Hunger today, bread for tomorrow

It happened last week in the boardroom of a well-known consumer goods company. The General Manager begins his presentation by stating that, once again, we had not reached the budget for the month of April. At the end of the first quarter, we are behind by 5% in sales and nearly 10% in profits. He then proposes to the board to suspend (or cancel?) the relaunch campaign of one of the company’s main brands, which was scheduled for mid-year. The priority is to close the year in line with the budget. Most directors nod in agreement, satisfied. Protecting the results is crucial.

What was described in the previous paragraph is almost commonplace for most Peruvian companies. The much-touted economic slowdown, coupled with the widespread sense of disorder and mismanagement, has led to the suspension or cancellation of countless projects. Austerity and prudence are the new mantras. No risks should be taken. Let’s wait and see who wins in 2016. The strategy is just wait and see.
The problem is that while this attitude may seem intuitively correct, it is actually deeply irrational. For several reasons.

The first is the childish confusion between slowdown (lower growth rate) and decline. Except for “high-ticket” markets, such as real estate or automobiles, the truth is that most markets in Peru are still growing. Less than before, of course, but growing nonetheless. Just a few weeks ago, the three main retail chains operating in Peru published their results for the first quarter of 2015, with sales growth ranging from 8% to 12% compared to last year. Surely, they nostalgically recall the times when they grew by more than 20% per year. We’re not ready to pop open a bottle of Dom Perignon and celebrate the results, but there’s a long way from that to despairing over the crisis.

But the most dangerous and irrational thing is to mortgage the future of the company to prioritize the goal of meeting the annual budget. It is understandable, and perfectly rational, for a company to suspend or cancel launches and relaunches if what is at stake is its survival, its ability to continue operating. But to stop sowing for the coming years because this year’s harvest is lower than we had anticipated? It’s absurd. The only sure thing when making these types of decisions is that the harvests in the coming years will also be mediocre.

The current situation presents us with a great opportunity. There is a widespread despondency among the business class, a sense of crisis, which, as I mentioned above, cannot be objectively sustained with the data we have. Competitors are reducing their advertising investments, postponing their plans, cutting marketing budgets. Bread for today, hunger for tomorrow. Those who take the initiative to endure a little hunger today, that is, those who resign themselves to not achieving the sales and profit targets of a budget that may have been made with much optimism, have a clear path to enter new categories or increase their market share in the categories in which they compete.

Last week, an old friend who heads one of the largest investment funds in Brazil came to Lima. Knowing what is happening in that country (in that case, there is indeed a declining economy and a significant risk of entering an economic crisis of proportions), I thought he would be very concerned. We went out to eat, and he didn’t stop talking about all the projects he was involved in. “And the crisis?” I asked him. “Look,” he said, “for investment funds, economic boom cycles are the worst. Everyone wants to buy, no one wants to sell. If you want to acquire a company or asset, you have to overpay. But when everyone is demoralized and scared, that’s when we make money. People tend to think, irrationally, that when everything is going well, it will go well forever and when things go wrong, we will never recover. We know there are cycles. In the end, we buy when everyone wants to sell and sell when everyone wants to buy.”