casas bahia

Casas Bahia: Fulfilling a DreamSocial Entrepreneurship

2011-01-0073

Scope and Size of Opportunity

Economic class C, D and E were considered to make the Bottom of Pyramid (BOP) in

Brazil. In 2002, out of a total population of 176 million 84% of population was

considered to be part of BOP, which represented significant purchasing power making

41% of total spending capacity of the country, which further accounted for US$ 124

billion in formal, reported economy. It was also believed that the informal sector reaches

another 50% of the BOP. The strength of the purchasing power of BOP can easily be

estimated by the fact that of the total appliance and furniture market of Brazil had 45% of

the pie represented the BOP. Television, radios and refrigerators were very common in

households in BOP, which even lacked basic infrastructure like toilets and telephones.

The furniture and appliances market at the bottom of the pyramid was estimated to be 6%

of the total spending capacity or US$7.6 billion.

Most of the banking sector in Brazil was formal and had less than 50% of penetration in

the BOP. Informal financiers were available in the market that were willing to provide

finance at micro level, but the average interest rates in such cases were about 14% per

month. Most of the BOP has a wage level of R$400, with which it was hard to support

good brands luxury items. Formal banking sector not interested to work and the informal

financing sector with very difficult terms to do business with, literally made access to

financing impossible, thus, BOP a strong purchasing muscle of society left untapped by

most of the big retailers. Casas Bahia realized the opportunity and aligned the strategy to

milk it. Some of the other players were working on the similar lines, but with retail

margins of as low as 2.5% where volumes was the name of the game, either they were

not very successful or were already planning to pull out of the venture.

Theory of Change

To improve the everyday life of those at the bottom of the pyramid by providing them

access to those merchandize that they dream to buy through giving them access to easy

financing which will trigger a consumption explosion.

Demographics of the Targeted Market

Seventy percent of Casas Bahia customers have no formal or consistent income. Majority

of them were working as maids, cooks, independent street vendors and construction

workers, with average monthly income of R$400. They typically lived in concentrated

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areas called favelas in small size houses of 215 square feet along with up to seven family

members.

Casas Bahia’s Role

Casas Bahia developed an innovative financing program to help this segment of BOP

where the people can make payments in form of small monthly installments against the

merchandize they bought. Working in credit terms with the bottom of the pyramid is

always hard because of higher risk of default due to informal and non-consistent income.

Thus the program helped Casas Bahia not only to judge the financial strength of the client

but also to create a relation that would be beneficial to both players. The relations helped

Casas Bahia to grow while helping their clients spending in accordance with their

income. This relation was required to be based on a program where the clients from the

BOP never felt humiliated due to their small pocket sizes and where saying “No” to them

was regarded as even below the last option.

Any client willing to purchase product on financing – which made about 90% of the total

sales – would be required to submit an SPC credit check. As SPC was a very reliable

source of credit check that would only provide positive or negative information about the

client thus saving Casas Bahia from working with bad creditors. If the client has positive

score on SPC only than he could move ahead with the process where if the product was

less than R$600 only requirement was a valid permanent address otherwise for more than

R$600 merchandize other information like proof of income were required to be entered in

a system to assess the clients financial health, which would as a result define an upper

limit for the client. If the price of merchandize that the client wants to buy is more than

that upper limit the sales man would kindly forward the client to the credit analyst, who

by way of interviewing the clients would evaluate the creditworthiness of the client. If in

future the client shows creditworthiness, his upper limit will be raised thus enabling him

to buy more. This results in customer education, which at Casas Bahia is believed to

major cause of lowest average default levels of 8.5% as compared to competitors where

default rates can be as high as 16%.

Human Capital

Credit Analysts are the most important players in the sales chain. Customers

regard that credit is easy at Casas Bahia. Salesmen only deal with the straightforward

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customers who have a case, while credit analysts are the guys who take on the complex

cases and with their fine tuned skills make it look simpler. This is where Casas Bahia has

spent a lot to train their human capital for capacity utilization resulting in not only to

maintain default rates below industry average but also fraud detection. Their training

process is a combination of classroom and informal techniques. At the BOP clients not

only expect to meet people who show respect when they go for asking credit but also

someone who could be friendly and have a sound understanding of their situation. It is in

the classroom where these future analysts are taught these soft skills so that can enable

them to foster relations with their clients. The training program is based on the ideology

that even if the client has to leave without being served he should leave with a positive

impression about Casas Bahia that would result him coming back when the situation

improves or referring several others to the store whom the system approves for purchase.

