Wednesday, July 14, 2004
Magazine Luiza: Retailer to the poor
The New York Times is carrying a very interesting profile of Magazine Luiza, a retailer in Brazil that specialises in selling in rural areas and to the urban poor. Conventional wisdom would have that selling to the poor is a very unprofitable business model. Fact is Magazine Luiza is the third largest non-food retailer in Brazil today with sales of about $477 million for the current fiscal. By September, Magazine Luiza will have 235 stores and 5,700 employees across 6 of Brazil's 27 states.
Through the store's strategy of selling in installments and providing affordable credit in a country with some of the world's highest interest rates, Mrs. Rodrigues, 52, has managed to bolster the spending power of the poor in Latin America's biggest consumer market. And by requiring customers to return to the store each month to make payments in person, this strategy has enticed many to make new purchases with a steady diet of blowout sales - prices can be reduced by as much as 70 percent - on wares that include furniture, refrigerators and other household goods. In a country where almost half the population does not have a checking account, the retailer also provides services - including personal loans and insurance policies - that would otherwise be out of reach to many customers.
About 35 percent of Magazine Luiza's profit comes from financial services, and 80 percent of the chain's sales are on credit. But the default rate of its clients is 50 percent lower than the average for Brazil's retailers, and its customers are fiercely loyal. Almost two-thirds of shoppers are repeat customers.
Critics say that retailers like Magazine Luiza and its larger rivals, Casas Bahia and Ponto Frio, prey on the poor by burying steep interest rates in their payment plans. But the lending policies of the three are roughly in line with - or more generous - than the norm here. For example, Magazine Luiza charges average monthly interest of 4 percent, while credit card rates can surpass 13 percent a month, far more than most Brazilians can afford.
long before Brazilians were familiar with shopping on the Internet, Mrs. Rodrigues delved into electronic commerce. Aiming at rural towns and poor urban neighborhoods, Magazine Luiza started opening stripped-down versions of its department stores with showrooms empty except for banks of computers, which sales representatives used to help customers view the chain's merchandise. Everything from washing machines to baby strollers is available through these "virtual stores" via high-speed computers connected to the company database, with home delivery guaranteed in 48 hours.
These stores, which require just 15 percent of the investment needed to set up a conventional store, also offer free Internet service and a variety of courses, from cooking classes to basic computer training. And thanks to a partnership with Unibanco, a large Brazilian bank, most of the virtual stores have a bank teller on site. People can also pay their utility bills there. The overall idea, Mrs. Rodrigues says, is to draw potential customers into her stores.
Until now, Magazine Luiza has managed to grow by steering clear of Brazil's two biggest cities, São Paulo and Rio de Janeiro, where its competitors are already firmly entrenched. Mrs. Rodrigues, however, intends to open her first stores in São Paulo this year, taking the virtual store model to blue collar neighborhoods on the city's outskirts in hopes of breaking into Brazil's largest consumer market.
Stories such as this (and Grameen Telecom) serve as reminders that the only reason why the world's poor remain untapped is because of a lack of creative thinking within business communities. Innovation and the lowering of transaction costs are key. After all, just about anything can be sold or bought at the *right* price. Finding that right price point is the tricky part in untapped/rural markets.
PS: On another note, I wonder sort of credit/risk assessment system Luiza uses. Clearly, a very large part of the transactions are credit-based and they claim an excellent repayment rate. Question then is how credit-worthiness is assessed among people who are not likely to have credit histories. If anyone has a clue, let me know.
Through the store's strategy of selling in installments and providing affordable credit in a country with some of the world's highest interest rates, Mrs. Rodrigues, 52, has managed to bolster the spending power of the poor in Latin America's biggest consumer market. And by requiring customers to return to the store each month to make payments in person, this strategy has enticed many to make new purchases with a steady diet of blowout sales - prices can be reduced by as much as 70 percent - on wares that include furniture, refrigerators and other household goods. In a country where almost half the population does not have a checking account, the retailer also provides services - including personal loans and insurance policies - that would otherwise be out of reach to many customers.
About 35 percent of Magazine Luiza's profit comes from financial services, and 80 percent of the chain's sales are on credit. But the default rate of its clients is 50 percent lower than the average for Brazil's retailers, and its customers are fiercely loyal. Almost two-thirds of shoppers are repeat customers.
Critics say that retailers like Magazine Luiza and its larger rivals, Casas Bahia and Ponto Frio, prey on the poor by burying steep interest rates in their payment plans. But the lending policies of the three are roughly in line with - or more generous - than the norm here. For example, Magazine Luiza charges average monthly interest of 4 percent, while credit card rates can surpass 13 percent a month, far more than most Brazilians can afford.
long before Brazilians were familiar with shopping on the Internet, Mrs. Rodrigues delved into electronic commerce. Aiming at rural towns and poor urban neighborhoods, Magazine Luiza started opening stripped-down versions of its department stores with showrooms empty except for banks of computers, which sales representatives used to help customers view the chain's merchandise. Everything from washing machines to baby strollers is available through these "virtual stores" via high-speed computers connected to the company database, with home delivery guaranteed in 48 hours.
These stores, which require just 15 percent of the investment needed to set up a conventional store, also offer free Internet service and a variety of courses, from cooking classes to basic computer training. And thanks to a partnership with Unibanco, a large Brazilian bank, most of the virtual stores have a bank teller on site. People can also pay their utility bills there. The overall idea, Mrs. Rodrigues says, is to draw potential customers into her stores.
Until now, Magazine Luiza has managed to grow by steering clear of Brazil's two biggest cities, São Paulo and Rio de Janeiro, where its competitors are already firmly entrenched. Mrs. Rodrigues, however, intends to open her first stores in São Paulo this year, taking the virtual store model to blue collar neighborhoods on the city's outskirts in hopes of breaking into Brazil's largest consumer market.
Stories such as this (and Grameen Telecom) serve as reminders that the only reason why the world's poor remain untapped is because of a lack of creative thinking within business communities. Innovation and the lowering of transaction costs are key. After all, just about anything can be sold or bought at the *right* price. Finding that right price point is the tricky part in untapped/rural markets.
PS: On another note, I wonder sort of credit/risk assessment system Luiza uses. Clearly, a very large part of the transactions are credit-based and they claim an excellent repayment rate. Question then is how credit-worthiness is assessed among people who are not likely to have credit histories. If anyone has a clue, let me know.
