In a recent blog post I examined Brazil’s current economic and political crisis, placing special emphasis on how congressional gridlock could derail fiscal adjustment and delay expected recovery in 2016. In this post I want to focus on what multinationals can do about it – specifically how companies can sustain growth and protect profits in this type of recessionary environment.
At FSG we believe that there are five strategies that multinationals should be deploying in Brazil in 2015:
1. Extend credit to partners and customers: With dwindling domestic demand putting pressure on prices, and currency depreciation, high inflation and rising energy costs increasing the cost of goods sold, margins are likely to get thinner for most companies, including distributors. At the same time, banks are becoming more risk averse and the central bank is increasing interest rates, which will inevitably result in tighter credit conditions for borrowers. In this environment, many distributors will struggle to finance their working capital requirements, especially those that are highly leveraged and more transactional.
Multinationals that can support their partners across the cash conversion cycle by extending payment terms or providing direct lending will not just be protecting current sales but also planting the seed for recurrent future growth as distributors become more loyal and engaged with the company’s brand. Some FSG clients have seen success helping their distributors shorten their own cash collection cycles by providing them with letters of recommendation for invoice factoring applications with commercial banks.
2. Assess distributors’ performance: In a recent survey conducted among FSG clients in Sao Paulo, 59 percent of executives reported that their corporate center’s top-line growth expectations were not very aligned with Brazil’s economic reality. This means that for most product categories, multinationals will need to beat market growth in order to meet their sales growth targets this year. In Brazil, where around 50 percent of multinationals’ revenues are generated through distributors, measuring distributors’ performance effectively and bringing them up to speed will be key for delivering on sales targets.
In a blogpost called The Neglected Art of Channel Management we analyze why performance management has been traditionally so difficult for multinationals in emerging markets, and we introduce the three principles that in our experience allow multinationals to consistently outperform their competitors. These are to: (i) measure capability gaps, not just commercial outcomes; (ii) schedule collaboration, not just accountability; and (iii) reward with status, not just margin.
3. Adapt your customer segmentation strategy and value proposition: With economic recession, price sensitivity is bound to increase in Brazil, whether we are talking about consumers, other businesses, or the government. B2C companies will have to deal with consumers whose disposable incomes are being squeezed by tax increases and rising energy prices and who will feel compelled to delay purchases of big ticket items when faced with prospect of losing their jobs. B2B companies will have to cater to businesses that are seeing drops in both sales and margins. Meanwhile, the government will likely try to squeeze suppliers at the federal, state and municipal levels, as it implements spending cuts to achieve a primary fiscal surplus target of 1.2 percent in 2015.
Multinationals should not wait to see sales decline before adjusting their strategy in Brazil. Proactive companies are already revisiting their customer segments, making changes to account for shifts in purchasing power and buying behavior and tweaking their value proposition to adapt to the needs of a more cost-conscious consumer base via changes in pricing, product formulation, package size or associated services.
This level of responsiveness requires a change in the mindset of local marketing teams, especially among junior members who didn’t live through the years of economic recession and hyperinflation of the eighties and early nineties in Brazil. As one FSG client in the consumer goods space put it, “I’m really struggling to convince junior executives that investing in a premiumization of our brands is not the right strategy anymore. We need to start thinking differently, and we need to do it fast if we want to maintain the same level of growth that we saw during the last decade.”
4. Expand into new markets within Brazil: Most multinationals in Brazil derive the lion’s share of their revenues from the southeastern and southern parts of the country, where economic deceleration has been most acute since 2009. In fact, growth has been quite uneven across Brazil, with some states such as Pernambuco in the Northeast, or Mato Grosso do Sul and Goiás in the Center-West still seeing growth of at least three times the national average.
Savvy companies are increasing their footprint beyond their market strongholds in order to tap into opportunities in still fast-growing markets in Brazil. Given the stark differences in demographics, retail landscape, infrastructure and customer sophistication that exist across the country, multinationals are strongly advised to adapt their go-to-market strategy according to the specific characteristics of each market.
5. Localize your business: In an Executive Round Table that we hosted in Sao Paulo in June of 2014, we asked our clients whether M&A and local production had become more attractive for their business given currency depreciation since 2011. When we asked that question, the real was trading at 2.2 BRL/USD, and yet around 60 percent of clients said that they were looking into strategic acquisitions more closely, while local production had become a more attractive option for 67 percent of our clients.
With the real now trading at 3.2 BRL/USD, and with expectations for further depreciation on the back of rising interest rates and stronger growth in the US, the need for further localization is becoming more evident. Multinationals should seriously consider expanding their local production capacity in Brazil to hedge against rising import costs. Additionally, when it comes to strategic acquisitions, currency depreciation is only half of the story. Economic slowdown has also reduced company valuations dramatically from earlier highs, offering very attractive opportunities for multinationals looking to pursue inorganic growth in Brazil.
Economic recession is already a reality in Brazil. Multinationals that want to survive Brazil’s economic crisis and get ahead of competition will need to adapt their playbook accordingly, be proactive about shifting market dynamics and be bold about investments that currency depreciation and market shifts generate. However, local teams will only succeed in shifting their strategies if they are able to generate strong alignment and buy-in from the corporate center, making clear communication about the risks and opportunities in the Brazilian market more important than ever.