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Comprehensive analysis of Brazil’s luxury market – challenges, real potential, future perspectives (part 1)

CPP-LUXURY.COM has been conducting an in depth research of the Brazilian luxury market, with a close up on real potential, challenges, opportunities and future perspectives. The analysis on Brazil’s luxury market will be published in 2 parts – the second one on 9 October 2012. The analysis has been compiled by CPP-LUXURY.COM contributor Kéren Carvalho.

Challenges

Counterfeiting

According to the latest survey conducted by IBOPE in São Paulo, 70% of those who bought fake products over the past 12 months knew the origin of such products. The fact that these purchases are conscious and intentional means that consumers are aware of their choice’s implications, both concerning legal issues and dubious quality.

Consumers of counterfeit products are well-informed; they know the brand, its communication and its latest releases, and the consumption motivation is exactly the fact that the product is a copy of a well known brand, not the features and functionalities of the product themselves. The price is also an important aspect, yet relative, since a Louis Vuitton well-made copy can cost more than R$300.00 (US$150.00).

Taxation

CPP-LUXURY.COM, has recently interviewed, exclusively, Luciana Marsicano  (Director-General of Tiffany & Co. Brazil) who affirmed that “if you deeply understand the Brazilian market and its consumers, there is a great probability of success and growth. Everything relies on a good strategy and on a good plan. It is definitely not a market for amateurs. In my opinion one of the greatest challenges is to understand the Brazilian tax system and to successfully operate in it for the tax burden is very heavy and it generates higher prices to the consumers.”

Brazil has the heaviest tax burden among emerging markets and it is even higher than in the United States and in Japan. However, such high taxes do not improve Brazilian companies’ health and have barely no proportional social counterpart. Moreover, they hinder the country’s growth in several ways. According to Rogério Amato, president of ACSP (São Paulo Trade Association) and FACESP (Federation of Commercial Associations of the State of São Paulo), the tendency is that by the end of 2012 the total tax revenue of the country will reach 1.6 trillion dollars. The exchange rate and the taxes generate higher prices. Brazil has a 365.6% tax on some luxury goods, turning some international mass brands into premium brands.

In an exclusive interview to CPP-LUXURY.COM, Freddy Rabbat (CEO of Montblanc Brazil) shared his strong point of view on this important issue: “Every country in the world poses its own difficulties. Brazil is not different. The Brazilian consumer likes and appreciates luxury, uniting the European good taste with the North American’s desire to buy, but he faces our tax burden problem. A burden which, in spite of being amongst the heaviest to be found, is only and always prone to grow. Tax policy reform? Those who are waiting for it would better take a seat… if something does change, it will be to raise the tax rates. Therefore, we have to keep driving the Ferrari in the dirt road and making lemonade out of our lemons. Despite all these drawbacks, Brazil has been growing and increasingly attracting more brands to its ground. (…) Today we are more than seventy international brands established in the national territory.”

Human Resources

According to a survey released by Manpower – a human resources company – Brazil is in third place in the ranking of countries with difficulty to find qualified professionals to fill available positions. The company, after interviewing 40.000 employers in 39 countries, pointed that 57% of Brazilian businessmen were not able to find suitable employees.

The luxury market executives face the same problem for luxury consumers demand a special treatment which must completely integrate technique and operational excellence. Moreover, Luciana Marsicano (Tiffany & Co Brazil) points out the language barriers: “other problematic aspect is the English language barrier which is yet a limitation to great part of the labor force once it compromises not only the exchange with the head office but also the growth possibilities within global enterprises.”

It is important to state, however, that Brazil is making considerable progress towards forming such a workforce, able to understand all the implications of working in the luxury market.

Interest rates

According to the Brazilian Association for Consumer Protection (Protest), the refinancing of a credit card debt has an absurd interest rate (average of 237.9% per year). This means that – according to National Association of Executives in Finance, Administration and Accounting (Anefac) – a debt of R$1.000,00 (US$491.03) postponed for a year – with an 18% rate per month – becomes a debt of R$7.287,59 (US$3.578,00).

A survey by the Boston Consulting Group (BCG) from April 2012 showed that 20% of those interviewed in São Paulo use half of their monthly income for paying credit cards debts, post-dated checks and loans. The figures showed that 30% of them choose to pay in cash for their purchases in order to escape from abusive interest rates. This constitutes a drawback because a large number of people end up reducing their consumption, especially of luxury goods.

Opportunities

According to the World Wealth Report, compared to other 12 countries with larger populations of individuals with US$1 million to invest (not including the value of assets and personal property), Brazil had the highest growth last year. The world average growth was 0.8%, while the country’s grew by 6.2% to achieve the impressive figure of 165.000 millionaires in 2011. In an upper view, Brazil is the 11th country with more millionaires in the world. The entrepreneur Eike Batista, controller of the EBX group, is the seventh in the Forbes World’s Billionaires List, with a fortune of US$30 billion. Besides Batista, this year Brazil has added six names to the list of billionaires, to a total of US$12.8 billion (about R$24 billion).

