Chains place orders for Black Friday in uncertain competitive environment
Some fashion retailers are seeking to work with lower stocks — Foto: Lucas Tavares/Agência O Globo
Brazil is beginning to implement a new model for imports as fashion retailers are under pressure from weak sales, high inventories, and the need to show investors a response before the end of the year.
Companies have been able to apply for an exemption from the 60% import duty on imported products worth up to $50 since August 1. To do so, they must join the federal government’s “Remessa Conforme” plan and provide various information to Brazil’s Federal Revenue. This regime, which is expected to benefit foreign platforms, according to local chains, has sparked protests from domestic retailers whose sales have been weak this year.
The performance below expected in the second quarter spread to the retail sector, mainly affecting the apparel segment, as well as sporting goods and electronics. Chains are now in the process of negotiating or receiving the final part of the purchase of products for Black Friday, which will be on November 24 this year. Digital is at the core of the dispute between domestic retailers and foreign platforms.
According to businesspeople and analysts consulted by Valor, there is an expectation that even in this complex scenario, amid changes in import rules, local chains will be able to recover demand and reverse the numbers of the first half.
“The scenario for the rest of the year is still a bit hazy,” said Eduardo Terra, head of BTR Educação e Consultoria and member of some retailers’ boards of directors. “There is even a possibility that the new remittance rules will actually improve the environment, due to the expectation of greater control by the tax authorities and the greater fear of consumers of being caught and taxed. There are already new signs that goods from China are coming in at a slower pace.”
According to a businessperson in the textile sector, “The first half was very difficult, textile retail fell by 8%, and there is still a factor of concern about these uncertainties regarding the new import program,” the source said.
“On the other hand, there is a positive environment with lower interest rates, which generates more confidence, we have the ‘Desenrola’ initiative, which frees up some income, and we do not have elections and the World Cup, which greatly affected the sales base of 2022. So, there’s still some optimism in the air, despite the uncertainties,” the source added.
Foreign platforms and carriers that join the program “Remessa Conforme,” which concerns shipments of up to $50, can offer consumers the benefit of zero federal tax, but they will have to pay sales tax ICMS of 17% on the total value of the purchase. The consumer pays the import tax.
The exemption for shipments of up to $50 came into effect on August 1, according to a government decree, but in practice, it is not yet being applied. This is because the platforms’ application to join the program must be analyzed by the tax authorities before the companies receive a stamp that guarantees faster clearance of products. Until this clearance takes place, the 60% tax rate remains in force. There is no deadline for this analysis – something that has led to criticism from logistics operators and platforms heard by Valor.
“The tax authorities have basically asked for more information, and at least four more regulations have been published this month regarding the operation of this system. We send them everything, we call them, and all they say is that they’re studying it,” said the CEO of a company that has applied to participate in the program.
Fashion chains are particularly affected by this scenario of regulatory changes and, at the same time, by the advance of the Chinese company Shein in the country.
Renner, Marisa, Riachuelo, and Centauro ended the second quarter with declining sales, increased losses, or lower profits, and were forced to lower prices to sell and clear goods. They all lost margins.
Only C&A’s performance was more positive — an aspect that was highlighted by investors and analysts.
“We saw measures such as the closure of loss-making stores and layoffs in some fashion chains in the second quarter, as well as new markdowns. July and August are in, and at first, there was a very gradual improvement. The information is that there is still a slow recovery, and this puts more pressure on the chains after September,” said Ana Paula Tozzi, CEO of AGR Consultores.
According to her, the focus is now on the conditions for negotiating and planning purchases with suppliers for sales in October, November, and December — in other words, Black Friday and year-end holidays. “And this is a period in which we may still have uncertainty about the competitive environment with the changes in the import program,” she said.
The government has already defined the tax exemption after August, but the Ministry of Finance said in May that it may define a new rate. Valor reported this month that the government is discussing a rate of around 20%, which could rise gradually.
“We’re at the stage in which everything can get better, and everything can get worse. We could arrive in the fourth quarter with the exemption defined in the regulation, with the 60% currently valid, or even with a new rate,” said Mr. Terra, with BTR.
An executive of a national fashion chain said that because of this situation, the way forward is to work with the worst-case scenario for local chains, which is zero tax. “For now, we’re working with the worst-case scenario, still maintaining the entry of uncontrolled imported products,” said the executive.
