SAO PAULO, Brazil — In the mid-to-late Nineties, the tony fashion boutiques that form the commercial hub of São Paulo’s Jardins district, an upscale residential area reminiscent of Beverly Hills, were thriving with shoppers.

But during the past several years, an economic crisis has reached even the well-healed Jardins shoppers, causing a marked business slowdown. And while fashion boutiques aren’t empty, they’re not exactly bustling.

At the heart of the economic crisis are sky-high basic interest rates — which were raised to 23 percent annually last year by the outgoing government — that have kept a relative lid on inflation, which is under 1 percent a month. That compares with inflation that was in the double digits monthly in the early Nineties. But the high interest rates have also dried up economic growth to just more than 1 percent a year, curbed investments, bankrupted businesses, and caused unemployment to rise to 8 percent and underemployment to increase.

All this has created stagnant consumer demand. Retail sales, according to government figures, have remained flat for a few years. And clothing manufacturers, because of a stagnant economy, said that last year, they sold — either domestically or for export — the same amount of product (in dollar terms) as 2001, when they sold 25 percent less clothing (in dollar terms), or $16.7 billion worth of clothing, than they sold in 2000 ($20.7 billion worth), according to Abravest, the national clothing manufacturers’ association.

Also feeding the economic crisis is a $300 billion public debt, which has swelled to 62 percent of gross domestic product, compared with 30 percent in 1992. This is partly attributed to failed attempts by the government to artificially prop up the local currency, the real, before being forced to devalue it in 1999.

The real continued to devalue steadily through October’s election period, at which time it had depreciated against the dollar by more than 50 percent since last June-July. The plunge in value was caused by the growing likelihood that no challenger would overtake the commanding lead held by socialist Luiz Inacio Lula da Silva, known as Lula, in presidential polls.

While Lula’s popularity rose mainly as a protest to the government’s failed economic policies, his being a socialist created an even greater uncertainly about the country’s economic direction, were he to be elected. This uncertainty fueled speculation that forced the real’s value down to record low levels by election day Oct. 27. But since Lula’s election, a landslide victory that curbed lots of market uncertainty, the real has stabilized against the dollar.Nonetheless, the plunge in the value of the real leading up to Lula’s election boosted prices for dollar-based imports, including foreign, mostly European, fashion labels.

Boutiques that import these European labels must do so by paying reais (the plural of real) for letters of credit in dollars, which are then converted into euros — which have also increased against the dollar by 10 percent since last year.

The bottom line is that this has greatly boosted prices at top fashion boutiques in the Jardins, most of which are franchises of foreign, mostly European, fashion labels or, to a much lesser extent, multibrand, foreign-label stores. And that increase in already-high prices is the main reason business at those boutiques is down.

"Even though we got a 10 percent discount from Max Mara in June, we’ve had a 35 percent drop in sales since June, when the value of the real plunged, forcing up our prices," said Angelika Winkler, owner of the Max Mara store in the Jardins. "We’ve been negotiating with Max Mara an even bigger discount, of at least 20 percent, for the new collectionbecause we know we can’t pass our higher dollar-based prices onto our customers."

A similar strategy is at work at the only Versace store in Brazil, down the street from Max Mara, where casual dresses average $1,000 and evening dresses run about $5,000 to $6,000. "We’ve seen a 10 percent drop in sales since last year, mainly because the real’s devaluation forced prices up since then," said Fernanda Boghosian Rossi, director of the Versace store. "So to help sales, we’re negotiating with Versace to lower the prices we have to pay for the winter collection, so we won’t have to pass on the full price to our customers."

At the Kenzo store across from Versace, sales have also fallen in the past year, especially from its middle-class clients who are buying much less, according to Maria Fernanda Sodre, sales director of the store.

"Those clients with slightly less acquisitive power are far less immune, which means that they are buying much less than they used to," said Sodre.One of the few exceptions to most Jardins foreign fashion boutiques is Brazil’s (and South America’s) first Diesel store, which opened in November 2001. The brand expects to ring up sales of $2 million this year, in part because sales rose 15 percent during the last half of 2002, despite higher prices caused by the plunge in the value of the real.

"We’re doing well here because we recently arrived and the brand is growing here, despite the economic crisis. That’s why we opened a second Diesel store in November in São Paulo," said Esber Hajli, owner of the Diesel stores in Brazil. "We’re also growing because Diesel jeans, which account for 45 to 50 percent of our sales, have become an object of desire here and because they cost the same average $150 to $200 price in dollars as Diesel jeans cost worldwide."

