Growth in Brazil Presents a Double-edged Sword

As developed economies continue to muddle through an increasingly tenuous economic recovery, the need for multinationals to find new sources of growth in emerging markets is becoming ever more important. This is a trend that Frontier Strategy Group has been tracking for some time across our client base, and one that is particularly apparent in Latin America, where renewed focus on the region has led to average growth targets in excess of 20% for 2011. In order to meet these growth targets, executives are adopting a combination of strategies that includes expansion into new geographies and consumer segments as well as implementation of aggressive M&A plans.

One country where multinationals have seen a tremendous amount of growth over the past two years is Brazil. In the first half of 2011 Frontier Strategy Group member companies averaged 27% YoY growth in Brazil despite a cooling economic environment. These types of results are capturing the attention of corporate centers; however, the stellar performance of Brazilian business units presents a serious conundrum for many heads of region.

The conundrum stems from the fact that as regional heads are seeing more and more of their top-line growth in Latin America come from Brazil, they are experiencing a narrowing of bottom-line margins. The cost of doing business in Brazil, or Custo Brasil as it is known locally, is so high that business units there contribute significantly less to overall profitability than they do in other countries. For executives tasked with maintaining current levels of profitability while achieving unprecedented growth targets, the challenge posed by Custo Brasil is particularly daunting.

For this reason, Frontier Strategy Group is undertaking an effort to help multinationals diagnose and quantify Custo Brasil. The output from this effort will give executives the tools to identify and mitigate some of the more pernicious effects of Custo Brasil in their cost structures and determine which costs are due to local conditions as opposed to organizational structure and execution. By finding ways to narrow the gap in profitability between Brazilian business units and the rest of Latin America, Frontier Strategy Group is looking to ensure the continued success of multinationals in O País do Amanhã.

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One thought on “Growth in Brazil Presents a Double-edged Sword

  1. Rachel Kasumba

    Ryan, bottom-line margins could also be attributed to the following factors: 1) The increased investment competition has saturated the market with more goods and services at lower prices 2) A more educated labor force than her neighbors triggering higher labor costs 3) Stronger labor unions that put pressure on, slow down, “eat” into M & A activities and profits 4) More stringent local protectionist policies as discussed in Clinton’s article …….

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