magazine luiza: building a retail model of 'courting the poor' · 2019-09-27 · 606-048...

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________________________________________________________________________________________________________________ Professor Frances X. Frei and Senior Researcher Ricardo Reisen de Pinho prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

F R A N C E S X . F R E I

R I C A R D O R E I S E N D E P I N H O

Magazine Luiza: Building a Retail Model of “Courting the Poor”

Thanks to [Trajano’s] hands-on management style and her knack for coming up with new sales strategies, Magazine Luiza has gone from being a relatively small department store chain to Brazil’s third-largest nonfood retailer in just over a decade. And it has done so by assiduously courting the poor. 1

— Todd Benson, The New York Times

It was late on October 23, 2004 as Magazine Luiza’s corporate jet prepared to land 850 miles away

from Franca, the company’s home base and operational center. Luiza Helena Trajano, CEO; Frederico Trajano, sales and marketing director; and several other members of the executive team were heading to the “Encontrão,” or “Big Meeting”: the company’s biannual off-site, which gathered 1,200 of its 5,700 employees to discuss strategy and reinforce the company’s unique culture. Despite the familiar ritual, Luiza Helena could feel the team’s unspoken tension. This would be the first time the Big Meeting would take place with such an uncertain future for the company.

In June 2004, Magazine Luiza had purchased Lojas Arno, a traditional retail chain in southern Brazil (a part of the country that was new to the company). This acquisition—Magazine Luiza’s sixth in the past eight years—added 52 new stores to the existing 202, along with 800 more employees. It was its largest, most geographically distant, and most culturally distinct addition to date, adding stores in the states of Rio Grande do Sul and Santa Catarina. The company already had an active presence in five other states: São Paulo, Minas Gerais, Parana, Mato Grosso do Sul, and Goias. (See Exhibit 1 for a map of Brazil and Exhibit 2 for its store performance by region.)

The pace of consumption—along with deep customer loyalty, a relentless focus on low-income segments, and an innovative use of technology—had driven Magazine Luiza’s exceptional growth. But the impact of such rapid expansion was weighing on the leadership team. Was the current pace of change compatible with the delicate formula behind their success? Luiza Helena believed that Magazine Luiza’s most important asset was its culture, and she wondered how quickly she could cultivate it in the new stores. She said, “Culture is the most difficult competitive advantage to copy. A marketing campaign or a specific technology or process can be easily replicated . . . culture, however, takes time to develop and consolidate. It took us almost 50 years to create a culture that is 1 Todd Benson, “A Brazilian retailer thrives courting poor: Magazine Luiza offers sales and loans,” The New York Times, July 15, 2004, available at Factiva, http://www.factiva.com, accessed December 11, 2004.

606-048 Magazine Luiza: Building a Retail Model of "Courting the Poor"

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genuinely customer centered and employee centered, capable of aligning minds, hearts, and pockets.”

Luiza Helena spoke openly about her decision to host the 2004 meeting in the center of Lojas Arno’s market:

This recent acquisition will challenge our capacity to maintain a homogeneous culture and streamlined organization when operating in so many different places and with such diverse employees. . . . There may be a backlash, since we will have to change the way the Lojas group is paid, deals with clients, and communicates internally. We don’t know how they will react to this.

Everyone at the company agreed that the success of the Lojas Arno integration would have serious implications for Magazine Luiza’s future.

A Brief History of Brazilian Retail

In 2004, Brazil was a large and diverse market. While it was the fifth-largest country in the world in terms of area—with a total population of approximately 170 million—84% of its 47 million households were located in urban areas, and regional development and income distribution were very uneven. Most of the country’s wealth was concentrated in the south and southeast, which were responsible for 18% of the total area and about half of the country’s gross domestic product (GDP).2 (See Exhibit 3 for Brazilian income stratification by region.)

By the end of the twentieth century, the country had experienced a mixed record of economic growth. The 1970s saw 7.2% growth, which decelerated to 1.3% in the 1980s, ushering in a period of hyperinflation in the beginning of the 1990s that peaked at a staggering 2,477%.3 This had a devastating impact on the retail industry. Wages lost their value daily, and prices changed so quickly that retailers were unable to keep accurate price tags on their merchandise current.

In addition, high inflation, interest rates, and cost of capital—which impacted the costs of inventory, marketing, and distribution—made alternative channels such as catalog-based retailing practically nonexistent. This scenario ensured relative isolation of the market until the mid-1990s, facilitating the growth of small family-run operations and medium-sized chains that developed local expertise.4

With economic stabilization in 1994 and a broader trend toward globalization, the Brazilian retail market experienced rapid change. Inflation rates dropped to single digits, which helped strengthen Brazilians’ purchasing power and allowed for the emergence of new consumer groups.

