How to develop a sound sub-national prioritization framework for Brazil

BrazilSubnationalPrioritizationFramework-FSG

Multinationals operating in Brazil will need to find new growth engines to sustain top-line performance as traditional and more mature markets in Brazil slow, a trend that has been exacerbated by the economic recession the country is currently facing.

Among potential growth strategies for Brazil, expansion into new geographies merits special attention given untapped opportunities and shifting market growth dynamics across Brazil’s 27 states. However, sub-national prioritization can be a very arduous process. Here are some of the challenges that companies looking to measure relative opportunity across Brazil are likely to encounter:

  • High market diversity: Brazil’s states vary greatly in terms of the composition of their economies and their dependence on the public sector. While the economies of Sao Paulo, Rio de Janeiro, or Minas Gerais are quite diversified, with fairly developed manufacturing, extractive and services industries, other states such as Mato Grosso, or Mato Grosso do Sul rely heavily on agriculture and farming. Even within the Northeast region, which has received increasing media attention over the last few years because of its higher rates of GDP growth and large market potential, differences across states can be stark; with Pernambuco, Ceara and Bahia developing industrial and consumer centers and rapidly decoupling from other states such as Rio Grande do Norte, Alagoas or Piaui, where growth still depends on public spending and social transfers.

Understanding the growth engines of each state and the sources of income of its citizens is of critical importance, as it will dictate how resilient each market is against internal and external shocks, and it will allow multinationals to identify and track the right leading performance indicators for their business as they prioritize among markets in Brazil.

  • Shifting sub-national market growth dynamics: The traditional growth drivers of Brazilian states are evolving as the country faces fiscal adjustment and higher volatility in global markets. For example, the fall in oil prices is dampening growth in the oil-producing municipalities of Rio de Janeiro, Espirito Santo and Sao Paulo. Meanwhile, rising meat prices, driven by changes in dietary habits in China and other emerging markets in Asia, along with resilient demand from developed markets, is boosting the economies of meat producing states like Mato Grosso, Minas Gerais, Mato Grosso do Sul, Goiás, and Pará.

Additionally, currency depreciation could encourage growth in states with strong manufacturing exporting clusters, mainly in Sao Paulo, Minas Gerais and states in the South. Finally, government spending cuts are resulting in delays in big infrastructure projects across Brazil, such as the Abreu e Lima refinery in Pernambuco, the Belo Monte hydroelectric dam in Pará, and the Transnordestina road project in the Northeast. These trends directly affect where opportunities are for B2B companies, but they are also important for B2C and healthcare companies as they affect employment and purchasing power levels in different states.

  • Choosing the right metrics: Variations in size, growth, and operating environments make state prioritization even more challenging. Should executives focus more on current size or future growth? Even if size and growth look good, how should companies account for differences in the ease and cost of doing business in each state? What are the right metrics to be used and what weighting should be assigned to each metric?

When it comes to assessing the operating environment in each state, companies should not overlook the importance of infrastructure bottlenecks, access to talent, access to finance and the availability of tax incentives, which vary greatly across states. For instance, the average salary in Sao Paulo is R$ 2,300 with 16 percent of the labor force having completed tertiary education, while the average salary in the Northeastern state of Pernambuco is R$ 1,700 with only 9.3 percent of its workers with university degrees.

Differences in the quality of infrastructure are also striking, with Sao Paulo having almost 80 percent of its roads in good condition, versus Mato Grosso, with only 14.7 percent of its road network in good condition. Even electricity prices show great variations, with industrial electricity prices being as high as R$ 444/MWh in Espirito Santo and as low as R$ 223/MWh in Roraima. States with the deep operating environment deficiencies and smaller market sizes have tried to attract investment into their markets by offering generous tax incentives, another factor to be taken into account by multinationals as they expand beyond their strongholds in the Southeast and South of Brazil.

  • Assessing industry landscape and internal capabilities: Even if companies succeed at wrapping their heads around market opportunity and operating environment across Brazilian states, they will still need to understand the industry landscape of key selected states and assess their own internal capabilities, which will determine their ability to capture opportunity and gain market share as they expand within Brazil; and more often than not this information is not readily available for most executives.

Some of the key questions to consider regarding industry landscape are: What specific regulations impact the industry in this state? Should we expect changes? Who are the competitors? Are they local, regional, or multinational companies? Do competitors control distribution channels, potentially blocking our access? How do local customers make decisions? What are their spending patterns? How many potential distribution partners are available and how sophisticated they are?

Finally, when assessing internal capabilities, multinationals will need to consider whether their salesforce or distributors have the necessary skills to sell into new states, whether they have the resources to finance additional required investments in working capital, logistics, human capital or eventually local production, whether they will need to adapt their product portfolio and whether they will be able to leverage their existing channel structure in key selected markets.

In order to help our clients tackle these and other challenges as they build their expansion strategy within Brazil, FSG has developed 3 different Brazil sub-national prioritization reports tailored to its B2B, B2C and healthcare client cohorts.

These reports use FSG’s proven country prioritization methodology, which has been tailored to Brazil’s subnational markets, and is built upon two main components: risk-adjusted opportunity and business fit. Clients looking to use a rigorous, data-driven approach to market prioritization will find these reports especially useful, as they contains metrics that measure the size and expected growth of Brazil’s various markets, the existence of city and industry clusters, market stability, quality of transport infrastructure, access to talent, access to finance and tax burden.


If you feel that you could use help in developing a sub-national prioritization framework for your company in Brazil please contact your FSG client relationship director or schedule a conversation with one of our experts by clicking here.

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