Protecting Profits and Managing Prices in Latin America

Companies are increasingly looking to adapt their pricing strategies and tactics to deal with macroeconomic volatility and shifting corporate mandates in Latin America.

As Latin America’s operating environment has become more volatile and bottom lines begin to receive more scrutiny from the corporate center, regional executives are focusing on how they can shift their pricing strategies to maximize profitability mandates while protecting volumes. FSG’s recent study Protecting Profits and Managing Costs: Pricing Strategies and Tactics for Latin America (clients only) focuses on the best approaches to manage pricing and maximize earnings in Latin America’s evolving operating environment.

LATAM Pricing ManagementIn this study, FSG concludes that multinationals’ approaches to pricing strategy are often dictated by organizational constraints, in particular  the degree to which regional teams have the capabilities to adjust prices in response to macroeconomic shocks. This depends in large part on how centralized both risk management and pricing strategies are within a given company.

Companies seeking to maximize the focus of local teams on executing a pre-determined market strategy often find that a centralized approach to pricing and risk management is optimal. By leaving the management of transaction and operational exposure to the corporate treasury, companies can help to ensure that local teams are not distracted by short-term fluctuations in the market environment.

However, a centralized approach to pricing and risk management often means that companies lose the ability to adapt pricing to local market conditions. This makes it more likely that an organization will leave money on the table or lose market share when adjusting prices.

To succeed, companies should ultimately seek to deploy a mix of hedging and operational strategies, coordinated across centralized and decentralized functions within the company. FSG’s study provides a set of best practices and case studies for companies to learn from and consider as they determine the optimal approach to pricing for their business in the region.

For FSG clients interested in learning more about these best practices, the full report is available here. Not a client? Contact us.

Emerging Market View: What Our Analysts Are Reading

EM View

India’s newly elected Bharatiya Janata Party (BJP) government announced its first budget last week, and according to the Wall Street Journal, it proved a letdown for those expecting big-bang reform, MNCs included.

“While it is a well-balanced fiscal plan with focus on reviving consumption and investments, markets have not been overly pleased and experts find certain growth targets to be quite unrealistic. The absence of specifics on several big-ticket items and lack of an overarching vision should rightfully disappoint companies,” says Shishir Sinha, FSG’s Senior Analyst for Asia Pacific.

(Readers can view FSG’s original expectations for India’s BJP government here.)

Last week, Portugal’s Banco Espirito Santo SA bonds hit record lows after parent company Espirito Santo International reportedly missed a debt payment, rekindling market fears and reminding investors that the eurozone’s woes are far from over.

“Executives should be wary of headlines for recovery in WEUR, and prepared for the heavy downside that could accompany bank failure. Banco Espirito Santo, a Portuguese bank, delayed payments on some securities, reminding us that just because banks have not been in the news does not imply that they are healthy. FSG’s WEUR Regional Outlook outlines how banks could impact MNCs throughout the region,” says Lauren Goodwin, Senior analyst for Western Europe.

In Latin America, Argentine presidential hopefuls are dealing with the issue of debt negotiations and exploring opportunities for business-friendly reform, according to Reuters.

“As Argentina strives to negotiate with holdouts to avoid default, executives should consider the potential for improvement as elections approach in 2015. The current frontrunners favor negotiating with holdouts and would likely be more pragmatic and business-friendly than President Fernandez,” says Christine Herlihy, FSG’s Senior Analyst for Latin America.

In global news, Forbes recently released an article on local companies competing with foreign investors in emerging markets, citing a new study by Boston Consulting Group and echoing past FSG reports.

“Echoing the same message in FSG’s report Winning the Race For The Market Diamond, local competition gaining market share in emerging markets is an increasing concern for multinationals, particularly for MNCs that focus on the burgeoning emerging market middle class. Read the report to understand the strategies other companies have used to battle the evolution of growing domestic companies,” says Sam Osborn, Associate Practice Leader for FSG’s global analytics.

Adverse US Supreme Court Ruling Undermines Argentina’s Ability to Return to Capital Markets

What happened, in brief?

Argentina has recently taken strides toward making amends with international lenders, including the IMF and the Paris Club. Such efforts were motivated in large part by the government’s desire to regain access to international capital markets; however, hopes of such a return were dashed by the US Supreme Court decision compelling Argentina to pay its holdout creditors in full if and when it issues coupon payments to restructured bondholders. Argentina has long held, and is in fact bound by domestic legislation to insist, that it will not pay holdout creditors, but has maintained that it is willing and able to pay restructured bondholders.

