Casas Bahia Case Study

Pr oduct Number 000
Rel eased August 31, 2003

Rel eased December 12, 2003

From the Department of
LEADI NG I N THOUGHT AND ACTI ON
CORPORATE STRATEGY AND INTERNATIONAL BUSINESS

CASE STUDY SERI ES

[=

This report was written by Sami Foguel and
Andrew Wilson, under the supervision of
Professor C.K.Prahalad. This report is
intended to be a catalyst for discussion and
is not intended to illustrate effective or
ineffective strategies.

Copyright, The University of Michigan
Business School, 2003

Casas Bahia
Iulilling a Dream
1hrough a unique approach to customer service, Casas Bahia has
developed an innovative business model that successully serves the
Bottom o the Pyramid` (BOP) population throughout Bra.il.
THE INNOVATION. . .
The poor represent a market, a big, lucrative, and sustainable one
with the right financial approach in countries where even Sears and
Wal-Mart have failed.

It is all about fulfilling the customer dream. My sales agent has to be
very well dressed, shaved and always smiling. If he has a personal
problem, he cannot come to work. I will never allow him to transmit
to my customer anything but perfection.
Michael Klein, Chief Financial Officer, Casas Bahia

In J!, ater surviving two years in a Na.i concentration camp,
Samuel Klein let his homeland to start a new lie in Bra.il. In order to
support his amily, Mr. Klein sold blankets, bed linens, and bath towels
door to door in So Caetano do Sul. Iity years later, Samuel Klein has
transormed his door-to-door business into the largest retail chain in
Bra.il, selling electronics, appliances, and urniture. Casas Bahia`s
igures are signiicant: R3!.! billion in revenues (the Reais is the
Bra.ilian currency), !!0 stores, J0 million customers and !0,000
employees. Samuel Klein has built Casas Bahia into a successul and
sustainable business serving Bra.il`s poor.
When my father arrived in Brazil, he realized the average population
was not wealthy. Thousands of people were migrating from the
northeast region to work in So Paulo. That is why our name is
Casas Bahia (Bahia is the largest state in the northeast region). This
population needed all kinds of basic goods, such as linens, towels,
and sheets. My fathers vision was to fulfill the needs of the poor
population. But how could they pay for it? The answer was simple:
financing.
Michael Klein


2003 Uni ver si t y of Mi chi gan Regent s
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1oday, Samuel Klein`s two sons, Michael and Sal, manage the day-to-day operations at Casas Bahia.
Michael is responsible or inance, stores, distribution, leet, technology, and employees. His brother, Sal,
oversees suppliers, customer sales, and marketing. 1hough Samuel no longer visits stores, due to security
concerns, he is always at the headquarters and considered the mind o the company.` Moreover, his son
Michael states, He Samuel{ understands this business better than anyone else in the world. I would be
oolish i I did not use this invaluable resource.`
Casas Bahia believes in staying true to its customers. As an eample o the company`s ability to both
relect and support the communities they serve, Casas Bahia`s headquarters have remained in the blue-
collar city o So Caetano. 1he atmosphere and attire are casual. Samuel Klein has set the tone and
philosophy o Casas Bahia. His deceptively casual attire masks an intense head or business and passion
or his customers and employees. 1his passion or total dedication to service has led to an atmosphere o
reverence rom both employees and customers. When you enter the headquarters o Casas Bahia, a large
caricature portrait o Samuel leaning over a Casas Bahia store greets you. A grateul employee who,
despite having no ormal art training, wanted to show his appreciation to the man who had changed his
lie painted it. One o Casas Bahia`s most successul regional sales managers has a lie-si.e painting o
Samuel in his oice serving as a reminder o the traditional values the charismatic ounder instilled
within Casas Bahia. When Michael attends store openings, lie-long customers will approach him to
show their appreciation and ask how his ather is doing.
1he culture and philosophy are important to the continued success at Casas Bahia. Maintaining
control over culture is one reason Samuel Klein is adamant about not selling a stake to outside investors.
'Partners boss you around,' he says. 1his deceptively simple approach to business is at the heart o
Samuel Klein`s direct, old-world style o management. He does not like surprises and ollows his
instincts. Mr. Klein believes in an iron-isted control over spending. Only our Klein amily members
have the authority to sign checks. While Michael and Sal continue to perpetuate their ather`s belies
and management style, they have begun to moderni.e the business. 1he current emphases in marketing
and inormation technology are the clearest signals o moderni.ation.
Scope and Size of Opportunity
Bra.il maintains a standard that stratiies individuals into one o ive basic economic classes: A, B, C, D or
F. C, D F are considered to be the Bottom o the Pyramid` (BOP). In !00!, the population in Bra.il
was J6 million, 8!/ o whom are considered to be at the BOP. 1he economic stratiication is illustrated
in the ollow table:

Brazilian Stratification Breakdown
FAMILIAR
INCOME
(MW*)
ECONOMIC
SEGMENT
POPULATION
(MILLION)
HOUSEHOLD
(MILLION)
INHABITANTS/
HOUSEHOLD
0-! F !.! .6 .J
! - ! D !!.! .! !.
!-J0 C !8. J!.6 !.0
J0-! B !J.6 .! !.0
>! A .! !. !.
MW Minimum Wage R3!00/month

1he BOP represents signiicant purchasing power in Bra.il`s economy, representing !J/ o total spending
capacity. 1his US3J!! billion only accounts or the ormal, reported economy. It is estimated that the
inormal market in Bra.il or the BOP reaches an additional 0/. Speciically, !/ o total appliance and
urniture spending is done by the BOP.

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Source: 1arget, 3 million

What is o particular interest is the high penetration o ma;or appliances, such as television sets and
rerigerators, at the Bottom o the Pyramid in Bra.il. It is not uncommon to ind households with a
television or rerigerator yet lacking basic inrastructure, such as toilets and telephone lines. 1hose at the
BOP in Bra.il spend based on their needs. In a tropical climate, a rerigerator is a necessity. Fveryone,
regardless o class, eels the need or entertainment. Ior the poor in Bra.il, that comes in the orm o
television or radio.
Total Spending Outlays by population categorized as C, D, & E
0% 5% 10% 15% 20% 25% 30% 35%
Educational
Furniture
Travel & Entertainment
Appliances
Apparel
Transportation
Health Related
Other
Housing Payments & Maintenance
Food & Beverage
$40.1 or 32%
$22.5 or 18%
$19.2 or 16%
$12.3 or 10%
$10.3 or 8%
$6.9 or 6%
$4.7 or 4%
$3.1 or 3%
$2.9 or 2%
$1.7 or 1%
(Billions of USD)
1,880
3,847
2,763
1,649
244
Total Appliance
Spending ($US)
18
37
27
16
2%
A
B
C
D
E
70,869
103,61
76,857
40,235
6,631
Total Spending
Capacity ($US)
24
35
26
13
2%
A
B
C
D
E
1,377
2,177
1,903
867
167
Total Furniture
Spending ($US)
A 21
B 34
C 29
D 13
3% E


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Penetration of Selected Goods by Economic Status

SEGMENT
E
SEGMENT
D
SEGMENT
C
SEGMENTS
A AND B
Households !!/ !J/ !8/ J8/

Number o toilets/household
0 !6/ J!/ / J/
J 60/ / !/ !/
! !/ 8/ J8/ !!/
! 0/ J/ !/ J8/
>! 0/ 0/ J/ 8/

