Since the beginning of 2011, Brasil has experienced hyper growth in e-commerce sales. What was less than 1% of total sales when I arrived in late 2012 is now projected to exceed 5% by 2018. In spite of the current recession, Brasil continues to grow online while the country’s GDP shrinks 2-3%. Brick and Mortar retailers have seen up to 40% declines in 2015 and the few retailers who are online have yet to reach a profit. Inability to achieve profitability is a common trend for retailers in emerging markets where the cost of doing business is insanely high and where there are just not enough margins to be shared between wholesalers and retailers while keeping a fair price to the consumer.
It is a credit to my former colleagues at Skullcandy who recognized the above back in 2011 and made it clear that we needed to invest more in direct sales channels in emerging markets as the demand was high but the retail infrastructure still very immature. In addition, we determined that the data extracted from the direct sales channels would help expedite knowledge around country-specific sales trends and brand affinity in geo-regions, helping to shape larger offline distribution strategies.
So given the above, why do 99% of brands still lack direct e-commerce strategies in a market where direct e-commerce is essential to meet demand? (especially when each brand affirms that the 2nd most traffic to their U.S. sites is from Brasil?)
2015, Politics and the Brasilian Recession
Many people still are unaware that Brasil, as a country, saw massive growth while the U.S. was in its recession. This resulted from a weak dollar, padded fiscal metrics via corrupt politicians and many other factors. One major benefit from this era was the subsidizing of broadband internet by the Brasilian government (which ultimately brought greater transparency to their corruption). Brasil, a country of now over 200m people, has been connecting at record rates in recent years and now represents the market with the 5th largest amount of internet users in the world. Brasil has more people online than the total populations of France or Spain, to help put it in perspective.
As 2015 approached, government scandal, a strengthening dollar and a growing spotlight on the issues surrounding the Olympics have been just a few factors contributing to the recession in which Brasil has found itself. A 2-3% shrinkage has been projected for the 2015 yr and much of the same for 2016. Yet in spite of this, e-commerce sales continue to grow by double digits.
Online Growth in a Discount Market
Brasil has always been known in the youth fashion market as a dumping ground for brands’ closeout merchandise. At best, brands sent leftover summer merchandise to Brasil as their summer came after that of the Northern Hemisphere. As broadband emerged over the last few years and due to Brasil being the youngest BRIC country (60% of 200m people are under 39 yo), the youth are now able to see the newest collections in real-time, thus altering the impetus of demand for their favorite brands from abroad.
Based on the results reported by e-Bit, Brasil’s independent authority on e-commerce growth metrics, from 2011 through 2014 Brasil averaged 24.5% annual growth in online sales, reaching 35.8 billion reais or roughly 13.5 billion USD based on the Dec ’14 conversion rate.
It is important to note that in Q1 of 2014, Fashion & Accessories became the #1 selling category online in Brasil fast-growing e-commerce market. Like in the U.S., after books and electronics, Fashion became the #1 selling online and never relinquished the top spot. Our prediction of the repetition of U.S. trends taking place online in Brasil was proving true with each quarter that passed. So here we have one of the youngest BRIC nation buying apparel online and sales growing at 20-28% per year. How could this possibly get better?
Large, Young Market + Online Boom
Brasil and the Action Sports Culture
Not only is Brasil the youngest BRIC nation, and aside from the hyper growth online driven by this youth market, Brasil is a hotbed for action sports talent and therefore an even bigger fan base. In the Surf and Skateboarding worlds, some of the hottest Pro’s today are Brasilian, and they are young. Leticia Bufoni, Pedro Barros, Luan Oliveira, Adriano de Souza, Gabriel Medina, Felipe Toledo, and many others; All in the top of the rankings and many under 25 yo. And to make it even scarier, this generation of champions have younger siblings who will be the future trendsetters in 5-7 yrs. In a country where soccer is king, it’s not like the U.S. where we have the NFL, MLB, NBA, etc. In a 200m+ population, Skateboarding and Surfing are only second to Soccer.
