At the end of March, Frontier Strategy Group hosted its biannual executive workshop in São Paulo. The overwhelming concern of the 30 multinational executives in attendance was understanding when to expect renewed growth of demand in the Brazilian market.
Indeed, the need from multinationals for higher growth from Brazil has grown following the election of Donald Trump last November, at which point a poll of FSG clients showed that 82% of regional executives expected to recuperate revenue losses in Mexico with higher sales in Brazil during 2017.
The challenge, however, is that the Brazilian economy should only grow by a paltry 0.8% in 2017, with private consumption likely to only grow at 0.2%. This means that in order to drive higher growth, multinationals will need to be even more targeted in their Brazil operations than before.
What do Brazil GMs expect for 2017?
While multinational executives in Brazil acknowledge short-term uncertainty, their expectations for the market over the next 12 months demonstrated guarded optimism.
- 70% of the executives in attendance at the workshop expected higher growth in Brazil for 2017 – While at first glance this number might seem high, it should be emphasized that on balance, overall growth targets for the year remain conservative
- However, of those executives, only 47% reported that sales in Q1 2017 had been better than in Q1 2016 – thus suggesting that the economy is still not in a full-fledged recovery, but rather in a fragile upturn that could still be reversed by further internal or external volatility
- For those that have already seen sales growth, only 36% reported seeing increased demand while 64% reported gaining market share – further cementing the view that significant fragility remains in the market
- A full 67% don’t expect to experience sales growth until at least Q3 2017 – which emphasizes the point that optimizing sales growth in 2017, and even into 2018, will require a more nuanced approach to the Brazil market
Demand Planning for Brazil
Brazil’s economy took a predictable path through economic contraction, with consumption and output of consumer non-durables (food goods/drinks/pharmaceuticals/etc.) contracting less than that of consumer semi-durables (clothes/shoes/etc.), and the output and consumption of consumer durable goods (automobiles/furniture/home appliances/etc.) contracting the most of any category. Furthermore, states in the South and Southeast (which rely more heavily on the private sector for job creation and have more diversified overall economies) remained more robust than states in the North and Northeast (which rely more heavily on the construction sector and the public sector to drive employment).
In that respect, and knowing that a short-term recovery depends significantly on easing credit conditions in the market, what should multinational executives expect for 2017?
- B2C: With the labor market set to remain weak throughout 2017 (in fact 52% of executives said that they would be maintaining a flat headcount in the Brazil market for 2017, while only 16% said they would add to their headcount during the first half of the year), and consumers only now beginning to deleverage as real average interest rates have just begun to fall, overall consumption is set to remain weak. While the upper-class segments will likely begin increasing consumption first, most consumer groups are likely to maintain spending habits exhibited during the crisis.
- B2B: Lack of access to credit became a significant problem for industry during the crisis, and easing credit conditions in the short-term (even without growing demand) means that some companies will be able to increase production. Look for producers of manufacturing inputs and consumer non-durables and semi-durables to increase output first. Meanwhile, the construction market is set to remain largely depressed during 2017, while the oil and gas sector should show small improvements due to stabilized global energy prices and changes to local content rules
- B2G: 2017 will be another challenging year for closing new sales to the public sector. While debt relief for key states such as Rio de Janeiro/Rio Grande do Sul/ and Minas Gerais should provide marginal relief, tax revenues have shown little improvements during the first months of the year and the federal government is set to cut expected spending by approximately R$ 20 billion in the next month. In this case, companies will need to continue targeting key outperforming states (such as Parana) and maintain a focus on low price products and lean service offerings
During 2017, it will be those companies that are best able to make tactical adjustments in reaction to a changing economic environment that drive the highest sales. Across industries, companies will need to target better positioned customers while identifying the right time to increase hiring before talent becomes more expensive, adapt inventories to growing demand, elevate their product and service offerings, and increase capital expenditures after sharp cuts during the crisis – all while continuing to track the key market risks.
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