Argentina’s obligations to holdout creditors participating in this round of litigation amount to a relatively manageable US$ 1.33 billion, but this ruling opens the door for other holdouts to come forward, leaving Argentina potentially liable for close to US$ 15 billion dollars, which is more than half of Argentina’s current stock of foreign exchange reserves. This would leave Argentina in a dire situation, and thus, the government is likely to maintain its hardline stance against paying holdouts in full. This leaves policymakers with a handful of unappealing options and a ticking clock, as the next coupon payment to restructured bondholders is due on June 30th, and a technical default could occur as soon as 30 days after this date, when the grace period will expire.

What are Argentina’s options?
  • It could pay holdout creditors in full—that is, the US$ 1.33 billion that is the subject of current litigation—and continue to pay restructured bondholders. This option is feasible but politically unpalatable, and opens up the risk of additional claims that will prove overwhelming given scarce reserves and existing external financing requirements
  • It could attempt to negotiate with holdout creditors and offer to let them participate in the restructuring process. Domestic legislation prohibits this option, but this legislation is set to expire in December; some holdout creditors have indicated that they would be open to such a swap
  • It could attempt to avoid paying holdout creditors while simultaneously swapping restructured bonds currently governed by US law for bonds governed by local law. Given the extraterritoriality concerns and lack of transparency regarding ownership of bonds, this option would be difficult to execute, but it is one of the only concrete proposals made by the government thus far.
    • It is also worth noting that any failure to pay holdouts would amount to technical default and bar Argentina from the US financial system
  • It could enter into technical default, refusing to pay both holdout and restructured bondholders
Among these options, what is the government’s most likely course of action?

The government thus far has opted for a hybrid solution—on the one hand, there is talk of swapping restructured bonds for local bonds, so that restructured bondholders can still be paid, albeit outside of the US financial system. The government reportedly also plans to negotiate with holdout creditors outside of court, in the hopes of reaching an agreement that will allow it to avoid default. There is sure to be little good will and considerable animosity on both sides of the negotiating table, but ultimately, nearly all parties involved—holdouts, restructured bondholders, and the Argentine government included - will prefer a settlement to default.

What does the increased possibility of technical default mean for the business environment? 

Regardless of which course of action is chosen, the ruling has negative implications for the Argentine economy and business environment. Even if we assume that technical default is avoided—which is by no means a safe assumption at this point—Argentina’s borrowing costs and risk premiums have already increased, and its reserves—not to mention potential future dollar inflows—will decrease, putting downward pressure on the overvalued peso.

Had the court ruling proven more favorable and the government been able to resolve its legal dispute with holdouts and return to capital markets this year, dollar inflows could have helped to boost reserves and stabilize the exchange rate. As it stands, such a return is highly unlikely and the chance of additional currency depreciation, perhaps on par with that seen in January, has increased markedly.

FSG will be closely monitoring the government’s response this evening, and will ensure that you are kept informed of developments and their implications for the business environment.

What can you do today to help protect your business?
  • FSG has a host of resources on contingency planning and management challenges in risky markets, including Argentina and Venezuela. We encourage FSG clients to take a look at these resources on our portal, and reach out to your account manager to set up an analyst conversation for an in-depth walk through.
  • We will soon be releasing research on scenario planning for Argentina, which will help you set expectations regarding the implications of Argentina’s near- to medium-term outlook for your business.

Argentina’s piecemeal shift toward pragmatism bodes poorly for growth in 2014

While it is too early to say if Argentina’s recent efforts to correct imbalances represent a genuine shift toward pragmatism or are merely calculated forms of damage control aimed at limiting the magnitude of future devaluations and helping Argentina regain access to international capital markets, it is clear that recent adjustments will raise borrowing costs and erode consumer purchasing power and business confidence in the months ahead.

Recent adjustments and their implications for the business environment include:

  • Argentina allowed the peso to fall in January and has also begun to raise interest rates, cut transportation and energy subsidies, and improve relations with external lenders in an effort to stabilize the exchange rate and regain access to capital markets
    • While these efforts are beginning to bear fruit, macroeconomic imbalances, including a dwindling supply of foreign exchange reserves and perniciously high inflation, remain, and the government has resisted a complete shift toward orthodoxy, preferring instead to expand price controls and leave import controls in place.
    • Argentina’s ability to successfully course-correct remains vulnerable and could be undermined by several key events, including wage negotiations, the soy harvest, and a forthcoming US Supreme Court decision regarding Argentina’s obligations to holdout creditors
  • Nearly all key growth drivers, including consumption, investment, and government spending, are expected to contract in the wake of monetary tightening, exchange rate uncertainty, double-digit inflation, falling real wages, and the potential for additional shifts toward fiscal austerity
  • As regional and country heads come under increasing pressure from corporate to make the case for continued presence in Argentina, executives are emphasizing the market’s enduring economic and demographic potential

