btg pactual international retailers in brazil€¦ · bottega veneta, christian louboutin and...

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Equity Research

Fabio Monteiro

Brazil – Banco BTG Pactual S.A.

[email protected]

+55 11 3383 2006

Thiago Andrade

Brazil – Banco BTG Pactual S.A.

[email protected]

+55 11 3383 2755

Foreign invasion: Why, how and what it means for locals

Unprecedented influx of international retailers

In this report, we discuss why more and more foreign retailers have entered Brazil in

recent years. The first movers (still here with major scale) were C&A and Carrefour in

the 70s. A few more players arrived in the 80s and 90s, before Inditex opened its first

Zara store in 2000. The invasion intensified after the 2009 crisis, as two new triple A

malls – JK Iguatemi and Village Mall (2012) – and a couple of other malls (Cidade

Jardim, Morumbi Shopping and Iguatemi Faria Lima) attracted more retail names.

The challenges remain the same as ever

The difficulties facing foreign players in Brazil have been pretty much the same for a

while: (i) hefty import taxation and 4 local taxes totaling, in some cases, up to 140% of

a product’s value; (ii) diametrically opposed seasonality vis-à-vis the Northern

hemisphere; (iii) difficulties producing locally, which includes finding reliable and

standard (decent) quality sourcing; and (iv) customs issues when importing products.

“Zara Index” confirms the cost burden of Brazil’s business environment

We’re introducing the “Zara Index”, developed to compare prices of selected products

in 22 countries where Zara is present. The basket includes 14 different items (ranging

from shoes to blazers) from Europe, Asia, North America and Brazil. Unsurprisingly,

Brazil came out on top with the most expensive basket (prices 21.5% above the US).

When we compile the same list considering purchasing power parity (PPP), Poland

beats Brazil as the country with Zara’s most expensive basket, but it is still clear that

apparel in Brazil is much more expensive than in the rest of the world.

Selected cases reveal the idiosyncrasies of doing business in Brazil

When foreign players consider entering Brazil, they are faced with a series of choices

capable of determining the success (or failure) of their efforts. Digging deeper into the

moves by players like C&A, Inditex/Zara, GAP, Diesel, Sephora and L’Occitane, we

analyze how they dealt with issues like: (i) partnering up (or not) with a local player;

(ii) local sourcing (or not); (iii) finding the right price point to balance profitability,

positioning and competitiveness; and (iv) assessing the potential # of stores in Brazil.

Readthrough for local apparel retailers: more competition, mainly in big cities

International retailers’ learning curve is usually a long one, and the examples of C&A

and Zara show it took a long time to succeed and adapt to the local market. The

number of stores being opened by Forever 21, GAP, Topshop and others is still very

low and focused on big cities (Rio, São Paulo, Ribeirão Preto, Brasília and Porto

Alegre) and the price gaps vs. the US in fast fashion and luxury players remain

sizable. In our exercise, we compare Brazil vs. US prices for GAP, Topshop,

Sephora, L’Occitane, Forever 21 and some luxury brands (Cartier, Louis Vuitton,

Bottega Veneta, Christian Louboutin and Coach). While the gap has gradually closed,

only Topshop has very competitive prices in Brazil. All-in, Brazilian apparel names will

need to react, but well-managed local players should have plenty of time to do so.

Brazil

Retail

SectorNote

04 April 2014

Brazil Retail

Brazil Retail 04 April 2014 page 2

So why are international retailers now coming to Brazil?

As we have discussed at length in recent years, real growth in income and credit

expansion has enabled Brazilians to devote a higher share of their pockets to

consumption.

Chart 1: Disposable income growth vs. IPCA (base 100)

Chart 2: Non-regulated credit to individuals (R$mn)

Source: BTG Pactual Source: BTG Pactual

As a result, Brazilian retailers have enjoyed a very good run in the last 10-15 years

and the burgeoning local market is attracting more and more international players to

Brazil, in contrast to past decades when only a few renowned foreign retailers

successfully initiated operations in the country.

Chart 3: Fabric, apparel and footwear retail vs. IPCA (base 100)

Chart 4: Supermarket retail vs. IPCA (base 100)


Up until the 1990s, the entry of international retailers into the Brazilian market was a

very limited and sporadic movement, reflecting the fact that the country’s unstable

political and economic environment made incursions too risky. It was only in the

2000s, after the introduction of the BRL and inflation control, that we saw a stronger

movement by foreign companies. And in the last 5 years, many key players (who had

always planned on coming to Brazil at some point) eventually arrived.

80

130

180

230

280

330

380

430

480

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Disposable income IPCA

CAGR: 11.5%

CAGR: 6.5%

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

Jun-

00

Feb

-01

Oct

-01

Jun-

02

Feb

-03

Oct

-03

Jun-

04

Feb

-05

Oct

-05

Jun-

06

Feb

-07

Oct

-07

Jun-

08

Feb

-09

Oct

-09

Jun-

10

Feb

-11

Oct

-11

Jun-

12

Feb

-13

Oct

-13

CAGR: 21.0%

80

130

180

230

280

330

380

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Fabric, apparel and footwear IPCA

CAGR: 9.8%

CAGR: 6.5%

80

130

180

230

280

330

380

430

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Supermarkets IPCA

CAGR: 11.3%

CAGR: 6.5%


Chart 5: Timeline of international retailers opening stores in Brazil

Source: BTG Pactual

The first international retailers to arrive in Brazil were Carrefour and C&A. Both

touched down in Brazil in the 1970s and are now very traditional and well-known

players.