Rapid consolidation within the industry created local retail giants such as Casas Bahia, Ponto Frio, Lojas Americanas, and Pão de Açucar. The opening of the market also allowed the entrance of international players such as Wal-Mart, Casino, Leroy Merlin, and JCPenney. Although confident of the company’s position as the third-largest nonfood retailer behind Ponto Frio and Casas Bahia,5

2 Adapted from “Síntese de Indicadores Sociais – 2003” and “Sistema de Contas Nacionais – Brasil – 2000 – 2002,” Instituto Brasileiro de Geografia e Estatística, 2003, available at www.ibge.gov.br.

3 Adapted from the Brazilian Central Bank, available at www.bc.gov.br.

4 Carrefour was the only relevant international player in the retail industry operating in Brazil before the 1990s.

5 Ponto Frio was focused on appliances, while Casas Bahia was most similar to a department store.

Magazine Luiza: Building a Retail Model of "Courting the Poor" 606-048

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which were twice and six times its size in 2004, respectively, Luiza Helena anticipated increasingly intense competition: “What we foresee is an arena with flexible, creative, and deep-pocket retailers fighting fiercely for additional new sales per square meter.”

Transforming the Family Business

Magazine Luiza was founded in 1957 by an entrepreneurial couple, Pelegrino José Donato and Luiza Trajano, when they bought a small “mom-and-pop” store in downtown Franca, a small city in the rural interior of the state of São Paulo. Until the end of the 1980s, the company grew primarily through the acquisition of small local chains near its headquarters. It was family owned and family run, led by Luiza Trajano and her relatives on the executive team. Unrelated businesses as diverse as car dealerships, farms, and real estate operated under the same corporate management.

In 1991, Luiza Trajano’s niece, Luiza Helena, assumed the role of Magazine Luiza’s CEO and began an aggressive reorganization of the group. A shareholders’ agreement was signed mandating that all family members step down from their executive responsibilities. A professional management team was formed to replace them, combining experienced staff with new, young talent. In addition, Luiza Helena launched an internal campaign to revive and reinforce Magazine Luiza’s mission to serve customers and employees. The effort was aimed at capturing the company’s legacy of external focus. Luiza Helena remembered:

When my aunts started the business, the very first thing they did was to promote a public contest through a popular local radio [show] to choose a new name. It was a huge success. After a few days of amazing participation, the [audience] chose “Magazine Luiza” as the winner.6 From the very beginning the company was truly customer centered, and we have tried to maintain this essence.

The company weathered the country’s notoriously volatile economy, turning a profit every year from 1992 to 2004. In 2003, when the economy shrank 0.2%, Magazine Luiza experienced a 35% return on equity. In 2004, as the economy began to recover, the company expected revenue to jump 56%. (See Exhibit 4 for Magazine Luiza’s financial statements.)

Operational Evolution

Up until 1991, Magazine Luiza operated like many other specialized retailers. The stores themselves sold approximately 8,500 stock-keeping units and covered about 1,400 square meters, with an average of 0.04 employees per square meter. Its cheap but cheerful ambiance was an integral part of its marketing and was essential to its operational strategy, which encouraged growth while limiting costs. (See Exhibit 5 for a picture of a traditional Magazine Luiza store.)

Procurement and distribution—always key elements in retail businesses—were even more critical in Brazil, with its history of economic volatility and vast geographic area. High interest rates and poor infrastructure became significant hurdles for companies seeking to purchase, stock, and widely distribute large amounts of merchandise. (See Exhibit 6 for a history of Brazilian interest rates.)

Operating mainly in small cities that did not accommodate large local inventory stocks, Magazine Luiza delivered 70% of its products directly to the customer’s residence 48 hours after the purchase.

6 In Portuguese, “magazine” refers to a small commercial establishment that sells a wide variety of products.


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By 2004, Magazine Luiza had four distribution centers in key locations and was planning two new cross-dock warehouses in 2005.

Magazine Luiza focused its product line on commodity products such as furniture, consumer electronics, and white goods (responsible for 23%, 39%, and 27% of its total sales, respectively). In 2004, the company had a product line of approximately 9,500 items sourced from over 500 suppliers.

