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A Shrinking Market: Is This Brazil’s ‘New Normal?’

Fashion brands rely on Brazil as their cash cow in Latin America, but how resilient is the luxury market as economic crisis deepens in the country?
Sao Paulo, Brazil | Source: Shutterstock
By
  • Vincent Bevins

SAO PAULO, Brazil — Until two months ago, Brazilian shoppers at the Prada store on Rodeo Drive in Beverly Hills could be attended to by a native speaker of their language. Since then, that salesperson has moved on and Prada has felt no need to search for a new Portuguese-speaking staff member for their California store. This may be as good a signpost as any that the moment in Brazilian luxury is over, at least for now.

During that 'moment,' which roughly dates from 2009 to 2013, the Brazilian currency, the real, was at record high levels in relation to the dollar. Brazilians flushed with newly inflated incomes flooded stores in Paris, New York, Los Angeles and Miami, making big purchases on luxury goods. With Brazil so expensive and foreign exchange markets on the fritz, it was almost always cheaper to buy prestige goods abroad.

How things have changed. Economic growth has slowed from a breakneck pace of 7.6 percent in 2010, and commodity prices have dropped. In June, the value of the real fell the most among major currencies (slipping from 1.5 reais to the dollar in 2011 to over 3.5 reais to one) and the country found itself bracing for the worst recession in 25 years. The impact on the luxury market has been profound.

“We’ve been analysing the Brazilian luxury market for the past seven years. We have had strong periods of growth over 22 percent and have kept an average of 18 percent. Last year we noticed a shrinkage to the level of 12 percent and this year has already fell to the level of 8 percent,” says Carlos Ferreirinha, president of the Sao Paulo-based consulting firm MCF Consultoria.

Indeed, with the currency worth less than half its previous value, Brazil's luxury market cannot help being smaller overall. Yet, due to the country's high-income inequality and the size of Brazil’s wealthy elite, there are certainly Brazilian consumers who will continue to buy luxury goods.

“This class is more bullet-proof to recession than anyone else. Will they take advantage of the price shift? Maybe. We might even see a spike this year, the same as we witnessed in Japan last year, when shoppers rushed to buy high-end brands before the new consumption tax hit. But it will be a blip because prices will inevitably go up when the current stock runs out,” says Rob Walker, a Latin American market expert and analyst for Euromonitor International.

These differences are likely to remain pronounced for a few years, so it makes sense sometimes to buy international brands in Brazil. Although, not always, say analysts.

“It’s complicated. There are some brands like Cartier, Prada, Tiffany that are right now cheaper in Sao Paulo than in New York and that's down to the currency plunge [but] price has always been a big issue in Brazil's luxury market,” says Walker. In light of this, foreign brands must choose between raising prices to maintain dollar-denominated revenue levels or taking a cut to stay competitive.

"The majority of [international] brands have adjusted their prices, but some have decided to only partially adjust them to remain competitive," says Carlos Jereissati Filho, chief executive of the Iguatemi Group, whose luxury malls host a range of international and Brazilian brands.

"The depreciation of the real has resulted in more Brazilians spending domestically rather than abroad. Brazilian brands will benefit from this, but we believe that a shift away from buying overseas will generally benefit all brands that are sold in Brazil," adds Jereissati Filho, explaining that same-store sales and same-area sales within Iguatemi increased by more than 6 percent in the second quarter of 2015 compared to the same period last year.

According to Walker, however, the desire to shop beyond Brazil’s borders will remain very powerful for some. “Keep in mind Brazil's formal luxury market is actually quite small, if compared to relative to the size of its retail market. It's not just New York and Paris that tempts shoppers; it's the cheaper prices you can grab at frontier towns both on the Paraguay and Argentine side. Luxury shopping outside Brazil is still big business,” he says.

Five years ago, when Brazil was viewed as one of the most promising emerging markets, Brazilians on holiday would often receive a flood of requests from friends and family, urging for them to pick up items like luxury accessories, electronics and even basic necessities to bring back home.

Brazil's apparel and footwear market is still by far the largest in Latin America, almost twice as big as that of Mexico. However, Euromonitor International reveals that from 2013 to 2014, Brazil's apparel and footwear market only grew 2.9 percent, whereas Mexico grew 8.6 percent and dynamic fashion markets like Colombia, Peru and Chile each achieved growth rates of over 5 percent.

In spite of the looming economic crisis, few luxury brands are likely to take their eyes off the still valuable Brazilian market.

"The culture of installments in Brazil protects the business in times like this," says Luciana Marsicano, general director of Tiffany & Co., Brazil, referring to the nature to Brazilian consumers, who are used to buying consumer items in monthly installments, even though interest rates are sky high. "Clients are not travelling as frequently and will always look to prestigious brands like Tiffany to celebrate important occasions in their lives. Brands may need to be more creative, but there are endless opportunities in a huge market like Brazil."

Whether a shrinking market with price adjustments and new buying habits reflects a ‘new normal' for Brazil is a difficult question to answer. Economic recovery is dependent on the resolution of a political crisis, austerity measures and a new export reality based on plunging commodity prices.

“The big question for me is how much the accessibly-priced luxury brands will be affected by recession. Middle class Brazilians have grown used to their fancy smartphones and their high-end whiskies. Brazilians put loads of stock in looking good,” says Walker. “The new middle class is desperate to hang on to these sort of mid-range prestige brands and will try to save cash by trading down in other more humdrum areas. That might make luxury more resilient. But something has to give.”

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