For a long time, Carrefour was the largest food retailer in Brazil, and was only

surpassed by CBD in 2009. In addition to organic growth, several acquisitions (most

notably, Atacadão) have supported Carrefour’s expansion. It currently has more than

200 stores and annual revenues in excess of R$30bn.

C&A is one of the most successful international retailers in Brazil, and the leading

apparel retailer with 2013 gross sales of R$5bn. While most international brands

touched down in Brazil in the past decade, C&A opened its first Brazilian store back

in August 1976 at the Ibirapuera Mall in São Paulo. It now has 261 stores (including

28 opened in 2013 and 28 remodeled in the same year) and its Brazilian operation

involves the sales of apparel, footwear, accessories and electronic goods (cell

phones, tablets, cameras and watches), with over 1 million customers a day, 19,000

employees and 3 distribution centers in São Paulo, Barueri and Rio de Janeiro.

After this first wave of entrants, Inditex’s Zara also achieved relevant scale in Brazil,

competing directly with traditional players like Renner, Hering, C&A and Riachuelo. It

opened its first store in São Paulo in 2000 and currently has 47 points of sale (plus 5

Zara Home stores, as of January 31, 2014) and revenues of approximately

R$600/700mn. But high import taxes (more on this below) prevent Zara from

aggressively expanding its footprint as it needs to practice high price points targeting


the wealthier income groups (as opposed to its popular positioning in other countries)

to preserve margins.

With the opening of: (i) Shopping Cidade Jardim (SP, 2008), (ii) Shopping JK

Iguatemi (SP, 2012) and (iii) Village Mall (RJ, 2012), the cities of São Paulo and Rio

de Janeiro were definitively included in the expansion roadmap of international

retailers. These locations are extremely high profile and key players like Chanel,

Apple, Rolex and Tag Heuer marked their entrance into Brazil at these venues.

Table 1: Shopping Cidade Jardim, JK Iguatemi and Village Mall store listings – foreign players

Source: BTG Pactual

We would like to highlight three recent cases (Topshop, GAP and Forever 21), which

all arrived without any local sourcing and seeking to practice competitive prices,

despite all the tax, logistics, competition and scale challenges. Topshop opened its

first Brazilian store in June 2012 at the JK Iguatemi mall in São Paulo. It currently has


4 stores, including the ones at Iguatemi São Paulo, Market Place (São Paulo) and

Iguatemi Ribeirão Preto. GAP touched down in Brazil a year later and now has 4

stores (GAP has had airport duty free stores in partnership with Dufry since 2003)

and plans to open 15 stores in the first 5 years of operation in Brazil. Forever 21 is

another case in point. It has just opened its first store in Brazil (Morumbi Shopping, in

São Paulo) and plans to open 7 by year-end (2 in São Paulo, 2 in Rio de Janeiro, 1 in

Ribeirão Preto, 1 in Porto Alegre and 1 in Brasília).

The impressive growth of Brazil’s e-commerce space (28.4% CAGR since 2009) has

also attracted the attention of foreign players. In 2012, Amazon unveiled its Brazilian

website, initially offering just Kindles and digital books. But a few weeks ago, it

announced that regular books will also be sold and we expect the company to

gradually start working with more categories in Brazil.

Chart 6: Brazilian e-commerce growth (R$bn)

Source: Ebit

We also highlight that some of these players successfully invested in and then exited

Brazil. JC Penney bought control of Renner in 1998, paying US$139mn. Renner’s

store count jumped from 21 to 64 in 6 years and its sales quadrupled to R$1.3bn. But

even after this expansion, Renner represented only 3% of JC Penney’s overall

revenues and, in order to focus on its US operations (where it had more than 1,000

stores), JC Penney sold its stake in Renner to the market in 2005 via an IPO.

10.6

14.8

18.7

22.5

28.8

34.6

2009 2010 2011 2012 2013 2014e

CAGR 09'-13': 28.4%


Import taxes are still a relevant barrier for foreign players

Brazil has a very complex tax structure, making apparel imports a slow, costly

process. Four different taxes (77% of product value) are levied on an imported pair of

jeans before hitting store shelves.

Table 2: Taxes on imported apparel

Source: BTG Pactual

GAP had a hard time defining the price points for its products. The company wanted

to avoid a luxury perception and be competitive with local mainstream players,

making it appealing to the Brazilian middle class. But its sourcing isn’t done locally,

which means it is subject to hefty taxes. In fact, GAP’s products ultimately cost more

in Brazil than in the US, giving it adequate margins/returns here, and its prices are

still competitive with Zara and Renner.

Forever 21 said it had planned on coming to Brazil for a while, but waited until now to

make sure that practicing low price points was feasible to preserve its proposition of

offering the latest fashion trends at the best price. Its products are sourced overseas,

but it hasn’t ruled out local production or local sourcing.

