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Magazine Luiza: Building a Retail Model of Courting the Poor

a. Identify the retail model Magazine Luiza employed to grow to the third largest
nonfood retailer in Brazil.

The key of retail model of Magazine Luiza was its genuinely customer centered and
employee centered culture.

Looking at the retail market of Brazil in 2004, it was a large and diverse markets, with
84% of its 47 million households were located in urban areas, and regional
development and income distribution were very even. In addition, high inflation, interest
rates, and cost of capital, which impacted the costs of inventory, marketing, and
distribution made alternative channels such as catalog-based retailing practically
nonexistent, and facilitated the growth of small family-run operations and medium-sized
chains that developed local expertise.

Because of the macro level environment, Magazine Luiza tried to build its retail model
that was truly customer centered and matched with the industrial phase of Brazil.
Focusing on low-income segments, the major elements of the retail model can be
viewed separated in following perspectives: operational evolution, deep customer
relationships, people and management and innovative use of technology. I will discuss
these building blocks of its retail model in the following paragraphs.

Operational Evolution:

In order to better serve low-income customers, Magazine Luiza put much effort in
operation innovation in order to encourage growth while limiting costs. First, because of
Brazils history of economic volatility and vast geographic area, procurement and
distribution were critical. Magazine Luiza operated mainly in small cities that did not
accommodate large local inventory stock. Magazine Luiza delivered 70% of its
products directly to the customers residence 48 hours after the purchase. Second,
Magazine Luiza focused its product line on commodity products such as furniture,
consumer electronics, and white goods to better meet its customers needs. Third,
Magazine Luiza had a product line of approximately 9,500 items sources from over 500
suppliers to hedge the risk of sourcing and get more products to further meet
customers needs.

In order to further reduce distribution costs, Magazine Luiza introduced virtual
showrooms showing product videos or flipping catalog pages with the clients and
increased the channels IT component, significantly reducing labor costs. The company
also invested in training consumers on the new concept and tried to make the whole
process customer friendly. Furthermore, in order to increase the flow of customers,
Magazine Luiza developed a strategy of social insertion, successfully made its stores
became recognized as the center of the community. In addition to its stand-alone
virtual stores, Magazine Luiza occasionally set up stands with its computer terminals in
other large companies to attract targeted customers. p

A critical part of Brazilian retail strategy was the capacity to finance clients. Considering
the low-income segments that Magazine Luiza was serving, the financing became even
more critical. The company realized the importance and developed its credit system to
be structured and decentralized, which was small, simple and low cost, requiring a
minimum of paperwork to initiate and quick disbursement of credit once a sale is made.
Here, flexibility was the key in its financing innovation. Magazine Luiza tried to think
from the customers point of view, and encouraged its customers to think big and adjust
their cash flow accordingly; again, very customer centralized approach.

Deep Customer Relationships:

Customer Relationship building and maintenance was key in the retail model of
Magazine Luiza. The basic concept was everybody was a sales person. It can be
viewed through both marketing and customer segmentation.

Magazine Luizas marketing strategy was based on its ability to effectively mobilize
customers and employees. Beyond low prices, Magazine Luiza believed customers
want something that can make them dream, something that perhaps can change their
lives. The company tried to seize its customers aspiration and made it an experience,
not just a bargain. They also introduced online format tried to further engage customers
and low costs, although there were a substantial number of complaints at the initial
stage. Although Magazine Luiza spent only 2.8% of its total sales in advertising, much
less ratio than its competitors its ability to effectively mobilize customers and
employees made the marketing spending more fruitful, because Magazine Luiza
considered the salespeople entrepreneurs, fully accountable for assessing how and
when they should spend their budget. Each region, city and neighborhood has its own
peculiarity, such entrepreneurship style stimulated brought Magazine Luizas marketing
creativity and agility. For example, managers had the flexibility to respond to
competition by adjusting individual product prices while maintaining an average overall
monthly margin.

