By  on July 20, 2010

RIO DE JANEIRO — Could the Brazil juggernaut be about to hit some road bumps?

As fashion brands such as Giorgio Armani, Diane von Furstenberg, Burberry, Chanel and Christian Louboutin flock to tap into the booming market with freestanding stores, joining the likes of Gucci and Louis Vuitton that are there already, there are growing concerns Brazil’s growth could slow down over the next 18 months, even as more brands enter the country. Then there is the nation’s upcoming presidential election in October, which will see incumbent President Luiz Inácio Lula da Silva — to whom many attribute Brazil’s economic miracle — step down and a new leader take over.

These are in addition to the country’s perennial problems that include massive income inequality, poor infrastructure, a fashion market that is centered almost entirely in São Paulo and continuing high duties on fashion imports.

Despite these worries, Brazil isn’t about to give up its alphabetical leadership of the so-called BRICs — Brazil, Russia, India and China — which are expected to drive global growth in luxury and fashion brands for the foreseeable future. Even as Brazil’s output is forecast by the International Monetary Fund to grow 4.2 percent in 2011, down from the 7.1 percent projected for this year, it will still be far faster than most other Western economies. Local economists concur about slower growth after 2011 as well.

Bernardo Wjuniski, an economist with Tendências Consultoria, a São Paulo consulting firm, said Brazil should grow by 6.5 percent in 2010, above Finance Ministry estimates of 6.5 to 7 percent. Economic growth from 2011 to 2015 should temper to between 4 and 4.5 percent.

“The economy will grow more this year than in the coming five years mainly because of zero economic growth in 2009, and because the government recently removed tax breaks on consumer purchases of cars and appliances to help jump-start the economy,” Wjuniski said. “Still, if Brazil grows by 4 to 4.5 percent in the next five years, this is a sizeable enough growth rate to attract foreign companies to set up shop here. The domestic market is very big and Brazilian growth rates over the next five years should be much higher than in the U.S. or Europe and other big emerging markets, except for China and India.”

Economist Roberto Teixeira da Costa, partner at Prospectiva Consultoria of São Paulo, added that a growth rate above 4 percent a year after 2011 will depend on a number of variables, including economic gains in China, the biggest importer of Brazilian goods; whether Europe experiences economic crises severe enough to rock other economies and whether U.S. interest rates rise considerably in the next few years, reducing the flow of foreign capital to Brazil, where interest rates are much higher. “Even though Brazil can count on a big domestic market for growth, such growth is not immune to what happens in the other major economies of the world,” he said.

According to the government’s Institute of Geography and Statistics (IBGE), based on 2008 income figures, only 0.6 percent of the population (945,000 people) makes more than $53,000 a year, but that’s enough to put them in the upper-middle to upper classes. The IBGE added that 2.2 percent (3.4 million people) earn more than $27,000 a year, landing them in the upper-middle class and able to afford luxury fashion.

This makes it appear that there aren’t manypotential consumers of luxury fashion. But these are 2008 figures — the most recent available — and, since then, incomes have risen considerably, especially for the upper-middle class and the rich, said David Fleischer, a political scientist at the University of Brasília.

“Some 10 to 15 percent of consumers can afford lower-ticket luxury items, like the occasional purchase of foreign-brand fashion, but can’t afford high-ticket luxury goods, like imported sports cars,” Fleischer said.

He pointed out that the presidential election in October is not expected to upend the economy, as “both of the top two contenders, government candidate Dilma Rousseff and opposition party candidate José Serra, plan to keep current macroeconomic policy, including keeping inflation and interest rate policy on track. It is expected to spur economic growth without overheating the economy.

“I believe that economists’ projections that Brazil will enjoy up to 6 percent growth this year and more than 4 percent a year from 2011 on are accurate,” he added. “Because incomes are rising, consumer demand is very strong and expected to remain strong in the coming years.”

Brazilian buying clout is also being fueled by a low, stable inflation of 4.5 percent a year; a relatively low unemployment rate of 7 percent, and interest-free monthly installments on credit-card purchases, said Carlos Ferreirinha, president of MCF, a São Paulo consulting firm specializing in luxury goods.

“Foreign fashion brands now see Brazil as the second-most promising emerging market [after China] with a $6.5 billion a year luxury market,” said Ferreirinha. “Russia and India, in conflict with neighboring countries, have complicated political situations. In India, there is much less impulse consumption than in Brazil, factors that make those countries less attractive for foreign fashion brands than Brazil. This is one reason those labels are opening in high-end urban malls, where well-off Brazilians buy fashion. The luxury fashion market in Brazil is still a young one, with lots of growing room because demand for foreign fashion among upper-middle and upper-class consumers remains strong.”

Ferreirinha added the luxury fashion market is expected to grow mainly in São Paulo, where most of the wealthy live and which accounts for 70 to 75 percent of the Brazilian fashion market, and, to a lesser extent, in Rio de Janeiro, which accounts for 10 to 15 percent of that market. This is where most new malls are being built, along with Brasília and a few other big cities in the São Paulo state that have high per capita incomes and where there is a dearth of malls.

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