The ability to build and finance a quality home has been beyond the means of most of the world’s impoverished. These people are often ignored by major corporations because it is thought they have too little money and are too difficult to reach. CEMEX,^[1] the largest cement manufacturer in Mexico, second-largest in the United States, and third-largest cement company in the world, has through innovation found a profitable and empowering means of housing the poor for profit, instead of leaving that to governments or not-for-profit organizations.

During the Mexican economic crisis in 1994 through 1995, CEMEX experienced a huge drop in domestic sales. Part of this stemmed from legal barriers that broke down, paving the way for international competition. Quick analysis of where revenues were specifically hemorrhaging most led to an astute observation that involving taking a closer look at the bottom of the pyramid^[2] market.

CEMEX analysts knew sales were down, but a key awareness was that whereas sales were down by as much as 50 percent in the formal market, sales in the less-wealthy segment informal self-construction market were down by only 10 percent to 15 percent.^[3] The company realized the high level of dependency on the formal segment left it vulnerable to the business cycle swings in Mexico. According to an estimate made by CEMEX, the do-it-yourself segment accounted for almost 40 percent of cement consumption in Mexico and has a market potential of $500 to $600 million annually. However, that segment also represented a portion of the population existing for the most part in a state of poverty. The company realized the key difference between the formal segment and the informal segment was in the average revenue per customer. Though fewer big-ticket customers could generate most of the company’s revenues, the situation is reversed for low-income customers (see Table 11-1). It is estimated that 60 percent of the population in Mexico earns less than $5 per day. CEMEX figured that by converting the low-income population (that forms a majority) into customers, the steady revenues from this segment could be very impressive.

Part of CEMEX’s awareness involved considering the obstacles of reaching this market in an effective, efficient, and sustainable way. Clearly, hard work and innovation would eventually be needed, but getting a clear big picture first was vital. Headed by Francisco Garza Zambrano and a consulting team from Business Design Associates, CEMEX performed in-depth market research to gain a good understanding of this low-income market in Mexico. The team conducted a three-month study based on various demographic factors—social, religious, political, and financial. The study also analyzed the various construction practices and methods, brand perception, and image of various cement brands.

The team realized that financing was the foremost and most difficult challenge to overcome for low-income customers. Unless the poor obtain access to credit, it would be difficult to sell the idea of constructing a complete house in the near future. The second challenge was that most families employed local semi-skilled or unskilled masons who built rooms without any planning. The lack of technical expertise resulted in a lot of raw material waste. Often, the masons did not order the right amount of material, and families did not have a safe place to store the excess raw materials. They had to leave the material outside their houses to the mercy of nature and theft. The team identified three keys areas of improvement/change for CEMEX:

Saving money is not a standard practice of most low-income families; when it occurs at all, it takes the form of tandas—a local neighborhood, family, and network of friends who pool money if and when they have any money left to save. Once a week (or at some predetermined interval), one of the members bids for the pool by deep discounting or might win the pool through a lottery. Typically, this pool is used for unanticipated family emergencies, education, and sometimes for housing. The only factor that enforces discipline in the tanda system is the social capital—the trust, reputation, and participation in the community. However, the tanda system is not nearly as effective for housing. Even before money found its way to such pools, families (usually the men) spent it on various other nonprimary activities—drinking, partying, and so on. Also, there were too many members in pools, and it was difficult to manage and enforce discipline.

CEMEX realized, too, that women are the key drivers of savings in families. In the Mexican society (and most other societies), women are entrepreneurial in nature, and they actively participate in the tanda system. Regardless of whether they are homemakers, outside-the-home workers, or small-business owners, they are responsible for any savings in the family. Research conducted by the Patrimonio Hoy team revealed that 70 percent of those women who saved were saving money in the tanda system to construct homes for their families. The men in the society consider their job done if they bring in their paycheck at the end of the day. The women actually manage expenses with the limited “allowance” that they receive per day from the men. They have to find creative ways to allocate money from the allowance as savings to build a house, spend on children’s education, and so forth.

The poorest people in the city live in settlements made of raw cinder blocks, and in worse cases cardboard and corrugated sheet metal. Most houses have one or two rooms per family, and the size of a family ranges from 6 to 10. The homes are overcrowded, and this overcrowding has its own set of social problems, including friction within the family and children taking to the streets.

As a bold cultural innovation, CEMEX modified the existing tanda system within the Mexican communities and called it Patrimonio Hoy, revolutionizing the idea of savings by changing the basic spending pattern of the poor in Mexico. In this system, poor people not only save their money, but also obtain access to credit based on their savings and payment discipline—a new model that moved away from a savings-only or a credit-only system to a savings-credit system. Recognizing the inefficiencies inherent in the original tanda system, Patrimonio Hoy has strict rules and standards for the program.

The creation of Patrimonio Hoy to replace the tandas also had distribution implications. Traditionally, the company has “pushed” its products and services through the distribution channels, and hence it was a very price-driven market. Distributors operated on a 15 percent average margin from sale of building materials. However, under the new business model, Patrimonio Hoy manages the distributor relationships on its own. Although it works with the existing CEMEX distributor network, the margins in the new channel differ slightly. Distributor margin on sale of building materials sometimes drops to 12 percent. But the slight drop in margins is more than offset by a steady demand for cement and other high-margin raw materials such as sand and gravel (for which the margin can be as high as 45 percent). Patrimonio Hoy has effectively created a pull for cement, and CEMEX on the supply side pushes it, enabling the “push-pull” strategy for cement sales. Patrimonio Hoy has seen a very enthusiastic response from distributors who are willing to participate in this program.

