Companies as savvy as Sears and Wal-Mart have sought to do business in Brazil, but have failed. Casas Bahia, though, successfully developed a model that serves the “bottom of the pyramid” in that country. The company succeeded in serving the large, lucrative market represented by the poor through innovation and the right financial approach.

Casas Bahia is a family-owned business started more than 50 years ago by Samuel Klein. After surviving two years in a Nazi concentration camp, Klein left his homeland in 1952 to start a new life in Brazil. To support his family, he sold blankets, bed linens, and bath towels door to door in São Caetano do Sul. That business has transformed through the years into the largest retail chain in Brazil, selling electronics, appliances, and furniture. With a 4.2 billion real (the Brazilian currency) annual revenue, 330 stores, 10 million customers, and 20,000 employees, Casas Bahias has established itself as a successful and sustainable business serving Brazil’s poor.

In 2003, the population in Brazil was 184 million, more than 80 percent of whom are considered to be at the bottom of the pyramid. The bottom of the pyramid, though, represents significant purchasing power in Brazil’s economy (specifically, 41 percent of the total spending capacity). This R$124 billion accounts only for the formal reported economy. According to some estimates, the informal market in Brazil for the bottom of the pyramid reaches an additional 50 percent. In Brazil, 45 percent of total appliance and furniture spending is done by the bottom of the pyramid. Of particular interest is the high penetration of major appliances, such as television sets and refrigerators, at the bottom of the pyramid in Brazil. It is not uncommon to find households with a television or refrigerator yet lacking basic infrastructure, such as toilets and telephone lines. Those at the bottom of the pyramid in Brazil spend based on their needs. In a tropical climate, a refrigerator is a necessity. Everyone, regardless of class, feels the need for entertainment. For the poor in Brazil, that comes in the form of television or radio.

For the market to connect with the products, though, some innovation was needed since 70 percent of Casas Bahia customers have no formal or consistent income. These customers are primarily maids, cooks, independent street vendors, and construction workers whose average monthly income is a bare minimum wage, while many do not declare an income at all. Yet this large portion of the population still wanted and needed appliances. Casas Bahia took an innovative approach and devised a unique financing model in order to serve this market. Part of the solution is the now famous carnê, or passbook, that allows its customers to make small installment payments for the merchandise. Payment schedules range from one to 15 months. The passbook is available only at Casas Bahia stores, and every month consumers must enter a store to pay their bill. The method also maintains relationships with clients. Financed sales represent 90 percent of all sales; six percent of are cash payments and four percent are via credit card.

All customers who wish to finance a purchase must submit to an SPC credit check. If the customer has a negative SPC score, Casas Bahia cannot complete the transaction until the customer resolves the credit problem. If the customer has a positive score, there are two alternatives. If the merchandise costs less than R$600, no proof of income is required; a valid permanent address suffices. Casas Bahia has developed a proprietary system to evaluate prospective clients when merchandise costs more than R$600. Clients receive a credit limit based on total income, both formal and informal, occupation, and presumed expenses. This “scoring” process takes less than one minute. If the system approves the prospect, the salesperson can continue with the sale. Clients rejected by the system are directed to a credit analyst for further evaluation. This is where the importance of building a relationship is prominent. Based on training, the credit analyst asks a series of questions to determine a client’s creditworthiness. The entire process typically is finished in 10 minutes or less.

The proprietary system that determines the creditworthiness of new clients also evaluates existing clients for potential new purchases. Based on the same factors previously noted, in addition to payment history, the system automatically produces a new credit limit. This ability is key in the cross-selling process. When the customer comes into the store to pay a monthly installment, the Casas Bahia salesperson sees that a new credit limit is available for the client. This salesperson has the opportunity to make a tailored cross-sale in the amount of the new credit limit.

Many outsiders argue that Casas Bahia simply exploits the poor and charges them exorbitant interest rates because the poor do not know any better. Quite the opposite seems to be true. To maintain low default rates, salespeople must “teach” consumers to buy according to their budget. For instance, a customer enters the store and wants a new 27-inch 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 for the customer to walk away) and discuss multiple payment options. If it becomes clear the customer cannot afford the 27-inch television, the salesperson will work with the customer to “tweak” the dream to temporarily include a 20-inch TV.

The consumer education process is a key component in Casas Bahia’s default level of just 8.5 percent. To put it into perspective, the average for the entire retail sector, which serves all income levels, is 6.5 percent. Casas Bahia’s competition at the bottom of the pyramid has a default rate that reaches 16 percent.

The credit analyst plays a vital role in the success of Casas Bahia. Therefore, the company has devoted significant time and resources to train its credit analysts. With an average of 750,000 customers requesting financing every month (1.4 million in December), Casas Bahia’s 800 credit analysts are the lynchpin, not only in maintaining a default rate below the industry average but also in fraud detection. In 2002, 35,000 cases of fraud representing R$440 million were averted.

