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The JK Iguatemi Mall in São Paulo is a big new attraction, providing a boost to luxury sales in Brazil. (Photo: Arquitectonica)
Monday, December 8, 2014
Special Reports

Latin America Leads Global Luxury Outlet Growth

Latin America is now the world’s fastest growing region in terms of new luxury outlets.

BY FFLUR ROBERTS

At a time of heavy pressure in developed economies and in a move to reduce reliance on Chinese performance, retail sales in Latin America have become a lynchpin of growth for many multinational luxury brands. The region is now the fastest growing region in terms of new luxury outlets.

These brands have everything to play for such as new luxury shopping malls, a sophisticated shopping culture and a young, aspirational middle class. Social class C – the new middle class and a key consumer base for affordable luxury – has also mushroomed over the past decade. With new shopping malls springing up all over the region a culture of “retailtainment” is being forged. Similarly at the same time there has been dramatic growth in social media, opening up new platforms for luxury brands to engage with consumers.

BRAZIL: LUXURY OPTIMISM DESPITE WEAK ECONOMY

Between the fast-approaching 2016 Olympic Games and the not-too-distant memories of the FIFA world cup in summer 2014, Brazil is positively basking in the global spotlight. Overall retail sales are expected to climb as a result of the sporting events, driven by influxes of wealthy tourists and an increase in domestic spending.

There are many reasons for luxury executives to feel optimistic about the local luxury market. Despite a slowing economy and high inflation, the long-term prospects remain positive. Euromonitor International forecasts that the country will become the world’s fifth largest consumer market in 2023, with total consumer expenditure reaching US$2.7 trillion in 2030.

Its luxury market is set to grow by approximately 25 percent in the five years to 2019, with additional value sales of US$1 billion. This growth will place Brazil among the top 20 luxury goods markets in the world (ranked 18th by 2019).

In line with the rest of Latin America, Brazil generally has a youthful population. The median age in 2012 was 28, compared with 38 in North America and 40 in Western Europe. These demographics fall further into luxury’s favor, with the wealthiest consumers falling into the 35-44 age group.

Brazil remains the wealthiest country in Latin America based upon ultra-high net worth population. The country is home to 4,640 UHNW (Ultra high-net-worth) individuals with a combined wealth of $865 billion, though this figure decreased slightly between 2012 and 2013. GDP saw modest growth during this period however that was offset by the 10 percent decline in equity markets and the 31 percent devaluation in the Brazilian Real.

HELD BACK BY LIMITED GEOGRAPHIC COVERAGE 

As the largest market overall in Latin America and one of the world’s major emerging economies, considering the size of Brazil, the luxury market has so far been underperforming. This is mainly because major luxury brands have not extended their presence beyond the three main cities of Rio de Janeiro, Brasilia and São Paulo, with second-tier cities remaining largely untapped.

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. According to Euromonitor International’s latest data, at the end of 2014 the luxury goods market in Brazil was valued at US$4.1 billion, having increased by 10 percent (year-on-year current prices) on 2013 figures.

This figure represents just over a quarter of all luxury spending in Latin America. While the 10 percent increase outpaced the global market (+6 percent), these figures were almost US$0.2 billion short on Mexico, which grew by more than 9 percent over the same period.

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.

However, as the retail environment in first-tier cities matures, development is becoming increasingly focused on less saturated second- and third-tier markets, where rising incomes are fuelling demand.

Shopping malls mean big business in Brazil. They offer consumers respite from hot (and damp) weather, as well as security while they shop, not to mention an unrivalled choice of brands. In São Paulo and Rio de Janeiro, malls now account for nearly half of all retail sales.

Of the 77 new shopping malls set to open by the end of 2015, 48 will be in small and mid-sized urban areas. Some of these cities were hosts for the FIFA Football World Cup and were the center of national attention. Growing retail sophistication at home is also encouraging social class A and B consumers to do more of their shopping domestically.

