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– Jim Wygand
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A Brazilian “War Story” - The importance of doing one’s “homework” in Brazil
I rather enjoy corporate “war stories”, especially when I happen to have been involved or witnessed them firsthand. Consider the following case:
Two foreign companies entered the Brazilian market at about the same time. Both produced the same product and both faced the same single major competitor that held about 80% of the market. Each fol-lowed a different strategy to garner market share.
Company no. 1 decided to take on the competition in its strongest market segment. The underlying as-sumption was that the company had an internationally recognized name and deep pockets. The company’s management told me that it planned to get a toe-hold in the strong market and then expand by acquiring smaller companies that serviced the same “demographics” thereby gradually increasing its penetration. I suggested that the company might consider launching its major brand name in Brazil at the outset to in-crease customer identification with the company. The company’s “strategist” informed me that in the market segment it planned to attack Brazilian customers were not sensitive to international brand names. Since Brazilians often identify quite strongly and well with names that enjoy success abroad, I was not so sure of the soundness of the company’s approach. But since I did not know the specifics of the sector, I held my tongue and expressed only mild disagreement.
Company no. 2 took a totally different approach. After considerable research the company’s management concluded that the competition was weak in one specific market niche. The underlying assumption was that if the company could quickly enter this niche the competitor would not have time to react and might even find it too expensive to engage in a major battle for such a small share of market (roughly 2%). The niche was at the upper end of the market where the “demographics” were sensitive to international brand names. Company 2 chose not to launch its principal brand name, preferring rather to launch a premium brand name that would sell less volume but had a “carriage trade” image.
Both companies began their respective campaigns.
The competition reacted strongly and immediately to Company no. 1’s attempt to enter its strongest mar-ket. It was not about to surrender even a small amount of market share in its most lucrative product line. Protecting this turf was as much a matter of pride as it was of economics. Just one or two points of market share meant a lot of money and the competitor was not about to tolerate an upstart. It retaliated with vigor. To build a local brand name Company no. 1 acquired a middle-to-lower-end company that was well known in the desired “demographic”, albeit at the lower end of that market. Company no. 1 spent heavily on advertising and used price as an entry strategy to move up-market. The strategy failed to re-position the acquired company and Company no. 1 remained stuck in the same market that it had ac-quired.
Meanwhile, Company no. 2 launched its high-end-of-the-market brand. Since the competitor had no strong presence in this segment Company no. 2’s presence was not a threat, at least not to an established product line in that segment of the market. Losing market share was not an issue in the segment because the competitor had virtually zero presence. Of course, Company no. 2’s presence was bothersome because it pointed to a long-term strategic error. The competitor had ignored a segment of the market and left open a window of opportunity. It began a search for a product line that would allow it to defend this relatively small amount of turf.
Company no. 1 was shipping water with its relatively stagnant acquisition. Its penetrate-and-grow strat-egy did not work so it was decided to launch one of its international product lines that successfully ap-pealed to the same “demographic” abroad. To generate economies of scale in production, Company no. 1 exported raw materials to its parent company and launched (another) major advertising campaign this time to promote its internationally known product line. The competitor responded with an advertising campaign of its own emphasizing its traditional presence in the market and brand loyalty (for which Bra-zilian consumers are known).
Company no. 2 had meanwhile consolidated its market presence and began launching product “exten-sions” that further exploited the competitor’s relative weakness. The competitor was rushing to catch up as Company no. 2 gradually increased market share, albeit at a rate that still did not seem to justify the expense of all out warfare.
By now Company no. 1 was facing serious problems. Its campaign to launch its international product line was enjoying only moderate success and was proving expensive. It increased its export business to gener-ate cash flow while Company no. 2 continued to consolidate an increasing market share and was now in a position to launch one of its major international product lines that would attack the competitor’s strongest product on its flanks. It had gained a major share of the high-end market segment and the competitor’s attempt to regroup and counterattack was unsuccessful.
You can pretty much guess the outcome at this point. Company no. 1 eventually left the market as a “player”. Company no. 2 continued to expand, became one of my best and favorite clients, and now en-joys a more-than-comfortable (and growing) market share and has made strategic acquisitions. Company no. 2 eventually abandoned its entry product line and now runs head-to-head against the competitor in its strongest market.
This particular war story illustrates the importance of doing one’s “homework” in Brazil. Company no. 1 chose to enter with its guns blazing to face the “town’s biggest gunslinger”. Taking on a popular com-pany with an 80% market share in a brand-loyal environment is dangerous at best and for Company no. 1 proved fatal. Company no. 2 chose to keep a low profile at the outset and attack the competitor where it would hurt the least. Anyone familiar with Brazil will recognize the same strategy when used by local motorists to enter a busy intersection. The driver inches his vehicle forward a bit at a time until he has reached a position that causes other drivers to pay attention at the risk of an accident that would damage both vehicles. The other drivers eventually stop and allow the bothersome upstart to enter the flow of traf-fic. It’s simply cheaper than an accident.
See what a little homework can do for you?
Jim Wygand
Managing Director for Brazil
1st West Mergers & Acquisitions Llc.
Presented by Real Trade: 11/12/2008