MEXICO CITY — Emboldened by strong economic growth and booming consumer demand in Brazil and Mexico, U.S. fashion retailers are bolstering their expansion plans in South America, with big brands such as Gap, VF Corp. and Aéropostale planning ambitious incursions.
Gap recently revealed plans to open its first South American store in Chile’s capital, Santiago, this fall in a move it hopes will provide a launching pad for a wider regional expansion. Meanwhile, VF Corp. hopes to sharply grow its flagship Wrangler, Lee and UFO jeanswear labels on the continent, where it expects sales to grow robustly in coming years.
Analysts say Aéropostale, Limited Brands and Abercrombie & Fitch are also likely to grow in Latin America in the medium to longer term.
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So far, the most concrete expansion plans have come from Gap. Carlos Alberto Cartoni, co-owner of Gap’s Chilean franchise partner Komax, said it hopes to open Gap’s first South American store, an 8,600-square-foot flagship, in Chile’s capital Santiago in early November. Further expansion into other South American countries of Gap and Banana Republic could follow.
As part of its recently unveiled international expansion scheme, Gap intends to roll out 400 franchised stores by 2015, up from 180 now.
Gap vice president of strategic relations Stefan Laban would not reveal store-opening forecasts for South America, but said the region will account for a significant portion of the new openings.
“Substantial opportunity exists for us in South America and we are exploring other markets in the region [apart from Chile],” Laban told WWD.
Those markets are likely to include Brazil, Argentina, Mexico, Peru and Chile, which U.S. retailers are likely to target because of their booming economies, according to analysts.
When asked why Gap chose Chile to begin its South American foray, Laban said Chileans have a strong appreciation for American fashion.
“Chile has a strong retail market with a large city-centered customer base that appreciates casual American style,” he noted. “It’s a great match for Gap brand’s aesthetic and target customer.”
Underpinned by a booming economy, the skinny country lining the west coast of South America has a $6 billion textiles and apparel market that is growing by more than 10 percent a year, making it an attractive destination for any specialist retailer.
This fact is known by several international brands such as Spain’s Inditex and Mango, which are taking Latin America by storm, creating formidable competition for U.S. brands seeking fortunes south of the border.
VF Corp. is also sweet on South America, where it hopes to grow significantly in coming years. According to Juan Pons, who leads the company’s Latin American denim franchise, the brand is betting on low- to mid-double-digit sale gains in Brazil, Chile, Argentina and Peru, the key markets for its Wrangler, Lee and UFO denim labels.
VF will continue to sell the three labels in multichannel and department store retailers in these four countries, but it also hopes to open stand-alone stores there, particularly in Argentina, where it already runs 26 Wrangler and UFO flagships.
While it expects strong growth in all markets including Mexico (where it operates through licensee partners), Brazil is poised to become the crown jewel of VF’s Latin American enterprise. The country’s jeanswear market, which retails 300 million pairs a year, is booming, driven by a young and increasingly affluent consumer segment in tune with U.S. and European fashion trends.
VF sells its Wrangler Western brand in Brazil, where consumers have a strong appetite for “Western style” jeans, driven by the country’s burgeoning beef export trade, which has given rise to a thriving cowboy rodeo industry and lifestyle.
“Brazil has one of the biggest rodeo events in the world,” Pons said, referring to the Festa do Peão de Boiadeiro, celebrated annually in the city of Barretos near São Paulo. “Rodeos are so big that they sold as many tickets as soccer events last year.”
Rodeos have also given rise to the Sertanejo, Brazil’s equivalent to U.S. country music, creating a big lifestyle around the event that drives demand for jeans and other cowboy-inspired apparel.
Fueled by such booming consumption, Brazil could become the world’s second-largest market for Western-style jeans after the U.S. in five years, some observers predicted. To profit from this phenomenon, VF is focusing its marketing efforts in Brazil’s Central-West region, which is heavily influenced by the agriculture trade.
“In these cities, some people work in the countryside and live a very intense farming lifestyle, whereas others live in more urban areas, but are influenced by that lifestyle; they don’t work in farming but go to rodeos for social amusement or practice horse riding,” said Pons.
