Brazil’s luxury market loses ground, fast!

With the accelerating worsening of its economy, Brazil’s luxury market has been hard hit too. Less and less Brazilians can afford luxury products despite,  paradox that luxury items have actually gotten cheaper in dollar terms. Louis Vuitton, Prada and many others don’t adjust prices very often, and many tolerate narrower profit margins in Brazil to partially offset high import levies and sales taxes.

“It’s truly a momentary phenomenon,” said Nadya Hamad, the manager of a Louboutin shoe store at the JK Iguatemi Mall in Sao Paulo. “We used to get complaints about how much more expensive things were here. Now our customers are coming in saying how much cheaper it is.”

At Cidade Jardim one of the many luxury malls in the capital of Sao Paulo, a Cartier Tank Anglaise  watch, costs 32,700 reais, the equivalent of $9,326. On Fifth Avenue in New York’s Manhattan, the same watch costs $580 more, taking various sales taxes into account.

The disparity provides another example of how the collapse in the real is rippling through the nation’s economy. Prices of many imports, from mobile phones to wine, have surged because of the weak real, adding to economic angst as Brazil heads for its worst recession in a quarter century.

The real has fallen 24 per cent against the U.S. dollar this year, making it the world’s worst-performing major currency, as prominent business and political figures have been swept up in the graft scandal that began with the nation’s state-run oil company.

Today in Sao Paulo, the deals are hit or miss. Bargains are concentrated in ultra-high-end shops — and they aren’t likely to last. Representatives for the various companies declined to comment.

Sales staff at Louis Vuitton,  Cartier, Gucci,  Christian Louboutin, and Prada stores, mainly in Sao Paulo are warning customers that prices probably will rise soon. “We’ve been trying to keep prices as is for as long as possible,” Louboutin’s Hamad said. “But we’re very likely to raise them, sooner rather than later.”

McKinsey‘s 2014 report on Brazil documented that since 2009, the number of foreign luxury brands in Brazil had more than doubled. Yet those who had expected an easy target have likely found themselves facing unforeseen challenges.

Given the continued weakness of the luxury markets of Russia, China and India, Brazil remains a growth market for luxury. Challenges include, apart from the high import taxes, the ‘unusual’ profile of the Brazilians high end consumers. Understanding the uniqueness of Brazil’s luxury consumers is critical to making an investment in the country pay dividends.

Global luxury brands have had their eyes on Brazil for many years. The country has undergone profound – and positive – changes in the past quarter century, transforming itself from a slow-growing debt pariah to a dynamic consumer-based economy. From a GDP of $1.2 trillion in 1998 (13th globally) to 2.2 trillion in 2012 (7th globally), and inflation of 5 per cent a week to 5 per cent a year, Brazil’s success story is unquestionable.

McKinsey’s 2014 report ‘warned’ that Brazil wasn’t a market that brands can afford to ignore. Brazil may have a lot of growth potential, as it maintains its emerging market status mainly because higher prices make it accessible only to the elite, but that is likely to change. However, considering the ongoing turbulences (since 2014), a key question remains: will Brazil rank among the top 15 luxury goods markets in the world by 2018, as per McKinsey’s report?

adapted from Bloomberg, McKinsey – edited by CPP-LUXURY.COM