FSG recently held its semiannual executive breakfast in São Paulo. In attendance were a wide array of regional executives and country managers from 26 leading multinationals.
The focus of the conversation was around the extended political questions that continue to afflict the economic outlook for the Brazilian market, specifically the possibility of the new Temer government achieving a strong and credible fiscal reform. This uncertainty, combined with the deep contraction in economic activity seen since 2014, has significantly shifted multinationals attention when operating in Brazil from headline growth to bottom line management. Below are the key takeaways from the overall discussion.
Sales have not yet picked up in the market
FSG began the conversation with an analysis of the recent Q2 statistical releases, exploring the significance of a recent uptick in investment and output in the production of capital goods. The conclusion of the analysis was that while there are some signs that the Brazilian manufacturing sector has readjusted output to meet current demand, and that expectations are for higher demand in the near future, the industrial sector has yet to enter into a sustainable recovery phase.
The discussion then turned toward the executives’ own experience in terms of current trends in demand for their company’s products in the market. While some consumer goods and healthcare companies suggested they had seen a jump in demand in the first half of 2016, most all suggested that overall performance during the year was down and that there was no continuous trend toward greater sales in the market. On the industrial side, one executive whose company sells across nearly all sectors of the economy suggested that it had not seen demand pick up for any of its products.
The consensus from available statistical data, as well as anecdotal sales information, points to an economy that has yet to enter into a sustainable recovery. Furthermore, the general feeling in the room was that even once the demand begins to pick up again, consumers and businesses are unlikely to return to their purchasing habits of the boom period, rather maintaining a much more restrained approach while seeking lower priced goods and services.
Using the crisis as an opportunity to fix the bottom-line
While the consensus in the room was that demand had yet to pick up in the market, and that even when the recovery arrived it would be weak with many threats to the downside, the overall sentiment in the room remained positive.
In fact, there was broad acknowledgement that for most multinationals, the economic crisis had presented an opportunity to shift focus in Brazil from torrid topline growth, to driving efficiency gains and cutting costs in order to improve the bottom-line. Indeed, during the boom period in Brazil most multinationals entered the market in a hurry in order to pick up market share before the competition, and in doing so they often times created a heavy cost structure. However, with limited resources and a booming economy there was a certain inertia that inhibited efficiency gains.
Interestingly enough, this trend could prove positive for Brazil in the long -run, as the market is well-known for ‘custo Brasil’ or the high cost of operating in the market. With liberalizing reforms expected from the new Temer government, and major multinationals busy putting their own house in order, Brazilians should be able to look forward to higher output (and thus lower prices) in the coming years.
Driving headline growth into the recovery phase
Finally, the conversation turned toward how multinationals can prepare strategically and commercially for the coming recovery phase in order to drive competitive advantages.
FSG began this final, but most critical, part of the conversation by presenting seven key buckets of activities multinationals should considering pursuing today:
- Talent management – poach talent into the recovery phase
- M&A and Divestitures – continue to seek acquisition targets
- Capital Expenditures – ensure adequate access to capital in order to cover needed expenditures following long delays to updated machinery etc.
- Scenario Planning – understand how different policy oriented events could affect demand for your product in the market, and determine how your company would react
- Production and Inventory – identify leading indicators of demand for your product in the market to determine when to increase production and stocks
- Marketing and Pricing – determine if and when consumers will return to their pre-recession buying happens and adapt marketing and pricing accordingly
- Channel Management – review changes to operating environment and competitive landscape to determine how your channel capability needs have shifted
The focus of the executives in the room was clearly on ensuring that (a) they had identified leading indicators of demand for their products and were prepared to adjust production and inventory accordingly; and that (b) they remained nimble to react to a changing operating environment in which multiple political questions remain outstanding.
While both are key cogs in ensuring the ability to leverage the recovery phase to drive competitive advantages, they are also unique in comparison to the other buckets presented by FSG in that their importance is often not noticed until they are needed, and then it is too late. This dynamic often leads to less than ideal allocation of resources and suboptimal performance in the long-run, but also presents key areas of potential strategic advantage for those companies with the internal focus and executive prowess to stay ahead of the curve.