July 7, 2014

A market of contrasts

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Brazil is the largest and most populous country in Latin America, with over 200 million inhabitants. The eyes of the world are currently riveted on the country, which is hosting this year’s Football World Cup as well as the 2016 Olympics. After several years of sustained growth, Brazil’s economy appears to have stalled, although the outlook is still positive. We take a look at some of the salient features shaping the Brazilian market.

Long eclipsed by China, India and Russia, Brazil was viewed as one of the most promising emerging markets toward the end of the first decade of the 21st century. The economy had gained new momentum following the runaway inflation of the 1990s, and this resurgence was reflected in the growth figure of 7.5% posted in 2010. 60 million Brazilians were lifted out of poverty under the Lula presidency, swelling the ranks of the middle classes to over 100 million people – around half of the country’s population, representing a huge influx of new consumers, with considerable spending power.

Since then, however, Brazil’s economy has run into some turbulence. 2011 saw a slowdown in growth to just 2.7%, compared with projections of 4%. Growth fell further, to 1%, in 2012, before recovering to 2.5% in 2013. Latent fears of a return to poverty drove the new middle classes to take to the streets in a wave of protests against government public spending priorities. Anger was directed in particular at investments for construction of stadiums for the World Cup, and by extension, at the tenuous prospect of real economic benefits for the majority of the people. Sports Minister Aldo Rebelo maintains that the competition will nevertheless have a positive impact in the long term, as the “World Cup effect” continues up to the 2016 Olympics and beyond, potentially boosting economic growth by 0.4% per year until 2019.

The slowdown in the Brazilian economy is not reflected in the country’s luxury goods market, however, which looks set to sustain growth of 30% year-on-year up to 2018. Figures like these continue to make Brazil an attractive target for luxury brands. Despite a fiscal regime that makes imported items two or three times more expensive than in Europe or the US, and the combined effects of stifling red tape and a complex 26-state federal system, prestigious brands continue to set up shop in the country. Some 25 years after Louis Vuitton, and more than ten years after Dior, a number of LVMH brands have now established a presence in the country, including most recently Sephora, Fendi and Hublot.

The Brazilian luxury goods market is highly localized too, with 80% of business concentrated in Sao Paulo and Rio de Janeiro, cities with 20 million and 12 million inhabitants respectively. Malls – which Brazilians love – account for 60% of sales. Owing to a combination of climate, security concerns and lifestyle, the middle classes prefer to shop in malls, with their mix of luxury boutiques as well as more popular stores, cinemas and restaurants, rather than in shopping districts. Another distinctive feature of the Brazilian luxury goods market is that excellent service is an absolute must, reflecting local cultural norms. All this makes for a highly challenging environment for foreign brands seeking to make headway in this promising market.

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