Custom Report Cartier by wilson.heidik

CONFIDENTIAL

RESEARCH custom research project for cartier | june 2016

Luxury prospects in Latin America strong despite regional slowdown

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JUN 2016 | custom research project for cartier

Contents 1. Introduction

What does the Latin American market for luxury jewellery and accessories look like in mid-2016?..................................................................................................................................................................5 Who are the buyers?....................................................................................................................................................................6 Outside Miami, what are the key markets?................................................................................................................... 8 What are the key trends?....................................................................................................................................................... 10 Who are the competitors?..................................................................................................................................................... 10

2. Miami/southeast Florida 3. Mexico

13 15

4. Colombia

5. Peru

Key economic trends.................................................................................................................................................................16 Notable.........................................................................................................................................................................................16 Investor sentiment.................................................................................................................................................................17 Key consumer trends............................................................................................................................................................17 FTCR Consumer Survey of Q116.........................................................................................................................................18 Key tourism trends.....................................................................................................................................................................18 Luxury retailing in Mexico......................................................................................................................................................19 A key sales channel: El Palacio de Hierro .....................................................................................................................21 Mexico’s top malls......................................................................................................................................................................22 Mexico Luxury Insights...........................................................................................................................................................22 Key economic trends................................................................................................................................................................25 Notable........................................................................................................................................................................................25 Investor sentiment................................................................................................................................................................26 Key consumer trends...........................................................................................................................................................26 FTCR Consumer Survey of Q116........................................................................................................................................28 Key tourism trends....................................................................................................................................................................28 Luxury retailing in Colombia................................................................................................................................................29 Top mall – Bogotá’s Centro Andino.................................................................................................................................30 Colombia luxury insights........................................................................................................................................................31 Key economic trends ............................................................................................................................................................... 35 Notable ....................................................................................................................................................................................... 35

JUN 2016 | custom research project for cartier

Investor sentiment ...............................................................................................................................................................36 Key consumer trends........................................................................................................................................................... 37 FTCR Consumer Survey of Q116........................................................................................................................................ 37 Key tourism trends....................................................................................................................................................................38 Key luxury retailing trends....................................................................................................................................................39 Peru luxury insights...................................................................................................................................................................41 Positioning in Lima....................................................................................................................................................................42 Expo Lujo Perú 2016 – Premium sizes up Peru........................................................................................................43

6. Brazil

7. Chile

Key economic trends................................................................................................................................................................45 Notable........................................................................................................................................................................................45 Investor sentiment................................................................................................................................................................46 Key consumer trends...........................................................................................................................................................47 FTCR Consumer Survey of Q116....................................................................................................................................... 48 FTCR Mall Shopper Survey of September 2015....................................................................................................... 48 Key tourism trends................................................................................................................................................................... 48 Rio de Janeiro Olympics................................................................................................................................................... 48 Overview.....................................................................................................................................................................................49 Key luxury retailing trends....................................................................................................................................................49 Iguatemi......................................................................................................................................................................................50 Aliansce.......................................................................................................................................................................................50 Multiplan......................................................................................................................................................................................51 Other mall operators............................................................................................................................................................51 Brazil luxury insights................................................................................................................................................................ 52 Key economic trends................................................................................................................................................................55 Notable........................................................................................................................................................................................55 Investor sentiment................................................................................................................................................................56 Key consumer trends...........................................................................................................................................................56 FTCR Consumer Survey of Q116........................................................................................................................................56 FTCR Mall Shopper Survey of September 2015........................................................................................................58 Key tourism trends....................................................................................................................................................................58 Key luxury retailing trends....................................................................................................................................................59 General........................................................................................................................................................................................59 Cencosud....................................................................................................................................................................................59 Parque Arauco.........................................................................................................................................................................59 Chile luxury insights.................................................................................................................................................................59

JUN 2016 | custom research project for cartier

8. Argentina

9. Cuba 10. Panama

70 72

11. Uruguay 12. Latest business developments

75 76

Is Brazil or Mexico the number one market for luxury retail in Latin America? ................................... 76 Brazil.................................................................................................................................................................................................. 76 Colombia..........................................................................................................................................................................................77 Mexico...............................................................................................................................................................................................77 Panama.............................................................................................................................................................................................78 Colombia/Panama......................................................................................................................................................................78 Argentina........................................................................................................................................................................................79 Peru .................................................................................................................................................................................................. 80 Cuba.................................................................................................................................................................................................. 80

Chapter 1 | INTRODUCTION

1. Introduction What does the Latin American market for luxury jewellery and accessories look like in mid-2016?

At first glance, it is the challenges that are obvious. Brazil, the region’s largest economy, is in a serious recession and appears likely to remain so for months to come (if not longer). Other important economies in the region, such as Colombia, Chile and Peru, are adjusting to lower prices for energy and mineral exports. In a number of countries – but perhaps most obviously Argentina – persistently high inflation has been constraining consumers’ purchasing power. Mexico, the region’s second-largest economy, has benefited from the growth of the US, but is only outperforming by the fairly low standards of the rest of the region. Further, Latin America is not a particularly easy part of the world in which to conduct business. It is easy to find examples of leading luxury brands that have abandoned particular geographic markets as unviable. In many of the countries, imports of luxury goods are subject to high duties and luxury purchases subject to high taxes. This is in the context of a region where, until recently, most currencies have been falling relative to the US dollar and the euro. As of mid-June 2016, Venezuela has one of the worst economic and business environments of any country globally. It is not clear how or when the various – and well documented – problems will be resolved. Accordingly, we have excluded it from this report. We have also excluded Ecuador, Paraguay and Bolivia. And in Central America, we have only considered Panama. Finally, we have also excluded the (much) smaller non-Spanish speaking countries of the Caribbean. Nonetheless, there are a number of positive aspects in the regional luxury market. First, major luxury brands are well established across the region. In particular, the very wealthiest consumers have long travelled to Miami – a city well suited to all their needs, shopping and beyond. Outside this group, the number of buyers from the region wealthy enough to travel to the US has held up well over recent years: however, there has been a significant variation in arrivals from particular countries.

luxury market: a definition We define the luxury market as including those organisations which supply jewellery and accessories (including watches) to customers in Latin America Rolex (including southeastern Florida). These organisations include Cartier and ten other specified Bulgari Tiffany & Co international David Yurman Louis Vuitton groups:

TAG Heuer

We have also included, H.Stern, the leading jewellery chain of Brazil, and a group that has a substantial regional presence.

Hermès Hublot Breitling Audemars Piguet H.Stern

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Chapter 1 | INTRODUCTION

FTCR LatAm consumer indices Q313 ARGENTINA

BRAZIL

Q116 CHILE

50=no change COLOMBIA

MEXICO

PERU 60

ECONOMIC CONFIDENCE INDEX

0 70

HOUSEHOLD FINANCIAL SITUATION INDEX

20 80

SPENDING INDEX

Note: The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel, etc.); the Economic Confidence Index is based on respondents’ perceptions of their country’s economy; the Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. Any index reading above 50 indicates an increase; any reading below 50 indicates a decrease Source: FT Confidential Research

Very substantial numbers of Latin American buyers still do not have the means or the desire to travel to the upscale malls of Miami for their purchases. These are the aspirational purchasers, people looking to buy their first or second branded watch, handbag or other accessory. Over time, this group is likely to grow in number and purchasing power (particularly in Colombia and Peru, but also in other major markets) as a result of more inclusive economic growth. Crucially, FT Confidential Research’s latest surveys have found that – across the region – spending on discretionary and big ticket items has held up well in the first quarter of 2016. The deterioration in headline macroeconomic metrics, such as GDP growth, does not tell the whole story. While aspirational buyers have endured more economically challenging times in the recent past, they are resilient. Finally, there are a number of positive changes taking place within the region consistent with continued steady growth in sales of jewellery and accessories. One is the development of financial services in general (and consumer credit in particular), which is boosting demand. Another is the growth of intra-regional travel, thanks to the rise of discount airlines. Thirdly, retail price differentials between countries often mean that substantial savings can be made by buying big-ticket and discretionary items in nearby countries. To this end, some mall owners in Latin America are developing clusters of luxury brands to better cater to customers, local and international.

Who are the buyers?

The Latin American buyer of jewellery and accessories is remarkably consistent. Likely drawn from among the top 1% of income earners, the Latino buyer who travels to shop at upscale malls in Miami or elsewhere in southeastern Florida almost certainly will be at least a ‘mass affluent’ professional or business owner. Latino buyers tend to be married and in their peak earning years of 35-55. Men account for www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

FTCR LatAm buying intentions indices Q313 ARGENTINA

BRAZIL

Q116 CHILE

50=no change COLOMBIA

MEXICO

PERU 80

CLOTHING

30 80

EDUCATION 30 60

HEALTHCARE PLANS

10 Note: The buying intentions indices are based on respondents’ reported purchases and intentions to purchase specific goods. Any index reading above 50 indicates an increase; any reading below 50 indicates a decrease Source: FT Confidential Research

a little over 50% of purchasers, according to industry insiders interviewed for this report. Three-quarters are accompanied by a spouse or partner. Often they are also travelling with their children, although ‘Dual Income No Kids’ couples, including heterosexual and from the LBGT community, are a growing demographic. The home countries of Latino customers in Miami reflect those countries’ relative economic performance in the recent past. In the last two years, 65% of Latin American buyers have come from South America (particularly Andean countries), while 23% have come from Central America (where most economies have been relatively strong in a regional context), with the remainder from the Caribbean and other countries. Relatively few Latin American buyers venture north from Miami to Palm Beach, but those that do tend to be older couples (aged 45-65+). Miami is more than just a place to buy luxury goods. Miami International Airport is one of Latin America’s key transport hubs. The city is a place where Latino visitors can relax, take in culture and leisure pursuits, and enjoy a vacation in safety. It also provides asset insurance against political and economic risk in their home country. One industry insider from the Miami Design District noted that typically over half of Latin American buyers have a second home in Miami or Broward County. Once the Latino buyer arrives in Miami, he/she will be looking for those leading brands with which they are familiar thanks to international travel. Wealthier Latin Americans may also have window-shopped at boutiques (usually in malls) in their home countries: however, high local sales taxes and import duties mean that particular items often are significantly more expensive than in Miami, while the selection in their home country is also narrower. Within the Miami Design District, traffic is driven by leading and well recognised brands such as Rolex, Van Cleef, Cartier, Hermès, Fendi and Dior, typically clustered together. Similar clusters can be found in Merrick Park, Aventura Mall, Dadeland Mall and the Bal Harbour Shops in Miami, as well as at upscale malls in Fort Lauderdale, Boca Raton and Palm Beach. www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

Relative to the wealthiest buyers, these consumers are more aspirational – saving for months to buy a watch or a handbag

If a Latino consumer can afford to travel to Miami, they likely will be relatively insensitive to absolute price, provided that they perceive the brand as offering value at the price point. Critically important to these consumers is the shopping experience, including the sales and after-sales service. Luxury buying is expected to be enhanced with complimentary gifts, champagne, valet parking, limousine transfers and so on. These aspects keep buyers coming back: around one quarter of shoppers in the boutiques of the Miami Design District, for instance, are repeat buyers. In southeastern Florida, the average size of sales to, and spending by, Latin American consumers are similar to those of US and Canadian consumers. One industry insider noted that Latin American buyers tend to be more ‘fashion forward’ than North American clients. Latinos prefer bolder designs, slightly larger pieces and yellow or rose gold. Among Latin American jewellery buyers, bracelets and earrings are especially popular. These characteristics are also valid of wealthier Mexicans who purchase jewellery and accessories at home. The retail industry in Mexico is heavily influenced by US trends. For instance, there is a long established tradition of shopping for discretionary purchases in malls. The store-in-a-department-store (or boutique-in-a-departmentstore) concept is well established. Likewise, Internet and social media are heavily used to promote brands. Outside of the “1%”, the vast majority of Latin Americans who can afford discretionary purchases do not have the money (or necessarily the desire) to travel to Miami for jewellery and accessories. Relative to the wealthiest buyers, these consumers are more aspirational – saving for months to buy a watch or a handbag. They are also far more sensitive to price – which generates challenges and opportunities for luxury brands and their distributors.

Outside Miami, what are the key markets?

Latin America’s domestic markets for jewellery and accessories are not homogeneous. The region in the past decade has been shaped by political and economic change, such as in Brazil, Peru and Colombia, which has boosted the numbers of people who can afford discretionary purchases and led to strong growth in the retail industry in general. Distinctions between the various markets are marked by import duties and sales taxes – which can have a major impact on prices between countries; the extent of competition between domestic and major foreign brands, the extent to which inflation may curb the purchasing power of this new middle and upper middle class; and finally, trends in inbound tourism. Mexico, for instance, stands out for the absolute size of the luxury jewellery and accessories market, the importance of inbound tourists as customers, and the sophistication of the retail sector. To date, the main constraint appears to have been a lack of credit, in a country where financial services are under-developed by most metrics. However, leading department stores provide credit – with the result that shopping at home is more cost effective than shopping in Miami. • To watch: availability of consumer credit Colombia’s luxury market really started developing in 2009-2010, when foreign companies began to perceive a major improvement in the internal security situation. However, the retail industry has proven challenging – even for long-established Latin American players: at least 10 brands that entered the market in the last five years or so have lost money; and withdrawn or downsized. Some companies particularly suffered amid a slippage in the Colombian peso over the last two years or so. It is also the case that Colombian consumers sometimes do not perceive foreign brands as being superior to long-established local premium brands. Nevertheless, the reasonably strong performance of the economy is www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

consistent with greater numbers of aspirational shoppers making their first purchases of jewellery and accessories. • To watch: growth in arrivals of foreign tourists/consumers, mall developments

Santiago has emerged as a shopping mecca for Latin American consumers from other countries

Peru’s luxury market has features in common with those of neighbouring Colombia and Chile. Like the former, the strong performance of the economy has significantly boosted the number of aspirational buyers. Like the latter, tourism has been growing rapidly. Within the retail sector, the number of malls has doubled since 2010. • To watch: efforts to develop a luxury shopping district in Lima’s upscale San Isidro district Brazil stands out for a generally challenging business environment, including high sales taxes and import duties, as well as restrictive labour restrictions. The jewellery chain H.Stern is a major distributor and has flourished even as other operators (including major international luxury brands) have had to cope with significant barriers to entry. Security issues mean that boutiques and other independent retailers tend to concentrate in malls or (particularly in Rio de Janeiro) in upscale hotels. • To watch: tourism trends after the Olympics Chile’s potential as a luxury market is greater than implied by the absolute size of the population and the domestic economy. A long period of stable (and reasonably inclusive) economic growth with low inflation means that a greater percentage of the population can be regarded as potential aspirational buyers of luxury items. Crucially, inbound tourism has been developing rapidly. Relatively low sales taxes and low import duties, combined with the general weakness of the peso relative to the US dollar, mean that Santiago has emerged as a shopping mecca for Latin American consumers from other countries (Argentines in particular). Luxury shopping was given a boost by the 2012-2013 development of a ‘Luxury District’ within the Parque Arauco Kennedy mall, one of the flagship properties of the Parque Arauco group. The ‘Luxury District’ opened in Q313, with the offer including Louis Vuitton, Emporio Armani, Salvatore Ferregamo, Dolce & Gabbana, Omega, Montblanc, Ermenegildo Zegna, Carolina Herrera and Burberry. By Q315, additional boutiques included Tiffany & Co, Michael Kors, Tory Birch and Gucci. • To watch: inbound tourism from other countries in Latin America Argentina differs from the other major markets in that buyers of luxury goods prefer to shop in stand-alone boutiques and independent jewellery stores located outside major shopping malls. The challenging economic and business environment under the left-wing administration led by President Cristina Fernández de Kirchner (2007-2015) constrained the development of the luxury retail sector, with the result that a number of leading international brands left the market. The move towards re-liberalisation of the economy under the new centrist administration led by President Mauricio Macri (which took power in December 2015) has boosted investor and consumer confidence. • To watch: a fall in entrenched structural inflation as the economy rebalances, which should boost disposable incomes This report also looks at three smaller regional markets, each of which presents wildcards to international luxury brands. In spite of the importance of Punta del Este as a resort playground in the (southern hemisphere) summer, Uruguay’s luxury market has faced a number of challenges in recent years. These include the general weakness of the Argentine and Brazilian economies and effective competition from boutiques (and independent retailers) in São Paulo and Buenos Aires. By contrast, Panama’s low sales www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

taxes and importance as a regional transportation hub have encouraged the development of a vibrant luxury market. In theory, Cuba has good potential as a luxury market, given the growth in in-bound tourism. In practice, the overall economic and business environment remains far too challenging for now.

Across the region, high-end shopping malls are operating at near 100% occupancy: more space is needed

To watch: • An eventual economic upturn in either of the two neighbouring countries • Expansion of luxury sales in Tocumen International Airport • Comprehensive monetary reform, the central element in the changes that are needed in Cuba

What are the key trends?

Industry insiders in the established luxury market in southeastern Florida have suggested that overall growth in sales to Latin American customers has been in the low single digits over the past year, and is expected to remain so. Retailers have reported a sharp drop in sales to Brazilians and Venezuelans, reflecting the economic and political problems in both countries, with sales to visitors from Central America also subdued. The impact of the drop in custom from Brazil and Venezuela has partly been offset by an increase in sales to nationals of other countries whose economies have been performing relatively well (Colombia, Peru, Chile), and also to visitors from Argentina, where confidence has improved substantially with the change of government in late 2015. The importance of macroeconomic trends to the luxury market should not be overstated. Many of the regional economies are adjusting to lower global prices for energy and other commodities. Brazil is enduring a recession of epic proportions. Nevertheless, FT Confidential Research’s most recent surveys found that discretionary spending by households that are at least aspirational buyers of jewellery and accessories has held up well in all six of the major regional markets. Across the region (outside Miami), industry insiders generally report sales growth of 5-8% over the past year or so. Hard times have hit a lot of people (in Brazil especially), yet outside of Brazil and Venezuela, the regional luxury market has been fairly resilient. Commercial real estate companies are facilitating sales of luxury goods. Partly because of concerns about security on the part of retailers and consumers (e.g. in Chile), along with concerns about security on the part of buyers (e.g. in Brazil, Colombia and Peru), and thanks to the rise in sophistication of retail sectors from a fairly low level (in most countries to the south of Mexico), regional shoppers have a strong preference for malls. Although the trends vary from country to country, it is generally true to say that international luxury brands tend to distribute through outlets located in malls (be they own-brand boutiques or independent retailers). Across the region, high-end shopping malls are operating at near 100% occupancy: more space is needed. And as noted above, mall owners in the Andean region are actively looking to attract luxury boutiques through the development of new premises. Intra-regional tourism is a positive wildcard. As is the case in the rest of the world, the rise of discount airlines has boosted the ability of people to travel internationally. FT Confidential Research found that Latin America’s consumers are increasingly looking to travel within the region – even if relatively few have plans to travel to Rio de Janeiro for the 2016 summer Olympics. Chile’s retailers have benefited from the growing perception of Santiago as ‘el nuevo Miami’ – especially among consumers for whom Miami has become too expensive. Over time, Lima and Bogotá may also attract increasing numbers of buyers from other countries in the region.

Who are the competitors?

Although the leading international luxury brands generally do not describe in detail their www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

Selected major luxury brands: regional footprints in Latin America Stand-alone boutique

Boutique in airport/hotel

ARGENTINA

BRAZIL 10

CHILE

Boutique in mall*

COLOMBIA

FLORIDA

Independents in mall

MEXICO^^

23 9

1 4

45 9

3 4

3 2

1 1

1 2

1 7

2 13

1 7

1 1

29 ^

1 1

7 1

URUGUAY

PERU

PANAMA

Other independents**

1 1

2 4

4 6

*Counting the Miami Design District as a mall. Includes store in store concept in Florida and Mexico. **Includes independents in hotels and airports. ^Distributing in Brazil mainly via partnership with H.Stern. ^^Includes two David Yurman distributors in CancĂşn and Cozumel. Sources: Company websites, FT Confidential Research www.ftconfidentialresearch.com

Chapter 1 | INTRODUCTION

12 respective strategies for the region, it is possible to make inferences from their presence in each of the various markets, both through own-brand boutiques and through those independent retailers that distribute their products.

H.Stern’s main focus outside Brazil appears to have concentrated on wealthy Brazilians visiting the US

In general, these competitors typically consider southeastern Florida a key market (including in global terms). All of the companies in our sample have at least one boutique in southeastern Florida. Some also distribute through independent retailers. In both cases, these outlets are most likely to be found in malls. Nevertheless, several of the brands also have stand-alone non-mall boutiques in Miami. H.Stern is a key distributor within Brazil. It has no equivalent in the other large Latin American markets. It appears to have exploited the persistently challenging business environment in Brazil – which has effectively served as a barrier to entry to other international jewellery groups. H.Stern has also expanded to Mexico and Peru, and has boutiques in some hotels in Argentina. However, its main focus outside Brazil appears to have concentrated on wealthy Brazilians visiting the US. Several of the companies in our sample are catering for well defined niches. Audemars Piguet and Hublot, for instance, cater to a small number of connoisseurs across the region (including in Panama and Uruguay) through independent retailers. David Yurman’s choice of distribution partners indicates that it is present in the region (or, to be more precise, in Mexico) to cater primarily to North American tourists already familiar with the brand. Some brands define themselves as much by the experience of their boutiques as by their products. Tiffany & Co, Louis Vuitton and Hermès only sell through their own boutiques and, typically, in established clusters of luxury brands. Conversely, Breitling sells predominantly through independent retailers. Outside of southern Florida, Mexico and Brazil, few of the Latin American markets to date have provided ‘core’ opportunities. Bulgari, for instance, closed its boutique in Bogotá in April 2016. Louis Vuitton, along with a number of other international brands, exited Argentina in 2012: the company also closed its outlet in Uruguay in late 2014. Nevertheless, particular initiatives by mall operators (such as the development of the ‘Luxury District’ in the Parque Arauco Kennedy mall in Santiago) can and do attract luxury brands that otherwise might have been absent. Some companies appear to be positioning themselves as ‘entry level’ brands for aspirational buyers. One example of this is TAG Heuer, which distributes through five independent retailers in Uruguay and over 40 in Colombia. TAG Heuer also has a distribution partnership with H.Stern in Brazil, and with G&G Joyeros in Peru. By contrast, Rolex remains focused mainly on wealthier buyers in southeastern Florida and Mexico. n n n

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Chapter 2 | miami/southeast florida

2. Miami/southeast Florida No review of the Latin American market for jewellery and accessories would be complete without a brief discussion of southeastern Florida in general and Miami in particular. As the overview at the beginning of this report makes clear, the city plays a central role in the regional market. The key characteristic of Latin American luxury shoppers in Miami is that they have plentiful means. Many hail from the wealthiest 1-2% of households in their respective countries. For these consumers, Miami is more than a place to shop or play: it is often the location of a second residence purchased by way of insurance against political and economic risk at home. These shoppers are attracted to leading luxury brands, with which they have become familiar from their travels in the US and Europe. Although they have a sense of a price for each brand, they are not sensitive to the absolute level of prices. For these buyers, luxury shopping revolves as much around the experience as the final acquisition of the branded item. According to one industry insider, about one quarter of the shoppers at the boutiques in the Miami Design District (one of five key clusters of luxury brands within 30km of Miami International Airport) are repeat shoppers. They are attracted by the first class service â&#x20AC;&#x201C; which includes complementary gifts, champagne, limousine transfers and other benefits. Many of the other Latin American shoppers coming to Miami are professionals and/ or business owners who would count as mass affluent consumers in most developed countries. Across the region as a whole, the number of such people has held up well

MIAMI: LATINO SHOPPER PROFILE

SLIGHTLY OVER HALF OF THE PURCHASES ARE MADE BY MEN

MOST POPULAR ITEMS:

SHOPPERS ARE TYPICALLY IN THEIR PEAK EARNING YEARS OF 35-55

BRACELETS

Miami EARRINGS

LUXURY STORES OPERATING IN DEPARTMENT STORES INCLUDE: LATIN AMERICANS FAVOUR LARGER PIECES WITH BOLD DESIGNS

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Chapter 2 | miami/southeast florida

over the last two years or so. However, relative numbers from countries in the region have changed in response to economic forces. Over the last two years, the numbers arriving from Brazil and Venezuela have fallen at double-digit rates. Numbers arriving from Mexico and Central America have generally held up. Numbers from the Andean countries and (more recently) Argentina have risen.

Visitor numbers from the Andean countries and Argentina have risen

One implication of this is that while many of the Latin American visitors to Miami and southeastern Florida are sensitive to the overall cost of a visit to the US, including the shopping, total numbers of Latino visitors will only fall in the event of a very serious region-wide recession, developments that cause the US dollar to soar against regional currencies, or a one-off event, such as the attacks of September 11 2001. Another implication is that, at the margin, some Latin American buyers who might otherwise have gone to Miami may opt for a less expensive (and still emerging) shopping hub such as Santiago de Chile or Panama City. Industry insiders indicated that, aside from their willingness and ability to travel to the US, Latin American consumers are very similar to counterparts shopping at home or travelling to another regional country. Slightly over half of the purchases are made by men. The vast majority of shoppers visit boutiques as couples. Sometimes they bring their children. They are typically in their peak earning years of 35-55: the main exception to this is the minority of Latin American visitors who venture north to shop in Palm Beach, who tend to be a little older. Latin American visitors’ average purchases are similar in size/value to those of North American buyers. One industry expert noted that, relative to North American consumers, Latin Americans tend to be more ‘fashion forward’, and to favour larger pieces with bold designs. Yellow and rose gold are the most popular metals, with bracelets and earrings the most popular items. The importance of southeastern Florida as a winter resort for wealthy North Americans means that it long has been one of the largest and most sophisticated luxury markets in global terms. All the major luxury brands have a presence in Miami (as well as in Fort Lauderdale, Boca Raton and/or Palm Beach). Many have stand-alone boutiques at one of the city’s five key luxury clusters: • the long established Bal Harbour shops; • the Dadeland Mall; • the Aventura Mall;

• Merrick Park; and • the Miami Design District.

