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Latin America duty free feels major forces of change
Impact International / July 1, 1998

By Larry Luxner

MONTEVIDEO, Uruguay -- Latin America today offers one of the world's most promising growth markets for duty-free sales, though that trend could be reversed if the region follows Europe's elimination of duty-free shopping by 1999 in the name of economic integration.

That's the chief concern these days of Enrique Urioste, executive director of the Association of South American Duty-Free Shops (known by its Spanish acronym Asutil).

Urioste, interviewed last month at Asutil's headquarters in Montevideo, Uruguay, said the organization was established in August 1995. It now comprises 23 duty-free operators and suppliers including Brasif, Interbaires, Witnauer, United Distillers, Allied-Domecq, H. Stern and Aldeasa; the trade association's combined membership represents over 99% of all duty-free business in the region.

"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 lawyer who's also the president of Tinwor, a logistics company that operates in Argentina, Brazil and Uruguay. "Further, we thought it especially desirable to consolidate and promote the model concepts of duty- and tax-free that have become characterized with South America."

In 1995, the latest year for which statistics are available, the Caribbean accounted for 6.0% of global duty-free sales of $20.5 billion; South America comprised another 2.7% and Central America 0.2% of the total. Top-selling categories worldwide were women's fragrances (11.0%; cigarettes (10.9%); women's cosmetics (8.6%); scotch whisky (8.1%) and cognac (6.0%).

Within South America, the largest duty-free markets are Brazil ($330 million); 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.

In March, Asutil received the final version of a study conducted by Coopers & Lybrand on the impact of the duty-free industry on the region's economies. The 70-page report, entitled "Duty-Free Business in South America: Evolution and Consequences," contains pertinent information on countries' legal systems, numbers of operators per country and other factors.

"Some countries have one big operator per airport, while others have plenty of small operators per airport," he told Impact International. "Other countries do not have a duty-free system and others are putting existing ones up for bidding. We believe that this study is of extreme importance to fulfill our commitments."

According to the Asutil study, miscellaneous goods (electronics, watches, cameras, fashions, leather goods, pens and other gifts) account for 36% of all Latin American duty-free sales, followed by wines and spirits (26.5%) and tobacco goods (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."

In April, the organization named as its new president Verónica Pueyrrredón, manager of institutional relations at Argentina's Exxel Group. Last December, Exxel acquired Argentine duty-free operator Interbaires, which holds the office of Asutil president for a two-year term. Pueyrredón has been with Exxel since 1996, representing all the companies in the group, including the Argentine hypermarket Supermercados Norte. Prior to this appointment, Pueyrredón served as manager of institutional relations for companies as diverse as Estee Lauder and McDonald's.

Asutil's vice-presidency is held by Samuel Kauffmann of Rio de Janeiro-based Brasif, South America's largest duty-free operator. Brasif -- 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, and Kauffmann himself couldn't be reached for comment. Of Brasif's total duty-free revenues, approximately 35% comes from liquor; 20% from perfume and cosmetics; 18% from watches, cameras and other gift items; 15% from electronics; 10% from food items, and 2% from cigarettes.

Urioste 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. The government had to save the Real Plan. If you look at the big figures, you'll see a growing economy that has reduced inflation" to single digits.

He added that even a doubling of the departure tax won't prevent Brazilians from traveling abroad and making duty-free purchases.

"South America is the most interesting continent in the world in terms of duty-free market growth," he said. "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."

That trend is being further accelerated by a 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 the recent establishment of the Southern Common Market -- a customs union that encompasses Argentina, Bolivia, Brazil, Chile, Paraguay and Uruguay -- may threaten the region's duty-free operators.

"Up until now, we have no reason to believe this could happen. There is nothing in the Mercosur regulations that talks about abolishing the duty-free industry as it is happening in Europe," he says. "For the time being, we don't have any problems."

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. But you need to see duty-free as a service provider. 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 Gurméndez, 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. Duty-free operations at the airport -- located in Punta del Este, a trendy resort that caters to wealthy Argentines and Brazilians -- will be exclusively handled by London Supply.

"The elimination of intra-European free shops would cause a problem for the financing of airport operations," says Gurméndez, who estimates that duty-free will contribute around 25% of the airport's total 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."

"There is no single Mercosur politician or technician who questions duty-free. Having made that statement, we believe that if something happens, it'll happen after 1999, after it's abolished in Europe."

Kauffman, when asked the same question in an interview several years ago, told Impact International that ""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."

All these issues will be discussed at Asutil's 1998 annual conference in Buenos Aires, scheduled for Sept. 2-4. Argentine retailers Interbaires and London Supply will play host to the upcoming meeting, expected to attract some 250 retailers, suppliers, distributors and travel industry executives from throughout South America.

For more information on the Asutil conference, call Hopkins Publishing, Asutil's U.S. conference partners, at (954) 344-0326, or send a fax to (954) 344-6119.

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