As the Olympic and Paralympic Games turn the world’s attention on Brazil, Drapers considers the opportunities for international retailers in this huge market
A spotlight has fallen on Brazil over recent months as concerns over the Zika epidemic and political instability in the country cast a cloud over preparations for the Olympic Games, which kicked off this week. The world is now watching to see if Brazil can battle through to deliver a successful tournament.
As well as becoming a magnet for sports fans, Brazil is increasingly the location of choice for fashion designers and retailers. Louis Vuitton’s creative director Nicolas Ghesquiére chose to set its 2016 resort show in Rio de Janeiro, using the city’s space-age Niterói Contemporary Art Museum as a backdrop. Ghesquiére praised the “movement” and “explosive energy” of the city.
Brazil’s population is more than 200 million. It’s clearly worth getting some of that market – if you can break into it
James McGregor, managing partner of retail analyst Retail Remedy
Retailers including Burberry and Zara, and ecommerce site Farfetch, all have a presence in Brazil, looking to take advantage of the huge market and growing middle class. Ecommerce is also a growing opportunity. Brazil is the largest market in Latin America for ecommerce sales, and logistics company WNDirect predicts the online market will increase by 40% to more than $27bn (£17bn) by 2018.
Brazil is the largest country in Latin America by both land mass and population.
“Brazil’s population is more than 200 million,” says James McGregor, managing partner of retail analyst Retail Remedy. “It’s clearly worth getting some of that market – if you can break into it.” However, he cautions that the sheer size of the country can make operating there logistically difficult. “There are a number of different challenges for retailers entering Brazil,” he explains. “A key one is the climate, which varies greatly across the whole market. Brazil covers five different climates, so there is a huge contrast in product demand.”
He continues: “Physically moving into the country can be difficult because of the infrastructure. To bring that to life, a 20-minute journey can take two and a half hours. There can also be issues with products sat in ports for 10 days, which is obviously a nightmare for retailers.”
The tax system can be very complicated
Matheus Meira, head of digital marketing, Farfetch
Shoe designer Kat Maconie, who manufactured her eponymous brand in Brazil for four years before switching to China at the beginning of 2015, agrees that getting products in and out of the country can be a problem: “It takes too long to ship, so you have to air freight everything out, which eats into profit margins. Transporting by road takes a long time because the infrastructure isn’t great. Both importing and exporting are difficult, as things can get stuck in customs and duty rates are high.”
But Michael Ward, managing director of Harrods and chairman of luxury retail trade body Walpole, disagrees that the size of Brazil is an issue: “There are only 15 cities in Brazil with more than a million people, and having 15 distribution centres shouldn’t be a problem.”
Farfetch Brazil Menswear
Either way, McGregor stresses that logistical issues don’t have to hamper entry into the Brazilian market, as long as retailers take them into account when planning: “The problems can be overcome if retailers build them into projected timescales and costs. Brazil is no different from any other market in that you have to have some expertise from someone already working in the country, who is used to doing business there. Problems can be overcome, but retailers need to think about whether it’s worth it.”
Ward argues that the main barrier to entry into Brazil comes in the form of “significant” import taxes, adding: “A large number of southern American luxury purchases are actually made overseas, in places like Miami, because the import taxes are so high.”
Marcos Gouvêa de Souza, founder and CEO of Brazilian retail consultancy GS&MD Gouvêa de Souza, also points to the difficulties retailers face when importing into Brazil, but adds that many fall into the same traps. “Many international retailers avoid producing locally, and because of that, they operate with higher prices. They try to make everything themselves instead of trying to work in alliance with locals.
Instagram is the number one tool for retailers in Brazil
Carlos Ferreirinha, former CEO of Louis Vuitton Brazil and founder of MCF Consulting
“Zara, for example, has done well in Brazil because it blends local production with importation. Similarly, Timberland’s alliance with Brazilian footwear company Alpargatas has also helped it succeed. International retailers underestimate the local difficulties and particularities – especially some north American brands, who try to implement exactly what has worked in the US.”
