Brazilian department store chain Lojas Riachuelo hopes to open 86 stores by 2014 as it aims to target the country’s booming middle class and expects revenues will grow sharply in coming years, investor relations director Tulio Quiroz told WWD.
Riachuelo operates 126 stores selling “affordable fast fashion” for all ages and lifestyles, though it targets mainly women and teens ages 16 to 25, which Quiroz claims spend most on fashion. The São Paulo-based firm, which acts as the retail arm of leading textiles manufacturer Grupo Guararapes, sells its own label of women’s, men’s and children’s apparel, as well as homewear and footwear. According to Quiroz, Riachuelo is Brazil’s largest apparel-focused department store chain.
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Last year, operating profits rose 34 percent to 495 million reais, or $266.9 million at current exchange, on sales up 20 percent to 2.9 billion reais, or $1.56 billion. Same-store sales rose 8 percent, while new-store turnover increased 18 percent.
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Quiroz said Riachuelo is about to embark on a major cost-cutting program, which will see management and other administrative expenses reduce drastically to maintain the company’s current earnings before interest, taxes, depreciation and amortization margin of 22 percent in coming years, despite the huge expenses linked to the expansion.
On the back of a burgeoning economy, Brazil’s middle-lower class has risen by 40 million people in the past five years, providing a new revenue stream for Riachuelo and other retailers focusing on the “C segment” made up of Brazilians that earn about $500 a month.
As Brazil’s economy flourishes, Quiroz said 10 million lower-class consumers have moved to the C-class segment since 2006, and he expects similar growth for the next five years.
“This class represents a huge potential to the important players like Riachuelo,” Quiroz said, adding that rising wages means many of these consumers (who spend 7 to 9 percent of their salary on apparel) have become legally employed and are shopping in formal retail channels as opposed to the country’s huge black market. “There is now better income distribution in Brazil and more people with a formal income.”
At the same time, Brazil’s shopping mall industry is booming with many operators, including Guararapes, targeting the B and C consumer segments and providing new retail space for department stores like Riachuelo.
To profit from this trend, Riachuelo has stepped up its expansion plans from opening five to nine stores a year to installing 16 in 2010. This year, the company will roll out 23 shops, while in 2012 and 2013 it will open more than 60 units to grow its chain to 212. The bulk of the new department stores will be opened in small to midsize Brazilian cities of 90,000 to 300,000 inhabitants, which Quiroz said present the biggest growth opportunities. To better target these markets, nearly 80 percent of the new stores will open as smaller “compact” stores measuring some 16,100 square feet compared to the chain’s traditional 26,900-square-foot units.
To bankroll the expansion, Riachuelo will invest some 900 million reais, or $485.3 million, over the next three years, Quiroz revealed, adding that the retailer has enough cash to finance the scheme. It currently has 200 million reais, or $107.8 million, in cash and “very low debt” of 400 million reais, or $215.7 million. The firm has a long-term loan facility with Brazil’s BNDES development bank, which it can expand in the future, or borrow from other lenders, Quiroz added.
Riachuelo’s marketing strategy mirrors H&M and other retailers with heavy advertising budgets. The company has teamed with famous local designers to launch special collections, with recent partnerships featuring Oskar Metsavaht and Cris Barros. According to Quiroz, Riachuelo spends 3 percent of its revenues on advertising and frequently launches TV, print and outdoor campaigns.
Regarding rivals, Riachuelo competes most heavily with Britain’s C&A, although it also takes on Spanish fashion giant Zara, which has been expanding aggressively in Brazil. Quiroz said C&A targets the same fast-fashion consumer segment but Riachuelo manufactures locally through Guararapes’ factories, enabling collections to hit stores more quickly.
“C&A has to work with several suppliers, which makes it harder for them to make fast and frequent deliveries,” Quiroz said. “Our average time to market is 40 days, but we can deliver as fast as 15 days in some cases.” This competitive advantage also allows Riachuelo to refresh its store stock every two weeks.
To create its collections, Riachuelo blends European and U.S. fashion trends and concepts with local consumer preferences.
“In northern Brazil the weather is warmer, people are more beach oriented, and they like strong colors like yellow and red,” Quiroz said. “In the south, we have the opposite phenomenon: cold weather and more traditional color preferences like blue and gray.”