Garbage Pick up 60/ 80/ 0/ 6/
Flectricity 8/ 6/ / J00/
Phone JJ/ !8/ J/ 86/
Microwave !/ / !!/ 8/
Rerigerator/Iree.er 6!/ 88/ 6/ /
o~= TUB= UUB= VPB= VTB=
q= TOB= VMB= VSB= VVB=
Typical Customer
Seventy percent o Casas Bahia customers have no ormal or consistent income. Casas Bahia customers are
primarily maids, cooks, independent street vendors and construction workers whose average monthly
income is two minimum wages (R3!00). Customers typically live in concentrated areas called avelas.`
1he average si.e home in a avela can be as small as !J square eet and house up to seven amily
members. As a result, these communities are densely populated with approimately !,000 people per
square kilometer. In comparison, according to the U.S. Census Bureau, ive o the most densely populated
cities in the United States are: Union City, NJ (J,6!); Guttenberg 1own, NJ (J6,6); West New York
1own, NJ (J!,!80); Hoboken City, NJ (J0,J!!); and New York City, NY (,JJ).
Competitive Landscape
Casas Bahia has operations in three Bra.ilian regions and eight states: Southeast (So Paulo, Rio de Janeiro
and Minas Gerais), South (Santa Catarina and Paran) and Central West (Distrito Iederal, Gois and
Mato Grosso do Sul).
1he competitive landscape o the retail industry in Bra.il is constantly changing based on product
oerings, geography and target population. Ior eample, Ponto Irio oers a wide range o products,
but primarily serves the medium- to high-income population. Marabrs is ocused on the BOP, but only
carries urniture. Casas Bahia`s competition also varies by region. In the Southeast region top
competitors include Ponto Irio, Lo;as Cem, Maga.ine Lui.a, Marabrs and Kolumbus. Lo;as Columbo
is the only serious threat in the south.


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Due to diicult economic conditions, the retail landscape over the past several years has seen many
competitors eit the industry as well as considerable consolidation. With no new entrants, a large
portion o the market share is concentrated with only a ew companies. 1he top ive competitors
comprise !/ o total retail sales. Casas Bahia remains the leader with approimately J/ to !0/ o the
market. 1he top competitors continue to grow; Casas Bahia, Ponto Irio, Marabrs and Lo;as Cem
averaged J0/ growth per year over the past several years. Others, such as Maga.ines Lui.a, eperienced
!0/ growth per year in the last decade.
With average net margins in the retail sector a modest !./, competition is ierce and volume
based. As such, it is doubtul that many new companies can aord to enter the market. 1hus, the
remaining / o the market, which is comprised o small to medium regional stores, should provide
the opportunity or urther consolidation within the retail market.
Until now, Casas Bahia has only concerned themselves with traditional` competitors. Recently,
large hypermarts, such as Carreour, Ftra, and Big, have begun to enter into the appliance and
urniture business. 1he entrance o these companies into the market represents an increasing threat to
Casas Bahia. Hypermarts generate high customer traic and have strong brand recognition. 1hey have
the physical si.e to accommodate additional merchandise as well as an eisting distribution network o
locations. Moreover, the diicult economic times are orcing hypermarts to ind new ways o increasing
the amount o each customer`s purchase. Despite this emerging threat, Michael Klein believes the Casas
Bahia business model is distinct and that our customer service is ar above the competition.`
Casas Bahia Business Model / Positioning
Management Style
While his ather`s management style is the basis or Casas Bahia`s culture, the moment you walk into
Michael`s oice and see the large lat panel monitor sitting on his desk, you begin to notice how Casas
Bahia is leveraging Samuel`s traditional ideals with modern concepts. As Michael taps on his keyboard,
the monitor pops to lie and the modern maniestation o Casas Bahia`s traditional values appears. 1he
screen displays a large array o real-time inormation: total unit sales, total revenues, total inanced value,
average down payment, average interest paid, average payment period, percentage use o own resources to
inance, use o third party or inancing (borrowing) and total sales to customers who enter the store to pay
an installment (cross sale).
All stores are linked and monitored real time. Casas Bahia has developed a system that can analy.e
data rom multiple points o view: individual store, groups o stores, region, city and even by product
category, individual product line or SKU. Irom his desk, Michael can track the results o the si million
people who enter his stores every month. 1hose si million customers generate an average 00,000 new
sales per month, / o whom take advantage o a cross-selling opportunity. 1he people comprising this
/ have an average balance o R3JJ. million and purchase an additional R3!J million. 1he percentage
o cross selling seems relatively low because customers are eligible to make additional purchases once
they have paid at least 0/ o the original purchase.
Currently, the average inance term is si months, the average interest rate is !.J!/ per month
(ranging rom !./ or our-month term sales to 6/ or J!-month term sales), the average ticket is
R3!!0 and the deault rate is 8./. Deault rates vary by product. Ior eample, urniture has a deault


6 of 24
rate o !/. Since Casas Bahia delivers and installs the merchandise in the customer`s home, it is much
easier to collect. Conversely, portable items such as mobile phones and bicycles have deault rates o up
to J0/. Casas Bahia does not monitor deault rates by length o loan.
All ma;or pro;ects, capital or otherwise, are under Michael`s supervision and direction. 1hough
each pro;ect varies based on particular circumstance, Casas Bahia maintains general guidelines. A new
store must have at least J00,000 potential customers. Casas Bahia also will eamine the number o
inquiries made to the Service o Credit Protection (Servio de Proteo ao Crdito or SPC). 1his will
provide a rough estimate o the commercial activity in a particular area. Additionally, the cost o
logistics is eamined, i.e., how close the acility will be to either o the three distribution acilities or the
si cross-docking centers or i a new cross docking center would be warranted.
Michael gives a signiicant amount o reedom to store and region managers. 1he only
requirements are predetermined revenue and proit targets. Knowing their stores` cost structure,
managers have discretion to manage their operations as they see it. A store manager has the ability to
reduce the price o any product up to J0/ to match the competition. I more negotiations are required,
the regional manager can authori.e a price reduction up to !/. Anything greater than !/, the
regional manager will call Michael Klein directly. With more than !0,000 employees, there are only
three levels rom the store manager to the top eecutive. 1his autonomy does not equal a lack o control.
An internal audit system is one o the important management tools or Michael.

We are always auditing our operations. I have an internal audit team. They show up unexpectedly in one
store and check everything: the money on the cashiers, the inventory, the cleanliness and the quality of in-
store advertising. Everything is checked.
Michael Klein

One o the most important managerial tools at Casas Bahia is the daily Director lunch. Fvery day, the
Klein amily and key eecutives sit down over lunch to discuss current issues. 1uesdays are reserved or
discussions with key suppliers. Occasionally, an outside guest is invited to lecture about a speciic topic.
1he conversations are quick and inormal. 1ypically, the ood is only served once all the guests have
arrived. 1he environment is very relaed and lighthearted. When an attendee introduces an important
topic, the atmosphere in the room will change slightly. Ior eample, Sal asks his Sony supplier about a
price increase. Ater J minutes o negotiation an agreement is reached.
A recent change in interest rates is brought up. 1he change is analy.ed based on the impact to inal
installment prices. Fvery eecutive sitting around the table knows his or her speciic business down to
the lowest level and what impact an interest change will have. Ior instance, the marketing director
begins to discuss how a change will aect his current and scheduled promotions. In such a relatively lat
organi.ation, it is easy to pass decisions down through all levels o the organi.ation. While still in the
meeting, eecutives will be on the phone with store managers to better understand the impact. 1he ast-
paced decision-making does not iner that decisions are uniorm or made hastily. 1he determination o
rates and terms or Casas Bahia merchandise takes into consideration the negotiation in the buying
process (purchase power), market interest rates, product deault rates and sales volume (seasonality,
etc.). Once all issues have been inali.ed, lunch is complete. All eecutives leave the room knowing what
to do and sharing a broad vision o Casas Bahia operations.