Virtual Showrooms

In 1992—well before Brazil embraced nonconventional shopping channels—Luiza Helena began experimenting with stripped-down versions of Magazine Luiza stores in order to reduce distribution costs. She started with sales representatives showing product videos or flipping catalog pages with the clients and increased the channel’s IT component, significantly reducing labor costs. The finalized concept was designed for cities with up to 50,000 inhabitants or districts of bigger cities with high real estate costs. The virtual showrooms used an average floor space of 140 square meters and consisted of approximately 10 employees who helped customers view the chain’s merchandise through six to eight “selling stations,” each essentially composed of a desk and a computer. Home delivery was guaranteed within 48 hours of purchase (see Exhibit 7 for pictures of Magazine Luiza’s virtual store).7 Frederico, Luiza Helena’s son, who was responsible for implementing the concept, explained:

At least 10 different images for each product are stored within our network and are updated on a regular basis to include new angles and all the information required to make your buying decision, including voltage and hookups. Most of our suppliers do not have an image database with so many details. . . . For instance, have you ever put your head inside an oven or gone down on your knees to inspect the bottom of a washing machine? Probably not! At a Magazine Luiza virtual showroom you can do it without getting up from your chair.

Frederico also explained the company’s investment in training consumers on the new concept and working to overcome their initial resistance:

The whole process is very customer friendly. As soon as you enter one of our stores you immediately meet a highly trained and smiling salesperson who leads you to a computer bank. Once there, he or she will be responsible for navigating the website while inquiring about your product needs and financial constraints. After having agreed on the product to be purchased, the sales representative checks and approves your credit on the spot, sends an online order to the warehouse, goes to the cashier, and comes back with all the papers to be signed. Although everything is done with the support of very complex technology, our customers feel as [though] they were at home chatting with a friend. The very next time the client returns to our store he or she will probably be recognized and greeted by name.

To increase the flow of customers to its virtual showrooms, Magazine Luiza developed a strategy of “social insertion.” This approach encouraged stores to partner with local providers to offer a range of services and activities that supported the store’s host community. Flexibly designed, the back of the stores supplied everything from free Internet access and computer training to cooking classes and English courses. In many areas, Magazine Luiza became recognized as the center of the community. Frederico recollected:

7 The virtual showrooms accounted for 7.5% of total sales.


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Every time we open a new virtual showroom we can see an immediate impact on the neighborhood. In the beginning, customers tend to see us as somewhat out of reach due to the layout of the stores, with all these computers, no merchandise, and employees in uniforms. Quickly this changes. Through strong mouth-to-mouth marketing and community events, the neighborhood starts to interact with us and the expectation for retail quality improves. In a few months you can see customers demanding better services, prices, and facilities from other businesses.

In addition to its stand-alone virtual stores, Magazine Luiza occasionally set up stands with its computer terminals in other large companies, such as the utility power company CPFL in São Paulo, and in retailers, such as U.S. video rental chain Blockbuster. “Our business model is constant innovation and excellent customer service,” said Frederico. “That is the only one that works in this business.”8 The company planned to open 20 new virtual stores in 2004–2005.

Enabling Consumer Credit

The retail industry was highly sensitive to fluctuations in interest rates and the expansion and contraction of consumer credit—a critical part of any Brazilian retail strategy was the capacity to finance clients. For Magazine Luiza, developing flexible approval procedures was essential to serving lower-income markets. For example, income level was less important than income stability to determine creditworthiness for Magazine Luiza’s target market. This meant that someone in the seasonally cyclical construction industry required different credit evaluations than a salaried civil servant. Credit considerations included whether income came from formal or informal sources—or both. Informality did not necessarily increase credit risk, but it made it more difficult to ascertain risk using traditional methods.9

The company’s credit system was structured and decentralized. Qualified customers received immediate credit approval from salespeople. For amounts under 800 reais (R$), approvals were granted on the spot if the client met scoring criteria based on income, length of employment, indebtedness, credit reports, and background information. Criteria became more stringent as the amount of credit increased, and approval was required from increasingly senior employees. Frederico described the process as “small, simple, and low cost, requiring a minimum of paperwork to initiate and quick disbursement of credit once a sale is made.”

In 2001, Magazine Luiza partnered with Unibanco, the third-largest private bank in Brazil, to set up a financial company to provide customers with a broader range of financial services, including personal loans and insurance policies. Frederico explained the value of the partnership:

The partnership allowed us more flexibility with our clients. We try to understand how much a client can pay each month without jeopardizing his/her financial capacity, and then build a financial proposal backwards. From the customer’s point of view, we encourage clients to think big and adjust their cash flow accordingly. Normally, people tend to act the other way around, having their ideas, dreams, and aspirations curtailed by the feeling that they cannot afford them. This has allowed us to offer payment conditions up to 24 months, while most retailers have rigid financial plans with fixed installments of 3, 6, or 12 months. It also allowed us to charge average interest, which is a third of what credit card companies do.