Many at the bottom of the pyramid have never applied for or been granted credit, rendering the formal SPC system useless. Without a steady or reported income, and with a personal economic status that can change daily, the credit analyst must decide whether the customer is honest, sincere, and able to make the necessary payments. Every customer has a unique situation. The training the analysts receive prepares them to make decisions that enable the continued success of Casas Bahia.

Training is a combination of classroom and informal techniques. The first step takes place in the classroom. Employees learn the basics, ranging from the importance of personal grooming to the necessity of having a positive attitude toward customers. In the classroom, Casas Bahia employees begin to understand the importance of building a long-lasting relationship with customers. When people, especially the poor, walk into the store, they want a friendly face, 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 fulfill their dream. Many customers “come in as a client and leave as a friend.”

When people, especially the poor, walk into the store, they want a friendly face, someone who they can talk to about their day. The relationship between the analyst and customer creates a virtuous cycle. For instance, a customer enters Casas Bahia in need of an oven to replace her current oven that is no longer working, yet is currently unable to pay. Based on either an existing relationship or one that is developed in the short time she is in the store, a credit analyst can approve the loan even if the customer does not currently have the necessary proof of income. The customer is grateful the analyst is taking a chance and trusting she will make the payments. Then, when things turn around for the customer, she is willing to buy more from Casas Bahia and she also tells family and friends about the experience.

It is also in the classroom where analysts learn the importance of asking the right questions. Analysts are taught to inquire, depending on the store location, which can represent varied income levels and backgrounds, about a customer’s primary livelihood. In addition, analysts are taught to discretely “size up” customers. For example, if a customer comes in and says he is a construction worker, the analyst will notice whether the customer has calluses on his hands or wrinkles around his eyes from working outside all day. The analyst might also ask a few technical questions (perhaps in the context of a project the analyst purportedly has going on at home). This interaction serves two purposes: It begins to filter out fraud potential, but more important, it helps build a relationship with that customer. Analysts are taught to always ask questions and be creative in trying to understand the customer.

After completing classroom training, new employees “shadow” an experienced employee for two weeks in a store. Trainees learn first hand how to implement classroom teachings and the importance of cross-selling at Casas Bahia. Cross-selling is an important part of the company’s success; after all, fully 77 percent of clients who open an account make repeat purchases.

Another important aspect of Casas Bahia training is teaching the analyst the art of saying “no” to the customer. An estimated 16 percent of customers applying for credit are denied. What is a seemingly basic concept has a long-lasting importance to Casas Bahia customers. When customers enter a Casas Bahia store, they are hoping to fulfill a dream. When you tell a potential customer “no,” you are effectively destroying that dream. Samuel Klein has fostered a culture where this is unacceptable. Analysts always work to maintain the relationship. The customer should be viewed for long-term potential, as a lifetime customer. Although a customer might not be able to afford something right now, that customer’s situation might improve and then he or she can buy that new TV, for example.

Rejection is sometime necessary and appropriate. The main reasons for rejection are threefold: negative SPC rating, credit limit, and third-party acquisition. With a negative SPC rating, there is nothing Casas Bahia can do. The analyst states that if it were up to Casas Bahia, they would do business, but cannot because of the score. They apologize and mention that as soon as the “little problem” is resolved, they will welcome the customer back and finish the transaction. An insufficient credit limit is handled with offers of similar products or different brands or models. Third-party acquisition is when the customer has a bad credit rating or cannot afford the merchandise, so he or she has another person purchase it. The customer then pays the third party. However, this arrangement usually leads to default. First, there is a reason the customer could not afford the merchandise in the first place; second, the third party who purchased the merchandise has no vested interest in paying Casas Bahia. Third-party purchase is the leading cause of default at Casas Bahia. The second is unemployment, and the third is simply spending beyond one’s means.

Casas Bahia’s dependence on banks is very low. Brazilian law does not permit Casas Bahia to fund the interest portion of its consumer loans. Therefore, that portion is packaged and sold to banks or financeiras. Casas Bahia used to have its own financeira. The company dissolved this entity because it was not the core business for Casas Bahia. Now, the company’s policy is to borrow as little as possible and finance the customer while funding the expenses internally.

Additionally, Casas Bahia does not hold external currencies. This is especially important in the Brazilian economy, where local currency devaluations have caused prices to increase dramatically. Casas Bahia believes that since they do business in Brazil, the company’s currency and exposure should be within Brazil. Moreover, minimal exposure to banks for external debt is beneficial.