Casas Bahia maintains a simple culture dedicated to serving the customer by undertaking an
aggressive style when it comes to other areas o its business. Ior eample, when Casas Bahia enters a
market, it wants to gain market share quickly. 1he goal is always to be irst in every market. We enter
the market to be the leader, to be the best. When we arrive, we want to attract everybody, and then we
clean the base and cross sell,` says CIO Irederico Wanderley. 1his mentality is not without a signiicant
cost. When a store is opened, its deault rate averages J6/, almost double the company average. It takes
a couple o years or that J6/ to come down to the average o 8./. 1he cost o customer acquisition is
considered a cost o doing business at Casas Bahia.

Default Evolution in New Stores - Sobradinho, DF
7
8
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10
11
12
13
14
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1his aggressiveness also applies to Casas Bahia suppliers. Due to their si.e, Casas Bahia purports to be able
to buy rom suppliers at lower costs than competition while still being able to sell or about the same price.
1he secret is not to pass our margin on to the inal product price. 1hus, we respect suppliers` brands,
remain competitive and maintain our proitability,` says Allan Barros, Director o Iurniture.
FINANCE
Brazilian Overview
Finance here is totally different from what one learns in school. First, the informal market is twice as big as
the formal market, especially in the lower-income population. Most of my customers do not declare income.
I have to believe what they are telling me. Here, several multinational retailers did poorly because they were
not able to understand local needs, for example, Sears and Wal-Mart.
Michael Klein

7 of 24

Retail banks in Bra.il are Universal Banks,` with wide national presence and complete product oerings
such as credit, savings, insurance and inance products. Client inormation is very important because the
credit bureau in Bra.il, Servio de Proteo ao Crdito (SPC), provides only positive/negative inormation
on customers. Any disclosure o credit inormation is illegal. Based on historically high interest rates, the
banking system is highly proitable. Maintaining this proitability has made banks` credit policies
conservative toward the low-income population. Consequently, access to current account varies
signiicantly with economic level.

Segment
Current Account
Penetration (%)
A >0
B 60/
C/D/F <!0/

Since traditional banks would not serve the poor population, Iinanceiras, consumer credit
companies, emerged to serve unmet consumer credit needs. 1heir core business is conceding credit to
low-income people who do not have access to a bank account. Additionally, a signiicant amount o
current account holders rely on Iinanceiras because traditional banks cannot ulill all their credit
needs. Iinanceiras typically have very high interest rates, up to J!/ per month on personal loans, and
origination ees that keep a signiicant share o this population away rom credit products.

Evolution of Distinct Interest Rates
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1998 1999 2000 2001 2002
Year
%

p
e
r

m
o
n
t
h
Basic rate
(SELIC)
CDC with
colateral
CDC - Without
colateral
Overdraft
Credit Card
Financeiras
Loan

8 of 24


9 of 24
Casas Bahias Role
Casas Bahia emerged by ulilling this untapped inancing need. Since ;oining the company ! years ago,
Celso Amancio, Director o Credit, has helped the company perect a unique inancing model that has
enabled Casas Bahia to successully serve BOP customers, customers previously ignored by the retail
industry. Casas Bahia`s motto is, 1otal Dedication to You.` 1his dedication is evident since Casas Bahia
has created a culture whose sole purpose is to ulill the dreams o its customers,` says Celso. While many
companies considered Casas Bahia customers undesirable, Casas Bahia saw an opportunity.
In order to serve the poor population, Casas Bahia developed an innovative approach. Part o the
solution is the now amous carn,` or passbook, that allows its customers to make small installment
payments or the merchandise. Payment schedules range rom one to J months. 1he passbook is
payable only at Casas Bahia stores, and every month consumers must enter a store to pay their bill. 1his
method also helps to maintain relationships with clients. 1he inanced sale is responsible or 0/ o all
sales volume: 6/ are cash payments and !/ are credit card.
All customers who wish to inance their purchase must submit to an SPC credit check. I the
customer has a negative SPC score, Casas Bahia will not be able to complete the transaction until the
customer resolves his credit problem. I the customer has a positive score, there are two alternatives. I
the merchandise costs less than R3600, no proo o income is required; a valid permanent address will
suice. I the merchandise costs more than R3600, Casas Bahia has developed a proprietary system to
evaluate the prospective client. 1hey receive a credit limit based on total income, both ormal and
inormal, occupation and presumed epenses. 1his scoring` process takes less than one minute. I the
system approves the prospect, the salesperson can continue with the sale. I the client is re;ected by the
system, he or she is directed to a credit analyst or urther evaluation. 1his is where the importance o
building a relationship is prominent. Based on training, the credit analyst will ask a series o questions to
determine a client`s creditworthiness. 1he entire process typically is inished in J0 minutes or less.
1he proprietary system that determines the creditworthiness o new clients also evaluates eisting
clients or potential new purchases. Based on the same drivers noted above, in addition to payment
history, the system will automatically produce a new credit limit. 1his ability is key in the cross-selling
process. When the customer comes into the store to pay their monthly installment, a new credit limit is
available to the Casas Bahia salesperson. 1his salesperson has the opportunity to make a tailored cross
sale in the amount o the new credit limit.
Many outsiders argue that Casas Bahia is simply eploiting the poor and charging them eorbitant
interest rates because the poor do not know any better. Quite the opposite seems to be true. In order to
maintain low deault rates, salespeople must teach` consumers to buy according to their budget. Ior
instance, a customer enters the store and wants a new !` television. A salesperson will sit down with
the customer (a Casas Bahia Regional Manager mentions you always discuss price sitting down, so it is
harder or the customer to walk away) and discuss multiple payment options. I it becomes clear the
customer cannot aord the !` television, the salesperson will work with them to tweak` their dream
to temporarily include a !0` 1V.
1he consumer education process is a key component or Casas Bahia to have a deault level o 8./.
1o put it into perspective, the average or the entire retail sector, which serves all income levels, is 6./.
Casas Bahia`s competition at the BOP has a deault rate that reaches J6/.

Monthly Average Default Rate in Retail
Industry
Average
Monthly Default
Rate
CB Furniture's
default rate
Marabraz
Furniture's
default rate
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
18.0%
1998 1999 2000 2001 2002
Year
M
o
n
t
h
l
y

d
e
f
a
u
l
t

(
%
)

If you look at the default rate for furniture at Casas Bahia, it averages 4.5%. Marabrs, our main competitor
in the furniture industry, has an average default rate of 15% to 16%. One of the driving factors of the higher
default rate is that they dont finance the customers themselves. In the [competitors] store you have a
number of kiosks from various financeiras. The customer simply chooses a kiosk. This creates a large
disconnect between the salespeople and customer. The salesperson has no incentive to build a relationship
with customers or understand their abilities and needs because they are at no risk.
Michael Klein

1hough Casas Bahia has become the largest retailer in Bra.il by ocusing on inancing BOP customers, it
has also provided several challenges. Identiying and overcoming these challenges has strengthened the
vision Samuel Klein had over 0 years ago. I you ask any customer they will state, At Casas Bahia, it is
easy to get credit.` Samuel Klein believes that customer needs are paramount and it should be as easy as
possible or the customer to ulill their dream. 1o make a seamless and eicient customer-acing process
requires rigorous and strict planning by Casas Bahia. It starts with the training o its credit analysts.
Training
1he credit analyst plays a vital role in the success o Casas Bahia. As such, the company has devoted
signiicant time and resources to train its credit analysts. With an average o 0,000 customers requesting
inancing every month (J.! million in December), Casas Bahia`s 800 credit analysts are the lynchpin, not
only in maintaining a deault rate below industry average but also in raud detection. In !00!, !,000 cases
o raud representing 3!!0 million were averted.

