Latin America’s Luxury Sales Drop After Two-year Boom
Latin America’s luxury market is expected to decline this year as soaring inflation and sluggish economic growth hit sales of high-end products, analysts said.
“We will grow 8 percent this year, which is less than the 12 percent in 2022 and 20 percent in 2021,” said Abelardo Marcondes, founder of local consultancy Luxury Lab, adding that this year’s gains will clock in sharply above gross domestic product (GDP). “We have an inflation crisis in the region and in the U.S. but we will still manage to grow above the economy.”
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This is largely due to Mexico’s buoyant sales, Marcondes added, which will sharply outpace the rest of the region’s, gaining 10 percent as a strong tourism industry and rising Chinese foreign direct investment (FDI) will bolster employment and consumption.
“There is a very strong near-shoring trend, both from U.S. companies but also Chinese,” Marcondes noted. “The U.S. has put many restrictions on China’s imports so you are seeing many firms invest in border-town maquiladoras [factories] to service the market.”
Then there is electric vehicle-maker Tesla, which is set to build its newest and largest Gigafactory in Monterrey, Northern Mexico, creating yet more jobs and fueling additional growth.
Amid this backdrop, global luxury brands are upping the ante in Mexico with a slew of houses opening stores in Mexico City recently. One such firm is Fendi Casa, which just inaugurated a 4,800-square-foot store in the capital’s Presidente Masaryk high street. The three-story boutique, opened in partnership with luxury fragrance distributor Falic, mirrors Rome’s Palazzo Fendi. Spain-based Pepa Pombo also installed a new flagship in Masaryk, Mexico, in November, preceded by Dolce & Gabbana, which added a boutique in the glitzy new Artz Pedregal mall last September.
Speaking about the opening, Dolce & Gabbana chief executive officer Alfonso Dolce told local media: “The Latin American market, with Mexico in particular, has grown a lot in recent years, both qualitatively and quantitatively. We have opened in Artz Pedregal to offer a more immersive shopping experience for our customers, including the youngest ones.”
Spanning 4,300 square feet, the store features gold, damask and Italian marble finishes and shelf decorations, and reportedly will carry all of the brand’s recent ready-to-wear and accessory collections, as well as fragrances and eyewear. It will also feature its “Dolce & Gabbana Sartoria” tailoring service.
Elsewhere in Latin America, where industry sales reached $28.5 billion in 2021, business is not looking so rosy.
In Brazil, for instance, growth is forecast to inch up a mere 3 percent from this year until 2025, according to Brazil’s Association of Luxury Companies (Abrael).
That’s a sharp decline from the 52 percent surge in 2021 when well-heeled Brazilians were forced to shop at home instead of in New York or Miami, where they have traditionally flocked for luxury shopping.
Brazil’s retail sales are anemic, rising just 1 percent in 2022, the lowest gain in six years, as soaring interest rates and stubborn inflation strangle investment and consumption. Adding to this is lingering uncertainty about third-time President Luiz Inácio Lula da Silva’s new policies to increase social spending amid a large fiscal deficit.
The once high-flying beauty industry is also struggling. Market leader Natura, for instance, has been forced to shed assets to shore up its business. The latest such move was revealed Tuesday when L’Oréal agreed to acquire Natura’s Australian brand Aesop in a deal that had an enterprise value of $2.5 billion.
But Thaya Marcondes, who runs Luxury Lab in Brazil, said things are not so bad. She noted Abrael’s forecast was probably referring to the aspirational fashion segment where brands such as Lacoste, Michael Kors or Coach may be suffering. The total market, she noted, will grow up to 7 percent versus 12 percent last year as brands catering to rich and super rich customers will continue to do well, she claimed.
“There is a year and a half wait to buy a Porsche in Brazil so that shows you that the very wealthy are still buying. Brands such as Gucci or Louis Vuitton continue to see brisk sales across the country’s malls while leading local brands such as Natalie Klein and Arezzo shoes are also growing,” Marcondes insisted.
But as some have struggled, entrepreneurs have found an opportunity to pick up rival brands at bargain prices.
Such is the case of fashion entrepreneur Alexandre Birman, who recently snapped up several brands, including local shoe label Carol Bassi and a majority stake in Italy-based Paris Texas to create a multibranded group together with this Arezzo footwear trademark.
In Argentina, where luxury has been struggling for years, the outlook is much bleaker, however.
“All the top brands have left,” lamented Marina Ancilletta, a local luxury expert, adding that only some Hermès and LVMH Moët Hennessy Louis Vuitton operations remain in the country after the likes of Polo Ralph Lauren, Kenzo, Escada and Armani exited in recent years, spooked by high import taxes and limited access to U.S. dollars.
Luxury sales, Ancilleta predicted, will likely be flat or decline in 2023 as GDP ekes a 0.5 percent gain amid 100 percent inflation.
As international brands have a limited offer, many wealthy Argentines have become avid consumers of local designer labels such as Gabriel Lage, who has a four-month wait for women looking to buy his high couture dresses, according to Ancilletta.
In Colombia, premium labels are selling well as the U.S. dollar’s gains against the peso have sharply boosted foreign investment and tourism.
“There are lots of foreigners spending on fashion, entertainment and real-estate,” said Catherine Villota, who leads Fashion Group in Colombia. “But that doesn’t mean the luxury market can sustain that kind of growth for much longer.”
This is because the new government of leftist President Gustavo Petro has raised import taxes by 40 percent, lifting merchandise prices to almost unsustainable levels. This will eventually impact sales and worsen the medium-term outlook in a country that has otherwise seen relatively rapid growth in recent years, Villota noted.
Zara, seen as an aspirational brand in Colombia, and the other Spanish Inditex labels such as Paul & Bear will likely begin to suffer in coming months as consumers will suffer from sticker shock, Villota added.
Colombia has seen a string of top luxury labels enter and then leave the country as consumption missed expectations, despite its fashion-centric society, which buys much more luxury than neighbors in Chile, Peru or Ecuador, according to the expert.
“We need a much higher spending power and for more wealthy Colombians to spend here as opposed to the U.S. if we want to have the same market dynamics as Mexico or São Paulo,” Villota said.
That may not happen soon. After two years stuck at home because of the pandemic, Latin Americans are once again shopping abroad, this time favoring new U.S. destinations such as Rodeo Drive in Beverly Hills and European fashion outlets such as Las Rozas Village in Madrid.
The latter has “good prices and ‘hands-free,’ VIP shopping services which Latin Americans love,” he concluded.
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