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.

Volatility in Venezuela: Using Scenario-Based Forecasts in Strategic Plans

As economic conditions worsen and social unrest continues, multinationals are facing significant challenges in planning ahead for their Venezuelan operations. With both the short-term and long-term outlook for Venezuela unclear, and with government policies lacking coherence and credibility in the face of growing problems, multinationals are increasingly using scenario-based forecasting as they develop their strategic plans for Venezuela.

FSG has recently released for its clients a set of comprehensive scenarios for Venezuela, focusing on the economic and political dimensions that will determine how economic indicators and the business environment will evolve as Venezuela continues to deal with its enormous challenges. The scenarios that we have developed include the following:

Venezuela Economic Scenario Planning Table

Along with these scenarios, we look at the potential for deteriorating economic conditions to lead to greater political instability, which would increase the prospects for regime change, for good or ill.

For FSG clients interested in learning more, the full report is available here.

Multinationals focusing on long-term scenarios for Venezuela

Multinationals are increasingly reevaluating their commitment to Venezuela given that most companies are facing deteriorating economic conditions and a worsening operating environment, regardless of whether they have a direct sales presence or are working exclusively through distributors. While conditions have been difficult over the last 18 months, due to chronic shortages of dollars and delayed payments from distributors and the government, the long-term outlook for Venezuela also remains shrouded in uncertainty.

With that in mind, FSG has built up a series of medium-to-long term scenarios that companies should be taking into account as they develop both their annual operating plans and long-term strategies for the market. These scenarios, in order of likelihood, are as follows:

  1. Gradual economic adjustment is largely ineffective: The government is ineffective at managing a gradual economic adjustment, with the triple-tier exchange rate system providing too few dollars, and price controls continuing to foster widespread shortages. The economy oscillates between small contractions and weak recoveries, with inflation remaining above 40%
  2. Gradual economic adjustment is successful: The government successfully manages an economic adjustment over the next few years, with a covert devaluation and slow contraction of stimulus bringing inflation back to pre-crisis levels and GDP growth stabilizing around 2%-3%
  3. Deepening the revolution: The government moves toward radicalization as attempts to stabilize the economy fail. The government centralizes all imports, suspends dollar debt payments to private sector companies not selling to the state, and pursues a series of even more restrictive and anti-private sector policies that makes a long-term presence for multinationals in Venezuela unviable
  4. Shock therapy:  The least likely scenario, the government moves to unify exchange rate system at a much lower exchange rate for the Bolivar, followed by a contraction in government spending and higher interest rates by the Central Bank of Venezuela, leading to a sharp recession over the short-term. The government follows by taking a more conciliatory stance toward the private sector to incentivize investment

FSG is closely monitoring developments in Venezuela and has resources to support our clients develop both short-term contingency plans as well as long-term scenarios for Venezuela and other emerging markets. FSG clients are encouraged to contact their account manager for more information.

Multinationals Are Reconsidering their Operating Models in Venezuela

As Venezuela gears up for municipal elections in December, which are likely to be viewed as a referendum on the government, the operating environment has become increasingly difficult for multinational companies. Venezuela has become a leading source of concern for LATAM executives over the last year, with unpredictable policy-making leaving companies without a clear outlook for the market. As such, the executives we work with are facing immense pressure to defend their current operating models in Venezuela given the market’s strict capital and import controls, rising inflation, price controls, product shortages, and currency volatility.

fsg Client Survey

FSG recently published a report specifically addressing the business environment in Venezuela, and how companies are navigating the distinct challenges offered by the Venezuelan market. The report arms senior executives with the knowledge to:

Anticipate how Venezuela’s business environment is likely to evolve: Companies have been struggling to navigate Venezuela’s ever-changing operating environment without a clear vision of the country’s short, medium and long-term trajectory. With the government proving unable to successfully shift the economy toward a more sustainable path, companies are looking for signposts to monitor to understand the direction of government policies, particularly relating to the exchange rate and inflation

Make the case for maintaining a local presence: Executives need to reassess and communicate the long-term potential of Venezuela in order to justify their commitment over the near-to-medium term. LATAM executives who restate the case for Venezuela by focusing on the consumer spending and government spending opportunities, as well as the long-term prospects for a more business-friendly government will see greater success

Navigate foreign exchange controls: The inability to access foreign exchange is not only hampering day-to-day operations, but in some cases, is calling the viability of Venezuelan operations into question. Companies need to understand what their alternatives for accessing foreign currency are, and what strategies other companies are pursuing to put their trapped cash to good use

Protect assets against currency devaluation and inflation: High inflation and constant foreign exchange volatility has left many companies trying to protect the value of their assets in the market. Companies are exploring front-loading capital expenditures and buying commercial real estate, but do not have a clear way of differentiating between what investments are likely to be safest over the medium to long term

With the Venezuelan government showing no signs of reversing its interventionist policies over the near term, multinationals serious about keeping maintaining a presence in the market will have to successfully maneuver through these distinct operational challenges.

Multinationals Are Reconsidering Their Operating Models in Venezuela

Venezuela has emerged as one of the most significant downside risks to 2013 performance for multinationals operating in Latin America. A devaluation in February and prolonged dollar shortages have not only hammered the value of Venezuelan business units, but in many instances have  rendered their operating models unfeasible.

While a minority of FSG clients are considering exiting Venezuela, some are asking whether a change in their operating model could position them to capture more opportunities over the medium-to-long term, especially given Venezuela’s recent history as one of the most profitable consumer markets in Latin America. Indeed, some companies, particularly in the consumer goods and healthcare space have been considering increasing their direct presence in the market, including opening up local offices with marketing and sales teams in order to capitalize on the struggles of competitors. The benefits of establishing a local office include allowing distributors to pay multinationals in local currency,  to better capture local opportunities, through stronger direct management of distributors or through a more robust direct presence.

