by Philip Guarino, Elementi Consulting

December 23, 2011

Poised above São Paulo is the uber-trendy Hotel Unique. Its signature Skye Bar offers a spectacular view of the industrial city and teems with well-heeled paulistanos. An English and Swiss colleague and I gaze over the skyline as we await our table on a warm November evening. As hotel guests our ‘priority’ table is ready at 12 midnight. Absolutely normal, one might think, in this part of the world. Except it’s a Tuesday. It’s just one sign of Brazil’s thriving economy.

It’s no secret that Brazil’s economy has boomed in recent years. Strong demand for its commodities, primarily from China, has contributed to an average growth rate of 5% and a rush of inbound foreign investment.  A growing economy and access to credit has boosted the fortunes of the Brazilian middle class and spurred an explosion of consumption. The price of housing, office and retail space has increased dramatically as construction firms have scrambled to meet demand. And the Brazilian real has strengthened dramatically, unleashing a wave of international tourist spending and property buying.

The Brazilian luxury market is currently valued at $2.6 billion, with another $5 billion consumed outside of Brazil. According to Global Blue, a private company that refunds the VAT of foreign shoppers, Brazilian spending in Europe has increased over 50% since 2009. In Paris, both Printemps and Galeries Lafayette each now have a Brazilian Portuguese-speaking customer service representative to assist with shopping. And Brazilians are the darlings of Miami, spending over $1 billion per year and buying nearly half of all downtown condos valued over $500,000.

Against this backdrop, and with over 155,000 millionaire households (about 40% of the Latin American total) and an ever-expanding aspirational class, it’s hard to imagine that Brazil wouldn’t be at the top of most firms’ international expansion plans. Yet Brazil has attracted relatively less attention by luxury corporations than its other BRIC counterparts, specifically China and India.

Although other emerging nations also share in these challenges, high import duties, complex taxation and red tape continue to vex companies operating in Brazil. Import duties are often cited as enemy number one for luxury firms, as the final price of goods can be 2 to 3 times that of the US or Europe. But there may be some cause for optimism. EU luxury associations for the first time joined in a coordinated business mission last week to petition Brazilian officials to lower import tariffs.

And success stories abound. Diane Von Furstenburg’s first São Paulo boutique netted over $1 million in sales in its first 6 weeks while Louis Vuitton’s flagship showroom is the company’s most profitable worldwide. With four Tiffany stores in São Paulo alone, it’s fair to say that the market is significant and that many brands have found great success. And with growing affluence throughout Brazil, international brands are also expanding beyond São Paulo for the first time. It’s easy to appreciate that without a Brazil strategy, companies are missing a major potential component of international growth.

There are several characteristics that make the case for Brazil more compelling.

Cultural affinity:

With a European heritage, Western companies will find fewer cultural challenges to conducting business in Brazil, particularly versus China or India. Affluent Brazilians are well-informed and well-traveled. They are familiar with leading international brands and know quality.  But Brazil is not Europe or the US. It is a heterogeneous country with large regional differences. Despite a growing middle class, it remains a hierarchical society where customer service demands are high and the affluent expect to be pampered. Successful firms will understand the social dynamics as well as the regional differences of this large country.

Limited product and venue availability:

Although several major brands are setting up shop, relatively few international luxury brands are present in Brazil, particularly vis-à-vis the Asian market. This lack of international competition provides a distinct advantage to companies–for now. Unlike other emerging markets, however, Brazil has a heritage of homegrown brands that firms will have to contend with. Savvy companies will understand that as more international companies enter the market, the cost of branding in Brazil will certainly increase.

Brazilians are spenders:

In stark contrast to other emerging economies, particularly those in Asia, Brazilian saving rates are low. Though part of this tendency to spend stems from years of inflation, differences in spending behavior also play a role. Brazilians are brand-conscious and love to shop. A recent study by Credit Suisse suggested that middle-income Brazilian consumers are the most likely emerging market consumers to splash out for a luxury purchase. This may explain why many companies have discovered a far larger market than what raw income data might have suggested.

E-commerce in Brazil is growing rapidly:

Forrester expects online transactions in Brazil to reach $22 billion by 2016 from $11.7 billion in 2011 as broadband availability increases and banking security concerns are allayed.  Import duties and expensive shipping have dampened the growth of the industry for luxury brands but new models are emerging. Mrporter.com, the London-based men’s online retailer, has developed a unique—and successful strategy—it ships products duty-paid to its customers in Brazil.  Expect more innovation to come as infrastructure improves.

Brazilians are ever more connected and highly engaged:  Brazilians spend more time online on social media outlets than in any other country. Brazil is now Twitter’s 3^rd largest market globally and Facebook’s fastest growing market worldwide. Brazilians are some of the world’s most active bloggers and in a recent study by the global market research firm TNS, one of the most open to engage with brands online.  Brazil is extremely fertile ground for “organic” brand development with localized social media and language as powerful brand-building tools.

In recent months the general slowdown in global growth has coincided with Brazilian policies aimed at taming an overheating economy.  As a result, most recent figures show that 2011 growth has slowed to around 3%. Though this is significantly less than the 7.5% growth in 2010, the Brazilian slowdown is a far cry from the sluggishness of the US or Europe.  2012 growth is estimated to rebound to a healthy 4-5% range. Investment and consumer confidence remain strong and the demand for high value-added goods such as luxury products will likely continue to grow.

The world’s seventh largest economy isn’t likely to remain “off the radar” for long. Focusing on building a cogent and deliberate Brazil strategy is not only imperative- it’s overdue.

Slow movers- take note.