Geographically, it is clear that most of the wealth is concentrated in São Paulo and Rio de Janeiro, where 70% of millionaires and billionaires in the country are located.

According to IBGE, from 2003 to 2011, 9 million people have joined classes A and B, reflecting a growth of 33% of the average Brazilian income. In addition, class C now corresponds to the entire population of Spain (40 million more people). Experts believe that in the near future classes A and B will consist of impressive 30 million people who shall have enough money to invest and consume and who will be willing to “forget they were poor” – which is a determinant sociocultural factor for the consumption of luxury products and services in the country.

Ibope Intelligence issued a startling prediction about the Brazilian consumption. Projections indicate a 13.5% increase in household consumption in 2012. According to Ibope, the phenomenon – which is powered by the enrichment of the population – will lead to an increase in national expenditure, which should sum up to R$1.3 trillion by the end of the year. According to the study, this maturing was only possible because of the combination of three factors: the continued growth, the reduction of social inequality and the significant generation of formal jobs (which increases confidence and optimism).

Consumption in the country also has gone through geographical changes since the estimation of consumption growth on the South and Southeast (6.5%) is equivalent to a quarter of the estimated growth for the North and Northeast. Another important data shows that Brazilians are not just buying more; above all, they are spending more in order to obtain superior quality. The country is already the fourth largest global market for cars and the third for cosmetics and beer.

Moreover, the consumption of technology related products is impressive: in 2011 smartphone sales grew 179% (the growth in the U.S. has not reached double digits). Another curious fact is that even in Japan sales of 3D TVs did not take off, but in Brazilian market they already account for nearly one quarter of the businesses closed. Likewise, the auto industry goes through the same process of sophistication: the popular 1.0 vehicles – that once held more than 70% of Brazilian’s preference – are now being replaced by 1.6 and 1.8 models, with air bag, automatic transmission and leather seat.

This luxury democratization tendency, combined with the aim for the best in the market, intensely increases the luxury customer base in the country. At the same time as it could lead a brand value to depreciate over time, since its exclusiveness is part of what makes the luxury product so desirable, the traditional consumers that are historically more wealthy will be willing to pay a far greater price to get what they consider to be the true luxury distinctiveness.

This luxury consumption not only in A, AA and Triple A classes, but also in middle and upper-middle classes (through payment facilitation and not through price reduction), resulted in a tendency pointed by the survey “The luxury market in Brazil”: for striking 70% of the executives a luxury brand must not be of exclusive access. The survey also shows that many affirmed as a possible solution the creation of new brands or sub brands.

Luxury consumer profile

Brazil has the potential for luxury development in three levels: Absolute, Intermediate and Accessible Luxury. Each of these markets represents a huge consumer base.

The aspirational consumer (accessible luxury) segment represents 0.5% to 1% of the population (190.7 million people in 2010). It consists of consumers who do not have enough income to buy very expensive products (such as a yacht), but may occasionally consume luxury products and services (such as cosmetics, clothes, watches and luxury hotels).

The other part of the market share is composed of 2% of the population, who owns 20% of the national income. Their consumption is refined and, in the case of Baby Boomers, goes beyond ostentation; they demand for unique products and experiences, as well as extreme personalization and excellence

Specifics of Brazilian luxury consumer

The Brazilian consumption behavior has some interesting peculiarities. The consumer has become very modern and updated, leading to a desire for an immediate consumption of what is new and of what is the best.

Retail specialist Renato Meirelhes states that, taking into account this characteristic, one of the best ways to enter and succeed in Brazil luxury market is through novelty, in other words: always launch in the country what is newest in the international market.

Further uniqueness is the pent-up luxury demand. This aspect leads to a great response from the consumers once there is willingness and desire to an immediate consumption which is much less rational. It is a kind of revolution in the luxury consumption, driven by rising incomes combined with the desire, the emotional needs and the immediacy.

Therefore, Brazilians are more passionate and impulsive in shopping than consumers around the world, and in general, they are much more adventurous too. This feature of a less rational consumption reaches even the richest of Brazilian society.

Shopping abroad

The emotional consumption is not driven by a planned desire; it is based in buying a dress for tomorrow or a pen for the day after tomorrow. This explains why, despite the fact that it would be much less expensive to take a plane and consume luxury goods abroad (because of the government imports barrier), the luxury market still grows more and more. Nevertheless, of all the luxury consumption by Brazilians, only 40% of products are purchased in Brazil, says Alain Lorenzo, president of the French holding company LVMH.

