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July 2, 2012

Brazil’s ‘Samba Surge’ Fuels Buoyant Luxury Goods Demand at Home and Abroad

IStock_000001513958XSmallSão Paulo and Buenos Aires are key Latin American consumption hubs for luxury goods, and the targets of strong investment interest by many of the world's leading luxury goods retailers and manufacturers. Euromonitor International takes a closer look at what's driving demand and opportunity in both cities.

São Paulo, the engine of Brazilian luxury goods consumption

A decade ago, high net worth individuals in Latin America would typically do their luxury goods shopping in Miami or New York. That was the default weekend break for anyone looking to buy a new wardrobe of designer outfits or to spend on high-end luxury accessories. The Miami and New York corridors are still popular, but these days Latin America has its own luxury hot spots to shop in.

São Paulo, the biggest city in Latin America and the third biggest in the world by population, has emerged as the region's dominant consumption base for prestige brands, fuelled by new-found economic prosperity and a seemingly insatiable appetite for shopping among the city's middle class.

Cariocas (people from Rio de Janeiro) joke that Paulistanos (people from São Paulo) love to shop so much because they have no beach. Indeed, what São Paulo might lack in beach culture it makes up for in shopping culture, especially when it comes to luxury goods.

Whether in the Iguatemi shopping mall, the Dasiu department store or the luxury boutiques on streets such as Lorena and Haddock Lobo in the Jardins district, most of the world's leading luxury brands are on show in São Paulo. Most too are keen to develop bigger footprints, not only in São Paulo but right across Brazil.

In particular, shopping mall developments are generating major interest among international luxury goods retailers, with upwards of 100 new malls on course to open by 2014 at a cost of almost US$3 billion.

The UK's luxury handbag maker Mulberry is one of a handful of trendsetting prestige brands yet to make a foray into Brazil, despite the popularity of the brand with Brazilians. New upscale Brazilian malls set to open over the next two years could provide a viable entry point.

In 2011, Brazil's luxury goods market was valued at over US$7 billion, according to data from Euromonitor International, with São Paulo at the epicentre of consumption. That was almost five times the value of luxury goods sales in Mexico, which is Latin America's second largest economy and home itself to significant new investment interest among luxury goods retailers. 

Luxury Goods By Retail Value: Mexico vs. Brazil 2007-2011
 

US$ million, fixed 2010 exchange rates

2007

2008

2009

2010

2011

           

Brazil 

5,242

5,753

5,995

6,605

7,197

Mexico 

1,198

1,258

1,326

1,413

1,514

Source: Euromonitor International

 

A new millionaire class in Brazil

Over the past decade, buoyant demand for luxury goods in São Paulo has been fuelled by high (consumer-driven) economic growth of Brazil. And while macroeconomic growth is slowing this year, reflecting sluggishness in manufacturing and a more glacial growth pace in investment, the consumer growth story appears to be holding firm.

In part, this is because Brazilians are spenders rather than savers – a trait that can be traced back to the hyperinflation era of the early 1980s when there was pressure to spend wages before their value eroded. Brazilians are also accustomed historically to periods of economic instability, and tend not to have knee-jerk responses – such as belt-tightening – when macroeconomic indicators go awry.

What is more, Brazilians are still revelling in the recent period of economic prosperity. Between 2007 and 2011, it is estimated that Brazil's consumer boom created an average of 19 new Reais millionaires a day (someone worth one million Reais has an approximate net worth of US$500,000). There was a huge expansion of the so-called C-class too, most visibly in the formally impoverished northeast region that is home to around 30% of the population.

Expansion of the top HNWI class on the one hand, and the middle class on the other, created new demand for both top end luxury goods and affordable luxury goods. The latter, in particular, has shown precipitous growth over the past five years. This is indicative of a strong status consumption culture, whereby aspirational middle class consumers buy prestige brands as testimony of social standing. The trait is not driven by vanity, more by pride. 

Brazil: Luxury Goods Consumption By Category 2011

% Share of spending

   

Designer clothing and footwear 

37%

Wines, champagne and spirits 

28%

Luxury accessories 

17%

Luxury jewellery and timepieces 

12%

Other 

6%

Source: Euromonitor International

Buenos Aires loses its swagger

Located a little over 1,000 miles from São Paulo, with a flying time of around two and a half hours, is the Argentine capital of Buenos Aires. In the 1980s and early 1990s, it was a magnet for high net worth Latin Americans with a taste for fur coats and fine wines. Luxury goods stores, boutique hotels and a Parisian style café culture were present in Buenos Aires long before such concepts were fashionable in São Paulo.