Local taxation is even higher for CF&T products, meaning companies like Sephora

and L’Occitane have an even harder time practicing competitive prices. Just to give

you an idea, taxation on a perfume can be up to 140% of the original product value.

As its initial target market was already well explored, L’Occitane realized the only way

to expand its Brazil business was to operate lower price points. It thus became one of

the first international premium cosmetics players to partner up with a local cosmetics

producer, precisely in order to avoid high import tax. With this partnership, it extended

its core brand to “L’Occitane au Brésil”, charging prices 30% below original

L’Occitane products but still 30% more than local brands Natura or o Boticário.

These efforts evidence companies’ increasingly creative mindset to overcome the

challenges of operating in Brazil, and the price gap to the US is slowly narrowing.

Jeans (US$) 50.00

FX 2.30

Jeans (R$) 115.00

Tax Base Rate R$

Import tax (II) Product v alue (PV) 35.0% 40.25

IPI PV + II 0.0% 0.00

PIS PV 1.7% 1.90

Cofins PV 8.6% 9.89

ICMS PV + II + IPI + PIS + COFINS + ICMS 18.0% 36.67

Total 88.70

% of PV 77.1%

Forever 21 - Morumbi Shopping (SP)


Table 3: Taxes on imported perfume

Source: BTG Pactual

We ran the following exercise to better illustrate the price gap between Brazil and

USA:

Table 4: Price comparison - Brazil versus US

Source: BTG Pactual. Prices as of March 27, 2014

While companies like L’Occitane and Topshop are practicing prices comparable to

those in the US, we discovered that GAP and Forever 21 charges higher prices in

Brazil. Elsewhere, while L’Occitane is admittedly closing the gap to US prices,

Perfume (US$) 20.00

FX 2.30

Perfume (R$) 46.00

Tax Base Rate R$

Import tax (II) Product v alue (PV) 18.0% 8.28

IPI PV + II 42.0% 22.80

PIS PV 2.2% 1.01

Cofins PV 10.3% 4.74

ICMS PV + II + IPI + PIS + COFINS + ICMS 25.0% 27.61

Total 64.44

% of PV 140.1%


excessive taxation means that CF&T products have the largest price differences. As

a result, Sephora prices in Brazil can be up to 140% higher than in the US.

When we perform the same analysis for luxury items, we see that some companies

are also striving to close the gap to US prices. A Louis Vuitton handbag in Brazil

costs only 12% more than in the US, something unthinkable a few years ago.

Table 5: Price comparison of luxury items - Brazil versus US

Source: BTG Pactual. Prices as of March 27, 2014


The Zara index

Zara is present in 87 countries, with comparable products in all these markets. We

selected a basket of 14 products and compared its price in 21 countries to the prices

practiced in the US. Unsurprisingly, Brazil came out on top with the most expensive

basket (with prices 21.5% above the US).

Table 6: Zara price survey - prices in US$

Source: BTG Pactual. Prices as of March 26.

When we compile the same list considering purchasing power parity (PPP), Poland

beats Brazil as the country with Zara’s most expensive basket, but it is still clear that

apparel in Brazil is much more expensive than in the rest of the world.


Chart 7: Zara index (raw) – Price gap to Zara US prices

Chart 8: Zara index (PPP adjusted) – Price gap to Zara US prices

Source: BTG Pactual. Prices as of March 26. Source: BTG Pactual

We acknowledge this exercise’s imperfections, as apparel is usually cheaper in the

US than Europe, but Zara is an exception to this rule of thumb. Its suppliers are

mainly located in Spain, Portugal and Morocco, giving its European stores a cost

advantage. And another caveat is the fact that some countries include VAT in the

prices listed on the websites while others don’t. But these exceptions aside, we still

believe the overall conclusion is very much valid.

21.5%

14.2%

12.9%

6.2%

4.8%

2.6%

-3.4%

-5.4%

-6.5%

-11.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-12.1%

-17.3%

-29.1%

-29.1%

Brazil

Switzerland

Norway

Sweden

Denmark

Japan

China

Poland

England

Canada

Italy

Belgium

Germany

France

Ireland

Luxembourg

Monaco

Netherlands

Greece

Spain

Portugal

49.4%

-27.4%

-22.4%

-21.2%

-26.6%

-0.8%

42.1%

54.2%

-14.1%

-19.1%

-18.2%

-25.0%

-19.3%

-25.8%

-22.2%

-29.9%

-25.8%

-23.2%

-11.8%

-25.4%

-17.0%

Brazil

Switzerland

Norway

Sweden

Denmark

Japan

China

Poland

England

Canada

Italy

Belgium

Germany

France

Ireland

Luxembourg

Monaco

Netherlands

Greece

Spain

Portugal


Cases: International Players in Brazil

C&A: Largest apparel player in Brazil (arrived in 1976)

C&A was founded in 1841 in the Netherlands by the brothers Clemens and August.

The company’s value proposition is to offer fashion-oriented products at affordable

prices. It started its international expansion in 1911 and, alongside Inditex and H&M,

is one of the apparel retailers with the highest level of internationalization. C&A has a

presence in 25 countries – 22 in Europe plus Brazil (1976), Mexico (1999) and China

(2007) – with close to 2,000 stores.