Right questions being asked and evaluating the answers to judge the creditworthiness of

the client in a span of ten minutes is the part of learning of the program. With the help of

these questions when the credit analyst has reached the conclusion to allow the client

make the purchase above than the approved limit helps the client to be grateful towards

the analyst for taking a chance on him and spreading a very positive word of mouth

because his dream was fulfilled. After the classroom training the analyst spends two

weeks in store with an experienced employee. Another major training effort is to teach

new comers the art of saying “no” to customers. At Casas Bahia it is believed that when

the customer enters the store he has a dream to be fulfilled and when denied their dream

is destroyed. This will not only result in a bad word of mouth but also if the situation

changes to positive for the client he might not return. Thus this training helps to develop

credit analyst who are known to have played a major role in the present success of Casas

Bahia.

Delivery Drivers ensure successful, on time and reliable deliveries to customers.

Casas Bahia employs and trains approximately 2500 drivers and crew. In order to lower

the training costs the company has increasingly focused on retention programs. These

retention programs include salaries above than the market average, subsidized cafeteria

services, free transportation and policy of no firing without director’s approval. This

policy has helped Casas Bahia to keep a very low turnover rate of 3%-4%. The fact that

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most of the time these employees will be dealing with the females, thus Casas Bahia also

ensures that these drivers undergo a formal training program, where they are trained to be

respectful, clean and well groomed. They are trained to load and off-load trucks, be

courteous to dispose off the old merchandize from customer’s place and not to bump or

drag the merchandize. An evaluation program is also maintained to ensure these services

by way of providing phone numbers to clients to lodge complaints and randomly

sampling of 3% of customers for report on their delivery experience.

Human Resources Management has become an important task since 1996 when

Casas Bahia started expanding rapidly. Casas Bahia employees approximately 20,000

employees and additional 2,500 contract installer. Most employees spent their entire

career at Casas Bahia and the average turnover rate is 1%. Most of the middle managers

have been with the company for the last 20 years, all starting at the bottom and working

their way up the ladder. Trainings are an important part of employee grooming, which

ensures that required level of services are performed and core values are entrusted with

the employees while helping them to learn and adjust quickly. All trainings are designed

to teach the employees one core value in addition to others that the better the Casas Bahia

do the better the employees will be personally and professionally. The lowest rank in the

corporate ladder at Casas Bahia is salesperson. Salesperson is paid minimum salary of

R$500 per month while usually a major chunk of salary comes from commissions from

sales which are in addition to the guaranteed salary. The average salespersons make about

R$1500 per month. These salary packages are believed to be better than the direct

competitors. Casas Bahia mostly hires locals as this results in not only in better employee

efficiency but also for the customers a feel of pride and ownership prevails. In addition to

this in good times the company ensures a bonus equivalent to two paychecks and

employee recognition and reward programs such as travel incentives to as lucrative

places as Disneyworld, which continues in times of economic turn downs.

Operating Model

Products of best labels and quality are carried and sold at Casas Bahia. Top

brands include Sony, Toshiba, JVC and Whirlpool, denying the misconception that the

people at the BOP do not desire quality products by providing a system of installments

for payment of such high priced quality goods. Casas Bahia’s merchandize was strongly

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concentrated on furniture and appliances. Furniture was the top-selling product with 31%

of total sales. Due to its huge size, the company was the major reason for failure or

success of brands in the Brazilian market. In order to increase its margins Casas Bahia

was continuously trying to move towards increased furniture sales as compared to

appliances. The company followed a backward integration by opening up furniture

production facilities. This helped the company to reduce costs hence increased margins

while ensuring quality and availability of products. Offering promotions like interest free

financing further augmented the demand for furniture. Another key success factor for

Casas Bahia was that while designing products it reversed engineered by first deciding

the terms the product will be sold to customers and based on that knowledge the product

is designed.

Supply Chain Management is a core success factor in Casas Bahia’s operational

excellence. The company negotiates hard with its suppliers to get the best deal at the

lowest possible prices and volumes are non-issue at Casas Bahia. Casas Bahia has one of

the world’s largest warehouses that help them store products in large quantities. In

addition to lower prices this storage capacity also helps to ensure timely delivery of

products thus saving the company of stock out costs. The company has achieved

operational excellence with the help of three distribution centers and six cross docking

facilities. In addition to this Casas Bahia maintains a fleet of approximately 1000 truck,

all from Mercedes. This fleet includes 90 long haul trucks, 700 standard trucks, 200

medium trucks and 10 small trucks. This range helps in maneuvering any type of terrain

in the supply chain system.

