Brazil’s ailing retailers are breathing sighs of relief amid signs that the country is starting to emerge from its worst recession in history — a rocky episode that forced apparel merchants to close 40,000 stores.
However, the specter of volatile presidential elections in October could change all that, spoiling a gradual recovery that started in the middle of 2017 and stretched through holiday, observers said.
Luiz Guanais, a retail analyst at broker BTG Pactual, said 200,000 stores closed overall in 2016 with almost 40,000 apparel and footwear stores alone shuttering between 2015 and 2016. “But there is a recovery ahead and retailers from all sides are reporting rebounding sales.”
In 2017, Brazilians continued to forgo apparel purchases, impacting department stores and boutiques, which reported negative same-store sales. However, overall trade improved as President Temer’s reforms, coupled with falling unemployment and inflation, lifted second-half spending, boosting aggregate sales 6 percent to 7 percent, Guanais said, though he cautioned the results are preliminary.
Brazilians began the New Year with positive economic news after Finance Minister Henrique Meirelles said GDP will grow 3 percent this year, from a previous forecast of 2.2 percent. For 2017, Meirelles said growth is expected to have been 1.1 percent, compared with an earlier prediction of 0.5 percent.
Consequently, Guanais expects trade to further improve in 2018, matching or exceeding last year’s results, as long as the elections don’t turn too dramatic. In addition, the mass closings have stopped and stores are expected to gradually begin reopening this year.
Fashion trade association Abvtex agreed, adding that average ticket prices are rising.
In 2017, sales will likely hit 192 billion reals, or $59 billion at current exchange, up from 177 billion reals, or $54.5 billion, in 2016, it predicted. Meanwhile, Brazil’s fashion market could grow 16 percent by 2021, it added.
In 2016, there were 155,000 apparel doors, with multibrand stores accounting for 36 percent and fashion-focused department stores such as Renner or Riachuelo representing 31 percent of the market, Abvtex said.
Paula Picinini, investor relations director at Renner, said 2018 is showing firm recovery signs.
“It could be a good year in terms of the consumption environment,” she said, adding that Christmas traffic and ticket volume/pricing ratios gained markedly. “When we consider the stabilizing employment rate and lower inflation, people are leveraging [buying] more. They are more confident.”
In the first nine months of 2017, the 330-strong chain posted a 9.5 percent gain in same-store sales and 6 percent growth in earnings before interest and taxes-level operating profits. Top-line sales grew 15 percent to 4.4 billion reals. That compared with an 8 percent increase in sales to 5.7 billion reals in 2016, though same-store results were flat, Picinini conceded.
Analysts credit Renner for sharply outperforming its peers and even stealing sales from affordable luxury boutiques with a loyal department-store following.
In the thick of the downturn, the company deployed a clever merchandising strategy to provide consumers with fashionable yet more affordable garments than arch-rival Riachuelo and others, winning shopper traffic that boosted its bottom line, said Guanais.
Picinini, however, claimed there was “no big magic” or strategic change, stressing that Renner did not need to aggressively discount its products.
“We continued with the same strategy of offering customers a good fashion proposition at the right price and quality levels,” she said from the company’s Porto Alegre headquarters. “We offered more value-added products and improved the store environment with better lighting, comfort areas and services.”
Picinini said Renner invested an undisclosed sum to refurbish stores, spruce up product displays and streamline the overall customer experience. As a result, it did not have to close any shops and will continue to open 25 to 30 doors a year — investing 200 million reals annually in the process, according to Picinini.
Renner, whose stock is up over 70 percent this year, specializes in affordable fashion with average prices of 180 to 200 reals, she said.
Asked how it stands apart from Riachuelo — its owner Guararapes has local sourcing operations to boost margins — Picinini said Renner outsources everything but ensures partners have the best design and quality.
“Customers can see the difference between our quality and prices which are better,” not just against Riachuelo but also “moms and pops which have very expensive products and worse store environment and sales,” she boasted.
Despite its growth, Renner has had to counter thorny sweatshop accusations in Brazil, alongside Zara and C&A, with which it recently teamed to launch a Sustainable Fashion Lab to improve working conditions, among other things.
Trade union AFL-ICO has alleged the scheme is an image-boosting ploy to ensure consumers don’t shun their stores, however.
Meanwhile, Brazil’s luxury market — once high-flying as the country’s economic boom created millionaires every day — continues to struggle, though its outlook is brightening slowly, said regional consultant Diego Stecchi.
“We see sales improving slightly but the market is still far from recovery,” he said, adding that sales are increasing in São Paulo but not Rio de Janeiro.
Still, brands have been rushing to restructure, strike better deals with mall operators and lower personnel costs, Stecchi said — efforts that should help boost this year’s fortunes.
According to Stecchi, most brands “are actively looking at ways to launch online sales, either directly or through third parties. One of the crisis’ byproducts is that everyone, including luxury brands up to now very reluctant to enter local e-commerce, are figuring out this is the only way growth might come.”
Unlike Renner or other retailers, luxury merchants will likely close some stores this year to continue to trim “overexposure” to the market, a period during which time many over-expanded to take advantage of the economic boom.