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Latin America: Insight into a Luxury Goods Anomaly

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Latin America is a frustrating region for the luxury industry. It has held huge promise over the last decade, but has largely failed to live up to expectations. Brazilians, for example, are among the biggest spenders in the world when it comes to fashion and beauty care; yet, demand for luxury goods is subdued by comparison, at least on home soil. It is a similar story across the region.

To put things in global context, Brazil’s luxury market totalled less than US$5.0 billion last year compared with more than US$75.0 billion in the US. A disparity is to be expected, but not one so cavernous. The collective wealth of Brazil’s high net worth individuals is widely reported to be the third biggest in the world, after all. Furthermore, in 2013 Brazil and Mexico ranked fifth and sixth in the world, respectively, in terms of the size of their social class A populations.

There are a number of reasons why Brazil – and Latin America as a whole – has not yet scaled the heights of its luxury goods potential. Firstly, import taxes and bureaucracy-related costs mean that international brands are normally far more expensive in Latin America than in developed markets. Secondly, and related to this, affluent Latin Americans have grown used to travelling to the US and Europe to buy their designer clothes, luxury jewellery and pricey fashion accessories.

Thirdly, while the region’s emerging middle class is aspirational and prone to showiness in its consumption habits, social class A consumers like to downplay their wealth because of fears over security. The overall result is that growth in Latin America’s luxury market has jogged along rather than sprinted. It begs the question, what can the industry do to more effectively harness such undoubted potential?

World Ranking of ‘Social Class A’ Populations 2013

Ranking Country Social Class A Population
1 China 126
2 India 81
3 US 30
4 Indonesia 17
5 Brazil 13
6 Mexico 10
7 Russia 9
8 Japan 8

Latin America goes to the mall

If Latin America is going to make the leap from an also-ran to a major winning luxury player, then shopping malls will be key. It might seem an unlikely marriage – high net worth individuals and garish shopping malls – but in Latin America, it works. The main reason has to do with security.

In short, many well-off families feel safer in shopping malls than in any other retail environment. It helps too that the region’s shopping malls are often air-conditioned and provide plenty of family entertainment beyond shopping. It is telling than Mexico currently has more shopping malls than Brazil, and also a bigger luxury market (see chart above). There is almost certain to be a correlation.

Luxury retailers have cottoned on and are increasingly viewing shopping malls as must-be locations in Brazil and across the region. Some have even closed their street locations in favour of setting up shop in one of the many new malls (Cartier in Brazil is an example).

A recent boom in shopping mall developments is helping luxury brands extend their footprint in Latin America (or, in many cases, get their first foothold). Some malls – such as Shopping JK Iguatemi in São Paulo – seem to drip in luxury, and are more high-end than any malls you will come across in Western Europe. Others are inevitably more humdrum in layout, but popular nonetheless as weekend ‘retail-tainment’ excursions for both middle- and upper-income families.

With property developers falling over one another to snap up new sites, growth in shopping malls is unlikely to slow over the next five years. If anything, it will get faster. Crucially, the next phase will be expansion into small and mid-sized cities. In Brazil, for example, cities such as Curitiba, Recife, Belo Horizonte and Porto Alegre could become key targets of new development.

Winning over social class A

The biggest challenge, however, is persuading high net worth individuals to spend more on luxury brands at home than they would end up spending on the same products in Miami, New York City or Paris. It is a big ask, even of Latin America’s wealthiest consumers.

Either that, or imported luxury brands will have to absorb more of the taxation (and red tape) costs. Clearly, this is not strategically viable given the negative implications for margins. Currently, price differences (on imported luxury brands) between Brazil and Miami are typically between 30% and 100%.

Building new positions in shopping malls will definitely help, but luxury retailers also need to find ways to make their particular shopping experience more luxurious and pampering (bespoke even) than a comparable shopping experience in developed markets. The brands are effectively the same, so the competitive differentiation needs to be in the experience of buying them. If a VIP ‘theatre’ is created around the shopping experience, then well-heeled consumers will be more inclined to shop at home.

There is everything to play for. As luxury retailers become more visible – in particular, by expanding into second- and third-tier cities – so high net worth Latin Americans will be forced to think twice about doing their luxury shopping abroad. Most have the propensity to shop at home – domestic demand for luxury cars is booming, for example. But, then, shopping for luxury cars in the US and Europe is not really an option. In the end, it is the inclination and, to some extent, the culture of luxury shopping that the industry needs to work on.

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