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11 of 24
Many at the Bottom o the Pyramid` have never applied or or been granted credit, rendering the
ormal SPC system useless. Without a steady or reported income and a personal economic status that
can change daily, it is up to the credit analyst to decide i the customer they are dealing with is honest,
sincere, and will be able to make the necessary payments. Fvery customer who presents himsel or
hersel has a unique situation. 1he training the analysts receive prepares them to make decisions that
enable the continued success o Casas Bahia.
1raining is a combination o classroom and inormal techniques. 1he irst step takes place in the
classroom. Fmployees learn the basics ranging rom the importance o personal grooming to the
necessity o having a positive attitude toward the customers. It is in the classroom where Casas Bahia
employees begin to understand the importance o building a long-lasting relationship with the
customer. When people, especially the poor, walk into the store, they want a riendly ace, someone who
they can talk to about their day. Customers want to ensure the person they are talking with understands
their background and can help them ulill their dream. According to Celso Amancio, many customers
come in as a client and leave as a riend.`
1he relationship between the analyst and customer creates a virtuous cycle. Ior instance, a
customer enters Casas Bahia in need o an oven to replace her current oven that is no longer working,
yet is currently unable to pay. Based on either an eisting relationship or one that is developed in the
short time she is in the store, a credit analyst can approve the loan even i the customer does not
currently have the necessary proo o income. 1he customer is grateul the analyst is taking a chance
and trusting she will make the payments. 1hen, when things turn around or the customer, she is
willing to buy more rom Casas Bahia and she also tells amily and riends about the eperience.
It is also in the classroom where analysts learn the importance o asking the right questions.
Depending on the store location, the analysts will learn about their customer`s primary livelihood. Ior
eample, i a customer comes in and says he is a construction worker, the analyst will begin to discretely
si.e up` the customer. 1hey will notice i the customer has calluses on his hand or wrinkles around
their eyes rom working outside all day. 1he analyst also might ask a ew technical questions in the
contet o a pro;ect they may be involved with at home. 1his interaction serves two purposes: It begins
to ilter out raud potential, but more important helps build the relationship with that customer.
Analysts are taught to always ask questions and be creative in trying to understand the customer.
Ater completing classroom training, new employees shadow` an eperienced employee or two
weeks in a store. 1rainees learn irst hand how to implement classroom teachings and the importance o
cross selling at Casas Bahia. Cross selling is an important part o the company`s success since / o
clients who open an account make repeat purchases.
Another important aspect o Casas Bahia training is teaching the analyst the art o saying no` to
the customer. An estimated J6/ o customers applying or credit are denied. What is a seemingly basic
concept has a long-lasting importance to Casas Bahia customers. When a customer enters a Casas Bahia
store, they are hoping to ulill a dream. When you tell a potential customer no,` you are eectively
destroying their dream. Samuel Klein has ostered a culture where this is unacceptable. Analysts always
work to maintain the relationship. 1he customer should be viewed or their long-term potential as
lietime customer. Although they can`t aord something right now, their situation will improve and
then they can buy that new 1V.
Re;ection is sometime necessary and appropriate. 1he main reasons or re;ection are threeold:
negative SPC rating, credit limit and third-party acquisition. With a negative SPC rating, there is
nothing Casas Bahia can do. 1he analyst states that i it were up to Casas Bahia, they would do business,


12 of 24
but cannot due to the score. 1hey apologi.e and mention that as soon as the little problem` is resolved,
they will welcome the customer back and inish the transaction. An insuicient credit limit is handled
with oers o similar products or dierent brands or models. 1hird-party acquisition is when the actual
customer has a bad credit rating or cannot aord the merchandise himsel, so he has another person
purchase it or them. 1he customer would then pay the third party. However, this arrangement usually
leads to deault. Iirst, there is a reason the customer could not aord the merchandise in the irst place;
second, the third party who purchased the merchandise has no vested interest in paying Casas Bahia.
1hird-party purchase is the leading cause o deault at Casas Bahia. 1he second is unemployment, and
third is simply spending beyond one`s means.
Cash Management
Casas Bahia`s dependence on banks is very low. According to Michael Klein, Bra.ilian law does not
permit Casas Bahia to und the interest portion o its consumer loans. 1hereore, that portion is packaged
and sold to banks or inanceiras. Casas Bahia used to have its own inanceira. 1he company dissolved this
entity because it was not the core business or Casas Bahia. Now, the company`s policy is to borrow as little
as possible and inance the customer while unding the epenses internally.
Additionally, Casas Bahia does not hold to eternal currencies. 1his is especially important in the
Bra.ilian economy, where local currency devaluations have caused prices to increase dramatically. Casas
Bahia believes that since they do business in Bra.il, the company`s currency and eposure should be
within Bra.il. Moreover, minimal eposure to banks or eternal debt is beneicial.
Products
Casas Bahia carries and sells top-quality brands: Sony, 1oshiba, JVC and Brastemp (Whirlpool). 1here is
a misconception that because customers are poor they do not desire quality products. In Bra.il, C, D F
customers desire the same merchandise as A B customers. 1hey want the dream they see on 1V, not a
cheapened version o that dream. 1he dierence is that individuals at the Bottom o the Pyramid cannot
aord to walk into a store and pay 300 cash or a new rerigerator. 1hey can aord to make small
installment payments to pay or that new rerigerator.
Currently, urniture is Casas Bahia`s top-selling product category at !J/ o total sales. 1elevisions
place second at J!/, and audio products are third with J0/ o total sales. Remaining sales are spread
among phones, computers, electronic accessories and appliances.
Casas Bahia`s purchasing power is one o its key success actors. In !00!, Casas Bahia sold J8/ o
the !. million televisions produced in Bra.il. Consequently, the company can determine the success or
ailure o a supplier in local markets. Allan Barros, Director o Iurniture, related the story o a Casas
Bahia supplier: Last year Mitsubishi was out o our stores rom June through December. In si months
they ell rom third to the Jth position in Bra.ilian television sales.`
Due to the pursuit o higher margins and an increasingly diicult market or appliances, Casas
Bahia has shited ocus and plans to increase urniture sales in !00! to !0/ o its total revenues (up rom
J/ in !00J). In order to keep up with demand, Casas Bahia has built its own production acility, a
wholly owned subsidiary called Bartira. Producing the urniture internally also will help ensure the
company can continue to provide customers great-looking urniture while controlling costs. Casas Bahia


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produces only large pieces o urniture, such as kitchen cabinets and room wardrobes. 1he remaining
urniture is purchased rom several suppliers.
When designing its products, Casas Bahia utili.es a reverse engineering process. Iirst, the company
determines the terms it will pass along to the customers, both price and number o installments. Based
on eperience and research, Casas Bahia understands what the customer is willing to pay. 1he product
then is developed. In addition to the cost, product si.e and appearance are considered. An eample o
ocusing on the importance o customer research can be seen with the success o the recently released
1op Line` wardrobe product. 1raditionally, wardrobes in Bra.il were !.! meters high. However,
Casas Bahia observed that many customers had houses that would only allow urniture that was !.0
meters high. Casas Bahia designed a product that matched the customer needs. 1op Line` products
have been a tremendous success. In the irst month, ,000 units were sold, with an average price o
R3J,0!. Customers pay up to J installments o around R30 (about US3!0). In addition to the
commercial success o the new wardrobe, Casas Bahia developed a manuacturing process or the
product that virtually eliminated all the waste previously associated with the manuacture o wardrobes.
1he production schedule is based on sales orecasts. 1hese sales orecasts are derived based on
historical sales, targets and product availability at the warehouse. 1ypically, Casas Bahia maintains !0
days o inventory or urniture and ! days or all other products.
In an attempt to ully reali.e the beneits rom the growing urniture segment, Casas Bahia
brought a second urniture production online in the second hal o !00!, at a cost o R3! million. 1his
will increase production rom J00,000 to !!0,000 pieces per month. In !00!, Casas Bahia had to purchase
up to 60/ o its urniture rom eternal suppliers. 1he chain will have special promotions to continue
the growth in urniture sales. Ior eample, Casas Bahia oers interest-ree inancing or urniture or
up to J months. 1ypically, at Casas Bahia, interest-ree inancing is only allowed up to the irst si
months.
Distribution
The poor are requiring more. Five years ago, giving the customer a seven-day delivery window was
sufficient. Now they require the specific day. The main reason for this change is that now, more than ever,
both the man and woman of the household are working. As a result, we are always looking for new
technology to better serve the customer. Our next step will be to be able to schedule the actual time of
delivery.
Gilberto Duarte, Distribution Director.

