La Salada

Argentina's gargantuan knock-off mall: Heading to the U.S.?

August 30, 2013: 5:00 AM ET

The La Salada market in Buenos Aires epitomizes the nation's economic problems and improvisational genius. And it might be making its way to Miami.

By Ian Mount

La Salada market in Buenos Aires, Argentina

FORTUNE -- On August 30, an Argentine entrepreneur named Jorge Castillo will present a huge new mall near the western wine capital of Mendoza. When it opens in October, it will house some 600 stalls, most of which will be rented by small and home-based clothing workshops. It's just the kind of enterprise that's typically celebrated by politicians and businesspeople for creating jobs and boosting the economy.

But with Castillo, nothing is normal. A rotund man with a voice that can scratch glass and a propensity for Members Only-style jackets, he resembles a Teamsters official as imagined by the late Elmore Leonard.

When he went on local Mendoza TV, the head of the local chamber of commerce accused him of evading taxes and engaging in unfair competition. Police have repeatedly raided his mall in Buenos Aires to confiscate counterfeit CDs and DVDs. And the Office of the U.S. Trade Representative (USTR) has paid that mall -- named La Salada -- the dubious compliment of putting it on its Notorious Markets List.

This would be local news save for one thing: Castillo has set his sights on Miami for his next site.

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La Salada epitomizes both Argentina's problems and its improvisational genius. It sits in a run-down neighborhood bordering a river fetid with industrial pollution. It's full of rip-offs. Few of its vendors pay taxes. And it's as chaotic as a Mad Max sequel.

At the same time, it is a successful ad-hoc solution to an economic collapse, a flat, direct-to-consumer model that provides desperately needed jobs, and it might just show the way to a brick-and-mortar version of Amazon. Moreover, as a middle class rises in developing countries like China, it offers a glimpse into the future of brands.

But first, a bit of history: In the town of Lomas de Zamora, alongside the Riachuelo river that divides Buenos Aires from its southern suburbs, there once were a series of natural thermal salt-water pools where locals went to "take the waters." Over time, the Riachuelo grew polluted with runoffs from the factories upstream; the baths filled with toxic gunk; and people stopped going.

Fast-forward to the 1990s gilded age of President Carlos Menem. After Menem dropped trade barriers and pegged the peso one-to-one to the dollar, local manufacturers could not compete. With the industry in tatters, local wholesalers and retailers paid textile sewers -- often Bolivian immigrants -- little and late, so the manufacturers began selling their clothing direct to consumers in markets near the pools of La Salada.

"I used to make shoes," says Castillo, 56, who is the managing shareholder at Punto Mogote, one of the three gigantic warehouses that make up La Salada. "I sold them to shoe stores, and the shoe stores sold them. I got paid whenever, 30 days, 60 days, 90 days, 120 days, 150 days."

Sensing an opportunity, a few enterprising locals bought the land, filled the pools, put up simple warehouses, hired security, and rented out stalls. Twenty years later, La Salada is a gargantuan beast. The largest such mall in Latin America, if not the world, it has some 30,000 retail posts that together move merchandise worth an estimated 300 million pesos (about $50 million at the official exchange rate) on each of the 12 market days every month. Consumers and shop owners come from all over Argentina, often on 12-hour bus rides, which is easy to understand after seeing the prices. Sneakers go for 50-to-60 pesos (about $10) while t-shirts are 15 pesos (less than $3). And CDs and DVDs go for pennies.

According to Castillo, the reason for the low prices is simple: no middlemen. Most of the 30,000 posts are filled by small businesses that make their own clothing. Instead of getting a fraction of the final price, as they did with middlemen, they can double their prices and still offer rock-bottom deals. Castillo claims that some 1 million people live off the stalls at La Salada, both directly and indirectly.

Of course, La Salada has many detractors. Everyone from music company trade groups to the EU and the U.S. Trade Representative have pegged La Salada as one of the world's biggest counterfeit goods vendors. At a quick glance, at least half of the goods sold are name-brand knockoffs –-- Nike (NKE), Adidas, and the like -- and scores of stalls sell pirated movies, music, and software.

While it's hard to argue that selling a copied DVD is not theft, the other goods -- which require manufacturing -- seem to fall in a legal gray area, at least in Castillo's eyes. He says that not one clothing brand has approached him with complaints. "No one ever came to say, 'Man, how can we fix this?'"

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Castillo argues that the brands benefit from the fair: The fake goods provide free publicity, and the people who buy them don't have the money to buy originals anyway, assertions supported by an EU-funded report. (While the clothing isn't top quality, it's not bad.)

"A person who buys a t-shirt that says Nike for 10 pesos is not going to buy one for 500 in a shopping mall," Castillo says. "Because then he doesn't eat."

Castillo's equanimity towards counterfeiting is backed by the recent Foreign Affairs article "Fake It Till You Make It," in which the authors of The Knockoff Economy: How Imitation Sparks Innovation argue that counterfeits create future customers among the developing world middle class.

For Castillo, La Salada is a triumph over middlemen and retailers who gouge the small manufacturer and consumer, and an example of citizens of developing countries protecting themselves from large economic interests.

And the accusations of tax evasion and counterfeiting? They're just diversions from resellers worried about losing high margins.

"It's easy to say that here we sell cheaply because we don't pay taxes or we counterfeit brands, but come on," Castillo says.

The world will soon see if the La Salada model is ready for export. The Mendoza mall in Argentina, which Castillo says will have 5,000 stalls within a year, is just miles from Chile and its millions of consumers. And the Argentine government has included representatives of La Salada on trade missions -- to Angola and Vietnam, among others -- to export the model abroad. While Miami will be a hard sell, a La Salada may indeed be coming soon to a developing country near you.

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