With little fanfare, Italian luxury brand Versace shut down its last Brazilian store, in the upmarket Iguatemi shopping mall in São Paulo’s financial center. After Christmas, the company’s doors never opened again. Versace, however, didn’t make an official announcement, nor did it publish a statement explaining its reasons for leaving Latin America’s largest economy. But it is not difficult to imagine why they did.

Versace’s time in Brazil began in 2014, when it opened stores in several shopping malls in São Paulo, Rio de Janeiro, and Fortaleza. This coincided, however, with the beginning of the worst recession in Brazilian history. And as the economy got worse, Versace started closing store after store—until there were none left.

</span></p> <p><span style="font-weight: 400;">While the Versace case is emblematic—due to the company&#8217;s relative silence on the issue—it is by no means the only high-end company to pull the plug on Brazil. It is estimated that 25 percent of foreign luxury brands in Brazil have fled the country over the past three years. Kiehl’s—a cosmetics store controlled by L&#8217;Oréal—deactivated its online store at the end of March. Other players, such as Ralph Lauren (clothing), Kate Spade (accessories), Vacheron Constantin (watches), Ladurée (pastries), and Lush (cosmetics) have also taken a pass on Brazil.</span></p> <p><span style="font-weight: 400;">Though the <a href="https://brazilian.report/money/2017/10/30/rich-brazilians-top-1-percent/">Brazilian luxury market</a> grew 7.8 percent in 2018, according to data from market research firm Euromonitor, the sector shrank 23 percent between 2016 and 2017.</span></p> <p><span style="font-weight: 400;">Part of that is down to the recession. But that doesn&#8217;t tell the whole story, as upper-income Brazilians felt the effects of the economic slowdown much less than poorer populations. &#8220;Richer Brazilians didn&#8217;t experience anything tragic enough to reduce their consumption. However, this public was contaminated by the negative environment and started doing less extravagant expenses,&#8221; wrote Elton Morimitsu, senior analyst at Euromonitor.</span></p> <h2>Brazil is not for everyone</h2> <p><span style="font-weight: 400;">Another important reason is that most of the companies which abandoned Brazil did so after deciding to fly solo here—and not relying on a local partner, as is usually the case. Not all brands were ready for the move. Some of this is down to brands treating Brazil as &#8220;just another market,&#8221; but strategies that work elsewhere can lead to utter failure here.</span></p> <p><span style="font-weight: 400;">The Brazilian market has a very different profile from the U.S. or Europe. Here, luxury brands will sell goods almost exclusively for Brazilians. Walking down Rua Oscar Freire (billed as the &#8220;most expensive street&#8221; in Latin America) in São Paulo, you won&#8217;t see the long lines of buses filled with Chinese tourists, eager to make purchases at the Galeries Lafayette in Paris.</span></p> <div id="attachment_15539" style="width: 1010px" class="wp-caption alignnone"><img aria-describedby="caption-attachment-15539" class="size-full wp-image-15539" src="https://brazilian.report/wp-content/uploads/2019/04/shutterstock_797340862.jpg" alt="Why are luxury brands leaving Brazil?" width="1000" height="667" srcset="https://brazilian.report/wp-content/uploads/2019/04/shutterstock_797340862.jpg 1000w, https://brazilian.report/wp-content/uploads/2019/04/shutterstock_797340862-300x200.jpg 300w, https://brazilian.report/wp-content/uploads/2019/04/shutterstock_797340862-768x512.jpg 768w, https://brazilian.report/wp-content/uploads/2019/04/shutterstock_797340862-610x407.jpg 610w" sizes="(max-width: 1000px) 100vw, 1000px" /><p id="caption-attachment-15539" class="wp-caption-text">Rua Oscar Freire, the &#8220;most expensive street&#8221; in Latin America</p></div> <p><span style="font-weight: 400;">Moreover, roughly 80 percent of all Brazil&#8217;s spending on luxury items takes place abroad—when Brazilians travel to the U.S. or Europe. In 2018 alone, Brazilians spent almost USD 17 billion abroad, and the Central Bank estimates that 20 percent of that was spent on apparel.</span></p> <p><span style="font-weight: 400;">Redirecting just a portion of that to local stores would be huge, &#8220;but first brands must think about how Brazilian stores fit into their global strategy,&#8221; writes consultancy firm McKinsey. If brands want their Brazilian stores to generate local sales—instead of just being an image showcase—they must try a different approach to pricing.</span></p> <p><span style="font-weight: 400;">A worthwhile case study is that of Vilebrequin, a beachwear brand from the French Riviera, which in 2016 closed its stores after eight years in Brazil. Their most sought-after items were beach shorts, which cost an average of BRL 900 (USD 235). With time, the same pair of shorts would cost BRL 1,400, more than the minimum wage in the country—too high of a price tag for the Brazilian market, according to brand managers. </span></p> <h2>The Brazil cost</h2> <p><span style="font-weight: 400;">Brazil remains one of the most expensive countries to buy imported goods. In 2014, investment bank BTG Pactual created the &#8220;</span><a href="https://static.poder360.com.br/2019/01/07.01-Brazil-Retail-and-Internet-1.pdf"><span style="font-weight: 400;">Zara Index</span></a><span style="font-weight: 400;">,&#8221; comparing the prices of the Spanish fast-fashion brand in Brazil and abroad. The latest index, published in January, shows that Zara is more expensive in Brazil than anywhere else in the world—according to a comparison of 22 items in 44 countries. </span></p> <p><span style="font-weight: 400;">On average, Brazilians will pay 18 percent more than American customers. And that happened despite the Brazilian Real having lost 14 percent against the U.S. Dollar last year. </span></p> <hr /> <p><img class="alignnone size-large wp-image-15538" src="https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u-1024x362.png" alt="Why are luxury brands leaving Brazil?" width="1024" height="362" srcset="https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u-1024x362.png 1024w, https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u-300x106.png 300w, https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u-768x271.png 768w, https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u-610x216.png 610w, https://brazilian.report/wp-content/uploads/2019/04/export-Zhp9u.png 1200w" sizes="(max-width: 1024px) 100vw, 1024px" /></p> <hr /> <p><span style="font-weight: 400;">In 2014, luxury apparel goods prices in Brazil were, on average, 33 percent higher than in the U.S. (including taxes on Brazilian credit cards when shopping abroad). That gap has narrowed recently but, depending on the item, buying in Brazil could mean paying double price—even considering the exchange rate.</span></p> <p><span style="font-weight: 400;">Brazil&#8217;s Kafkaesque tax framework is much to blame. High import taxes, different rules in each of the 27 states, and severe infrastructure and logistics bottlenecks also make selling imported goods in Brazil a daunting task. After shutting down their Brazilian operation, cosmetics giant Lush blamed Brazil&#8217;s “high tax burden, <a href="https://brazilian.report/money/2018/11/26/recession-brazil-poor-oxfam/">prolonged recession</a>, and political instability” as factors which made it “impossible to continue investing and turning a profit.”</span></p> <p style="text-align: center;"><strong><em>Mauro Mantica contributed for this story.</em></strong>

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MoneyApr 08, 2019

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