Unlike its competitors, Casas Bahia does not strictly ocus on streamlining the supply chain, minimi.ing
working capital or increasing its inventory turnover ratio. Casas Bahia dierentiates itsel by placing a
large emphasis on the supplier negotiation process. 1he company strives to make the best possible deal
with its suppliers, negotiating huge volumes at very low prices. Casas Bahia claims this strategy works best
both inancially and in terms o customer service. Ior eample, Casas Bahia typically sells J,000 units o an
item per month and a supplier comes with a great oer on 6,000 units. Ior the right price, the deal will be
eecuted. One reason why Casas Bahia has built the largest warehouse in South America (also one o the
largest in the world) is to give management the reedom to make deals the company deems good or
business. 1he large warehouse also allows Casas Bahia to hold large inventory positions. 1his can be


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important because the supplier and production system in Bra.il can be much less reliable than in more
developed countries. Casas Bahia cannot aord to be out o stock.
1o support operations Casas Bahia has three distribution centers. 1he largest is in So Paulo, then
Rio de Janeiro and Ribeiro Preto. Additionally, the company has si cross-docking acilities: Braslia,
Goinia, Campo Grande, Belo Hori.onte, Curitiba and Ita;a. Due to its strategic position, the main
distribution center or So Paulo is located in Jundia. 1he acility is located on several ma;or reeway
access points that provide multiple entryways into So Paulo in case o traic problems. Also, it allows
or easy access to the roads to Rio de Janeiro and Minas Gerais. 1here are more than J,800 employees at
the So Paulo distribution center alone.
Casas Bahia owns and maintains a leet o approimately J,000 trucks: 0 long-haul trucks,

00
standard trucks, !00 medium trucks and J0 small trucks. 1he small trucks can maneuver diicult
deliveries in small streets that run throughout the shantytowns.` 1he leet is entirely comprised o
Mercedes trucks. 1his enables eiciency and cost reduction when it comes to maintenance. Casas Bahia,
at its So Paulo distribution center, does all maintenance, cleaning and care.
Delivery Drivers
A successul delivery can determine whether the customer makes a second purchase at Casas Bahia. Casas
Bahia employs and trains approimately !,00 drivers and crew. All trucks or customer delivery go out
with one driver and two crew members to help with delivery.
In order to reduce training costs, Casas Bahia ocuses on employee retention; current driver
turnover is very low, approimately !/ to !/. 1he company has developed a number o programs and
incentives to target retention. Casas Bahia pays its drivers more than the competition. 1he company
oers subsidi.ed caeterias in each o its three distribution centers. In So Paulo, Casas Bahia provides
ree transportation (park and ride bus system). Iinally, no one can be ired without director approval.
Drivers go through a ormal training process. Drivers must always be respectul, clean, well
groomed and wearing a clean uniorm. 1he ma;ority o people they deal with are emale. Drivers are
taught how to properly load and unload a truck. 1hey always must be courteous and never bump or
drag the merchandise. I they are there to replace the rerigerator, or eample, the crew will dispose o
the eisting appliance i desired. 1his is all a part o respecting the customer.
Once the delivery is complete, customers are given a phone number to call i they have any
complaints. I a driver or crew member receives two complaints, they are typically let go. Additionally,
!/ o all customers are randomly sampled to report on their delivery eperience with Casas Bahia.
Delivery Process
Do you know why I do not outsource delivery? Because I cannot permit the delivery person arriving at a
clients house without a uniform, or that he doesnt have enough care and causes damage at my customers
house. If he is my employee, my client knows where to complain.
Michael Klein


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All ma;or appliance deliveries are made rom one o the three distribution centers or si cross-docking
acilities and are guaranteed by a speciic date. No deliveries are made rom the stores. I a customer wants
the item that day, they must carry it out themselves. In some instances when the customer really wants
that stove or rerigerator that day and has no way to get it home, Casas Bahia will, at their own cost, hire a
local service to deliver the merchandise. Other than that rare occasion, the merchandise in the store is
mainly or display purposes. Once the display items begin to get old, they are moved to the clearance
section or sale as an open item.` 1hese items will be delivered by Casas Bahia the net time a truck rom
the warehouse arrives to replenish the store. In this instance, there is no guarantee o delivery time. Stores
utili.e a system that automatically reorders their inventory based on predeined reorder points. On
average, each store has J days o merchandise on hand or small appliances.
In general, a long-haul truck that carries an average o J!0 orders delivers to one o the si cross-
docking acilities. At the cross-docking acilities, the orders are broken down onto our urban` trucks
that carry !0 orders. 1he urban` trucks also can deliver directly rom the distribution center. In
December alone, Casas Bahia averaged !!,000 deliveries per day, si days a week.
Customers can pick the date they wish to have the merchandise delivered. In general, deliveries are
made within !8 hours o purchase. However, a customer can make the purchase now and have it
delivered si months rom now. Also, a customer can purchase any item at any store and have it
delivered to any location in Bra.il where Casas Bahia operates.
Stores and Store Fronts
All stores have roughly the same coniguration, product oerings and brands. Fach store will dier
slightly based on the local client needs. In So Caetano more appliances are sold. In So Paulo, televisions
and electronics are the biggest sellers. 1he layout o the stores is decided by the store and regional
managers based on local needs. Generally, layouts and product mi will be ad;usted over time, especially at
new stores.
1raining is a very important part to the success o ulilling the customers` dream. Salespeople
become eperts in their particular department, and are only allowed to sell in their department. I the
customer wants something rom another department, the salespersons will team-sell with a
representative rom their respective department. 1he only people in the store who can sell across
departments are those located at the cashier whose sole purpose is to ocus on cross selling. Several sales
representatives are dedicated to this unction. When the customer comes in to pay their monthly bill,
salespeople gather all the eedback on the purchase, delivery and process. 1his inormation is then
passed on to the store manager. As long at the customer has paid o 0/ o their bill, they are eligible
or cross selling.
One strategy that Casas Bahia has undertaken is building several stores close together. 1his strategy
serves two distinct purposes. In an area like So Paulo that is very densely populated, traveling can be
diicult. Bringing the store to both the customer and employee is crucial. Many customers must walk to
the store. A customer can take the bus, but that costs money and takes a lot o time. Stores must be