It is one of the most successful international retailers in Brazil, and the leading

apparel retailer with 2013 gross sales of ~R$5bn. While most international brands

touched down in Brazil in the past decade, C&A opened its first Brazilian store in the

1970s (August 1976 to be more precise) at the Ibirapuera Mall in São Paulo. It has

261 stores today (including 28 opened in 2013 and 28 remodeled stores last year).

While the C&A chain is present in 23 states and the Federal District (over 80 cities),

roughly half of its stores are located in the states of São Paulo and Rio de Janeiro.

Its Brazilian operation involves the sales of apparel, footwear, accessories and

electronic goods (cell phones, tablets, cameras and watches) and we estimate 2013

sales of ~R$5bn (20-25% in electronic goods), with over 1 million customers a day,

19,000 employees and 3 distribution centers in São Paulo, Barueri and Rio de

Janeiro. Like Riachuelo and Renner, C&A has several dedicated private label brands

in Brazil: Ângelo Litrico, Sun Coast, PaloMino, Yéssica, Clock House, Ace, Jinglers,

Baby Club, Fifteen and Design Íntimo. Some of these private label brands are used

by C&A worldwide.

In addition to its private label brand strategy, it has been aggressive in launching

collections in partnerships with famous designers and fashion brands. Between 2009

and 2012, it launched an average of four collections per year, and last year it

launched eleven including: 284, Santa Lolla, Carina Duek, Isabella Giobbi, Ágatha,

Roberto Cavalli and Lenny Niemeyer. Turnover for these types of collections is

usually three weeks, 50% faster than a regular collection. According to the company,

these collections are bringing new customers (a more fashion conscious, brand-

oriented middle class) to the stores.

Plans for 2014 include the opening of 25-30 new stores, mainly in São Paulo, Rio de

Janeiro and the Northeast. C&A stores usually have 2,300 sqm, but in November

2013 the company launched a smaller format in Ipanema, with 1,000 sqm, focused

on women (70% of overall sales). It is also planning to launch a new e-commerce

website after an unsuccessful trial 12 years ago. To face the challenges related to the

World Cup, the company upped the ante by licensing 105 Fifa products, marking the

third consecutive World Cup that C&A has adopted this type of licensing strategy –

and it is spending 50% more on this year’s event.

In terms of sourcing, we note that roughly a third of C&A’s products in Brazil are

imported from Asia, South America and Europe. The unfavorable FX rate hasn’t

changed its strategy, as they have long-term agreements in place with suppliers, but

they have admitted the possibility of some margin pressure in the short term.

C&A - Morumbi Shopping (SP)


Zara believes Brazil has the worst business environment anywhere in the world

Present in 87 countries (on all five continents) with over 6,300 stores and 125,000

employees, Zara arrived in Brazil in 2000. At that time, it planned to open its first 50

stores in a 3-year timeframe. But fast forward to January 2014 (almost 14 years

later), and it had only 47 Zara and 5 Zara Home stores. Unlike other players, Zara’s

incursion into Brazil was a solo flight, as the company preferred not to partner up with

local groups.

Zara came up short on its initial plan because high import tariffs for apparel and an

unfavorable FX prevent it practicing the same price points of other markets without

hurting margins. Thus, Zara in Brazil is not as democratic as in other countries and its

products are more appealing to the A and B classes, limiting its addressable market.

To overcome all the logistics and import issues in Brazil, Zara opened a 40,000m² DC

in Cajamar (São Paulo), its only facility of this kind outside Spain. It is also sourcing

40% of its products locally (with approximately 50 different suppliers) while Inditex

maintains 75% of its production in Europe. When Zara first came to Brazil, it wanted

to deliver its apparel in Brazil (by air) in 3 days, but the poor infrastructure of Brazilian

airports and a time-consuming customs process prevented it going ahead with this

strategy. The São Paulo distribution center is also responsible for supplying Zara’s

operations in Argentina, Uruguay, Chile, South Africa and Australia.

Inditex has also brought its Zara Home store format to Brazil (5 stores), but still

doesn’t have plans for other brands like Massimo Dutti or Bershka. It also hasn’t

disclosed when it will roll-out e-commerce operations in Brazil.

Cannibalization from stores abroad hurt Diesel in Brazil

Diesel first came to Brazil in 2001 in a partnership with Esber Hajli, a local

businessman. With 2 stores in São Paulo (on Rua Oscar Freire and at the Shopping

Iguatemi mall) and 1 in Rio (Fashion Mall), the brand was initially a big hit.

The initial strategy in Brazil had a well-defined marketing strategy that combined

creative campaigns and high price points to create desire for the products. With

prices of R$800-1,000 (USD400), Diesel’s jeans became highly aspirational and the

buzz in the specialized media was tremendous. With these price points, Diesel’s

operations in Brazil posted great results and the Shopping Iguatemi store achieved

the highest sales/m² of any of the company’s global stores.

In 2008, it revamped its Oscar Freire store, which became the largest in the world

with 1,700m², and planned to sell its products via another 35 multi-brand stores

outside the São Paulo-Rio axis.

But after this initial success, BRL appreciation started to affect Diesel’s sales,

enabling its customers to buy the products abroad for much lower prices. In an

interview in 2008, Renzo Rosso (Diesel’s founder) said Brazilians accounted for up to

30% of its store sales in Paris, Berlin, Milan and Rome.

