MEXICO CITY — Latin America’s apparel licensing market is heating up with a string of U.S. and European brands rushing to expand in booming Mexico while scrambling to seize control of struggling franchises in recession-stricken Brazil.
Carlos Ferreirinha, owner of luxury industry consultancy MCF, forecast Brazilian apparel sales will plunge 25 percent in 2016 after shrinking 15 percent last year as GDP declined 3.5 percent.
“The economic meltdown is affecting the middle class which brands like Tommy Hilfiger or Timberland were focusing on,” said Ferreirinha. “The retail market is suffering the worst crisis in 45 years.”
As a result, international fashion brands are trying to regain control of flagging franchises, with Timberland recently terminating its distribution agreement with textiles giant Alpargatas to bring the business back under its control.
The decline is so severe there are suggestions struggling Alpargatas will put its fashion brand Osklen on the block after a 318 million real, or $94 million at current exchange, takeover in 2014. Speculation is also mounting that two leading licensing groups, Inbrands and Restoque, could merge to stem growing losses.
Alpargatas is said to want to divest assets to help embattled owner, builder Camargo Correa, pay a $200 million fine linked to its alleged participation in a scandal involving oil giant Petrobras.
But Fabio Leite de Souza, investor relations director at Alpargatas, denied Osklen is for sale, adding that first and second-quarter business was good. But he revealed that the footwear, beachwear and eco-friendly Osklen will delay a U.S. expansion planned for this year.
Alpargatas’ sales will rise 20 percent in 2016 as it expands sandal brand Havaianas globally. Leite de Souza would not comment on Camargo Correa’s misfortunes.
Analysts said Inbrands and Restoque, which own the popular Le Lis Blanc and Ellus labels, respectively, are mulling a merger. InBrands has the local license for Tommy Hilfiger and G-Star Raw while Restoque owns apparel brands Dudalina, John John, Bobo and Rosa Cha.
“These companies are not strong enough separate,” said Ferreirinha. “Le Lis Blanc has lost a 30 percent market share and Ellus 20 percent.”
Their struggles are part self-inflicted, Ferreirinha said, adding that the firms lost an opportunity to develop strong fashion and creative identities before Brazil’s boom turned to bust in 2013. “They didn’t surprise the market so at the end of the day, their brands have no equity,” he claimed.
InBrands and Restoque’s woes can be extrapolated to the rest of the industry, where many brands boast flashy and eccentric designs but lack quality.
“In Brazil, we love to be shiny but we don’t believe in the full package,” added Ferreirinha.
More carnage looms as apparel firms and retailers scramble to survive the worst economic downturn in over a century.
Ferreirinha expects more foreign companies will seek to regain control or buy their licensors to survive the turbulent market, where turning a profit has been challenging amid heavy import restrictions and red tape.
“Licensing has never been very profitable,” he said. “Brazil has huge distribution problems. Brands like Calvin Klein or Tommy are forced to invest in flagship stores and sales-managed stores, which is expensive and complicated.”
But there is a silver lining for low-cost, local brands that can produce domestically. Opportunity-driven retailers could benefit from shopping malls’ idle capacity, now estimated at 25 percent, while as many as 200 shopping centers planned to open by 2018 have been postponed or cancelled. Fabio Silva, a production manager at PVH Arrow wholesaler Oracon, said, “There is an opportunity for the low-cost brands,” adding that apparel-focused department stores Riachuelo and Marisa, targeting cash-squeezed aspirational shoppers, are outpacing the market.
Oracon, which sells private labels Hemingway, Yachtmaster and California Surf, expects revenues will rise 3 percent this year versus flat sales in 2015.
While Brazil is the region’s largest economy, it stands in stark contrast to Mexico, where GDP is set to increase by up to 3.2 percent. Clothing sales are surging as a result, driven by the stable economic outlook and surging remittances fueled by the strong dollar.
Fitch Ratings analyst Maria Pia Medrano predicts same-store sales will rise 9 to 10 percent this year, compared to around 5 percent for its Latin American peers. Apparel sales are expected to be equally strong. Mexico is so attractive that PVH recently struck a joint venture to deepen its relationship with licensor Grupo Axo and sell its Calvin Klein, Warners and Arrow brands in Latin America’s second-largest market. The deal will boost Axo’s revenues 30 percent in 2017.
Perry Ellis International in March handed a license for a special collection for Mexico, Central America and South America to Mexican-Panamanian firm Multimoda Import. Eric Levy, commercial director at Dillard’s manufacturer Industrias Cavalier, said the growing economy, stable politics and, for now, an open border with the U.S. makes Mexico an expansion priority for international labels.
Cavalier, keen to expand its wholesale business, recently bought distribution rights for German scarf maker Fraas and is negotiating to bring several other U.S. and European brands into the market. The firm, which also makes the Cavalier and C-Cavalier labels, distributes French brand Daniel Cremieux and Sweden’s Strellson as well. Through a partnership with Axo, it has manufacturing and distribution rights for Chaps and Tommy Hilfiger’s tailored lines.
Cavalier boasts strong relationships with Mexico’s department stores including El Palacio de Hierro, Liverpool and Sears, which alongside Coppel, control 70 percent of clothing sales. This, coupled with its own manufacturing and warehouse facilities, provides an advantage over competitors.“You have to have very good relations with department stores and the capital to open stores,” Levy said. But this can be difficult “as retail is very expensive in Mexico and transfer rights can be as high as up to $2 million in some locations. Right now, I am talking to a jeans brand to distribute in department stores but they want a minimum number of stores and that’s costly.”
According to Levy, Mexican franchisors pay foreign labels royalties of 5 percent to 25 percent depending on their market recognition and sometimes have to fork out additional sales commissions and meet turnover and marketing investment targets.
With a 2,800-strong point of sale network dotting most department stores and shopping malls, Axo calls itself “an anchor retailer” in Mexico. “We have been in the market for 21 years and have been adding very strong brands,” said Axo investor relations executive Roberto Velasco. Exceeding 400 stand-alone stores, Axo has wholesale rights for over 20 brands in Mexico, including Coach, Guess, Brooks Brothers, Victoria’s Secret and Bath & Body Works.
Axo competes heavily with the 100-strong Liverpool chain and smaller luxury chain El Palacio de Hierro. Moises Azrak, owner of Panamanian apparel maker and licensor European Fashion Group, forecast the Mexican market will grow 10 percent this year against 15 percent in 2015, hurt by the economic crises in Brazil and Venezuela and the cooling economies in Colombia, Chile and Argentina. In addition, the strength of the dollar makes imports more expensive and dents franchisers’ bottom lines.
“It’s a very complicated market,” he said, adding that many brands are looking to enter markets directly or buy their licensors. “Mexico is growing but at [the recent] 19 pesos per dollar, there is a 40 to 50 percent devaluation that’s difficult to pass onto consumers.”