16 of 24
accessible in order to be successul. Also, having several stores located in close vicinity eectively
saturates the area, making it diicult or outside competition to enter. One megastore is not the same as
our or ive smaller stores serving the same population. Some cannibali.ation has taken place. 1hough
individual store sales have decreased, the overall sales o Casas Bahia had increased dramatically.
1o better understand the si.e, scale and proitability o a Casas Bahia store, we have selected a ew
eamples. Ior instance, in the southern part o So Paulo, there are J Casas Bahia stores serving over
our million people. In one large neighborhood in this region, there are seven stores in a our-block
radius. In a large nearby shantytown, Jardim Angela, !0,000 people are served by one store. Despite
this variation, all Casas Bahia stores average !/ to!0/ gross margins.
Marketing
Marketing always has been very important to Casas Bahia and is one o the key components or success.
Casas Bahia strives to always be oremost in the mind o its population because potential customers tend to
research prices at one o the chain`s stores prior to making a purchase.
1oday, ierce competition in the retail industry has increased the importance o marketing. Since
most products do not dier signiicantly, competition is ierce. 1he lack o product dierentiation
reinorces the importance o marketing within the retail sector. 1oday, Casas Bahia invests
approimately !/ o revenues in advertising. It maintains one o the largest advertising budgets in
Bra.il. In !00!, the advertising budget or Casas Bahia totaled R3!00 million, equal to the combined
advertising budgets o McDonalds and Po de Acar (the largest Bra.ilian hypermarket chain) or the
same period. Casas Bahia`s total airtime is larger than that o the most amous Bra.ilian soap opera. 1he
company`s strategy to attract customers to the stores is to announce their low prices with brand name
products. Michael Klein believes that, Once in the store, the well-trained sales rep has to make the
sale.`
Casas Bahia`s main advertising venue is television, which reaches over 0/ o all Bra.ilian
households. 1he company also uses signiicant radio time. According to Crowley Broadcast Analysis,
Casas Bahia led the ranking o the J0 most invested companies in radio advertising. 1he survey covered
J So Paulo-based radio broadcasters and J6 Rio de Janeiro-based stations over the second hal o !00!
(Jul-Dec). 1he chain accounted or J,!!8 radio spots in So Paulo and JJ,J06 in Rio de Janeiro. In Belo
Hori.onte, Casas Bahia ranked tenth with J,8!! ads. 1hroughout Bra.il, Casas Bahia moved to the
number-two position in advertising.
Since there is little product dierentiation, sales are oten made on the basis o emotion, leveraging
amous singers, actors and television anchors.` Last year, Casas Bahia used a campaign utili.ing client
testimonials or the irst time, which intended to show the emotional relationship between the company
and its consumers. Casas Bahia advertisements are broadcast on main television channels, including
premium programs at prime time. Advertising messages range rom pure price advertising and
notiication o clearances to a company belie that i the competition has better price or better payment
plans, we will beat them.`
Fvery month, Dataolha/MM Research publishes a summary o the marketing impact on the
Bra.ilian consumer. In May !00!, the research reported the ollowing inormation: Casas Bahia ranked
ith in the overall avorite advertisements by television viewers. 1he top three were beer sellers and the
ourth a cleaning sponge. 1he closest competitor was Marabrs at number JJ.

Additionally, Casas Bahia ranked as the ourth most recogni.ed brand that is on the consumer`s
mind.

Top of Mind Brands (May 2003)
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0%
Fiat
Nestle
Marabraz
Skol
Omo (Unilever)
Casas Bahia
Coca-Cola
Kaiser
Brahma

Casas Bahia also relies on special promotions to both maintain their current customer base as well as
attracting new customers. In !00!, the company pardoned debt o consumers who had deaulted on
payments prior to J. As a result, thousands o previously inactive clients were able to purchase again.
Not only did this promotion generate signiicant sales low, it also provided Casas Bahia with a ta break.
1he company also created unemployment insurance` or appliance sales. I a client lost his or her ;ob,
Casas Bahia would orgo the irst si installments.
Other promotions include the Casas Bahia yellow preerred-client card. 1he card, which gives
punctual payers automatic credit approval, is considered a status symbol among customers. Another
marketing tool is a orm letter that is generated when a customer has had no activity in their account or
several months. It serves as a subtle reminder to the customer that they have not purchased anything or
some time and their business is valued. 1he letter, rom Mr. Klein, thanks the customer or paying on
time.` As witness to the seeming success o this campaign, while visiting a store we noticed customers
proudly displaying their letters as they waited in line to pay or their new purchase.
Technology
1he role o technology at Casas Bahia is to enable three guiding principles: productivity, low- cost
operations, and client satisaction.

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18 of 24
On April !J, J!, while competitors were scaling back technology spending, Casas Bahia
upgraded its systems. 1his has eectively enabled Casas Bahia to take ull advantage o the economic
regeneration in Bra.il. 1he company has grown si-old in nine years. On July J, J!, Bra.il
introduced its economic turn around plan, eectively halting its massive inlation. 1his improved the
everyday lie o those at the Bottom o the Pyramid,` triggering a consumption eplosion. 1oday,
Casas Bahia has more than J0 million customers. 1his igure does not include those individuals who
have not been active in the past two years.
1echnology has been a key enabler to the growth o Casas Bahia. Prior to upgrades in technology,
Casas Bahia required an average o !0 credit analysts per store. Fvery customer was treated as new
whether they had been a loyal customer or !0 years or ;ust walked in o the street. 1he average wait
time or credit approval was !0 minutes or all customers. 1here was no purchase history or
documented behavior or the customers. 1here were several clerical mistakes and considerable
redundancy.
1he entire process is now automated. Stores require only our or ive credit analysts. Ior purchases
under 3600, customers eperience virtually no waiting times. I the purchase is greater than 3600,
average wait time is one to two minutes. I there is a new customer or a credit limit etension is
required, the wait time can be up to J0 minutes. Since all inormation is only entered once, processing
time and related mistakes essentially have been eliminated.
1echnology also has helped to greatly reduce raud. All customer inormation is now centrali.ed
and available to all stores. Inormation is stored regardless o whether a purchase was made or not.
1echnology also has allowed or a centrali.ed database o all names and companies associated with
raud or attempted raud at all their stores.
Example of Technology at Casas Bahia
One important aspect o the Casas Bahia customer relationship is that every month the customer must
enter the store to pay his or her bill. Until J, customers and salespeople would complete a orm by hand
and then turn it in to the credit department to have it typed. In addition to errors, customers were orced
to wait or etended periods o time.
1he irst signiicant change came in J, when Casas Bahia developed a system that would print
the passbook rom a computer. 1he company also decided to make it easier on the customer by sending
the bill directly to the customer`s home. 1he speed and accuracy o the customer ticket increased
dramatically and the waiting time decreased. However, the customer deault rate and associated costs
increased dramatically. Disturbed and surprised by the two negative side eects, Casas Bahia quickly
began to investigate the root cause.
1he problems stemmed rom two simple issues. Iirst, the new computer generated a passbook that
could not it into a shirt pocket. Until then, customers carried the passbook in their pocket as a reminder
to pay their bill. Now, customers would simply orget to pay their bills. Customers also claimed they
never received the passbook or it took too long to arrive at their house. 1hough some customers actually
did not receive the book, others were tempted to deault. Within a year Casas Bahia had developed a
new system that solved these problems. 1he new passbook could it into a shirt pocket and people