Due to the disappointing results, Diesel decided to take a step back, closing its

Brazilian stores in 2011 and ending the partnership with Esber Hajli. It reviewed its

Zara - JK Iguatemi (SP)

Diesel - JK Iguatemi (SP)


strategy and came back a year later after partnering up with Aste (a group that also

operates North Face and Kipling stores in Brazil). Before choosing Aste, Diesel also

negotiated with InBrands. To support its initiative, Diesel also cut prices in Brazil by

30% on average, partly closing the gap to its stores abroad.

Diesel has 7 stores in Brazil (4 in São Paulo, 1 in Rio de Janeiro, 1 in Pernambuco

and 1 in Brasilia) and plans to reach 24 by 2017.

Sephora is betting on a differentiated shopping experience

The LVMH group has been present in Brazil since the 1970s with the introduction of

Chandon, a Brazilian sparkling wine. But it was only in recent years that it brought its

selective retail division to Brazil via Sephora to take advantage of Brazil’s booming

CF&T market (CAGR of 12.9% in 1996-2012).

Chart 9: Brazilian CF&T market (R$bn)

Chart 10: Brazilian CF&T market - channel breakdown

Source: ABIHPEC Source: Euromonitor

To gain critical mass in Brazil, LVMH initially pursued the acquisition of a relevant

local CF&T retailer, with the rationale that the CF&T retailing operation required a

certain minimum scale to achieve the desired profitability, despite the excessive

taxation on imported cosmetics.

In July 2010 it bought 70% of Sack’s, the largest Brazilian CF&T e-commerce retailer.

At that time, it is speculated that LVMH paid R$200-350mn for the company which, in

turn, grossed R$100mn in annual revenues. Sack’s was a natural choice for LVMH

due to its longstanding relationship with the company, since Dior (an LVMH brand)

products were top sellers at Sack’s.

After this initial period, Sephora opened its first store in Brazil at the JK Iguatemi

Shopping mall (SP) in July 2012 and currently has 5 stores in São Paulo, 3 in Rio de

Janeiro and 1 in Paraná. The unique shopping experience offered by Sephora, which

includes differentiated visual merchandising, professional assistance at stores to

support product choice (without the language barrier most Brazilians would face when

shopping abroad) and targeted marketing campaigns, have been key to its success in

Brazil. It also brought exclusive brands like Make Up Forever, which didn’t have local

distribution and is seen as a democratic store, aspirational for the middle class and

accessible to the wealthiest income groups. As part of this strategy, Sephora offers

clients payments in up to 10 interest-free installments.

4.9 5.5 5.9 6.6 7.5 8.39.7

11.513.5

15.417.5

19.621.3

24.427.3

29.4

34.0

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

CAGR 96'-07': 13.4%

CAGR 96'-12': 12.9%

CAGR 07'-12': 11.6%

38.4% 37.8% 37.0% 36.9% 36.9%

15.9% 16.1% 17.3% 17.3% 17.5%

14.9% 15.2% 15.4% 15.9% 16.3%

28.3% 28.2% 27.8% 27.2% 26.5%

2008 2009 2010 2011 2012

Others

Direct selling

Drugstores

Beauty SpecialtyRetailers

Grocery retailers

Sephora - Village Mall (RJ)


The acquisition of Sack’s and the consequent development of Sephora in Brazil since

2012 is highly opportune in the sense that beauty specialty retailers and e-commerce

have been gaining share from direct CF&T sales (a very traditional channel) in recent

years.

L’Occitane started local production to broaden its addressable market

L’Occitane started operations in Brazil in 1995 and opened its first store in 1996 at

Morumbi Shopping in São Paulo. By the end of 2013, it had 70 stores and was selling

products at another 260 points of sale (mainly drugstores and premium

supermarkets).

Chart 11: L’Occitane – Number of stores in Brazil

Chart 12: Sales in Brazil (EURmn) and SSS growth (local currency)


L’Occitane realized the only way to further expand its Brazil business was to practice

lower price points, as its initial target market was already well explored. It thus

became one of the first international premium cosmetics players to partner up with a

local cosmetics producer to avoid high import tax. With this partnership, it extended

its core brand to “L’Occitane au Brésil”, with prices 30% below original L’Occitane

products but 30% more expensive than local brands like Natura or o Boticário.

Initially, the company placed L’Occitane au Brésil products in a standalone store and

in corners of selected L’Occitane stores. The customer response has been better

than management envisioned and, with the new format, L’Occitane intends to open

1,000 franchises in the next 10-15 years.

GAP sacrificed margins to be competitive against local brands

GAP has been present in Brazil since 2003 via a partnership with Dufry that features

stores at the duty free areas of selected Brazilian airports. Brazilians were among the

top 5 nationalities purchasing at US GAP stores and, after six years of diligence, the

company opened its first 4 duty paid stores in Brazil in 2013. With the introduction of

own stores, GAP now offers 2,500 SKUs (versus only 200 in duty free stores), or 65%

of its entire product line (including women’s fashion, men’s fashion, GAP kids, baby

GAP and fitness products). Stores range from 600m² to 750m².

