With the economy booming in Brazil, North American developers are looking to the country for red-hot opportunities in specialty retail.
As North American shopping center development slows, more American developers are looking at “The Big Four” countries to expand their global footprint. South America, specifically Brazil, is one of these targets—this move has signaled new business opportunities for specialty retail entrepreneurs in that country.
Brazil is the fifth largest country in the world and as one of the BRIC economies (Brazil, Russia, India and China), is thought to be at a stage of newly advanced economic development. Rapid growth over at least a decade, and sound fiscal policies have lead to an envious economic boom. And unemployment has been consistently low.
With over 190 million residents, Brazil is about 10 percent larger than the United States. Its two chief cities are Rio de Janeiro and San Paulo. Brazil’s population is predominantly young, with nearly 62% under 29 years of age. These characteristics make Brazil the focus of interest—especially because of its robust economic growth.
Brazil has been chosen to host The World Cup in 2014 and the Summer Olympics in 2016. These events are bound to attract even more attention and business to the country. With 40 new malls expected to open this year, the Brazilian consumer seems ready to spend. The growth of the middle class means more consumers now looking to purchase everything from home furnishings and clothing to a meal in the food court.
Expanding in Brazil
Developers Diversified Realty, based in Beachwood, OH, is one developer that has created a presence in Brazil. DDR got involved in Brazil in 2006—at a time when the company was “looking for international relationships in the BRIC countries,” says Richard Brown, Executive Vice President, International at DDR. The search lead DDR to Sonae Sierra, Portugal’s largest shopping center developer, which has a strong presence in Brazil. Sonae Sierra also owns shopping centers in Spain, Italy, Germany, Greece, Romania, Colombia, and Morocco.
Sonae Sierra Brazil owns a premier collection of 10 malls clustered around San Paulo, one of Brazil’s most vibrant cities. Brazil was a natural international investment for Sonae Sierra mainly because there was no language barrier with Portuguese being spoken in Brazil; the company has been in Brazil since 1998.
In 2006, DDR formed a joint venture with Sonae Sierra effectively launching DDR’s international business arm with that entry into South America. “We are very similar [companies],” Brown says of the partnership, “we are both shopping center developers and managers. Our relationship has evolved and been tweaked as the business has grown and we are very well aligned.”
Developer Westfield has also entered the Brazilian market. It made a press announcement in August that it recently purchased a 50% stake in a Sao Paulo-based mall owner—Almeida Junior Shopping Centers SA. It will become an active partner in the newly created company called Westfield Almeida Junior Shopping Centers S.A. The Co-CEO of Westfield Group, Steven Lowry, said: “The underlying characteristics of the Brazilian market combined with a strong and diversified local retailer base and growing consumer spending makes Brazil a strategic long-term opportunity for the Group.”
The Brazilian mall
Developers Diversified Realty will soon have 13 properties in Brazil with three under construction. The company says their shopping centers here are quite a bit like their North American retail centers. “You walk through one of our Brazilian shopping centers, you would think you were in North America,” says Kurt Palmer, DDR’s Director of Specialty Leasing. These enclosed malls have cinemas, food courts, specialty leasing and small regional inline retailers.
But there are some interesting differences that set these malls apart from their North American counterparts. First, the enclosed mall is the dominant format with food courts that are twice the size (30+ retailers) of American malls. Second, the average store size is smaller with stores ranging in size from 500 to 1,000 square feet. There are no fashion department stores. Instead, hypermarkets or WalMart stores are in sub-grade locations and the balance of the center is mixed with fashion anchors that occupy approximately 20,000 to 30,000 square feet. “There tends to be more verticality because malls are being built close to the cities where land is expensive and scarce,” Brown says.
Most of DDR’s existing properties are two to four levels with the food court and movie theater on the top floor to draw customers through the entire property. Brazil also has larger format game stores; mini roller coaster rides and day care centers are common. A notable distinction in Sonae Sierra/DDR malls is the robust specialty leasing programs—a feature that is new to Brazil.
Business basics in Brazil
The good news is that Brazil is unlike most emerging countries where political unrest and/or corruption make conducting business a challenge. The country seems to welcome international investments. “We really like Brazil. Government interference is far less here; more open and transparent and we aren’t confronted with corruption,” Brown says.
This does not mean that there aren’t rules to be followed. Kurt Palmer says opening a retail business in Brazil could be a challenge for U.S.-based specialty retailers. “Everyone is interested, but their interest slows down with customs and tax regulations,” Palmer says. First, an outside retailer must form a local Brazilian partnership; second, one must adhere to (and understand) the local labor laws, customs procedures and taxes.
Attracted by the apparent opportunities in Brazil, Sal Babbino of NYS Collection Eyewear, the sunglass retailer/wholesaler, has been working closely with Palmer to find a Brazilian partner in hopes of opening locations in the near future.
