Martim Prado Mattos, a senior executive at one of
But just shy of its tenth birthday, the firm has, by many measures, already cracked the code to growth at home. Often referred to as the "Unilever of Brazil," the firm has a market capitalization of R$31.5 billion (US$20 billion) as of March this year, net 2010 revenue of R$3.2 billion -- up from around R$2 billion the previous year -- and sizable market share in many parts of Brazil's health, beauty, personal care, home care and food businesses, making it number one or number two nationally for products ranging from sweeteners to body lotion to condoms.
That in itself is remarkable. But what is also sparking the interest of the international investor community is that Hypermarcas has built its vast empire using nothing more than an arsenal of tried-and-tested marketing, pricing and distribution tactics, along with a hefty dose of M&A and razor-sharp management of its brands -- "our most important asset," as Mattos says. It's a combination that has made Hypermarcas one of the largest, most diversified companies in
RACE TO THE TOP
And it's a combination that makes emerging market companies like Hypermarcas one of the biggest competitive headaches for today's expansive multinational corporations (MNCs). In Hypermarcas's universe, that includes the likes of Unilever, Procter & Gamble (P&G), Colgate and L'Oreal, all of which have businesses spanning the globe and are now looking to the BRICs --
"Hypermarcas is an example of how local companies can go after a huge market leader," says Fernando Robles, professor of international marketing at
"The consumer market in
Despite enviable economies of scale, MNCs are indeed generally facing more complexity, particularly when aiming to take a product global and into new markets "where consumers tick slightly differently," adds Martin Boehm, marketing professor at the IE Business School in
There's no question about how Hypermarcas positions its products, according to Mattos. Rather than competing directly against the
With its roots firmly planted in
It's against this backdrop that Hypermarcas has flourished under "typically Brazilian management," according to local business magazine, Exame. A recent profile in the magazine of Hypermarcas's founder and chairman, João Alves de Queiroz Filho-- or "Junior," as he is most often called -- recounts how some 20 years before Hypermarcas began, he and his father were already making a name for themselves with Arisco, their modest cleaning products company that mushroomed into a national food firm. In 2000, Junior sold Arisco to Bestfoods of the
The idea behind Hypermarcas was to replicate Arisco's success, only at a faster pace. Starting off with a steel wool company in 2002, Junior snapped up rivals around the country, and was soon diversifying into other consumer goods. "That set the trend," says Daniel Weil, an analyst with market research firm Datamark in
By the time Mattos joined the firm in 2008 – as head of investor relations, which he has continued to oversee since being promoted to CFO last year – it was a far cry from the startup with R$30 million of annual revenue that it was just a few years earlier. It's the result of what Mattos calls a "very consciously focused, step-by-step" strategy. The key, he says, is Hypermarcas's acquisitions strategy -- 27 acquisitions since the company began, with 10 in2010 alone, including its biggest-ever deal to buy a local pharmaceutical company called Mantecorp for roughly US$2.5 billion.
The good news for Hypermarcas is that there has been no shortage of rivals to snap up. By "picking up small gems at reasonable prices," says Weil, Hypermarcas has been part of a larger M&A wave in
What's more, the companies on Hypermarcas's radar are generally in sectors ripe for consolidation. A case in point: Beauty products. ABIHPEC, a Brazilian industry association, says there are more than 1,600 companies competing in the country, the world's third-largest cosmetics, toiletries and fragrance market (after the U.S. and Japan) -- 20 of which each generate after-tax revenues of more R$100 million annually and represent 73 percent of the sector's total gross sales.
But with or without an abundance of takeover targets, pulling off an aggressive M&A strategy is always a challenge, and in some sectors it's an even greater challenge, warn experts. In a briefing paper published last spring on the sectors in which Hypermarcas is involved, for example, Bain & Company consultants noted how scale is important in consumer goods as it is in most product and service industries, but it is not sufficient by itself. A brand may look to an investor like an underachiever that can be turned around when, in fact, it is performing at its strategic full potential."
According to Mattos, one reason Hypermarcas manages to avoid such traps is that it has a portfolio that's regularly refreshed and diverse enough to spread risks. He says it also helps that "we see M&A as a continuous process. At any given moment, we'll be analyzing and talking to several companies at a time. And at a certain point, we'll accelerate some, and leave others behind. So we have walked away from deals."
