Gerardo’s Cautionary Tale: Pharmaceutical Companies and Distributors in Brazil

Brazil Flag

Last week I interviewed Gerardo Mendoza, one of Frontier Strategy Group’s Expert Advisors.  Gerardo is originally from Mexico, and also spent some time working in Argentina, before landing in Brazil where he has been an entrepreneur and business advisor for the last fourteen years.  He has become a specialist on corporate tax concerns and the healthcare industry, but this post will be about neither of those themes, per se.  Instead, I want to discuss a trap that Gerardo has seen pharmaceutical companies fall into in Brazil.  This trap is a cautionary tale, because it could easily become a problem for companies in other countries and other industries.

Before I go further, since this is my first post on the FSG blog, let me also introduce myself.  My name is Dan Kornfield, and I spend my time interacting with clients and working with them to uncover useful perspectives on and solutions to common management challenges they face in emerging markets.  I tackle these challenges primarily from a thematic rather than geographic angle.  Specifically, I serve as FSG’s Director of Strategic Research.

One of the areas where I believe FSG is doing truly groundbreaking work is on “channel management,” which is business jargon for managing sales channels, or the variety of ways a company gets its products to end customers.  For many global businesses operating in emerging markets, the most common sales channel is to operate through distributors. In fact, a great deal of business in emerging markets would come to a screeching halt if distributors stopped offering their services.

Distributors are intermediary third party companies that serve as a sales organization (and usually logistics provider as well) for their clients, the producers.  Unlike wholesalers, transactional links in the value chain that simply purchase based on bulk discount and then resell, distributors become active agents for their business partners.  Some distributors work for one company, but most work for several at once.  Some companies have one distributor authorized to operate in a country or region, and others have many.

Distributors represent the producer client’s brand, and take its products to end customers more efficiently and/or more effectively than the client believes they could accomplish by themselves.  Sometimes, distributors are also hired by a company to avoid hassle, or, whether they know it or not, to take on risks that the producer would rather not assume.  For example, a company recently told me they employ a distributor to sell to the Mexican government, because they do not want to have to deal with all the paperwork.

Regardless of industry (e.g. consumer goods, healthcare, heavy industrial, or technology and telecom), about 94% of our clients rely at least partially on distributors, and just over 50% of our clients’ sales volume is brought in through these “indirect” (distribution) channels.

Okay, enough background.  Now back to Gerardo and his cautionary tale.

He explained that many pharmaceutical companies in Brazil have relied too heavily on distributors.  The distributors have grown up to become indispensable partners.  And as the market has grown, distributors have undergone a flurry of M&A activity amongst themselves.  Now some pharmaceutical companies have to reach their end customers through distributors that have larger annual revenues than their clients, and they gain that revenue from a more diversified set of partnerships.  This has led, and is continuing to lead, to a significant imbalance of power in the producer-distributor relationship.

At the end of the day, this means that it is hard for pharmaceutical manufacturers to be able to offer enough sales volume to really matter to some of the major distributors.  Now the only way they can gain preferential time and attention from their own third party agents is to pay them more – at the risk of beginning a margin-conceding arms race with other companies that employ the same distributor.  The alternative is to exit the distributor relationship and, if there are no good alternatives, to shift to operating their own direct sales force.  Now that the market is both complex and well developed, the easiest way to “go direct” would be to acquire some existing distributors.  Unfortunately, many of the good targets have already been gobbled up.

Gerardo believes pharmaceutical companies in Brazil waited far too long to make their move.  If they had diversified earlier into more of a hybrid model, employing distributors while simultaneously developing their own formidable sales force, they would be better off and less drastically dependent.  They also should have had their eyes on acquisition targets earlier, before the distribution market became more consolidated on someone else’s terms.

If you are operating in a fast-growing emerging market country, this story could happen to you.  In your team meeting this month, ask your team members whether they are concerned about overdependence and the potential for consolidation in the distribution space.  You’ve heard the warning that your value chain is only as strong as its weakest link.  But what happens when one of the links in your value chain becomes stronger than you are? That, too, is a problem.


One thought on “Gerardo’s Cautionary Tale: Pharmaceutical Companies and Distributors in Brazil

  1. Pingback: Logistics, supply chain and customer relations in Emerging Markets

Leave a Reply

Your email address will not be published. Required fields are marked *