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remembered to pay. Also, all paperwork was completed at the store, and the customer would provide a
signature conirming receipt o the passbook and an understanding o the terms. Moreover, costs
decreased due to the lack o postage and handling. With the modiications put in place, deault rates
returned to their normal levels.
1he new system signiicantly increased customer satisaction. Fvery time a customer made a new
purchase, their inormation was already in the system. 1here was eectively no waiting time associated
with receiving a passbook. 1his system saved Casas Bahia over 3! million in annual labor and printing
savings.
1he net evolution o this idea is currently in process. All customer-related materials will be
optically scanned and digiti.ed. Casas Bahia will be able to eamine any inormation by customer, store,
contract number, credit analyst, etc. at the source document level. With an average o 800,000 tickets
printed per month, any incremental eiciency has a signiicant impact.
History with IBM / Linux
In J!, Casas Bahia was running on an IBM !00. It was the irst company in South America, and second
in the world, to run IBM !0! OS J.! and J.!. Irom J! to !00!, Casas Bahia used IBM OS! or their
point-o-sale (POS) terminals. 1he technology was solid, stable and no serious problems occurred. In !00!,
IBM announced they would no longer support OS!.
Initially, the only option or Casas Bahia was to migrate to a Windows environment. 1he
migration worried the company or several reasons. Iirst, it would cost over 3!0 million. Second, it
would eectively change the systems and processes employees were accustomed to. Retraining
thousands o employees would require a signiicant investment in time and resources in addition to the
cost o sotware. Moreover it would be diicult to quantiy the eect on sales and customer relationships
that would result rom the distraction o a ma;or systems implementation. (Casas Bahia would switch to
smart terminals.) Iinally, the epense associated with ongoing maintenance and individual site licenses
was signiicant.
Casas Bahia was not satisied with a Windows solution, so it began to investigate alternatives.
Casas Bahia researched Linu. Since Linu is an open system, Casas Bahia developed a solution that
closely matched its eisting setup but with more leibility and scalability. 1he company would be able
to remotely boot and utili.e rame relay and dummy terminals. 1he end user would never know the
dierence. Casas Bahia was the irst to transition rom the IBM OS to Linu. 1he company was the irst
in the world to come up with this solution or POS.
Recently, IBM contracted Casas Bahia to become strategic partners, helping IBM sell this solution
to other companies looking or an alternative to Windows. As o March !J, !00!, Casas Bahia is one o
three companies worldwide to have this agreement with IBM. Fectively, IBM can use Casas Bahia as
an eample and Casas Bahia gets !!/ tech support rom IBM and access to their development labs.
When asked i Casas Bahia is concerned about opening up its solution to the competition, the Director
o I1 responded, We are already two steps past that. Competition is good and gives you perspective as
to what others are doing.`


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Technology Today
Casas Bahia spends 0.8/ o its revenues on technology, including capital and maintenance spending. It is
estimated that competitors spend an average o !/ o revenues on similar ependitures. 1he key to cost
savings is really three-old. Iirst, Casas Bahia employs a relatively low level o employees: !0 developers,
0 technicians and 0 relatively inepensive support sta. Second, Casas Bahia does not utili.e third-party
vendors. As seen with the Microsot eample above, licensing third-party sotware or an entire company
is epensive. Iinally, Casas Bahia invests its resources into inrastructure. In partnership with CISCO and
1eleonica, Casas Bahia had installed an IP network that connects all stores, warehouses and cross-
docking acilities. Casas Bahia also worked with 1eleonica to develop state-o-the-art rame relay with
voice and data over IP, the irst or both companies. Because this was a new venture or both 1eleonica
and Casas Bahia, Casas Bahia was able to lock into a long-term contract with a low rate. Iinally, I1
constantly ocuses on reducing costs and improving productivity.
1he ma;ority o work today is ocused on maimi.ing the customer eperience. 1he new POS and
passbook system enables the customer to have a great store eperience with as little waiting as possible.
1he POS terminals and related system also enable the salespeople to cross sell more eectively. 1hey
instantly have the ability to know where the customer is in their payment stream and how much more
the customer can aord. Casas Bahia utili.es an integrated warehouse system to ensure customers
receive the product they want when they want it. Also, the integration between the ront and back oice
enables management to be more responsive to customer needs.
Currently, Casas Bahia has no plans to integrate with its suppliers. 1he model in Bra.il is much
dierent than that in more developed countries. 1he economy is not as stable and the vendor mi
changes quickly. Also, Casas Bahia ocuses on personal negotiations or every ma;or purchase. It would
be ineicient to maintain a system that would have to keep up with constantly changing terms. It is
easier or Casas Bahia to leverage their purchasing power without an automated system.
In the Store
Fvery month, the Casas Bahia system handles an average 800,000 contracts. 1hirty percent are new clients
and must be set up in the system or the irst time. Approimately hal o all returning customers are
automatically approved, while the remaining hal are re;ected by the system and must be approved by an
analyst. 1here are several reasons why the system will re;ect a customer. Ior a ma;ority o those reasons
though, the credit analyst will override the system and, based on their relationship with the client, grant
the credit. 1he system does not capture i the customer has had a change in circumstance, such as a new
;ob. It is up to the analyst to take a risk based on the relationship with the customer. 1hough overrides
increase the deault rate, the increase in the amount o sales greatly outweighs the corresponding risk. I a
customer is new and has no history, the analyst must determine i the customer is a good risk. 1he ability
o the analyst to override the system and provide the customer what they require is vital in earning the
trust o the customer. Once the customer trusts Casas Bahia, the virtuous cycle can begin.


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Uniqueness
According to Casas Bahia, no competitor has developed, or is in the process o developing, a comparable
I1 backbone or inrastructure in Bra.il. 1his unique network inrastructure is important in the
company`s ability to respond quickly to the unoreseen problems that arise. All stores have remote
connectivity. Approimately one-third o the stores are connected via !6kps. 1he remaining stores are
connected at a rate o J!8kps. 1he warehouse is at J!kps. Whether it is due to the lack o creativity or
unding, the competition does not invest in technology. Our competitors rely on third-party vendors that
do not develop speciic solutions, but rather a generic solution that can it anyone`s problem. It doesn`t
work,` says Irederico Wanderley, CIO.
Ongoing IT Projects
Casas Bahia has our ma;or initiatives. 1he irst, which is currently being implemented, is linking sales
with marketing at the POS. 1he company will be able to custom design, roll out and track promotions by
store and customer. All stores will track the productivity and proitability o each campaign. 1his
initiative only took our months rom concept to implementation. 1he second ma;or initiative is to
improve deliveries. As customers become more demanding, Casas Bahia must ind a way to meet their
needs. 1he current process requires manual entry o the customer`s address or all deliveries and leads to
wasted time and errors. 1he third is the switch to optically scanning and digiti.ing all customer-related
documents and binding them together in one electronic ile. Soon, all customer-related inormation will be
centrali.ed and viewable at the POS. Casas Bahia has invested in a si-terabyte hard drive to house all the
data. 1he ourth initiative is to develop a desktop managerial tool based on the new Linu inrastructure.
Future
The project next on the horizon is wireless in the stores. We see this as a better way to serve the client. It
will provide an easy and cost effective way to change the layout of the stores to meet changing customer
demands. Our main concern here is the security [encryption] issue.
Frederico Wanderley, CIO

1he uture o technology at Casas Bahia can be described as day by day.` 1hough A B customers`
behavior is predictable, the behavior o C, D F customers is not. Casas Bahia must remain leible
enough to react to quick changes. Irederico urther eplains:

I see a problem, I create a solution. It has to be creative. My development teams are constantly in the stores
talking with the users trying to understand current issues and determine future needs. We are constantly
evaluating requests to see if they make sense for Casas Bahia and are feasible. Casas Bahia works very hard
to foster an environment of trust where people feel safe to share their ideas.
Frederico Wanderley, CIO


