As 2016 opens (with rather disappointing news across global markets), I wanted to share a few observations about how FSG expects the macroeconomic, business, and operating environments to evolve this year in Latin America, with special emphasis on the strategies we believe will set successful companies apart from the competition.
2015 was a year of disruption—from pricing strategies that were upended by massive currency volatility, to political and economic turmoil in Brazil and landmark political transitions in Argentina and Venezuela. Growth in Latin America has slowed, competition has intensified, and customer preferences, buying habits, and purchasing power have shifted. Governments are re-thinking their spending priorities, and face mounting pressure from a middle class that has found its voice and is growing increasingly dissatisfied with corruption scandals, poor governance, inequality, and lower growth prospects.
These trends threaten to continue into 2016. The US Federal Reserve is expected to continue to raise interest rates, prompting further currency depreciation in Latin America while forcing many central banks in the region to also increase interest rates, likely at the expense of growth. With regards to fiscal policy, it is probable that governments across the region will need to pursue spending cuts while also increasing taxes, both of which will cut into companies’ bottom lines. In oil-producing states, such as Colombia, these cuts will be driven by a continued decline in global oil prices, which FSG expects to remain suppressed throughout 2016. Meanwhile, the biggest market in the region, Brazil, will continue to struggle with economic recession; political instability is likely to mount in Venezuela; and although Argentina’s medium-term prospects have definitely improved with Macri’s election, multinationals should expect 2016 to be a year of painful economic adjustments in this market as well.
To help clients get off to a good start in 2016, FSG has identified three strategies that multinationals should consider to protect market share and profitability in this environment:
1. Make sure that resources flow readily from stagnant businesses to growth opportunities: With pockets of opportunity becoming scarce across national markets, industries, and customer segments, companies will need to reallocate resources more aggressively than what may have seemed prudent in the past. Such reallocation will optimize resources and ensure companies stay ahead of their competitors who are equally hungry for growth.
2. Re-define your value proposition: With economic growth slowing in the region, the price sensitivity of current and potential customers – consumers, other business, and the government – is bound to increase. Competition will intensify, and the cost of doing business for multinationals is likely to increase as a result of tax increases, rising interest rates, and currency depreciation. Adapting your value proposition to account for these changes will be critical to defend sales volumes and protect profitability in Latin America.
Among the levers that companies can pull to redefine their value proposition, consider providing value-added services. Such services could make your products and solutions stickier with customers, allow your company to command higher prices, and create more stable revenue streams. In addition, since services are mostly rendered both locally and in local currency, those companies that can tap into resources in hard currency could deploy this strategy at a relatively low cost.
3. Strengthen commercial execution: Align your corporate center’s view on the region and winning strategies with those of regional and country leaders to ensure strong planning leads to strong execution. Given Latin America’s evolving market dynamics, key commercial execution decisions that companies will need to make in 2016 will include:
- a. Redefining go-to-market and channel strategies, especially when entering new markets, industries, or customer segments
- b. Revamping organizational structure and footprint in the region given differing economic growth and exchange rate trends across markets (and the relaxation of trade and capital controls in some cases – notably Argentina)
- c. Recruiting, developing and retaining top talent to execute on ambitious and increasingly complex strategic plans
- d. Balancing market share with profitability targets in an environment of high currency volatility
Finally, companies should account for potential external surprises in 2016 through sound scenario and contingency planning to ensure that strong execution effectively leads to expected commercial and financial results. FSG research suggests organizations that exhibit high alignment and resilience are more likely to exceed expectations for profitability and market share, with a 99% confidence level.