Americas Duty Free & Travel Retailing

March 4th, 2016

Uruguayan duty free shops gear up for Brazilian competition
A level playing field will be needed when duty free shops open up on the Brazilian side of the border later this year says Carlos Loaiza Keel, secretary general of Cámara de Empresarios de Free Shops del Uruguay.

 “Brazil is the country of the future and always will be,” runs the old joke. These days Uruguayan duty free shop operators aren’t laughing. The industry, led by players such as Neutral Duty Free, Grupo Wisa and DFA, has invested tens of millions of dollars in retail projects to leverage lucrative traffic flowing through the Uruguay-Brazil border.

However developments such as the opening of Melancia Mall (see our story on page XXX) a 60-outlet duty free and travel retail complex located near the Uruguayan town of Rivera, which opened late last year are coming on stream, just as Brazil’s economy is hitting a major rough patch.

The number of foreign visitors to Uruguay is projected to grow by a 4.2% per year during the coming decade to 3.6 million arrivals by 2025, according to a recent report published by the World Travel and Tourism Council. Brazilians were expected to supply a major chunk of that growth. However a sluggish Brazilian economy has slowed both cross-border traffic and the amount of money that Brazilian tourists have available to spend in Uruguayan frontier shops.

“It’s hard to say when this will end,” says Carlos Loaiza Keel, general secretary of the Cámara de Empresarios de Free Shops del Uruguay, a trade association. “The timing is unfortunate.” Several trends, including slowing natural resources exports to China and other emerging economies, the Petrobras scandal and challenges with the Dilma Rousseff administration, are putting a crimp in Brazil $2.34 trillion gross domestic product (2014). According to a survey of central bank and related economists, the country’s output is expected to shrink by more than 3.0 percent in 2016.

Directive 307 implementation remains unclear
“Business among our members is down by nearly 40%,” said Loaiza Keel. “Many of their investments were in multi-year projects that were thought up during a time when Brazil’s economy was slated to grow by leaps and bounds. The slow start is causing challenges to the region’s economy, because the industry and related business employ so many people.”  

The timing of the tourism slowdown could not have been worse for Northern Uruguay duty free and travel retail shops, which will be competing with the new duty free Brazilian border shops as early as September of 2016.

The scale of the competition they will provide remains unclear at this time says Loaiza Keel, due to questions regarding implementation of the Brazilian Government’s Directive 307. The new rules, passed in July 2014, contain guidelines related to the establishment and operation of duty free shops on the Brazilian side of the border, which were initially slated to begin implementation by July of 2015. However, despite the fact that several Brazilian cities have passed the necessary legislation to allow such shops, that has yet to occur. Although the public sector decision making process in Brazil is notoriously sluggish, uncertainly stemming from a tense political situation are also partly at fault.

CEFSDU takes action
Led by Loaiza Keel, a well-connected lawyer, who does business in several countries, the Cámara de Empresarios de Free Shops, isn’t waiting around for developments. The association’s first goal is to ensure that duty free and travel retail shops on both sides of the border compete on a level playing field. The will not be easy says Loaiza Keel, due to the minimal clout that a small country such as Uruguay has in the five country Mercosur trade alliance, which is dominated by two larger players, Argentina and Brazil.  

Two immediate causes for concern relate to the fact that under current provisions, Uruguayans are not allowed to take advantage of domestic duty free shops. Loaiza Keel wants to ensure that Brazilian stores operate under the same constraints. The recent reduction by the Brazilian government on the inbound duty free allowance to $150 is another cause for concern.

So far, Loaiza Keel and the Cámara de Empresarios de Free Shops del Uruguay have had some success in advancing the industry’s interests. One recent win: the organization helped obtain government relief for laid off industry workers in the region, notably an extension in unemployment insurance premiums. That concession, as well as implementation of a partial work/study program, will enable merchants to keep together their pool of skilled workers, for when the industry does start to bounce back.

Brazilian economics growth projected to turn positive in 2017
The other good news is that despite the current challenges, there are several bright spots on the horizon. In February a consensus among Brazilian economists projected that the country’s economy would stop shrinking by the end of 2016, and return to growth the following year. Furthermore, while Brazilian tourism will likely continue to feel the pain, the number of international visitors to Brazil, at least a portion of which will likely visit Uruguay as well, is likely to spike later this year, due to the 2016 Olympics, which will be held in Rio de Janeiro.  

Furthermore Brazil isn’t the only game in town. As Uruguay’s tourism minister Liliam Kechichian noted late last year, the number of Argentinian visitors to Uruguay, many of whom pass though the country on the way to Brazil, shot up by 150,000 during the first eight months of 2015. A new government in Argentina, which is instituting tough measures (that over time are likely to strengthen the country’s currency, during a time of a devalued Brazilian real), suggest that the cross border flows of Argentinian tourists through Uruguay into Brazil is likely to continue to increase.

Carlos Loaiza Keel and members of the Cámara de Empresarios de Free Shops del Uruguay will be hoping that they stop at Uruguayan retail outlets, while they pass through.

Peter Diekmeyer (peter (at) peterdiekmeyer (dot) com) is a senior writer at America’s Duty Free & Travel Retailing.


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