Large, Young Market + Online Boom + Action Sports Popularity
More Fashion Spending per Capita vs the U.S.
To the surprise of many, Brasilians spend more per capita, annually, on fashion than any other country, A.T. Kearney’s report on emerging market apparel consumption.
“Brazil’s strong showing in the index is driven by its large total clothing sales, second only to China, and its annual clothing sales per capita, which tops the Index at $490. Not only do Brazilians buy large quantities of apparel, the five year growth rate of consumption, at more than 20 percent, is staggering. Brazil’s vibrant young population is also a major factor in its ranking – more than 60 percent of the population is under the age of 39. Brazil’s relatively young population is extremely fashion conscious with a strong sense of celebrity culture.”
So now we have not only a young, connected, market of action sports enthusiasts, but we have one that spends more on apparel than the average American each year, yet where specialty retailers are nowhere close to meeting the entire demand of the country.
Large, Young Market + Online Boom + Action Sports Popularity
+ 2nd Most Fashion Spending
Opportunity Cost
After discussing the above with a brand and similar metrics for other LatAm markets, the typical follow-up question I receive is, “So how much could we actually sell online in Brasil?” And the answer I give is one that is consistent for any brand… ‘If you invest appropriately in your direct online channel, then at least 10% of your annual Brasilian revenue should come from your direct online sales.’ And I usually follow-up with how this may not represent a ton of revenue, but that extra margin is so very important in a market like Brasil where the cost of doing business is absurdly high. “It will help you be stronger in the good times, and it will help keep you alive in the bad times”, as I like to say.
Large, Young Market + Online Boom + Action Sports Popularity
+ 2nd Most Fashion Spending + Necessary Extra Margins
99% of Brands Still Not Online in Brasil
Given all of the compelling reasons to be online and sell direct in one of the hottest digital markets in the world, you have to scratch your head and wonder why 99% of the brands in our industry (many of which are public entities) are not online and benefitting from this high growth digital market.
The primary reason lies with how Brands are aligned with local distributors. As mentioned above, Brasil has long been a closeout market, so distribution partners representing iconic brands are incentivized based on the volume of product they can sell, and not on the profitability they can achieve and brand awareness they can establish. As consumer demand has shifted to the newest collections from the U.S. that are found online, plus the lack of localized sites and direct e-comm strategies, the distributors who have done business the same way for the last 30 years are now struggling to meet goals and turning to a more discount-focused strategy that often signals the end of a brand’s relevance. These same distributors believe that there is no reason to explore digital investments and essentially refuse to evolve along with the Brasilian youth who are living on their smartphones like that of the global youth. And in many cases, we have seen distributors simply open more doors to meet sales goals, and not always the best doors.
Of course, I’ve heard a myriad of excuses from brands as to why they are not online in Brasil but the best one that I’ve heard to date… “We are focused on cost-cutting measures due to the recession and therefore direct e-commerce is not a priority.” Think about that one for a minute and then you’ll realize the challenges of doing business in the Brasilian market.
Summary
In emerging markets like Brasil, a brand needs to sell direct online and tell their story in the local language of the market. If not, the brand will not meet its potential and newer brands will quickly take market share.
Few retailers are well managed and distributors of these iconic youth brands refuse to embrace technology and connect with the youth consumer where their eyeballs are daily. It is completely ironic that we have consumers who are extremely tech savvy, yet brands/distributors who are the last to adopt the latest technology that their Customers are adopting.
We have consulted a number of brands to enter a market like Brasil with a pure digital strategy and to wait 12 months before engaging in any offline distribution. This presents a low risk, high return opportunity that will yield valuable website data analytics which will fuel a more intelligent offline strategy.
If you are a brand interested in Latin American markets, we are always happy to share our knowledge and network in helping you learn a market from the inside. One of our goals in launching our company in LatAm was to help our industry be smarter and safer in expanding in markets rich with opportunity, but that are complicated in nature.
Author: Matt Falcinelli
Source: Linkedin Pulse