8 Raymond Colitt, “Alive and well: buying online, a billion-dollar business in Brazil, was buried before its time – Connection,” Latin Trade, December 2003, available at Factiva, http://www.factiva.com, accessed December 11, 2004.

9 Adapted from “World industry: Financial services in low-income markets,” Economist Intelligence Unit—ViewsWire, May 23, 2003, available at Factiva, http://www.factiva.com, accessed November 15, 2004.


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In addition, in an attempt to draw more people into stores, potentially enlarging our customer base or creating an opportunity for a new sale, we require our financing clients to pay off their balances in person every month as well as to pay their utility bills on our checkout. In 2004, the company received 60,000 utility bills on checkouts per month.

In 2003, about a third of Magazine Luiza's profit came from financial services, and 80% of sales were on credit.10 Its default rate11 was 4%, which was a third of Brazil’s average and half of Casas Bahia’s.12 The company’s salespeople were responsible for both issuing and recovering credit—a portion of their monthly paycheck was linked to a metric that captured their achievement of both sales and payments.

Deep Customer Relationships

Luiza Helena, a highly energetic four-foot, nine-inch-tall woman, began working at Magazine Luiza during summers when she was 12 years old, and since then she had always seen herself first and foremost as a mix of dream seller and merchant, emphasizing that there had not been a day in her adult life when she had not spent some time thinking about how she could improve this symbiosis. In 1991, when she became CEO, she started to implement some of her ideas based on her previous experience as a salesperson. She explained:

Consumer behavior strongly differs between the lower-, middle-, and upper-income groups, and therefore companies should tailor their product-development and marketing efforts accordingly. For example, many in the lower bracket in Brazil are not functionally literate and have had little formal schooling. They may have difficulty reading product manuals or filling out application forms for credit.

Likewise, low-income consumers tend to be conservative and stick to familiar procedures, such as using cash rather than debit or credit cards or avoiding applying for credit out of fear of being rejected. Many are not technologically savvy and are intimidated by computerized services. They may also have a sense of unease in the posh surroundings of a fancy store at a shopping mall or are turned off by sophisticated sales pitches.

Luiza Helena set up a system in which employees were empowered to increase the number of customers they served. She explained:

Every month the relationship marketing department distributes a list of inactive clients13 to all employees at the central office. At this moment, any collaborator, no matter his/her function or position, is entitled to make them active again. They log in at the computer, claim responsibility for a certain group of clients, and then pick up the phone and start calling the potential customers—in their spare time—to market Magazine Luiza. We are all salespeople.

10 Adapted from Todd Benson, “Courting the Poor, a Retailer Rises to No. 3 in Brazil,” The New York Times, July 14, 2004.

11 For statistical purposes in Brazil, credit balances more than 180 days overdue were considered unrecoverable credit.

12 “Bradesco e Casas Bahia anunciam parceria estratégica,” O Estado de São Paulo, November 25, 2004.

13 An inactive client was one who did not buy again within a one-year period at Magazine Luiza’s stores.


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Marketing

According to Frederico, Magazine Luiza’s marketing strategy was based on its ability to effectively mobilize customers and employees. It was a mix of actions that combined (a) special dates such as Father’s Day, (b) vacation promotions, and (c) anchor campaigns. While the first two targeted specific groups and products, the latter was focused more on brand awareness and conceptual ideas. Frederico explained:

If you open a newspaper or turn your TV on, what you see are advertisements saying “No one can beat our prices,” “Always low prices,” or “Everyday low price.” Our connection with our customers goes beyond this. Along with low prices, we believe customers want something that can make them dream, something that perhaps can change their lives. Our challenge is therefore to find ways through which we can move to a more inspirational marketing campaign without losing our daily sale.

Magazine Luiza had a portfolio of unique trademark marketing campaigns. Some campaigns were able to move millions of clients in just one day, also resulting in media coverage and increased public awareness. For example, on the first Saturday of each January, from 5:00 a.m. to 11:00 a.m., the “Liquidação Fantástica” (Fantastic Sales) campaign offered merchandise discounted up to 70%. In front of Magazine Luiza’s biggest stores, queues with an estimated 20,000 customers started forming days before the opening.14 The company provided waiting customers entertainment; public restrooms; and, through partnerships with other local vendors, additional supplies and amenities. On January 3, 2004, more than 2 million customers shopped at Magazine Luiza, with total revenue of R$23.9 million, or 840% of its daily average sales (see Exhibit 8 for Liquidação Fantástica pictures). Frederico commented:

The whole concept is based on dreams. Most of our clients have to wait a year for the opportunity to buy their first TV or to change their old refrigerator or armchair. Some of them keep saving for long periods just for this event. You can see the expectation and anxiety in the eyes of whole families while they are waiting in the queue. Therefore we should focus on these feelings —their aspirations—and make it an experience, not just a bargain.