When it came to customer segmentation, although Magazine Luizas customers were
mainly low-income customers, they still tried to segment customers by analyzing data
to determine customer repurchase patters and tried to tmarketing accordingly. From
the very beginning, the firm created and courted a special customer class: the Golden
clients by giving these customers preapproved credit limits and better payment
conditions etc. At the end of 2004, Magazine Luiza wasv also looking at how should
reward clients who did not have Golden client status. In this way, Magazine Luiza
made a solid building block to maintain customer loyalty.

People and Management

Magazine Luizas main target in people and management was self-development, open
communication, ample participation from all employees, and a compensation package
that reflected their effort as individuals and as a group. The backbone of this system
was the idea of assisted freedom by which a rigid ethical code supported
mechanisms that allowed the companys headquarters to ease control in attempt to
empower employees and foster creativity and agility. In order to better empower
employees, Magazine Luiza created a very lean structure with few hierarchical levels,
started investing in technology and focused on employees as our capability. Another
key element of the companys overall human resources strategy was its emphasis on
career development and compensation, which incorporated approximately 65% of fixed
salary and 35% variable pay. In addition, Magazine Luiza initiated a range of efforts
from an extra bonus for outstanding performance to a billboard recognition ad to thrills
the character, attitude and determination of its employees.

Service
-deep customer relationships
-customer segmentation
Marketing & Sales
-Ability to mobilize customers and employees
-Entrepreneurs
-Flexibility

Operations
-lean structure
-could deliver 70% of its products directly to the customers residence in 48 hours -
virtual showrooms
Financing
-structured and decentralized credit system
-flexibility with clients
-small, simple and low cost
Procurement and Sourcing
-4 distribution centers in key locations, planning two new cross-dock warehouses -
focus on product line on commodity products, sourcing 9,500 items from over 500
suppliers Firm Culture
Family business, genuinely customer centered and employee centered

Human Resource: People and Management
-assisted freedom; a rigid ethical code; empower employees and foster creativity and
agility -emphasis on career development and compensation; best company to work in
Brazil

Technology development
-Increase the channels IT component
-Innovative use of technology
Margin/Value
Customers
-focus on low-income segments

Competitive Advantage
Service
-deep customer relationships
-customer segmentation
Marketing & Sales
-Ability to mobilize customers and employees
-Entrepreneurs
-Flexibility

Operations
-lean structure
-could deliver 70% of its products directly to the customers residence in 48 hours -
virtual showrooms
Financing
-structured and decentralized credit system
-flexibility with clients
-small, simple and low cost
Procurement and Sourcing
-4 distribution centers in key locations, planning two new cross-dock warehouses -
focus on product line on commodity products, sourcing 9,500 items from over 500
suppliers Firm Culture
Family business, genuinely customer centered and employee centered

Human Resource: People and Management
-assisted freedom; a rigid ethical code; empower employees and foster creativity and
agility -emphasis on career development and compensation; best company to work in
Brazil

Technology development
-Increase the channels IT component
-Innovative use of technology
Margin/Value
Customers
-focus on low-income segments

Competitive Advantage
In summary for the retail model, focusing on customer and employee culture, Magazine
Luiza built up an effective value chain, including technology, people and management,
retail locations, procurement, sourcing, marketing, customer relationship and customer
service, to better serve its low-income customers.

How does retailing as practiced by Magazine Luiza differ from offering a similar service
to retail customers in the United States?

The retailers offer a similar service to retail customers in the United States is
dramatically different from Magazine Luizas practices. The difference is the customer
segmentation in the United States is very different. Even low-income customers in the
United States have much high purchase power, and they can easy to get access to
credit in order to purchase. Furthermore, because of the massive land, building retail
stores are relatively easier for the United States retailer, therefore the value chain
employed by US retailers are very different in several perspectives, such as :
technology, retail locations, procurement and sourcing, marketing and customer
relationship.