Casas Bahia carries and sells top-quality brands: Sony, Toshiba, JVC, and Brastemp (Whirlpool). There is a misconception that because customers are poor they do not desire quality products. In Brazil, bottom of the pyramid customers desire the same merchandise as top of the pyramid customers. They want the dream they see on TV, not a cheapened version of that dream. The difference is that individuals at the bottom of the pyramid cannot afford to walk into a store and pay R$500 cash for a new refrigerator. They can, however, afford to make small installment payments to pay for that new refrigerator.

Unlike its competitors, Casas Bahia does not strictly focus on streamlining the supply chain, minimizing working capital, or increasing its inventory turnover ratio. Casas Bahia differentiates itself by placing a large emphasis on the supplier negotiation process. The 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 financially and in terms of customer service. For example, Casas Bahia typically sells 1,000 units of an item per month and a supplier comes with a great offer on 6,000 units. For the right price, the deal will be executed. One reason why Casas Bahia has built the largest warehouse in South America (also one of the largest in the world) is to give management the freedom to make deals the company deems good for business. The large warehouse also allows Casas Bahia to hold large inventory positions. This can be important because the supplier and production system in Brazil can be much less reliable than in more developed countries. Casas Bahia cannot afford to be out of stock.

Marketing always has been very important to Casas Bahia and is one of the key components to its success. Casas Bahia always strives to be foremost in the mind of its population because potential customers tend to research prices at one of the chain’s stores prior to making a purchase. Fierce competition in the retail industry has increased the importance of marketing. Because most products do not differ significantly, competition is fierce. The lack of product differentiation reinforces the importance of marketing within the retail sector. Casas Bahia invests approximately three percent of its revenues in advertising. It maintains one of the largest advertising budgets in Brazil.

Casas Bahia’s main advertising venue is television, which reaches more than 90 percent of all Brazilian households. Since there is little product differentiation, sales are often made on the basis of emotion, leveraging famous singers, actors, and television “anchors.” More recently, Casas Bahia used a campaign with client testimonials for the first time, intending to show the emotional relationship between the company and its customers.

One important aspect of the Casas Bahia customer relationship is that every month customers must enter the store to pay their bills. Until 1995, customers and salespeople would complete a form by hand and then turn it in to the credit department to have it typed. In addition to errors, customers were forced to wait for extended periods of time.

The first significant change came in 1995, when Casas Bahia developed a system that printed the passbook from a computer. The company also decided to make it easier on the customer by sending the bill directly to the customer’s home. The speed and accuracy of the customer ticket increased dramatically, and the waiting time decreased. However, the customer default rate and associated costs increased dramatically. Disturbed and surprised by the two negative side effects, Casas Bahia quickly began to investigate the root cause.

The problems stemmed from two simple issues. First, the new computer generated a passbook that could not fit into a shirt pocket. Until then, customers carried the passbook in their pocket as a reminder to pay their bill. Now, customers simply forgot to pay their bills. Customers also claimed they never received the passbook or it took too long to arrive at their house. Although some customers actually did not receive the book, others were tempted to default. Within a year, Casas Bahia developed a new system that solved these problems. The new passbook fit into a shirt pocket, and people remembered to pay. Also, all paperwork was completed at the store, and the customer provided a signature confirming receipt of the passbook and an understanding of the terms. Moreover, costs decreased (as postage and handling costs fell). With the modifications in place, default rates returned to their normal levels.

The new system significantly increased customer satisfaction. Every time a customer made a new purchase, that customer’s information was already in the system. Effectively, no waiting time was associated with receiving a passbook. This system saved Casas Bahia more than R$4 million in annual labor and printing savings.

The next evolution of this idea is currently in process. All customer-related materials will be optically scanned and digitized. Casas Bahia will be able to examine any information by customer, store, contract number, credit analyst, and so on at the source document level. With an average of 800,000 tickets printed per month, any incremental efficiency has a significant impact.

Looking forward, there are several challenges to maintain the success. In the short run, the introduction of credit cards poses a threat of losing the important client relationship as well as decreasing cross-selling opportunities. General acceptance of credit cards with C, D, and E customers forced Casas Bahia to accept credit cards in September 2002. Casas Bahia was the last major retailer in Brazil to accept credit cards. In six months, credit card sales have reached four percent of Casas Bahia’s total sales. On a positive note, when the credit card sale is made, the risk of default transfers to the credit card company. Credit card companies in Brazil offer an installment payment option without interest on a product-by-product basis. There is some concern that an increase in credit card sales might decrease customer loyalty (based on the lack of in-store traffic). Currently, all customers must come in every month to a Casas Bahia store to make their monthly payment. This is the main traffic that facilitates the 77 percent cross-selling ability. As the Brazilian economy recovers and of the financing market evolves, Casas Bahia will have to continue to contend with the issue of loyalty. Little by little, banks are targeting the bottom of the pyramid in Brazil with accounts and credit cards; Casas Bahia must prepare for competition.