FSG recently hosted an event with regional managers and country executives in São Paulo that was centered on how to best navigate Brazil’s recession while preparing for changes to the market and competitive landscape. Below are the key takeaways from the discussion.
1. Clients believe that Brazil’s troubles are mostly related to the country’s political situation
83 percent of FSG clients believe that the main obstacle to Brazil’s recovery is the failure of the fiscal adjustment or political paralysis, a view that aligns with our own in respect to the Brazilian market. As a matter of fact, investor and consumer confidence has been consistently falling since President Rousseff’s reelection in October of last year, reflecting the widespread belief that Rousseff and her political party have lost command of the political and economic situation. A sustained political battle in Congress in addition to President Rousseff’s weak popular support have contributed to rising skepticism among domestic and international investors regarding Brazil’s ability to put its economy back on track.
At FSG, we believe that the economy will return to positive growth in the second half of 2017 on the back of investment recovery and improving business and consumer confidence ahead of 2018 elections. Clients can download our economic and business outlook for Brazil here.
2. Most multinationals expect to gain market share vis-à-vis domestic competitors
Economic recessions tend to lead to industry consolidation. According to an HBR study, 17 percent of companies don’t survive economic downturns—they go bankrupt, get acquired, or go private. In fact, high debt-to-equity ratios and rising interest rates coupled with falling sales and margins are hurting the financial viability of many companies in Brazil and consolidation is expected to take place in most industries.
The good news is that multinationals are better-positioned than domestic companies to withstand economic recession because of their lower capital costs and international diversification, which allows them to offset potential losses in Brazil using profits earned in other markets. As a matter of fact, 63 percent of our clients expect to gain market share vis-à-vis local competitors through 2020. Multinationals’ ability to pursue strategic acquisitions of domestic competitors was one of the key factors that were mentioned as being drivers of this trend. Clients that do not expect to gain market share relative to domestic players highlighted the challenge of staying competitive against local companies that do not face the same scrutiny to comply with local tax, labor and environmental laws.
3. Companies are planning to make significant changes to their value proposition
Shifts in buying behavior and lower spending power will force most companies in the B2C, B2B and B2G spaces to revisit their value propositions in order to maintain sales growth in Brazil. Indeed, 44 percent of FSG clients will make significant changes to their value propositions through 2020 and 28 percent are in the process of assessing such changes right now.
47 percent of multinationals will focus on enhancing value-added services as a way to defend their sales volumes while protecting their margins; in fact, only 11 percent of FSG clients see pricing as the most important value-proposition lever, suggesting that companies acknowledge the unsustainability of price discounts and the need to protect profitability as sales slow. Making changes to product offerings and positioning were tied as the second most important levers, with each receiving 21 percent of votes.
Companies’ preference for value-added services as a lever to strengthen their value proposition is not surprising. To begin, this strategy can allow companies to maintain prices while protecting margins, and second, because services are always rendered in local currency the steep depreciation of the real has made this strategy especially attractive for multinationals that can tap into resources in US dollars.
4. Country leaders are concerned with their ability to compete for corporate resources
FSG expects the Brazilian real to continue to depreciate in 2016 on the back of rising interest rates in the US, with an average exchange rate for the year of 4.2 BRL/USD. Despite this figure, 50 percent of our clients will use a 3.80-4.00 BRL/USD exchange rate for their 2016 operating plan and 33 percent will use a rate between 4.01-4.20. Only 17 percent of companies will use an exchange rate above 4.21 BRL/USD.
This does not mean that FSG clients’ view on the exchange rate is not aligned with our own forecasts. As a matter of fact, most clients admitted that the reason why they were choosing a lower exchange rate than what current forecasts suggest is that they wished to avoid painting an overly negative picture for the corporate center in terms of year-on-year US dollar denominated growth.
This behavior is illustrative of a growing concern among Brazil executives. Will they be able to continue to compete for resources with other faster-growing markets in Latin America and in other regions, especially those in South East Asia? Most of our clients are focusing on stressing the solid long-term fundamentals of the Brazilian economy to make the case for resources, but many fear that a protracted economic recession could begin to erode corporate patience.
Finally, FSG presented the three strategies that we believe multinationals should be deploying in Brazil at the present moment in order to maintain growth and protect profitability: (i) cut costs and maintain investments; (ii) defend sales volumes; and (iii) take advantage of cheap assets. Clients can download a copy of the presentation here.