Big challenges for luxury brands in Brazil as the currency goes into tailspin.

BY ROB WALKER

Some 1.5 million households in Brazil (2.5 percent of the population) were sitting on annual disposable income worth more than US$100,000 last year. The combined net spending power of the country’s wealthiest consumers is getting weaker by the month, however, due to rapid depreciation of the real, which has lost a quarter of its US dollar value in less than six months. So far this year, the real is the world’s second worst performing major currency, trailing only Ukraine’s war-ravaged hryvnia. For Brazil’s luxury goods market, this currency volatility signals new risk. But, there is opportunity too.

EXORBITANT TARIFFS

Brazil imposes some of the highest import duties in the world on luxury goods (between 30 percent and 100 percent higher than in the US or Europe, for example). As a result, leading brands of designer apparel and luxury accessories are normally much more expensive in São Paulo, Brazil’s dominant luxury consumption base, than in Miami, London or Paris.

This has led to two key luxury goods trends. Firstly, more than half of luxury goods value sales in Brazil are generated via credit card instalments (typically 10 payments). In effect, this has made luxury brands more accessible to the country’s rapidly expanding middle class. (Luxury retailers also say that instalments are popular with well-heeled Brazilian women because they are a discreet way of hiding the true cost of purchases from their husbands).

Secondly, most of Brazil’s high net worth individuals (there are over 200,000 US dollar millionaires) prefer to do their luxury goods shopping abroad. This latter point is key to why Brazil’s total luxury goods spending looks rather tame compared with spending in other industries. For example, Brazil is the second biggest market in the world for beauty and personal care products, yet ranks only 18th in the world for luxury goods, according to data from Euromonitor International.

A POSSIBLE UPSIDE OF CURRENCY DEPRECIATION

Inevitably, the sharp drop in the value of the real will make imported luxury brands more expensive for middle-class Brazilians, and will subdue demand over the rest of the year. But, at the same time, it is likely that fewer Brazilians will travel abroad to do their shopping, given the increasingly unfavorable exchange rates. Will this drop off in outbound tourism boost footfall in luxury retailers at home? It ought to, and could drive up sales in categories such as designer apparel, luxury accessories and timepieces.

As outbound tourism slows, so a weaker real will also encourage stronger flows of inbound tourists. This could yield an upside for the Brazilian luxury goods market too.

Brazil, keep in mind, has opened dozens of shopping malls over the last five years, and many have the sort of glitzy profile that will entice international visitors.

The biggest and most famous luxury mall, JK Iguatemi in São Paulo, opened in 2012. Gucci, Prada, Lacoste, Coach, Dolce & Gabbana, Tod’s and Mui-Miu are all present, among many others. Close by, the Cidade Jardim houses Hermès, Louis Vuitton, Chanel and a host of other high-end outlets. In fact, any luxury retailer worth its salt has taken advantage of Brazil’s booming shopping mall developments over the last five years.

THE MIDDLE OF THE MARKET COULD GET SQUEEZED

One offshoot of Brazil’s high import tariffs is that perceptions of what constitutes luxury have become blurred. For example, the UK fast fashion chain Top Shop, which opened its first Brazilian outlet in JK Iguatemi, has a much more upmarket image in Brazil than it does in Western Europe (and prices to reflect it). This is the type of store that could do well from an influx of international tourists. It could also pick up consumers from lower- and mid-priced sectors of the luxury goods market, as they trade down.

The high end of luxury goods (so-called absolute luxury) is resilient, and is the segment most likely to benefit if affluent Brazilians decide to shop at home rather than abroad. The Hermès store in Cidade Jardim, and high-end boutiques on streets such as Lorena and Haddock Lobo (in São Paulo), could see an increase in footfall, for example.

Homespun luxury brands have potential to benefit too, as their price points will look increasingly competitive compared with those of imported brands. The biggest losers will probably be imported brands that are positioned in the middle of the luxury goods price spectrum. They will be increasingly out of the reach of middle-class Brazilians, but are unlikely to benefit significantly from either stronger inbound tourism or weaker outbound tourism.

SOMETHING HAS TO GIVE

Overall, Brazil’s economic outlook does not bode well for the luxury goods market (nor for any consumer market). The Central Bank expects GDP to contract by almost 1 percent this year. At the same time, inflation is getting out of control, interest rates have been hiked and the real is in a tailspin. Conditions seem to be going from bad to worse.

There are other factors at play that could derail luxury goods demand this year, as the Brazilian economy stumbles. In particular, the new middle class has grown used to owning products such as smart phones, satellite TVs and cars. But, to hold onto these products, they will have to rein in spending elsewhere. It follows that non-essential luxury goods could lose out.

Equally, Brazil has never been a predictable luxury goods market. Yes, the economic implosion will dampen demand in some categories, particularly in the mid-market. But, high-end brands and accessibly priced luxury goods could end up holding their own. The key will be the real, and for how long and to what extent it continues to lose value against the US dollar. As things look now, it still might have some way to fall.

Rob Walker is a Contributing Analyst at Euromonitor International. This article was written for Latinvex. 

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