Commercial Strategy Remains Top Priority for Brazil Execs

Frontier Strategy Group recently held an executive breakfast event in São Paulo, Brazil which gathered over twenty senior-level leaders of Latin America businesses, representing many US and European-based multinationals.  The event provided an opportunity for our executive clients to gain a deeper understanding of how Brazil is likely to perform over the coming quarters, along with key scenarios for Brazil’s upcoming elections.  Ryan Brier, FSG’s Head of Latin America research and moderator of the event, provided practical advice on how to position Brazil and make the case for investment relative to other emerging markets in LATAM and on a global scale.  Below are several of the key takeaways from the event:

Key Takeaway #1: Realigning Expectations around Targets for Brazil Will be Crucial Moving Forward
  • Confidence around the ability of multinationals to hit their 2014 targets is at a new low. 66% of executives in attendance have low or no confidence in their ability to hit their 2014 top-line targets for Brazil, while 72% of executives in attendance had low or no confidence in their ability to hit bottom-line targets. This is the lowest level of confidence that FSG has seen since it began polling clients around targets in 2011
  • Many executives voiced concern around rising costs in an environment of mediocre top-line growth, with several stating that they were forecasting flat or declining bottom-line growth this year despite an increase in top-line revenues. Rising energy and logistics cots were among the top reasons cited for this trend
  • Despite this poor performance, only 31% of the executives in attendance expected their 2015 targets to be lower than their 2014 targets, underscoring the need to realign corporate expectations around the potential for Brazil over the coming years
Key Takeaway #2: Executives Are Hopeful for Political Change, but Skeptical over Its Potential Impact
  • Executives are increasingly optimistic that Dima faces a serious challenger in Marina Silva, with many citing strong desire for change among the pragmatic voto útil as possibly providing a boost to Silva over Aécio Neves
  • The consensus was that a Silva victory would likely lead to a near-term boost in investment, which could serve to blunt the impact of declining government spending in 2015. However there was also a fair amount of skepticism that Silva would be able to tackle many of the structural reforms that multinationals feel Brazil requires
Key Takeaway #3: Setting the Right Commercial Strategy Remains the Top Priority for Executives
  • 42% of the executives in attendance reported that their top internal challenge over the next 18 months would be to set the right commercial strategy. This was in large part due to the fact that the top external challenge cited by executives was expected weak customer demand
  • For most executives, setting the right customer strategy went beyond rethinking customer segmentation and commercial resource allocation to also include ensuring that the targets they set for their teams were realistic in order to avoid a deterioration of morale among commercial staff

If you are an FSG client and would like more information about future events, please contact your client services director.  Not a client? Click here for more information about our services. 

Emerging Markets View: What Our Analysts Are Reading

EM View

McDonald’s restaurants in Russia came under increasing pressure from the Russian authorities this week as officials closed several outlets in Moscow and inspected 435 of the fast-food chain’s restaurants across the country, according to the Wall Street Journal. The increased checks come amid heightened tensions with the West, and FSG’s Head of EMEA research, Martina Bozadzhieva, says similar actions are likely to begin affecting other western businesses in the region.

“Regulatory checks are likely to intensify across industries, especially against American companies,” says Bozadzhieva. “It is very difficult to predict who the authorities may target next and for what, and companies should be aware that problems may arise with regional as well as federal agencies. Local teams should watch their industry regulators particularly carefully to get ahead of any problems.”

Meanwhile, Argentina’s latest plan to exit default is being met with skepticism by financial markets, as bond prices slip and the black-market peso hits a record low.

“Markets are rightful to be wary with Argentina’s proposed local law debt swap, as it suggests that, contrary to initial expectations, Argentina has no intention of reaching an agreement with holdout creditors in the near term,” says Gabriela Mallory, senior analyst for Latin America.

Thailand’s military-appointed legislature nominated army chief Gen. Prayuth Chan-ocha to become prime minister on Thursday, and FSG’s senior analyst for Asia Pacific, Shishir Sinha, says it may mean increased stability for investors.

“Thailand might be able to guarantee investors with more political stability as the ruling army chief is officially moving on to the helm of the country as its newest Prime Minister. While this move will delay truly democratic elections for quite some time to come, it is likely to help with economic growth; both consumer and investor sentiment should rise due to the expectation of stability,” says Sinha.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client? Contact us to learn more.

Emerging Market View: What Our Analysts Are Reading

EM View

On Friday, Iraqi Prime Minister Nouri Maliki resigned, according to the BBC. Despite hopes that a resignation would help end the political crisis in Baghdad, FSG’s Practice Leader for Middle East & North Africa says it’s not over yet.

