Brazil’s Bumpy Road Ahead

Brazil

Brazil’s recovery from the previous quarter’s economic slowdown has proven more difficult than multinationals expected, and the road to growth appears to be very bumpy. FSG clients reported underperforming sales growth during the first half of the year with many considering a slowdown as a viable threat to overall sales in 2012. Regardless, FSG clients are looking to capitalize on growth opportunities in the second half of the year by introducing new products into local markets.

The weakening real is providing some aid to exporters, but recent efforts by the government to stimulate consumer credit have failed to engender sustainable growth as consumers’ appetite for credit wanes. Brazil’s complex tax system is adding even further strain to multinationals’ business operations, yet FSG clients have reported scarcely allocating resources towards strengthening tax compliance teams. FSG surveys indicate that 35% of clients foresee a significant increase in the tax burden on their profits this year. FSG believes that tax compliance efforts by clients must be ramped up in order to capture cost-saving opportunities and protect profit margins.

Acquisitions have been a popular strategy for multinationals seeking to capture Brazil’s rising middle-class, but recent obstacles have made joint ventures a cost-effective alternative. Intensifiedcompetition for the “middle of the diamond” along with consumer growth in far-reaching regions and adaptation to regional middle-class preferences has made acquisitions more difficult and more costly. By targeting local companies offering popular products and with established distribution networks, JVs offer a successful alternative strategy to commonly pursued acquisitions.

*Erick Soto contributed to this piece

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