Trying to replicate Liquidação Fantástica in an online format, Magazine Luiza launched “Liquidação da Madrugada.com” (Daybreak Sales.com) in August 2003. On a given Saturday, from 12:00 a.m. to 8:00 a.m., customers could buy all kind of goods through Magazine Luiza’s website.15 In the days leading up to the sale, Magazine Luiza launched an aggressive marketing campaign through different media, including personal e-mails. Discounts went up to 50%, and tens of thousands of customers waited to have access to the site. Although the website received more than 1 million hits and sales achieved R$3.5 million, the company also received a substantial number of complaints from angry clients upset with unexpected, large-scale system failures. Frederico recalled:

Not even in our wildest dreams could we conceive of something like this. All the senior team was at the headquarters following the campaign when suddenly our servers went down. Our first thought was a security breach, but very quickly we realized that the system was completely overwhelmed by our customers. In the following days all the top management of the company, including Luiza Helena and myself, personally called the most upset customers

14 Fabiano Falsi, “Lojas dão desconto de até 70% em Produtos,” Folha Dinheiro, January 3, 2004; and Luciano Calafiori, “Liquidação,” Folha Dinheiro, January 9, 2000, available in Portuguese at www.folha.uol.com.br, accessed November 4, 2004.

15 In 2004, Magazine Luiza ‘s website had approximately 2 million unique visitors per month.


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and explained what happened. Their reaction was a mix of disbelief at having “Dona Luiza” on the other end of the line and happiness for feeling that the company cared about them.

After that event the company’s sales, marketing, and IT departments started a joint effort to carefully evaluate and plan its next campaign. “We have a culture of learning through our mistakes,” commented a marketing senior manager, “and therefore we openly discuss successes and failures, strengthening the concept that creativity must prevail over fear.”

In 2004, Magazine Luiza launched two new anchor campaigns: “Sonho Legal” (Cool Dream) and “Casa em Dobro” (Double House). Both campaigns were developed in connection with a popular TV program broadcast every Sunday to an audience of approximately 3.6 million viewers from the top 10 cities.16 Added Frederico:

In the first campaign, we selected a client and provided an architect/interior designer plus construction material, furniture, and appliances to entirely refurbish parts of a house, showing that people can have a nice house without spending much more. In the second campaign, we provided a R$100,000 house itself through monthly sweepstakes in which a customer could get an entry ticket for every R$50 spent.

In 2004, Magazine Luiza expected to spend 2.8% of its total sales in advertising; by comparison, Casas Bahia, the largest advertiser in Brazil, invested approximately 6.5%.17

Magazine Luiza’s response to the typically intense price competition in the market was to provide its sales staff an unprecedented degree of freedom and decision making. Headquarters considered the salespeople entrepreneurs, fully accountable for assessing how and when they should spend their budget. Stated a Magazine Luiza marketing executive:

Our sales force bears the ultimate responsibility for understanding local behavior and acting upon it. Some will opt for a radio or a billboard ad, while others will dress all their employees with a special seasonally appropriate costume or will hire a speaker with a microphone to stand in front of the store announcing the daily offers. Each region, city, and neighborhood has its own peculiarity. However, what can bring us creativity and agility can also convey a lack of standards, damaging our image in the long run. To minimize this risk, we strongly encourage employees to discuss good and bad experiences through regular meetings or the intranet or just call us for guidance.

Store performance targets were based on a combination of sales (merchandise and services) and profit metrics as well as group and individual goals. Managers had the flexibility to respond to competition by adjusting individual product prices but were asked to maintain an average overall monthly margin. Inventory turnover was monitored online, allowing headquarters, product supervisors, and store managers to quickly respond to market demands.

Customer Segmentation

The company’s customer database held approximately 4.3 million clients, of whom 1.5 million were considered active.18 The sales force was responsible for updating client information. Frederico elaborated on some of the benefits that the company had gained from analyzing customer data:

16 This was translated to a nationwide audience of approximately 10 million viewers according to IBOPE`s methodology.

17 Revista Veja, October 31, 2004.


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Analyzing customer data allowed us to determine customer repurchase patterns. For example, we discovered that 58% of our first-time buyers in 2001 came back to buy again. However, from the ones who bought for the second time, just 36% returned for a third round [see Exhibit 9 for customer recall rate]. We also learned that regular clients typically bought within a period of three installments before or after their last payment. With this information, we took two actions. First, we trained cashiers to identify where customers were in their buying cycle and to play a central role in convincing customers to buy again. As a result, cashiers are often among our best salespeople. And second, we began a campaign to contact clients with two installments remaining, providing an offer that if they bought again they would have a 70-day grace period to pay.

