading designer brands over the next five years, which would benefit from tailored retail and marketing strategies. Men in Rio de Janeiro typically have different tastes to men in São Paulo, for example.
Luxury brands with an eye on the Brazilian male need to come up with innovative advertising and marketing concepts. Crucially, they need to invest in targeted portfolios, and even specific menswear stores, much like Burberry has done in the US and China.
“ In 2011, average per capita spend on men’s grooming products in Brazil overtook that of the US ”
Brazil will of course witness a boost in tourism as a result of the FIFA World Cup – international arrivals are expected to increase in 2014 by 15% to reach a record high of 7.1 million. Tourism expenditure (including domestic tourist spending and incoming tourist receipts from international visitors) is expected to increase by 8.7% in real terms in 2014.
However, if we look closer at the issue of tourist expenditure on shopping (including luxury goods), whilst spend from incoming tourists on shopping is expected to increase by almost 27% in 2014 (in real terms) – reaching an all-time high – spend from domestic tourists on shopping is expected to decline by -2.3% in the same year.
Meaning that overall tourism expenditure on shopping in Brazil will witness a measly 0.6% value gain, following 8% growth the previous year.
In the past we have seen a similar scenario of limited economic impact on other host nations, and with winners and losers across different sectors of the economy. For example, the UK hosted the Olympic Games in 2012 and a study by the Office for National Statistics (ONS) saw no real indication of an “Olympic effect”.
“ Overall tourism expenditure on shopping in Brazil will witness a measly 0.6% value gain ”
It found that although tourist spending increased, actual arrivals decreased because of a displacement effect, with the Games leading some tourists to avoid the UK. Interestingly, it also found anecdotal evidence of a fall in online sales as consumers spent their time watching sporting coverage.
Indeed, Brazil’s forecast figures for 2014 suggest that the FIFA World Cup could act as a deterrent to Brazil’s wealthy tourists, meaning they may well choose to shop abroad, which could lead to slower growth in luxury sales on the ground.
According to Euromonitor International’s latest figures, the number of trips taken outside Brazil is set to increase by just under 11%, with key luxury shopping destinations such as France, Italy, the UK and the US all appearing in the top 10 growth markets.
Whatever happens, the boost, if it comes, will be short term as what Brazil’s luxury market really needs is structural reform to improve the country’s potential rate of growth. Private consumption has hitherto been the engine of growth, with growth in luxury goods expenditure peaking at 11.5% in 2007.
“ The World Cup could act as a deterrent to Brazil’s wealthy tourists, they may well choose to shop abroad ”
However, this model has reached the end of its course and consumers are being squeezed by high interest rates as well as high import duties and luxury tax. Reforms to improve the business environment, boost infrastructure and liberalise the economy are where Brazil stands to make real and lasting gains in the global luxury goods landscape.
Underlying this weak performance, Brazil has many strengths, including its sheer scale – in 2013 Brazil was the world’s seventh largest economy (in PPP terms), had its sixth largest population and spans its fifth largest land area. It is also home to a vast array of natural resources, key to which is its agribusiness sector and also a young population.
Structural reform will allow Brazil to capitalise on these advantages and place it squarely in the global spotlight for the right reasons economically speaking – a prime example of a large emerging market experiencing strong and sustainable growth.
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