For companies who already have a long established presence in Venezuela, the biggest challenge is how to best shield their local revenues from additional devaluation over the next twelve months. Meanwhile, the inability to repatriate currency after the shutdown of SITME and the inoperability of SICAD has only further compounded the situation. As such, companies such as Telefonica and Kimberly-Clark have decided to increase their capital expenditures over the short term and invest in their local production facilities, thus shielding cash assets from further devaluation while putting them to productive use. Other companies have considered investing in commercial real estate or other fixed assets only marginally related to their business models.

Regardless of their current operating model, multinationals should be cautious about the timing of any change in their strategy in Venezuela. The economic and business environment in the country is as likely as not to worsen over the next six months, and the Venezuelan government has thus far failed to pursue a coherent strategy to returning the economy to a period of relative stability, let alone high growth. Prospects for political and economic destabilization remain high, and companies should continue to prioritize contingency planning over growth strategies over the coming months.

Hugo Chavez’s Death: Considerations for Multinationals

According to Venezuela’s vice president, Nicolas Maduro, Hugo Chavez died at 4:25 PM, local time, on Tuesday from complications related to cancer.

FSG has been predicting for some time that it was unlikely that Hugo Chavez would be able return to lead the country, as his health has been in serious decline since he underwent his fourth cancer-related surgery in December.

While there might be a temptation for multinationals with operations in Venezuela to greet this news with cautious optimism, FSG stresses that executives should focus on managing expectations for any material change in the operating environment over the near-term.

The government is constitutionally mandated to hold presidential elections within 30 days; however, there is a possibility that this requirement could be ignored, with elections falling as far out as June.

Regardless of the timing of the elections, the most likely candidates will be Vice President Nicolas Maduro and Governor Henrique Capriles. FSG expects Maduro to win a clear electoral mandate due to a strong sympathy vote as well as the relative weakness of the opposition, which is still suffering the after effects of two big electoral defeats at the end of 2012. Recent poll results casting Maduro as a legitimate heir to Chavismo bear this prediction out.

Given Maduro’s ideological affinity for the key social tenets of Chavismo, as well as the fact that most legislators will not be up for reelection until 2015, it is highly unlikely that multinationals will see any major policy adjustments over the near-to-medium term. The one exception to this is a probable second devaluation sometime after the elections, along with the establishment of a new parallel exchange rate system to replace SITME.

The long-term picture is somewhat more optimistic as it is unlikely that Chavismo will hold together as a cohesive political force without a strong and charismatic leader at the helm. As such, there is a strong possibility that the opposition will slowly gain strength, leading to a modest opening of the economy to investment over the next few years. While this would be a welcome scenario for multinationals, it is also one fraught with a good deal of risk if the fragmentation of Chavismo leads to social unrest and instability.


Multinationals in Venezuela Should Prepare for a Slowdown in 2013

Post by, Antonio Martinez & Christine Herlihy

On October 7th, Venezuelan president Hugo Chávez was re-elected with 54% of the vote. While opposition candidate Henrique Capriles did manage to unite Venezuela’s historically fragmented opposition and garner a significant percentage of the vote, Chávez’s populist policies and mass-mobilization tactics ultimately allowed him to win a sizable victory. What this means in real terms is that Chávez and his macroeconomic tools of choice—namely, price controls, capital controls, expropriation, and populist social programs— will be around for another six years, barring health-related complications. As if bellicose rhetoric and a tendency to expropriate at will while belittling executives and political leaders alike on national television weren’t enough to look forward to, consider this: in addition to calling the election for Chávez, Frontier Strategy Group also expects significant currency devaluation sometime in early 2013 as well as a slowdown in government spending, with overwhelmingly negative implications for consumer spending.

This degree of pessimism may surprise many executives—after all, among FSG’s client base, especially among consumer goods companies,  2012 has been an extremely strong year in terms of revenue growth. However, the combination of government policies which have helped facilitate this success by bolstering consumer purchasing power through relatively low inflation, loose credit conditions, and robust government spending, are unsustainable over the medium-term. It is important to emphasize the extent to which the ‘health’ of the Venezuelan economy in 2012 has been driven by political, rather than macroeconomic fundamentals: not only is the current lending rate negative relative to inflation, but high levels of government spending are unsustainable given Venezuela’s growing debt burden and inability to capitalize on higher oil prices due to pre-existing oil-for-loans agreements with the Chinese.

Venezuela’s monetary policy has depleted foreign exchange reserves, and given that a large portion of the country’s outstanding loans come due in early 2013, FSG expects a devaluation of at least 32%, which will most likely take place after regional elections and the Christmas holidays, sometime between January and March 2013. Furthermore, as the spread between Venezuela’s official ‘non-essential’ exchange rate and the black market exchange rate continues to grow, there’s an increasing chance that the devaluation may be as high as 55-60%.

This devaluation will have a tremendously negative impact on consumer purchasing power, and CPG companies will be especially hard hit. Healthcare companies and luxury goods manufacturers are likely to continue bearing the brunt of price controls, and the risk of expropriation looms as large as ever. Of particular note—time is of the essence:  multinationals have long struggled to access dollars and repatriate their profits in Venezuela, and these challenges will only increase in the wake of both an expected devaluation, and a government dealing with severe debt obligations. Multinationals need to plan ahead for a rocky 2013 in Venezuela.

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.

Latin America – Emerging Markets Insights – June 2012


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