By  on December 30, 2008

MILAN — After years of political, social and economic instability, Brazil is emerging as one of the most promising markets for Italian luxury goods companies — and undoubtedly the most promising in South America.

With gross domestic product expanding by between 6 and 7 percent a year, and an increasingly affluent customer base, Brazil is a growing draw for many brands seeking to offset slowing, or downright stalled, sales in more developed markets. Brazil is seen as one of the industry’s main emerging markets, which also includes Russia, India and China, and is commonly referred to as BRIC. And, given the recent economic woes of Russia and China and political turmoil in India, Brazil stands out from the pack more than ever.

Leveraging a stable political situation; a wealth of natural resources, from natural gas to wood; steady population growth; a strong currency, and a rigorous fiscal strategy that has helped the country emerge from its national debt, Brazil is now focused on building its retail infrastructure to measure up to international luxury standards. While Brasília is the actual capital and Rio de Janeiro attracts a large number of international visitors, the city of São Paulo serves as the country’s de facto capital. There are 20 million people living in the greater São Paulo area, making it the third largest metropolis in the world.

“There’s been a continuous and constant development for the past two years,” said Vittorio Missoni, who oversees institutional affairs at the family-owned company. Missoni said Brazil is one of the most ebullient markets for the brand, which fits in especially well with Brazilian customers drawn to colors and fun patterns. “They love clothes, especially more casual, easy looks,” said Missoni, whose family company opened a shop-in-shop in the new NK Store in São Paulo in the fall. Business is still mainly concentrated in São Paulo, where a large number of multinational firms and diplomatic offices are located.

Salvatore Ferragamo, which already counts four stores and two duty free posts in Brazil, opened a store early last month in São Paulo’s Cidade Jardim residential and mall center, a shopping center modeled after Miami’s Bal Harbour Shops mall. Ferragamo’s goal is to have 10 stores in Brazil within five years. “This is a very, very interesting market, one that is showing the strongest growth, one where there is a big Italian community with a lot of spending power and affection for Italian brands,” said Michele Norsa, chief executive officer of the company, noting that a new wave of malls and hotels is springing up in the country, solving real estate issues of the past.

One Ferragamo boutique is located in Haddock Lobo street, which Norsa compared with Milan’s Via Montenapoleone, and another in the Iguatemi shopping mall, in the city’s Jardim area. The company also has a store in Rio de Janeiro, in the trendy Leblon area, and has projects for Brasília.

Norsa said customers in Brazil are very fashion savvy and opt for Ferragamo pieces “that are more recognizable.” In particular, Brazilians have a deep knowledge of hides, given the country’s tradition of leather goods manufacturing, and “the more precious and exotic the hides, the more they want them,” said Norsa.

He and other executives conceded business in Brazil is still relatively tiny, but said it is one of the areas showing the fastest growth and the biggest potential.

The victory of left-wing politician Luiz Inácio Lula da Silva in the presidential elections in 2002 over right-wing Fernando Henrique Cardoso created a wave of positive developments in the country, according to John Hooks, commercial and marketing director at Giorgio Armani. “Lula is an enlightened, pragmatic leader,” said Hooks. “I went back last spring after six or seven years and was impressed by how much more confidence, wealth and merchandise there is.”

In August, the company opened a Giorgio Armani boutique in Cidade Jardim. The designer already is well established in the country, with two Giorgio Armani and Emporio Armani stores in São Paulo and an Emporio Armani in Rio de Janeiro. In addition, five A|X stores opened 18 months ago, and his products are widely distributed throughout other retailers. For example, Armani Jeans are available in about 40 multibrand stores.

“Brazilians are big spenders — they are considered the Russians of South America,” said Hooks, who also noted that, from the company’s tax refund data, he sees more Brazilians spending in the brand’s Paris and London stores than in the past.

Gucci opened its first directly owned flagship in São Paulo last month, at the Iguatemi mall. “It’s a milestone move for us,” said Gucci president and ceo Mark Lee. “We’ve been monitoring [the country] for the last few years. It’s always a matter of location and timing, and now we found enough space to present the full collection.

