Tapping Brazil’s Next Tier

SÃO PAULO, Brazil — Whispers of a miracle kept them pouring in. And for the past decade, the faithful came, expecting profits of epic proportions. But most fashion executives who made the pilgrimage here soon realised that the prophecy of Brazil's "second economic miracle" had yet to materialise and the bounty offered by this colossal country boiled down to just two cities: São Paulo and Rio de Janeiro.

Well, not anymore.

"A silent movement has been happening here in recent years. Now we have to seriously consider other emerging cities and regions around the country," says Carlos Ferreirinha, president of Brazilian luxury consultancy MCF Consultoria, who has worked with Burberry, Kering and Richemont, among others. "Brazil doesn't equal São Paulo anymore. Rio is back with enthusiasm too. But these two are no longer the only outlets for [international] fashion in Brazil."

In a nation with the scale and diversity of an entire continent, 85 percent of its 200 million people live in urban areas — a higher proportion than in the US, according to market research firm Euromonitor International. More than 20 Brazilian cities have metropolitan areas housing over one million people and many are now seeing significant investment from leading mall developers like Iguatemi, JCPM, JHSF, Aliansce, BRMalls and Multiplan.

Brazil's supreme cities of São Paulo and Rio are clearly in a league of their own in terms of size, wealth and influence, but they still only account for 10 percent of the country's population. This leaves a staggering 140 million urbanites without day-to-day access to the kind of shopping facilities found in Brazil's two largest cities. Now, urban planners, mall operators and fashion brands are joining forces to fill this enormous gap.

A Web of Secondary Cities

"Recife, Brasília, Belo Horizonte, Curitiba and Ribeirão Preto are the most important markets for fashion brands outside São Paulo and Rio. All the major cities of Brazil have undergone huge transformations in the past five to ten years," says Daniela Falcão, editor-in-chief of Vogue Brazil. "Besides Rio and São Paulo, Ribeirão Preto and Fortaleza are those that have had the biggest transformations, with a lot of new real estate developments and highways."

Erika Palomino, editor-in-chief of L'Officiel Brasil, adds to that list a number of cities that can count on foot traffic from both affluent residents and domestic tourists. "Fortaleza, Florianópolis, São Luís, Salvador and Natal, with their beautiful beaches nearby, are also important. As are some [much smaller] resort destinations in Bahia like Praia do Forte, Trancoso and Porto de Galinhas, with their charming little local boutiques. And, of course, Buzios, three hours from Rio de Janeiro, made famous by Brigitte Bardot in the '60s. There are already some brands established there," she says.

"What typically happens is that signs of economic growth draw the attention of the most important shopping mall groups here. The groups then secure the interest of a leading international brand like Prada, which will be a magnet for other brands. Then they fill out the rest of the mall with a combination of global, domestic and local brands."

One of the pioneers of Brazil's upmarket shopping centre business and a leading figure in the country's fashion industry is Carlos Jereissati Filho, CEO and president of Iguatemi Group. Under Jereissati Filho, the group opened an Iguatemi mall in the nation's capital, Brasília, with anchor tenants including both Prada and Dolce & Gabbana in 2011. In addition to Ribeirão Preto, Iguatemi also has malls in several other cities in São Paulo state and three in Rio Grande do Sul state in the far south.

"We continue to grow and improve our malls," says Jereissati Filho. "Campinas is an important industrial centre, less than an hour from São Paulo and now the second most industrialised, technological and developed market. In Campinas and Porto Alegre, we are undergoing expansion with a focus to receive more luxury brands. We recently entered the outlet segment in some regions of the country, providing the consumption of premium brands with significant discounts. Plus, intermediate brands are coming to Iguatemi Florianópolis."

Shifting Consumer Expectations

Back in the 1990s, when specialty retailer Daslu and Iguatemi began bringing foreign fashion brands to São Paulo, shoppers from most other cities seemed happy enough schlepping to the other side of the country to find the best — or only — selection available in Brazil, often combining it with a holiday or business trip. But that mindset is changing.

