Opinion: The 10 biggest Latin America market entry blunders
Over the last 25 years, Americas Market Intelligence senior consultants have led more than 2,000 client engagements in Latin America. Along the way, we have witnessed many a blunder when it comes to entering markets in Latin America. To help companies learn from the mistakes we’ve observed while conducting market research, competitive intelligence and analysing Latin American risk, we created a top 10 list of market entry mistakes. As Latin America returns to growth in 2017, we hope these market entry tips will prove useful.
#1: Entering the Market at the Top of the Cycle
Most companies enter new markets around the world once they show a 3+ year positive track record. Latin America is inherently cyclical because its citizens and companies squirrel away half their savings outside the region, leaving them chronically short of capital and reliant on international loans, repayable in dollars, which they service through the export of volatility priced commodities. The average boom cycle in Latin America lasts 4-7 years. Waiting halfway through the cycle before investing cuts your returns in half. When a LatAm country enters a down-cycle, voters tend to eschew populism and embrace fiscally prudent policies, signalling to investors to start buying assets. The benefits of early cycle entry are many
a) Assets are cheaper and their owners more malleable to ceding control, financial and managerial, an absolute necessity to any successful acquisition.
b) Managerial talent is cheaper and available. Experienced, multi-lingual managers and engineers in Latin America are scarce and salaries quickly climb later in the business cycle.
c) Clients, partners, and vendors are all more attentive, flexible, and interested when you arrive in a downtime versus a boom period.
d) Negotiating optimal investment terms with the host government will prove much easier in an economic tough spot than when you have to cue to meet with mid-tier bureaucrats in a growing economy.
#2: Starting in Brazil or Mexico.
Because They Are the Biggest Markets Most companies first enter Latin America through its largest markets, Mexico or Brazil. That may make sense for some products or services whose demand is only yet developed in Latin America’s largest, most advanced economies. But Latin America’s largest countries are costly and complicated pilot markets for a regional entry strategy. Brazil is attractive because your competition there may be weak or inefficient…but Brazil is also Latin America’s most complicated, bureaucratic business environment with onerous local regulations, a myriad of taxes to report, costly labour regulations and social taxes, a high cost of capital, an expensive real-estate environment, poor infrastructure, crippling traffic and a conflictive legal environment. All together, these impediments are often referred to as the “custo brasileiro”.
Most foreign entries take three times longer to reach positive returns in Brazil versus any other Latin American market. Mexico is far easier to enter as a market than Brazil, but as a result, the competition is a lot fiercer. Furthermore, local competitors, who after 25 years of NAFTA free trade, are consolidated and lean, too often operate in direct violation of Mexican labour and tax laws, giving them a leg up over multinationals that tend to be held to a higher standard. In spite of boasting a modern entrepreneurial class, Mexico’s political class remains stuck in an age of bloated corruption. While most foreign firms refuse to play, Mexican firms may be more comfortable navigating the corrupted contractual arrangements of government procurement and permitting. The smarter move may to be cut your teeth in a mid-size or even small Latin American market, such as Colombia, Peru, Panama, or Guatemala or even Argentina where the learning curve is less costly, competition remains weak but red tape is not too onerous. On the million dollar question of where to start your Latin American entrée, we coach our clients by applying an opportunity benchmark study, tailored to their needs.
#3: Feeling Obliged to Joint-Venture or Buy a Local Company
There are very few places left in Latin America where there is a regulatory obligation to enter the market via a joint-venture (J/V). Most governments have given up on protecting strategic industries from foreign investors. So why do companies continue to subject themselves to the pain and hardship of a J/V when entering LatAm markets? The truth is that some Latin American companies, originally targeted as acquisition targets somehow convince their suitors to structure the deal as a J/V, normally to keep the founding family employed at the new firm—big mistake. Cross-border joint ventures rarely work anywhere in the world due to the clash of cultures asked to share power and decision making. Acquisitions should be made outright or at least with controlling interest.
Furthermore, it is imperative for the majority buyer to exercise his right to hire and fire all levels of personnel. Founding family members, with a few notable exceptions (usually in sales), make poor employees. They are presumptuous, rebellious, usually overpaid and often under-qualified. They should be quickly replaced by locals hired on merit and forced into a non-compete in exchange for the sale of their shares. What sounds like vindictive advice is only prudent. Family owned companies in Latin America are sold precisely because their reliance on nepotistic hiring practices (hiring those they trust rather than the most qualified) prevents them from growing and evolving. It is important to root out a culture of nepotism and replace it with meritocracy.