The few multibrand foreign fashion label boutiques in the Jardins that offer their own private label collections, which haven’t gone up in price, are faring a bit better than the single-brand franchise boutiques.

Take Daslu, for example, by far the biggest multibrand foreign fashion store in Brazil with more than 70 labels. Its main foreign women’s fashion brands are Ferragamo, Chanel, Gucci, Prada and Dolce & Gabbana. While Daslu’s imports account for 30 percent of its sales, Daslu’s own private label collection accounts for 70 percent.

"Our overall sales have increased this year, in part, because we’re selling more of our own Daslu private label pieces this year than in the past," said Satomi Namba, director of new business for Daslu, which is also in the Jardins. "Our foreign brands are still selling well because we haven’t adjusted their prices in accordance with the devalued real. Instead, to maintain sales levels, we’re working with an old dollar-real exchange rate."

The boutique "nkstore," — which caters to a young upscale crowd — enjoys the similar advantage of selling its own private brand, accounting for 80 percent of sales, with labels like Catherine Malandrino, Language, Marc Jacobs, Blumarine, Just Cavalli, Diesel, Anna Molinari and Dolce & Gabbana generating 20 percent."One of the reasons we’re doing well is because our own collection, whose prices haven’t gone up, accounts for most of our sales," said Natalie Klein, the owner of the store, which in August moved to the Jardins, from another São Paulo address. "Also, with the sharp drop in the value of the real, we’ve reduced the number of foreign brands we carry."

Eclat, the second-largest multibrand foreign fashion boutique in Brazil after Daslu but without its own private label collection, expects to have a break-even year this year because of the devalued real. As a result, it now features stylish Brazilian-made accessories, like handbags, belts and sandals, alongside its European brands, like Blumarine, Sonia Rykiel, Emilio Pucci, Gianfranco Ferré and Roberto Cavalli.

"We’re planning to increase our selection of Brazilian-made accessories and start offering trendy, locally made jeans whose prices are more competitive," said Kika Rivetti, an owner of Eclat. "These items will help offset the higher prices of our foreign labels."

The real’s devaluation has had a smaller impact on domestic fashion designers and ready-to-wear labels with chain stores throughout Brazil. That’s because, as most of these designers and boutiques import only a small part of their fabric from abroad, the devaluation hasn’t forced them to raise prices like foreign fashion boutiques have had to do.

Take Zoomp, a ready-to-wear brand that appeals to young women with trendy, chic tastes, and whose 40 stores nationwide include a flagship in the Jardins. Zoomp jeans average around $40 a pair and its silk dresses average around $200.

Pipa di Peitro, the marketing director of Zoomp, said that "despite the increase in our imported fabric costs caused by the devaluation, our sales this year are 10 to 15 percent higher than last year, because we have responded to the economic crisis by establishing a better relationship between the quality and the price of our brand."

The same holds true for M. Officer, a ready-to-wear brand that appeals to young women with modern, sensual tastes whose 93 stores in Brazil now do $60 million a year in business. M. Officer, whose tops average $150, has seen sales go up by more than 20 percent since last year, said Carlos Miele, the chain’s owner-designer who also sells high-end fashion under his own name to foreign boutiques like Barneys, Browns and Harvey Nichols.Because the real’s devaluation against the dollar has boosted the competitiveness of Brazilian dollar-based exports, Miele is also studying export M. Officer abroad.Zoomp, which is already selling its brand name jeans and other items to multibrand stores in Europe, has increased those export sales with the recent devaluation of the real.

So has Reinaldo Lourenco, a top Brazilian fashion designer with a single store in the Jardins, who sells 75 percent of his production to 100 fashion multibrand stores throughout Brazil, and 25 percent of it abroad, to stores like Browns in London and Isetan in Tokyo.Lourenco, who imports very little fabric, said business in Brazil in 2002 was as good as 2001, and that the real’s devaluation helped boost export volumes by 20 to 30 percent this year.

Brazil’s largest department store chain, C&A, with 77 stores, has not witnessed a drop in sales or increased prices in its men’s or women’s collection, despite the real’s most recent devaluation because it had collection orders in the pipeline before that devaluation began in June.

But Marcelo de Castro Fernandes, C&A vice president, said "if the real’s value doesn’t drop, there will be a pressure on our costs next year because our textile suppliers import part of their cotton and synthetic fabrics."

Lojas Riachuelo, Brazil’s second largest department store chain (72 stores with $300 million a year in sales), has witnessed a 20 percent increase in clothing sales since last year, despite a stagnating market. Flavio Rocha, vice president, said, "Our clothing sales have increased because the chain is importing far less fabric than it used to, allowing it to maintain price levels."

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