Research data shows that it is the traditional Brazilian fashion chains that are suffering the most from Shein’s advances. Sources close to the platforms said that the increase in imports is not the only factor having an impact and that the chains’ actions are also having an effect, such as delay in investing more heavily in digital. “They only really got online projects off the drawing board after the pandemic started,” said the general manager of an Asian online marketplace.
A study carried out by the Institute for Retail Development (IDV) shows that Shein accounted for 16.1% of total goods sales in 2022, three years after the company began operating in the country. The share, which considers the market of publicly traded chains, is only lower than that of the leader Renner.
Marisa (which is facing operational difficulties), Riachuelo, and C&A gave the most market share, in that order. Their loss between 2019 and 2022 ranged from 33% (C&A) to almost half (Marisa) of the share they had before the entry. The study takes into account Shein’s estimated net sales of R$8 billion in 2022.
One of the positive aspects is that some of the large fashion retailers are already trying to work today with lower inventories and a more adjusted cash situation than was seen in the first half of the year.
There are signs that imports of low-value products by foreign platforms have lost some steam, possibly as a result of Brazilians being more cautious about importing at a time of changing rules.
According to data from the Central Bank, total low-value imports via international orders fell by 9.9% from April to June, to $2.6 billion.
In recent weeks, executives with Renner, Riachuelo, C&A, and Marisa have spoken to the market about their second-quarter results without specifically mentioning the Shein effect. But analysts have been factoring this effect into their forecasts.
Most of the chains cited the not-so-low winter temperatures, as well as macroeconomic effects such as deteriorating revenues and high payment defaults.
Renner, the country’s leading fashion retailer, posted a 6% drop in sales (something it has never seen in a quarter since becoming a corporation in 2005), gross margin fell by 2.2 points to 53.9%, and inventories are 4% higher in value than a year ago. Net income fell by 36% to R$230 million.
In an earnings conference call this month, CFO Daniel Martins mentioned the need to resolve the tax collection “problem” “correctly and quickly.” He also stressed the need for Renner to be more competitive in the second half of the year.
The chain is increasing its offer of entry-level items with “more affordable” values. According to the chain’s financial statement, inflation, high interest rates, and rising default rates have affected the fashion sector, which is why it is necessary to act to change the perception of price, and this has had an effect since June.
The management team also understands that the markdowns it has made have been made before other chains, and this opens space to recover the lost margin. Asked by Valor about Shein’s impact on the business and its loss of market share, Renner said that it has been “talking to entities representing the sector.”
At Marisa, which caters more to the middle to lower-middle class, competition is squeezing the business at a time when the chain has been reorganizing since March, closing stores, and cutting expenses, and needs to generate cash again. The retailer saw a 12% drop in merchandise sales from April to June, and the value of its inventory fell by half in 2022, after closing 25% of its units as part of the restructuring.
João Nogueira, CEO of Marisa, said in an interview after the releasing of the earnings report that it is not possible to make a direct link between the company’s situation and the advance of platforms in “totally unequal conditions.” However, he said that illegal imports are “stealing market share” from the chains.
“We hope that by the end of the year, the government will solve this problem of the [import] rate. Consumers may not realize it, but it is affecting domestic companies, taking away jobs and closing stores,” Mr. Nogueira said.
Riachuelo also cited in its financial report the need to put in place more promotions and to reduce inventories in volume and quality (it stood at R$1.5 billion in June, R$100 million more than a year ago).
When asked about the loss of market share and measures to respond to the increased competition from Shein, Riachuelo decline to comment and sent a note from Abvtex, the garment association, which criticizes the lack of equality between foreigners and locals and that this “benefits international production companies.”
When asked to comment on the progress of its participation in the country, Shein said in a statement that the company’s advantage is not in the tax rules, but in its business model, as it operates without inventories, and its ability to “design and manufacture garments in less than seven days, unlike the traditional retail business which needs greater advance,” it said.
It also said on the actions that support its growth, such as increasing local infrastructure (there are five warehouses in the country built in three years), the creation of an online marketplace with third-party items, agreements with influencers, and opening temporary stores.
Por Adriana Mattos — São Paulo
Source: Valor International