Two weeks in São Paulo (Brazil) and conversations with over 50 multinational executives have shown me that while the economic recession in Brazil has indeed been tough for companies doing business there, revenue and profitability growth were not out of reach during this period.
Here I share lessons learned from the trip, including how some companies were able to succeed, the general market sentiment for 2017, along with the major questions that executives have for the market when looking out to the medium- and long-term prospects for an economic rebound.
Challenges during the crisis and the most common reaction:
As was probably expected by the readers of this post, there was no one prescription for multinational executives whose mandate was to grow the business during the most severe economic contraction in Brazil’s modern history.
- While some companies were naturally better positioned to succeed, all had to consider the same dramatic shifts in the operating environment: All companies were pushed to adapt to shifting customer behaviors, the extreme financial pressures on key partners, and the need to adopt a new value proposition in the face of growing competition from local players and non-western multinationals – at the same time that customers (both private and public) witnessed a decline in purchasing power (especially in foreign currency terms).
- The complicating factor was political dysfunction in Brasilia (the country’s capital): Add this factor to an economic recession, and you make an already challenging environment a near impossible one in terms of planning for the near future. In a matter of months, the best laid plans could be discarded, and executives operating in the market would need to start from scratch.
- With no exception, everyone we talked to had used the crisis to rein in costs and increase productivity in the case they had local manufacturing: However, such measures are usually unrepeatable and will either demand continued innovation or a near-term return of top-line growth.
What companies did to outpace the competition
Some multinationals were in fact able to put up double digit growth during this period, often while applying unique formulas.
- Adapted the product/pricing mix
- Doubled down on existing value proposition to key customer segments in order to drive further differentiation from the competition
- Invested during the crisis, leveraging cheap assets to enter new verticals
- Expanded the service business, tapping into a new and often times lucrative market
The one trait that the outperforming companies had in common was greater local flexibility to adapt strategy to shifting local market conditions, a lesson that should be taken seriously by those companies looking to outperform over the long-term in this market.
The view for 2017
FSG is currently forecasting GDP growth in Brazil of 1.0% in 2017, with fixed capital investment expanding at 1.5% and private consumption expanding at only 0.3% (with the risk to the downside in both cases).
- Consumer goods companies reported a poor performance in January: Our short-term outlook was largely corroborated by the early experience of our clients in the market, with the exception of consumer goods companies that reported on net a very challenging January. However, leading indicators of demand (including performance in the packaging industry) continue to point toward easing contraction in private consumption and a marginal recover for the second half of the year.
- On the industrials side, while sentiment was higher, the noted shock from the crisis lingers: Especially for those executives who were constantly battered by the uncertainty and surprises generated from Brazil’s political crisis. While these companies tend to be slightly more optimistic than their consumer segment brethren, there is a recognized need for greater scenario and contingency planning to protect against the sudden events that have become common in Brazil (and in many other emerging markets in recent years). One executive even commented that these unplanned for disruptors were easily responsible for wiping away millions of dollars in sales revenue overnight (on multiple occasions).
Preparing to outperform in the recovery
Despite these challenges, multinationals are clearly in Brazil for the long haul, but it has become more evident that in order to succeed they will need to become more granular in their demand analysis, more localized, and more consistent in their execution. Companies operating in Brazil today are pursuing several strategies to succeed long-term, among which are included:
- Doubling down on demand analysis – by incorporating FSG subnational forecasts into their strategic planning process and increasing internal resources
- Localizing production – either via M&A or a greenfield investment
- Creating new market monitoring tools – becoming more rigorous in their approach to scenario and contingency planning and ensuring adequate internal capabilities