Some brands distribute through independent retailers, many of which also have outlets at malls. Others distribute through ‘stores in department stores’ such as Nordstrom and Saks Fifth Avenue. Leading department stores, too, are found at the leading malls. Large numbers of independent jewellery stores can be found in or near the historic Seybold Building in downtown Miami. Outside Miami, there are clusters of luxury brands at the Galleria shopping centre in Fort Lauderdale, the Town Center at Boca Raton and The Gardens Mall at Palm Beach Gardens. As might be expected in one of the world’s most important markets for jewellery and accessories, real estate developers, mall owners, retailers and luxury brands collaborate in innovative ways. The development of the Miami Design District by local group Dacra, for instance, has few equivalents in other countries globally and none in Latin America. Overall, though, the market for jewellery and accessories in Miami and southeastern Florida is mature and competitive, if highly resilient. Industry insiders suggested that total sales have been growing at low single digit rates, and will likely continue to do so. Sales to visitors from Latin America should rise at similar speed: albeit the source countries of Latin American buyers will continue to change according to economic conditions at home. n n n www.ftconfidentialresearch.com

Chapter 3 | mexico

3. Mexico Mexico has been experiencing steady GDP growth in the 2-3% range in recent years: while disappointing to many Mexicans who have hoped that recent reforms will trigger an acceleration, this is still a strong performance when compared to the rest of Latin America in 2015 and 2016. Importantly, high-income sectors of the economy have been growing at significantly higher rates. The luxury goods market has been expanding strongly at double-digit percentage rates. A growing middle class and an expanding group of high net worth individuals underpins a boom in luxury goods sales, particularly those carried out through urban shopping malls and upscale boutiques. • The Mexican economy continues to grow, not least because it is closely linked to the US, and the US continues to do well. Despite concerns over the impact on Mexico of low oil prices – which have triggered fiscal austerity measures – and heightened political risk factors over security and corruption, the economy is still expanding and demonstrating resilience. • The IMF expects GDP growth of 2.4% in 2016 and 2.5% in 2017. There has been a slight loss of momentum in the manufacturing sector in early 2016, but the overall trend continues to point upwards. While a little more cautious, investor sentiment over Mexico remains strong. • The middle class and higher-income Mexican consumer remains broadly confident. Mexico has gone further than any other Latin American country towards adopting the

MEXICO: ONE OF THE FASTEST-GROWING LUXURY GOODS MARKETS

592

Clothing and footwear Jewellery and watches

40%

Mexico City is one of the top three global emerging market cities for the sale of luxury brands

27% MEXICAN LUXURY MARKET BREAKDOWN IN 2015

Accessories

8% 6%

1. Domestic travel

67.3

2. Electric appliances

54.7

3. International travel 24.5

18%

4. Car Wines and spirits

22.6

5. Property

Beauty products Other: 1%

SPENDING INDEX

YoY GDP CHANGE

7.7

HOUSEHOLD FINANCIAL SITUATION INDEX 45

2Q15

2.2%

3Q15

2.6% 35

50 40

RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

No. of shopping malls in Mexico (3Q15)

4Q15 3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

2.5%

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

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Chapter 3 | mexico

US shopping mall culture – it now has over 600 malls, more than Brazil. Centro Comercial Santa Fé in Mexico City is one of the country’s largest malls.

The top sales and distribution channels for luxury goods in Mexico

• The luxury sector is buoyant. Growth in luxury goods sales is estimated to have averaged a CAGR of 12% in recent years. Mexico City has been identified as one of the top three global emerging market cities for the sale of luxury brands. • According to FTCR Q116 consumer surveys, 5.3% of the population, equivalent to around 6.5m people, can be considered wealthy. • Upper income sectors of the population are optimistic: two-thirds say their economic situation is stable or improving. One in four have bought a car in the last three months, more than half have bought electrical appliances, and one in four has travelled abroad. • Mexico is one of the world’s top 10 most-visited tourist destinations with over 30m annual visits. Many of those visitors enter and leave through Mexico City airport, an important duty free retail point for luxury goods. A new airport is being built at a cost of over $10bn and should be operational in 2020. • The top sales and distribution channels for luxury goods include upscale department stores such as Palacio de Hierro and mid range ones such as Liverpool; duty-free outlets in the main airports; and branded boutiques in the fashionable areas of major cities. The most important cities for luxury goods sales include the capital Mexico City, Guadalajara, Querétaro, Puebla, Monterrey, and Villahermosa. Points of sale in resorts such as Cancún and Cozumel are also important.

Key economic trends

Notable Mexican governments are elected for six-year terms, and the administration of President Enrique Peña Nieto, which took office in December 2012, has now passed its mid-term point. Shortly after taking office, the president launched an audacious programme of economic reforms, including ending the state monopoly in oil and gas and strengthening competition in the telecoms sector. The overall aim was to boost foreign investment and lift the country’s long-term growth rate from 2-3% to 4-5%. But halfway though his administration, the desired acceleration in growth is still proving elusive: the sharp fall in international oil and gas prices, coupled with ongoing concerns over crime and corruption, have all played a part.

Key metrics on Mexico Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) 2.2 2.6 2.5 2.5 2.4 2.9 Gross fixed investment YoY change (%) 4.7 3.8 0.7 3.9 3.3 4.3 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 23.8 24.2 23.5 24.1 23.6 – General government spending (% GDP) 27.5 28.1 28.1 28.1 27.1 – General government fiscal balance (% GDP) -3.7 -3.9 -4.6 -4.0 -3.5 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) 2.6 2.9 2.6 2.1 3.4 3.4 Unemployment (%) 4.4 4.3 4.3 4.4 – – Industrial production YoY change (%) 0.0 0.8 2.6 1.0 2.6 3.3 Retail sales YoY change (%) 3.4 5.2 – 5.0 – – Car sales (000s units) 77 72 – 892 – – Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

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Chapter 3 | mexico

17 For a variety of structural reasons, the economic performance of various sectors tend to diverge quite sharply. In the industrial north, closely linked to the US market, many industries benefit from double-digit growth rates. Mexico’s middle classes and high networth individuals (HNWIs) in the main urban areas also continue to benefit from strongly rising income levels. But parts of the country – particularly in the south – are still enduring high levels of poverty and financial exclusion.

30%

Of institutional investors surveyed by FTCR were overweight to the Mexican stock market

In its April 2016 World Economic Outlook, the IMF expected Mexico to continue growing at a steady rate. After an estimated real annual GDP expansion of 2.5% in 2015, the Fund projects growth of 2.4% in 2016 and 2.5% in 2017. In the context of a general slowdown in Latin American growth and a recession in countries like Brazil and Venezuela, the IMF said: “Given the continued recovery in the US, the growth outlook for Mexico… remains relatively robust”.1 The Markit Mexico Manufacturing PMI (Purchasing Managers’ Index) eased down slightly to 52.4 in April from 53.2 in March. This was described as another moderate improvement on a year-on-year basis, continuing an upward trend experienced over the last two and a half years; there is however, a relative loss of momentum. According to Markit senior economist Tim Moore, “New order flows were constrained during April, but there were signs that manufacturers in Mexico remain upbeat overall about the business outlook. In particular, the latest survey revealed a slight uptick in staff recruitment since March, amid reports of ongoing business expansion plans, strong product pipelines and positive export sales forecasts across the manufacturing sector.” Investor sentiment Total returns from the JP Morgan EMBI+ for Mexico’s bond market was 9.6% from the beginning of the year to 19 April. The Mexican stock exchange IPC index had risen by 6.5%. The Mexican peso had strengthened by 6.5% against the US dollar.2 In Q116, 30% of institutional investors surveyed by FTCR were overweight to the Mexican stock market. Another 5% were equal weight. The remaining 65% were underweight. All had some weighting. The number of investors who were underweight has grown consistently over the last year (up from 15% in Q215 and from 20% in Q315).3 In early 2016, commercial real estate consultancy group CBRE interviewed 31 leading institutional investors that focus on the Americas. Some 13% cited Mexico as the country that is most attractive for making property purchases in 2016, behind Brazil (29%), the US (23%) and Chile (23%). The most attractive metropolitan markets cited included São Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami.4

1. http://www.imf.org/external/pubs/ft/ survey/so/2016/car042716a.htm 2. FTCR LatAm report April 21 2016 3. FTCR LatAm report March 24 2016 4. CNRE Latin America Investor Intentions Survey, May 2 2016 5. http://www.atkearney.co.uk/ consumer-products-retail/ global-retail-development-index/ full-report

Key consumer trends Mexican retail sales have been expanding in step with the country’s steady but slow economic growth. Compared to the rest of the region Mexico has a mature retail sector. Retail sales per capita were $3,420 in 2014, the highest in Latin America, but less than a third of those in the US ($11,500). The per capita retail store space now exceeds 200 sq metres. Many retailers have been diversifying and developing their online sales platforms: M&A activity remains dynamic.5 Consumer sentiment has faced headwinds but remains resilient. Negative factors have included the impact of low international oil and gas prices, which have triggered fiscal austerity, and mid-term political risk factors including dissatisfaction over issues such as crime and corruption. Notwithstanding this, the index of consumer confidence compiled by the national statistics institute (base year 2003 = 100) rose from 84.5 in January 2014 to 91.1 in January 3015 (+7.8%) and to 92.5 in January 2016 (+1.6%). The index fell, however, on a year-on-year basis in the three months to April 2016, ending that month at 88.9 (down www.ftconfidentialresearch.com

Chapter 3 | mexico

by 2.6% on the year-ago level).6 It is worth noting that in 2015 and 2016 the traditional link between consumer confidence and sales has weakened: for much of 2015 sales continued to grow at faster rates than confidence indicators.

34%

Expected rise in luxury goods sales in Mexico by 2019

Despite sluggish growth of the overall economy, the luxury goods sector has been expanding at a much faster rate. This is attributed to various factors. One is that the distribution of income remains unequal, which means that the urban middle and upper classes gain a comparatively greater share of income growth. In the four years to 2013, the luxury goods market is estimated to have averaged a 12% CAGR.7 Other factors cited include the rising number of women in work, and the growth of so-called Dinkies (couples with ‘double incomes and no kids’).8 A study by Wealthinsight identified Mexico City, along with Istanbul and Mumbai, as one of the top three emerging-market cities for luxury brands. The study said the city had over 60,000 HNWIs (high net worth individuals) in 2014, and that their number was expected to grow at a CAGR of 7.7% to 2019.9 Another study by Euromonitor ranked Mexico among the top 10 growth markets for luxury goods, with sales rising by 34% to 2019.10 The Mexican and Brazilian luxury markets are often compared. One significant difference is that because of high import tariffs and taxes, a proportion of Brazilian luxury goods consumers exposed to luxury brands at home will actually wait to make their purchases when travelling overseas to benefit from duty free rates. Thus many Brazilians buy luxury goods when travelling to the US or Europe. Mexicans have in the past done the same thing, but with lower import taxes Mexicans are increasingly purchasing luxury items at home, often using credit facilities, including from department stores like Palacio de Hierro and Liverpool, or directly from city-centre boutiques. On some estimates, the value of the Mexican luxury goods market reached $14bn in 2014, overtaking Brazil ($13bn) for the first time.11 According to Brenda Díaz de la Vega, editor of Harper’s Bazaar Mexico & Latin America, “Brazilian sales are huge, but the profit isn’t huge due to high duties and taxes to import the collections. It’s also more of an image-building market, because brands know that Brazilians are shopping in Europe and the US, so they might not close the transactions at home, but they are definitely impulse buying them there. In Mexico, it’s less expensive to import so the profits that can be made are bigger.”

FTCR Consumer Survey of Q116 6. http://www.inegi.org.mx/sistemas/ bie/cuadrosestadisticos/GeneraCuadro. aspx?s=est&nc=479&c=24034 7. Bain & Co, cited here: http:// luxurysociety.com/articles/2014/03/ mexico-is-latin-americas-biggestluxury-goods-market 8. http://luxurysociety.com/ articles/2014/03/mexico-is-latinamericas-biggest-luxury-goods-market 9. https://timetric.com/info/mediacenter/expert-insight/2015/10/27/riseluxury-brands-emerging-market-cities/ 10. http://www.ft.com/cms/s/0/ d20b4faa-57d5-11e5-a28b50226830d644.html#axzz4953vi7Km 11. http://www.banderasnews. com/1506/nr-mexico-leads-latamluxury-goods-sales.htm 12. http://www.sbs.com.au/news/ article/2016/05/04/mexico-enterstop-10-tourist-destinations

According to FTCR Q116 consumer surveys, 5.3% of the population (equivalent to around 6.5m people) were in households with monthly incomes in excess of MXN53,000 ($2,890). This segment was, as might be expected, generally more optimistic in its outlook than the general population. Roughly two-thirds believed its economic situation was stable or had improved; just under a quarter had bought a car in the preceding three months, more than half had bought electric appliances, two thirds had travelled in Mexico, and a quarter had travelled abroad. Almost a third had used mobile banking apps to carry out transactions in excess of their net monthly income, suggesting this group was confident in the use of credit.

Key tourism trends

Mexico is a significant tourism destination in global terms. According to the UN World Tourism organisation (UNWTO), the country re-entered the ranking of the top ten global destinations in 2015, taking 9th position with a total of 32.1m visitors. Foreign currency earnings from international visitors rose by 7.7% to $17.45bn, ranking the country 17th in the world (up from 22nd in 2014).12 The growth in tourism has continued despite localised concerns over poor levels of security and threats of violence attributed to organised crime in some parts of the country. Although some crime metrics, such as the homicide rate, have improved in recent years, progress has been mixed. Security levels are nevertheless much higher in the main urban www.ftconfidentialresearch.com

Chapter 3 | mexico

FTCR Mexico consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 68.9 43.3 45.3 47.2 55.6 56.3 54.7 54.8 53.9 59.6 58.1 Economic Confidence Index 26.5 19.4 18.5 20.4 20.6 17.9 20.7 18.5 11.6 20.9 16.4 Household Financial Situation Index 41.2 34.4 32.9 35.6 37.0 37.1 39.3 35.2 32.6 38.7 36.1 Inflation Indices Inflation Perceptions Index 62.9 64.2 65.9 67.3 64.4 63.0 62.1 64.2 62.4 64.0 64.4 Inflation Expectations Index 56.8 60.2 59.8 59.3 61.2 59.8 55.5 57.1 57.4 58.2 56.1 Job Prospects Index 45.3 40.8 47.3 52.1 50.6 45.8 50.3 45.8 48.7 50.5 52.8 Buying Intentions Indices Clothes 62.3 62.4 48.2 55.7 59.9 65.9 52.4 55.0 58.2 66.2 52.5 Education 59.7 45.0 48.5 49.3 63.5 45.4 56.5 54.1 60.1 50.9 55.2 Healthcare plans 29.2 30.1 30.6 29.5 32.9 34.2 37.4 32.3 33.1 35.5 34.3 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Mexican economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

centres and most of the seaside resorts (a recent exception however is Acapulco on the Pacific coast, in Guerrero state). Tourisms’ direct contribution to GDP was estimated at 7.0% in 2015, and is projected to rise by 4.0% per annum in 2016-2026. Including indirect effects, tourism’s overall contribution is put at 15.1% of GDP. The direct contribution to employment in 2015 was calculated at 7.5% of the total, or 3.77m jobs. Just over 90% of all inbound and domestic travel and tourism spending was for leisure, with the remainder representing business spending.13 Most tourists visiting the country by air arrive in Mexico City’s international airport (Aeropuerto Internacional Benito Juárez). In 2014 the total number of passengers travelling through Mexico’s airports exceeded 100m for the first time. In 2015, passenger throughput in Mexico City rose by 12.2% to 38.43m. It was followed in traffic by Cancún (19.59m passengers), Guadalajara (9.76m passengers) and Monterrey (8.46m passengers).14 A major $10bn-plus project is underway with UK architecture firm Foster & Partners to build a new Mexico City airport, which is expected to be operational from 2020 onwards.15

Luxury retailing in Mexico

Luxury brands are sold through department store/retail chains, particularly Palacio de Hierro, which in 2015 completed a $300m upgrade of its flagship department store in Polanco, Mexico City. Palacio de Hierro has been operating at the top end of the Mexican market for over 125 years. The Liverpool department store is also present in the luxury sector, but its focus is more clearly mid-market. 13. https://www.wttc.org/-/media/ files/reports/economic%20impact%20 research/countries%202015/ mexico2015.pdf 14. http://www.sct.gob.mx/ transporte-y-medicina-preventiva/ aeronautica-civil/estadisticas/ estadistica-operacional-deaeropuertos-airports-operationalstatistics/ 15. http://www.infrastructuremexico. com/2016/03/28/an-ambitiousbeginning-for-the-new-mexico-cityinternational-airport-naicm/

Palacio de Hierro has eight main outlets in Mexico City: Centro, Coyoacán, Durango, Interlomas, Perisur, Polanco, Santa Fé, and Satélite. It also has outlets in five other cities – Guadalajara, Querétaro, Puebla, Monterrey, and Villahermosa. There are three boutique stores in Acapulco, Cancún and Acoxpa. At the Latin American level, the FT Confidential research Q315 Consumer Survey found signs that customers were adapting to harder times, reducing expenditure on clothing and “downshifting” their purchases, showing greater interest in cash and carry and discounters. However, much of this was driven by the recession in Brazil, and does not necessarily apply in the same degree to Mexico, where GDP growth has remained positive and leisure spending has continued to rise. The proportion of Mexicans spending 11% or more of household income on leisure activities rose by nearly a percentage point to 14.2%, www.ftconfidentialresearch.com

Chapter 3 | mexico

almost double the level of two years earlier.16 Palacio de Hierro executive Carlos Salcido, referring to the luxury retail sector, noted in May 2016: “In the last 20 years we’ve had double digit growth every year. We can see luxury growing and growing. The top income bracket is growing but you have a middle class that is earning more and starting to come in.”17

The top income bracket is growing but you have a middle class that is earning more and starting to come in

Mexico has perhaps gone furthest in the region towards adopting US shopping mall culture: in Q315 there were a total of 592 malls in operation in the country (the largest number in Latin America, and ahead of Brazil’s 481). With a further 13 new malls planned, the total number is expected to exceed 600 in 2016. According to the International Council of Shopping Centres (ICSC), investment in new shopping malls totalled MXN18bn ($1bn) in 2015, and was set to create 30,000 new jobs. Regional retail industry analysts attending an April 2016 conference in Cancún said that despite the slowdown in Latin American growth rates, the continuous growth of the middle class and surging disposable income was sustaining development momentum. It was estimated that 830 new retail centres would be opened across Latin America in the

Situation of wealthy households relative to Q115 Better

Unchanged

Worse

26.9% 38.5%

34.6% Source: FT Confidential Research

Did you purchase the following in the last three months? Did you purchase the following in the last three months? Yes

100

% of respondents

80 60 40 20 16. FTCR LatAm report October 22 2015 17. http://www.eldailypost.com/ news/2016/01/the-mexican-paradoxrampant-poverty-soaring-luxurysales-2/

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

Chapter 3 | mexico

period running up to 2025, of which 300 were already under construction.18 A key Mexican mall is the Centro Comercial Santa Fé, which houses no less than three department stores: Palacio de Hierro, Liverpool, and Saks Fifth Avenue. Other important malls in the capital include Multi Plaza Aragón, Plaza Satélite, Forum Buenavista, and Perisur.

Outside of Mexico City, other key urban centres for retail include Guadalajara, Monterrey and Querétaro

A trend since 2013 has been that some luxury brands are opening their own stores or boutiques in upmarket areas such as Polanco. Outside of Mexico City, other key urban centres for retail include Guadalajara, Monterrey and Querétaro. Luxury brands present in Mexico include Prada, Dolce & Gabbana, Burberry, Michael Kors, Louis Vuitton, Tiffany & Co.

A key sales channel: El Palacio de Hierro

The Palacio de Hierro department store is a dominant force in the distribution of luxury brands in Mexico. Established in the 1880s-1890s, the company was deliberately modelled on the top US and European stores of the late nineteenth century, such as Harrods in London and Saks Fifth Avenue in New York. Palacio de Hierro now forms part of Grupo Bal, a conglomerate which, apart from retail, also has interests in insurance and mining. There are over a dozen Palacio outlets in Mexico City, including eight stores, one “Boutique Palacio” and two “Casas Palacio”. It also has outlets in other cities including Puebla, Guadalajara, Acapulco, Cancún, Villahermosa, Querétaro and Veracruz. According to its published accounts, Palacio de Hierro reported a sharp 63.7% rise in Q315 Ebitda to MXN435.5m with net earnings soaring to MXN111.6m, up from only MXN17m in

Growth rates Annualised to 2016 2015

2016E

2026F

Visitor exports Domestic spending on tourism Internal tourism consumption Purchases by tourism providers Direct contribution of travel and tourism to GDP Capital investment Imported goods from indirect spending Total contribution of travel and tourism to GDP Expenditure on outbound travel 18. http://www.eluniversal.com.mx/ articulo/cartera/economia/2015/08/24/ estiman-un-crecimiento-de-15-decentros-comerciales

15 %

Sources: WTTC, Travel & Tourism Economic Impact 2016, Mexico www.ftconfidentialresearch.com

Chapter 3 | mexico

the same year-earlier period. For the first nine months of 2015, net earnings rose 18% to MXN5.753bn.19

55% 45% 55% of luxury buyers in Mexico are male, 45% female

While Palacio de Hierro is the key player in the luxury sector, the mid-scale Liverpool chain is much larger, with 19 department stores, 109 stores, and six duty free outlets. Including the Fábricas de Francia chain, Liverpool has an estimated 355,000 sq metres of selling space in 57 cities.20

Mexico’s top malls

The two top malls in Mexico by floor size are Centro Comercial Santa Fé and Toreo Parque Central, both in Mexico City and both with approximately 70,000 sq metres of shop floor space. They are followed by Multiplaza Aragón in Estado de México (60,670 sq metres), Forum Buenavista (37,250 sq metres), Plaza Satélite (34,000 sq metres) and Andares in Guadalajara (30,900 sq metres). Centro Comercial Santa Fé was built in 1993 and designed to house three anchor department stores: Palacio de Hierro, Liverpool, and Sears. Following expansion in 2013, it now houses 476 retail units and 23 film theatres. Toreo Parque Central opened in 2014 without an anchor department store but has attracted a range of tenants including America Eagle, Old Navy, and Forever 21. It is part of a mixed development that also includes offices and a hotel.

Mexico Luxury Insights

The Mexican consumer of luxury jewellery, watches and accessories is thriving and prosperous. He (55% of buyers are male, 45% female) is likely to be married, to be aged between 35 and 55, and to be found in the malls and up-scale shopping districts of the country’s main cities, as well as in Miami malls and shopping outlets. While the male buyer is still predominant, professional women are a growing segment; so too are young professional couples without children. In general terms, market penetration for luxury goods in Latin America is still low. But it is growing, and Mexico is leading the way. The value of the global market in luxury goods is estimated at $328bn in 2016. Despite having 8.5% of the world’s population, Latin America is expected this year to have only a 5.9% share of the luxury goods market (estimated sales of $19.3bn). In the long term, as Latin America’s middle class continues to grow and per capita incomes rise, that gap will narrow. For some countries however, high import taxes on luxury goods have held back domestic sales growth. Consumers in consequence have tended to purchase luxury goods duty-free when travelling to the US or Europe. This is nowadays much less the case in Mexico: because of comparatively low taxes, sales in the domestic market have been healthy, even though some consumers still prefer to make their purchases in Miami or other international travel destinations. Mexican luxury goods sales (including clothing and footwear) grew by an estimated 6.1% to $5.9bn in 2015. Mexico is predicted to be one of the world’s top ten fastest-growing luxury goods markets in the five years to 2019.

19. http://www.tabascohoy. com/nota/277605/ tiene-palacio-de-hierro-trimestre-record 20. http://www.pulso.cl/ noticia/empresa---mercado/ internacional/2015/11/72-74340-9liverpool-el-gigante-del-retail-que-buscaconquistar-latinoamerica.shtml

Brand recognition is a key driver of consumer behaviour. The Mexican consumer is looking for the big global luxury brands, such as Rolex, Cartier, Van Cleef, Hermès, Dior. He or she is very fashion-aware. A unique and personal shopping journey is also important and helps build loyalty – complimentary gifts, champagne, a parking service, an enjoyable and non-pressured environment to consider a purchase, all form part of a positive experience and are likely to bring the customers back again on repeat visits. Of all the Latin American countries Mexico is closest to US retail trends in two important respects: first it has a well developed shopping mall network and culture, and second it has high internet and social media usage. Luxury goods are not yet sold online in any significant volumes, but having a strong online presence is critical to projecting the brand. Mexico may well follow the pattern emerging in the US, where online channels now account for 7.6% of luxury spending by consumers but a much higher percentage of customers – 85% – say they www.ftconfidentialresearch.com

Chapter 3 | mexico

Mexico: Key developments to watch As consumer credit expands, so too will the luxury good market. The digital luxury goods consumer is not big yet in Mexico, but digital consumers are coming. A recent Credit Suisse survey suggests that 54% of the population is planning to acquire a smartphone. A survey of the Mexican digital consumer by Territorio Creativo (TC) suggests that wealthier consumers favour international brands more than local ones (a total of 80% in the fashion and clothing sector, 60% in jewellery). Online luxury sales remain tiny – about 1.1% of the total, according

to TC. But everything indicates that number is going to grow, and that online content is increasingly influencing offline sales. About half of the population is online, with connectivity rates highest among the top 25% by income. TC says that 80% of smartphone owners watch videos. A majority of consumers (58%) are still finding out about new brands through traditional radio and TV advertising, but web advertising is already in second place (reaching 50% of consumers). Social networks have become particularly influential for

brand choice (cited by 53% of respondents). Víctor Alvariño of L’Oreal has said that the company is seeking “digital transformation” by focusing on four areas: • CRM (customer relationship management); • social media; • digital marketing; and • e-commerce. Other companies, such as Lancôme, are developing micro-segmentation, for example by targeting their Mexican Facebook followers by age and geography, so as to be able to send tailored marketing messages.

use a mobile device to “window shop” merchandise before purchasing through another channel such as visiting a store. After-sales service is also critical. An average of 25% of sales can be accounted for by repeat business. Concerns over levels of crime and personal security are an important factor in Mexico, but not a major inhibitor of sales. This is because most sales are a) in the bigger cities or resorts such as Mexico City, Guadalajara, Monterrey, and Cancún where security is good b) in secure malls and/or c) in upmarket streets or districts such as Polanco in Mexico City, which are also well policed. Price is not the major factor compared to others, such as brand recognition and the quality of the product. However, payment terms can be relevant. While the wealthier consumer will pay outright, there is an important and growing aspirational market that will buy luxury goods using generous credit facilities offered by Mexican department stores such as El Palacio de Hierro and Puerto de Liverpool. For some consumers, these credit terms make buying luxury items in Mexico much more financially accessible than buying them duty free in Miami. One executive told us: “as the middle classes get bigger and more people buy luxury products, the upper middle class is seeking out more upscale products to differentiate itself from those bought by what it sees as the nouveaux riche.” Clothing and footwear sales dominate the Mexican luxury sector, with an estimated 40% of total sales, followed by watches and jewellery (27%), accessories (18%), wines and spirits (8%), and beauty products (6%). The outlook for watches and jewellery sales is strongly positive in the medium to long term, while modestly positive in the shorter term. Shortterm growth constraints include sluggish GDP growth and the weakness of the Mexican peso, which has raised domestic luxury goods prices. n n n

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Chapter 4 | colombia

4. Colombia Colombia is emerging as a promising luxury retail market, a fact that has sometimes been overshadowed by the country’s headline-grabbing history of domestic political conflict, international drug trafficking, and criminal violence. While those negative aspects are part of recent history, so too is another perhaps less publicised reality: that the country has a diversified and strong economy, that growth has exceeded the Latin American average, and that there is an emerging group of discerning middle class and wealthy consumers able to drive demand for luxury products. • Despite the downturn in global oil and gas prices, Colombia, a hydrocarbons exporter, is proving resilient. The IMF forecasts that GDP growth will drop to 2.5% in 2016, before recovering back to 3.0% in 2017. • A peace settlement with rebel guerrilla forces has been under negotiation since late 2012 and despite delays is expected during the course of 2016. While the benefits will take time to feed through, they could be transformational, lifting long-term economic growth by as much as two percentage points per annum. • Investors have been enthusiastic about Colombia for a number of years: despite a degree of caution caused by lower oil prices and concern over fiscal adjustment, they remain fundamentally upbeat about the country’s prospects. • Colombia has a healthy retail sector, which is experiencing strong rates of growth. It is,

COLOMBIA: EMERGING WEALTH TO DRIVE LUXURY DEMAND

RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

OF THE WORLD’S 75 TOP LUXURY COMPANIES HAD ESTABLISHED A PRESENCE IN COLOMBIA BY MID 2015,

Bogotá

INCLUDING:

SPENDING INDEX

YoY GDP CHANGE

1. Domestic travel

43.1

2. Electric appliances

47.1

3. International travel

19.6

4. Car

5.9

5. Property

9.6

HOUSEHOLD FINANCIAL SITUATION INDEX 60

2Q15

3.0% 50

3Q15 4Q15 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

3.3% 3.2%

40 30 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

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Chapter 4 | colombia

however, a sophisticated and competitive market and not all the foreign brands that have flocked to the country in recent years have succeeded.