* In the technology side, because of well-established infrastructure, US customers are
already adapted to post-industry IT technology, therefore, online shopping are more
popular than the developing countries. Even low-income customers have the skills to
find product information online by themselves. Therefore, US retailers employed more
technology in order to reduce their back office operation costs in inventory
management, transportation, and account system * In the retail locations side, because
of the car-culture in the US, customers are already used to driving to visit retail stores
for most of products. Therefore, retailers could set up stores in relative far away
locations to serve customers. And because the purchase patterns, US customers, even
low-income customers, usually purchase a large quantity when visiting the store, a big,
nice retail store is much more preferred than virtual stores * In the procurement and
sourcing side, the US retailers usually go to fewer suppliers in order to increase scale
and low cost per unit * In the marketing side, US retailers usually adopt mass media as
their priority in reaching customers. Direct mails and catalog are also used often in
order to attract new customers and maintain existing customers. Also because the US
marketing is more developed, even low-income customers have easy access to
different media, such as Internet and cable TV. Retailers always have the options to
diversify their marketing in different channels to reach their target customers. * In the
customer relationship management. US retailers rely more on IT system rather than
personal expertise because labor is much more expensive in the US and not that
reliable considering people turnover.

b. Review The Battle for Chinas Good Enough Market. What does the concept of
Good Enough markets mean, and how do these market segments differ from the
premium and low-end markets as defined in the article.

In this article, the Chinas Good Enough Market means middle class market, which is
between the premium and low-end markets.

The small premium segment served by mostly foreign companies realizing solid
margins and rapid growth; the low-end market is a large low-end segment served by
local companies offering low-quality, undifferentiated products (typically 40% to 90%
cheaper than premium ones) that often lose money.

In my personal experience, the typical marks of the middle market, or good enough
market, in China represents the main purchasing power in second and third tier cities
consumers. The products usually bear basic functions and some advanced but useful
functions compared with premium products, while pricing reasonably low to meet the
fastest growing middle-class in China. Although, the good enough market is a middle-
class market in China, its very different from middle-class market in developed
countries. Its the middle-class in the developing world that is experiencing the
industrialization phase; the average purchasing power is still lower than the middle-
class in post-industrialization countries.

Is the market Magazine Luiza is going after a Good Enough market? If so, what does
this imply for retailers wishing to capture the middle class nonfood retail market in
Brazil?

I think the Magazine Luiza was going after a good enough market in the Brazil
because several reasons.

* First, the low-income customers still had incomes to purchase these the products,
especially white goods to enrich their life experience, which means they are in the
industrialization progress. * Second, most customers can have access to credit. Not
like low-end customers in China, who have no way to access to personal credit,
Magazine Luizas customers can have access to credit to purchase goods, which was
a symbol that these customers were good enough to serve and to make reasonable
profit margin.

The hints for retailers wishing to capture the middle class nonfood retail market in
Brazil would fail in different perspectives.

* First, the high-end retailer could attack from above by selecting locations that are
more accessible to the good enough customers, who usually not live in the big cities,
while low-end retailer could leverage their existing retail locations to serve these good
enough customers. * Second, procurement and sourcing should be redesigned
carefully in order to get good enough products at a reasonable price levels to meet the
demand of these middle customers. * Third, credit and financing would be important to
attract these good enough customers. Because most of these customers still have
difficulty to afford the product at once, and have limited credit access, therefore helping
them to access credit would be important in stimulating demands. For example, in
China, the government is taking major responsibility to give credit to these middle-class
customers, and many local companies are partnering with local banks in serving the
needs of these good enough customers. * Customer service is also very important to
better serve the good enough customers. Not like premium and low-end customers,
middle-class customers need very special customer care to educate them about
spending and budgeting with their limited disposable incomes. The customer service
experience also needs to focus on fostering a community environment, making
connection with people in order to attract customers.

How would you advise foreign MNC retailers compete in this market? If you conclude
Magazine Luizas market segment is not equivalent to a good enough market in
Brazil, how would you categorize the market?

