Brazil: Confronting the Productivity Challenge

Brazil: Confronting the Productivity Challenge

          
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Brazil: Confronting the Productivity Challenge

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  • Key Levers for Future Value Creation

    The imperative to improve productivity is not the only challenge Brazilian companies face. There will also be significant changes on the demand side.

    Although some of the drivers that fostered demand growth in the past decade will continue to be relevant—particularly income redistribution and the demographic bonus—some important drivers will lose steam. In the domestic market, growth of consumer credit is expected to slow as Brazil closes the gap with other countries. (See Exhibit 9.) Furthermore, in many industries the consumption gap with developed economies narrowed in the past decade, reducing growth prospects. In the external market, the world economy is expected to go through a period of slow growth that will affect demand for Brazilian commodities.

    exhibit

    In this new context, we believe that the relative importance of various value-creation levers will change, and revenue growth will no longer be the dominant driver for many industries. Especially in those industries highly dependent on the expansion of consumer credit or on developed economies with which the consumption gap has narrowed in the past decade, companies will have to look for new avenues of growth and for efficiency improvements to sustain value creation.

    As the differences in value creation within industries during the past decade illustrate, the path to future value creation will be specific to each company. (See “Value Patterns: The Concept,” BCG Perspectives, May 2012, for a discussion of how a company’s starting position affects value creation.) However, we expect to see the following trends:

    • Growth. The period of rapid expansion is over for many industries, but it is still in the future for others. Many companies in consumer-related businesses will see volume growth slow. To sustain top-line growth, such companies will need to innovate and develop new markets and segments. However, for companies that are linked to infrastructure and operate in industries with delayed take-up curves (for example, insurance), revenue growth is expected to be a key value driver.

    • Profit Margin. Despite gains in scale, profit margin was not a key value-creation driver from 2004 through 2011. Margin is expected to grow in importance as many companies shift their focus from growth to efficiency. Enhancing productivity will be key to taking advantage of the profit margin lever.

    • Valuation Multiple. This was a key driver of value in the expansion phase from 2004 through 2007, when the average valuation multiple increased from 5.2 to 8.4. However during the global-turbulence phase from 2008 through 2011, the average receded to 6.3. Variability will likely continue, given the uncertainty in the external economic scenario and a potential slowdown of the domestic market.

    • Cash Management. In the past decade, dividend yield was the second-most-important TSR driver behind revenue growth. Dividend yield will likely gain importance, particularly in industries experiencing slower growth. As companies find fewer investment opportunities that offer high returns, returning cash to shareholders can be an important value-creation lever, eventually driving up valuation multiples and premiums as well. (See “Back to the Future: Inves-
      tors Refocus on Yield
      ,” BCG article, April 2012.)