From the very beginning, the firm created and courted a special customer class: the Golden Clients. Responsible for 20% of total sales but making up just 6% of its client database, Golden Clients were required to have more than seven purchases totaling at least R$2,000 fully paid for and no default credit history. In return, they received preapproved credit limits and better payment conditions and were eligible for personal birthday cards, calls from store managers informing them about special promotions, and private movie sessions organized by the company. “We need to remember that most of our clients come from small communities, and being received by a company’s top officer in a red-carpet fashion is therefore a great honor,” Frederico noted.

At the end of 2004, the executive team was discussing new ways to better segment the company’s clients. For example, how should Magazine Luiza reward clients who did not have Golden Client status? Should clients receive a preferred card after their second or third purchase? And what about a fidelity program in connection with a cobranded credit card? What kind of benefits and liabilities could this bring to the company? How would the clients perceive it? Frederico was keenly interested in the answers.

People and Management

A typical Magazine Luiza week started Monday morning at 7:45 sharp, with thousands of current employees holding hands and shouting cheery welcomes to new employees. In these meetings employees scoured the latest sales figures, making sure they were on track to meet their monthly targets. Marketing promotions for the week were outlined, and customer complaints were brought out for all to see. Finally, employees sang the national and company anthems and bowed their heads in a group prayer before buckling down to work. Commented Luiza Helena, the architect of the Monday morning ritual: “We want people to be happy and to work together as a group, but we don’t play around when it comes to results. That’s why we insist on transparency with the company's numbers, so everyone knows where we stand and has an incentive to do their part.”19

Luiza Helena’s goal was an environment that allowed self-development, open communication, ample participation from all employees, and a compensation package that reflected their effort as individuals and as a group. The backbone of this system was the idea of “assisted freedom,” by which a rigid ethical code supported mechanisms that allowed the company’s headquarters to ease control in an attempt to empower employees and foster creativity and agility. Luiza Helena recalled:

18 Clients were considered actives if they had purchased at Magazine Luiza within a 12-month period.

19 Adapted from Benson.


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When I took over the company, its mainstay was a control-oriented structure. At that time, for example, we were operating like an auditing firm with 25 stores and 50 controllers. To me, this would inhibit growth. We had to change our corporate structure and increase our focus on the employee-customer pair. We immediately created a very lean structure with few hierarchical levels, started investing in technology and, most of all, focused on our employees as our core capability. Some of the changes we made were so profound that we had to hire a therapist to help members of the group recover from the emotional stress of the process.

Conceptually, we developed a collective attitude by which every employee is responsible for the group’s success through a mutual trusting relationship. In practical terms, employees have to regularly prepare a self-auditing report encompassing all kind of activities in which they were involved. This individual report is then compared with the company’s auditing reports to check discrepancies. Obviously we have had setbacks, but they were not significant when compared with the speed, quality, and profitability achieved in the process.

We forged a transparent culture here. For example, we recently placed 10 proposed advertisements in a room which anyone could enter and place a suggestion or opinion. We also strongly encourage people to say what is wrong within the company. We have an internal program called “Denuncie” [“Report It!”] where employees can directly send an e-mail to top management stating what is not in accordance with the company’s vision.

Luiza Helena liked to say that every opportunity was a good opportunity to get the message across. External and internal communication was therefore constantly boosted within the company through a mix of different corporate initiatives. Groups of new employees wearing T-shirts with the company’s logo were constantly seen within headquarters during their 15-day training period. An internal newspaper, Luiza News, was released, company intranet chat groups were developed, and videos were produced, while regular informal and formal sessions such as the Big Meeting and regional sales meetings were relentlessly organized. In 2004, the company was considering setting up a corporate university and launching an internal TV channel.

Another key element of the company’s overall human resources strategy was its emphasis on career development and compensation. A Magazine Luiza executive elaborated:

A typical career plan at Magazine Luiza is designed by the employee and submitted to their manager. In instances where the employee wants the manager’s job, they have to clearly point out how they will help the manager to also get a promotion as well as suggest their own replacement. Frustration at not having demands accepted, a natural setback in this system, has thus far been mitigated by the company’s expansion. Actually, it is common to see former secretaries and janitors as managers and salespersons.