4.5%

Average annual Colombian GDP growth in the 15 years to 2014, compared to 3.9% for the rest of Latin America

• The natural market for luxury goods is formed by around 5-6% of the population represented by 2-3m people, depending on the criteria used. Within this sector, there are some 50,000 high net worth individuals. • There have been significant social changes over the last 5-6 years, which are helping the luxury goods sector. The most important change is that large parts of the country have become safer. Consumers are less concerned that displays of wealth may attract the attention of extortionists and kidnappers. Negative views of luxury goods – as being ostentatious and vulgar – are being replaced by more positive ones linked to concepts of quality and aspiration. • Upscale shopping malls in fashionable city areas remain one of the main sales and distribution channels.

Key economic trends

Notable Despite the downsides of a long-running internal political and military conflict, Colombia has a strong reputation for stable macro-economic management, a market friendly policy posture, and an open economy. It is a member of the outward-looking Pacific Alliance group (along with neighbours Chile, Peru, and Mexico). In the 15 years to 2014, average annual Colombian GDP growth was 4.5%, compared to 3.9% for the rest of Latin America. Following the most recent Article IV consultation with the IMF in May 2016, the Fund expressed a positive opinion about the management of the Colombian economy. It commented: “Colombia showed strong resilience to changing global conditions in 2015. Despite facing a terms-of-trade shock larger than most of its peers, Colombia posted one of the highest growth rates in the region (3.1%) and achieved important social gains with improvements in poverty reduction, income inequality and financial inclusion.” The IMF is projecting that real annual GDP growth will slow to 2.5% in 2016, before picking up speed again in 2017 to reach 3.0%. Inflation is forecast at 7.3% in 2016, falling to 3.4% in 2017. Average import tariffs are calculated at 4.4%, compared to 6% in Argentina and 8% in Brazil.1 Colombia also scores well in terms of limiting bureaucracy and red tape: it was the top-ranked Latin American country in the World Bank’s 2015 Ease of Doing Business index.

Key metrics on Colombia

1. https://www.knowledgeatwharton. com.es/article/el-despegue-de-laindustria-de-la-moda-de-colombia/

Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) 3.0 3.3 3.2 3.1 2.5 3.2 Gross fixed investment YoY change (%) 1.9 0.5 0.0 2.8 2.2 3.6 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 28.3 28.3 27.7 26.8 26.7 – General government spending (% GDP) 28.3 29.2 29.5 29.9 29.7 – General government fiscal balance (% GDP) 0.0 -0.9 -1.8 -3.1 -3.0 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) 7.5 7.6 8.0 6.8 5.1 3.5 Unemployment (%) 8.6 11.9 10.0 8.9 – – Industrial production YoY change (%) 8.2 – – 0.9 3.7 3.5 Retail sales YoY change (%) 5.5 6.9 – 6.5 – – Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

www.ftconfidentialresearch.com

Chapter 4 | colombia

Annual inward FDI could triple from the current $12bn to $36bn as a result of a peace deal

According to a study by one of the government’s planning departments, ending the country’s long internal conflict could raise the long term potential economic growth rate from what it calculates as the current level of 4.0% to 5.9% – nearly two percentage points. The report also predicts that annual inward Foreign Direct Investment (FDI) could triple from the current $12bn to $36bn as a result of a peace deal. In addition, improved consumer confidence and stronger exports would also play a part in strengthening the economy’s post-conflict performance.2 Tourism is particularly likely to receive a boost. Colombia has a diversified economy. While its reliance on the oil and gas sector has been a negative during the current international oil price slump, the country has mineral wealth, a strong banking and finance sector, well developed manufacturing (particularly the textile sector) and a big potential in agriculture, agro-industry and services such as tourism. Investor sentiment Total returns from the JP Morgan EMBI+ for Colombia’s bond market were 10.4% from the beginning of the year to 19 April. The Colombian stock exchange IGBC index had risen by 17.8% over the same period. The Colombian peso had weakened by 8.2% against the US dollar.3 In Q116, only 15% of institutional investors surveyed by FTCR were overweight to the Colombian stock market. Another 5% were equal weight. Of the remainder, 70% were underweight, and 10% did not take a position on the local market. The number of investors who are underweight has grown over the last year (up from 50% in Q215).4

2. http://www.reuters.com/article/ colombia-economy-peaceidUSL1N13Y1UQ20151209 3. FTCR LatAm report April 21 2016 4. FTCR LatAm report March 24 2016 5. CBRE Latin America Investor Intentions Survey, May 2 2016

In early 2016, the commercial real estate consultancy group CBRE interviewed 31 leading institutional investors that focus on the Americas. Only 3% cited Colombia as the country that is most attractive for making property purchases in 2016, which placed it behind Brazil (29%), the US (23%), Chile (23%), and Mexico (13%). The most attractive metropolitan markets cited included São Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami.5 Key consumer trends Colombia is a promising retail market, but also one that poses challenges to new entrants. In early 2016, trade reports indicated a number of new brands were poised to enter the local industry. They included Spanish brands Foque y Gocco (childrens’ clothing), Diez Euros (a value franchise chain), Protocolo (men’s clothing) and Doopies

FTCR Colombia consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 68.8 55.8 55.3 53.2 57.9 64.3 62.7 60.1 58.2 62.7 55.8 Economic Confidence Index 41.4 38.7 40.5 35.7 41.0 41.6 36.9 33.5 27.5 31.8 14.3 Household Financial Situation Index 55.6 52.9 54.5 52.8 55.3 54.6 52.3 51.8 48.9 52.1 39.5 Inflation Indices Inflation Perceptions Index 65.1 64.7 63.9 67.0 63.0 62.8 63.6 65.4 66.5 66.1 71.1 Inflation Expectations Index 52.0 55.0 52.8 52.6 53.9 56.3 52.5 54.5 56.8 59.4 58.8 Job Prospects Index 48.7 54.1 53.0 51.6 55.0 55.1 55.2 52.1 47.2 53.0 48.3 Buying Intentions Indices Clothes 55.8 67.0 49.9 54.6 56.5 70.6 50.8 55.6 52.8 68.7 46.4 Education 49.4 52.3 54.7 49.5 52.5 50.5 57.3 52.8 49.0 52.3 54.4 Healthcare plans 29.7 33.8 32.3 31.3 36.6 34.8 37.4 34.6 33.3 31.9 35.5 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Colombian economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

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Chapter 4 | colombia

& Coffee (franchised coffee and cake shops). US brands reportedly planning entry to the Colombian market included Applebee’s (restaurants), Margaritaville (casual dining) and Ihop (breakfasts/pancakes). French brands Decathlon (fashion and sportswear) and Petite Bateau (clothing) were also assessing a Colombian presence.

US brands reportedly planning entry to the Colombian market included Applebee’s, Margaritaville and Ihop

Retail analyst Leopoldo Vargas has pointed out some of the risks: noting that in recent years at least 10 brands came to Colombia, lost money, and eventually withdrew, downsized, or had to rethink the terms of their operations.6 The list includes La Polar, Chile’s fourth-largest general retailer, Ripley (also from Chile) and Mango (Spain). La Polar withdrew after four years in 2014, citing poor profitability and high rents: local analysts say its choice of location for its outlets was ill-advised, and it was affected also by allegations of financial improprieties in its store credit operations in the parent group back in Chile. Ripley, a department store/shopping mall company with over 50 outlets in Chile that also has a presence in Peru, opened six outlets in Bogotá and Medellín but announced its withdrawal in 2016 after three years. Ripley said its financial results were not good enough to justify remaining in Colombia. Local analysts again say that its stores were poorly located and that it did not invest enough in marketin. Also, it failed to secure a local

Situation of wealthy households relative to Q115 Better

Unchanged

Worse

20% 32%

48%

Source: FT Confidential Research

Didyou youpurchase purchasethe thefollowing followingin inthe thelast lastthree threemonths? months? Did Yes

100

% of respondents

80 60 40 20 6. http://www.dinero.com/edicionimpresa/negocios/articulo/ las-nuevas-marcas-internacionalesde-los-centros-comercialescolombianos/223568

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

Chapter 4 | colombia

partner, and furthermore, it was hit by foreign currency losses caused by the depreciation of the Colombian peso against the US dollar. Four of every of five Colombian respondents believed their economic situation was either stable or improving relative to a year earlier

Finally Barcelona-based Mango found itself involved in legal disputes with its original partner, Grupo Uribe, and announced the closure of 12 our of 23 outlets. Mango also had dealings with Grupo Wisa, the duty free and retail group, which found itself engulfed by controversy in April 2016 after the US Department of the Treasury listed members of the Waked family, which has a controlling interest in the group, as â&#x20AC;&#x153;Specially Designated Narcotics Traffickersâ&#x20AC;? (known as SDNTs).7 Other brands that have had to withdraw or downscale include Bulgari (see below) and Paris Hilton.

FTCR Consumer Survey of Q116

Based on an FTCR survey carried out in Q116, 5.1% of the Colombian population (about 2.4m people) were earning over COP8.3m ($2,742) a month. This group was optimistic in its outlook. Four of every of five believed their economic situation was either stable or improving relative to a year earlier. In the preceding three months, around 6% of this wealthy group had bought a motor car, just under 10% had bought property, almost half had bought electrical appliances, one in five had travelled overseas, and two in five had travelled within Colombia. Of those using mobile banking apps, just under 14% had used them to carry out a transaction in excess of their monthly income, a sign of self confidence in their ability to borrow and repay.8

Key tourism trends

The move towards a peace settlement in the country, coupled with the recent depreciation of the Colombian peso, is seen as triggering strong inward tourism growth. The direct

Growth rates Annualised to 2016 2015

2016E

2026F

Visitor exports Domestic spending on tourism Internal tourism consumption Purchases by tourism providers Direct contribution of travel and tourism to GDP Capital investment Imported goods from indirect spending Total contribution of travel and tourism to GDP 7. http://www.elcolombiano.com/ negocios/empresas/los-desaciertosde-la-polar-ripley-y-mango-encolombia-AX3660839 8. FTCR Consumer Survey Q116

Expenditure on outbound travel -5

% Sources: WTTC, Travel & Tourism Economic Impact 2016, Colombia www.ftconfidentialresearch.com

Chapter 4 | colombia

contribution of tourism to GDP in 2015 was 2.0% and the total contribution, including indirect effects, was 6.1%. Over the ten years to 2026 both the direct and total values of tourism are predicted to grow by an average of 3.8% per annum. The direct contribution to employment is 556,000 jobs or 2.5% of total employment in the country.

12.2% YoY increase in foreign visitors to Colombia in 2015

President Juan Manuel Santos has said that tourism is the industry that will benefit most from a peace settlement, and that the hotels and restaurants sector has been the third largest recipient of inward foreign direct investment. In September 2015, the president said that hotel projects in which construction is initiated before December 31 2017 will qualify for a 30-year income tax exemption. The president’s office said that this tax exemption would help create 300,000 new jobs in the tourism industry by 2018, particularly in key tourist destinations such as Cartagena, the Caribbean island of San Andrés, Santa Marta, and the Coffee Zone. Aviation and transport links would be improved, with plans to modernise 58 airports in the country and to develop the road network.9 According to official figures, more than 2.5m foreigners visited Colombia in 2015, up by 12.2% on the previous year. Numbers were boosted by an upsurge in US visitors, who were encouraged by a favourable exchange rate. Almost half the visitors stayed in Bogotá, with the cities of Medellín and Cali also proving popular. Just over three quarters of visitors (76%) said they were on holiday, with 6.6% citing business, and the remainder citing other motives for travel.10

Luxury retailing in Colombia

The combination of economic growth and rising wealth, together with the prospect of a peace agreement ending decades of conflict, have been making Colombia more attractive to luxury retailers in recent years. According to one analysis, by mid 2015, 19 of the world’s 75 top luxury companies (as listed by Deloitte) had established a presence in Colombia. The 19 included LVMH (Louis Vuitton, Loewe), Compagnie Financiere Richemont (Cartier), L’Oréal (Kiehl), Longchamp, Carolina Herrera, Swarovski, Giorgio Armani, Ermenegildo Zegna and Max Mara.11

9. http://colombiareports.com/ santos-hopes-peace-will-boost-tourism/ 10. http://colombiareports.com/ colombia-received-12-more-foreignvisitors-in-2015/

Wealthy individuals are key consumers of luxury goods in Colombia: there are various measures of the size of this market. According to local estimates, in the four years to 2016 approximately 3.6m Colombians emerged from poverty to join the middle class, currently estimated to constitute 15m, of the country’s total population of just over 48m. Using a definition of socio-economic group A as those with incomes that are 200% or more above the national average, Euromonitor has calculated Colombia’s wealthy as 2.9m people in 2015, a number projected to rise to 3.25m in 2018 – roughly 6% of the total population. Within socio-economic group A, Euromonitor said there were over 50,000 households earning the equivalent of $300,000 per annum or more.12 Credit Suisse estimates that a similar number – 51,000 – of Colombians are millionaires – people with $1m available to invest (excluding the value of their homes or mortgage debt). A separate measure by Wealth X and UBS suggested that in 2016 there were 670 Colombians with more than $30m of personal asserts available to invest.13

12. http://www.dinero.com/edicionimpresa/informe-especial/articulo/ el-estrato-esta-moda-colombia/204151

Awareness of the high net wealth group as a desirable market segment has increased in recent years. CPP Luxury Industry Management calculates that the number of luxury brands offered to these Colombian consumers increased by 30% in the five years to 2013. It estimated that the luxury market was worth $250 in 2013. Euromonitor has a narrower measure of the market ($51.6m in the same year, but limited to clothing, jewellery, footwear, bags and luggage). However, according to the Euromonitor numbers, growth in that year was an explosive 24.6% relative to 2012.

13. http://www.dinero.com/edicionimpresa/informe-especial/articulo/ el-estrato-esta-moda-colombia/204151

In policy terms, the luxury sector received a small impetus in early 2016, when the government approved Law 660, allowing tourists to receive VAT refunds on items

11. http://www.larepublica.co/ en-colombia-están-19-de-las-75firmas-más-lujosas-del-mundo_258911

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Chapter 4 | colombia

purchased in Colombia when they depart from the country. VAT is currently levied at 16%, but under government fiscal plans there is a proposal to increase it to 19% – so the exemption will have a significant impact on the prices of luxury items.14

Colombian emeralds are attracting growing interest from China

In cultural terms, some analysts say that the Colombian luxury goods market is beginning to mature. According to Marco Pastrana, president of Audi Colombia, luxury goods have in the past been associated with ostentation and excess, and have been linked to a “mafia” criminal culture, but are currently been redefined around perceptions of quality and good taste, and values linked to aspiration and a strong work ethic. Some analysts also say that the country’s falling levels of violence and the prospect of a peace settlement to end Colombia’s long-running internal conflict is playing an important role. José Miguel Echenique of German-owned Engel and Volckers estate agency says the recent boom in the luxury housing market reflects an important change of mood among the wealthy “Before, they didn’t dare live in high quality homes, drive premium cars, or wear costly jewellery, because they feared being victims of extortion or kidnapping. Now they feel safer, and that has benefited the luxury industry”, he says.15 Some argue that there was a specific turning point for the luxury sector in Colombia. Kelly Tamaras, editor of Vogue Mexico and Latin America, commented: “Roughly around 2009 or 2010 there was a change in thinking about Colombia with a shift to a more optimistic view. Around that time the country became safer. It was like the conquest of the Wild West. Apart from a few pioneers such as Louis Vuitton, Max Mara and Hugo Boss, at that point Colombia’s potential for investors and international luxury brands was largely unexploited”. An important factor is that in the textiles and clothing sector, Colombia has a very well developed local industry and established fashion design talents – something that makes it more difficult for incoming luxury brands to capture market share. This may explain why some clothing brands have found it a difficult market to crack. To some extent, the same is said of jewellery and precious stones, where locally produced products compete with international brands such as Bulgari, Cartier, and Tiffany & Co. Colombian emeralds, for example, are attracting growing interest from China. Some retail analysts moot a fuzzy line in the minds of consumers between locally produced “premium” products and the international “luxury” brands. It has also been argued that the Colombian luxury goods consumer is selective in his or her purchases. The typical consumer is cosmopolitan, travelling regularly to the US and Europe, aware of the effects of currency fluctuations on prices, and in that sense quite price sensitive.16

Top mall – Bogotá’s Centro Andino

14. http://co.fashionmag.com/news/ Colombia-devolvera-el-IVA-a-turistasen-compras-de-moda-y-lujo,687845. html 15. http://www.dinero.com/ edicion-impresa/informe-especial/ articulo/el-estrato-esta-modacolombia/204151 16. http:// co.fashionmag.com/news/Cifrasen-descenso-para-el-lujo-enColombia,684636.html

Retail analysts agree that the top shopping mall for luxury brands in Colombia is the Centro Andino in the fashionable Zona Rosa area of Bogotá. This mall, with 230 retail units, was opened in the 1990s – and conceived as a safe and attractive upscale shopping destination for a city suffering from poor planning and continuing concerns over crime. FTCR research shows that 73.2% of Colombians visit malls to shop for clothes, compared to a regional average of 66.4%. Jorge Lizan of locally based Lizan Retail Advisors says that Centro Andino has been very successful in attracting key international brands and placing them all under one roof. “Latin American shoppers are very demanding today and are increasingly endorsing global brands as they travel more widely and want access to different products,” he says. “[And] the developers are doing what the customers want, supporting the big brands and bringing them to their malls.” Brands present in Centro Andino include Cartier, Nespresso, Tiffany & Co, Dolce & Gabanna, and Burberry. Others have opened retail stores in the immediate area around the mall, including the Zara clothing chain (owned by Inditex of Spain). Chilean development companies have been particularly successful in the shopping mall www.ftconfidentialresearch.com

Chapter 4 | colombia

colombia: Key developments to watch Foreign investment in shopping mall development in Colombia is on the increase. Chilean retail chain Parque Arauco has announced it will invest $308m to build four new malls in the country between now and 2017. Its existing 72,000 sq metres of floor space in malls in Pereira

and Bucaramanga will be boosted to close to 200,000 sq metres with the addition of new malls in Bogotá, Neiva, Valledupar, and Sopó. Parque Arauco’s first quarter Colombian revenues grew by 17% year-on-year, compared to a 1% contraction in Peru and a 5% gain in

its home market in Chile. Parque Arauco executives say there is plenty of room to expand shopping mall penetration in Colombia, which has average per capita shopping mall space of only 0.18 sq metres, compared to 0.63 sq metres in Mexico City of 4.66 sq metres in Los Angeles.

business in Colombia. They include Parque Arauco, which opened ParqueArboleda, a 34,000 sq metre mall in the Colombian city of Pereira in 2008, and went on to open Parque Caracoli with 30,000 sq metres of retail space in Bucaramanga. Parque Arauco is reportedly investing $308m to open four new malls in the cities of Bogotá, Neiva, Valledupar, and Sopó.17 Another Chilean company, Cencosud, which operates various multibrand retail formats, is also an important player in Colombia (it acquired Carrefour Colombia in 2012).

Colombia luxury insights

The typical Colombian consumer of jewellery, watches and accessories is cosmopolitan and well travelled, and everything indicates that a significant proportion of his or her purchases are made overseas. Miami-based jewellers, for example, have been reporting increased sales to Colombians in Q216 relative to year-earlier levels. While relatively low tax levels support domestic sales, duty free travel-based purchases are still attractive. Brand promotion needs to take into account these different sales channels. Luxury good consumers include top executives and their wives, politicians, aspirational middle managers, and some “self made” individuals. The most popular products are watches, handbags, wallets, and jewellery pieces. There is great potential for luxury brand development in Colombia, but it is not an easy market and a lot of work is required to correctly analyse the market opportunities for individual brands. One problem is that the shopping mall space on offer for luxury brands is comparatively expensive and of relatively low quality compared to other regional markets. Meanwhile, existing retail sales channels are fragmented. Although improving security across the country has driven a revival in luxury sales, consumers still worry about crime and the malls are perceived as more secure environments. While the malls are spreading and improving, they are starting from a low base, and it will take time before there are more of comparable quality to the Centro Comercial Andino in Bogotá, which is the country’s prime “destination mall” for luxury goods.

17. http://www.dinero.com/edicionimpresa/negocios/articulo/nuevoscentros-comerciales-colombia/208518

Colombians are strong collectors of high-end watches, and since 2013 have hosted a well-attended annual trade air for timepieces, known as WatchBO. Watch and jewellery sales are channelled through a large number of small independent jewellery chains. About 92.5% of sales go through these chains: the largest among them is Kevin’s Joyeros which in 2014 had a market share of only 1.9% ($12.5m). Others include Sterling (1.3% market share), Time Square, Joyería Bauer, and Joyería Glauser. The big international brands have had mixed results when setting up their own dedicated outlets. Cartier, TAG Heuer, Bulgari and Tiffany & Co have all opened stores, but have struggled to take market share away from established family-owned jewellers such as Joyería Schumacher, Joyería Bauer or Liévano. Bulgari closed its boutique down in 2015, after achieving annual sales of only $710,000; www.ftconfidentialresearch.com

Chapter 4 | colombia

in the same year, press reports claimed Cartier had sales of $2.7m. Market fundamentals for the luxury sector are positive. Luxury sales are reported to have totalled $667m in 2015, with recent annual percentage growth rates often in double digits.18 The market can be broadly segmented between the aspirational middle classes (it is calculated that over the last decade around 12m Colombians have joined the middle class) and high net worth individuals. One estimate is that 4% of the population or 1.9m people are high net worth individuals (HNWIs) earning over $250,000.19

18. http://www.elcolombiano.com/ negocios/empresas/bvlgari-cierrasu-boutique-en-colombia-por-crisiseconomica-XB3982990 19. http://co.fashionmag.com/news/ Cifras-en-descenso-para-el-lujo-enColombia,684636.html

A range of companies are beginning to target HNWIs more closely, opening up new perspectives for marketing partnerships that may be of interest to luxury brands. Spanish bank BBVA aims to have 7,500 premium banking users by the end of 2016, to whom it is offering a differentiated service, specialised financial advice, and non-financial benefits (such as access to sporting events, international investments, and global health coverage). Banco de BogotĂĄ has 13 special premium banking branches. Sources in TAG Heuer, which has two retail outlets, one in BogotĂĄ and another in MedellĂn, say its watch sales have been dynamic and that it has entered into local marketing partnerships with Porsche and regional airline Avianca. n n n

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Chapter 5 | peru

5. Peru Peru’s approximately 409,000 wealthier households have some concerns about the state of the economy, but expectations are improving following the election on June 5 of the US-trained orthodox economist, Pedro Pablo Kuczynski, an experienced technocrat who as finance and then prime minister helped steer the country back towards economic stability in the early 2000s, followed thereafter by a period of fast growth in the mining-dependent country during the decade-long global commodity boom. Despite a cooling in Peru’s Asian-style growth rates since 2013, consumer confidence remains relatively stable. Higher income households have not suffered overtly from the economic slowdown, and a recovery is now beginning to make itself felt, with first quarter annual real GDP growth of 4.4%. Despite some concerns about wages and unemployment levels, household consumption has been resilient, and Peru’s growing middle class continue to enjoy new affluence, spending more on leisure, eating out and big-ticket items. Peruvians enjoy the mall experience, and there has been rapid growth in the number of shopping centres in the country since 2010 – from 36 to 75 – a trend set to continue to 2020. Tourism (domestic and international) is also on the rise, including to the capital, Lima, which has successfully rebranded itself as a global gastronomy capital and also as a leading new centre in Latin America for corporate tourism. Higher end tourism is also expanding in key destinations like Lima and Cusco. As a result, the luxury market, which for now remains highly concentrated in central Lima, has also posted strong growth of around 10% per annum in recent years. With ample room for expansion still, this double-

PERU: ENJOYING THE MALL EXPERIENCE 2010

No. of shopping malls in Peru 2016

RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

Lima

500 2.5m shops

Peru’s flagship premium shopping mall has over:

SPENDING INDEX 80

50.0

2. Electric appliances

45.0

3. International travel

26.7

4. Car

10.0

5. Property

average monthly footfall

YoY GDP CHANGE

1. Domestic travel

5.0

HOUSEHOLD FINANCIAL SITUATION INDEX 70

2Q15

3.0%

3Q15

2.9%

60 70

50 60

4Q15 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

4.7%

40 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

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Chapter 5 | peru

digit growth is set to continue, with the most optimistic local players touting Lima as a future luxury-shopping destination.

