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Brazil economic difficulties cut into profits at Brasif
Impact International / December 15, 1998

By Larry Luxner

RIO DE JANEIRO -- Brazil's continuing economic upheaval has begun cutting into profits at Brasif Duty Free Shop Ltda., the country's dominant duty-free operator.

Samuel Kauffmann, Brasif's managing director, says that while the number of passengers rose to 6.6 million during the first 10 months of 1998 (up 5.3% from the 6.2 million registered in the year-ago period), the average expenditure per passenger has fallen by 13% -- leading to an overall 10% drop in sales for 1998.

In 1996, says Kauffmann, per-capita expenditures averaged just $41, down from $45 in 1995. Also in 1996, only 23.8% of all passengers even entered duty-free shops, down from 25% in 1995. Kauffmann declined to give similar figures for 1997 and 1998.

"We expect to have a tough year," the entrepreneur said in an interview at Brasif's Rio de Janeiro headquarters. "We're forecasting a 2% drop in Brazil's GDP in 1999, and a 6% decline in our own sales. I think every country in the world will feel a drop in the economy next year."

In November, the International Monetary Fund cobbled together a package of loans designed to stabilize the Brazilian economy and fend off renewed volatility in emerging markets worldwide. The IMF is the leading lender in the rescue plan, unveiled Nov. 13, with $18 billion. Other contributors include the World Bank ($4.5 billion) and the Inter-American Development Bank ($4.5 billion). Another $14.5 billion will be available through governments and central banks of industrialized economies. The money -- which includes $5 billion from the U.S. Treasury -- will be made available in stages, as Brazil's Congress enacts spending cuts, social-security and pension reforms and other painful measures.

Among the measures announced under President Fernando Henrique Cardoso's $23.5 billion austerity plan for 1999: a hike on the corporate profit tax from 2% to 3%, and a tax increase on checking transactions, bank withdrawals and stock-market investments from 0.2% to 0.38%.

The Cardoso government had already doubled Brazil's airport departure tax from $18 to $36 -- a move Kauffmann said had virtually no 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 creates a barrier 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, 60, is descended from Bessarabian Jews who settled in Brazil around the turn of the century. For the past 16 years, he has served as managing director of Brasif, which started life 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 14 stores throughout the country, including two outlets (750 square meters each) at São Paulo's Guaralhos International Airport. It 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 90% of Brasif's shoppers are Brazilians making purchases on their way back into the country from abroad. Of the remaining 10%, noted Kauffmann, most come from Europe or elsewhere in Latin America; very few are U.S. tourists.

Brasif has also opened a 1,000-square-meter shop along the Brazilian-Bolivian border, at the Zoframaq free zone at Puerto Suarez. Business there is "going very well," Kauffmann told Impact International.

In terms of overall numbers, though, the news is not encouraging. The number of passengers flying into Brazilian airports will grow by 4.8% this year, while outbound growth will come to 0.8%. But the amount of money these passengers spend on duty-free items -- notably big-ticket electronic items -- is falling. Of Brasif's estimated $300 million in annual revenues, liquor accounts for 32%, followed by perfumes (23%), gift items (14%), foodstuffs (11%), electronics (10%), cosmetics (8%) and tobacco (2%).

"Liquor sales are dropping by around 11%, mainly in whisky," he said. "As far as I know, the domestic market for spirits is dropping, though in general terms, wines and champagnes are growing, in both the domestic market and duty-free."

One thing Kauffmann fears is a devaluation of the Brazilian real, currently trading at around 1.19 to the dollar.

"There's been very strong speculation about another devaluation, but so far, there are no signs of this happening," he said. "Historically, when we've had a big devaluation of the currency, we have suffered, because not only do people spend less, but for about three months after, prices in the domestic market remain at the old figures." That, he explains, lessens the appeal of duty-free, where prices are 60% lower than on the street.

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."

Despite Brasif's downward sales trend and the economic challenges facing Brazil, Kauffman denies persistent reports his empire may be acquired by a larger conglomerate.

"We had some talks with some companies concerning a joint venture, but that was all," he said. "We are now looking for opportunities outside Brazil." Asked what opportunities those might be, Kauffmann replied: "I prefer not to mention them."

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