GETTING THERE FIRST
When does Hypermarcas decide to stick with a deal? Along with traditional metrics like national market share and gross margin, Junior and his M&A team consider the longevity of a brand. "Not just the founder, but the rest of [the executive team] have been in
And Mattos contends that Hypermarcas's ability to identify and go after those brands sets it apart from rivals. "The challenge is to find the brand, and we've gone after brands before others," he says.
That was the case with Monange, a lackluster moisturizer brand that had been around for 40 years when Hypermarcas acquired it in 2007. Hypermarcas swiftly updated its marketing, relaunching existing products with trendy packaging while expanding the brand into new lines, such as razor blades and shampoo. The result: Annual sales jumped from pre-acquisition R$81 million to R$218 million. Last year, Monange -- along with Bozzano and Niasi, the other so-called "dormant brands" that were suffering from underinvestment in innovation before landing in Hypermarcas's portfolio at around the same time -- accounted for 30 percent of its total organic growth.
"That's what Hypermarcas is all about," says Robles of the
‘LIKE A BOA’
Hypermarcas's executive team has vowed to use this year to slow the pace of M&A to focus on integration. “It is like a boa after eating a cow,”
Analysts also expect a tidying up its portfolio to jettison underperforming brands and focus on faster-growing segments. According to Datamark, the key sectors will be beauty products (which an annual growth rate of around 8 percent every year between 2009 and 2014); personal care (at 4.5 percent) and pharmaceuticals (at around 5 percent). Divestments and less investment are likely in cleaning products and food since growth in those areas, at 3 percent or less, look less robust.
"It's a good year to organize the house," agrees Mattos. "What we have to balance when deciding whether to reduce our focus on a particular brand is how much we are leaving behind in terms of scale, bargaining power and strategic strength."
An analysis of first quarter earnings by Morgan Stanley this spring noted that the integration of Mantecorp and Mabesa, the two big acquisitions from last year, "are off to a slower start than we would have guessed." The report also drew attention to what it called a "hiccup" that has dampened earnings, which involves working capital – a hot button for any CFO. In a bid to boost revenue in the second half of last year, Hypermarcas extended the payment terms for its customers -- wholesalers and large supermarket and drug store chains. While that might have pleased customers then, it was another matter as 2011 rolled in and Hypermarcas reversed the terms, introducing higher prices and stricter deadlines for payments. Not surprisingly, many customers balked and delayed or reduced their orders, leading Hypermarcas to miss first quarter revenue expectations by 20 percent and its share price to seesaw, reported Morgan Stanley.
But there are other, external factors affecting Hypermarcas's earnings that Mattos is watching just as closely. An overheating national economy is one. Like
"High inflation is the worst possible thing for us," says Mattos. In late July, as Brazil's rising inflation raised concerns among investors about the impact on companies dependent on consumer demand, shares in Hypermarcas -- which listed on Brazil's main board in 2008 -- fell 6 percent, to R$11.30, the lowest level in more than two years. Some observers say household belt-tightening is inevitable. Research published in the Financial Times on July 1 found that the average interest rate for consumer credit in the country has climbed from 41 percent last year to 47 percent in 2011, "which means families must leave aside not 24 percent but 28 percent of their disposable income to service debts," compared with 16 percent in the U.S., 4.8 percent in India and 6.5 percent in China.
But after dipping the three previous months, consumer confidence data from the FGV did show a recovery in June. To be sure,
The macroeconomic picture is just one of the larger concerns shared by executives in
And it's not just onerous red tape holding back corporate
The big debate, then, for Brazilian companies is whether better opportunities lie outside their country. After all, says IE Business School's Boehm, they could take a leaf out Grupo Bimbo's book. The well-known Mexican bakery began expanding across the globe more than 50 years ago, venturing into both developed and developing countries, including
But the risks are just as high today as ever. "If you start expanding abroad, you could lose yourself," says Robles. "On the other hand, if you don't do it, you're missing opportunities. For some companies that are more commodity or resource based, the answer is very clear -- they go abroad. For companies like Hypermarcas, going abroad is just another battle. Those are competitive markets, and they may not have the resources to do it well. And if they do it, they may lose their home market."
All told, Mattos says Hypermarcas's home market is worth hanging on to, especially as the country continues to benefit since being grouped under the BRIC umbrella by market analysts several years ago. "It's quite positive for
Republished with permission from http://www.knowledge.wharton.upenn.edu -- the online research and business analysis journal of the