This article first appeared in The State of Fashion 2022, a comprehensive report on the global fashion industry, co-published by BoF and McKinsey & Company. For more information and to download a copy of the report, Click here.
Although some have suggested that the repatriation of luxury spending to Brazil is only temporary, José Auriemo Neto believes the opposite. The increasingly local consumption habits developed by Brazilians during the pandemic are not disappearing, said the president of JHSF Participações (JHSF), who is so convinced that he is building a hotel above the larger center luxury shopping group to make it more convenient and attractive for wealthy Brazilian travelers from all over the country to shop in the commercial capital.
One of the two leading luxury retail players in the country, JHSF has forged long-term relationships with tenants such as Louis Vuitton, Christian Dior and Cartier, while establishing exclusive joint ventures with Céline, Valentino and Balmain. But more than a decade after having introduced personalities like Hermès and Jimmy Choo to Brazil via the group’s jewel, Cidade Jardim, the executive does not envisage an international expansion, or even regional. On the contrary, Neto is doubling down on a state in Brazil, where it plans to strengthen ties with the group’s high-end clientele using a diversified experience-driven strategy.
BoF: Brazil has been particularly affected by Covid-19, both in terms of the human tragedy and the economic impact on businesses. But what was the scale of JHSF’s retail losses during the pandemic and the local luxury sector in general?
José Auriemo Neto: In the Retail division, we were negative during the months we had to stay closed, down 15-18%, but sales recovered from the last quarter of 2020, where we saw growth exceed the levels of 2019. Sales in our shopping centers increased by 16% in the second quarter of 2021, compared to the second quarter of 2019. Of course, the luxury segment benefited, as our customers could not travel and people were buying more in the country.
In the state of São Paulo, where most of our activities are located, vaccination [is happening quite quickly as of September 2021] so people are more confident to go out. We see the luxury segment growing faster than other segments and the country’s GDP which I believe… will be close to 4.5%. Our retail division expects double-digit growth this year [in 2021], and also next year, because of all the demand we’re seeing.
BoF: What share of your retail sales did regional and international tourism represent, respectively, before the pandemic? What did the repatriation of luxury expenses look like for JHSF?
JAN: About 90% of our business was carried out by locals, but we were seeing people coming from other parts of Brazil to buy in São Paulo – 25% of that figure [domestic share of] 90 percent. Brazilian customers have spent almost a year and a half with travel restrictions to destinations like the United States, Europe and also some countries in Asia and Africa. But it helped us deliver an experience that they didn’t have before; I think the level of activity that we are going to have after the pandemic is going to be higher, as customers have adapted to buy in the country.
BoF: Brazil’s high tax burden has traditionally prompted luxury brands to retail at significantly higher prices than in other markets, prompting affluent Brazilians to shop abroad in stores flagship of the brand in Europe and the United States where there is usually a greater choice – rather than buying at home. Are things changing?
JAN: Some brands are now selling at 15%, or 18% above retail in the US, but our customers expected much higher price spreads given that the prices were 50-60 % higher than in the US and Europe through 2019, so we saw a very positive impact when they came to the stores and said, “Okay, that’s not so wrong, so I can be a regular customer in Brazil after all. Brands saw that they would increase their business volume the closer they got to retail prices in the United States and Europe.
BoF: What strategies are you currently using or planning to adopt in your shopping centers next year to continue to benefit from repatriation? And how can you fend off competition from local luxury shopping center competitors in the process?
JAN: It’s about giving those customers the right experience. Thanks to our partner brands, we can merchandize and buy with a focus on our customers and their sizes. We also organize lunches and dinners where we showcase some of the new products that we receive in advance. Some of the travel restrictions to France have been lifted, so we are taking clients to Paris Fashion Week. We have another advantage in that customers buy in installments; this is a common practice in Brazil.
We have also launched a perks program where we offer 2% cash back on all their shopping in the mall; this is linked to our real estate division, so if you buy a house in one of our campaign projects you collect 0.5% cash back which you can use in our malls, restaurants and hotels. We therefore further explore these synergies and offer more advantages in terms of service, experience and benefits to our customers.
BoF: Who is your main buyer? How have their habits changed during the pandemic and what changes do you foresee for the coming year?
JAN: About 65 to 70 percent are women, aged 22 to 55. In terms of geography, these are mainly São Paulo and states like Goiás, Minas Gerais and Rio de Janeiro. We are seeing more and more people coming to São Paulo, not only to buy, but also to enjoy the city. We have seen more of our customers buy online and more of our customers accessing our concierge service, which we launched this year. [in 2021] with one person, but we expect 50 people will be working there by next January.
BoF: JHSF operates five shopping centers – with a total gross leasable area of over 265,000 square meters – and has more under construction. What exactly are your expansion plans?
JAN: We have four retail projects in development. One, in the district of Faria Lima, the central financial district of the city of São Paulo, is a shopping center with the exact same model that we recently inaugurated in the district of the Gardens of São Paulo. We have a physical retail platform and we also have a digital platform built into some of these stores; some of the merchandise is in stores, but some orders that customers receive at home are delivered from a warehouse. We have three other projects: one in the countryside of São Paulo [state], called Boa Vista Village; another in São Paulo, called Real Parque; and the extension of the Cidade Jardim shopping center that we are opening in H1 2022.
BoF: You are betting really big on São Paulo. Why?
JAN: Our business is focused on high-end customers, so we need to be where they are. It is the center, the rich part of the country. More and more of these Brazilian customers come from elsewhere in São Paulo as well, so we want to offer them a good experience. [as possible] when they are here. We are even opening a new hotel at the top of the Cidade Jardim shopping center. It will be finished in about a year and a half, so people can stay in the same place they shop when they travel.
BoF: You also have shopping centers outside the state of São Paulo, in cities like Manaus and Salvador. How are they taken into account in your projects?
JAN: When we look at the growth opportunities in the country, they relate more to the state of São Paulo, and we don’t see very relevant growth in the north or northeast region where the two shopping centers are located than you mentioned. Right now we are focusing our expansion 100% on luxury malls, but the ones we run there are not luxury malls, they are more democratic.
BoF: Once restaurants and stores reopened after the closures in Brazil, did you see a drop in online sales compared to physical retail sales?
JAN: Yes, the level of demand for the online platform stabilized and then declined by around 10-15%. But of course it means customers have downloaded our app [CJ Fashion] on their phones and they started surfing this digital world, and once they started going digital, they got used to it more.
BoF: There are many large global luxury e-commerce platforms with large assortments of merchandise that try to entice wealthy Brazilians to buy from them. How can your online offering compete?
JAN: We have an advantage over international players because the brands we offer on our digital platform are in our shopping centers. We really think that for a country where there are a lot of logistical challenges, it is very important to have both; it’s different from other markets, where you can deliver goods across the country from a large warehouse. This integration is how we give our customers access to the merchandise they want and how we can understand our customers in a very deep way.
BoF: JHSF also operates the Catarina Fashion Outlet outside of São Paulo. What changes have you observed in your outlet activity and what are your expectations for 2022?
JAN: The outlet activity is growing strongly. We see this business growing year over year in double digits.
BoF: Everyone is bracing for continued uncertainty in 2022. How is JHSF adjusting to a more volatile luxury, travel and retail market?
JAN: Much of our strategy relates to mixed-use projects. It helps us a lot because we can offer our clients not only the experience of buying goods, but also the experience of living in our properties. I think this is relevant for the next few years, because we can see that people want to meet again; they want to spend time with their families. Our challenge is therefore to be even more on this trend.
This interview has been edited and condensed.