FSG recently hosted an event in Mexico City with regional executives and Mexico country managers that focused on how multinationals can respond to changing economic conditions in Mexico. These conditions have upended assumptions about the external environment that will be critical to multinationals’ business performance in 2016. Below are the key takeaways from this discussion.
Recent economic events could have a major negative impact on their businesses
Of the executives who attended the event, 87% are either somewhat or significantly concerned that recent economic events may impact their top-line performance in Mexico. Mexico executives have top-line targets for Mexico of an average 10.8% in US dollar terms for 2016, but the strong depreciation of the Mexican peso, cuts to government spending due to the fall in oil prices, and uncertainty over the state of the U.S. economy are significant threats to multinationals. The government’s preventative adjustment via interest hikes and additional budget cuts, a response largely to accelerating inflation and falling government revenues, will further dent economic growth, which has been revised down from 2.8% to 2.3%.
Few multinationals expected the drastic weakening of the Mexican peso
Most multinationals did not prepare for further depreciation of the Mexican peso, and have been reluctant to increase prices as the limited pass-through effect of depreciation on inflation has made consumers hesitant to accept significant price hikes. This has led to substantial margin pressure along with the rising focus on improving revenue growth as other Latin American markets underperform.
Most multinationals are focusing their attention on bolstering efficiency gains
Over half of executives polled during the event believe that pursuing productivity or efficiency gains is the best approach their companies can take to continue to grow in the Mexican market, with currency depreciation and its impact on margins making this approach important to pursue. The continued need to provide value-added services to compete effectively against low-price competitors also make efficiency gains vital.
The environment warrants a multi-faceted response to changes in underlying assumptions
Executives are also interested in pursuing as many approaches as necessary to bolster their ability to outperform in these market conditions. FSG presented five strategies that we believe multinationals should be deploying in Latin America to maintain growth and protect profitability: (i) deepen portfolio allocation capabilities, particularly at the subnational level; (ii) support channel performance; (iii) cut costs but maintain investment; (iv) divest from non-priority businesses; and (v) implement operational hedging strategies.
FSG clients can contact their Client Relationship Director to learn more about these strategies and obtain a full copy of the presentation. Not a client? Contact us to learn more.