“Iraq’s political crisis is not over yet, but Nouri al-Maliki’s decision to step aside is a critical development. Companies should watch for whether PM-designate Haider al-Abadi is able to to form a new government that promotes cross-sectarian cooperation. A new government would need to usher in political reforms that ease sectarian tensions to bring Iraq back from the brink of civil war,” says Matthew Spivack.

In Latin America, Mexico’s government has outlined a plan to open oil fields to private companies, providing opportunity for foreign investment, according to the Wall Street Journal.

“The Mexican government is quickly moving forward with the first round of bidding starting early next year, which should provide an early infusion of FDI and support higher investment growth in 2015 ,” says Antonio Martinez, FSG’s Associate Practice Leader for Latin America.

This news comes in the same week as The Economist’s story “Mexico’s minimum wage: Stingy by any measure,” highlighting the low interest in the country’s consumer opportunity over the past two decades.

“Over the last two decades the increase in earning power of Mexican workers has severely lagged most of the other large LATAM economies, and is an important reason why the consumer opportunity in Mexico has not been as attractive to B2C companies as the economy’s size would suggest,” says Antonio Martinez.

In the Asia Pacific region this week, good news for Malaysia’s economy as second quarter growth shows unexpected acceleration on exports, according to Bloomberg.

“Malaysia’s impressive Q2 performance bodes well for the country’s growth over the coming months. The government’s efforts to address bottlenecks in the economy and improve the domestic operating environment are clearly paying dividends,” says Adam Jarczyk, FSG’s Practice Leader for Asia Pacific.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Emerging Market View: What Our Analysts Are Reading

EM View

After defaulting on some of its restructured debt on July 30, Argentina has petitioned the International Court of Justice to hear a lawsuit against the U.S. According to the Wall Street Journal, the South American nation claims that decisions by the U.S. courts in the legal battle between Argentina and some of its creditors have violated its sovereignty, but FSG’s senior analyst for Latin America research says it’s merely a stalling tactic.

“Argentina’s lawsuit against the U.S. is a stalling tactic intended to bolster the Argentine government’s political rhetoric. Most likely, its main result will be a further delay in negotiations with holdout creditors,” says Gabriela Mallory.

On Tuesday, South African publication The Daily Maverick asserted that “corrupt, incompetent governments and their repeated failure to protect their citizens” was more to blame for the Ebola outbreak than the disease itself. FSG’s Sub-Saharan Africa analyst Alexa Lion agrees, adding that the virus will have little affect on Western businesses involved in the region.

“Ebola is scary but is fairly isolated from Western economic interests. Its spread speaks more of government inability to contain the virus rather than high risk of contagion. MNCs must be vigilant and articulate health precautions to their partners, but also remain aware that it is business as usual in West Africa’s largest hubs,” she says.

In Indonesia, members of losing presidential candidate Prabowo Subainto’s political coalition are planning to form a special committee, or pansus, in the House of Representatives, claiming electoral fraud. Despite Prabowo’s large presence in the legislature, FSG’s Adam Jarcysk says it is unlikely the court will rule in his favor.

“The Prabowo camp’s decision to begin saber-rattling now about launching a pansus in October suggests that the Constitutional Court is likely to support Jokowi in its ruling later this month,” says Adam Jarczyk, FSG’s Asia Pacific Practice Leader.


FSG clients can stay up to date with analyst commentary on the latest emerging markets headlines on the client portal. Not a client?  Contact us for more information.

Emerging Market View: What Our Analysts Are Reading

EM View

On Thursday, EU diplomats will consider increased Russian sanctions. The sanctions include a proposal to ban all Europeans from purchasing any new debt or stock issued by Russia’s largest banks, according to the Financial Times, and FSG’s Head of Research for EMEA says it’s time for multinationals to make contingency plans.

“If some or all of the proposed measures are approved by the EU, MNCs operating in Russia will be significantly affected. Executives should build a targeted contingency plan for their Russia operations to prepare. Read FSG’s report Protecting Your Russia Business for analysis and suggested actions for building a contingency plan in the case of further sanctions against Russia.” – Martina Bozadzhieva

In Southeast Asia, a rising middle class and strong demand for more expensive foods has led to increased investment by Japanese food companies, mirroring FSG predictions on the rising competition from multi-ASEAN corporations.

“The increasing sophistication of regional firms and growing demand is attracting several global players to partner/acquire ASEAN firms. MNCs should explore all types of partnerships with such regional firms; they understand the market better, tend to have deeper distribution networks, and lower-cost operations.” – Shishir Sinha, FSG’s Senior Analyst for Asia Pacific after reading this WSJ article.

Good news for Argentina this week. Last Friday, the Latin American country struck a deal to borrow $7.5 billion from China for power and rail projects, according to Reuters.

