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Brazil’s Boom May Face Challenges

As luxe brands including Giorgio Armani, Burberry and Chanel flock to Brazil, there are some concerns the country's growth will slow.

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The JK complex in São Paulo.

The JK complex in São Paulo.

Courtesy

A look down on Trancoso.

A look down on Trancoso.

Alexandre Schneider/Getty Images

Paraty in Rio de Janeiro.

Paraty in Rio de Janeiro.

Getty Images

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 many potential 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.

 

Brazil is getting noticed on international fashion and travel fronts, too. Local fashion has increasingly projected the country’s sensual, laid-back and let-loose spirit, either at 7th on Sixth, where designer Alexandre Herchcovitch shows his playful prints, or as homegrown stylists open boutiques abroad. Carlos Miele, known for tropical motif dresses, and casual-chic sportswear brand Osklen have set up shops in New York, Miami and major European capitals, and Rosa Chá, Brazil’s top swimwear brand, now has a Manhattan store, as well.

The sun-drenched jet-set image that Brazil has exuded for years has recently turned unspoiled beach towns, like Trancoso in the northeastern Bahia state, into trendy getaways.

While not enough foreigners have discovered Trancoso to push it into the 10 most poplar escapes for international travelers just yet, two towns that are include Florianópolis, an island ringed with 40 beachfront villages in the southern Santa Catarina state, and the colonial town of Paraty in the southeastern Rio de Janeiro state, according to Brazil’s Tourist Board. Trancoso, though, is likely on the way up. The town, largely a hippie settlement in the Seventies and now a sudden hot spot among locals, was dubbed “the chicest beach town you’ve never heard of” by The New York Times in April.

But it’s not entirely under the radar. Francesca Versace and Dimitri Mussard, an heir to the Hermès empire, partied in Trancoso during the Christmas and New Year’s holidays, and Diane von Furstenberg, Naomi Campbell and Gisele Bündchen rent or own more secluded beachfront homes.

“Brazil has never been a bigger protagonist on the international stage,” said Walter Vasconcelos, marketing director of the country’s Tourist Board, which estimates that Brazil will lure 5.3 million visitors in 2010 — the most since 2005. “And this should attract new business here, including more foreign fashion brands and foreigners buying local fashion.”

Von Furstenberg opened her first Brazil store in São Paulo’s high-end Iguatemi mall in March, following Christian Louboutin and Missoni, who set up their first Latin American stores there in 2009. Chanel is due to arrive in September and Burberry in November. This Iguatemi mall, opened in Brasília in March, boasts Vuitton, Zegna, Missoni and Burberry, with Emporio Armani coming this October.

“Big names in foreign fashion who now vacation in Brazil, combined with a growing economy that is sparking mall development, has helped convince more top European fashion labels to come here,” said Carlos Jereissati Filho, president of a group that is one of Brazil’s biggest high-end mall operators. The group, with nine Iguatemi malls and four other shopping centers nationwide, plans to open five more Iguatemi centers in cities in the São Paulo state by 2013. Business was up 15 percent at the group’s 13 malls in the first quarter of this year.

Rosanne Behar, the head of new international business at JHSF, the group that owns the Shopping Cidade Jardim — the largest luxury emporium in South America, which opened in São Paulo in 2008 — agreed with Jereissati Filho.

“I expect more foreign fashion labels to come to urban luxury malls, like SCJ, because they see purchasing power here, particularly among those in the upper-middle and upper classes, increasing,” said Behar. “They want to tap into it.”

SCJ, whose brands include Armani, Ferragamo, Vuitton and Zegna, boasted a 30 percent increase in business in 2009.

Hermès opened its first Brazilian boutique there last September, followed by Carolina Herrera in April.

In the recently released 2009 A.T. Kearney Global Retail Development study, Brazil ranked fifth among markets with the greatest potential, up from eighth in 2008, with 80 percent of executives polled targeting the BRIC nations among their target markets for expansion.

Silvio Passarelli, director of the M.B.A. program for fashion management at Fundação Armando Alvares Penteado, a private São Paulo university, said that both high- and lower-end foreign brands almost always set up shop in urban malls that attract enough customers to sell the volumes needed to offset high taxes on foreign fashion — as much as 85 percent, when considering 35 percent import duties, along with state and national taxes.

“Trendy tourist towns like Trancoso, Florianópolis or Paraty aren’t likely to turn into the next Capri or Saint-Tropez, attracting high- or lower-end foreign fashion boutiques, because they don’t have the mall infrastructure or the year-round tourist traffic to make the margins needed to offset high taxes,” said Passarelli. “That situation could only change if Brazil greatly reduces fashion import duties, as Chile has done.”

Amir Slama, the designer who created Rosa Chá, agreed that “the need for volume-driven business, amid high import duties and other taxes, is why even lower-end foreign brands like Zara or Calvin Klein Jeans are only found in urban malls and why the Gap has opened here only in duty free airport stores.”

Another reason trendy beach towns aren’t overrun by tourists: zoning laws have kept development at bay so they remain unspoiled. That has helped keep them free of malls — and consequently, high-end local or foreign fashion labels, according to Oskar Metsavaht, Osklen’s founder and designer.

“I am the only high-end fashion brand in Trancoso because my casual-chic sportswear suits the town’s laid-back atmosphere,” said Metsavaht. “If zoning laws keep Trancoso undeveloped, it will never attract luxury foreign fashion because its unspoiled nature doesn’t suit such labels.”

 

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