“Brazil has solid GDP and there’s excitement,” he added.

Gucci has long ties with luxury multibrand boutique Daslu in São Paulo, which continues to carry the brand and remains a shopping mecca in the country.

Although strongly influenced by North American fashion and shopping trends, Brazil has more of a history of freestanding multibrand stores in shopping malls than large department stores.

The Iguatemi mall, for instance, totals 1.2 million square feet of rentable space, with 330 stores, restaurants and a luxury cinema complex. Neighboring tenants include Tiffany & Co., Louis Vuitton, Ferragamo, Burberry andBulgari. The Gucci store covers 3,355 square feet of selling space on the mall’s Faria Lima floor and carries the company’s full selection of men’s and women’s ready-to-wear, accessories, shoes and timepieces, with a room dedicated to jewelry. The store is one of the new-generation boutiques designed by creative director Frida Giannini. It has an extensive facade facing the mall entry area and features iconic Gucci materials such as rosewood and marble combined with new elements of polished gold and smoked glass.

Lee, who also is investigating other cities in the country, said Giannini’s colorful and iconic prints “resonate well with Brazilians.”

The executive said the main obstacle for business in Brazil is the very high import taxes and restrictive barriers that protect local producers and push up retail prices of foreign goods by 60 to 70 percent. However, these rules are changing under the government of President da Silva.

Still, the high taxes and other barriers are among the issues that make some companies still cautious about Brazil.

Cristiana Ruella, Dolce & Gabbana’s director of general affairs, said the country’s protectionist strategies are preventing the company from entering the market with more directly owned stores. The firm counts men’s and women’s Dolce & Gabbana shop-in-shops in Daslu, as well as a D&G freestanding store in São Paulo, which opened in 2004. “Yes, it’s a market that we are looking at closer, and it’s very ebullient, but we are not going to enter directly until the rules change,” said Ruella.

Prada chairman Patrizio Bertelli was equally careful, while aware of the high growth potential. “Brazilians have a strong relationship with high-end quality products in all sectors, not only fashion,” said Bertelli. “There are the conditions for this market to bloom,and our development in Brazil is on our agenda, but new openings remain subordinate to the definition of spaces and commercial contexts in line with our brands,” he said. Prada has one store in São Paulo, which opened in 2005.

Other companies, such as Diesel, also are looking beyond São Paulo. In August, Diesel opened an 18,000-square-foot, four-level flagship in the city, one of its largest retail spaces worldwide. Five more units were expected to open in Brazil in the second half, in Recife, Porto Alegre, Belo Horizonte, Curitiba and Brasília — for a total of eight by yearend. Diesel is using the new São Paulo megastore as a test model for the even larger retail space slated to open nextyear in New York on Fifth Avenue.

Located in an old building in São Paulo’s Haddock Lobo Street, the boutique on three floors has an industrial atmosphere and a lounge bar with a terrace and garden. The store also carries collections produced by Staff International: Diesel Denim Gallery, Maison Martin Margiela, Sophia Kokosalaki, Dsquared2 and its latest addition, Viktor & Rolf. Diesel ceo Renzo Rosso said Brazilian customers are very “evolved,” and that they buy a season ahead since their southern hemisphere climate is opposite to Europe’s.

And, while some brands remain hesitant about expanding in Brazil, the consensus is that the market offers a consumer base that is “very interesting” for luxury goods brands and that “[loves] jewels, for example,” said Armando Branchini, deputy chairman of Milan-based luxury goods consultancy Intercorporate.

Branchini praised Brazil’s “great” universities and the social evolution of the country over the past 30 years, with a new group of professionals and managers. Thirty years ago, only about 300 families controlled more than 50 percent of the nation’s domestic wealth, he noted.

“There is a learning curve, and it’s a market that has only recently opened up, so one of the priorities is to recruit qualified personnel,” Branchini stressed. “But if the economy continues like this, as is commonly forecast, the perspective is a growth between 7 and 9 percent a year.”

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