24 2630 32

46

63

70

2007a 2008a 2009a 2010a 2011a 2012a 2013a

11.114.3

19.325.5

34.8

45.7 44.2

9.0%6.2%

13.3%

-7.0%

2007a 2008a 2009a 2010a 2011a 2012a 2013a

Sales (EURmn)

SSS (local FX)

L’Occitane - Shopping Cidade Jargim (SP)

L’Occitane au Brésil - Morumbi Shopping (SP)


The lengthy preparation to enter Brazil reflected difficulties mapping out a profitable

business model (i.e. profitable even with high apparel import taxes). The company

also had to decide between operating the stores itself or finding a local partner. At the

end of the day, GAP made a conscious decision to reduce margins so its price points

could challenge established players and appeal to the A, B and C classes, even

though its products in Brazil are 10-40% more expensive than in the US. It is also

offering customers payments in up to five interest-free installments. Due to the

complexities of operating in Brazil, GAP chose to franchise its Brazilian stores to Blue

Bird, a group that owns the local brands Luigi Bertolli, Cori and Emme, after receiving

50 different proposals to enter Brazil.

Regarding sourcing, GAP’s products sold in Brazil come from Hong Kong, and Blue

Bird’s expertise in importing apparel from Western countries was key to securing the

partnership. To introduce GAP in Brazil, the company also conducted media

campaigns focused on social networks.

GAP plans to open 15 stores in its first 5 years of operation in Brazil and said it

doesn’t intend to open stores of other brands (Old Navy, Banana Republic) for now.

GAP – Morumbi Shopping (SP)


Required Disclosures

This report has been prepared by Banco BTG Pactual S.A.

The figures contained in performance charts refer to the past; past performance is not a reliable indicator of future results.

BTG Pactual Rating

Definition Coverage *1 IB Services *2

Buy Expected total return 10% above the company’s sector average.

55% 46%

Neutral Expected total return between +10% and -10% the company’s sector average.

41% 46%

Sell Expected total return 10% below the company’s sector average.

4% 0%

1: Percentage of companies under coverage globally within the 12-month rating category.

2: Percentage of companies within the 12-month rating category for which investment banking (IB) services were provided within the past 12 months.

Absolute return requirements

Besides the abovementioned relative return requirements, the listed absolute return requirements must be followed:

a) a Buy rated stock must have an expected total return above 15%

b) a Neutral rated stock can not have an expected total return below -5%

c) a stock with expected total return above 50% must be rated Buy

Analyst Certification

Each research analyst primarily responsible for the content of this investment research report, in whole or in part, certifies that:

(i) all of the views expressed accurately reflect his or her personal views about those securities or issuers, and such recommendations were elaborated independently, including in relation to Banco BTG Pactual S.A. and/or its affiliates, as the case may be;

(ii) no part of his or her compensation was, is, or will be, directly or indirectly, related to any specific recommendations or views contained herein or linked to the price of any of the securities discussed herein.

Research analysts contributing to this report who are employed by a non-US Broker dealer are not registered/qualified as research analysts with FINRA and therefore are not subject to the restrictions contained in the FINRA rules on communications with a subject company, public appearances, and trading securities held by a research analyst account.

Part of the analyst compensation comes from the profits of Banco BTG Pactual S.A. as a whole and/or its affiliates and, consequently, revenues arisen from transactions held by Banco BTG Pactual S.A. and/or its affiliates.

Where applicable, the analyst responsible for this report and certified pursuant to Brazilian regulations will be identified in bold on the first page of this report and will be the first name on the signature list.

Statement of Risk

Retail/consumer goods companies are subject to local macroeconomic conditions, mainly inflation, FX-rate and GDP growth. In addition, volatility in raw materials costs may impact company’s margins in the future, as well as the FX rate volatility.

Company Disclosures

Company Name Reuters 12-mo rating Price Price date Grupo Pão de Açúcar 1, 2, 4, 6, 18, 19,

20 PCAR4.SA Buy R$102.23 3-4-2014

Hering 1, 2, 4, 6, 18, 19, 20 HGTX3.SA Buy R$25.50 3-4-2014 Lojas Renner 1, 2, 4, 6, 18, 19, 20 LREN3.SA Buy R$63.90 3-4-2014 Marisa 1, 2, 4, 6, 18, 19, 20 AMAR3.SA Neutral R$15.01 3-4-2014 Natura 1, 2, 4, 6, 10, 18, 19 NATU3.SA Neutral R$37.60 3-4-2014

1. Within the past 12 months, Banco BTG Pactual S.A., its affiliates or subsidiaries has received compensation for investment banking services from this company/entity.

2. Banco BTG Pactual S.A, its affiliates or subsidiaries expect to receive or intend to seek compensation for investment banking services and/or products and services other than investment services from this company/entity within the next three months.

4. This company/entity is, or within the past 12 months has been, a client of Banco BTG Pactual S.A., and investment banking services are being, or have been, provided.

6. Banco BTG Pactual S.A. and/or its affiliates receive compensation for any services rendered or presents any commercial relationships with this company, entity or person, entities or funds which represents the same interest of this company/entity.