10%

Annual growth of luxury market in Peru in recent years

• There are around 409,000 wealthier households in Peru, on the basis of official data and FTCR’s Q116 survey of consumers.1 • In the past few years, in line with the end of the recent commodity-led boom in the country, the wealthiest households have fretted about the state of the national economy in general and also about employment prospects. Nevertheless, economic confidence and spending has held up. • In particular, wealthier households have been spending on big ticket and non-essential items. Half purchased domestic travel in Q116. Just over a quarter travelled overseas. Nearly half (45%) bought electric appliances. Some 10% said that they had bought a car, while 5% had purchased real estate.2 • Peru’s tourism industry is going from strength to strength, with some 5.7m visitors a year expected within a decade, along with a doubling of annual revenues to over $8bn by 2026.3 The sector is diversifying as it expands, particularly in the capital, Lima, which is now focusing strategically on corporate tourism and the conventions sector – a brand new convention centre, with capacity for almost 10,000, opened in Q415.4 Most international hotel chains are present in central Lima. • Peru’s best-known and flagship premium shopping mall is Jockey Plaza, owned by the Chilean group Altas Cumbres, which has over 500 shops and an average monthly footfall of 2.5m. Currently, the mall is being upgraded and expanded with a $200m investment, as part of which Jockey Plaza will launch a dedicated prestige zone, to which it aims to attract additional prestige premium brands.5

1. FTCR Q116 Survey of LatAm Consumers, April 21 2016 2. FTCR Q116 – Peru data 3. WTTC, Economic Impact 2016, Peru. 4. http://ww2.mincetur.gob.pe/ ministra-magali-silva-ciudad-de-limaprimera-en-ranking-de-turismo-dereuniones-en-la-region/.; http://www. andina.com.pe/agencia/noticia-ciudadlima-es-primera-ranking-turismoreuniones-la-region-613054.aspx 5. http://elcomercio.pe/economia/ negocios/jockey-plaza-quiere-tenerbarrio-lujo-2017-noticia-1854901 6. http://gestion.pe/empresas/aperturanuevas-tiendas-se-va-formandoprimer-boulevard-lujo-peru-2133354 7. http://elcomercio.pe/economia/ dia-1/peru-podria-cuartomercado-sudamericano-cartiernoticia-1882882?ref=flujo_ tags_303787&ft=nota_1&e=titulo; http://elcomercio.pe/economia/ negocios/marcas-lujo-gg-joyeros-louisvuitton-y-burberry-acercan-llegada-alperu-noticia-1797858

• In a bid to accelerate development of the premium luxury sector, efforts are also underway to create a luxury boulevard in Lima. One such effort is being led by the Yes Group (which represents a collection of premium brands in Peru), centred on Avenida del Bosque in the upscale San Isidro district6. Yes Group management reportedly has held talks with companies including Louis Vuitton, Hermés Paris and Cartier7. These three brands have been examining Lima for several years now, with visits by senior executives several years running, and all three are expected to enter the market in the near term, starting with Hermés Paris in late 2016/early 2017. In the adjacent Miraflores district, Avenida Santa Cruz also is home to many upscale international brands. • H.Stern, Brazil’s dominant premium jewellery chain, which has a broad regional

Key metrics on Peru Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) 3.0 2.9 4.7 3.3 3.4 4.0 Gross fixed investment YoY change (%) -9.7 -4.2 -1.0 -4.9 1.0 3.6 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 22.2 22.3 22.3 20.7 20.6 – General government spending (% GDP) 20.3 21.5 22.5 22.6 22.8 – General government fiscal balance (% GDP) 1.9 0.8 -0.2 -1.9 -2.2 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) 4.6 4.5 4.3 4.4 3.4 2.9 Unemployment (%) 7.6 7.4 7.2 6.5 – – Industrial production YoY change (%) 5.0 -4.0 - -1.7 1.1 2.1 Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

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Chapter 5 | peru

footprint, has an established presence in Lima, Cusco and Callao, catering to higher-end customers. Established local jewellers also have a traditional presence in the high-end market, and most international luxury brands retail exclusively through these players, or in partnership with them, with only a minority having set up stand-alone stores to date.

Key economic trends Peru has accumulated 80 consecutive months of positive GDP growth

8. Mayor demanda interna y externa incidieron en el crecimiento del Producto Bruto Interno del primer trimestre de 2016, https:// www.inei.gob.pe/prensa/noticias/ mayor-demanda-interna-y-externaincidieron-en-el-crecimiento-delproducto-bruto-interno-del-primertrimestre-de-2016-9055/

Notable Peru’s credit ratings are enviably stable in comparison to some of its regional neighbours. Standard & Poor’s (S&P) rating for the sovereign stands at BBB+ with positive outlook, and has been unchanged since July 2014. Moody’s rating for Peru is A3 with stable outlook, since August 2012. Fitch’s Peru rating is BBB+ with a stable outlook, since October 2013. In a note released on 13 June, a little over a week after the 5 June presidential run-off ballot, Moody’s said that Peru would benefit from an investor and consumer confidence boost following the election of Pedro Pablo Kucznyksi, with domestic retail, banking and construction among the best positioned corporate sectors. The national statistics institute (Inei) reported real annual GDP growth of 3.72% in the month of March, with Peru thereby accumulating 80 consecutive months of positive growth. Overall first quarter real GDP growth was a strong 4.42% YoY, indicative of a consolidating recovery. While a rise in exports, as new copper mines come on stream, is the principal factor behind the headline growth rate, domestic demand growth was reported at a reasonable 1.9% YoY in the first quarter. Notably, private consumption growth was 3.6%, the highest in the past year. And in line with this, retail growth was 2.8% YoY overall in the first quarter (albeit car sales, as elsewhere in the region, continued to fall), accompanied by robust services sector growth of 4.4%. Construction activity also picked up after a two-year slowdown, with growth of 2.1% in the January-March period, mostly linked to government spending ahead of the elections. In line with stagnant investment, private sector construction activity was still down by 1% on an annual basis in March.8 However, a post election rise in private investment is likely as the new Kuczynski government sets out a business-friendly economic policy agenda. Credit to the private sector rose by 8.3% YoY in April according to the central bank (BCRP), with a 20.7% rise in local currency credit and a continuing fall (15.4%) in $-denominated credit. Corporate sector credit grew by 7.3% YoY in April, while credit to individuals was up by 10.3%, led by personal loans (up 12.1% YoY) and mortgage lending (up 7.8%). The central bank left the benchmark interest rate steady at 4.25% for the third straight month at its

FTCR Peru consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 72.0 65.9 64.0 61.3 60.0 66.7 63.8 61.1 62.3 60.1 61.1 Economic Confidence Index 57.4 59.4 57.0 51.2 50.4 50.5 45.5 38.8 34.9 36.7 32.0 Household Financial Situation Index 60.9 62.7 60.3 56.2 58.1 57.4 54.4 51.4 49.9 49.2 47.0 Inflation Indices Inflation Perceptions Index 55.8 57.6 57.9 62.1 57.5 54.7 57.2 57.2 56.6 59.0 58.6 Inflation Expectations Index 51.7 55.4 54.3 55.8 53.6 58.9 52.9 52.4 52.7 55.5 56.5 Job Prospects Index 64.6 66.3 68.0 61.8 64.8 63.2 63.5 58.6 55.4 57.4 58.6 Buying Intentions Indices Clothes 58.3 66.8 65.3 58.5 63.0 68.0 64.1 56.1 56.4 62.4 60.3 Education 66.8 68.3 76.2 63.3 67.8 63.1 74.5 65.1 63.8 61.7 73.6 Healthcare plans 47.9 56.8 53.0 46.4 46.9 43.3 42.8 42.4 40.9 40.3 42.7 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Peruvian economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

www.ftconfidentialresearch.com

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2.9%

Expected inflation this year, falling to 2% in 2017

12 May meeting, citing benign inflation and reduced currency depreciation pressures.9 The BCRP president, Julio Velarde (who will remain in his post under the new government), in an 18 June press interview said it was “a luxury” for Peru to have Kuczynski as presidentelect, citing his distinguished CV and long experience.10 The BCRP expects real GDP growth of 4% in 2016, rising to 4.6% in 2017. It expects inflation of 2.9% this year, falling to 2% in 2017, at the centre of the target band of 1-3%. As exports recover, the current account deficit is projected to fall from 4.4% of GDP in 2015 to 3.8% this year and 3% in 2017.11 President-elect Kuczynski is targeting real annual GDP growth of 5% on average from 2018 to the end of his five-year term in 2021, consolidating Peru as one the fastest-growing regional economies. Investor sentiment Peru’s IGBVL Index, heavily dominated by mining companies, has gained 87.14 points, or 0.65%, in the last 12 months, from 13,478.72 points in May 2015 to over 13,500 points in mid May 2016. The Nuevo Sol rose by 6.63% against the US dollar in the same period, and was trading at PEN3.32/$ on June 17. In early 2016, the commercial real estate consultancy group CBRE interviewed 31 leading

Situation of wealthy households relative to Q115 Better

Unchanged

Worse

Do not know

1.7% 21.7%

23.3%

53.3%

Source: FT Confidential Research

Did you purchase the following in the last three months? Did you purchase the following in the last three months? Yes

100

9. BCRP, Nota Semanal No. 19, 2O May 2016 10. http://gestion.pe/economia/ julio-velarde-ppk-presidente-lujoobviamente-2163635 11. http://www.imf.org/external/pubs/ ft/weo/2016/01/

% of respondents

80 60 40 20 0

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

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23%

Of wealthier Peruvian households felt that their financial situation had improved over the last year

institutional investors that focus on Latin America. The most attractive metropolitan markets cited included São Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami.12 Outside of the sustained interest in the region’s big metropolitan zones, only 3% of investors cited Peru as ‘the most attractive country’ for making property purchases in 2016; the same percentage identified Colombia as the most attractive prospect. Mall and commercial rents are high in Lima. According to a 2014 survey, leases were averaging 25% of pre-cost sales, above the rule of thumb that they should not be higher than 20%. Market entrants take 2-3 months, on average, to find suitable retail space, prompting concern among retailers about the impact on growth prospects and overall profitability of a tight commercial property market in sought-after central Lima malls and commercial districts. With commercial space at a premium, and private construction activity still a little soft, this trend is unlikely to change in the near-term.13 Key consumer trends FTCR’s quarterly consumer surveys portray an environment in Peru that has declined since 2013 in line with slowing economic growth in the country, but which remains relatively upbeat in comparison to other regional countries. Only 16% of households expressed a concern about the economy. As elsewhere in the region, economic confidence has deteriorated over the last two years or so. However, despite concerns about unemployment, the Job Prospects Index remains relatively strong, as does the buying intentions index, in particular for education. Unlike their counterparts in other countries, Peruvian consumers are not particularly concerned about inflation, which has fallen in 2016 in line with the strengthening of the Sol against the US dollar. Peru’s economic slowdown has been milder than elsewhere and there has not been a strong negative shock to either incomes or the labour market, meaning that most middle class households have not really felt the recent slowdown. Around 60% of households, on average, say their household debt is manageable, while credit card use is also steady at about 40%. Notably, these percentages have been relatively stable since Q313.14

FTCR Consumer Survey of Q116

There were an estimated 6.83m households in Peru in 2015. Some 6% had monthly incomes in excess of PEN11,000 ($3,300). Extrapolating from FTCR’s sample, there are an estimated 409,000 wealthier households. In the latest FTCR Consumer Survey of Q116, about 23% of wealthier households felt that their financial situation had improved over the last year, while 22% felt that their financial situation was unchanged. However, reflecting slower growth in the country since 2013, over half (53%) felt that their financial situation had deteriorated. The state of the national economy was the main financial preoccupation for 28% of wealthier households, followed by unemployment (20%) and credit (18%). 12. CBRE, Latin American Investor Intentions Survey 2016, Latin America Research, May 2 2016 13. http://pa.fashionmag.com/ news/Lima-Alto-consumo-y-altosalquileres,690096.html#.V0MipJMrKYU 13. FTCR Q116 Survey of LatAm Consumers, April 21 2016 – Peru data 14. FTCR LatAm October 22 2015

Despite this caution, 10% had purchased a car in the last three months, while 45% had bought electric appliances. Over a quarter (26.6%) had purchased international travel, while 50% had enjoyed national travel. While online banking is not yet widely used in Peru, 56% of the wealthy households had used the service in the previous week. Of those using mobile banking, a quarter (25%) had undertaken an online transaction in excess of their monthly income, suggesting confidence in their finances. www.ftconfidentialresearch.com

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FTCR Mall Shopper Survey of October 2015

People are spending more on going to restaurants, bars and cafés, an important part of the ‘mall experience’ in Peru

As the middle class continued to enjoy stronger affluence, the percentage of Peruvian households spending 11% or more of their monthly incomes on leisure rose to 13.5% in Q315, from 12.3% a year previously. In the main, people are spending more on going to restaurants, bars and cafés, an important part of the ‘mall experience’ in Peru. As such, the share of respondents who said that they spent 16% or more of their total leisure budget on eating out increased by 8pp YoY to 64.4% in Q315.15

Key tourism trends

Peru’s tourism industry is going from strength to strength. According to the World Travel and Tourism Council (WTCC), the total economic impact of the sector was $20bn in 2014, with a combined direct, indirect, and induced impact of 9.7% of GDP. On WTCC estimates, Peru generated $4.1bn in visitor exports in 2015, with 3.5m international tourist arrivals, up by 7.8% on 2014. By 2026, international tourist arrivals are forecast to total 5.7m, generating expenditure of $8.4bn. Chile is the main source market (with 906,789 visitors in 2015), followed by the US (492,102). These are followed by Ecuador and Argentina, from where tourist arrivals rose by 16.4% and 11.2% respectively in 2015. Italy, Germany, France and Spain are the main European source markets, while Taiwan, South Korea, Hong Kong and China are the main Asian source markets.16 New direct flights to Lima’s modernised Jorge Chávez international airport launched in 2016 from cities including Washington DC and London, UK. The Jorge Chávez airport, which won best airport in South America for seven consecutive years to 2015 (and was ranked 35th in the world at the 2015 World Airport Awards), is undergoing a long-awaited expansion; with a second runway and terminal due for completion by 2019-2020.17

Growth rates Annualised to 2016 2015

2016E

2026F

15. FTCR October 22 2015, LatAm. 16. WTTC, Economic Impact 2016, Peru 17. http://www.peruthisweek.com/ news-jorge-chavez-internationalairport-chosen-as-best-of-southamerica-105534

Total contribution of travel and tourism to GDP Expenditure on outbound travel 0

10 %

Sources: WTTC, Travel & Tourism Economic Impact 2016, Peru www.ftconfidentialresearch.com

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Lima, with some 31 museums, a host of ancient heritage sites and world-renowned gastronomy, has rebranded itself as a tourist destination in its own right and now plays host to up to 2m visitors a year. The city’s emblematic Larcomar mall, overlooking the Pacific Ocean in the central Miraflores district, receives 1m tourists a year – more than Peru’s most famous tourist site, Macchu Picchu (which can take about 630,000).18

Peru is one of fastest growing markets for luxury brands in Latin America and one of the best prospects in the region

In October 2015 a brand new convention centre was opened, as part of a pivot towards corporate tourism. The centre can hold 9,950 delegates in 18-22 rooms and its inaugural event was the annual board of governors meeting of the World Bank and the IMF. In 2016 the convention centre will host the World Economic Forum, the XIV UN Ministerial Conference on Trade and Development (XIV Unctad), and the World Congress on Biosphere Reserves, among other events.19 The International Congress and Convention Association (ICCA) ranked Lima, along with Buenos Aires, as the most popular convention destination in Latin America in 2015. Lima staged 105 events last year, up from 84 in 2014, hosting 52,868 delegates (more than Buenos Aires).20 Peru’s tourism minister, Magali Silva, notes that ‘meetings tourism’ (conventions) is now part of national tourism policy. Domestic tourism is also rising (from a low base), with an estimated 1.4m people taking a holiday within the country in 2014. With an average of 3.2 overnight leisure trips a year, that amounts to over 4m domestic tourist trips a year, with an estimated economic impact of $669m. Around 3m Peruvians go on outbound tourism a year, with almost half destined for Chile, and about 12% heading for the US, followed by Bolivia (10%), Ecuador (6%) and Panama (3.4%).21

18. http://www.larcomar.com/ 19. http://elcomercio.pe/economia/ peru/asi-fue-inauguracion-centroconvenciones-lima-noticia-1845412/5 20. http://gestion.pe/economia/ lima-principal-sede-eventos-rankingamericas-icca-2161011 21. Promperú, National Tourism Indicators, 2011-2014 22. http://pe.fashionmag.com/ news/Peru-La-nueva-meca-dellujo-en-Latinoamerica-,686687. html#.V0NCiZMrKYU, http://www. peruthisweek.com/news-luxury-brandseye-peruvian-market-103321 23. 30 Día.1 Lima, lunes 15desetiembre del 2014, ESPECIAL – A todo lujo – PERUANOS SE SUMAN AL CLUB; September 5 2014, FT Special Report: Watches & Jewellery, Peru embraces hard luxury Middle-class appetite grows for fine watches and jewellery, https://next.ft.com/ content/b807edf0-0134-11e4-a93800144feab7de

In FTCR’s Q116 survey, two thirds (66%) of Peruvian consumers had recently taken, or expected to take, a vacation this year. Of those, the vast majority – 78% – intended to holiday within the country, while 6% intended to go to the US, 6% to another Latin American country and 5.4% to the Caribbean.

Key luxury retailing trends

Amid Asian-style economic growth rates in the past decade, and rapid growth in the middle class, Peru is one of fastest growing markets for luxury brands in Latin America and has been identified by retail experts as one of the best prospects in the region22. From a low base, the luxury market has been growing at an annual rate of 10% in the country, with estimated annual sales rising from $30m towards $50m in the period 2013-2015.23 Home to one in every four Peruvians, Lima (pop 10m), is the locus of this growth. As of April 2016, 40 of the 80 international prestige luxury brands were present in the capital, with 30 others looking to enter. Several of these brands in recent years have set up standalone boutiques in the capital, which is home to 11.8% of the A1, A2 and B1 socioeconomic strata (the highest income earners), accounting for just over 1m people as of 2015. (There are an estimated 1.5m ‘luxury shoppers’ in total in the country.) Tiffany & Co is the latest international player expected to open a branded outlet (in late 2016-early 2017), in partnership with a high-end local jewellery retailer, G&G Joyeros. G&G Joyeros, established in 2002, represents over 30 Swiss premium watch brands and has exclusive franchise deals with international luxury brands Breitling, Tag Heuer and Gucci, for which it also operates stand-alone boutiques in Lima. Most brands, however, retail their products through local stores. High-end luxury brands have a very limited presence outside of Lima. Nonetheless, in line with the growth of luxury tourism there is a push to sell some items (in particular www.ftconfidentialresearch.com

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40 jewellery) in certain tourist districts like the increasingly upmarket Cusco, in upscale hotels, museums and art galleries. H Stern has a particular presence in the tourist zones, plus regional airports. G&G Joyeros, which positions itself as something of an upscale ‘upstart’, is present in Arequipa and Cusco, as well as Trujillo, Piura and Ica.

The Yes Group is seeking to develop a luxury street on Calle Daniel Hernández, in the upscale San Isidro district

In keeping with a pre- and post-Colombian heritage and culture that has long celebrated ornate jewellery and fine stones (the country is rich in gold, precious stones and other mineral wealth), Peruvians are among Latin America’s most avid consumers of diamonds in particular.24 Lima is unusual in not having a luxury-shopping street or district akin to New York’s 5th Avenue, London’s showpiece Bond St or the prestige Mayfair district. This, along with high import, set-up and operating costs, and a relatively small market size to date, has mitigated somewhat against the growth of the luxury sector. The Yes Group, which represents a collection of international fashion players including Hugo Boss, is seeking to develop a luxury street on Calle Daniel Hernández, in the upscale San Isidro district, which is home to Lima’s financial centre and in which 90% of social Class A and 80% of Class B reside. Avenida del Bosque in San Isidro is another premium shopping street, home to several high-end luxury brands. In neighbouring Miraflores, Avenida Santa Cruz has been (and remains) a traditional home for high-end brands and, according to Jack Gomberoff, head of G&G Joyeros, is consolidating it position as a premium hub, with the new Tiffany & Co store expected to open there by early 2017.25 And as part of a major modernisation and expansion plan, the Jockey Plaza mall is also planning a ‘super luxury’ section for 2017, with the aim of attracting more of the ‘super prestige’ brands, from the 3-4 currently present in the mall.26 According to the Association of Shopping and Entertainment Centres (Asociación de Centros Comerciales y de Entretenimiento del Perú, ACCEP), there were 75 malls in Peru in 2015, operated by 16 business groups. Total sales from the 75 came to $7.89bn in 2015, up from $7bn in 2014 and from $3.2bn in 2010. According to the ACCEP, there will be 81 shopping centres in the country by end-2016. Peruvian retailers are benefitting from a demographic windfall, as both the labour market and the middle class expands simultaneously. 27 The growth in malls has been exponential; in 2010 there were just 36 in Peru. Total investment in the period 2011-2015 was $1.79bn, averaging $358m a year and peaking in 2013 at $417m.

24. http://elcomercio.pe/economia/ peru/peruano-mejor-consumidordiamantes-latinoamerica_1noticia-1658294 25. http://gestion.pe/2012/08/20/ empresas/se-alista-nueva-zona-lujodistrito-san-isidro-2010448, http:// elcomercio.pe/economia/negocios/ hemos-puesto-semilla-que-lima-tengacalle-lujo-noticia-1806980 26. http://www.economiaynegocios.cl/ noticias/noticias.asp?id=149046 27. http://elcomercio.pe/economia/ peru/estos-principales-desarrolladoresmalls-peru-noticia-1871949

Four players dominate, operating between them 51 of the 75 malls, and covering almost two thirds (62%) of total available retail space. These are Real Plaza (with 585,408 sq metres of leasable space in total), Parque Arauco/Inmuebles Panamericana (with 346,000 sq metres), Aventura Plaza (285,000 sq metres) and Open Plaza (270,000 sq metres). Jockey Plaza Shopping Center, with 156,000 sq metres and over $800m in annual sales, is considered Lima’s premium mall and is also one of the oldest (established 19 years ago). It houses some 550 brands, with 2.5m visitors a month, on average. Its Chilean owners, Altas Cumbres), are currently carrying out a major $200m upgrade and extension of the mall to 178,000 sq metres, to include additional retailing and restaurant space, as well as a hotel and offices, in addition to a dedicated prestige luxury zone, set to be inaugurated in 2017. Real Plaza, owned by the Intercorp group, has 19 shopping centres in Peru. Real Plaza went against the grain in that it set up first in Peru’s provinces, and has only more recently moved into Lima. In 2015, total sales were valued at $1.5bn. Real Plaza’s flagship highend malls include Real Plaza Primavera and the Centro Cívico in central Lima, as well as the large five-story Real Plaza Salvarerry (71,000 sq metres) in San Isidro, home to www.ftconfidentialresearch.com

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international names including Adidas, Zara, Zara Home, Banana Republic, Calvin Klein, Converse, Gap, Lacoste, North Face, Forever 21, MAC, Swarovksi, Watch Boutique, Tommy Hilfiger, Kenneth Cole, Starbucks and others. Real Plaza Salvarerry is positioning itself as a rival to the older Jockey Plaza mall.

Open Plaza is owned by the Chilean group Falabella. It has 10 shopping centres nationwide, with 2015 sales of $1bn

The Chilean-owned Parque Aracuo/Inmuebles Panamericana entered Peru in 2006 and now has 18 shopping centres in the country, including the premium Larcomar mall in Lima’s Miraflores district. Its main brand name is Megaplaza. In 2015, sales were valued at $810m. In January 2016, Parque Aracuo opened the InOutlet Premium Mall in Lúrin, southern Lima, off the PanAmerican highway. The 8,500 sq metres outlet is home to some 40 international brands including Adidas, Tommy Hilfiger, Kenneth Cole, Calvin Klein, Dunkelvolk and Marathon, among others. Open Plaza is owned by the Chilean group Falabella. It has 10 shopping centres nationwide, with 2015 sales of $1bn. Aventura Plaza is a joint venture between the two Chilean firms, Falabella and Ripley. It has four shopping centres in Peru, with registered sales of $970m in 2015. Other players with more than one mall in the country include Cúbica (La Rambla), Centenario (Grupo Romero), Cencosud and Corporación EW. Grupo Romero, which runs the Centario shopping centres, owns the Minka and Plaza del Sol brands. Its sales in 2015 were valued at $400m. Censosud (Chile) has three shopping centres in Peru, including the large Plaza Lima Sur. Its 2015 sales were $262.2m. Cábica is owned by the Brescia Group and runs the La Rambla-branded shopping centres. Its sales in 2015 were $58.8m. Corporación EW, owned by the Peruvian Wong family, owns the large (200,000 sq metres) Plaza Norte shopping centre in Lima, with two new centres planned for 2016 opening.28

Peru luxury insights

The traditional elite in Peru is rather typical of other Latin American countries: USand Europe-facing, privately educated (often abroad), well travelled, informed and cosmopolitan. Given a dearth of luxury shopping in Lima, they are used to travelling to the US and/or regional capitals like Buenos Aires to shop and as such are brand, fashion and relatively price savvy. A long history of insecurity in Peru means that the traditional upper class is rather cautious and conservative, ostentatious shows of wealth are not the norm. This has changed gradually in the past decade as internal security has improved and the country went through a decade long Asian-style growth spurt during the global commodity boom. This drove a domestic consumer market explosion manifested in the retail and construction sectors. And despite an economic slowdown since 2013, Peru’s retail market in 2015 was still the fastest growing in Latin America, with new channels like malls and online shopping posting firm results, reinforced by retailers’ growing use of social media and the growth of mobile services including online banking. Today’s middle class consumer is newly affluent, status-aware and aspirational, typically looking to the US for cultural and fashion influences. However, their wealth is relative, they are not yet as travelled and cosmopolitan as the traditional elite, and so are excited to socialise and spend money in the snazzy new malls in Lima and other provincial cities offering international ‘fast fashion’ brands like Zara, restaurant chains and coffee shops like Starbucks, multiplex cinemas, bowling alleys and so on.