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Human Resources Management
Casas Bahia has approimately !0,000 employees. 1he company employs an additional !,00 contract
installers. Until J6, all human resources-related decisions, including training, hiring and iring, were
made at the corporate level. Ater the rapid epansion began in J6, all HR-related unctions, ecept or
speciali.ed training and the administrative aspect o the unction, moved to the local stores. All policy
decisions are still centrali.ed at headquarters.
Most employees spend their entire career at Casas Bahia and believe they have good ;obs. Average
employee turnover is only J/. Most middle managers and above have been with the company or more
than !0 years. 1hey start at the bottom and work their way up. Ior eample, the typical path in the sales
unction is salesperson, manager trainee, classroom training, manager, regional manager trainee and
regional manager.
All along the way they are taught and come to believe that the better Casas Bahia does, the better
o they will be personally and proessionally.
Prior to J! there was no ormal training. 1raining is now a two-step process that includes ormal
classroom training as well as two weeks o on-the-;ob shadowing. 1he actual shadow time can vary
according to the speciic ;ob requirements. 1his system enables employees to quickly learn and become
comortable with their unctions. Casas Bahia developed speciali.ed teams in inance, sales and
management to assist in the training process. Additionally, suppliers now come to Casas Bahia to train
employees on the uses and beneits o their respective products. 1his is a relatively new and welcomed
occurrence. 1he centrali.ed HR department occasionally will sponsor small, speciali.ed training or
contract out to a third party i speciic skill training is required.
Compensation or salespeople is based on perormance. 1hough salaries are commission-based,
salespeople are guaranteed a salary o R300 per month (!. minimum wage). Bra.ilian labor laws do
not allow or J00/ commissioned salaries. 1he base salary is set well below the employees` sales targets.
Casas Bahia employees believe the labor law is ;ust to protect bad sales reps. Salespeople make an
average o !/ commission on all their sales. However, as soon as the employee`s salary rom his or her
commissions eceeds R300, he or she switches to J00/ commission only. 1he average salesperson
makes R3J,00 per month (. minimum wage); high perormers can reach R3!,00. Michael Klein
says:

If I let them, some of them would work for hours and hours without stopping. They know they can make a
lot of money at Casas Bahia. Any person has to have a motivation, an ambition in his life. Nothing is better
than giving my employees the freedom to pursue their ambitions.

Casas Bahia preers to hire locally or its stores or several reasons. Iirst, local hires tend to be more
amiliar with the neighborhood and the customers. Second, hiring employees who live close to the store
minimi.es the impact o bus and train strikes. 1he rainy season in So Paulo also results in ma;or traic
problems. Iinally, hiring locally helps both the employees and customers eel a sense o pride and
ownership. In the southern region o So Paulo, there are typically J00 applicants or every sales opening.
Due to epansion and turnover, Casa Bahia hires an average o !0-!0 salespeople every month.


23 of 24
On average, according to Jos Roberto Iernandes, HR Director, Casas Bahia pays better than direct
competitors. People love working or Samuel Klein. 1hey believe in his philosophy o valuing and
respecting the individual. Iernandes believes, Samuel Klein has planted a seed in every store and
person that is now growing.` 1hat seed is most evident by Samuel`s belie that the more he makes the
more he needs to share. Ior eample, Bra.il requires that companies pay employees one etra pay
period in the month o December. At Casas Bahia, i business went well, the company oten will pay
employees a J!
th
period. Also, travel incentives or achieving business goals and targets are
commonplace. I a region or store meets a particular quarterly goal or special promotional target, they
are rewarded with several days at Disneyworld in Orlando, Ilorida. Fven now, when the overall
economy is suering, Casas Bahia continues its rewards practice; trips now are ocused on local or in-
country resorts.
Future Challenges
1he most important actor in the continued success o Casas Bahia is the belie system and values that
Samuel Klein has instilled in all the employees. A strong and continued relationship with customers is
paramount. Also, within the company, every department believes the success o Casas Bahia is more
important than the success o an individual department or group. Unlike in many organi.ations where the
sales and credit departments have dierent ob;ectives, this is not the case at Casas Bahia. Fmployees
believes that as long as the customer is happy and Casas Bahia does well, then they will be personally
better o.
Looking orward there are several challenges to maintain the success. In the short run, the
introduction o credit cards poses a threat o losing the important client relationship as well as
decreasing cross-selling opportunities. General acceptance o credit cards with C, D F customers
orced Casas Bahia to accept credit cards in September !00!. Casas Bahia was the last ma;or retailer in
Bra.il to accept credit cards. In si months, credit card sales have reached !/ o Casas Bahia`s total sales.
On a positive note, when the credit card sale is made, the risk o deault transers to the credit card
company. Credit card companies in Bra.il oer an installment payment option without interest on a
product-by-product basis. 1here is some concern that an increase in credit card sales may decrease
customer loyalty due to the lack o in-store traic. Currently, all customers must come in every month
to a Casas Bahia store to make their monthly payment. 1his is the main traic that acilitates the /
cross-selling ability. 1his situation only will be enorced with the stabili.ation o the Bra.ilian economy
and evolution o the inancing market. Little by little banks are targeting the BOP in Bra.il with
accounts and credit cards. 1his will be an issue Casas Bahia must learn how to deal with.
Additionally, Casas Bahia has opened a ew stores in neighborhoods that cater to A B customers.
Over the past J0 years, several retail chains that ocused on serving the A B segment have been orced
to leave the market (Sears, Mappin, G. Aronson and Casas Centro). Also, in parallel with these
companies going bankrupt, Casas Bahia was undergoing a ma;or moderni.ation. Due to the purchasing
power o Casas Bahia, the company could oer better prices on the brands that A B customers desired
on a cash basis. 1his combination has allowed the company to capture some o the A B segment.
1hough store locations are in nicer areas o the city, the coniguration and products oered remain the
same. 1hat said, A B customers tend to purchase more appliances and electronics than urniture.


24 of 24
1here are two signiicant dierences when serving the A B segment: decreased proitability and
diering needs. Iirst, A B customers typically pay in cash (C, D F customers are 0/ inanced), so
Casas Bahia receives no interest revenue. 1he company also must oer discounts to entice A B
customers into the stores. Also, A B customers are much more demanding. Unlike those at the BOP,
A B customers require an eact delivery date and time. 1hey also have a high propensity to complain.
Moreover, as a low-cost operator, paying or real estate in more epensive markets will decrease the
company`s proitability. Casas Bahia must learn how to deal with high-income customers or risk taking
the same path o bankrupted competitors.
Fpansion poses three ma;or challenges. Iirst, Casas Bahia must quickly learn the behavior o an
entirely new customer base. 1his will be increasingly diicult as Casas Bahia continues its rapid
epansion o ! stores per year. Second, the rapid growth also creates new distribution demands.
Monitoring thousands o drivers, damages to merchandise, turnover, and attending to customer
demands or more accurate delivery time orecasting is not trivial. Iinally, controlling the deault level
may be the key challenge or Casas Bahia. 1he company opened a centrali.ed call/collection center to
address this challenge. Since consolidating more than !00 call center employees rom all stores,
collections recovery has increased J00/. Casas Bahia must develop a process whereby it can maintain or
reduce its current deault rate while continuing with its plan o rapid epansion.
Another threat is the increasing competition o large hypermarts. It is unclear whether or not those
chains will develop the capability to serve the bottom o the pyramid with any signiicant presence. 1his
competition poses the biggest worry to Michael Klein.
One o the most signiicant issues Casas Bahia aces is a long-term plan or succession. Samuel Klein`s two sons,
Michael and Sal, have successully transitioned the daily operations rom their ather, convincing both employees
and customers they can continue the belie system their ather has instilled. As Samuel reaches his 80s and his sons
get older, the plans or succession are either not known or publicly stated.
F Sources
Associao Comercial de So Paulo, Boletim do Instituto de Fconomia Gasto Vidigal
(ACSP/IFGV)
Banco Central do Brasil
Casas Bahia
Dataolha/MM
Iaculdade de Arquitetura e Urbanismo, Universidade Iederal do Rio de Janeiro
IBGF
IPFA
IPFAD
Local Maga.ines and Papers (Ve;a, Isto F, Isto F Dinheiro, Fame, Iorbes, O Fstado de So
Paulo, Iolha de So Paulo)
Press Clipping
1arget
1eam analysis
United States Census Bureau

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