Luisa Vautier Franco, who spent eight years working in the Brazilian luxury market before becoming director of Vautier Communications, agrees that international retailers need to work with local businesses to be successful in Brazil: “Import taxes in Brazil are at an all-time high and it’s not an easy market to navigate alone. Retailers need to find the right local partner who understands how the Brazilian market grows. Foreign companies will also need to take a creative approach to make up for the higher costs of doing business in Brazil and maintain their products at a competitive price.”
Farfetch has been able to navigate Brazil’s complex tax system by working closely with its partners, says Matheus Meira, head of digital marketing for the company: “The tax system can be very complicated. For example, several months ago, a [government] decision altered how the interstate tax should be calculated and paid, but many companies were not ready for the change. Fortunately, we anticipated the problems and were able to provide support to our partners when they need. It is very helpful to have a strong and experienced team to handle this area.”
The Brazilian reliance on credit and paying in instalments is another quirk international retailers have to consider when looking at Brazil. Speaking at Walpole’s The Americas Summit last month, Carlos Ferreirinha, former CEO of Louis Vuitton Brazil and founder of MCF Consulting, said: “Brazilians are addicted to buying on credit. They’re used to being able to buy, say, a Gucci bag and pay for it in five or six instalments.”
Gouvêa de Souza agrees, warning: “Interest rates and credit costs are really high and reduce purchasing power. The credit structure is complex, which creates additional difficulties for foreign brands.”
Import taxes in Brazil are at an all-time high and it’s not an easy market to navigate alone
Luisa Vautier Franco, director of Vautier Communications
However, McGregor argues that a reliance on credit is not necessarily bad news for international retailers in Brazil. “Even in Brazilian supermarkets, people will be buying on credit. It is part of the culture, but it’s not dissimilar to other developing markets and it doesn’t have to be a problem for retailers. In fact, retailers can make more on credit because you’ve locked the customer in.
“Creating credit facilities also isn’t difficult. When you think about it, UK consumers are buying on credit, too, and, although it might feel very different in Brazil, it’s not.”
It is clear the Brazilian market is not without its challenges. However, the country also offers opportunities for international retailers.
“Shopping centres [such as the mall, Goiânia Shopping] are becoming state of the art,” says Ferreirinha. “I think, in the future, retailers from all over the world will go to Brazil to learn about the quality of its shopping and retail. Brazilians like to be served well.”
Shopping centres are keen to work with international retailers, adds Gouvêa de Souza. “Malls are desperately looking for alternative brands to differentiate their portfolio and offer. There is a desire and an open mind for global fashion brands in Brazil.”
The country’s love of social media can also help international retailers entering the country to engage with its potential new customers. The daily usage of social media in Brazil is more than double the world average, explains Ferreirinha, and it has some of the highest numbers of Facebook and Instagram users in the world.
“Brazilians are very intense and very talkative,” says Ferreirinha. ”We’re the same on social media. The average interaction online in the world is 3.8 hours per day, and it is 3.6 hours in the US. The average in Brazil is 9.8 hours per day. Instagram is the number one tool for retailers in Brazil.” Indeed, Brazil’s daily use of social media far outstrips the UK’s, which stands at 2.13 hours per day.
Harrods’ Ward agrees this is something retailers looking at the Brazilian market will have to consider: “Brazil is very sophisticated in terms of its social media. You can’t just go in with a traditional marketing strategy.”
Brazilian designer Mariana Jungmann points to Brazil’s culture as another benefit for retailers: “Brazil has long been known for its beach culture and producing talented athletes, making the country a hot topic when it comes to anything from swimwear to the sports industry.”
Retailers have to remember Brazil is more than just São Paulo and Rio de Janeiro, concludes Farfetch’s Meira: “There are plenty of opportunities on other cities and states, and the key is to understand what kind of customers your company needs and where you can find those customers. Retailers must identify the markets that are growing, and deeply research about local culture and behaviours.”