Marketing has always been very important to Casas Bahia and is one of the key

components of success. Casas Bahia invests 3% of its revenues in advertising and

consistently maintains the largest advertising budget in Brazil. In 2003 advertising budget

for Casas Bahia reached R$200 million equaling to the combined advertising budgets

McDonalds and Pao de Acucar for the same period. Advertising is given extra

importance at Casas Bahia, as it is believed that in retail business, there is much less to

differentiate between the available products, which leaves broadcasting heavily the brand

name and low prices to attract customers. Mostly Casas Bahia advertises on television,

which is believed to reach about 90% of the households in Brazil. The company also

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invests heavily in radio time with more than 30,000 spots in 3 cities in the last 6 months

of 2002. The advertising campaigns usually target emotional appeal and emotional

relationship of customers towards the company by way of leveraging famous singer,

actors and television anchors. Research for finding the impact of advertising on Brazilian

customer reported that Casas Bahia ranked 5th in overall favorite advertisements by

television viewers, with the closest competitor at number 11. In addition to that Casas

Bahia ranked 4th in the top of mind brands. In order to attract customers the company also

improvised several promotional plans, including pardoning of bad debtors in 2002 thus

enabling those to purchase again and unemployment insurance for appliance sale

committing to forgo first six installments if the purchaser lost his job. In addition to these

promotions was the Casas Bahia yellow preferred – client card, which was given to the

punctual customers and soon become a status symbol in Brazilian society. Further there

were letter-writing plans in which punctual clients were sent letters of thanks from Mr.

Klein and inactive customers were sent letter reminding them as how business with them

is valued by the Casas Bahia.

Technology at Casas Bahia

Technology has been the main edge for Casas Bahia. It has helped them not only to

create differentiation in terms of customer management but also providing excellence in

their internal systems and processes. At the time when rest of the industry was pulling

away from investing in technology, Casas Bahia took the initiative to invest into

upgrading its systems, which gave it an edge during the economic regeneration. Prior to

these upgrades, the company required 30 credit analysts and the average waiting time for

customers was 30 minutes, which afterwards reduced to 4-5 credit analysts per store and

the waiting time reduced to 10 minutes. In addition to as the data was required to be

entered only once, so the errors and redundancy reduced many folds. It is estimated that

Casas Bahia spends about 0.8% of its revenues on technology related expenses as

compared to about 3% by its competitors on similar expenses. Casas Bahia continues to

invest in technology today to bring further improvements in the systems in which, the

focus now is on maximizing customer experience.

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Pakistan Store

This idea has a lot of potential in Pakistan agri-business. It is a common known fact that

most of the farmers do business with middle man (Arthi) due to lack of financing. But the

Arthies exploit this situation in order to increase their profits. I was doing my internship

in agri-sector and had a chance to meet several farmers for the purpose of market

research. It was very interesting to know that even big farmers (who own 200-300 acres

of land) worked with Arthies and more interesting was the fact that they knew that

Arthies are selling them goods way above the market prices and buying product from

them way below market prices. But I was told that it was their need to work with them

due to non-availability of finances. They minimum interest rates (or profit) charged was

30-40% on 6 month basis.

My idea is if a chain of agri product outlets is opened on the similar lines of Casas Bahia

in Pakistan rural areas, which could provide products (including seeds, fertilizers,

pesticides etc) to farmers on credit with lower interest rates that can tremendously

improve our agricultural output as well as can be an excellent source of revenues. There

are a couple of risks, which are required to be managed while taking this idea into

persuasion including the risk of bad credits as a result of destruction of crop due to

natural factors or otherwise. I do not think other than that bad debit can be a big issue in

rural areas. But if the crop is destroyed due to natural causes it’s a complete loss. But still

I think that can be manageable.

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Exhibit 1

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Exhibit 2

Casas Bahia’s Innovative Platform

Source: Booz Allen Hamilton

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Exhibit 3

Website of Casas Bahia – Another proof of their technical strengths

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casas bahia

Documents

pyramid bop

casas bahias role casas

segment of bop

client willing

purchasing power of

credit terms

informal financing sector

informal sector