“Argentina has reached a deal with China to borrow US$ 7.5 billion to finance energy and railway projects, and the two countries have also signed a three year, US$ 11 billion currency swap, in which Argentina will receive Chinese yuan that it can then use to finance Chinese imports or exchange to USD to bolster reserves. This news is welcome given Argentina’s balance of payment concerns.” – Christine Herlihy, FSG’s Senior Analyst for Latin America.

FSG clients can keep up to date with the latest emerging markets headlines and exclusive analyst commentary on the client portal.

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.

2014 will be a pivotal year for Brazil

Multinationals are struggling to assess whether and when Brazil will return to high-growth after three years of disappointing economic performance, and more specifically, they want to understand how 2014 – a pivotal year with the World Cup and the October presidential elections – will affect their businesses in the near future.

FSG recently published a report specifically addressing most of these questions. The report is intended to equip senior executives with the knowledge to:

  • Understand Brazil’s new economic reality: Over the last decade, Brazil’s ability to grow beyond 2–3% was driven by internal and external growth accelerators, which began to subside in 2011. These accelerators were: workforce growth; a massive credit expansion; a commodity super cycle driven by China’s demand for commodities; and high levels of capital flows into the country. A return to higher growth will depend on the government’s ability to pass key structural reforms, and implement effective policies that lift gross fixed investment and productivity levels in the economy. Unfortunately, 2014’s calendar will not be conducive to any major reforms or investments, and the likelihood of significant reforms emerging over the medium term will depend heavily on which candidate wins the elections in October.

Brazil Outlook and long range scenarios

  • Set expectations for 2014’s economic performance: Brazil is set to muddle through 2014 with the help of government spending and decent private consumption. However, investment will remain muted due to higher uncertainty about where the economy is headed. While FSG believes that Brazil is likely to grow around 2% in 2014, there are two major downside risks to our forecast: 1) persistent high inflation that forces the central bank to continue raising interest rates and limit credit growth; and 2) a rapid deterioration of fiscal accounts that prompts the government to reduce spending, raise taxes, and delay infrastructure investments, in order to avoid a sovereign risk downgrade by credit agencies.
  • Monitor signposts for the October presidential elections: Although FSG believes Rousseff remains the favorite to win in October’s elections, economic turmoil and social unrest during the World Cup could rapidly erode her popularity down to July 2013 levels, when Brazilians took the streets to protest against widespread corruption and the poor quality of public services. If momentum for change were to build, we could see Rousseff as more vulnerable to the Eduardo Campos-Marina Silva alliance (PSB-Rede) than to Aecio Neves (PSDB), despite Neves’s current strength in the polls.
  • Assess economic growth prospects for 2015 and beyond: Regardless of who wins the elections, 2015 will be a tough year of adjustment, as Brazil tries to regain credibility in its macroeconomic framework by restoring its fiscal balance and reducing transfers from the treasury to public banks. Over the long term, a return to high growth is less likely with Rousseff than with Campos, as we see Rousseff’s PT as less prone to undertake the reforms and policies that the country needs to unlock investment growth and produce productivity gains.

In the report we provide a detailed analysis of the key signposts to monitor ahead of the October presidential elections, as well as a comparison of the policy agendas of Rouseff and Campos, and their likely impact to multinationals in different sectors. FSG clients can access the full report here.

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3 Mistakes B2B Companies must Avoid for Ecommerce Success in Latin America

Ecommerce in Latin America

The consumer ecommerce channel in Latin America is experiencing rapid growth, fueled by increases in internet connectivity, the growth of the middle class, and the proliferation of smartphones that allow consumers to make purchases from anywhere. In response to growing consumer demand, companies such as MercadoLibre, eBay’s Latin American partner and one of the leading ecommerce sites in the region, have increased their reach while enjoying steady growth in sales. While the consumer oriented ecommerce segment is a field crowded with established competitors offering a variety of purchasing and payment options, B2B sales through the online channel remain relatively underdeveloped.

With no equivalent of MercadoLibre in the B2B sector, companies that act now stand to capture significant untapped market share by using ecommerce to access SMB customers that were previously deemed too difficult to reach or too expensive to serve. A recent study conducted for a client by Frontier Strategy Group’s Bespoke Research team confirmed the market opportunity for B2B sales to SMB customers in Colombia through the ecommerce channel and also identified three common mistakes avoid:

Mistake #1: Taking a One-Size-Fits-All Approach

Not all SMB customers are the same. FSG’s study focused on a variety of different types of businesses, revealing key differences in purchasing frequency and expenditure, and different priorities for each segment. While fast and reliable delivery of goods and high quality customer service were important for some respondents, other respondents were more concerned with convenience and cost savings. In order to successfully meet the needs of segments with highly differentiated priorities, B2B companies must ensure that an ecommerce site is adaptable enough to meet the needs of different segments, offering flexible payment and delivery options, with customer service that is responsive the unique needs of a diverse range of customers.

