By  on July 15, 2005

RIO DE JANEIRO — A federal police raid on designer retailer Daslu is likely to have significant impact on its business, industry observers here predicted Thursday.

Daslu — which in early June moved to a new $70 million, 200,000-square-foot Florentine-style villa — was raided Wednesday as part of a government sting operation, called "Narcissus," involving 250 agents of the federal police (Brazil's FBI) in four states, as well as 80 tax auditors. The operation was investigating Daslu's owner, Eliana Tranchesi; her brother Antonio Carlos Piva de Albuquerque; their accountant, Celso de Lima, and import firms linked to Daslu, for alleged tax evasion.

The government alleges import-export firms falsified invoices that showed that foreign merchandise, delivered by them to Daslu, cost much less than the real prices. Federal police allege that, under the scheme, Daslu paid less than the 20 to 30 percent average import taxes on fashion imports.

"Products sold at Daslu were acquired by importing firms, which underinvoiced the foreign merchandise to reduce the import tax paid on it," a federal police statement issued Wednesday said. "The underinvoicing occurred when the importer replaced a real commercial invoice with another with an inferior price. This procedure, besides reducing import taxes, also reduced [Daslu-paid] sales taxes on the items, allowing the imported product to be sold at a lower price than their real commercial value." 

The police began investigating the retailer in early 2004 when tax officials seized a container carrying Gucci shoes and discovered the merchandise and prices described on a fraudulent invoice were different from the same information on the real invoice, also found during the seizure, federal police said.

Federal prosecutor Matheus Baraldi Magnani told TV Globo Wednesday that, "Dresses that Daslu sells for 4,000 to 5,000 reals [$1,000 to $1,200] were being imported for a declared value of $10 to $15." He also told Rio de Janeiro's O Globo newspaper the tax evasion involved "millions of dollars."

Police arrested Tranchesi at her home and detained her for 12 hours to "avoid the disappearance of evidence," said Magnani. A Daslu spokeswoman said Thursday the firm "was cooperating with the federal police investigation," but refused to comment further.When the new Daslu opened in June, it featured 77 stores and 120 mostly foreign labels. They included not only traditional Daslu foreign brands — Chanel, Dolce & Gabbana, Valentino, Burberry, Salvatore Ferragamo, Gucci, Christian Dior, Chloé and Prada — but new ones like Giorgio Armani, Louis Vuitton (the new Daslu boasts the two designers' biggest stores in Latin American), the Gap and Banana Republic, the latter two making their debut in Brazil.

Since these foreign brands account for 40 percent of Daslu's business, and Daslu's own brand accounts for nearly all the remaining 60 percent, the question is how badly Daslu's business will be affected by the investigation.

"The size of Daslu's foreign-brand business is going to shrink dramatically. As a result, Daslu's business — $300,000 per day during the first month in the new store, a figure that had been expected to drop to $200,000 per day by year's end, when the store's novelty wore off — will now drop much further," said one market source. "With tax authorities now watching Daslu's every move, Daslu's going to have to pay high, as opposed to fictitious, import taxes for that apparel. That means it will have to charge a lot more for soon-to-arrive fall-winter 2005-2006 foreign labels than it charged in the past."

Another São Paulo fashion industry insider agreed the investigation would definitely hurt Daslu's foreign-brand business. "Before the investigation, Daslu's foreign-brand prices were 30 percent higher than they were abroad," she said. "Now that Daslu is going to have to declare the real prices of her foreign brands and pay import taxes on those prices, those foreign brands are going to cost 70 percent more than they cost abroad. And those prices will be prohibitive, even for the high-income individuals. They will simply buy foreign fashion on business trips and vacations to Europe, what they did before Daslu started importing in the early 1990s."

Tranchesi said, in an early July interview, that Daslu's biggest competition comes not from local foreign and multibrand competitors but from Brazilian clients buying foreign brands abroad at cheaper prices, free of import taxes.

Another question is how the sting operation at Daslu will affect São Paulo's other foreign-label and multibrand boutiques. "In this last month, and prior to the federal intervention, virtually every multibrand boutique in São Paulo saw its business suffer because of the new Daslu, with its doubled size and its new venue," said Kika Rivetti, whose own foreign multibrand São Paulo boutique, Eclat, closed in March, in part because of high import taxes. "With the intervention, it's hard to say what the future holds for Daslu and how her São Paulo competitors will be affected."

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