The Brazilian Association of Luxury Companies (ABRAEL) shows that, because of this situation, the Brazilian market became the second or third largest luxury market abroad and, therefore, many operations are employing Brazilian labor to meet a growth of 120% of consume from Brazil. In this sense, experts like Silvio Passarelli say that if this complex and adverse scenario changes through a tax policy reform, Brazil will infinitely increase its luxury consumption potential.

On the other hand, Freddy Rabbat has an important insight that explains why this issue is not prejudicial to the brands business itself: “the Brazilian market sustains its growth potential and consumers will buy products from their favorite brands either inside the country or during their international travels. The stores located in Brazil are important when it comes to impulse buying, gifts purchases and specific products sales. (…) We are all watching over our consumers, but without any concerns as to where they are buying.  What is important is to be present and to be remembered. If the brand is not in Brazil, the consumer does not buy it abroad and the brand loses. Montblanc, established in Brazil since 1954, always took advantage of this memory and its sales in Brazil have always increased by two digits”.

In the same way, Luciana Marsicano (Tiffany & Co Brazil) brings the perspective that a brand should be solid regardless of any other issues: “we are a prestigious global brand which relates to Brazilian customers in Brazil and in over 250 stores around the world making the maximum effort to offer the very best service possible in every one of our stores at any purchase occasion.”

Consumer Installment Credit 

In Brazil, companies have an installment policy that allows Brazilian to pay their bills in a huge number of parcels (which is unique in the world). Because of it, a greater amount of items is affordable to consumers, boosting the already acclaimed impulsive consumption. This characteristic, combined with the other Brazilian peculiarities, allows the country to occasionally deliver the best square meters in the world and to increase the release and absorption speed expressively.

The Director-General of Tiffany & Co. Brazil, shows the importance of this particular aspect: “it is essential to understand the local market and to adapt to it. In Brazil, for example, we detected that an installment policy is important to the clients. Therefore, Tiffany & Co. implemented this system here. And it works: I can say in advance that we are delighted with the performance of our 3 stores.” (Freely translated)

Whether consumption is luxurious or not, and independently of having more than enough money to buy in cash, the lack of option to split the value into three, six and twelve months or more is considered inadequate once that, after all, most traders do not offer significant discounts for cash payments.

This behavior can be explained, according to consumer experts, for two key factors: pent-up demand and inflationary memory.

The opening of the economy brought a disproportionate wish list to the available income. This desire that could have become a resignation cycle was changed into an opportunity cycle through consumer installment credit.

Regarding inflation, it must be bared in mind the economic history of the country which has experienced decades of very high inflation rates (20% to 30% per month). Thus, postponing consumption could represent the difference between consuming and not consuming something.

These factors generated in Brazilian a unique ability to deliberate, not how much one can spend, but how much one would like to spend and, above all, how could it be divided in order to fit into one’s monthly budget. In consequence, the selling point becomes “R$7.000 is not expensive, you can divide it in 4 monthly payments of R$1.750! It will be easy to pay!”.

The major issue mentioned by all specialists in the field is that these features increase the customer base by allowing a democratization that is distinguished from the rest of the world. This fact makes it more difficult (obviously up to a certain limit of luxury consumption) to determine the profile of the luxury consumer: “can you buy it, or are you struggling to buy it?”

Regional Customization

On the one hand, the decentralization of luxury consumption beyond São Paulo and Rio de Janeiro is prone to be slow; on the other hand, Brasília’s luxury market has already its own power and brands are begging to look carefully to the North and to the South of the country. In this context, cities as Curitiba and Recife are gaining strength.

In this context the luxury brands are still discovering the potentialities and the peculiarities of these markets. Meanwhile, enterprises are building commercial centers that meet the quality standards and profile required by international luxury brands that are seeking to expand their operations to these cities. This factor, added to the rise of the cities’ GDP supported the decision of luxury brands to explore other markets.

When questioned about the opportunities of the Brazilian luxury market, Luciana Marsicano  (Tiffany & Co.) pointed the importance of analyzing not only the potentiality of the market, but also the commercial structure of the city and its social and cultural aspects in order to develop an effective communication plan.

“Referring to opportunities, I see many; as the consumers are increasingly sophisticated and can be easily reached once they are opened to new brands and experiences. Moreover, the customers are no longer concentrated just in one region, which allows brands to expand business beyond the Rio-São Paulo axis.

Tiffany & Co. always analyses two main factors to decide on whether or not a new regional operation will be opened: the market potentiality and the existence of a commercial center that is aligned with our quality standards and profile. After it, to succeed regionally, it is extremely important to identify the best communication channel option and to promote events to approximate the brand to its consumers. We believe that the relationship actions we perform regionally allow us to tell Tiffany & Co. history and, yes, to enchant our clients. Nevertheless, our strategy is global and very consistent: to celebrate magical moments in the lives of our customers.”

Kéren Carvalho