Barriers to entry for business expansion to Brazil

Operating a business in a developing economy is cheap, right? That’s why the BRIC economies have a comparative advantage, right? Wrong! At least, not in Brazil. The FT report the high costs of setting up in such a booming economy, highlighted by the fact that it is cheaper now to get your shoes shined by a Brazilian in New York than by a Brazilian in São Paulo. So businesses wanting to expand to Brazil and get the benefits of its high growth rate need to be aware of the low margins they will make, at least at first.

Frontier Strategy Group, an business advisory company with a focus on emerging markets, estimates that while the average net margin in Latin America is 10.5 per cent, or nearly a third of gross margins, in Brazil, net margins are only 5.4 per cent, or nearly one-seventh of gross margin. An illustration of relative consumer prices is given by the Volkswagen Fox, a Brazilian-made car that has a starting price of more than R$32,000 ($18,660) but sells in the UK at just under £7,000 ($11,100).

The article goes on to suggest ways in which businesses entering the market can improve their bottom-line figures, either by identifying the regions with the best infrastructure and fastest growth, or by manufacturing locally to avoid high import tariffs. Knowing the local market and managing expectations of what to expect are the key points for overseas expansion.

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