Mall operator Iguatemi Empresa de Shopping Centers SA is expanding at its fastest pace since going public in 2007, betting that luxury shoppers will be more resistant to a souring economy.
Brazil’s fourth-biggest mall company is planning to open more shopping centers in the South and Southeast as soon as this year, Chief Financial Officer Cristina Betts said in an interview. The total size of its malls will grow 54 percent to 434,000 square meters (4.67 million square feet) by 2015.
Iguatemi, whose malls boast the world’s most luxurious brands, from Christian Louboutin to Prada, is eschewing the faster-growing Northeast, where rivals such as industry leader BR Malls Participacoes SA (BRML3) are vying for bigger market share. While that region has experienced the biggest income boom as Brazil’s middle class expanded by 36 million people to about 100 million since 2002, their spending habits are more sensitive to rising debt burdens and surging consumer prices, according to Marcelo Motta, an analyst at JPMorgan Chase & Co.
“If you look at what consumers are buying in our malls, everything that’s different-slash-luxury is doing spectacularly well,” Betts said at the company’s Sao Paulo headquarters. “All the tenants in our malls that are geared toward a lower- income segment, it’s not that they are doing poorly, they just haven’t done that much better than last year.”
Inflation has exceeded the 4.5 percent midpoint of the central bank’s target range for more than two years. Annual inflation accelerated to 6.43 percent from 6.18 percent in mid- February, according to the national statistics agency in a report published today. Consumers’ buying power is also being hurt by rising debt loads and slowing economic growth, which narrowed to 0.9 percent last year from 2.7 percent in 2011.
Rivals including BR Malls are growing revenue at a faster pace by targeting the middle class. Income for the poorest 10 percent of Brazilians grew 550 percent more than that of the richest 10 percent between 2001 and 2011, according to a September study by the federal government’s Institute for Applied Economic Research, known as IPEA.
“Our entire history depends on the middle class,” Luiz Alberto Quinta, commercial and developments director at BR Malls, said in a phone interview from Rio de Janeiro. “For a company to be big, you have to focus on where most of the population is and where the biggest income is, and that’s the middle class.”
Iguatemi’s sales growth has averaged 24 percent in the past three years, the lowest of the five mall operators listed on the Bovespa index, data compiled by Bloomberg show. BR Properties SA (BRPR3), the third-biggest operator by market value, posted the best gain at 78 percent per year, followed by BR Malls at 42 percent.
Iguatemi’s “differentiated” strategy to build new malls with exclusive stores in wealthy cities should soon begin to pay off, said Sam Lieber, chief executive officer at Alpine Woods Capital Investors LLC, which owns 2.4 million Iguatemi shares, or about 1.5 percent of the company.
“To the degree that they can attract good stores to their centers, that creates a good pattern of hopefully stable earnings and hopefully growing earnings,” he said. “For now it makes a good business model -- in the long run, who knows.”
Iguatemi has climbed 18 percent to 25.49 reais in the past 12 months, trumping a 7 percent gain by BR Malls. While both companies trade at discounts to the benchmark Bovespa index, Iguatemi’s is the smallest, at 26 percent.
While the newly minted middle class -- known as Class C and D in Brazil and defined as having an average monthly family income between 1,110 reais and 3,875 reais ($550 to $1,925) -- may be cutting down on discretionary spending, the upper ranks are more resilient, said Jefferson Finch, an analyst at political risk consultant Eurasia Group in New York.
Brazil retailers from Cia. Hering to Lojas Renner SA, which cater to the middle and upper-middle classes, posted the most disappointing profits in almost six years. Fourth-quarter profit (IGTA3) at Renner, Hering, Cia. Brasileira Distribuicao Grupo Pao de Acucar, Natura Cosmeticos SA and B2W Cia. Global do Varejo trailed analysts’ per-share estimates, data compiled by Bloomberg show. The last time that many retailers on the Bovespa index fell short was in the first quarter of 2007.
“Looking at the pyramid of wealth, Class A and B are the smallest population, but they are huge in terms of income,” JPMorgan’s Motta said.
BR Properties declined to comment.
Profit at Iguatemi will probably rise by about 13 percent this year and 24 percent in 2014, after remaining little changed since 2010, Motta said.
The company, which operates 13 malls and three office towers, is planning to build four new shopping centers and expand three others by 2015. It is also trying to buy out partners in existing older sites, such as its flagship Iguatemi mall, the first in Brazil.
Selling to the wealthiest “is the highest profitability per square meter you can get,” CFO Betts said. “It’s less replicable, what we do.”
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