The most influential Megatrends set to shape the world through 2030, identified by Euromonitor International, help businesses better anticipate market developments and lead change for their industries.Learn More
There is an economic wind change in Latin America at the moment, and the outlook for Brazil is getting brighter. This is because commodity prices have received a new injection of life thanks to surprisingly strong third quarter GDP growth in China. As a commodity driven (and increasingly Chinese-oriented) economy, Brazil is reaping the upside. On the flipside, Mexico’s economy – which had been doing so well – is getting more sluggish by the month, reflecting its heavy dependence on the US, where economic recovery is stalling. It is a reminder that conditions change very quickly in emerging regions.
Now is a good time for luxury goods brands to re-assess opportunities in Brazil. The FIFA World Cup kicks off in June next year, and a host of Brazilian cities – including lesser-known ones – will become a focus of global attention. So far, the development of luxury goods in Brazil has focused almost entirely on the southeast region, and on São Paulo in particular. In smaller cities, luxury brands are conspicuous by their absence. This is, perhaps, surprising given that second- and third-tier cities have been such a major focus of investment in fellow BRIC market, China.
The small footprint of luxury brands outside São Paulo (and to a lesser extent Rio de Janeiro) also explains why Brazil’s luxury goods market is comparatively small. Brazilians spend less than half as much on luxury goods as Russians, for example, even though Brazil’s economy is bigger. Indeed, Brazil is still outside the top 15 luxury goods markets in the world, according to the latest data from Euromonitor International.
There are 12 host cities for next year’s FIFA World Cup in Brazil and each one has been the target of significant infrastructure investment, which is a platform for stronger economic growth going forward. Businesses and investors – from property developers to supermarkets – are eyeing up new opportunities. For luxury brands looking to build new positions in Brazil, these host cities could be a good place to start. One host city, in particular, stands out from the crowd.
Natal is the capital city of Rio Grande do Norte on the extreme northeast tip of Brazil. It has a population (including Greater Natal) of around 1.4 million. As one of the host cities for next year’s FIFA World Cup, its profile is about to get much bigger – and not least because it is the target of strong new investment, including a huge new airport.
The airport (Brazil’s first 100% privately-owned airport) is set to open at the end of April 2014, and has potential to be the biggest in Latin America in terms of capacity (up to 70 million passengers a year is possible into the long term). Its size is a measure of the ambition of Natal, which is closer to Africa and Europe than any other Brazilian state capital. As a hub, Natal could become the Atlanta of South America.
A new port is also in the planning stage, which will open up Natal to new trading opportunities. The area is rich in natural resources and has some of the biggest reserves of cement in the world. Given Brazil’s close ties with China, this new port could be a powerful magnet for business investment. The AB class is currently small in Natal, but that will change as a new entrepreneurial spirit takes hold.
Natal’s flagship shopping mall is called Midway, but it is a far cry from the sophistication of the malls in São Paulo – such as Iguatemi. There are no luxury brands on show, and very few imported consumer goods. Like the city itself, the malls in Natal are ready for a makeover.
Retail real estate rents are still comparatively low. That is why the conditions are ripe for a bolder approach by luxury retailers. Yes, there are risks because Natal might never fulfil its potential. But, the initial investment costs are quite small relative to the potential long-term returns. The new FIFA World Cup stadium – a state-of-the-art structure designed to imitate the sand dunes famous in this part of Brazil – is itself a sign that the city is moving in a more sophisticated direction.
The northeast of the country has been a key engine of Brazilian growth over the last decade and is home to around 30% of the population. Consumer goods companies and retailers have been falling over themselves to establish stronger regional positions. But, the luxury goods industry has been reticent. This is because economic growth has fuelled a new socioeconomic group C, which is aspirational but lacks the buying power for most luxury brands.
Luxury brands require a solid AB platform, but this is where Natal (which means Christmas in Portuguese) is now showing more growth potential than any other city in northeast Brazil. This is a second-tier city – and a host for next year’s World Cup – where a vibrant luxury consumption culture could grow very quickly over the next 10 years. For that to happen, the luxury goods industry needs to review its Brazilian growth strategy – and dilute some of its dependence on São Paulo.