Similarly, trendsetting Porteños (people from Buenos Aires) were wearing Prada, Gucci, Louis Vuitton, Hermes and Armani long before such labels had developed a following with upwardly mobile Paulistanos. It would be fair to say that there was a swagger to Buenos Aires in the 1990s, which was epitomised economically by the national currency's parity with the US dollar.

Everything changed with the debt default and currency crash of 2001. Almost overnight, the US dollar savings accounts of millions of Argentines were virtually wiped out. It was an economic crisis that impacted worst on the middle class. As a result, the domestically fuelled luxury goods market was substantially weakened.

Paradoxically, the silver lining for Argentina's luxury goods industry was the devaluation of the currency. This paved the way for a surge in international tourism, especially Brazilian tourism. Within weeks of the devaluation, high-end stores in Buenos Aires were packed with wealthy Brazilians, Chileans and Uruguayans, buying up the fine wines and fine leather that were once (virtually) the exclusive terrain of the domestic population.

For Porteños, the steady flow of Latin American neighbours arriving in their city to buy homespun as well as international luxury goods brands was a bitter pill to swallow. It was the beginning of a more humble era for Buenos Aires, and for Argentina.

The country's subsequent economic recovery was spectacular, though. After contracting 11% in 2002, real GDP grew annually around 9% for the next five consecutive years. Economic growth even outperformed Brazil, and was more on the scale of India and China. Following a blip in 2009, real annual growth returned to 9% in both 2010 and 2011. 

Argentina: Real GDP Growth 2002-2011

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

                     

Real GDP Growth (%) 

-10.9

8.8

9.0

9.2

8.5

8.7

6.8

0.9

9.2

8.9

Source: Euromonitor International

Brazilians fuel revitalised luxury goods era in Buenos Aires

In Patio Bullrich, a luxury mall located on Posadas in the upmarket district of Recoleta, one gets a sense of how the luxury landscape has evolved in Buenos Aires. A decade ago, the most popular stores in this mall sold luxury brands made locally, especially handbags and fur coats. Today, those stores have moved largely to the lower ground area and are subordinate to the likes of Tiffany & Co, Rolex, Omega and Carolina Herrera, which populate the showcase ground and upper floors.

Even more revealing is that the accents of people buying engagement rings in Tiffany's and watches in Rolex are predominantly Brazilian, not Argentine. Despite Argentina's strong economic recovery of the past decade, it seems that the core driver of the luxury goods market in Buenos Aires is the Brazilian growth story - the so-called Samba surge - not the Argentine one.

It is true that consumer confidence has grown in Argentina, but inflation is running very high and there is a prudence to middle class spending that is visible across both retail and foodservice in Buenos Aires.

The Samba surge has been fuelling luxury goods industries in other parts of the world too. Harrods, Mulberry and Burberry in London, for example, each count on Brazilians (as well as Chinese and Russians) for a significant share of their annual turnover. And it is a similar story for luxury goods retailers in Paris, Milan and New York.

There is legitimate concern, therefore, that the current slowing of the Brazilian economy could unhinge some of the global resilience of the luxury goods industry. In particular, the weakening Real currency will dampen Brazilian enthusiasm for foreign travel, particularly among the new middle classes who have shown a big appetite for affordable luxury goods.

Brazilians might have a natural propensity to spend, but they will channel that spending more into the domestic market than the international market if the Real continues to weaken.

This is the critical implication, perhaps. In short, Brazil's own luxury goods retail sector could get a bounce from a slower macroeconomy and a weaker currency. The bigger losers would be the flagship stores of luxury goods retailers in Western Europe and North America. The luxury goods market in Buenos Aires would feel some of the contagion, but markedly less than in Europe because of its proximity to southeast Brazil (São Paulo and Rio de Janeiro) and the comparative weakness of the Argentine currency, which will keep prices competitive for Brazilians.

What is certain is that the malls and upmarket shopping districts of São Paulo and Buenos Aires will continue to generate strong new investment from the luxury goods industry. Brazil, in particular, will be a key global focus of luxury goods expansion, fuelled by the mushrooming of its shopping malls and boosted to some extent by the marketing and promotional opportunities presented by the 2014 Football World Cup, and the 2016 Rio de Janeiro Olympic Games.

International luxury goods retailers and manufacturers who might be re-thinking their Brazilian strategy amidst signs of an economic slowdown should not be put off. The consumer growth story will remain strong in Brazil over the next five years and there has probably never been a better time to carve out a bigger luxury goods footprint. 


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