Specialty retail arm
Palmer helped launch specialty retail programs in Brazil from scratch. “The idea of specialty retail was not new [in Brazil], but it was new to put specialty leasing into malls,” he says. Palmer now works closely with Mari Archanjo Salvia, the Corporate Manager of Merchandising and Temporary Leases in the Sonae Sierra Brazilian shopping centers. Salvia speaks the language and understands the consumers. “I am her support person here,” Palmer says. While Palmer has only traveled to Brazil twice, he trained Salvia by walking her through U.S. and Puerto Rican centers.
Salvia for her part, supervises 10 specialty leasing consultants. She and Palmer are responsible for three revenue streams: mall carts/RMUs; kiosks; and publicity or sponsorships. “A typical deal is very similar to deals here in the United States,” Palmer says. “Most deals are short-term [six months or less] because concepts are so new to the market,” he says. “DDR wants to make sure of a retailer’s success before renewing and extending the terms. Standard license agreements with a minimum rent plus a percentage of sales are typical here,” Palmer adds.
“Retailers and customers originally looked at the programs as a street vendor program. Now we have everything from $5 items to expensive $300 food blenders on carts,” Palmer says. Like other booming economies, developers leasing townhomes and selling residential properties are using the RMU and kiosk program to create active sales centers to sell real estate. “Some developers have even activated their display with staff who invite customers to sit down and talk about residential opportunities,” Palmer says.
Operationally, Palmer’s challenge has been retrofitting carts in common areas that were not originally designed for them. In some cases, DDR has invested in the infrastructure of electrical floor outlets, but in some malls, Palmer admits, they are drawing electrical cords from the ceiling. Some centers have 40 units and others have ten.
Developers Diversified finds the Brazilian operating standards for shopping centers to be very high. According to Palmer, centers are clean and they do not allow any hawking of merchandise, which is a typical practice of Brazilian street retailers.
Overall, Palmer is pleased with the growth of the specialty leasing programs and the acceptance of what was a relatively new concept in Brazil. “Occupancy levels are high and inline tenants are coming out on RMUs and selling too,” Palmer reports.
As always, it is important to pay attention to merchandising. The opposite seasons of the year in the southern hemisphere make merchandising tricky, but November and December are important holiday periods and Palmer says the specialty retail rents reflect it.
Kiosk design in-house
Growing the program to 130 units in nine properties did not happen overnight. Palmer enlisted the support of The Bella Group, a retail manufacturing and design firm based in Coppell, TX, that has since opened up a manufacturing business in Brazil. The Bella Group has set up shop here both to support the needs of DDR’s expanding specialty leasing program and to grow their business by designing and building carts, RMUs and kiosks for both developers and retailers. “The shopping center business is very dynamic in Brazil. The centers are more of a destination place for eating, visiting and shopping [with family and friends],” says Jeff Gern, Vice President of Sales for the Bella Group.
Gern says the language difference has not been a deterrent to doing business. The Bella Group formed a partnership with Brazilians who speak English and Portuguese, easing potential language concerns.
With the newness of common area merchandising programs, Gern finds the experience similar to the 1980’s when programs were popping up across the United States. “Carts are a great way to test market a new product or idea, and some products just sell best on carts. It will take time for Brazilian entrepreneurs to find the right products for the market and gain the expertise to be successful on carts,” Gern says. To simplify the process for retailers, Gern says Bella Group has focused on a few core designs that they are marketing to clients. Gern also noted that some of the higher quality materials used to manufacture RMUs and kiosks in the United States are prohibitively expensive in Brazil. “The cost of importing materials is very high so we try to make sure we can source all the materials for our Brazilian manufacturing in Brazil,” Gern says.
The Brazilian buyer
“As far as the consumer goes, they are readily accepting the concept of purchasing from carts and kiosks. Customers will even spend $300 to buy sewing machines from carts,” Palmer says. “Brazilian consumers are very beauty conscious. Therefore, the products like hair-straighteners, Dead Sea Salts and costume jewelry fare well here,” he adds.
“The consumers are very aspirational and have a high view of the United States culture,” Brown says. “They are close-knit families with extended families and they are [very] social. Lunchtime is the big, main meal of the day and at one o’clock the offices are empty and the food courts in our malls are jam-packed,” Brown says. The Brazilian customer has longer stays in the mall because offerings like the mall-based movie theaters and arcades are positioned on the top floors alongside food courts, making them an important family entertainment destination. “Air conditioning,” says Brown, “is like an anchor especially when compared to the street market shopping in the country.” According to Brown, who has lived in Brazil for over a year, retail sales have increased 10% year over year because of a combination of high employment and consumer optimism.
DDR has three new developments with full-scale programs coming on line in 2012, and Palmer and Salvia will certainly have the chance to create specialty retail programs here from scratch.
Developers like DDR and Westfield already know Brazil is a country ripe with opportunities in the increasingly global field of specialty retail.