Emerging Market View: What Our Analysts Are Reading – 2/15/2013

Recent economic headlines reflected what FSG’s research reports have indicated around the world.  Ranging from the economic implications of the Syrian civil war to Argentina’s controversial elections and Estee Lauder’s successful EM portfolio, here are a few articles that our analysts read this week pertaining to emerging markets:

Estee Lauder reported big success in emerging markets via MSN Money online Emerging markets drive Estee Lauder’s profit growth:

“Not surprising that the Asia Pacific region was the largest contributor to Estee Lauder’s sales growth.  From a global perspective, we are noticing an uptick in consumer goods companies that are prioritizing the strong consumer environments available throughout the region.”
-Sam OsbornSenior Analyst

The Financial Times’ Beyondbrics blog, centered on emerging market news, posted an interesting entry about Vote buying in Latin America:

“The numbers validate FSG’s view that Hugo Chavez essentially bought his reelection in 2012 with huge increases in public spending, for which the country is now suffering a hangover. This article highlights other countries with a strong propensity to inflate the economy prior to elections, of relevance in 2013 to the growth outlook in Ecuador and Argentina in particular.”
-Clinton CarterHead of Latin America Research

The Washington Post reported Syrian business exodus gains pace:

“Syrian businessmen are shifting their investments, operations, and focus abroad amid increasing chaos of the civil war.  FSG mentioned how this impacts Jordan and Lebanon in the recently released MENA regional overview. This article also cites examples involving Egypt and the UAE.”
- Matthew SpivackPractice Leader for the Middle East and North Africa

*Post compiled by Hal Olson

Argentina Consumer Crisis Redux: Lessons from History to Inform Investment Today

Argentina Consumer

While Argentina may be doomed to ignore the lessons of history and again plunge into recession or even economic free fall, investors are not obliged to follow blindly. For investors focused on the consumer products segment, previous crises offer ample clues to how consumers may behave in future crisis. Understanding these clues will be critical to crafting an effective strategy for mitigating risk and capturing opportunity in the consumer space should Argentina again march over the precipice.

Frontier Strategy Group works primarily with large multinationals operating and expanding in emerging markets. In an effort to inform strategy for clients with exposure to the consumer segment in Argentina, Frontier Strategy Group shared insights gleaned from experts and leading executives who weathered the past two crises in the country, namely the hyperinflation of the 1980s and the 2001 debt default and ensuing chaos. While the macroeconomic imbalances that precipitated those crises are different than those driving the country towards recession now, the conditions they produced for the average Argentine consumer could be similar: loss of purchasing power, evaporation of savings, inflation, shortages of goods, and unemployment.

Faced with these conditions in past crises, Argentine consumers responded with dramatic purchasing changes, as well as lifestyle alterations, and increased reliance on community. Practically speaking, this meant consumers reduced consumption of food and non-food consumer staples, substituted regular brands for cheaper alternatives, switched to cheaper transportation options, and were forced to prioritize between food and non-food consumer staples and other essentials such as medicines. Some significant lifestyle observed were consumers moving back from big cities to rural areas, home production of food, selling belongings, living off savings, and sharing housing and resources with many more members of family and community.

To continuing reading the full version, click here

Multinationals Reevaluating Growth Targets in Latin America

Weaker regional growth in the first half of the year has driven multinationals to reevaluate their growth targets for 2012 as Argentina’s business landscape grows increasingly unnerving, Brazil’s economy slows, and devaluation risks in Venezuela swell as President Chavez drives up fiscal spending as part of his reelection campaign. However, many regional executives are looking towards new opportunities in Mexico as higher labor costs in China and election of business friendly Enrique Peña Nieto leads executives to believe the new administration will be able to implement structural reforms aimed at boosting higher and sustainable long-term economic growth. Meanwhile, many multinationals are undeterred by the weaker first half growth as they continue to invest in Brazil, hoping that government stimulus measures to revive consumer spending and industrial production in Brazil in the second half of 2012.

Argentina: Multinationals are dealing with an increasingly dire business environment by decreasing investments and lowering growth expectations

Brazil: Foreign investors shake off short-term woes as some multinationals position themselves for the long-term rewards that Brazil offers

Chile: The forecast is upbeat as production, consumption, and high consumer sentiment all point to a favorable economic outlook for 2012

Colombia: Colombia’s economy will continue to be a growth leader in 2012, but sluggish retail and falling industrial production dim its prospects

Mexico: Multinationals remain bullish on Mexico’s growth prospects as a new administration offers hope for necessary structural reforms

Venezuela: Multinationals remain cautious as ballooning fiscal spending contributes to rising currency devaluation risks for the beginning of 2013

Antonio Martinez and Erick Soto contributed to this piece.