28. http://elcomercio.pe/economia/ peru/estos-principales-desarrolladoresmalls-peru-noticia-1871949

The emergence of this new middle class and the recent entry into Peru of ‘fast fashion’ brands like H&M and Forever 21 interests international premium brands in so far as it indicates that a middle class is consolidating. This, alongside the country’s robust income growth prospects, has encouraged premium brands to examine ever more closely the www.ftconfidentialresearch.com

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peru: Key developments to watch Other brands are strongly rumoured to be looking seriously at Lima. Some Hermès Paris stock is sold by the traditional jeweller ALDO & Co. The firm is not yet present in Peru as a mono-brand but according to local industry sources, it too, like Louis Vuitton, may be considering a premium location in San Isidro. The Jockey Plaza mall in Lima is currently undergoing a $200m upgrade and extension of the mall to 178,000 sq metres, to include additional retailing and restaurant space, as well as a hotel and offices. The plans include a dedicated prestige luxury zone, set to be inaugurated in 2017. Jockey Plaza currently only hosts a few super premium brands; the ambition with this new dedicated luxury zone is to attract more of the top tier brands. However, the mall will have to work hard to compete with the emerging luxury shopping streets located more centrally in Lima, including Avenida Santa Cruz in Miraflores,

and Avenida del Bosque and Calle Daniel Hernández in San Isidro. Of these various locations, San Isidro potentially has the most cachet. Incoming tourism continues to rise strongly. According to latest data from the tourism ministry (Mincetur), Peru received 1.2m foreign tourists in the four months to April, a rise of 6.7% over the same year-earlier period. Chile was the main source market, followed by the US, Ecuador, Colombia, Bolivia, Italy and Costa Rica. Indeed, 60% of tourists came from Chile, the US, Ecuador, Colombia and Costa Rica in the period, with 15% from Europe. Tourism from China was also up notably, by 38.3% YoY to 7,562. For luxury retailers this is good news – most tourists spend a couple of days in Lima on the way back home, where they have money left to spend, while they also shop in the main tourist cities like Cusco and Arequipa. The rising numbers of tourists from within the region – arrivals

from Uruguay spiked up by 26% to over 6,000, thanks to a new direct Montevideo-Lima flight – is also positive for efforts to put Lima on the map as a regional shopping destination. Likewise, the Jorge Chávez airport, which is increasing its airport shopping offering as part of its new extension, also stands to benefit strongly from the increased traffic flow. The incoming new government led by Pedro Pablo Kuczynski will be business friendly and open to international trade, and as such interested new investors can likely expect some reforms (potentially including tax and labour market reforms), which could lower the cost of doing business in Peru, making it easier to enter and thrive in the domestic market. Overall, the new administration will be keen to attract new foreign investment, and the fast growing retail sector, which still has enormous growth potential, will remain one of the most attractive.

local market, as they can look to very clearly differentiate themselves, making their ‘super exclusivity’ all the more attractive to both the newly affluent and also to the traditional elite – the opening of a Gucci or Tiffany & Co store in Lima is a news item for months in advance and an important event on the social calendar. And despite high set up costs and higher pricing in Peru in comparison to the likes of Miami, these new premium outlets expect to hold their own. G&G Joyeros, for example, is expecting a 20% increase in its overall sales in 2016, and has plans to open two additional stores29.

Positioning in Lima

Given the absence of a central premium shopping district, the question of where to operate in Lima has been something of a conundrum for international luxury brands. Most to date have opted for a partnership or franchise deal with a local retailer by way of market entry, however small clusters of premium own-branded stores like Hugo Boss and Gucci, sitting alongside independent upscale Peruvian fashion boutiques, galleries and home stores like Roche Bobois, have grown up in the San Isidro district in particular, which has a rarefied air and residential district elegance that sets it a little apart from neighbouring Miraflores. 29. http://www.peruthisweek.com/ news-tiffany-co-peru-109334 30. http://www.peruthisweek.com/ news-tiffany-co-peru-109334

There is much expectation for the opening of a new Tiffany & Co outlet. According to Jack Gomberoff, general manager of G&G Joyeros, it will be located on the 8th block of Avenida Santa Cruz, the main premium shopping street in Miraflores, and will have 250 sq metres of space.30 www.ftconfidentialresearch.com

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Louis Vuitton does not yet have a presence in Lima, but there is some expectation that it may shortly look to establish in the San Isidro district, on one of the two prestige shopping streets in the district (Avenida del Bosque and Calle Daniel Hernández). Similarly, there is also an expectation locally that Cartier too will soon enter the Peruvian market.

Expo Lujo Perú 2016 – Premium sizes up Peru

On June 18-19 the Lima Polo Club hosted the first luxury trade fair in Peru. Over 60 international brands participated including Land Rover, Lexus, Jaguar, Volvo, Ducati, BMW, Motorrad, Cadena de Hoteles Inkaterra, Fly Emirates, Delta Air Lines, Air Canada, Swissotel, Sonesta, Hotel B, ATSA Jet Privados, Eyes Illusion, JW Marriot Hotels, L’Oreal and Pernod Ricard.

31. http://gestion.pe/tendencias/ amantes-exclusividad-sereuniran-primera-vez-expo-lujoperu-2016-2158831

Alongside high-end cars, luxury travel, perfumes and cosmetics, luxury whiskeys and wines, attendees could also enquire as to yachts, helicopters and private jets, as well as international real estate opportunities. Also on hand were interior design companies, aesthetic companies and so on. This annual fair, which started in the region in 2004 and previously has been held in neighbouring Chile, Argentina and Colombia, is organised by the Santiago-based company Modern Luxury, which markets the event as an important and exclusive networking opportunity for local business people and ‘taste makers’. The fact that Peru has been chosen for the 2016 fair is no coincidence; the director of Modern Luxury, Pablo Pries Bronenburg, points out that international luxury brands are keenly eyeing the Peruvian market. The fair was being sponsored by Peru’s Grupo El Comercio, Revista Caras and Revista G, as well as Banca Privada de Interbank.31 n n n

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Chapter 6 | BRAZIL

6. Brazil Brazil’s recession is brutal and has been compounded by the political crisis. Brazil’s wealthy are less well off than a year ago, and are fretting about the economy. Nevertheless, they are still making sizeable non-essential and/or big-ticket purchases – often through the upscale malls where the majority of luxury outlets in Brazil can be found. • At first glance, Brazil’s economic situation looks dire. An extremely severe and broadly based recession is being exacerbated by a complicated political situation, with President Dilma Rousseff standing aside for months as an impeachment trial takes place. • However, an improvement in investor sentiment, which has been reflected in a sharp bounce in the Brazilian stock market, as well as good returns from Brazilian bonds, suggests that many observers are looking for a substantial improvement in conditions from H216. • In Q116 the ‘big four’ mall owners – Iguatemi, Aliancse, Multiplan and BR Malls – have demonstrated resilience in operating performance. This is in spite of the very difficult economic environment. • Given that the malls owned and managed by these companies are preferred locations for luxury stores, this suggests that spending by higher income households is holding up.

BRAZIL: DEMOGRAPHIC TRENDS SUPPORT LUXURY GOODS SALES BRAZIL’S ‘BIG FOUR’ MALL OWNERS: RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

351 THE TOTAL NO. OF MALLS HAS RISEN FROM 351 IN 2013 TO 538 IN 2015

SPENDING INDEX

Brasília

538

1. Domestic travel

49.5

2. Electric appliances

46.8

3. International travel

14.4

4. Car

12.6

5. Property

YoY GDP CHANGE

3.6

HOUSEHOLD FINANCIAL SITUATION INDEX

60 -2.6%

-4.5%

2Q15 3Q15

50 40 30

-5.9% 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

4Q15

20 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

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Chapter 6 | BRAZIL

• FTCR’s Q116 survey of consumers confirms that this is the case. In the previous three months, about one eighth of households surveyed who had monthly incomes in excess of R$9,746 ($2,785) had bought a new car and a slightly greater number had travelled outside Brazil. About half of these households had travelled within Brazil or purchased an electrical appliance in the preceding three months.

Luxury product outlets are predominantly located in malls

• This expenditure on non-essential and/or big ticket items took place even though more than one half of the wealthy households felt that their financial situations had deteriorated over the preceding year and many are fretting about the state of the domestic economy. • On the basis of official data and FTCR’s Q116 survey of consumers, there are around 5m wealthy households in Brazil. • In part because of the lack of interest on the part of consumers elsewhere in Latin America, it appears that the economic and tourism benefits of the Rio de Janeiro Olympics will be disappointingly small. • Luxury products are sold through own-brand stores and boutiques, through distribution arrangements with leading regional jewellery chain H.Stern, or through distribution arrangements with independent jewellers. • Luxury product outlets are predominantly located in malls – and especially in those that are owned/run by the ‘big four’ companies listed above. A partial exception is the H.Stern outlets located in upscale hotels in Rio de Janeiro.

Key economic trends

Notable On May 11 2016, the Brazilian federal senate voted 55:22 to begin an impeachment trial against President Dilma Rousseff. She will step aside while the trial is underway: a final decision, which requires a two-thirds majority of the senate, is likely in September or October. Until that time, Vice President Michel Temer will act as President1. Markit’s seasonally adjusted Composite Output Index fell from 40.8 in March 2016 to 39.0 in April. This is the joint-lowest mark in the history of the series, and is on a par with the reading of February 2016. The Index reflects conditions in both the manufacturing and the services sectors of Brazil’s economy. A reading below 50.0 indicates a deterioration of conditions, and vice-versa. Markit economist Pollyanna de Lima noted that higher

Key metrics on Brazil

1. ‘Dilma Rousseff suspended as senate votes to impeach Brazilian president, Guardian, May 12 2016

Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) -2.6 -4.5 -5.9 -3.8 -3.5 0.6 Gross fixed investment YoY change (%) -11.9 -15.0 -18.5 -13.9 -10.8 1.0 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 35.4 35.6 34.0 33.5 35.0 – General government spending (% GDP) 38.0 38.6 40.2 41.2 42.1 – General government fiscal balance (% GDP) -2.6 -3.0 -6.2 -7.7 -7.1 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) 10.7 10.4 9.4 10.7 7.3 5.7 Unemployment (%) 7.6 8.2 – 6.8 – – Industrial production YoY change (%) -13.9 -9.8 – -8.2 -5.4 1.1 Retail sales YoY change (%) -10.6 -4.2 – -4.2 – – Car sales (000s units) 150 142 173 2,478 – – Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

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Chapter 6 | BRAZIL

unemployment is likely to result in weaker domestic demand in coming months. ‘Looking ahead, economic prospects remain bleak when so much uncertainty abounds in the market. Economic reforms are unlikely to be part of politicians’ agenda until an outcome is reached in the Senate2.’ The IMF expects real annual GDP to contract by 3.8% in 2016, having shrank by a similar amount in 2015. Growth in 2014 was 0.1% and is expected to be 0.0% in 2017. Inflation jumped from 6.4% in 2014 to 10.7% in 2015, and is forecast to fall to 7.1% this year and 6.0% in 2017. The anticipated trend in the current account deficit is one of gradual improvement – from 4.3% of GDP in 2014 to 3.3% in 2015 to 2.0% this year and to 1.5% in 20173. According to the IMF, ‘economic activity has been contracting because of low business and consumer confidence, high domestic policy uncertainty, weakening export prices, tightening financial conditions and low competitiveness. The deteriorating fiscal position and public debt dynamics played a role in the collapse in sentiment, especially as the fiscal adjustment targets put forward in 2015 were repeatedly trimmed down, triggering a rise in market interest rates and eventually the downgrade of the sovereign rating below investment grade.4’ 2. Markit, Markit Services PMI (with Composite PMI data), May 4 2016, ‘Private sector activity falls at jointfastest pace in survey history’ 3. IMF Regional Economic Outlook, Western Hemisphere, April 2016, p48 4. IMF Regional Economic Outlook, Western Hemisphere, April 2016, p29 5. Bloomberg, ‘Brazil Credit Ratings Cut to Junk by Moody’s’, February 24 2016 6. Banco Central do Brasil, Minutes of the 198th Meeting of the Monetary Policy Committee (Copom) 7. The Rio Times, ‘Selic Interest Rate Increased for the Seventh Time in Brazil’, July 30 2015 8. FTCR LatAm April 21 2016, p24ff

Moody’s was the last of the three major ratings agencies to reduce the sovereign rating to below investment grade, in late February 2016. It’s Ba2 rating is in line with that of Standard & Poor’s and one level below Fitch. Moody’s outlook is negative5. At its meeting on April 26 2016, the central bank’s monetary policy committee (Copom) voted unanimously to keep the benchmark Selic interest rate unchanged at 14.25%, without bias6. The Selic had been increased by 50 basis points to 14.25% in July 20157. Investor sentiment Total returns from the JP Morgan EMBI+ for Brazil’s bond market was 17.1% from the beginning of the year to 19 April. The Bovespa Index had risen by 23.9%. The real had fallen by 10.3% against the US dollar8. In Q116, 25% of institutional investors surveyed by FTCR were overweight on the Brazilian stock market. Another 5% were equal weight. The remainder were underweight. All had some weighting. The number of investors underweight was little changed relative to Q415, Q315 or Q215. The main change has been an increase in the number of investors

FTCR Brazil consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 71.2 68.3 66.5 65.3 72.6 72.8 71.6 67.9 61.7 65.3 61.4 Economic Confidence Index 31.0 30.1 26.1 19.5 20.7 17.7 6.0 5.7 5.1 4.0 9.0 Household Financial Situation Index 51.6 50.0 46.6 43.1 47.5 44.1 30.6 29.2 25.7 24.3 26.2 Inflation Indices Inflation Perceptions Index 69.8 66.5 64.3 66.2 65.2 63.6 65.3 64.8 61.8 62.5 59.3 Inflation Expectations Index 52.1 52.1 48.4 49.8 52.8 53.5 53.0 51.0 50.7 52.2 49.1 Job Prospects Index 55.7 58.8 54.6 51.9 46.4 52.9 38.9 33.1 30.8 33.7 31.2 Buying Intentions Indices Clothes 61.7 65.5 49.6 56.7 53.4 63.0 40.6 42.0 38.0 46.4 34.2 Education 41.9 42.7 53.0 45.0 45.9 40.8 49.0 38.6 43.2 37.7 46.1 Healthcare plans 23.1 18.8 19.2 18.5 20.7 19.1 18.1 16.4 17.1 18.7 18.5 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Brazilian economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

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Chapter 6 | BRAZIL

overweight, from a low of 10% of investors in Q3159.

Buying intentions for education and healthcare plans have held up fairly well over the last three years

In early 2016, the commercial real estate consultancy group CBRE interviewed 31 leading institutional investors that focus on Latin America. Some 29% cited Brazil as the country most attractive for making property purchases in 2016. The most attractive metropolitan markets cited included SĂŁo Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami10. Key consumer trends FTCRâ&#x20AC;&#x2122;s quarterly consumer surveys portray an environment that is both grim and deteriorating. The overall Spending Index deteriorated in late 2013, but held up quite well from the beginning of 2014 to the end of 2015. This is, presumably, the result of resilience in spending on essential items (including education). Spending slumped in Q116. Both the Economic Confidence Index and the Household Financial Situation Index have fallen consistently since mid-2013, amid a combination of a much tougher job market and persistently high inflation. Buying intentions for education and healthcare plans have held up fairly well over the last

Situation of wealthy households relative to Q115 Better

Unchanged

Worse 1.0%

Do not know

9.6%

51.0% 46.2%

Source: FT Confidential Research

Didyou youpurchase purchasethe thefollowing followingin inthe thelast lastthree threemonths? months? Did Yes

100

% of respondents

80 60 40 20 9. FTCR, LatAm March 24 2016, p6 10. CBRE, Latin America Intentions Survey 2016, p10

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

three years or so, but this was not the case for clothes over that period.

FTCR Consumer Survey of Q11612

20%

Of respondents cited shopping malls as their primary destination for clothes shopping in 2015

In 2012, there were an estimated 66.85m households in Brazil, of whom 47.9m were economically active13. Some 7.4% had monthly incomes in excess of R$9,746 ($2,785). Extrapolating from FTCR’s sample, there should be about 5m wealthy households. Over half of these wealthy households considered that their financial situations had deteriorated over the last year because of the impact of inflation and the general malaise of Brazil’s economy. Nevertheless, wealthy households have generally maintained spending on big ticket and/or non-essential items. Over one eighth had bought a new vehicle in the preceding three months. Even though only about 4% had purchased a new property, nearly half had purchased an electric appliance. Nearly 15% had undertaken a foreign trip, while over half had travelled within Brazil over the preceding three months. About three quarters of wealthy households use online banking: of this group, one quarter had recently undertaken an online transaction the size of which exceeded their monthly income.

FTCR Mall Shopper Survey of September 201514

For consumers of all social strata, numbers going to malls to shop had fallen. Respondents who cited shopping malls as their primary destination for clothes shopping dropped from 30.7% in 2013 and 23.9% in 2014 to 20% in 2015. The number visiting mall-based food courts fell by 21.1 percentage points in Q313 to 59.1% in Q315. There appears to be an oversupply of malls – particularly in second- and third- tier cities. However, the ‘big four’ operators – Multiplan, BR Malls, Aliansce and Iguatemi, appear not to have been much affected by the deterioration in consumer demand.

11. FTCR Consumer Indices 12. All data from FTCR LatAm consumer survey of Q116 13. IBGE, Diretoria de Pesquisas, Coordenação de Trabalho e Rendimento, Pesquisa Nacional por Amostra de Domicílios 2011-2012, table 5.3 14. FTCR, LatAm October 22 2015, p5 15. Iguatemi, Earnings Release for Q116 16. Aliansce, Earnings Release for Q116 17. BR Malls, Earnings Release for Q116 18. FTCR, LatAm April 21 2016, p10

Multiplan, one of the four largest mall operators, has been substituting underperforming clothing retailers for service providers (e.g. hair salons, mobile phone shops, pharmacies and medical centres). This has maintained consumer traffic, occupancy rates and rents. By shifting its tenant mix, Iguatemi too was able to boost rents and profitability in Q11615. The Q116 results of Aliansce also pointed to resilience in face of a difficult economic environment16, as did those of BR Malls17.

Key tourism trends

Rio de Janeiro Olympics18 Although Latin American consumers are increasingly looking to travel to nearby countries in the coming year, fewer than 2% intend to go to Rio de Janeiro for the 2016 Olympics. The countries from where most people plan to go to the Olympics are Colombia (2.9%) and Peru (2.8%). Conversely, only 0.7% of Argentines intend to do so. As of late April 2016, only 50% of tickets have been sold. At the same point in the run-up to the 2012 London Olympics, at least 80% had been sold. The federal government has been forced to buy some of the unsold tickets and distribute them to schools. The overall budget for the event has been cut by $500m. Hotel sector organisation ABIH expects that hotel occupancy rates in Rio de Janeiro will be close to 100% during the Olympic Games, thanks to block bookings over recent years. www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

Do you or any of your family plan to travel to the Olympic games in Latin Americans August 2016 staying away from Olympics Do you or any of your family plan to travel to the Olympic games in August 2016? Yes

Maybe

A IN

7.6%

ARG EN T

2.8%

1.9%

0.7%

ZIL RA

No 91.7%

7.3%

U PER

Não 90.9%

No 83.4% No 93.6%

2.9% BIA C O LO M

0.8%

5.6

No 86.8%

13.8 %

MEX

ICO

Source: FT Confidential Research

However, the vacancy rate is expected to fall to 58% for the Paralympics. The Urban Pacification Program (UPP), which had reduced crime in Rio de Janeiro’s favelas (many of which are adjacent to the main Olympic sites), appears to be unravelling. This is due to repeated abuse of power by police, which has reduced trust; the failure of investment in schools and infrastructure to keep pace with law enforcement; and the reconquest of territory by criminal organisations. Overview19 The benefits to Brazil’s tourism sector from hosting the Olympic games in Rio de Janeiro will be more than offset by the impact of Brazil’s well-publicised economic problems. After stagnation in most aspects of the tourism industry in 2015, conditions appear set to become more difficult in 2016. Visitor exports (spending by international tourists for both business and leisure trips, including expenditure on transport but excluding expenditure on education) is the only aspect that should grow at a high mid-single digit rate. Visitor exports should rise by nearly 8% annually over the next decade. Leisure spending accounted for 87% of travel and tourism’s contribution to GDP in 2015. Spending by domestic residents accounted for 94%.

Key luxury retailing trends

As discussed below, the leading luxury brands generally operate in Brazil through one of three channels: own brand stores; retail partnership with the H.Stern jewellery group; or retail partnership with other independent jewellery operators. The own brand stores, many of the H.Stern stores and many of the independent jewellery operators’ stores are located in malls. A partial exception is H.Stern’s placement of stores in luxury hotels in Rio de Janeiro.

19. WTTC, Travel & Tourism Economic Impact 2016, Brazil

Overall, Brazil’s mall industry has continued to expand by many metrics in spite of the well publicised economic problems. The total number of malls (i.e. catering to all demographics and not just higher socio-economic groups) has risen from 351 in 2006 to 495 in 2013 to www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

538 in 2015. Total space available for leasing has grown from 7.492m sq metres to 12.940m sq metres to 14.680m sq metres. The numbers of visits by customers have grown from 203m per month to 415m to 444m.20 Over the course of 2016, 20 new malls are set to open, taking the total to 56621.

Over the course of 2016, 20 new malls are set to open, taking the total to 566

Iguatemi The dominant operator of malls that appeals to luxury retailers appears to be Iguatemi Empresa de Shopping Centers SA, an element of the Jereissati Group. Iguatemi is the majority (or 100%) owner of Iguatemi São Paulo, JK Iguatemi, Market Place, Iguatemi Alphaville (all in metropolitan São Paulo), Iguatemi Campinas, Galleria, Iguatemi Esplanada, Iguatemi São Carlos, Iguatemi Rio Preto, Iguatemi Ribeirão Preto, and Boulevard Iguatemi (elsewhere in the state of São Paulo), and Iguatemi Brasília. It is a minority owner in Pátio Higienópolis, Iguatemi Florianópolis (in the state of Santa Catarina) and four other malls – Iguatemi Porto Alegre, Praia de Belas, Iguatemi Caxias and Outlet Novo Hamburgo (all in the state of Rio Grande do Sul). In São Paulo, Iguatemi is also the outright owner of the Torres I and Torres II shopping complex and majority owner the Torre Iguatemi centre.22 Aliansce Some of the luxury retailers are also present in malls owned/operated by Aliansce Shopping Centers SA in which the dominant investors are Canadian Pension Plan Investment Board and Renato Rique23.

Growth rates Annualised to 2016 2015

2016E

2026F

Visitor exports Domestic spending on tourism Internal tourism consumption Purchases by tourism providers Direct contribution of travel and tourism to GDP Capital investment

20. www.portadodoshopping.com.br/ monitoramento/numeros-do-setor 21. www.portadodoshopping.com.br/ monitoramento/numeros-dos-estados 22. http://ri.iguatemi.com.br/ conteudo_pt.asp?idioma=0&conta=28 &tipo=49995 23. ir.aliansce.com.br/enu/ history-and-corporate-profile

Imported goods from indirect spending Total contribution of travel and tourism to GDP Expenditure on outbound travel

-8

-6

-4

-2

% Sources: WTTC, Travel & Tourism Economic Impact 2016, Brazil www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

51 Aliansce owns and manages 19 malls, and manages a further 10 on a third party basis. Malls that have been operating for more than five years include Shopping da Bahia (BA), Shopping Taboão, Shopping West Plaza, Santana Parque Shopping, Shopping Santa Úrsula (all SP), Via Parque Shopping, Shopping Grande Rio, Carioca Shopping, Bangu Shopping, Caxias Shopping (all RJ), Boulevard Shopping Brasília (DF), Boulevard Shopping Belém (PA) and Boulevard Shopping Belo Horizonte (MG)24.

Aliansce owns and manages 19 malls, and manages a further 10 on a third party basis

Aliansce’s malls that have been open for less than five years include Boulevard Shopping Campos (RJ), Parque Shopping Belém (PA), Boulevard Shopping Vila Velha (ES), Boulevard Shopping Nações Bauru (SP), Parque Shopping Maceió (AL) and Shopping Paragaba (CE). Aliansce is the manager of Boulevard Shopping Feira da Santana (BA), Shopping Leblon (RJ), Passeio Shopping (RJ), Floripa Shopping (SC), Santa Cruz Shopping (RJ), Continental Shopping (SP), Pátio Alcântara (RJ) and São Gonçalo Shopping (RJ). Multiplan Some of the luxury retailers are also present in malls owned/operated by Multiplan Empreendimentos Imobiliários SA. With over 560,000 sq metres in owned space and over 2m sq metres in space overall, it is one of the largest mall owners. Multiplan’s portfolio includes: BarraShopping, New York City Center, ParkShopping Campo Grande and Village Mall (RJ); JundialShopping, MorumbiShopping, ParkShopping São Caetano, and RibeirãoShopping (SP); BH Shopping, DiamondMall and Pátio Savassi (MG); BarraShoppingSul (RS); ParkShopping Barigúi (PR); ParkShopping (DF); Parque Shopping Maceió (AL).25 Other mall operators BR Malls Participações SA is the largest mall operator by several metrics, with just under 1m sq metres in owned lettable space and 1.6m sq metres of space overall26. It has a portfolio of 45 malls. It is the ‘only shopping mall company in Brazil with nationwide presence and targeting all income segments’. Cyrela Commercial Properties SA has 136,000 sq metres in owned lettable space. Its portfolio includes four malls in São Paulo state, and one in each of Para, Minas Gerais and Rio de Janeiro27. General Shopping Brasil SA has a little over 262,000 sq metres in owned lettable space. Its focus includes branded outlet malls. There are two downtown malls (Poli Shopping), four Outlet Premium malls and nine regional & neighbourhood malls (Parque Shopping and other brands), as well as the Auto Shopping Internacional thematic mall28.