In terms of compensation, we developed a metric that preserves the long-term financial objectives of the company through a responsible credit policy while keeping the employee motivated in terms of daily goals. For an average employee, approximately 65% of salary is fixed, while the remaining 35% is variable pay based on sales, credit, and service productivity, respectively. We want to recognize the company’s high performers.

In addition to the compensation package, Magazine Luiza had several internal initiatives that ranged from an extra bonus for outstanding performance to a billboard recognition ad (see Exhibit 10 for an example). A scheme based on airline mileage programs was also developed, by which sales were converted into points that could be exchanged for merchandise or travel. “A bonus can thrill the pocket, but appreciation thrills the character, boosting attitude and determination,” explained Luiza Helena.


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In 2003, Magazine Luiza was named the best company to work for in Brazil.20 It was the first time that a retailer had won the annual award. In 2004 Magazine Luiza again placed among the top three companies in the list (see Exhibit 11 for the 2003 “The Best Place to Work” Award announcement).

Outlook for the Future

The Lojas Arno acquisition threatened to affect the company’s capacity to both grow and maintain its identity. If Magazine Luiza wanted to sustain a high rate of growth despite intense competitive pressures, it faced difficult decisions. The company was unable to finance new acquisitions through its own cash flow or debt. The executive team considered an initial public offering but worried that it might receive a low valuation due to a recent spate of acquisitions that were not yet fully consolidated into the company. Another option was to work with a private equity fund, but that would mean outsiders on the board of directors for the first time in the company’s history.21

In addition to financing the growth, the decision as to where to expand loomed large. Should the company protect its strongholds or move into new markets? Candidates for new markets included São Paulo, the largest city in Brazil, along with other regional markets. However, these were the places where their competitors were strongly entrenched, real estate was difficult to find, and Magazine Luiza was a relative unknown.

Along with deciding where to expand, the company needed to consider how to expand. Conventional stores were more visible and allowed easier interaction with customers—especially in the introductory stages—but they were also expensive. Alternatively, virtual showrooms were inexpensive but were based on a new concept that relied on brand recognition, which could be difficult in areas where the Magazine Luiza name and reputation were not already established.

Frederico summarized, “Tough competition in a harsh economic environment is a fact that we have to live with. Our challenge is therefore to keep our culture and business model going at the same time that the company is operating approximately 250 stores in 199 different and distant towns.” The first Porto Alegre city lights had just appeared in the distance when the pilot turned the warning signal on, requesting the passengers to fasten their seatbelts. They would have a bit of turbulence ahead.

20 The award was given by the Great Place to Work Institute, an American management consultant that ranked companies worldwide based on their capacity to achieve lasting improvements in the workplace, relationships that could produce measurable business benefits, and better corporate performance. For more details see http://www.greatplacetowork.co.uk/gptw/index.php.

21 Some in the investment community argued that the company did not have the necessary capacity for leverage; sales projections were not sufficient to justify the long-term investment.


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Exhibit 1 Map of Brazil

Source: Adapted by casewriter from Consulate General of Brazil in Los Angeles, available at http://www.brazilian-consulate.org/files.php?id=93#sa, accessed December 11, 2004.


13

Exhibit 2 Store Performance by Region (as per projected for December 2004)a

São Paulo Paraná Rio Grande

do Sul Minas Gerais Mato Grosso

do Sul & Goias # of Conventional Stores 91 24 51 34 9 # of Virtual Stores 37 61 6 - # of Distribution Centers 2 1 1 - - # of employees 2,960 690 800 1,130 310 # of customers 2,750,000 580,000 1,300,000 840,000 170,000 Sales (in million of reais) R$756 R$169 R$100a R$271 R$75 % Total sales 55.1% 12.3% 7.3% 19.8% 5.5%

Source: Company documents.

aNet consolidated in Exhibit 4 2004 figures.

Exhibit 3 Brazilian Income Stratification by Selected Regions (as of December 2002)

Brazil South

Regiona Southeast

Regionb São Paulo

State São Paulo

City Income Range (# of minimum monthly wages) Up to ½ 9.5% 5.7% 5.3% 3.4% 3.2% 1/2 to 1 17.6% 12.1% 13.7% 9.7% 7.7% 1 to 2 26.3% 28.7% 28.8% 28.1% 25.1% 2 to 3 12.3% 14.1% 15.7% 18.3% 18.6% 3 to 5 10.0% 11.4% 13.1% 16.0% 17.4% More than 5 11.4% 11.8% 15.5% 18.8% 21.8%

Total Economic Active Population (in million) 76.1 13.3 33.7 17.2 8.2

Total Population (in million) 171.6 25.8 74.6 38.3 18.4

Source: “Síntese de Indicadores Sociais – 2003 “ and “Sistema de Contas Nacionais – Brasil – 2000 – 2002,” Instituto Brasileiro de Geografia e Estatística, 2003, available at www.ibge.gov.br.

aRio Grande do Sul, Santa Catarina, and Paraná states.

bSão Paulo, Rio de Janeiro, and Minas Gerais e Espírito Santo states.