Argentina: Trade Restrictions and Policy Uncertainties

Argentina

The recent imposition of additional trade restrictions coupled with economic policy uncertainties in Argentina continue to cast doubt onto the country’s economic outlook for 2012. Our clients and experts expect operational conditions to further deteriorate as surging government spending and minimal political opposition allows President Kirchner’s administration to continue on this volatile path. This volatility is leading many MNC executives to adopt a “wait-and-see” approach when conducting operations in Argentina. Indeed, 57% of FSG advisors reported being concerned about economic stability in Argentina, while 59% of clients believe in a likely economic crisis within the next 18 months.

Argentina’s troubles stem from high government spending, which has eliminated previous years of budget surplus while pushing upwards pressure on inflation.  An appreciating peso has been boosting imports at the expense of the trade balance and further contributing to the budget deficit. The increase in non-automatic import licenses and the Argentine government’s demand for import pre-approvals has further complicated multinational operations in an already challenging economic environment.  Judging by the positive Argentine public response to the nationalization of YPF it is hard to expect the Argentina government will adjust its restrictive course and instead apply economic austerity programs.

Despite increased restrictions, import strategies like engaging in government relationship building or increasing local production can potentially reward companies willing to take the risks. Finding locally produced products to export (or countertrading) can help companies come in line with Argentine government demands.

There are two likely scenarios to consider over the next 18 months: economic crisis or economic rebalancing. Under a worst-case scenario, Argentina will continue to muddle through with the current policies it has in place until the economic imbalances worsen to the point where a crisis ensues. A more positive scenario envisions Argentina enacting politically difficult austerity and a gradual devaluation of the peso that would set the economy on track for long-term economic growth and stability. At this point it is difficult to say which of these scenarios will likely prevail, but the fact that improvement will require Argentina to endure near term pain to achieve long-term gain does not bode well for multinationals.

*Erick Soto contributed to this piece

Latin America – Emerging Markets Insights – June 2012


LATAM

Multinationals are taking note of the strength of the Andean economies of Colombia and Peru, but the increasingly negative outlook in Argentina and Brazil is weighing down growth in the region.  Stagnating industrial output and diminishing consumer demand in Brazil led economists to trim economic growth expectations to less than 3% for 2012. The race for the Mexican presidency heats up as PRI candidate Enrique Peña Nieto maintains a steady lead heading into the July election. Meanwhile, the race for Venezuela’s presidency in October is underway contributing to market uncertainty as president Chavez registers to run for a third term despite his poor health.

For a more detailed insight on key trends in Latin America, here are the analyst headlines for our key markets:

  • Argentina:A thriving black market for dollars and widespread withdrawals from local banks signal a growing belief that boom times are over
  • Brazil: Multinationals are facing increasing headwinds as the effectiveness of government stimulus falls short of expectations and credit markets soften
  • Chile: Higher-than-expected export growth is keeping Chile’s economy buoyant, but protests continue to mar President Piñera’s government
  • Colombia:Colombia’s potential is no longer a secret, but popularity brings a pricey peso that is eroding competitiveness
  • Mexico: Multinationals look to Mexico as a safe haven to weather the European storm
  • Peru: Stellar performance is only somewhat dimmed by concern over tax reform increasing the cost of doing business in Peru
  • Venezuela: Oil-fueled spending is succeeding at supporting higher growth this year, but Chavez’s poor health is creating political uncertainty

*Erick Soto contributed to this piece.

May 2012 Latin America Outlook: Taking Global Volatility In Stride

Frontier Strategy Group’s clients are revising growth forecasts for Latin America’s major economies upwards as the outlook for the global economy begins to stabilize. Growth leaders are emerging in the Andean region, and we expect that Chile, Colombia, and Peru will contend for the highest growth rate in Latin America in 2012. Strong fundamentals are keeping the Mexican economy remarkably stable while Brazil continues to miss the mark. Finally Argentina and Venezuela’s risk profile is increasing significantly, forcing MNCs to reconsider whether the potential rewards warrant the blood, sweat, and tears.

For a more detailed insight on key trends in Latin America, here are the analyst headlines for our key markets:

  • Argentina: The nationalization of YPF has become the clearest indication of the Fernandez Administration’s hostility to investor concerns
  • Brazil: The Brazilian government remains committed to revitalizing the economy, but it has not yet had a discernible impact on industry
  • Chile: Strengthening domestic demand, higher copper prices and an improving international outlook point to continued strength for Chile’s economy
  • Colombia: Strong growth in an uncertain global environment is forcing Colombia to deal with an appreciating currency and rising wages
  • Mexico: Economic prospects appear to be stabilizing, but drug war violence sustains tension
  • Peru: Growing pains in spite of robust consumer spending
  • Venezuela: Chávez looks to foreign patronage to offset the deleterious effects of economic domination by decree

*Melissa Pegus, Senior Analyst – Latin America contributed to this piece