24. ir.aliansce.com.br/enu/our-portfolio 25. ri.multiplan.com.br 26. Cushman & Wakefield, Market Positioning, Retail Brazil 2015/2016 27. ir.ccpsa.com.br 28. www.generalshopping.com.br 29. ri.jhsf.com.br 30. sonaesierra.com.br

JHSF Participações SA is a diversified commercial real estate company with interests in malls, offices, hotels/restaurants (under the Fasano brand) and the Catarina Executive Airport near São Paulo. It is the 100% owner of the Cidade Jardim mall in that city. It owns three other properties in Salvador, São Paulo and Manaus as well as the Catarina Fashion Outlet in São Roque. Luxury brands with which JHSF is involved in Brazil include Hermès, Valentino/Red Valentino, Emilio Pucci, Jimmy Choo and Ralph Lauren29. Portuguese group Sonae Sierra is also one of the larger players, with over 350,000 sq metres of owned space in Brazil. In South America, it is also present in Colombia. Its malls in Brazil include Shopping Metropole, Shopping Plaza Sul and Shopping Campo Limpo (São Paulo), Parque D. Pedro Shopping (Campinas SP) and Franca Shopping (Franca SP), Boulevard Londrina Shopping (Londrina), Uberlândia Shopping (Uberlândia MG) and Passeio das Águas Shopping (Goiâna GO)30. Sonae Sierra is an element of Sonae SGPS SA. www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

BRAZIL: Key developments to watch In terms of luxury brand strategies in Brazil one of the key issues now is finding the best way to weather the recession. Despite weak sales, many global brands are choosing to maintain or increase their presence in Brazil, positioning for recovery, including an expected jump in international tourism as one of the legacies of the Rio Olympics. In April 2015, Ralph Lauren opened its first Brazilian store. In September 2015, Cartier opened its largest boutique in Brazil, located

in the Iguatemí shopping centre in São Paulo (the company already has two other direct outlets, one in São Paulo’s Cidade Jardim and the other at Village Mall in Rio). Hermés is opening a second store in Brazil. In May 2016 Louis Vuitton showed its Cruise 2017 collection at the Niterói Contemporary Art Museum. In all these cases the companies are betting on a long-term resumption of market growth. But the pattern of that growth,

and the best strategies to unlock its benefits for the luxury retail sector remain uncertain. Cartier’s partnership with the up-market Iguatemí chain positions it to identify the best future store locations. One suggestion is that consumer growth in the traditionally well-developed urban centres near the Atlantic coast line, such as São Paulo and Rio de Janeiro, will be outshone by growth in the interior and among so-called second tier cities.

Brazil luxury insights

Facing economic troubles and a strong challenge from Mexico, Brazil is still the top market for luxury retail in Latin America. Despite the recession, in 2015 luxury good sales are estimated to have grown by 3.9% to $6.47bn. This means more luxury goods were sold last year in Brazil than in Mexico (where the total was $5.92bn). But Brazil’s annual sales growth rate has in recent years been much more sluggish, and Mexico may yet take the number one slot. In the meantime, one in every four dollars’ worth of luxury sales in Latin America happens in Brazil. This market has undoubted long-term promise. Brazil is one of the world’s top ten economies by value of GDP, and has a population of 209m people. Over the last decade the expansion of the middle classes has been numerically the strongest in the region (up to 40-50m people entered the middle class). The country has a significant number of HNWIs and UHNIs (in the latter category there are some 4,640 individuals with assets of over $30m). The wealthiest consumers are typically aged 35-44 and the country’s demographics are still skewed towards the young. The median age of the Brazilian population is 28, compared to 38 in North America and 40 in Europe. What these numbers indicate is that if Brazil can get back on a sustainable economic growth path, the medium to long term will see demographic and economic trends strongly supportive of luxury goods sales. But any luxury brand targeting Brazil needs to have a strategy to overcome substantial short-term obstacles. These include the 2015-2016 recession (a weak recovery is projected for 2017), high import taxes, and a pattern of consumer spending that tends to be skewed more towards fashion, health and beauty products than to watches and jewellery. One analyst says that the local luxury sector is falling short of its potential “in part due to import taxes making luxury brands far more expensive than in developed markets, and the fact that affluent consumers have grown used to travelling to the US and Europe to buy their designer clothes, luxury jewellery and designer fashion accessories.” The Brazilian luxury goods consumer is very fashion and brand-aware. Consumer culture and tastes are more Europe than US-driven. At the upper end of consumer segmentation customer service and personalisation are particularly important. There is a strong celebrity culture and the brand and lifestyles of celebrities influence consumers. Market research shows Brazilian consumers react to recession by “trading down” across wide areas of www.ftconfidentialresearch.com

Chapter 6 | BRAZIL

53 spending but maintaining or even “trading up” in some narrower segments for “feel-good” reasons – this has been characterised as “shopping in discount supermarkets but buying a designer dress.” The challenge in the luxury sector is to provide the right product, location, and price point to win a place in the favoured “feel good” category. Brazilian consumers will split their luxury shopping between home and abroad for the foreseeable future. According to a study by McKinsey & Co, a luxury product priced at $1,000 at a Brazilian port of entry will, after taxes and tariffs, end up with a $2,300 price tag for the consumer in São Paulo or Rio. This is therefore a strong incentive encouraging the consumer to wait, and buy the item duty-free on their next trip to the US or Europe. But not all consumers want to wait until they travel, and those buying in domestic shopping malls get reasonably favourable credit terms, which to some extent offset the negative impact of the higher price. n n n

www.ftconfidentialresearch.com

Chapter 7 | chile

7. Chile Chile’s approximately 400,000 wealthier households have been worrying about the state of the economy in general and the risks of unemployment in particular. However, their fears have not been realised. In the meantime, they have continued to spend on big ticket and non-essential items. The three large malls in Santiago – Costanera Center, Alto Las Condes and Parque Arauco Kennedy – which appear to have a crushing domination of the luxury retail trade in Chile, have continued to perform well for their owners and have enjoyed nearly 100% occupancy rates. If, as seems likely, the three malls remain attractive to high-end shoppers and Chile’s tourism industry continues to grow steadily – thanks in part to perception of Argentine consumers that Santiago is ‘el Nuevo Miami’ given the shopping bargains that are available – the luxury trade should post solid growth over the next three-to-five years. • On the basis of official data and FTCR’s Q116 survey of consumers, it appears that there are around 400,000 wealthier households in Chile. • The wealthier households have fretted about the state of the national economy in general and about employment prospects in particular. Nevertheless, economic confidence and spending has held up. • In particular, wealthier households have been spending on big ticket and non-essential items. Over half purchased domestic travel in Q116. Nearly half bought electric appliances. Over one third travelled overseas. Some 5% said that they had bought a car

CHILE: SANTIAGO IS ‘EL NUEVO MIAMI’

INCREASE IN SALES OF LUXURY WATCHES AND JEWELLERY IN 2015

Many wealthy Argentines and Brazilians are now choosing Santiago over the likes of Buenos Aires

Santiago

No. of shopping malls in Chile

1. Domestic travel

55.1

2. Electric appliances

46.2

3. International travel 34.6

JOINED CHILE’S ASSOCIATION OF LUXURY BRANDS IN 2015

SPENDING INDEX

YoY GDP CHANGE

4. Car

5.1

5. Property

6.4

HOUSEHOLD FINANCIAL SITUATION INDEX 60

1.9%

2Q15 60

50 2.2%

3Q15 50 40

RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

40 4Q15 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

1.3%

30 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

www.ftconfidentialresearch.com

Chapter 7 | chile

and a slightly higher number said that they had purchased real estate. • Well over 70% of consumers say that they visit malls each month for clothing purchases.

73.9%

Of Chilean consumers say that they visit malls at least four times a month to purchase clothes

• And the clothing retailers are not just selling to Chilean consumers. Reports from CASC, the association of Argentine mall operators, indicate that there has been a surge in the numbers of Argentine shoppers who have travelled to Santiago to buy clothing and electrical goods at prices that are much lower than in Buenos Aires. This is in the context of a tourism industry for which most metrics are rising at solid mid-single digit rates. • The luxury brands’ boutiques and the independent retailers/jewellery stores through which they distribute are concentrated in three upscale malls in Santiago. Two of those malls are the flagship Costanera Center and the Altos Las Condes mall, owned by the Cencosud group. The third, which was the country’s first upscale mall when it opened in 1982, is the Parque Arauco Kennedy, operated by Parque Arauco. Both operators report very high rates of occupancy in these malls. • H.Stern, the dominant jewellery chain of Brazil, does not appear to have a presence in Chile even though it has a substantial regional footprint.

Key economic trends

Notable In mid-May 2016, Fitch Ratings affirmed Chile’s Long-term Foreign- and Local-currency Issuer Default Ratings (IDRs) at ‘A+/AA-’. Fitch also affirmed Chile’s senior unsecured foreign bonds at ‘A+’. The outlook is stable1. Banco Central de Chile (BCC- the central bank) noted in early May 2016 that the IMACEC, its indicator of the performance of the overall economy, had slipped by 0.1% in the month of March in seasonally adjusted terms. Relative to March 2015, the indicator was up by 2.3%2. At its meeting on 17 May 2016, the central bank kept its key policy rate unchanged at 3.5%3. The IMF looks for real GDP to grow by 1.5% in 2016, having risen by 2.1% in 2015. Growth in 2014 was 1.8% and is expected to be 2.1% in 2017. The current account is expected to remain stable, deteriorating slightly from 2.0% of GDP in 2015 to 2.1% this year and to 2.7% in 2017. The IMF anticipates that inflation in Chile will slip from 4.4% in 2015 to 3.5% in 2016 and 3.0% in 2017.4

Key metrics on Chile 1. Reuters, ‘Fitch Affirms Chile’s Foreign-Currency IDR at ‘A+’; Outlook Stable’, 19 May 2016 2. Banco Central de Chile, March 2016’s monthly index of economic activity, IMACEC, 5 May 2016 3. Banco Central de Chile Press Release of 17 May 2016 4. IMF Regional Economic Outlook, Western Hemisphere, April 2016, p48

Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) 1.9 2.2 1.3 2.1 1.9 2.6 Gross fixed investment YoY change (%) -3.0 4.3 -1.3 -1.5 1.0 2.3 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 24.4 23.3 23.4 22.9 24.8 – General government spending (% GDP) 23.7 23.7 24.9 26.2 27.1 – General government fiscal balance (% GDP) 0.7 -0.4 -1.5 -3.3 -2.3 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) 4.8 4.7 4.5 4.4 3.6 3.0 Industrial production YoY change (%) -3.3 -7.6 1.8 -0.3 1.2 2.0 Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

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Chapter 7 | chile

Investor sentiment The IGBA Index of Chile’s stock market rose by 18.8% from the beginning of the year to April 19 2016. The peso had fallen by 5.8% against the US dollar5. Over the last year or so, the norm has been for about 20-25% of institutional investors surveyed by FTCR to be equal weight to Chile’s stock market. A clear trend since early 2015 has been for investors to move underweight. In Q215, only 25% of investors were underweight – and all survey respondents had some exposure to Chilean stocks. In Q116, 10% of respondents had no exposure, and 45% were underweight6. In early 2016, the commercial real estate consultancy group CBRE interviewed 31 leading institutional investors that focus on Latin America. Some 23% cited Chile as the country most attractive for property purchases in 2016. The most attractive metropolitan markets cited included São Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami7. Key consumer trends FTCR’s quarterly consumer surveys portray an environment that has remained broadly stable in Q413, when the Spending Index fell quite sharply. 5. FTCR LatAm 21 April 2016, p24ff 6. FTCR LatAm 24 March 2016, p6 7. CBRE, Latin America Intentions Survey 2016, p10 8. FTCR Consumer Indices 9. iProfesional 21 April 2016 ‘Chile: “Nuevo Miami” de los Argentinos: con precios súper bajos para electrónica y ropa, el turismo sube 60%’. http://www. casc.org.ar/index.php?option=com_ k2&view=item&id=143:25-04-16noticias-del-sector&Itemid=163

Economic Confidence is low, and has been deteriorating steadily over the last two years or so. However, fear among consumers about the impact of the weaker economy on the job market appears excessive. The Household Financial Situation Index has held up over the last year or so. The Job Prospects Index is at a similar level to mid 2014. Unlike their counterparts in other countries, Chilean consumers are not concerned about inflation. Buying intentions for clothes and healthcare plans have held up well over the last two years or so. Buying plans for education improved sharply in Q116.

10. All data from FTCR LatAm consumer survey of Q116

Chilean retailers are benefiting from Argentine shoppers coming to Santiago to take advantage of prices that are much lower than in Buenos Aires and in a city that is easier and cheaper to get to than Miami9.

11. ‘El Chile que revela Censo 2012: suben los hogares unipersonales y aumenta el acceso a internet’, La Segunda online, 2 April 2013

FTCR Consumer Survey of Q11610

In 2012, at the time of the last Census, there were an estimated 5.04m households in Chile11.

FTCR Chile consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 68.4 56.5 56.2 48.9 55.6 50.0 58.8 53.6 52.2 51.2 56.8 Economic Confidence Index 47.4 52.9 47.2 37.7 30.6 23.8 30.5 25.6 17.2 19.8 22.8 Household Financial Situation Index 53.9 48.0 48.6 44.4 42.8 39.0 45.1 40.7 37.3 36.4 38.5 Inflation Indices Inflation Perceptions Index 65.1 68.4 65.1 66.6 68.0 66.6 65.9 65.8 69.5 68.3 65.1 Inflation Expectations Index 56.0 58.5 60.0 57.5 61.0 60.5 59.8 58.7 60.9 62.1 59.4 Job Prospects Index 50.4 52.0 52.9 44.3 41.5 40.4 46.7 39.9 37.3 41.8 43.9 Buying Intentions Indices Clothes 55.9 60.5 64.1 55.0 51.6 53.9 58.6 56.4 47.6 53.7 54.0 Education 51.7 46.9 60.2 41.3 43.7 45.0 62.4 44.4 42.3 45.2 58.0 Healthcare plans 33.9 25.0 24.5 25.5 26.3 23.6 27.0 25.8 27.3 27.2 28.4 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Chilean economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

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Chapter 7 | chile

Some 7.8% had monthly incomes in excess of CLP2,300,500 ($3,200). Extrapolating from FTCRâ&#x20AC;&#x2122;s sample, there should be about 400,000 wealthier households.

Of the wealthier households said that their financial situation had improved over the last year

About 67% of the wealthy households use online banking: of this group, 12% has undertaken an online transaction in excess of their monthly income.

Situation of wealthy households relative to Q115 Better

Unchanged

Worse

Do not know

1.3% 21.8% 35.9%

41.0%

Source: FT Confidential Research

Didyou youpurchase purchasethe thefollowing followingin inthe thelast lastthree threemonths? months? Did Yes

100 80 % of respondents

22%

About 22% of the wealthier households said that their financial situation had improved over the last year. Around 36% said that their financial situation had deteriorated, while a similar number believed that their financial situation was basically unchanged. The main problem is the deterioration of the national economy, which is the main financial preoccupation for 24% of the wealthier households. At 22%, the number of wealthier households for whom the weakness of the labour market is the main financial preoccupation is only marginally lower. Although they are cautious, and quite reluctant to buy cars (with only 5% having purchased one in the last three months), Chileâ&#x20AC;&#x2122;s wealthier households are still spending on big ticket and/or non-essential items. Some 46% had purchased electric appliances in the preceding three months. Some 35% had purchased international travel, while just over one half had purchased domestic travel.

60 40 20 0

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

Chapter 7 | chile

FTCR Mall Shopper Survey of September 201512

The number of Chilean consumers who go to a mall at least four times a month to purchase clothes rose from 72.9% in Q314 to 73.9% in Q315.

About half of Chilean consumers spend 16% or more of their monthly leisure budget on dining out at restaurants, bars and cafes

About half of Chilean consumers spend 16% or more of their monthly leisure budget on dining out at restaurants, bars and cafes. About one quarter of consumers spend 16% or more of their monthly leisure budget on cinemas, theatres and concerts. Having expanded into Peru and Colombia, Chilean mall operator Parque Arauco is looking to exploit turmoil in the malls sector in Brazil to expand into that country.

Key tourism trends

Inbound tourism has been surging in Chile. According to the World Tourism Organisation, the number of visitors surged by 22% in 2015 to 4m. Across the region as a whole, growth was 4.7%. The number of tourists was boosted by an influx of visitors from Argentina for the Copa América football championship14. FTCR’s Q116 survey found that the number of Chilean consumers who have recently taken, or who expect to take an overseas vacation was higher than in Q115. The number of travellers to other destinations in Latin America was 9.3%, up from 7.7% in Q115. The number of travellers to the Caribbean jumped from 2.1% to 3.6%. Smaller increases took place in the number of travellers to the US (from 1.2% to 2.4%) and to Europe (from 1.8% to 2.8%)15. Thanks to the large number of foreign visitors for the Copa América football championship, visitor exports jumped by 13.1% in 2015. Most other aspects of the tourism

Growth rates Annualised to 2016 2015

2016E

2026F

Visitor exports Domestic spending on tourism Internal tourism consumption Purchases by tourism providers Direct contribution of travel and tourism to GDP Capital investment 12. FTCR, Latam 22 October 2015, p5 13. WTTC, Travel & Tourism Economic Impact 2016, Chile 14. FTCR LatAm, 21 April 2016, p6. 15. FTCR LatAm, 21 April 2016, p6. 16. WTTC, Travel & Tourism, Economic Impact 2016, Chile 17. WTTC, Travel & Tourism, Economic Impact 2016, Chile

Imported goods from indirect spending Total contribution of travel and tourism to GDP Expenditure on outbound travel 0

10 %

Sources: WTTC, Travel & Tourism Economic Impact 2016, Peru www.ftconfidentialresearch.com

Chapter 7 | chile

industry increased at solid mid-single digit rates. Through 2016 and for the next decade, most metrics are expected to rise by around 3% annually. The main exception is spending on outbound travel, which is expected to grow by about 6-7% annually.16.

No. of shopping malls of all kinds in Chile

Business travel accounts for just over 17% of the tourism industry’s contribution to GDP. Foreign visitor spending accounts for 19% of the industry’s contribution17.

Key luxury retailing trends

General As discussed below, some of the major luxury brands have their own boutiques in Santiago. However, they predominantly operate through independent jewellery stores. The luxury brands have a very limited presence outside Santiago. Typically boutiques and the independent jewellery stores are located in one of three upscale shopping malls in Santiago: Mall Costanera Center, Mall Parque Arauco and Mall Alto Las Condes. There are around 79 malls of all kinds in Chile18. Cencosud19 Chilean retail giant Cencosud SA operates 245 supermarkets, 35 home improvement stores and 25 shopping centres in Chile. It also has a joint venture in financial services with Scotiabank. Cencosud’s strengths include a broad variety of brands in all business segments, catering to both high income and low-to-middle income consumers. Cencosud is the owner of the Costanera Center, in the Providencia district of Santiago. Costanera Center is a complex that includes the tallest skyscraper in Latin America (Gran Torre Santiago), three other skyscrapers and a mall with six levels. Cencosud also owns the Alto Las Condes mall. Other properties in Santiago include the Florida Center, Portal La Dehesa, Portal La Reina, Portal Nuñua. Elsewhere, Portal malls can be found in Quilpué, Rancagua, Temuco and Osorno20. Parque Arauco21 Parque Arauco is one of Latin America’s leading developers and operators of shopping centres, with properties in Chile, Peru and Colombia. Opened in 1982, Parque Arauco Kennedy was the first upscale shopping mall in Chile. It has 115,000 sq metres of gross leasable area and is fully occupied. The company notes that ‘many brands have opened their first store in Chile in Parque Arauco Kennedy during the last five years including Tiffany & Co, Dolce & Gabbana, Forever 21, Jimmy Choo, Tory Burch, Aeropostale, Gap, Omega, Versace Collection, Vince Camuto, Free People and Café Paul.’

16. WTTC, Travel & Tourism, Economic Impact 2016 – Chile 17. WTTC, Travel & Tourism, Economic Impact 2016 – Chile 18. FTCR, LatAm 22 October 2015, p8. 19. Cencosud corporate presentation of April 2016 20. www.cencosudshoppingcenters.com 21. Parque Arauco corporate presentation of September 2015

In H215, Parque Arauco increased the gross leasable area of Parque Arauco Kennedy by 1,000 sq metres, with the opening of the Distrito de Lujo. Total investment was $10m. Other properties in metropolitan Santiago include the malls at Maipú, Quilicura, Estación Central, and the Buenaventura Outlet. Parque Arauco’s portfolio includes six regional shopping centres, three outlet malls and 11 strip centres. The average age of the portfolio is 16 years.

Chile luxury insights

Sales in Chile’s luxury market were valued at $500m in 2015, according to the local association of luxury brands (Asociación de Marcas de Lujo [AML]), a little lower than www.ftconfidentialresearch.com

Chapter 7 | chile

chile: Key developments to watch According to Nicolas Parkes, the president of AML, Chile is already the Latin American country with the greatest presence of luxury brands, and he identifies exchange rate stability as key to that. He also notes that while Chile represents a small domestic market, Chilean consumers of luxury goods are knowledgeable, they follow global trends; and they “think and consume” like international customers. Parkes notes also that personalised and differentiated service will remain very important to Chilean consumers. The new ‘luxury district’ in the Parque Arauco mall is leading the way in this respect, with a particular focus on Chile’s new generation of affluent and more independent female customers. Online marketing is critical to reaching these customers, whether by way of blogs or lifestyle sites like biut.cl In 2015, despite a ‘crisis year’ in Chile, sales of premium watches and jewelry rose by an estimated 7% year on year, on AML figures, indicating continued demand strength within the high income

consumer segment, despite a sharp drop in the exchange rate. There is some political instability affecting the centre-left government led by President Michele Bachelet, associated to the administration’s difficulties in progressing with flagship education, tax and labour reform initiatives, as well as problems with corruption scandal. The capital Santiago has endured some recent social unrest in the form of student protests, and the general public mood has soured in line with the economic downturn. That said, Chile will remain a very safe destination for visitors and one of the most open and businessfriendly countries in Latin America. The Bachelet government is seeking to steer closer regional trade and investment links, encouraging those countries grouped in the Southern Common Market (Mercosur, comprising Argentina, Brazil, Paraguay, Uruguay and Venezuela) to pivot towards the more liberal free trade approach taken by the Pacific Alliance bloc (Chile, Peru, Colombia and Mexico). This will be supportive of investment and tourism. The Bachelet government

has sent down to congress new legislative initiatives to boost productivity, as per the ‘year of productivity in 2016. The government aims to improve access to financing, increase services exports and simplify regulatory procedures to strengthen entrepreneurship and investment, so as to boost economic growth and continue to lift domestic incomes. For now economic growth will remain sub-par in the mining-dependent economy. The Organisation for Economic Cooperation and Development (OECD), of which Chile is a member, in June said that growth would moderate this year reflecting weak commodity prices, tighter financial conditions and fragile consumer and business confidence. It projected improving activity in 2017, “as confidence starts to rebound and the global economy strenghtens, underpinning a gradual recovery in investment and private consumption”. Once the effects of the past currency depreciation have worn off, inflation will return to within the central bank’s tolerance range, it noted.

expectations, reflecting a cooling of the mining-dependent economy. Within this nonetheless, the only category to post a decline in sales was the luxury vehicles sector; this was mostly attributable to the fall in the exchange rate, which added sharply to prices for vehicles already typically costing over $100,000. While the economy has slowed, high-income earners have not felt any significant drop in earnings, and low inflation has ensured price stability despite some currency depreciation. The AML noted the continued strength of the market for premium watches in Chile, where, as in some other Latin American countries like Colombia, there is a strong tradition of collecting. Both consumers and collectors in Chile prize tradition, complex movements and are very aware of new products and international brands. It estimated that sales of luxury watches and jewellery rose by about 7% in 2015; partially driven up by an increase in average prices, due to the weaker exchange rate. Tiffany & Co and Hermès joined Chile’s association of luxury brands in 2015. Chilean luxury consumers are quite sophisticated and mirror their international www.ftconfidentialresearch.com

Chapter 7 | chile

61 counterparts in that they can broadly be segmented into three groups; led by those above 49 years old, who value exclusivity, sophistication and traditional, high quality brands. They are conservative and quite classical in their dress sense, disliking showy brands and logos, and preferring ‘subtle wealth’ brands that are established, discrete and timeless.

Santiago has become an important hub for regional shoppers and tourists coming from the likes of Argentina and Brazil

The ‘Generation X’ consumers, aged between 34 and 48, place a little more value on logos, status and peer approval, however the brand ‘experience’ and brand heritage are key to their purchase decision. These consumers value the history and trajectory of a brand, the story behind their purchase item, and they appreciate handicraft and traditional methods. They are also more environmentally conscious than the older generation and therefore place strong value on products that claim to continue to use very localised craftsmanship and inputs. Finally, these consumers like a highly personalised and differentiated customer service experience. The ‘millennials’ are less consumerist. They buy less frequently, but they too place a strong emphasis on high quality, traditional and local methods, and will more actively seek out environmentally friendly brands, goods and services. Peer approval and peer-to-peer communications are significantly more influential than traditional advertising – social media and the Internet being the best way to reach these young consumers. AML expects sales to recover from 2017 and rise steadily to $1bn in or around 2020. In the Chilean market, it points in particular to the growth of affluent female shoppers looking to distinguish themselves through high-end clothing and premium accessories, as well as a new generation of professional couples with strong purchasing power. These new segments have also grown up with the Internet, and from a young age have also travelled and engaged in cultural exchange. As such, they are sophisticated, discerning and also price-savvy consumers. For the new generation of professional Chilean women in particular, ‘pleasure is no longer a sin’ and these aspirational consumers will save up for a particular product. AML echoes other retail experts in noting that the Chilean client’s shopping experience is critically important; they will complain and not return if they feel in any way slighted by a store. Santiago has become an important hub for regional shoppers and tourists coming from the likes of Argentina and Brazil, thanks to its safe and secure environment, high quality accommodation, its central and sophisticated luxury shopping malls with their attention to personalised customer service, in which all the main brands are conveniently concentrated and – most particularly – its competitive prices. This price advantage is thanks to Chile’s wide array of free trade agreements, which means lower average import tariffs and costs for luxury goods in comparison to other regional countries like Brazil. As such, many wealthy Argentines and Brazilians are now choosing Santiago over the likes of Buenos Aires (from which luxury brands have exited in recent years). For international brands looking at Latin America, Chile is also the top country in the region in which to do business, with transparent and relatively straightforward set up and operating costs. n n n

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Chapter 8 | argentina

8. Argentina Headlines have been dominated by the Argentine government’s successful placement of $16.5bn in bonds, in mid-April 2016, in the largest ever issue by an emerging markets sovereign. For the 500,000 or so wealthier households in Argentina with monthly incomes that exceed $2,500 or so, life generally has not altered. Consumer confidence had been improving gradually even before the change in government in December 2015. Around 40% of the wealthier group purchased electrical appliances in the first three months of this year, and a similar number travelled internationally. It appears that sales of luxury items have remained stable, even though many of the wealthier consumers buy when they are outside the country. Unlike in other Latin American countries, Argentines tend to buy luxury items from independent boutiques and jewellery stores – outside major shopping malls. • On the basis of official data and FTCR’s Q116 survey of consumers, it appears that there are around 500,000 wealthier households in Argentina. • The persistently high inflation, and the threat of unemployment, has been a challenge for many of the wealthier households. Nevertheless, a clear majority considered that their financial situation did not deteriorate over the year to Q116. • Sales data from the leading malls in the Federal Capital and across greater Buenos Aires indicate that, in real terms, consumption spending has increased marginally in real terms over the last year or so.