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Exhibit 4 Magazine Luiza's Balance Sheets and Financial Statements (in million of reais)

Balance Sheet 2004Ea 2003 2002 2001 2000Assets Cash and cash equivalent 76.3 21.3 33.0 32.5 14.1 Accounts receivable 109.3 114.2 80.7 61.7 77.2 Inventories 166.0 89.0 59.0 42.6 41.5 Other current assets 30.7 28.9 32.9 14.1 6.7Total current assets 382.3 253.4 192.8 150.9 139.5 Property, plant and equipment 71.6 50.8 31.2 23.9 17.5 Investments 54.0 28.7 12.1 16.1 - Others 38.3 31.5 12.8 6.8 3.9Total non-current assets 163.9 111.00 56.1 46.8 21.4Total Assets 546.3 364.4 249.0 197.7 161.0Liabilities and Shareholders� Equity Short-term debt 8.6 2.0 2.0 1.4 6.3 Suppliers 292.6 227.0 154.1 114.4 95.4 Other current liabilities 74.9 53.0 35.5 27.6 27.1Total current liabilities 376.1 282.0 191.6 143.4 128.8 Long-term debt 64.5 14.9 3.6 6.6 3.2 Other liabilities 26.9 9.1 5.3 12.1 4.0Total non-current liabilities 91.4 24.0 8.9 18.7 7.2Total Liabilities 467.6 306.0 200.5 162.1 136.0 Shareholders' Equity 50.0 43.3 23.5 23.5 23.5 Retained Earnings, Minorities & Others 28.7 15.1 24.9 12.0 1.4Total Shareholders� Equity 78.7 58.4 48.4 35.5 24.9Total Liabilities + Equity 546.3 364.4 249.0 197.7 161.0

Income Statement Gross Sales 1,270.9 917.9 699.9 588.4 546.6Net Sales 935.0 724.6 550.6 476.3 441.0CoGS (582.5) (485.6) (372.3) (332.4) (301.6)Gross Profit 352.4 238.9 178.3 143.9 139.6Operating Expenses (326.7) (214.2) (161.6) (131.4) (133.9)Credit Losses na (11.1) (6.7) (23.8) 12.8Operating Profit 25.6 24.6 16.6 12.4 5.7Depreciation & Amortization (18.4) (9.9) (5.9) (4.3) (3.3)Financial Income (Expenses) (39.0) (29.2) (13.3) (10.2) (14.6)Non-operating Items - - - (0.6) -Earnings before Tax 25.7 24.7 16.6 11.8 5.7Provision for Income Tax (1.5) (3.1) (2.9) (6.4) (1.8)Extraordinary Gains (Expenses) - (19.0) (4.0) - 2.1Net Income 24.1 8.8 15.6 18.2 6.0


aExpected figures for December 2004.


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Exhibit 5 Magazine Luiza's Conventional Stores


Exhibit 6 Average Monthly Interest Rates for Individual Borrowers (in %)

Average Interest Rate for Individual Borrowers

-

50.0

100.0

150.0

200.0

250.0

300.0

Jul-94 Jul-95 Jul-96 Jul-97 Jul-98 Jul-99 Jul-00 Jul-01 Jul-02 Jul-03 Jul-04

Selic - Basic Interest Rate

Source: Adapted by casewriter from Banco Central do Brasil, “Economia e Finanças – Séries Temporais – código 3953 and 4189,” Banco Central do Brasil website, http://www.bcb.gov.br.


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Exhibit 7 Magazine Luiza's Virtual Store



17

Exhibit 8 Magazine Luiza's Liquidação Fantástica



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Exhibit 9 Magazine Luiza's Customer Recall Rate

100%

58%

36%

23%

15%10% 7% 5% 3% 2%

1st Sale 2nd Sale 3rd Sale 4th Sale 5th Sale 6th Sale 7th Sale 8th Sale 9th Sale 10th Sale


Exhibit 10 Magazine Luiza's Recognition Billboard



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Exhibit 11 2003 “Best Places to Work” Award in Brazil

Source: Claudia Vassallo, “Magazine Luiza – A melhor empreasa para trabalhar,” Revista Exame, Front Cover, Editora Abril, September 17, 2003.

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