For farmers, VF sells a basic “core” range based on traditional American cowboy styles. For the city consumer, it retails a more modern and fashionable “Western urban” line. Both segments carry basic and premium items, Pons said.
VF also tailors its Brazilian marketing effort by region as each has sharply different consumer profiles. “Lifestyles and habits are very different in the south than they are in the north or the west,” added Pons.
Brazilian consumers also have different tastes than Americans, seeking more aspirational apparel so “while a jean may sell for $25 in the U.S., it can sell for $100 in Brazil,” Pons noted. Part of that is the high duty on apparel imports into Brazil.
VF hopes to continue opening stores in Argentina, but also has plans to do so in Brazil, Chile and Peru within the next five years, either on its own or through a partner, Pons said.
Despite U.S. brands’ deepening interest in the region, some observers say expanding in Latin America presents its challenges.
“Import tariffs are very high in Brazil and Mexico,” said a source at a major U.S. specialty retailer. “You can’t just go there and pop up stores. It takes time to build the right financial engineering to structure the stores profitably.”
Consequently, the retailer is looking for an experienced local franchise partner to enter the market. “We won’t go in without a franchise partner or joint venture,” the source added. “It’s simply too risky to go on our own.”
An Aéropostale spokesman said the firm is likely to pursue this strategy to lower its expansion costs and minimize operating risks when moving south of the border. He said Aéropostale is “actively” looking at growth opportunities in Mexico and Brazil, but that it’s unlikely to arrive until 2013. To gauge consumer interest for its products, Aéropostale plans to launch e-commerce sales in several Latin American countries in coming months, the spokesman added.
Pons said fashion retailers interested in spreading their wings in the region could benefit from a mixed sourcing strategy.
“This is not the EU,” he noted. “Every Latin American market has different entry barriers. Chile has a 6 percent import quota, so it’s basically open, but Brazil and Argentina have 40 percent so we [VF Corp.] use a mixed strategy depending on the restrictions and possibilities of each market.”
Regarding other VF brands, analysts said the company is expected to develop its outerwear business in Latin America, particularly after its recent acquisition of Timberland, which has a strong presence in the region.
Meanwhile, American Eagle and Guess are also considering expanding in Latin America, analysts said.
Guess recently stated it is keen to grow in the region, mostly Brazil, but would not provide more details. A Guess spokeswoman would not comment, while American Eagle didn’t return phone calls.
Most U.S. retailers looking to muscle into Latin America will likely adopt a partnership strategy to limit operational risks in a region where political and economic volatility remains high.
“Gap chose a franchise model because they don’t have enough expertise to deal with these markets on their own and I expect others will do the same,” said Paul Lejuez, a retail analyst at Nomura.
According to Lejuez, Aéropostale is likely to follow Gap and VF as the most aggressive U.S. retailer targeting the region.
“They have a very broad appeal with the U.S. Hispanic community so they should do well in Latin America.”
While Abercrombie & Fitch is also popular with U.S. Hispanics, the brand is unlikely to arrive in the region anytime soon, analysts said.
“They are more focused on their European and Asian expansions and have not expressed any interest in Latin America in the near term,” said one analyst.
Abercrombie & Fitch officials did not return calls seeking comment.
Still, Latin America is likely to attract growing interest from U.S. brands eager to boost their margins amid cutthroat competition at home.
“While Latin America has not been a great focus for American apparel brands, an increasingly saturated U.S. market is making them reconsider,” said Dorothy Lakner, a Caris & Co. analyst.
Retailing in Latin America should also command higher margins as the region has a less aggressive discount culture than the U.S., Lakner said, adding this benefit should help brands offset high import costs.
Footwear brands are also joining the Latin American expansion foray.
A spokeswoman for Payless ShoeSource said the company has a “high interest” in the region where business is going “very well.”
“Payless has enjoyed strong business growth in the Latin American market since it entered in 2000,” she said, adding that its store network grew 13 percent in the first quarter to 285 shops. Payless is present in 14 Latin American countries and has ambitious growth plans for the future, observers said.
Store openings aside, U.S. retailers are also increasingly interested in sourcing in the region, particularly Latin America. A number of firms are looking to shift sourcing from Asia to the region amid production woes and high labor costs in China.