10. Banco BTG Pactual S.A., its affiliates or subsidiaries makes a market in the securities of this company.

18. As of the end of the month immediately preceding the date of publication of this report, neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries beneficially own 1% or more of any class of common equity securities

19. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries have managed or co-managed a public offering of securities for the company within the past 12 months.

20. Neither Banco BTG Pactual S.A. nor its affiliates or subsidiaries engaged in market making activities in the subject company's securities at the time this research report was published.


Grupo Pão de Açúcar

Source: BTG Pactual and Economatica. Prices as of 03 April 2014

Hering


Lojas Renner


BuyNeutral

SellNo Rating

0.0

30.0

60.0

90.0

120.0

150.0

4-A

pr-1

1

4-Ju

l-11

4-O

ct-1

1

4-Ja

n-12

4-A

pr-1

2

4-Ju

l-12

4-O

ct-1

2

4-Ja

n-13

4-A

pr-1

3

4-Ju

l-13

4-O

ct-1

3

4-Ja

n-14

4-A

pr-1

4

Stock Price (R$) Price Target (R$)

BuyNeutral

SellNo Rating

0.0

20.0

40.0

60.0

4-A

pr-1

1

4-Ju

l-11

4-O

ct-1

1

4-Ja

n-12

4-A

pr-1

2

4-Ju

l-12

4-O

ct-1

2

4-Ja

n-13

4-A

pr-1

3

4-Ju

l-13

4-O

ct-1

3

4-Ja

n-14

4-A

pr-1

4


BuyNeutral

SellNo Rating

0.0

20.0

40.0

60.0

80.0

100.0

4-A

pr-1

1

4-Ju

l-11

4-O

ct-1

1

4-Ja

n-12

4-A

pr-1

2

4-Ju

l-12

4-O

ct-1

2

4-Ja

n-13

4-A

pr-1

3

4-Ju

l-13

4-O

ct-1

3

4-Ja

n-14

4-A

pr-1

4



Marisa


Natura


BuyNeutral

SellNo Rating

0.0

10.0

20.0

30.0

40.0

4-A

pr-1

1

4-Ju

l-11

4-O

ct-1

1

4-Ja

n-12

4-A

pr-1

2

4-Ju

l-12

4-O

ct-1

2

4-Ja

n-13

4-A

pr-1

3

4-Ju

l-13

4-O

ct-1

3

4-Ja

n-14

4-A

pr-1

4


BuyNeutral

SellNo Rating

0.0

20.0

40.0

60.0

4-A

pr-1

1

4-Ju

l-11

4-O

ct-1

1

4-Ja

n-12

4-A

pr-1

2

4-Ju

l-12

4-O

ct-1

2

4-Ja

n-13

4-A

pr-1

3

4-Ju

l-13

4-O

ct-1

3

4-Ja

n-14

4-A

pr-1

4



Global Disclaimer

This report has been prepared by Banco BTG Pactual S.A. (“BTG Pactual S.A.”), a Brazilian regulated bank. BTG Pactual US Capital LLC (“BTG Pactual US,”), a broker-dealer registered with the U.S. Securities and Exchange Commission and a member of the Financial Industry Regulatory Authority and the Securities Investor Protection Corporation is distributing this report in the United States. BTG Pactual US is an affiliate of BTG Pactual S.A.. BTG Pactual US assumes responsibility for this research for purposes of U.S. law. Any U.S. person receiving this report and wishing to effect any transaction in a security discussed in this report should do so with BTG Pactual US at 212-293-4600, 601 Lexington Ave. 57th Floor, New York, NY 10022.

This report is being distributed in the United Kingdom and elsewhere in the European Economic Area (“EEA”) by BTG Pactual Europe LLP (“BTG Pactual UK”), which is authorized and regulated by the Financial Services Authority of the United Kingdom. This report may also be distributed in the United Kingdom in the United Kingdom and elsewhere in the EEA by BTG Pactual S.A. and/or BTG Pactual US. BTG Pactual UK has not: (i) produced this report, (ii) substantially altered its contents, (iii) changed the direction of the recommendation, or (iv) disseminated this report prior to its issue by BTG Pactual US. BTG Pactual UK does not distribute summaries of research produced by BTG Pactual US.

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BTG Pactual S.A. Comisionista de Bolsa (“BTG Pactual Colombia”) formerly known as Bolsa y Renta S.A. Comisionista de Bolsa, is a Colombian broker dealer register with the Superintendencia Financeira de Colombia and is responsible for the distribution of this report in Colombia. BTG Pactual Colombia acquisition by BTG Pactual S.A. was approved by Brazilian Central Bank on December 21st, 2012.