By doing so, mid-level employees, who worked for years under the yoke of family and friends of the founder, will finally fulfil their potential. Purchasing a controlling interest in a company provides a jump start on capturing market share, but in Latin America, it comes with huge legal costs and regulatory obligations, particularly those embedded in labour laws. Seniority is protected in most jurisdictions, such that laying off an employee of 20 years can cost 1-4 years in severance pay. Even after calculating for the hard costs of acquisition, there are the softer costs of restructuring and integration as the buyer tries to impose its own corporate culture over its acquisition. There are many companies in Latin America worth buying but in a lot of product categories, the multinational brand entering the market already enjoys cache and name recognition. Scaling up operations can be done by outsourcing local manufacturing and relying on 3rd parties to execute sales execution, neither of which requires purchasing a company. Going alone may be the simplest path, but does require excellent local support from professional firms as well as layers of support from the head or regional office.
#4: Awarding Market Exclusivity to a Single Distributor or Agent
Most Latin American markets are highly centralised, with anywhere from 60-90% of wholesale activity centred in the capital city. However, three countries are not structured as such: Brazil, Colombia and Mexico. In those markets, it is almost impossible to find any rep, agent, wholesaler or distributor with true national coverage and reach—though they might insist otherwise when you meet them at a trade show. If you are serious about achieving market penetration in these markets, then you should consider contracting multiple resellers in the market, divided by region, or sales channel or client category. Where exclusivity is provided, be within the boundaries of a country, region or otherwise, it should be tied to minimal sales goals. No product can afford to wait three years to finally determine that the local distributor was poorly chosen. Nothing inspires performance like competition. If you have multiple resellers in a market and they are aware of one another’s performance, then your likelihood of success is high. If you are at the mercy of one distributor, your probability of under-performance is worrisomely high. Latin American markets represent 10% of the world’s GDP and roughly the same portion of population. You should expect the region to capture no less an amount of your company’s global sales.
#5: Neglecting to Visit the Market on a Regular Basis
Many global consumer brands in niche products neglect Latin America because they lack the international management bandwidth to properly oversee their sales efforts in the region. International sales managers who are focused on North America, Europe, China and elsewhere are almost relieved when a Brazilian or Mexican distributor shows up offering to rep their product. After a flurry of visits to the market during the due diligence and start-up phases, Latin American markets are often ignored, particularly when left in the hands of sophisticated local distributors. National distributors—particularly in Brazil and Argentina—are adept at defending their autonomy and at discouraging visits from headquarters. Ignore their charms and visit the market regularly. Local stocking distributors are known to switch branding labels to their own, sell outside their boundaries, price the product in violation of global guidelines, bribe customs officials to import shipments—all manner of activities that jeopardise the integrity of your brand. Perform regular market audits, including mystery shopping of your product or service in each major Latin American market. Be sure to build penalties into your distribution agreements against those actions that threaten your brand.
#6: Sending One of Your Own to be Country Manager
Exercising control over your subsidiary or sales office in an emerging market is a sensible instinct to employ, but the country manager is the wrong instrument of that control. In Latin America, like most emerging markets, the country manager is the tip of your marketing, PR and government relations spear. He or she should be local or someone who has lived in the local market for years, speaks not only the local language but is sensitive to local customs and enjoys personal relationships with powerful local players in business and government. The country manager is your top sales person, your brand spokesperson, your government relations manager, an inspiration to employees and your number-one problem solver. All of those roles rely more on local knowledge than corporate legacy. It takes far less time to indoctrinate a local hire as to your corporate culture than it takes for one of your own company veterans to learn the customs and develop contacts in a local market. The ideal vessel of corporate control in your Latin American subsidiary is the CFO, traditionally the 2nd strongest C-suite position in Latin corporate culture. Not only does the CFO oversee budgets but he or she also leads strategic planning, and often compliance issues as well. The CFO is the most logical interlocutor with headquarters on the most sensitive issues that can undermine your overseas operations.
#7: Refusing to Extend Credit to LAC Importers, Customers and Suppliers
American and Canadian firms are notoriously conservative when it comes to issuing credit to customers overseas, particularly in emerging markets like Latin America where the costs and bother of collecting debt are onerous. European firms are somehow less encumbered by the practice. Even when sourcing from emerging markets, multinationals make the mistake of setting painful payment terms of 60-90 days to their under financed vendors. Credit is costly and scarce in Latin America, in spite of all the recent strides made in the region’s banking systems. Local brands and European suppliers understand that Latin American distributors and importers simply cannot finance enough inventory to serve their potential demand. Holding back credit limits the ability of your product to penetrate the market.
Failing to extend credit for the sale of your service may effectively price you out of the market in a region where consumers and businesses live pay period to pay period. Case in point is Telmex, the Mexican telecom giant, who with 15 million landline customers back in 2000 began selling computer+modem+ISP service packages for $60 USD per month over a five-year period, realising a profit margin twice that of traditional computer value-added resellers. Within six months, Telmex became the largest computer reseller in Mexico. They took no sales away from competitors. Instead, they created a new market of buyers who previously had no access to credit and thus could not purchase a large ticket item like a computer. The same Telmex company knows how to bank its own vendors. Its default payment terms are 90 days but they will pay vendors within 72 hours in return for hefty discounts of 2-3% per month, i.e. 6-9% discount versus normal 90 day payment terms. For Mexican distributors or small foreign suppliers, immediate payment may be worth the cost. For Telmex, which enjoys borrowing rates lower than the federal government of Mexico, their vendor credit program saves them millions per year.
