Impact International / April 1, 2000
By Larry Luxner
RIO DE JANEIRO -- This year, Brasif Duty Free Shop Ltda., Brazil's leading airport duty-free retailer, expects to recover most of the losses suffered in the wake of last year's crippling currency devaluation.
Managing director Samuel Kauffman said Brasif's sales dropped from $290 million in 1998 to $190 million last year, though revenues are expected to climb back to $250 million in 2000.
"This hasn't been an easy year for us," Kauffman said in a recent interview at Brasif headquarters in Rio de Janeiro. "On Jan. 15, 1999, the government devalued the real, and for the next few months, the situation was very difficult. Because of the devaluation, prices in the domestic market were very close to or lower than duty-free prices. Some distributors didn't release products for sale, and those products that remained in the stores weren't sold because they didn't have accurate prices. For two or three months, the domestic market was very confused.Some Brazilian competitors decided to sell their old stocks for old dollar terms. So we were obliged to go to our suppliers and ask for permission to lower our prices."
The difficulties were compounded by the fact that, with the real worth far less than before in dollar terms, Brazilian tourists -- the 'meat and potatoes' of Brasif's business -- immediately began cutting back on overseas travel.
"People only started to buy again in May and June, when the situation relaxed a little, but they're still spending less," said Kauffmann. "Confidence is now growing, not only internally but also externally. We feel good about 2000. We think we'll probably be able to recover 75% of our total losses. The company is still maintaining all our investment plans. We are investing $10 million this year in duty-free, up from $4 million in 1999."
Meanwhile, he says, "the Brazilian economy is projected to have single-digit inflation. The exchange rate will be sustained, and we're not expecting another devaluation."
Last year, as part of austerity measures announced by President Fernando Henrique Cardoso, the federal government doubled Brazil's airport departure tax from $18 to $36 -- a move Kauffmann said had little effect on business. "We do have a problem, however, with the new law that holders of international credit cards must pay a 2% fee over the amount of their purchases," he said. "This is one way the government tries to prevent people from spending more."
Asked if he supports such austerity measures, the businessman replies: "My patriotic side says yes, but not the commercial side."
Kauffmann, 61, is descended from Bessarabian Jews who settled in Brazil around the turn of the century. For the past 17 years, he has served as managing director of Brasif, which started life in 1960 as a steel and construction firm, and was gradually transformed into a duty-free conglomerate.
Brasif, with 900 employees and an estimated 97% of Brazil's duty-free market, today operates 17 stores throughout the country, including two outlets at São Paulo's Guaralhos International Airport that are being enlarged from 720 square meters apiece to 1,600 square meters.
The company also operates a 1,400-square-meter arrivals shop at Rio de Janeiro's Galeão International Airport, and shops in Belo Horizonte, Porto Alegre, Campinas, Recife and Brasília. The company's São Paulo operations are the most profitable, largely because of the high passenger volumes.
At present, arrivals account for 70% of Brasif's business, while departures are only 30%. Approximately 85% of Brasif's shoppers are Brazilians making purchases on their way back into the country from abroad. Of the remaining 15%, noted Kauffmann, most come from Europe or elsewhere in Latin America; very few are U.S. tourists.
Some 7.5 million travelers are expected to pass through Brazilian airports in 2000, says Kauffmann, adding that 38% of arriving passengers shop duty-free, while only 20% of departing passengers do so. Of those who do visit a duty-free shop, the average expenditure is around $25 -- down substantially from previous years.
While the outside world is suddenly more expensive for Brazilians, the devaluation has had the opposite impact on Americans, Europeans and other foreigners visiting Brazil, which is now suddenly 50% cheaper than before. Yet the corresponding rise in tourism is "still very low," says Kauffmann.
"It's increasing in the Northeast, but normally those people come in on chartered flights, and they don't spend much," he said, adding that he doesn't put too much stock in the government's talk about privatizing airport operations. "This is under discussion, but I don't see any possibility of anything happening in the short term. There's a lot of controversy, and the [airport privatization] experience in Argentina was not encouraging."
Liquor currently accounts for 35% of all Brazilian duty-free sales, while perfumes and cosmetics make up another 35%. Electronics, gift items, foodstuffs and tobacco comprise the remaining 30%. Within the liquor category, whiskey -- led by Johnnie Walker Red and Black, Ballantine Finest and Chivas -- accounts for 60% of all sales. "Vodka and other white spirits are growing," says Kauffman, "but not much."
One way Brasif might boost sales in an uncertain economy, Kauffmann said, is to offer customers duty-paid merchandise in the same way it currently sells duty-free items.
"We are expanding today under the travel retail concept into duty-paid shops, using the synergy we have with the name and the quality of our products," he said. "The philosophy is the same. Travelers use their time in the airport to buy."
Following that concept, Brasif opened its first duty-paid store in January 1998 at Congonhas Airport, São Paulo's domestic terminal; the second one was inaugurated in October 1998 at Rio de Janeiro's Galeano International Airport, followed by a third outlet at Santos Dumont, Rio's domestic airport. Two big duty-paid shops opened last August at São Paulo's Guarulhos International Airport, and in December 1999, Brasif opened its first off-airport store in Brazil along busy Rua da Assembleia, on the ground floor of Brasif's downtown Rio headquarters building.
"Duty-paid still represents a very small part of our business, probably less than 10% of total revenues," says Marcelo Bordini Racy, manager of Brasif's duty-paid operations. "We saw that other companies weren't investing anything in duty-paid. So Brasif has invested a lot, taking advantage of the goodwill and the confidence the Brasif name has, and our reputation for selling legitimate products."
Racy, who supervises 50 employees in the duty-paid division, says "our strategy is not to offer the lowest price, but quality and service. We guarantee not only the quality, but also the origin. That's important, since there's a lot of contraband here."
The newest store, at Rua da Assembleia, covers 186 square meters and offers lots of brand-name and designer pens, perfumes, sunglasses, watches and other gift items -- but no liquor or cigarettes. The clientele is mostly executives and secretaries working in this busy downtown location at the center of Rio's financial district.
Brasif has also quietly expanded outside Brazil, and last year opened its first duty-paid store in the United States -- smack in the middle of downtown Miami.
"We have a new duty-paid store on Flagler Street and Second Avenue, close to the Inter-Continental Hotel," says Kauffmann. "We were planning to do a joint venture with Victor's, but decided to do it alone. We found a better location. Next year, we'll probably open a store in Orlando. These shops will not only be for Brazilian tourists, but for all Latin American tourists visiting the United States."