Journal of Commerce / August 12, 1998
By Larry Luxner
MONTEVIDEO, Uruguay -- Latin America today offers one of the world's most promising growth markets for airport duty-free sales. Executives worry, however, that the entire industry could be jeopardized if the Southern Common Market (Mercosur) follows the example of the European Union, which plans to eliminate duty-free shopping by 1999 in the name of economic integration.
That's the chief worry these days of Enrique Urioste, executive director of the Association of South American Duty-Free Shops (known by its Spanish acronym Asutil).
"Asutil originated out of the necessity to create a permanent platform of initiatives for the development of duty-free activities, and an entity for the defense of collective interests," said Urioste, a 36-year-old Uruguayan lawyer who was hired as Asutil's executive director in 1996. Today, the organization comprises 23 duty-free operators and suppliers including Brasif, Interbaires, Witnauer, United Distillers, Allied-Domecq, H. Stern and Aldeasa.
"South America is the world's most interesting continent in terms of duty-free market growth," Urioste said during an interview at Asutil's Montevideo headquarters. "Why? Basically you have the great Asian market that has now collapsed, and in Europe, the [proposed] elimination of the intra-European duty-free business. The U.S. market is growing, but it doesn't have a growth potential because of low taxation and the small difference in pricing between duty-free and non-duty-free products. Africa doesn't have the economic growth needed for duty-free. So that leaves South America. It's one of the few regions with high GDP growth and falling unemployment rates. If Argentina, for example, is growing at 3% to 4% annually, you'll have more people likely to travel and access the duty-free market."
At present, South America accounts for $700 million of the world's $20.5 billion in annual duty-free sales. According to a Coopers & Lybrand study commissioned by Asutil and completed in March, the continent's most important duty-free market is Brazil ($330 million), followed by Argentina ($136 million); Uruguay ($62 million); Colombia ($48 million); Venezuela ($43 million); Chile ($26 million); Peru ($20 million); Bolivia ($13 million); Ecuador ($11 million) and Paraguay ($7 million). This excludes ship chandlers, border shops, free zones and military sales.
The study also found that miscellaneous goods (electronics, watches, cameras, fashions, leather goods, pens and other gifts) account for 36% of all Latin duty-free sales, followed by wines and spirits (26.5%) and tobacco (12.5%).
"In some countries like Brazil, electronics are the leading duty-free goods, because they are so heavily taxed, though higher demand has developed for miscellaneous goods like ties, shirts, umbrellas, toys, leather goods, caviar and salmon," says Urioste. "In the near future, local market prices should go down. That might hurt duty-free, but the duty-free buyer is a very special buyer. He goes in, buys and goes out. He very compulsive. A high percentage of users are executives buying gifts for their wives and children."
Rio de Janeiro-based Brasif is South America's largest duty-free operator. The company -- with annual sales of $250 million and an estimated 97% share of the Brazilian duty-free market -- has reportedly been put up for sale, though Urioste declined to speculate on that.
He did say that Brazil's recent economic upheavals -- a direct consequence of the Asian financial crisis -- have taken their toll on duty-free shopping, though he adds that the Brazilian government's decision to boost the airport departure tax from $18 to $36 "was like medicine to prevent a crisis."
Latin America's duty-free industry is no doubt helped by the recent rash of airport privatizations throughout the region. Earlier this year, the Argentine government decided to transfer the operations of 33 state-owned airports to the Argentina 2000 consortium. That group, led by Ogden Corp. and including Italy's SEA and Argentina's Eurnekian Group, offered to pay the government $171.12 million a year, or $5.1 billion over the life of the 30-year concession.
Yet Urioste is concerned that Mercosur -- which hopes to tie together the economies of Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay -- may eventually threaten the region's duty-free operators.
"Up until now, we have no reason to believe this could happen," he says. "There is nothing in the Mercosur regulations that talks about abolishing the duty-free industry as it is happening in Europe."
Nevertheless, he says, "Europe is taking a decision by 1999 to abolish intra-EEC duty-free. All the European associations and suppliers are running a very intensive lobbying campaign to stop this. We believe they will succeed, because they have very strong arguments for how important duty-free is for the regional economy."
Urioste says that "from a customs point of view, when you fly from Madrid to Frankfurt, you're not crossing any border. It's the same as if you're on a domestic flight. On the other hand, he says, "duty-free contributes between 20% and 30% of the airport budget in Latin America, and worldwide."
In Uruguay, which despite its small size ranks as South America's No. 3 duty-free market, the industry is even more important.
Gabriel Gurmendez, general manager of Consorcio Aeropuertos Internacionales, recently presided over the inauguration of Uruguay's new $40 million Punta del Este International Airport, the first private airport in the world in which the World Bank's International Finance Corp. has ever taken an equity interest.
"The elimination of intra-European free shops would cause a problem for the financing of airport operations," says Gurmendez, who estimates that duty-free will contribute around 25% of his company's total airport operating revenue.
Adds Urioste: "What happens in Europe might affect Latin America, because all the concepts of common markets like Mercosur are based on the EEC model. So if the EEC takes a final resolution to abolish intra-EEC duty-free, that might affect recently born common markets like Mercosur. We have the big advantage of watching what happens in Europe, and obviously we have some time to react."
Samuel Kauffmann, managing director at Brasif, says "the example of the EU is a long way from South America, because the common market in Europe took 30 years to be implemented. Mercosur started four years ago, without time enough to be established. You're talking about four or five countries with major differences among them, such as tax rates, culture and standard of living. Put all this together and it'll take a lot of time."