Credit is always paired with risk but in Latin America, the rewards of extending credit, when priced as high as the market will bear, far outweigh its risks. Credit policy should not be left to the CFO alone to decide. In Latin America, it is as much a sales and marketing decision as it is a financial risk decision. When considering the option of extending credit, invest in both the reputational due diligence of your customer as well as understanding the market price that your credit can earn your company through market research.
#8: Not Selling through E-Commerce
Channels in Latin America E-commerce is a well-oiled machine in the American market. The same cannot be said in Latin America, especially cross-border product e-commerce. Merchants in the US, Europe and Asia frequently receive requests, if not orders from Latin American customers. Many dread such enquiries because the fulfilment of a single purchase export to Latin America is a logistical nightmare. In one mystery shopping exercise AMI carried out, single product shipments to some two dozen markets around the world—including emerging markets in EMEA and APAC—revealed that logistics hurdles were greatest when trying to penetrate Latin American markets, including delivery delays, lost product, and bribery demands from customs officials. Beyond logistics is the challenge of payments. Only a portion of Latin American-issued credit cards are set up for cross border purchases.
Local banks often reject international ecommerce purchase for fear of fraud. Foreign merchants often don’t accept any local credit cards from Latin American markets because their ecommerce platform lacks a local payment gateway relationship. AMI recently published a white paper on this very issue. E-commerce is not easy but will grow to become an important channel in Latin America. There are 1/6th the number of brick and mortar retail square meters per capita in Latin America compared to the US. For people living outside the largest 1-2 cities in a Latin American country, product choice is limited and niche products are simply unavailable. E-commerce will be the channel that serves those people as well as the growing middle class who lacks the time to battle epic traffic levels in order to buy what they seek in a physical store. Ecommerce fulfilment is growing more sophisticated, reliable and cheaper in Mexico, Brazil, Chile and Argentina. Other domestic markets will soon follow. Cross-border ecommerce will take longer to improve but already innovative solutions are allowing consumers and small business to source product overseas via e-commerce in Brazil, Mexico, Chile and Central America.
#9: Choosing to Ignore Latin America’s Massive Grey Markets
The 800-pound gorilla in the room for product managers trying to build a marketing strategy in Latin America is the influence of the grey market, defined as a channel through which legitimately manufactured products are illegally imported (evading tariffs) and illegally sold to customers (evading VATs). In every major Latin American city, there are multiple grey markets. Some look like large street fairs, others are housed in physical stores – all rely on cash to transact. In some product categories, the grey market might represent 60+ % of national sales—the Peruvian athletic shoe market, for instance.
Often dismissed by multinationals, grey markets can be surprisingly sophisticated, offering and delivering money back guarantees for a limited warranty period, even extending credit to well-known customers. Another form of grey market sells pirated products, most notably intellectual property goods like software, music and films, but also rip-offs of luxury brands. As a former LAC General Manager for Levis Straus once quipped at a regional conference, “Latin America may not yet be a world-class market but one can certainly realize world-class losses there”. Expect little or no enforcement support from host governments. Grey marketers have cleverly woven themselves into the institutionalized corruption of customs and immigration, always one of the least transparent areas of government. Their political might give grey markets a degree of legitimacy and formal players must take heed. Pricing policies for product distribution need to recognize the competitive pressures of the grey market. Latin Americans prefer to buy from formal channels but will only pay so much of a premium over the grey market alternative. Another advantage of grey markets is market reach. Clorets, one of the top selling chewing gum brands in Mexico, is almost universally sold via grey markets, using hundreds of thousands of street peddlers to sell the gum. Any serious analysis of a market’s potential along with competitive threats must include the relevant grey markets.
#10: Exiting Markets in Tough Times
Latin American importers, reps and distributors frequently complain that when the going gets tough, the Americans pack up shop and abandon the market. Leaving a market sends a traumatic signal to customers and suppliers. Unless you are certain of leaving a market for good, it is far wiser to trim down to a minimum, maintain some brand presence and continue to service existing customers as cost effectively as possible. Abandoned customers do not forget and may not come back when you decide you want to reopen a market. Additionally, the cost of market entry and exit is such that once in, it is cheaper to maintain a holding pattern than pull up stakes. Last but not least, keeping a skeleton staff employed will provide the necessary platform upon which to grow quickly when conditions return.
The above article was written by John Price of Americas Market Intelligence and was published on the company’s website on 5 December, 2016)