ARGENTINA: LUXURY FROM INDEPENDENT BOUTIQUES 7.6%

Shopping centres

277,203

sq metres GLA

SAID MALLS ARE THEIR FIRST CHOICE FOR BUYING CLOTHES IN Q315

1. Domestic travel

32.4

2. Electric appliances

40.5

3. International travel

37.8

4. Car

Shopping centres

5. Property

334,080

2.7 –

sq metres GLA

SPENDING INDEX

YoY GDP CHANGE

HOUSEHOLD FINANCIAL SITUATION INDEX

40 2Q15

70 60

1.9%

35 30

2016E -0.7%

40 30

RESPONDENTS WHO BOUGHT THE FOLLOWING IN THE PAST THREE MONTHS (%)

Buenos Aires

2017E 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

3.6%

20 3Q13 1Q14 3Q14 1Q15 3Q15 1Q16

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Chapter 8 | argentina

• In general, economic confidence has been improving – and was doing so even before the change in government in December 2015. In short, excitement about Argentina on the part of international investors enabled the government to place the record $16.5bn issue in April.

Economic confidence has been improving – and was doing so even before the change in government in December 2015

•

While wealthier households have been reluctant to buy motor vehicles, they have been spending on big ticket/ non-essential items. FTCR’s consumer survey found that 40% had purchased an electrical appliance and a similar percentage had travelled overseas in the previous three months.

• Collectively, all Argentine consumers spend less of their monthly income on leisure than do their counterparts in other countries in the region. They also tend to shop far less at malls than other Latin American consumers. • This is reflected in the location of luxury product outlets. Although a number are located in upscale malls in the Federal Capital (and, in particular, malls owned by IRSA and Cencosud), much of the luxury sales take place through independent jewellery stores that are not situated in malls. • Unicenter and the Tortugas Open Mall appear to be the main malls in greater Buenos Aires (outside the Federal Capital district) where luxury goods are sold. Residents of greater Buenos Aires tend to buy either within the Federal Capital district, or overseas. • H.Stern, the dominant high-end jewellery chain in Brazil, has a small presence in Argentina.

Key economic trends

Notable The new government led by President Mauricio Macri reduced foreign exchange controls in December 2015. This resulted in a 40% devaluation of the peso and essentially eliminated the gap between the official and the unofficial (‘blue dollar’) exchange rates. The government also eliminated or reduced export taxes on agricultural products and increased utility tariffs1. On April 19 2016, the Argentine government successfully placed $16.5bn in bonds with institutional investors. This marked its return to global bond markets after a 15-year hiatus. The deal was the largest ever issue by an emerging markets government2. Moody’s raised its sovereign credit rating from Caa1 to B3 at about the time of the bond issue3.

Key metrics on Argentina

1. IMF Regional Economic Outlook: Western Hemisphere, April 2016, p29 2. ‘Argentina Returns to Global Debt Markets With $16.5 Billion Bond Sale’, Wall Street Journal, 19 April 2016 3. https://au.news.yahoo. com/a/31365834/moodys-raisesargentina-credit-rating/

Q215 Q315 Q415 2015 2016E 2017E YoY GDP change (%) 1.9 – – – -0.7 3.6 Gross fixed investment YoY change (%) 4.6 – – – 2.5 8.8 2012 2013 2014E 2015E 2016E 2017E General government revenue (% GDP) 31.5 33.4 35.5 35.5 35.1 – General government spending (% GDP) 33.9 35.4 38.1 40.3 40.0 – General government fiscal balance (% GDP) -2.4 -2.0 -2.6 -4.8 -4.9 – Jan-16 Feb-16 Mar-16 2015 2016E 2017E CPI inflation YoY change (%) – – – – 32.1 19.0 Industrial production YoY change (%) – – – -0.3 0.1 4.2 Car sales (000s units) 50 53 61 612 – – Source: FT Confidential Research, Thomson Reuters and Latin American Consensus Forecast

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Chapter 8 | argentina

The national statistics agency (INDEC) notes that its index of manufacturing activity has been tracking broadly sideways at 96-98 points (2012 = 100) in seasonally adjusted terms since early 2014. In October 2015, the latest month for which data is available, the index was down 1.7% in seasonally adjusted terms. INDEC estimated that construction activity in the first 10 months of 2015 was 7.1% higher than in the previous corresponding period. It also calculated that the value of public services provided in the first 10 months of 2015 rose by 2.5% over the previous corresponding period4. In October 2015, INDEC conducted a survey of 37 shopping centres, of which about half were in the Federal Capital district and the remainder in greater Buenos Aires. The agency found that consumer spending in current prices was about 35% higher in the first 10 months of last year than in the previous corresponding period5. The IMF expects real GDP to shrink by 1.0% YoY in 2016, having risen by 1.2% in 2015. Economic growth in 2014 was 0.5% and is expected to be 2.8% in 2017. The anticipated trend in the current account deficit is one of gradual improvement – from 4.3% of GDP in 2014 to 3.3% in 2015 to 2.0% this year and to 1.5% in 2017. The IMF anticipates that inflation will fall to 25% this year and to 20% in 2017.6 Investor sentiment Total returns from the JP Morgan EMBI+ for Argentina’s bond market was 10.6% from the beginning of the year to 19 April. The Merval Index had risen by 18.8%. The peso had risen by 2.8% against the US dollar7.

4. www.indec.gov.ar 5. INDEC Encuesta de Centros de Compras, 25 November 2015 6. IMF Regional Economic Outlook, Western Hemisphere, April 2016, p48 7. FTCR LatAm 21 April 2016, p24ff 8. CBRE, Latin America Intentions Survey 2016, p10

In Q116, 50% of institutional investors surveyed by FTCR were overweight to the Argentine stock market. Another 5% were equal weight, while 15% were underweight. The remaining 30% had no exposure. Relative to Q415, the big change was a reduction in the number of investors with no exposure, from 55%. Over half of investors surveyed in Q215 and Q315 also said that they had had no exposure. In early 2016, the commercial real estate consultancy group CBRE interviewed 31 leading institutional investors that focus on Latin America. Some 6% cited Argentina as the country most attractive for property purchases in 2016. The most attractive metropolitan markets cited included São Paulo, Santiago de Chile, Buenos Aires, Mexico City and Miami8.

FTCR Argentina consumer indices Q313 Q413 Q114 Q214 Q314 Q414 Q115 Q215 Q315 Q415 Q116 Spending Index 70.9 46.6 39.8 42.0 48.3 46.7 52.1 50.1 52.0 53.4 55.0 Economic Confidence Index 25.7 18.6 11.5 14.6 14.3 15.7 24.4 22.8 20.1 24.9 26.0 Household Financial Situation Index 39.5 31.7 23.7 27.0 30.5 29.5 33.7 34.2 34.2 35.2 30.2 Inflation indices Inflation Perceptions Index 77.0 78.3 75.5 72.9 72.1 74.0 72.6 68.5 70.7 68.9 68.1 Inflation Expectations Index 63.3 64.2 62.6 61.7 63.4 64.8 61.4 58.5 60.1 59.0 58.4 Job Prospects Index 32.0 35.1 38.2 37.0 30.3 34.7 36.7 36.4 35.1 37.4 40.2 Buying Intentions Indices Clothes 54.3 51.3 45.6 44.7 46.7 50.9 49.9 47.8 47.0 49.8 42.8 Education 44.9 39.5 59.0 46.6 43.0 36.4 57.7 44.8 45.6 41.5 58.6 Healthcare plans 24.3 20.0 19.7 26.9 23.4 23.6 26.3 23.7 25.7 24.2 23.3 Notes: The current index refers to respondents’ perceptions of the last month (relative to a year ago). The future index refers to their expectations for the coming months. The Spending Index is based on respondents’ reported purchases of essential and non-essential items (restaurants, cinema, travel etc). The Economic Confidence Index is based on respondents’ perceptions of the Argentine economy. The Household Financial Situation Index is based on respondents’ perceptions of their household’s financial situation. The Inflation indices are based on respondents’ perceptions of changes in their cost of living. The Job Prospects Index is based on responses to the question, Is this a good time to look for a job? The Buying Intentions Indices are based on respondents’ reported purchases and intentions to purchase specific goods. Source: FT Confidential Research

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Chapter 8 | argentina

Key consumer trends FTCRâ&#x20AC;&#x2122;s quarterly consumer surveys portray an environment that has been improving since Q413, when the Spending Index slumped. The improvement was quite rapid in 2014 and has since slowed. Economic Confidence had improved substantially, even before the change in government in December 2015. Economic Confidence held up in early 2016. This may be because of the improvement in the perceived state of the employment market. Inflation has been persistently high and the Household Financial Situation Index has deteriorated relative to late 2015. Buying intentions for education and healthcare plans have held up fairly well over the last three years or so. However, buying intentions for clothes have not been lower over that period than they are currently.

FTCR Consumer Survey of Q11610

In 2010, at the time of the last Census, there were an estimated 13.8m households in Argentina11.

Some 3.7% had monthly incomes in excess of ARS35,000 ($2,500). Extrapolating from FTCRâ&#x20AC;&#x2122;s sample, there should be about 500,000 wealthier households.

Situation of wealthy households relative to Q115 Better

Unchanged

Worse 18.9%

40.5%

40.5% Source: FT Confidential Research

Didyou youpurchase purchasethe thefollowing followingin inthe thelast lastthree threemonths? months? Did Yes

100

% of respondents

80 60 40 20 9. FTCR Consumer Indices 10. All data from FTCR LatAm consumer survey of Q116 11. INDEC, Census

Domestic travel

Electric appliances

International travel

Car

Property

Source: FT Confidential Research www.ftconfidentialresearch.com

Chapter 8 | argentina

19%

Of the wealthier households consider that their financial situation has improved over the last year

About 19% of the wealthier households consider that their financial situation has improved over the last year. Around 40% consider that their financial situation has deteriorated, while a similar number believe that their financial situation is basically unchanged. Argentinaâ&#x20AC;&#x2122;s rampant inflation has been the main problem, and is the principal preoccupation of nearly half of the wealthier households. One fifth of households worry about unemployment. Although they are cautious, and reluctant to buy motor vehicles (with only 3% having purchased one in the last three months), wealthier households are still spending on big ticket and/or non-essential items. Some 41% had purchased electric appliances in the preceding three months. Some 38% had purchased international travel, while just under one third had purchased domestic travel. About 60% of the wealthy households use online banking: of this group, 9% had undertaken an online transaction the size of which exceeded their monthly income.

FTCR Mall Shopper Survey of September 201512

Argentine consumers tend to shun malls. Only 7.6% said that malls are their first choice of destination for clothes shopping. In Q313, the equivalent figure had been 13.5%. In regional terms, Argentine consumers have the lowest leisure expenditure . About onethird spend nothing on leisure, while another 30% or so spend less than 5% of their posttax monthly income on leisure. A partial exception to this is spending on gym memberships. Nearly one fifth of Argentine

Growth rates Annualised to 2016 2015

2016E

2026F

-2

Sources: WTTC, Travel & Tourism Economic Impact 2016, Argentina www.ftconfidentialresearch.com

Chapter 8 | argentina

consumers spend 16% or more of their leisure budget on gym membership. In Q314, this was true of just under 18% of consumers.

Key tourism trends

The major luxury brands mostly operate through independent jewellery stores

FTCR’s survey of Q116 found that the number of Argentine consumers who have recently taken, or who expect to take an overseas vacation was lower than in Q115. This was entirely due to a drop in the number of consumers planning a Caribbean vacation from 2.1% to 1.1%. There were small increases in the numbers of consumers going to other Latin American countries (from 6.6% to 6.9%), the US (from 1.0% to 1.2%) and Europe (from 1.8% to 1.9%)14. In spite of a fairly lacklustre economic environment, most aspects of Argentina’s tourism industry have been growing at by about 2-3% per annum over the last year or so, and should continue to do so through 2016 and, indeed, over the next 10 years. The main exception has been spending by foreign visitors, which has generally been trending downwards. Spending by foreigners is, however, expected to increase by 5.5% annually over the decade to 202615. Business travel accounts for just under 70% of the tourism industry’s contribution to GDP. Foreign visitor spending accounts for 13% of the industry’s contribution16.

Key luxury retailing trends

General The major luxury brands predominantly operate through independent jewellery stores. Typically, the independent jewellery stores are located in the Federal Capital district or major regional centres. In greater Buenos Aires, outside the Federal Capital, these brands are offered by independent jewellery stores at Ezeiza Airport and in a small number of malls (such as Tortugas Open Mall and Unicenter) but not, it seems, very much elsewhere. The Brazilian jewellery chain H.Stern has a small presence in Argentina. It has outlets at Ezeiza Airport and in several hotels. There are around 120 malls in Argentina. Argentine shoppers tend to visit malls a lot less frequently than consumers in other Latin American countries. IRSA The dominant operator of malls that appeals to luxury retailers is IRSA Inversiones y Representaciones SA, which describes itself as Argentina’s leading real estate company. Real estate interests in Argentina include offices, hotels, resorts and shopping centres. IRSA has interests in financial services through Banco Hipotecario and owns the Lipstick Building in New York City. Following its acquisition of IDB Development Corporation in Israel, IRSA is effectively one of the largest conglomerates in that country, with interests in real estate (Property & Building Corporation), supermarkets (Shufersal), agribusiness (Adama) insurance (Clal group), and telecommunications (Cellcom)17. 14. FTCR Latam, 21 April 2016, p6. 15. WTTC, Travel & Tourism, Economic Impact 2016 – Argentina 16. WTTC, Travel & Tourism, Economic Impact 2016, Argentina 17. IRSA results for Q116 18. www.irsa.com.ar

In Argentina, IRSA operates 15 shopping centres, with 334,080 sq metres of gross leasable area. Except as indicated, IRSA has a 100% interest in these centres. Properties in the Capital Federal include the Distrito Arcos Premium Outlet (90%), Buenos Aires Design (53.7%), Patio Bullrich, Paseo Alcorta, Dot Baires Shopping (80%) and Abasto Shopping. Alto Palermo caters to middle income shoppers. In greater Buenos Aires, outside the Capital Federal, IRSA operates Soleil Premium Outlet in San Isidro and Alto Avellaneda (which caters to young middle income shoppers). Elsewhere in the country, IRSA operates Alto Comahue (Neuquen – 99.6%), Ribera (Santa Fe – 50%), Córdoba Shopping (Córdoba), Alto Rosario (Rosario) and Mendoza Plaza (Mendoza)18. www.ftconfidentialresearch.com

Chapter 8 | argentina

In its report for the nine months to the end of March 2016, IRSA noted that the occupancy rate for all its shopping centres approached 100%. Revenues and operating income from the shopping centres were both up 36% relative to the previous corresponding period. The EBITDA margin was 77%, in line with that of the previous corresponding period19.

Argentine luxury goods consumers have particularly ‘European’ tastes

Cencosud Chilean retail giant Cencosud SA is present in Argentina as a retailer, through the Jumbo, Disco, Vea and Easy chains. Cencosud also operates 18 shopping centres, within which Cencosud’s share of total gross leasable area (to third parties) is 277,203 sq metres. As of the end of 2015, Cencosud’s shopping centres in Argentina had an occupancy rate of 97%20. Cencosud is the owner of Unicenter, in Martínez, greater Buenos Aires. Unicenter is one of the malls favoured by luxury brands. Elsewhere in greater Buenos Aires, Cencosud owns the Plaza Oeste (Morón), Portal Lomas (Lomas de Zámora), Portal Escobar (Escobar), Palmas del Pilar (Pilar), Factory Parque Brown, Factory San Martín and Factory Quilmes. In the rest of the country, properties include Portal Rosario (Rosario), Portal Tucumán (San Miguel de Tucumán), Portal Salta (Salta), Portal Patagonia (Neuquén), Portal Los Andes (Mendoza) and Portal Trelew (Trelew)21. Galerías Pacífico Owned by Galerías Pacífico SA, the eponymous mall is a historic belle époque style building located at the corner of Florida and Av. Córdoba in the Federal Capital. It includes 150 or so shops. Outlets include Chanel, Christian Lacroix, Daniel Hechter, Guylian, Lacoste, Lancôme, L’Occitane, Salomon, Swatch and Tommy Hilfiger. Testorelli, a leading jewellery chain, has an outlet in the building.

Argentina luxury insights

Due to historical and cultural factors, Argentine luxury goods consumers have particularly ‘European’ tastes. The country tends to look to Paris, Milan and Rome for trends in fashion and lifestyle; Buenos Aires likes to call itself “the Paris of Latin America”. Argentina’s middle classes have grown in recent years, but less dramatically so than in countries like Brazil or Mexico: one result of this is that consumer tastes in jewellery, watches, and accessories tend to be somewhat more traditional in nature. Last year’s luxury sales in Argentina are estimated to have grown by 0.8% to reach $1.76bn according to Euromonitor. More so than in other Latin America countries, luxury goods tend to be sold through boutiques, small shops, and jewellers rather than through shopping malls. There is an average of 5.4 sq metres of commercial retail floor space per 100 inhabitants, one of the lowest levels in the region (compared to 16.9 sq metres in mallrich Mexico or 7.8 sq metres in Brazil). The local luxury market is undergoing an important transition associated with the recent change in government. In the 12 years to 2015, Argentina experienced populist and protectionist economic policies: while President Cristina Fernández de Kirchner, who stepped down in December 2015, could regularly be seen wearing expensive jewellery and timepieces (such as a $20,000 Rolex) her economic policies, particularly high import taxes, did not favour the sector.

19. IRSA results for Q116 20. Cencosud Investor Overview 21. cencosudshoppingcentres.com

As the economy stagnated after 2012 and inflation rose, many luxury brands closed down their direct retail presence in the country. Among those to depart were Yves Saint Laurent, Escada, Polo Ralph Lauren, Louis Vuitton, Calvin Klein, Cartier and Fendi. Carolina Herrera closed down its only shop in Argentina in 2015. After an initial adjustment through devaluation, in the medium to long term the economic policies of the new president, Mauricio Macri, are expected to be much more favourable www.ftconfidentialresearch.com

Chapter 8 | argentina

argentina: Key developments to watch The trend of inflation is critical in Argentina. The national statistics institute (Indec) in late June released new figures putting the inflation rate at 4.2% in the month of May; the government is targeting inflation of 25% by year end and this the yardstick by which the relative success (or failure) of its economic management will be judged. One potential sign of changes in the jewellery sector is the gradual decline of the once booming network of small gold traders and jewellers traditionally based around Calle Libertad, a street in central Buenos

Aires. Some say this is because the long marriage between Argentinaâ&#x20AC;&#x2122;s middle classes and gold is ending in divorce. According to them, gold jewellery was used by the middle classes as a form of investment, but has now been largely sold off out of economic necessity during recurring economic crises. The high international price of gold has certainly not helped sales. Others say there is a cultural shift going on. People nowadays prefer to hold US dollars or invest in property. In the words of one trader, â&#x20AC;&#x153;Before, families would give

gold presents for baptism, first communion, and confirmation. On their 15th birthday, girls would get gold earrings or a gold Virgin Mary pendant. On their eighteenth birthday boys would get a gold watch. Now families prefer giving technology as a present: a tablet or an iPhoneâ&#x20AC;?. Other analysts argue that while traditional gold items may be a little out of fashion, upscale, crafted, and more modern jewellery pieces manufactured from a combination of precious metals (including specialist steels) remain in strong demand.

to the luxury sector. What remains to be seen is the speed of the turnaround. Import taxes and quotas are being reduced or dismantled and heavy taxes on overseas travel by Argentine citizens have been lifted. Jewellers in regional retail hubs such as Miami are already reporting increased sales to Argentine travellers. Given the earlier departure of a number of luxury brands, the question now becomes how, when, and if they will choose to re-enter the Argentine market. Conservative strategies will involve biding time while assessing the strength of the recovery, and perhaps initially focusing on travel-related sales (duty free, Uruguay, Miami) and in-country retail partnerships. The more aggressive will look at gaining a first-mover advantage by opening or re-opening own-brand boutiques in Buenos Aires and other centres. An important characteristic of the Argentine retail market is the high sophistication of retail advertising. Consumers are used to the attentions of a strong TV and online advertising and PR industry, meaning that marketing and branding activities need to be high quality. A well-crafted marketing approach must form part of any re-entry in the Argentine market. n n n

www.ftconfidentialresearch.com

Chapter 9 | cuba

9. Cuba1

$6,700 Average per capita GDP

Aside from sales of locally produced rum and cigars, luxury retail appears to be nonexistent in Cuba. The excitement over the re-establishment of diplomatic relations between the US and Cuba, first announced in December 2014 and formalised in August 2015, has overshadowed two key facts: significant restrictions on US-Cuba business and financial transactions remain in place (including the use of credit cards issued by US banks); and the overall business operating environment in Cuba remains extremely challenging. Even if a luxury retailer could establish an outlet in Cuba, in partnership with a Cuban State-owned enterprise, the retailer would not be able to repatriate the cash generated. There is no evidence that the overall business environment will improve materially any time soon. Perhaps the most important problem is that neither of the two currencies in circulation in Cuba perform the functions of money. Wholesale monetary reform is a necessary – although not a sufficient – condition for Cuba’s economy to fulfil its potential and for a luxury retail sector to develop. • The World Bank and the UN have estimated that Cuba’s GDP in 2012 was over $70bn and that the economy had been growing by around 3%. On World Bank data, average per capita GDP is just over $6,700. • Estimation of wages and real incomes is complicated by price controls and the exchange rate regime. The Convertible Cuban peso (CUC) is used by tourists and in foreign investment transactions. The (non-convertible) Domestic Cuban peso (CUP) is used for domestic wages. One CUC is equivalent to 25 CUP and $1.00. At official exchange rates, Cubans paid in CUCs earn the equivalent of around $20 per month. Many supplement their incomes through black market activities or with remittances from friends and relations in the US. • The complex exchange rate regime and the absence of market prices in many facets of the economy are inextricably linked. The system also has adverse impacts on Cuba’s international competitiveness. Currency reform to date has taken place at an evolutionary pace and envisages a gradual revaluation of the CUP vis-à-vis the CUC. However, unification of the two currencies does not, by itself, solve a fundamental problem: neither the CUP nor the CUC adequately perform the functions of money (i.e. unit of account, medium of exchange, store of value or store of deferred value)2. • It is unlikely that Cuba’s economy will reach its full potential unless and until there is wholesale currency reform. Such a reform might involve the establishment of a currency peg regime – such as that which exists in Hong Kong or Bermuda. However, this would require Cuba’s proper integration with global capital markets beforehand3.

1. All data from FTCR LatAm, 22 October 2015, unless indicated otherwise. 2. ‘Cuba’s unsustainable dual currency system: why it has to be changed and what could replace it’, Emily Morris and Andrew Hutchings, Intelligence Research Limited, August 2013 3. ‘Cuba’s unsustainable dual currency system: why it has to be changed and what could replace it’, Emily Morris and Andrew Hutchings, Intelligence Research Limited, August 2013

• Much of the excitement over the re-establishment of diplomatic relations between the US and Cuba has obscured the fact that the business environment remains very challenging. The foreign investment law (of 1995, and amended in 2014) demands majority control by the Cuban state in various sectors – including natural resource extraction, tourism, wholesale/retail trade, public services and biotechnology. Importantly, the local partner will control access to banking services. • Hotel companies active in Cuba in the past two decades include Spain’s Melía Hotels International and France’s Accor. Many tourist operations have been set up in partnership with Gaviota, the tourism company controlled by Cuba’s military. • Participation of foreign banks in the local financial system remains very restricted. While technically credit cards issued by US banks now can be used in Cuba (following www.ftconfidentialresearch.com

Chapter 9 | cuba

a January 2015 US reform) in practice US banks are reluctant to deal with Cuba, amidst an almost total dearth of correspondent banking between the two. Perhaps most importantly, foreign investors are required to keep cash that is generated by their operations in Cuba with the 100% state-owned commercial banks.

• Other challenges include opaque property and ownership laws, frequent and sudden changes to economic and financial policies, periodic freezing of hard currency bank accounts, restrictive labour laws, and the country’s chequered record of debt and payments problems.

