Casas Bahia: Fulfilling a Dream

Social 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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Social Entrepreneurship
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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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Social Entrepreneurship
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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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Social Entrepreneurship
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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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Social Entrepreneurship
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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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Social Entrepreneurship
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Exhibit 1

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Social Entrepreneurship
2011-01-0073

Exhibit 2
Casas Bahia’s Innovative Platform

Source: Booz Allen Hamilton

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Social Entrepreneurship
2011-01-0073

Exhibit 3
Website of Casas Bahia – Another proof of their technical strengths

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