beyondbrics

It has become commonplace for recession-savaged western companies to seek fresh fortune in emerging markets – especially in Brazil, the world’s second biggest emerging economy.

But that’s not the case for at least one western multinational wanting to boost its sagging domestic sales. Gap Inc, the US clothes retailer, is eschewing Brazil in its Latin American plans and looking for its retail El Dorado among the smaller but faster-growing economies of Spanish America instead.

At Albrooks, a cavernous shopping mall on the outskirts of Panama City, frantic tradesmen and stylists are adding the finishing touches to two flagship Gap and Banana Republic stores ahead of a grand opening this week.

“Hello Panama” declares a banner hung outside the store and on the overhead pass ways of Panama city’s busy roads. Oddly, though, Gap has no plans to hang similar banners declaring “Bom Dia Brasil” in São Paulo.

“We’re dancing around Brazil, for the moment,” Stefan Laban, the head of Gap’s overseas business, tells beyondbrics. “We want to get experience in the rest of Latin America before we take on Brazil, so we can get it right. But there is also the matter of Brazilian duties and the high cost of doing business there.”

It is a growing complaint among multinational companies.

Indeed, Gap’s non-Brazil position is clearly reflected in how it plans to tap the emerging world’s growing number of middle class consumers – which the company says will account for almost a third of total sales by the end of 2013, including online sales.

China accounts for much of that forecast growth, with some 45 shops expected to have opened by the end of this year. But Latin America, which has a combined economy the same size as China’s, is catching up fast – and all without Brazil.

By the end of the year, Gap expects to have opened five franchised shops in Panama – the region’s fastest-growing economy. That is on top of two stores which opened in Chile last year; three expected later in 2012 in Colombia; another in Uruguay; a 12th in Peru by 2013; and a series of in-store outlets already operating in Mexico.

“Latin America accounts for a relatively small proportion of our sales now, but I’ve no doubt it will be big – the brand recognition is huge,” says Laban.

Some simple maths illustrates why Gap might be leaving Brazil alone, for now. Last year, the average growth rate of all those Spanish-American economies listed above was 5.8 per cent. The Brazilian economy, although bigger than all of them combined, expanded at 3.8 per cent.

Then there are tariffs. On imported clothes, for example, Brazil’s are 35 per cent – before including regional duties, which are piled on top.

In Chile, total duties are just 2 per cent, Laban says, while in Panama they are of the same order – and Panama, with its excellent maritime and aviation links and the world’s second largest free trade zone, makes its a natural launch pad for much of the region too.

Of course, Spanish America has its laggards and protectionists too, such as Venezuela and Argentina. Brazil also remains too big and important a market for any multinational to ignore forever, as Gap acknowledges. But as Gap also shows, big is not necessarily always the best or easiest way to break into emerging markets. Small can be more beautiful – and more profitable too.

Related reading:
The high price of booming Brazil, FT
Brazil slowdown presents chance to reform, FT
Walmart seeks bigger slice of Brazil, FT