In our last post recapping key takeaways from our recent Buenos Aires executive breakfast, we illustrated how, despite rising investor sentiment, Argentina country managers of top multinationals are still struggling with operational challenges – namely FX volatility, high inflation and salary negotiations. We also discussed whether companies should change their demand planning assumptions as leading economic indicators continue to show contradictory signs despite a consensus forecast of higher economic growth.
Furthermore, we highlighted the fact that there is ongoing uncertainty as to when demand will start to accelerate, and more importantly, whether Macri’s administration will be able to overcome pressures from key local interest groups to place the country on a sustainable growth pattern (only 26% of FSG clients in Argentina are confident that the market will avoid another recession within the next ten years).
In this post, we look at how this continued uncertainty is influencing the types of strategies that companies are willing to pursue in this market to capture growth.
Short-term considerations complicate structural changes to Argentina strategy
Over the next 12 to 18 months, multinationals in Argentina are considering implementing the following strategies:
- Companies are planning to leverage existing channel structures: Skepticism about the sustainability of Argentina’s recovery, long-standing personal relationships with local partners that have proved resilient through the country’s different crises, and legislation that overprotects local distributors vis-à-vis multinationals, has companies in Argentina wary of radical changes to their channel structure. Additionally, a full 80% of executives feel that their local partners have the right capabilities to capture Argentina’s upside potential, and only 10% of executives are planning to enact channel transitions in the next 18 months. These figures stand in stark contrast to the rest of Latin America, where on average 75% of companies report to be likely to make a channel transition within the next 12-18 months
- Local production is not being considered for Argentina: Also in contrast with other markets in Latin America (a region throughout which executives have been increasingly willing to consider expanding local production as currencies depreciated against the US dollar), in Argentina only 25% of companies report plans to expand local manufacturing. After years of import controls, local companies feel that they can finally update their product portfolios, and importing from overseas feels like a much safer and quicker bet than committing big capital investments to local manufacturing; especially given other considerations, such as the potential struggle to achieve economies of scale or the lack of reliability of local suppliers
- Companies will focus on their product portfolio and value-added services as they revamp their value proposition: In connection to the end of import controls, 47% of executives will focus on enhancing their product portfolios to strengthen their competitive position, while 35% of FSG executives said value-added services would be their key lever for driving enhanced competitiveness. Only 12% of executives selected pricing as their top value-proposition lever, which illustrates the unsustainability of pricing strategy as a lever to defend market share, especially from new Asian players and increasingly stronger local companies. In fact, 47% of Argentina country managers expect the toughest competition in Argentina to come from Asian companies in the years to come
Close market monitoring will continue to be key
One of the biggest strengths that anyone managing an Argentina business needs to have is adaptability to unexpected market shifts and changing operating conditions, as illustrated by the country’s tumultuous recent history. When asked how often they reviewed external conditions with their teams, 36% of Argentina general managers reported that they go through this process monthly. In Mexico, a traditionally more stable market, monthly reviews were only reported by 14% of the companies. Whether Argentina GMs can move into a less frequent though more normal cadence of quarterly reviews will depend on greater market stability, for which the advancement of Macri’s administration agenda throughout 2019 and beyond will be key.
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