References herein to BTG Pactual include BTG Pactual S.A., BTG Pactual US Capital LLC, BTG Pactual Europe LLP, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia as applicable. This report is for distribution only under such circumstances as may be permitted by applicable law. This report is not directed at you if BTG Pactual is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available to you. You should satisfy yourself before reading it that BTG Pactual is permitted to provide research material concerning investments to you under relevant legislation and regulations. Nothing in this report constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation, offer, invitation or inducement to buy or sell any securities or related financial instruments in any jurisdiction. Prices in this report are believed to be reliable as of the date on which this report was issued and are derived from one or more of the following: (i) sources as expressly specified alongside the relevant data; (ii) the quoted price on the main regulated market for the security in question; (iii) other public sources believed to be reliable; or (iv) BTG Pactual's proprietary data or data available to BTG Pactual. All other information herein is believed to be reliable as of the date on which this report was issued and has been obtained from public sources believed to be reliable. No representation or warranty, either express or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, except with respect to information concerning Banco BTG Pactual S.A., its subsidiaries and affiliates, nor is it intended to be a complete statement or summary of the securities, markets or developments referred to in the report. In all cases, investors should conduct their own investigation and analysis of such information before taking or omitting to take any action in relation to securities or markets that are analyzed in this report. BTG Pactual does not undertake that investors will obtain profits, nor will it share with investors any investment profits nor accept any liability for any investment losses. Investments involve risks and investors should exercise prudence in making their investment decisions. BTG Pactual accepts no fiduciary duties to recipients of this report and in communicating this report is not acting in a fiduciary capacity. The report should not be regarded by recipients as a substitute for the exercise of their own judgment. Opinions, estimates, and projections expressed herein constitute the current judgment of the analyst responsible for the substance of this report as of the date on which the report was issued and are therefore subject to change without notice and may differ or be contrary to opinions expressed by other business areas or groups of BTG Pactual as a result of using different assumptions and criteria. Because the personal views of analysts may differ from one another, Banco BTG Pactual S.A., its subsidiaries and affiliates may have issued or may issue reports that are inconsistent with, and/or reach different conclusions from, the information presented herein. Any such opinions, estimates, and projections must not be construed as a representation that the matters referred to therein will occur. Prices and availability of financial instruments are indicative only and subject to change without notice. Research will initiate, update and cease coverage solely at the discretion of BTG Pactual Investment Bank Research Management. The analysis contained herein is based on numerous assumptions. Different assumptions could result in materially different results. The analyst(s) responsible for the preparation of this report may interact with trading desk personnel, sales personnel and other constituencies for the purpose of gathering, synthesizing and interpreting market information. BTG Pactual is under no obligation to update or keep current the information contained herein, except when terminating coverage of the companies discussed in the report. BTG Pactual relies on information barriers to control the flow of information contained in one or more areas within BTG Pactual, into other areas, units, groups or affiliates of BTG Pactual. The compensation of the analyst who prepared this report is determined by research management and senior management (not including investment banking). Analyst compensation is not based on investment banking revenues, however, compensation may relate to the revenues of BTG Pactual Investment Bank as a whole, of which investment banking, sales and trading are a part. The securities described herein may not be eligible for sale in all jurisdictions or to certain categories of investors. Options, derivative products and futures are not suitable for all investors, and trading in these instruments is considered risky. Mortgage and asset-backed securities may involve a high degree of risk and may be highly volatile in response to fluctuations in interest rates and other market conditions. Past performance is not necessarily indicative of future results. If a financial instrument is denominated in a currency other than an investor’s currency, a change in rates of exchange may adversely affect the value or price of or the income derived from any security or related instrument mentioned in this report, and the reader of this report assumes any currency risk. This report does not take into account the investment objectives, financial situation or particular needs of any particular investor. Investors should obtain independent financial advice based on their own particular circumstances before making an investment decision on the basis of the information contained herein. For investment advice, trade execution or other enquiries, clients should contact their local sales representative. Neither BTG Pactual nor any of its affiliates, nor any of their respective directors, employees or agents, accepts any liability for any loss or damage arising out of the use of all or any part of this report. Notwithstanding any other statement in this report, BTG Pactual UK does not seek to exclude or restrict any duty or liability that it may have to a client under the “regulatory system” in the UK (as such term is defined in the rules of the Financial Services Authority). Any prices stated in this report are for information purposes only and do not represent valuations for individual securities or other instruments. There is no representation that any transaction can or could have been effected at those prices and any prices do not necessarily reflect BTG Pactual internal books and records or theoretical model-based valuations and may be based on certain assumptions. Different assumptions, by BTG Pactual S.A., BTG Pactual US, BTG Pactual UK, BTG Pactual Chile and BTG Pactual Peru and BTG Pactual Colombia or any other source, may yield substantially different results. This report may not be reproduced or redistributed to any other person, in whole or in part, for any purpose, without the prior written consent of BTG Pactual and BTG Pactual accepts no liability whatsoever for the actions of third parties in this respect. Additional information relating to the financial instruments discussed in this report is available upon request. BTG Pactual and its affiliates have in place arrangements to manage conflicts of interest that may arise between them and their respective clients and among their different clients. BTG Pactual and its affiliates are involved in a full range of financial and related services including banking, investment banking and the provision of investment services. 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Any of BTG Pactual and its affiliates may: (a) have disclosed this report to companies that are analyzed herein and subsequently amended this report prior to publication; (b) give investment advice or provide other services to another person about or concerning any securities that are discussed in this report, which advice may not necessarily be consistent with or similar to the information in this report; (c) trade (or have traded) for its own account (or for or on behalf of clients), have either a long or short position in the securities that are discussed in this report (and may buy or sell such securities), with the securities that are discussed in this report; and/or (d) buy and sell units in a collective investment scheme where it is the trustee or operator (or an adviser) to the scheme, which units may reference securities that are discussed in this report.

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