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Mercosur, Economic Boom Are Mixed Blessing For Brasif
Impact International / October 15, 1996

By Larry Luxner

RIO DE JANEIRO -- Brazil's newfound economic prosperity and South America's continuing trend toward economic integration has been both a blessing and a curse for Brasif, the country's dominant duty-free operator.

Samuel Kauffmann, Brasif's managing director, spoke to Impact International in a lengthy interview at his office in downtown Rio de Janeiro. He said that so far this year, the numbers have not been encouraging.

"We are with a good economy with many more passengers than in the past, but those passengers are poorer than before," he explained. "The problem is that passengers are spending less per-capita."

During the first seven months of 1996, said Kauffmann, four million passengers arrived and departed Brazil through the country's main airports -- a 6.3% increase over the same period last year -- but spending per head dropped 9.4%. In dollar terms, per-capita expenditures so far this year are $41, down from $45 last year. In another disturbing trend, only 23.8% of all passengers even entered duty-free shops, down from 25% in 1995.

Part of the reason, suspects Kauffmann, is the continuing economic downturn in neighboring Argentina, where the economy shrank 2.5% last year and unemployment now hovers around 20% -- the highest in Latin America.

"Four years ago, 50% of the sales in our departure shops came from Argentines," he said. "Today, less than 15% of sales are going to Argentines. This shows the impact changes in the Argentine economy have had on us."

But the declining revenues have more to do with Brazil itself. Thanks to the Real Plan, introduced by President Fernando Henrique Cardoso in July 1994, prices rose only 15.5% in 1995 -- a far cry from the 1,000% recorded the year before, and Brazil's lowest inflation since 1957. The plan dumped the cruzeiro in favor of the real, and set the real on parity, more or less, with the U.S. dollar. Meanwhile, Brazil's GDP growth reached 5.3% in 1994 and 1995, though it's projected to fall to 3.2% by year-end 1996. While unemployment is on the rise, inflation will probably end the year at a low 13-17%.

As a result, Brazil is no longer the travel bargain it once was, and São Paulo has easily become the most expensive city in Latin America, with prices comparable to that of New York. It's now cheaper for a resident of Rio to fly to Miami than to Manaus, a city in the Brazilian Amazon.

"The real stabilization plan helps us because it encourages Brazilians to travel more, but on the other hand they come back with an image that things here are expensive," said Kauffmann. "People are coming to understand the relationship between price and value."

Kauffmann, 58, is descended from Bessarabian Jews who settled in Brazil around the turn of the century. For the past 14 years, he has served as managing director of Brasif, which started life as a steel and construction firm, gradually transforming itself into a duty-free conglomerate.

Last year, the company had sales last year of $250 million and enjoys a whopping 97% share of the Brazilian duty-free market. Yet Kauffmann bristles at the suggestion Brasif is a monopoly.

"This is not a monopoly, it's a circumstance," he said. "We won all the tenders but one. We lost Salvador a year and a half ago to SOS, a supermarket company."

At the moment, Brasif has two outlets (750 square meters each) at São Paulo's Guaralhos International Airport. It also operates a 1,400-sq-meter arrivals shop at Rio de Janeiro's Galeão International Airport, 200-sq-meter shops in Recife and Belo Horizonte, and a 150-sq-meter shop in Porto Alegre, as well as a special duty-free airport shop for diplomats in the national capital, Brasília. "São Paulo is the most profitable, because we have more volume there, and can pay fixed costs more easily," says Kauffmann.

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.

By far, the single most important item in Brasif's stores is whisky. Sample prices include Johnnie Walker Red ($15); Johnnie Walker Black ($29); Johnnie Walker Blue ($120); Ballantines' Founders Reserve ($35); Drambuie ($25), and Camus, Courvosier X.O, Imperial, Hennessy X.O and Remy Martin X.O (all $99). The cheapest item is Martini Blanco Vermouth ($7.00), while the most expensive is Ballantine 30-year ($255). Interestingly, neither Pirassununga 51 cachaça nor other local products are sold at Brasif stores -- only international brands.

Interestingly, arrivals account for 70% of Brasif's business, while departures are only 30%. In addition, 90% of Brasif's shoppers are Brazilians. Of the remaining 10%, noted Kauffmann, most come from Europe or elsewhere in Latin America; very few are U.S. tourists. "Americans aren't traveling to Brazil anymore because of all the bad publicity," he says.

That could soon change, however. Earlier this year, Rio de Janeiro kicked off a $15 million media blitz aimed at promoting the city to U.S. tourists and countering negative publicity spawned by the city's reputation for violent crime. A New York ad agency, Jerry & Ketchum, is overseeing the five-year multimedia campaign, which is funded jointly by the Rio Convention & Visitors Bureau, the mayor's office, the state tourism agency and Varig Airlines. Rio's media blitz seeks to boost the number of U.S. visitors from 120,000 in 1995 to half a million in 1998, extend their average stay from four to six nights, and increase average daily tourist expenditures from $155 to $180 over the same period.

In addition, the city is a serious contender for the 2004 Olympic Games -- along with Buenos Aires, Cape Town, San Juan and seven European candidates. The Rio 2004 Olympic Committee, headed by Jorge Pedro Dalledonne, has 50 full-time employees and a budget of $16 million. A final decision won't be made until March 1997, but the entire city is united behind the effort, which is helped by the fact that Rio successfully hosted the Earth Summit in 1992, and by the fact that South America has never had an Olympics.

"Rio used to be the capital of the country until 35 years ago, when it moved to Brasília," said Kauffmann. "The city lost many of its qualities, and now it's recovering. I think Rio has a chance."

Asked if Mercosur -- a customs union comprising Argentina, Brazil, Chile, Paraguay and Uruguay -- could follow the lead of the European Union, which plans to abolish duty-free shopping among its 15 members by 1999, Kauffmann said he doubts it.

"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," he observed. "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."

"On the other hand," he added, "people here will be more aggressive in terms of implementation. I think it's something we'll have to look at, but not in the short term."

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