São Paulo and Rio continue to attract the affluent and aspirational from around the country, as seen by the new landmark shopping centres that have all been built within the past five years, like Cidade Jardim, JK Iguatemi and VillageMall. And even though street-level retail is currently going through a rough patch since the arrival of these bullish malls, the long legacy and cachet of fashion districts like Oscar Freire and Leblon mean that they remain stylish beacons for shoppers visiting São Paulo and Rio from other regions.

However, the Brazilian fashion market is more cutthroat — and sophisticated — than even a few years ago. For a start, more and more brands are battling for customers' real (an increasingly volatile currency). And the overall mood on the street is more cautious. The economy is no longer growing at the mouth-watering rate of 7.5 percent, as it was in 2010. In fact, the latest projections by the International Monetary Fund (IMF) forecast growth of just 1.8 percent this year and 2.7 percent next year.

And with no signs whatsoever of a reduction in the government's exorbitant 35 percent import tax on apparel and footwear, for affluent consumers, shopping abroad in favourite destinations like Miami or Paris looks set to become even more attractive.

In such a scenario, the main incentive for Brazilians to buy domestically is service and convenience — especially in a country this size. Given that it is a 3,000 kilometres jaunt from the swanky nightclubs of Porto Alegre to Belém's bustling colonial district and 1,600 kilometres down the Amazon to the opera house in sprawling Manaus, it’s clear that one way to unlock Brazil's full potential as a market is by expanding a brand's regional footprint.

Indeed, a 2013 report by the Boston Consulting Group, a global consulting firm, predicted that "companies will require a much larger geographic presence in Brazil than they did in the past. For example, in order to reach 75 percent of middle-class and affluent households by 2020, they will need to have a footprint in 405 cities, compared with 345 today."

What's more, the benefit of having a retail presence in Brazil's smaller cities is not just about sales per square foot. There is marketing and advertising value in having a wider footprint, driving traffic either to the brand's flagships in São Paulo and Rio or to its bigger stores abroad and online. For many brands now operating in Brazil, this all means one thing: it's time to move the mountain to Mohammed.

Differing Regional Preferences

Each city in Brazil has its own unique taste, cultural history and shopping habits — not to mention climate. Fashion brands which invest in local outposts can adapt their marketing strategies and merchandise mix to target consumers in these regions much more effectively. For instance, as Brazil's federal capital, Brasília hosts the country's politicians, international diplomats and many non-governmental organisations (NGOs). Some large corporations also have a sizable presence here due to its proximity to the organs of government and Brasília’s rank as the fourth largest city in the country. Because of this, formal galas flourish and, therefore, formal attire can be a big seller.

"Women in Brasília have a lot of free time to dress up and spend money with personal care. Most of the time they are the company of their politician husbands, which means they can be far from family and old friends and in need of fun and self gratification. It's the perfect mix for shopping malls and multibrands to treat them like queens, promoting a lot of events to fill their empty afternoons," Vogue Brasil's Falcão explains.

The city's iconic landmarks and modernist architecture, planned and built by Lúcio Costa and Oscar Niemeyer in the 1950s, help buoy domestic tourist numbers year-round. And as the hub of the Central-West region, the city is also where the cattle barons and newly wealthy agribusiness entrepreneurs from Mato Grosso and Campo Grande come to spend their money.

"In Brasília, some multibrands still resist even the most buzzing malls, like Iguatemi Brasília. Magrella is a sophisticated store owned for forty years by Cleuza Ferreira in a beautiful house at Lago Sul, where she also sells a home line. For a more edgy mix in Brasília there is Maison Ana Paula from Ana Paula Gonçalves, where you can find Balmain and MSGM," says L'Officiel Brasil's Palomino.

As in Brasília, local players in the neighbouring state of Minas Gerais have led the local fashion market for a number of years before major shopping malls began their nation-wide expansion. Built on the wealth of mining and textiles, the capital city of Belo Horizonte, home to 2.5 million people, hosts seasonal fashion events like Minas Trend Preview and is a gateway to Brumadinho, where the famous Inhotim outdoor art museum is located.