For the foreign MNC retailers to compete in this market, I would suggest them to be
localized in order to better meet the customers needs. They also needs to reinvent
their strategies and operations together with advanced technology and management
capability to build their local competency. My detailed advice would be:

* Hiring local talents to take the marketing, sales and customer service roles that
understand the people and the market. Still, aligning the incentives are very important
to stimulate the performance out of these local talents * Lean operation. Sometimes,
serving these good enough markets, a foreign MNCs operations seem to be overkill
and thus not cost effective and slow in response. Therefore, studying the good enough
markets and redesign the operation processes to achieve industry frontier is key in
competing with local low-cost competitors * Invest in educating customers. Beyond
marketing in developed market, MNC retailers should learn to educate customers that
are still in the industrialization phase, who are not sophisticated to make smart
decisions by themselves. Therefore, in the marketing and customer services sides,
MNC should focus on educating these customers. * Understand the customers needs
and source appropriate products to meet these requirements. Good enough customers
need good enough products, therefore understanding their requirements and thus get
the price advantage is the decisive success factor for MNC to compete in this market

c. Does Magazine Luizas model have any value for developed country retailers such
as Wal-Mart or Carrefour who might wish to compete in the Brazilian retail market?

In my opinion, most of the elements in the Magazine Luizas model do not fit with
developed country retailers core competency. Magazine Luiza was a very typical
retailer in the developing world, its model is heavily people centered, less process
oriented, and requires a very different management style that is customized for small
and medium business. However, if Wal-Mart or Carrefour wishes to compete in the
Brazilian retail market, there is still something they can learn from Magazine Luiza.

* Procurement and distribution. In order to serve the Brazilian retail market, they should
consider cost more in seeking to purchase stock and widely distribute large amounts of
merchandise. Especially operating in small cities, procurement and distribution become
even more important for developed country retailers to reach these customers and
meet customer demands. * Product sourcing. As discussed before, sourcing the good
enough products is vital to compete in the good enough market, Brazilian retail market.
* Flexibility is also very important for these developed country retails to succeed in the
Brazilian retail market. With sophisticated processes, these MNC retailers often copy
their existing practices in the developed countries. However, this attempt seems to be
rarely succeeded because the post-industrial and industrial countries are so different in
so many perspectives that very few processes can be common in both worlds.
Therefore, maintaining a level of flexibility is critical to adapt to the Brazilian retail
market in order to succeed. * Understanding the incentives of Brazilian customers and
employees. Even the products are the same; the consumers incentives are different.
Learning from Magazine Luizas model, these MNCs should be more people oriented
rather than process or management oriented to align the incentives of all the parties in
order to stimulate the customers demands and employees creativity.

d. Do you think Magazine Luizas retail model could be applied in other emerging
economies, for example in India, or China? Why, or why not?

Basically, I think Magazine Luizas retail model could be applied in other emerging
economies, such as India or China. My reasoning as below:

* The similarity of these emerging economies. India, China and Brazil are in the similar
industrial phase. The customers purchasing power in these developing countries are
the similar. Therefore, one product fit with one markets need might fit with the other
markets * The customer incentives are similar across these emerging economies. They
have limited disposable income and thus view purchasing certain kind of products,
such as white goods, experience, making dream come true. Therefore, the Magazine
Luizas retail model, which focuses on people and customer experience, might be
applicable across these markets. Customers value the experience, not only a bargain. *
The geographical distribution of wealth is similar in these emerging economies. The
procurement and distribution requirements are similar too, especially for India, China
and Brazil * The social insertion of the Magazine Luizas retail model could be
embraced by other developing countries with large population. The Magazine Luizas
style store could provide added values to customers by offering them more social
elements therefore become recognized as the center of the community. This is actually
true in China. Most Wal-Mart stores and local retail stores offer various social elements
and stay together with cinema, restaurants, and shops to build a community in order to
attract customers. * People and management. In the same industrial phase, the
employees in these developing economies also bear the same incentives, such as
more performance based income and faster career development. Therefore, these
factors in the Magazine Luiza retail model seem to be same across these developing
countries.