30 Apr 2001  Research & Ideas

Big Companies, Big Opportunities—Big Questions

Markets that were once protected in Latin America are suddenly open to competition from all sides. For large companies, this new playing field presents wonderful opportunities—but great risks, too.

 

Opportunities abound for large companies looking to expand into Latin America. But risks remain, and the development of better capital markets is needed to attract more investment, according to panelists at the "Growth Opportunities for Established Companies" seminar.

Andrés Obergón Santo Domingo, managing director of O&V Associates, said established Latin American companies face a situation in which their markets are no longer protected by national interests and suddenly face competition on all sides.

photo of Andres Obregon Santo Domingo
Andres Obregon Santo Domingo

"There's going to be a complete change-over for corporate groups in Latin America from working within protected economies and industries to being completely open to the global economy," he said. "We're going to have to be much more entrepreneurial than we were in the past. And we're going to have to be venture capitalists and portfolio managers and we're going to have to leverage our local knowledge with our partners."

Cash not on hand

But financial partners are becoming increasingly difficult to find, particularly after the devaluations of the last several years, said Alvaro Rodriguez Arregui (HBS MBA '95), chief financial officer of Grupo Elektra, Latin America's leading specialty retailer and consumer finance company.

Global banks are decreasing their positions in Latin America. Last year alone, he said, major banks reduced investments in Latin America by $150 billion.

"We're not being able to attract capital from the outside. It's been coming down tremendously," he said. "And capital is very expensive, on average, the spread is 700 basis points," he said.

Investors have also grown weary of putting money into supposedly quickly emerging countries that in the end don't produce returns. "Investing in Latin America, or in emerging markets, has simply not paid off," he said. Investors are also jittery over a lack of monitoring and transparency of public companies and the fact that in many countries, the rights of minority investors aren't adequately protected, scaring funds away from anything but a majority position, Rodriguez said.

Illiquid markets are also a turn-off for institutional investors. Only thirty-three companies in Latin America meet the minimum $5 million in daily trading volume most fund managers want in order to invest. Only eight Mexican companies reach that level of trading volume.

Building a consumer-products empire

But the negatives haven't scared off consumer products giant Procter & Gamble. Since 1987, the company's Latin American sales have grown by 4.5 times to $2.8 billion. Profit has increased fifteen-fold, according to Fernando Aguirre, president of P&G's global feminine care division.

Most companies believe that in times of crisis you have to drop your costs. That typically leads to erosion of consumer value because you actually erode your product performance. Well, we did just the opposite.
— Fernando Aguirre, Procter & Gamble

Aguirre said the company followed several guiding principles in setting its Latin American strategy. It focused on strong global and regional brands, on global product development efforts, and also followed a regional product supply strategy. The company carefully built relationships with regional and local customers.

Still, P&G has seen its share of tough times in Latin America. For example, the company had surpassed $1 billion in sales in Mexico in 1993. But after the currency devaluation in 1994, it lost $400 million in sales, and didn't get back to $1 billion until four years later.

Rather than retreat after the devaluation, however, the company became more aggressive. P&G raised its prices significantly to recover its devaluation losses, introduced new brands and began competing in new categories, Aguirre said. One result: In Mexico, the company has 40 percent to 70 percent market shares in the categories it competes in.

"Most companies believe that in times of crisis you have to drop your costs. That typically leads to erosion of consumer value because you actually erode your product performance. Well, we did just the opposite. We invested more in the product," he said. "We gave the consumer more value, and we priced for it, and by and large, the consumer actually paid for it."

One other important lesson P&G learned in Latin America is that strategies have to be tailored to each location. "We have made major mistakes by thinking that all our plans can look the same everywhere, that all our brands can feel the same everywhere, and we have made huge mistakes in that regard," he said.

Changes brewing

AmBev, one of the world's largest beer producers, learned the lesson of localization the hard way.

When the company began selling one of its beer brands in Argentina five years ago, executives believed success lay in replicating the methods that had led to a strong business in Brazil, said sales officer Carlo Alves de Brito.

"In the first year [in Argentina], we made a lot of wrong investments in the marketplace," de Brito said. For example, his company tried to sell the standard 600-milliliter bottle it sold in Brazil rather than the one-liter bottle that was standard in Argentina. Market research had told the company that the smaller bottle would be a novelty.

The research was wrong.

"It was a complete mistake," he said. "We learned very fast that we had to adhere to the local standards in terms of packaging."

photo of Fernando Aguirre and HBS professor Rogelio Oliva
Fernando Aguirre and
HBS professor Rogelio Oliva

He said companies crossing borders need to be sensitive to local sensibilities, and sometimes to international rivalries.

"Argentines and Brazilians don't get along that well," he said, "especially when soccer is the issue. So we decided not to market our beer as a Brazilian beer but as a beer for the youth—a beer connected to fun."

Aguirre said big businesses must solve those cultural challenges if they want to grow. "If you want to be the largest consumer-products company in Latin America, as we do, you have to be in every country," he said.

But de Brito said his company found that growing at home first was the best way to expand. "After looking for five years to expand internationally, we finally found our expansion domestically. When we merged with our competitor in Brazil, that was the best opportunity that we had," he said.

In de Brito's view, international expansion "is good only if you buy at the right price at the right time, if you have good people to put there... If not, it's better to stay home and make the best of it."

Photos by Martha Lagace