"Because of the legacy of the baroque in the region, Belo Horizonte consumers have this passion for embroidery and handicraft," Palomino explains. "Further in the South region, women love dark colours and really know the art of layering because there is a real winter down there. Curitiba is a very important city in this region. It's very wealthy and well-planned. People are very proud of it and the cultural scene is strong. New malls and international brands are heading there because they feel people are more open-minded than in other cities in the region. Last year, Patio Batel opened in Curitiba with 200 stores including Louis Vuitton, Burberry, Zegna, Emporio Armani, Valentino and Tiffany's."

Cities in the country’s far Northeast region have been attracting huge infrastructure, industrial and IT projects, as well as port regenerations, to what has long been a disadvantaged area. Coupled with the fact that one in four Brazilians live here means that economic growth in some cities in the Northeast are outpacing the rest of the country — even if many people still remain poorer than the average Brazilian. The recent discovery of offshore oil and the area’s many pristine beaches are just two other reasons analysts are excited about the region. The stars here are Pernambuco's capital city of Recife, Ceará's capital Fortaleza, Rio Grande do Norte's capital Natal and Bahia's capital Salvador.

"Contrary to Salvador, whose gregarious people love to travel to Rio and São Paulo to shop and dine, the consumer in Recife prefers to shop in their own city. They are very proud of their state and consider it almost an offense having to go out beyond their borders to get what they need," says Falcão.

Palomino believes that the state of Pernambuco had developed a lot in the last ten years. "You can feel it in the types of cars being driven and the new buildings. Like most new money, they're at a point where they're enjoying [showing off]. First because it's always hot summer there and second because of their tastes, they go for very colourful, powerful and sexy pieces. Recife is a very interesting city with energy and a long tradition of making good music. There are lots of young people hanging out in bars and in the streets. Burberry and Prada just opened large accessory stores in Recife at RioMar Shopping Mall," she says.

Through its more upmarket RioMar format and other formats in its portfolio, parent company JCPM Group is moving fast to become the dominant mall operator in the region and, some say, a possible national player if the Northeast follows the path predicted by optimistic forecasters. In addition to malls in the region's three most important cities — Recife, Fortaleza and Salvador — JCPM also has one in São Luís and another in Aracaju.

Uncertainty Remains

Despite having one of the world's worst examples of inequality between rich and poor, Brazil has made impressive gains in recent years. Economists estimate that 40 million Brazilians have risen out of poverty and joined the middle classes in the past decade alone. Now over 100 million people are considered middle class (known as the C-class) while over 40 million are upper class (known as the AB-class). Of these, about 165,000 are high net worth individuals (those with investable assets of $1 million or more), according to a 2013 wealth report by Capgemini.

But for the fashion industry, three big social questions remain: first, which direction the economic and political compass will turn after the presidential election later this year; second, whether the social unrest witnessed on the streets last year will return or intensify; and, third, whether or not the big urban development projects pegged to this summer's FIFA World Cup and the 2016 Olympics Games will significantly transform Brazil’s emerging cities. (After all, many of the cities where mall and retail development are taking place are those same cities that will be hosting the sporting events).

On whether the World Cup and the Olympics will have a lasting impact on second tier cities, Iguatemi's Jereissati Filho offers a resounding no. "Only high visibility will be generated for the country as a whole," he says. "It will spark a showcase to make Brazil more interesting and attract more visitors, but there will be no great transformation in the cities.”

Ferreirinha agrees but offers hope that some of the country's many bureaucratic, tax, legal and logistical hurdles could improve if the political climate changes.

"It's time to take the tough decisions to improve the country's competitiveness now and see whether we want to become an adult country or if we still want to be a teenager country,” sayd Ferreirinha. “I'm absolutely sure that this is our biggest problem. We could be a state of the art nation if we just did what we know we need to do."

Marvin Traub Associates is a global business development and management consulting firm focused on growing businesses in the premium fashion retail and consumer products industries. Clients range from brands and retailers, to real estate developers and technology companies.