4. http://data.worldbank.org/indicator/ ST.INT.ARVL 5. http://www.melia.com/en/hotels/ cuba/havana/melia-cohiba/services. html

• In any national market for jewellery and accessories, there are two groups of potential clients: locals and visitors. In Cuba, a country where the average per capita income is around $5,500 per year but where the number of inbound tourists has now reached 3m annually (and rising), the latter group is far more important. Over recent years, the main trend in tourist arrivals to Cuba has been one of steady growth. According to the World Bank, the number of international tourist arrivals increased from 2.69m in 2011 to 2.82m in 2012 to 2.83m in 2013 and to 2.97m in 20144. In 2015 arrivals rose to 3m and a rise again is expected in 2016. • In short, the impression is that Cuba currently is an unpromising market for luxury retail – and will remain so for some time. The website of the Melía Cohiba, the top business hotel in Havana, gives no indication of sales of luxury products other than cigars5. n n n

www.ftconfidentialresearch.com

Chapter 10 | panama

10. Panama

Panama’s significant luxury retail segment caters overwhelmingly to foreign visitors

Luxury retail is well established in Panama, and is centred on the Soho Mall, the Multiplaza Pacific Mall (both in Panama City) and the expanding Tocumen International Airport: the customers are foreign visitors. The number of inbound tourists was nearly 1.8m in 2014. Some 13.4m passengers passed through Tocumen International Airport in 2015. The opening of the new terminal at the airport in 2017 will facilitate the growth in the number of passengers towards 20m over the coming years. Many of these tourists and passengers can be assumed to have sufficient disposable income to at least consider the purchase of luxury goods. Most aspects of Panama’s tourism industry are set to grow by around 5% annually over the medium-to-long term. A part of Panama’s appeal as a shopping destination is that it has the lowest sales tax (7%) in the region. The main risk arises from Panama’s being a dollarised economy. In theory, a sharp depreciation in other Latin American currencies against the US dollar could make Panama a significantly costlier destination. However, as of Q116, there was no evidence that the strength of the US dollar over the last two years has had any impact on the number of visitors to Panama. • Panama’s significant luxury retail segment caters overwhelmingly to foreign visitors. • Luxury brand boutiques and the independent retailers through whom they distribute are concentrated at the Soho Mall on Calle 50, at the Multiplaza Pacific Mall and at Tocumen International Airport. • Most aspects of Panama’s tourist industry are growing by around 5% annually.

Key economic trends

Notable As of 2013, Panama’s population was estimated at 3.93m, of whom 1.64m lived in greater Panama City. At current prices, GDP was estimated at $40,467m, or just under $10,300 per capita1. The IMF is looking for real annual GDP growth to rise from 5.8% in 2015 to 6.1% in 2016 to 6.4% in 2017. Inflation is expected to remain moderate, growing from 0.3% in 2015 to 0.8% in 2016 to 2.0% in 2017. The current account deficit is expected to fall, from 6.5% of GDP last year, to 6.1% this year and 5.0% of GDP in 20172.

1. UN Data, Country Profile for Panama 2. IMF, Regional Economic Outlook: Western Hemisphere, April 2016 3. Oxford Business Group: The Report, Panama, passim. 4. Micanaldepanama.com/expansion/ 5/ http://www.fatf-gafi.org/countries/ a-c/brazil/documents/outcomesplenary-february-2016.html

Panama’s economy is dollarised. The local currency, the balboa (PAB), serves only as a unit of account. It is fixed to the US dollar at parity. The US dollar serves as the medium of exchange, the store of value and the store of deferred value. There is no central bank. Monetary policy is determined by the Federal Open Market Committee of the US Federal Reserve. The banking sector is overseen by the Superintendencia de Bancos de Panamá (SBP – the banking regulator). Some non-monetary functions that would normally be carried out by a central bank are undertaken by Banco Nacional de Panamá (BNP – a state-owned universal bank)3. As of the end of April 2016, the new Panama Canal Expansion Program was 98% complete4. In late February 2016, the Financial Action Task Force (FATF) removed Panama from its ‘Grey List’ of jurisdictions with inadequate anti-money laundering regimes5. This positive development was overshadowed by the enormous publicity surrounding the ‘Panama Papers’ affair. www.ftconfidentialresearch.com

Chapter 10 | panama

In early December 2015, Moody’s Investor Services affirmed Baa2 issuer and senior unsecured ratings. The outlook remains stable.

Many of the main luxury brands operate own brand boutiques in Panama

Key tourism trends Inbound tourism has been rising steadily in Panama. According to the World Bank, the number of arrivals increased from 1.473m in 2011, to 1.606m in 2012, 1.658m in 2013 and 1.745m in 20146. The World Travel & Tourism Council (WTTC) expects that spending in Panama by international tourists will fall by 2.0% in 2016. If this is accurate, the downturn will represent a minor correction in a longer-term trend of strong growth. Visitor exports surged by 10.3% in 2010, 31.8% in 2011 and 20.8% in 2012, before rising by 8.9% in 2013, 4.5% in 2014 and by an estimated 12.3% in 20157. Over the long term, most metrics of Panama’s tourism industry are expected to grow by around 5% annually. Business travel accounts for just over 16% of the tourism industry’s contribution to GDP. Foreign visitor spending accounts for 82% of the sectoral contribution. Total spending by foreign visitors is expected to amount to $6.2bn in 2016 and to increase, in nominal terms, to $12.3bn in 2026.8 The geographic position of Tocumen International Airport, and its status as the hub for Copa Airlines, a major regional carrier, mean that usage of the airport should increase as a result of increased intra-regional travel. The number of Latin American consumers who have recently travelled (or expect to do so) to another country in the region rose from 3.7% in Q115 to 3.9% in Q116. The number of consumers looking to travel to the Caribbean slipped marginally, from 2.8% to 2.7%.9

Key luxury retailing trends

Many of the main luxury brands operate own brand boutiques in Panama. The boutiques, and many of the independent jewellery stores through which they distribute, are located in two malls: Soho Mall on Calle 50; and Multiplaza Pacific Mall. There is also a concentration of independent retailers at Tocumen International Airport. Elsewhere, there are also a small number of retailers in the Colón Free Zone (CFZ). Soho Mall was developed by Westline Enterprises, an element of the local Grupo Wisa. This is the first mall in the country entirely dedicated to upscale brands.10

6. http://data.worldbank.org/indicator/ ST.INT.ARVL 7. WTTC, Travel & Tourism, Economic Impact 2016 – Panama 8. WTTC, Travel & Tourism, Economic Impact 2016 – Panama 9. FTCR LatAm, 21 April 2016, p6. 10. Oxford Business Group: The Report, Panama, p95 11. http://www.gruporoble. com/english/wp-content/ uploads/2015/01/1200x360_ lasterrazas2.jpg

Mall Multiplaza Pacific is owned by Grupo Roble of El Salvador. It has more than 105,000 sq metres and is home to over 350 national and international stores, including department stores, supermarkets, pharmacies, banks, restaurants, and modern movie theatres. Luxury, glamour and fashion are to be found in Luxury Avenue Multiplaza Panama, a unique experience where prestigious global fashion brands including Gucci, Dolce & Gabbana, Cartier, Tiffany & Co, Hermès and a long list of other top fashion power houses are located’11. Grupo Los Pueblos is the owner and operator of three other leading malls. Albrook Mall is co-located with the southern terminus of the first line of the Panama City Metro, and the country’s principal bus terminal. Westland Mall is located at Arraiján, to the west of the Panama Canal. Outside the capital, the Cocle Mall is located close to the airport, in the resort of Rio Hato. According to consultancy CBRE, the gross leasable area of Class A shopping malls in Panama City amounted to just under 400,000 sq metres at the end of 201412. Foreign shoppers are attracted to Panama because of the convenient location and a sales www.ftconfidentialresearch.com

Chapter 10 | panama

tax which, at 7%, is the lowest in the region. Studies indicate that, following the expansion of Tocumen International Airport, the number of people passing through the airport should rise from around 8m people annually to 20m13.

The main wildcard for the luxury market in Panama is the expansion of sales to passengers who are in transit at the airport

In March 2016, Tocumen International Airport revised its methodology for counting passengers, so that the methodology is consistent with the norms of the International Civil Aviation Organisation (ICAO – the United Nations agency responsible for the promotion of international air transportation). As a result, the Airport concluded that 12.78m passengers had passed through the airport in 2014, rather than the 8.53m originally reported. The airport calculated that the number of passengers passing through in 2015 numbered 13.43m, an increase of 5.1% relative to the previous year14. Terminal 2 of the airport is due to begin operations in 201715.

Panama luxury insights

Panama is a country with a population of just under 4.0m and, according to the United Nations, average per capita income. However, the number of inbound tourists has been rising steadily, and reached just under 1.8m in 2014, according to the World Bank. These people entered the country (mainly) through Tocumen International Airport, located a little to the east of Panama City. The airport benefits from being near the geographic centre of Latin America (with half of the region’s population living to the north and half to the east) and from being the hub of Copa Airlines. Most metrics of inbound tourism are rising by around 5% annually. The tourists include shoppers attracted to Panama by its convenient location and sales taxes which, at 7%, are the lowest in the region. Along with Miami and southeastern Florida, Panama is the only regional luxury market where the US dollar is the currency. The growth of the market would almost certainly suffer in the event that economic factors caused the US dollar to rise very rapidly relative to all other regional currencies.

12. Oxford Business Group: The Report, Panama, p95 13. Oxford Business Group: The Report, Panama, p95ff 14. Pasajeros Internacional Registrados en el Aeropuerto Internacional de Tocumen Acumulado Diciembre 2015. 15. http://www.tocumenpanama.aero

Aside from H.Stern and David Yurman, many of the leading international luxury brands have a presence in Panama. A number of these luxury brands operate their own boutiques. The boutiques, and many of the independent jewellery stores through which the brands distribute, are located in two malls in Panama City. One of these malls is the Soho Mall on Calle 50, which was developed by Westline Enterprises, an element of the local Grupo Wisa. This was the first mall in the country dedicated entirely to upscale brands. The Multiplaza Pacific Mall, which is owned by Grupo Roble of El Salvador, includes the Luxury Avenue Multiplaza Panama cluster: brands to be found there include Gucci, Dolce & Gabbana, Cartier, Tiffany & Co and Hermès, among others. Independent retailers may also be found on Panama’s Caribbean coast, at the Colón Free Zone (CFZ). In short, the main – and positive – wildcard for the luxury market in Panama is the expansion of sales to passengers who are in transit at the airport. Currently, luxury goods are only offered at the airport through independent retailers. Brands available at the airport include Rolex and TAG Heuer. n n n

www.ftconfidentialresearch.com

Chapter 11 | uruguay

11. Uruguay In theory, Uruguay should be one of the more prospective national markets for jewellery and accessories in Latin America. Uruguay has one of the highest per capita incomes ($16,400 according to United Nations data) and one of the highest Human Development Indices in the region. In addition, Punta del Este, to the east of Montevideo, is one of the premier (southern) summer resorts in South America.

International luxury brands have much less of a presence in Uruguay than in other countries in Latin America

Luxury retailing is focused on three areas. One of those areas is the World Trade Center in Montevideo and the adjacent Montevideo Shopping mall. Both were developed by the Estudio Luis E. Lecueder group. The Lecueder group is also the owner of the WTC FreeZone, an extension of the World Trade Center. Aside from the World Trade Center/ Montevideo Shopping mall complex, luxury goods are also available in the city at the Punta Carretas shopping mall. The other key area for luxury retail in Uruguay is the Hotel Conrad Resort & Casino at Punta del Este and, in particular, the Saison du Temps jewellery and watch retailer. Other luxury retailers may also be found on Calle 20 in Punta del Este. Overall, though, international luxury brands have much less of a presence in Uruguay than in other countries in Latin America. This is partly because of the low numbers of genuinely affluent visitors. According to the Uruguay XXI Investment and Export Promotion Agency, the country had 476 hotels with 15,180 rooms and just under 34,000 beds in 2013. There were only 12 Five Star hotels (with 1,383 rooms and 2,541 beds) and 38 Four Star hotels (with 1,896 rooms and 3,868 beds). The implication is that many of the people who travel to Uruguay can and do also travel to other places where clusters of luxury brands are larger and better established. Moreover, the number of inbound tourists has stagnated over the last five years, amid Brazil’s slide into a serious recession and the restriction on Argentines’ access to foreign currency until December 2015. Louis Vuitton closed its outlet in Punta del Este in November 2014. The imposition of currency controls by the Cristina Fernández de Kirchner administration had caused the country to pull out of Argentina two years previously. During 2014, the number of Argentine shoppers had fallen. There was also a lack of customers from São Paulo. With luxury retailers in that city delivering purchases safely to customers’ residences, Paulistas who might otherwise have shopped in Uruguay were doing so at home. Luis Vuitton was unusual in that it was selling through its own brand boutique. If they have a presence in Uruguay at all, most major brands distribute through independent retailers. The major brand with the largest footprint in Uruguay appears to be TAG Heuer. The eight locations in which its watches are sold in Uruguay suggest that the company is focusing on customers travelling into or out of the country. It sells through the independent Chronos Montevideo at the World Trade Center and through the independent Sensation du Temps at the Hotel Conrad Resort & Casino in Punta del Este. Through a partnership with independent group Dufry, TAG Heuer watches are also available at the Montevideo and Punta del Este airports. The other four outlets, operated by Duty Free Americas, are located in the border towns of Bella Unión, Chuy, Rio Branco and Rivera. Looking forward, it appears unlikely that there will be a significant upturn in the fortunes of the luxury retailers in Uruguay until there is a meaningful improvement in economic conditions in Argentina or Brazil. n n n www.ftconfidentialresearch.com

Chapter 12 | latest business developments

12. Latest business developments Is Brazil or Mexico the number one market for luxury retail in Latin America?

There is no black and white answer. According to Euromonitor, luxury market retail sales in Brazil were up by 3.9% to $6.47bn in 2015, while in Mexico they were up by 6.1% to $5.9bn. So on that basis, Brazil, for now, is the bigger market overall. However, according to other estimates, the Mexican luxury market is much larger than that. Abelardo Marcondes, director general of the Mexican firm LuxuryLab, calculates that the luxury sector in Mexico generated $14bn in earnings in 2015, up by 11% year on year. LuxuryLab, which in June hosted a luxury brand and travel conference at the St Regis hotel in Mexico City (‘DigitalLuxuryLabGlobal’) expects additional growth of 8% in 2016. It may be that some measures of the ‘luxury market’ are broader than others. Nonetheless, there is evidence of Mexico’s ascent to the top luxury market spot in Latin America. According to WealthInsight, Mexico City, along with other leading emerging cities like Mumbai, Istanbul and Tel Aviv, will post strong luxury sector growth to 2019. Brazil’s economy is 1.8 times larger than Mexico’s, and it has 1.6 times more inhabitants. Between them, according to WealthInsight, the two countries are home to 23m of the estimated 320m people in the international luxury goods market. But Brazil is in recession and Mexico is not; Brazil’s luxury sales have been growing more slowly than Mexico’s; and profit margins tend to be lower because luxury imports such as jewellery and watches are taxed more heavily in Brazil than they are in Mexico. On current trends, Mexico is clearly the more dynamic market and may become number one in overall sales terms. Yet Brazil may bounce back. In the medium term, assuming Brazil is able to overcome its current economic problems, it may be able to leverage its larger size and population, to push it further ahead in the luxury sector. However, much more needs to happen for Brazil to become more attractive to luxury retailers: the key issue – and a key variable to watch – is what happens to Brazilian import tariffs and retail taxes. The question is whether the current interim government will seek to open up the economy more, and whether the luxury sector will benefit from that.

Brazil

Brazil’s economy will have contracted for two years in succession, 2015 and 2016, the first time this has happened in over half a century – since the 1930s. The question now is whether the recession has run its course and whether a recovery may be on the way in Latin America’s largest economy. The balance of probabilities is that a rather weak recovery will begin in 2017. The latest data, for the first quarter of 2016, shows a quarter-on-quarter fall in GDP of 0.3%, not as weak as expected and better than experienced in2015. On a yearon-year basis the economy still shrank by 5.4%, however. There are various reasons now for cautious optimism. Brazil has begun to adjust to the end of the commodities boom; a depreciated local currency is helping boost exports. With Dilma Rousseff suspended from the presidency and facing an impeachment trial, the interim president, Michel Temer, has begun to pursue more investor-friendly economic policies, and is renewing attempts to reduce the massive fiscal deficit. Most analysts expect Temer to remain in office until new elections in 2018, meaning that the new government taking office in January 2019 will be well placed to consolidate economic improvement. That is the optimistic scenario. Against this, there are a number of risks. The Temer government, like its predecessor, has not been able to shake off corruption allegations (with less than two months in office, www.ftconfidentialresearch.com

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three ministers have had to resign already because of allegations over their conduct). The impeachment process and corruption investigations remain volatile and unpredictable. And also like its predecessor, the Temer administration may struggle to get support in congress for necessary but unpopular economic reforms and fiscal austerity. While the balance of probabilities points to recovery, it may take a number of years and structural economic reforms before Brazil is really able to regain something of its earlier dynamism. According to calculations by the Spanish bank BBVA, “Brazil’s capacity to grow without generating distortions has declined to 1%, in comparison to 3.5% between 2004 and 2010.” It will take time to turn that around.

Colombia

Following approval in April of presidential decree no. 6601, which amends a previous tax law, Colombia will now return VAT to tourists purchasing luxury goods in border special development zones. Local retailers hope the reform will provide a timely boost to the luxury sector, which has reported mixed fortunes of late, not least because of the strength of the US dollar against the Colombian peso, which has weighed on prices. The VAT rate in the country is currently set at 16%, but a new fiscal reform, if approved later this year, could raise it to 19%. Under the decree, a customer must present an original receipt, as issued by an officially registered retailer, whereupon 100% of the VAT will be returned for items above a certain value. The peace dividend? On June 23 the Colombian government and the Fuerzas Armadas Revolucionarias de Colombia (FARC), the country’s largest left-wing rebel group, signed an historic cease-fire agreement, after over two years of negotiations on a comprehensive peace settlement. The deal could be a historic turning point, ending over half a century of damaging internal conflict and ushering in a new period of inclusive and stronger economic growth. This is a positive development for the country, but going forwards there are many risks to bear in mind. First, a smaller but still significant guerrilla force, the Ejército de Liberación Nacional (ELN), has not yet begun peace talks with the government (despite a tentative agreement to do so). Secondly, the process for moving from a cease-fire with the FARC to full disarmament and a comprehensive peace settlement remains complicated, and is resisted by an opposition party led by former president Alvaro Uribe (2002-2010), now a prominent senator, who says it gives away too much to the guerrillas. The full settlement is expected to be put to a national referendum: approval is not guaranteed. In third place, there is a danger that some demobilised guerrillas may be drawn to Colombia’s drug and criminal cartels, meaning that the security forces will continue to face the problems posed by the existence of heavily armed groups. However, even bearing in mind all these provisos, the cease-fire is a positive signal: it points to a higher long-term economic growth rate and a stronger luxury goods sector.

Mexico

Competition may intensify in the Mexican department store sector. Falabella of Chile, South America’s largest department store chain, has made an interesting move to enter the Mexican market. Initially, Falabella is not targeting the luxury retail sector, but focusing instead on do-it-yourself (DIY) format stores. Falabella says it will invest over $500m with the grocery group Organización Soriana over the next five years to develop the DIY format, which to date has had relatively little market penetration in Mexico.

1. http://es.presidencia.gov.co/normativa/ normativa/DECRETO%20660%20 DEL%2023%20DE%20ABRIL%20DE%20 2016.pdf

However, once present in Mexico, Falabella might look at other formats and retail sectors, including the luxury market. Falabella’s foreign sales have been hit by high inflation in Argentina and the recession in Brazil, so Mexico could be an attractive new market. According to Luis Willard of a Mexico City-based broker, Corporativo GBM, “It is a reality that today’s Mexican consumer is more robust, with better access to credit and stable www.ftconfidentialresearch.com

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job creation. We’ve seen real estate development and shopping centres that favour the creation of big department stores.” Mexico’s Cozumel – also a luxury hotspot New stores by Bulgari, Hublot and Tag Heuer are opening in the city of coastal resort of Cozumel, joining the likes of Cartier, as well as others including Bulova, Movado and Gucci Timepieces, this latter brands sold by the jewellery store ‘Diamonds International’ in the Edificio Miro complex.

Panama

Panama has seen some significant real estate developments, with associated expansion of retail opportunities. One of those currently under development, involving the conversion of the US-built Howard Air Force base, has been described by Forbes Magazine as “the world’s most audacious real estate project”. A wealthy Colombian entrepreneur with a background in banking, Jaime Gilinski, is leading the venture. In partnership with a UK-based developer, Ian Livingstone, he is pursuing a plan to re-develop the 4,450-acre abandoned military base, converting it into a new city to be known as Panama Pacífico. Although 85% of the land is still undeveloped, the work done so far has raised the value of the project to an estimated $3.6bn. Qatari investors now have a 50% take in the overall project. The new city already has attracted industrial and logistics investors, but it also has an important residential and retail component. It is designed to take overspill from the overheated Panama City office, retail and residential real estate market.

Colombia/Panama

Potential realignments in the retail sector have been triggered by US sanctions against Panama’s Waked family, affecting a total of 68 companies including the holding Grupo WISA, through which the family has operated shopping centres, duty free shops and other businesses in Panama itself or in neighbouring countries such as Colombia. Sanctions were announced in early May after Nidal Ahmed Waked Hatum was arrested in Colombia (he faces extradition to the US on money-laundering charges). Collectively, the US Office of Foreign Asset Control (OFAC) designated the Waked companies a money laundering organisation (MLO); US citizens are now banned from transacting business with any of the companies or related individuals, known as Specially Designated Narcotics Traffickers (SDNTs). Since the companies are estimated to employ up to 6,000 people, the Panamanian authorities have been seeking to minimise the economic impact of the MLO designation. The Felix B. Maduro department store (composed of three linked companies: Importadora Maduro, Maduro Internacional, and Lindo & Maduro) has been transferred to a trust administered by the state-owned Banco Nacional, and the OFAC has in return exempted it from full sanctions for a six-month period, pending its potential sale to new owners. Significantly, this means that the store can again accept customer payments made via credit cards operated by US financial institutions. Government sources say this should help save over 70% of the 1,000-plus jobs at risk in this unit. According to reports in mid-June, Soho Mall, a luxury shopping centre in that forms part of Grupo WISA, could also be transferred to a trust prior to being sold. The mall, built at a cost of $400m, was opened in 2015 in central Panama City – the development also houses the Ritz Carlton Hotel. The OFAC in May issued a general licence to assist with winding down transactions for a limited time at Soho Mall. Under the licence, ‘US Persons may engage in limited transactions such as salary payments associated with the Soho Mall Panama only through July 6, 2016, but they may not pay rent to the mall and may not initiate any new orders for the shipment of goods to the mall’. www.ftconfidentialresearch.com

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However, there have already been staff reductions at duty-free outlet La Riviera at Tocumen International airport and other locations. La Riviera, which specialises in beauty products, has been particularly hard-hit in Colombia, where it has both duty-free and domestic retail chains. A decision by landlords to terminate shop leases is forcing the company to close 42 of its 102 outlets. The company was intervened by Colombia’s company regulator in late May: at that point it was reported to have 1,271 employees, assets worth $130m, and liabilities of $45m.

Argentina

In early anticipation of the new Macri government’s moves to lift currency and import controls, the fast fashion brand Forever 21 was already in talks in December 2015 with Grupo Irsa to open a first flagship outlet in Argentina, in the Alto Palermo mall. Now the fifth largest retail chain in the US, Forever 21 is already present in large cities all over the region – with the exception of Buenos Aires. Local consumer market analysts expect Forever 21 to blaze a trail for other international brands to set up (or return) to Argentina. According to Colliers International, a US-based global commercial real estate company, over 40 international brands from the fast fashion and luxury sectors have set up shop in the region in recent years but have yet to move into Buenos Aires. Aside from Forever 21 these include the likes of H&M (whose arrival is also rumoured to be imminent), Topshop, Gap, Zara Home, Brooks Brothers, Bershka and Stradivarius; as well as more exclusive names like Burberry, Dolce & Gabbana and Gucci. Added to these are those brands that were in the country but left amid difficulties with import and currency controls. Many of these, including Armani, Ralph Lauren, Carolina Herrera, Salvatore Ferragamo and Escada, were located along the Patio Bullrich/Avenida Alvear circuit. Buenos Aires luxury district is much reduced now; the remaining international brands are largely high street fashion brands like Zara and Levi’s, and sports outfitters like Adidas, Nike and Puma. By contrast, on similar streets like Alonso de Córdova in Santiago, or Oscar Freire in São Paolo, the offer includes top luxury brands like Fendi, Bulgari, Louis Vuitton and Cartier. Marcelo Zuliani, commercial director at Colliers, commented that these luxury brands did not leave Buenos Aires for want of clients, but because of the difficult business-operating environment. However, he argued that strong demand still exists in the Argentine capital and that while the luxury market was barely there anymore by late 2015, there is an expectation that the major brands will return in short, and he stresses that they can expect to sell as much or more in Buenos Aires than in Santiago or Bogotá, for example. Moreover, Marcelo Sorzana, director of Surreal, a local consultancy, argues that “luxury brands are going to return to the country because they need to have a foot in Buenos Aires for image sake. A shop in the capital acts as a flagship, which serves to position the brand with the Argentine public and foreign tourists”. IRSA group to invest $460m in mall upgrades The IRSA group has announced new investment of $460m to refurbish and upgrade its malls, to include the addition of more retail units and the entry of new brands. Within this, the group plans to spend $21m on its flagship Alto Palermo mall in Buenos Aires, which opened back in 1990. The investment signals the recovery in investor sentiment in the Argentine economy, most especially in the retail sector, in which there is a lot of pent-up consumer demand www.ftconfidentialresearch.com

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following recent years of economic difficulties. However, much will hinge on the Macri government’s ability to get inflation down.

Peru

In partnership with G&G Joyeros, Omega, Tissot and Tiffany & Co are set to open their first exclusive boutiques in Peru this year, with the aim of increasing sales by 20-30%. According to the founder and general manager of G&G Joyeros, Jack Gomberoff, there are plans for a second Tissot store and a third Montblanc store in 2017. G&G Joyeros itself is also considering a new store in Cusco, which is developing a more upmarket tourist offering – the luxury tourism market is growing at an annual rate of about 9%, according to the tourism ministry. Peru’s luxury goods market is set to remain one of the fastest growing in the region, with projected annual growth of 10% in the period to 2020 according to a consensus of sector analysts including Euromonitor.

Cuba

Cuba in late June stated Cubaindustria 2016, an international Havana fair attended by 2,000 visitors from 29 countries, interested in exploring new investment opportunities in Cuba under the revised FDI Law. The fair held 11 sessions on selected sectors including the fashion industry, technology and innovation and organisational innovation. This fair, along with the Congress of Light Industry and the fashion fair La Habana Moda, aims to develop investor interest in the nascent fashion sector in the country, currently the darling of fashionistas. Cuba was given an important PR boost by the decision of French fashion house Chanel to stage its 2016 cruise collection in Havana, marking Chanel’s first ever show in Latin America. n n n

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