Mistake #2: Lack of Payment Options

“Usually we pay all suppliers at the end of the month by checks. We have credit for one month or 35 days. We do not pay immediately after purchase. Here, bills expire in one month and then they are cancelled. Sometimes, we do not have all the money to pay suppliers at the beginning of the month, but, at month end, we have money from everything that was sold throughout the month.”
—Interview Respondent

One of the key inhibitors of online purchasing among SMB customers is the perception that online platforms do not offer the same payment options as the local stores and distributors that these businesses typically purchase from. Many of the business respondents interviewed for FSG’s study were accustomed to making purchases on 30-day trade credit, paid at the end of each month via check, and worried that this payment option would not be available online. B2B companies seeking to reach these customers through the ecommerce channel must offer more flexible payment options, including the ability to purchase products on credit and pay at the end of each month.

Mistake #3: Failure to Minimize Customer-Perceived Risks

“The only objection I would have is around security, as the seller could be a fictitious company and there is the risk of being conned.”
— Interview Respondent

“Goods that come by boat sometimes are delayed or damaged; the service is not good.”
— Interview Respondent

For B2B customers in Latin America, payment security is paramount. FSG’s study found that concerns over security were one of the most commonly cited inhibitors of ecommerce adoption. Though many respondents reported making personal purchases online, these same respondents were concerned about the security risks involved in making business purchases through unfamiliar online portals. Ecommerce companies must take extra steps to reassure B2B customers that their personal and payment information is secure on online platforms. Because B2B customers are more trusting of recognized names with a proven track record, B2B companies that can establish themselves early on as a secure ecommerce portal will gain a significant advantage in the long run.

B2B respondents also reported concerns over the quality of products purchased online. These respondents expressed reservations about purchasing products without being able to judge product quality in person, and were also concerned that products shipped from long distances could become lost or damaged. B2B ecommerce companies can minimize this perceived risk through a comprehensive return policy that reimburses customers for products that are damaged or unsatisfactory.

Click here for more on FSG’s Bespoke Research offerings.

Chilean Elections: Anticipated Bachelet Victory May Lead to Fiscal Reform

Chilean Elections

With Chilean presidential elections now little more than a week away, executives are weighing the implications of an anticipated Bachelet victory on fiscal and energy policy. Former President Bachelet has indicated that if she is re-elected, she will prioritize fiscal reform to generate the revenue needed to increase funding for education, a key part of her campaign platform.

In our view, the Chilean business environment will remain favorable, although multinationals should be planning for higher corporate tax rates and the gradual elimination of the FUT (taxable profit fund), with potentially negative implications for margins and investment on the part of B2B customers. Input costs, including energy and labor, are likely to remain high due to environmentally-related social unrest and historically low unemployment, respectively.

Exchange rate volatility also remains a concern for companies importing into Chile. During the second half of 2013, the Chilean peso has depreciated due to a combination of weaker global demand for copper and expectations about the near-term trajectory of US monetary policy. As the pace of Chinese investment moderates and the US moves to taper quantitative easing, the peso is expected to weaken against the dollar in comparison to its performance in recent years.

Exchange Rate Volatility

Memo to EMEA and LATAM regional heads: time to pick up the phone and chat

Struggling to Combat Slowing Growth and Rising Costs in Key BRICS Markets?

A conversation with your regional counterpart in EMEA, LATAM, or APAC can help you understand the common structural factors driving lackluster growth and help you re-set corporate expectations for growth in 2014

BRIC deceleration

2013 has been a difficult year for the BRICs—economic growth has decelerated across the board due to the confluence of external headwinds and domestic inefficiencies, while the political will to push for necessary structural reforms has proven elusive.

For emerging markets executives seeking to respond to slowing growth in key BRICS markets, cross-regional conversations can be valuable for issue diagnosis and strategy development. The premise of the argument here is a simple one: common problems can and ought to be identified, so that viable strategies for driving profitable growth given less favorable medium-term prospects for the BRICs can be replicated and applied across regions.

I’ve been ruminating about Brazil’s slowdown and potential for recuperation in 2014 for several quarters now, while my EMEA colleague, Martina Bozadzhieva, has been doing the same with respect to Russia.  However,  it wasn’t until we had an opportunity to sit down together and discuss the dynamics driving Brazil and Russia that we learned how much these two seemingly disparate markets have in common.

Listen to our podcast below for a quick recap of the structural factors driving lackluster growth in Brazil and Russia, and get a cross-regional perspective on strategies for managing corporate expectations and improving bottom-line performance across the BRICS.

Download the podcast or access the entire FSG iTunes library here