The JK Iguatemi Mall in São Paulo is a big new attraction, for example. Labels such as Burberry, Coach and Kors could start to see a significant upside from the emergence of a new middle ground in luxury. However, whilst these growth drivers are being put in place, Brazil’s economic slowdown teamed with ultra-high import tariffs is creating a barrier for brands and consumers alike.

MEXICO: STRONG POTENTIAL

Mexico has the biggest luxury goods market in Latin America, and there has been significant new investment in Mexico City and a host of mid-size cities. However, the economy has struggled in 2014, which has tempered some industry initiatives.

According to Euromonitor International’s latest data, at the end of 2014 the luxury goods market in Mexico was valued at US$4.3 billion, having increased by 9 percent (year-on-year current prices) on 2013 figures.

In 2012 (latest data available), FDI inflows into Mexico totaled 167 billion pesos (US$12.7 billion), down from 310 billion pesos (US$25.6 billion), as the global financial crisis of 2008-2009 and the subsequent global economic slowdown took their toll on Mexico’s largest investor, the USA. As a result, FDI intensity dropped from 2.5 percent of total GDP in 2008 to 1.1 percent in 2012, below the Latin American average of 4.2 percent in 2012;

The government has passed legislation that will enable foreign investment in the highly prized oil and gas sector, through partnership with the state-owned entity, Petroleos Mexicanos (Pemex). This is likely to increase Mexico’s foreign direct investment inflows as companies;

Corruption has been a big issue for many luxury brands in Mexico, as indicated by its ranking of 103th out of 175 countries in Transparency International’s Corruption Perceptions Index 2014, below Panama (94) but above Nicaragua (133rd). With drug cartels active in the country, corruption permeates the Mexican system and is rife within the judiciary and amongst government officials but is also present amongst its powerful trade unions;

Once a rarely discussed subject, the authorities are making high profile investigations bringing corruption to the fore. Furthermore, in a bid to tackle corruption, the government created the National Anti-Corruption Prosecutor’s Office and the National Anti-Corruption Agency in 2012.

The privatization of Pemex is likely to provide a much needed short-term boost to Mexico’s FDI intensity levels. This in turn will shore up government finances, and enable the government to invest more heavily in tackling its issues with drug cartels and crime, which is the long run should help increase the overall luxury goods industry.  

ARGENTINA: OPPORTUNISTIC CONSUMPTION

Lack of confidence in the stability of Argentina’s local currency (the peso) is pushing up the value of the country’s black market or so-called ‘blue dollar’ exchange rate and changing the face of the luxury goods landscape, both nationally and across the region.  

Euromonitor International’s latest provisional figures for 2014 show it to be the second fastest growing market in the world for luxury goods, based on year-on-year changes at current US dollar prices. However, convert the figures to constant US dollars and its performance this year is one of the weakest in the world.

The disparity is, of course, to do with the exchange rate volatility of the peso. In fact, Argentina’s economy is mired in problems. A default on the sovereign debt two months ago has worsened the recessionary climate, inflation is running exorbitantly high and foreign capital is taking flight. Paradoxically, it is not all bad news for the country’s luxury goods industry, though.  

Over recent years, international luxury goods retailers have fled Argentina in their droves due to the government’s implementation of tighter currency controls and tougher import barriers (both compounded by high inflation). Ironically, those same conditions have helped create a vibrant black market that is now turning Argentina into an attractive destination for luxury goods shoppers.  

The border and free zone areas are where some of the biggest retail footfall is visible. But, Buenos Aires – often referred to as ‘the Paris of Latin America’ – is set to see a sharp rise in visitors too. It seems odd to identify positive outcomes from the dismal condition of Argentina’s macro economy, but it would be naïve to think that blue dollar activity is not enhancing sales performances in some areas of the marketplace. As a result, we will continue to see anomalous trends in Argentina’s luxury goods market over the year ahead, and probably beyond.  

Fflur Roberts is Head of Luxury Goods at Euromonitor International. This article was written for Latinvex. 


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