Business growth can be accomplished in many ways – share gain, adjacent market entry, new product innovation, M&A, and geographic expansion. Entering new geographical markets can be both exciting and lucrative. Based on recent research, it is the second most sought-after growth strategy among private company CEOs behind M&A. However, geographic expansion can prove to be not only risky but can also be very costly in terms of human and financial capital.
Before pursuing a geographic expansion strategy, companies must carefully weigh the costs vs. benefits and establish a process to evaluate a potential move. Poorly planned and vetted expansion into a new territory or country can result in a severe negative impact on the balance sheet.
A word to the wise when considering a geographic expansion strategy is to “look before you leap.” This cautionary phrase manifested when a US-based client asked PMG to research Brazil as a potential target for geographic expansion of their diving boards and slide products for swimming pools. On the surface, Brazil was an attractive market for expansion, experiencing consecutive years of solid GDP growth and considered South America’s premier economy.
As our research progressed, we found other critical market dynamics that confirmed Brazil was likely a good candidate for geographic expansion, including:
Favorable Trade Status
- a preferential customs tariff between the US and Brazil
- no tariff quotas of any kind in place on this type of pool equipment,
Attractive Market Size and Growth
- the current installed base of pools exceeded 2.5 million,
- a new pool annual growth rate of over 3.0%,
- the approximate number of new pools installed annually was over 80,000 units,
Solid Market Growth Potential
- only 2% of the population had a residential pool
- the desire to own a pool was one of the top 5 dreams of a Brazilian,
Limited Product Modification
- our client’s equipment met the quality and safety standards currently in place,
Manageable Competitive Landscape
- only a few competitors controlled a large portion of the market.
Based on the findings there certainly seemed to be a good opportunity; a growing new pool market, a large installed base to purchase pool accessories, no tariffs, and current products that met quality and safety requirements. However, diving and slide equipment only had an 11% penetration rate and a total market value of only $2 million. So the critical question became, why was it so low?
As further research revealed, the average installed pool in Brazil is 3 X 6 meters and contains approximately 6,700 gallons of water while the US average in-ground pool holds 18,000 to 20,000 gallons of water. Due to the smaller size, most Brazilian pools were typically large enough for accessories such as diving boards and slides.
What initially looked like a great market for geographic expansion turned out to be significantly less attractive due to the unexpected reality that pools are much smaller in Brazil than in the US, and therefore installing diving boards and slides is often not practical. If PMG had not uncovered this critical finding in our research or if the client had elected not to investigate the Brazilian pool market before expanding, the cost of failure would have far exceeded the cost of the research project.