In a traditional distribution network and supply-chain model, bargaining power and market dominance play a key role in the determination of prices and selection of distributors. The distributors primarily care about prices and discounts. The industry is driven by price wars. However, the new model took a very different approach. Not all the traditional distributors were part of Patrimonio Hoy. In fact, a new methodology was adopted to select distributors for this program. Certain “prerequisites” were established for distributors and resellers:

Nearly one tenth of the distributors qualified under the rigorous selection process. For example, in the Mesa Colorada neighborhood in Guadalajara, of the 30-odd distributors that sold CEMEX, 10 distributors sold only CEMEX products; among the 10, three to four distributors were selected to participate in the project.

CEMEX chose Guadalajara, in the southwestern province of Jalisco, as the first city in which to implement the program. CEMEX chose this test market for a variety of reasons. First, the social/economic profile of low-income communities was representative of most of the populated areas in Mexico. More than 50 percent of the population live in homes that hug a network of pitted, unpaved roads in unplanned settlements surrounding the city and blending into the countryside. Second, CEMEX was gradually losing its stronghold in the second-largest city in Mexico. Nearly all the houses appear to be under construction. The third (and subtle) reason was that the construction methods in Guadalajara differ from that of other places. Traditionally, for every 100 pesos that were spent on construction raw materials, 52 pesos were spent on cement. In Guadalajara, only 22 pesos were spent on cement. Instead, clay and limestone were used in the construction of houses. So, CEMEX had to find new opportunities for growth in Guadalajara.

A special research team set out to explore neighborhoods in and around the city of Guadalajara to identify high-growth opportunities. In a broad sense, the team identified potential pockets or cells based on income, construction progress, housing development, concentration of poor people, distributor network, and population growth.

The team identified target communities where the average family (five or six people) earned between 50 and 150 pesos ($5 to $15 approximately) per day. The target population for Patrimonio Hoy is not the absolute bottom of the economic pyramid (for whom the average per-capita income is less than $5 per day).

After a neighborhood was identified, Patrimonio Hoy set up a cell for that neighborhood. A typical cell targets a customer base of 5,000 or a community with a population of 50,000 to 100,000 (or 20,000 families). Each cell has one to four employees—a general manager (or chief), an engineer, a technical advisor (or an architect), supplies manager, and a customer service representative (administrative clerk).

The chief works to identify “promoters” within the community who sell (to the poor) door to door the new savings-credit idea. The supply manager works closely with corporate CEMEX in the negotiation of prices for raw materials, interacts with the distributors for the delivery, and monitors the quality of suppliers and distributors in terms of delivery time, customer treatment, quality of materials, and so on.

Savings and credit are the key drivers for the business model of Patrimonio Hoy. The enrollment of a socio ensures a consistent and steady source of revenue in the pipeline (for x number of weeks) for Patrimonio Hoy and the distributors. The predictability of revenue has huge implications across the value chain from the suppliers to the end customers.

When a socio group is formed, the group goes to the nearest cell and completes an application. This application is completely informational and does not require any credit history or collateral. Also, the prices of raw materials are “frozen” throughout the payment period. The only requirement is a commitment from each socio in the group to pay 120 pesos per week for a definite period of time (at least 70 weeks).

After enrollment, each socio in the group sets up an appointment with the technical advisor/architect (for a low fee) for an interview. Through an interactive process, the technical advisor helps the socio decide the following:

The personal visits of architects make the socios feel like important customers and have helped Patrimonio Hoy build trust among the socios.

Each socio in the three-member group takes a turn every month to collect money from the other two members and remits a weekly payment of 360 pesos (120 pesos per head). For every 120 pesos a partner pays per week, Patrimonio Hoy charges 15 pesos as a membership fee per socio.

CEMEX offers socios two delivery choices: receive delivery right away for immediate construction, or receive a delivery voucher now that can be exchanged for raw material delivery at a later time when construction is ready to commence. However, they never receive cash in hand, unlike the original tanda system wherein pool members could receive cash.

If the partners choose to receive their raw material, Patrimonio Hoy coordinates with its distributors to arrange for delivery of the material. If partners choose to receive delivery vouchers for delivery at a later date, the inventory is stored at the distributors’ warehouses.

Interviews with socios revealed the first delivery made after just five weeks of payment and consistent on-time delivery played a big role in earning the trust of the partners. The supply managers also play a role of an audit manager, ensuring the distributors deliver good-quality material on time and provide good service to the socios.

The objective of Patrimonio Hoy is to serve not only a social cause, but also make it a profitable self-sustainable business. Patrimonio Hoy also recognizes that volume is important for it to be a success, and hence has based its revenues on a per-transaction basis. These revenues are in addition to the sale of cement by CEMEX. The revenue streams are as follows:

The average initial investment per typical cell is 400,000 pesos. The operational cost per cell, including salaries, is around 85,000 pesos per month. An average cell needs approximately 700 enrolled socios to break even on operations. According to Patrimonio Hoy’s general manager, the program generates approximately 125,000 pesos in cash flow from operations. The goal of this program is to operate as a standalone break-even unit, since the initial objective is to increase customer awareness, change consumer behavior, and establish a competitive position in the market.

The traditional methods of marketing communication, advertising, and promotion are not effective in this operating model. Patrimonio Hoy realized early on that mass-media advertising through television, newspapers, and so forth would not convey a personalized message or help build trust among low-income people.

After its first three years of operations, Patrimonio Hoy had 36,000 customers and more than $10 million in credit. It operated through 49 cells in 23 cities across 19 states in Mexico. The customer base is growing at 1,500 to 1,600 per month.

It might be too early to use financial profits as a measure of success. As a standalone operation, Patrimonio Hoy might not be generating as high a margin as corporate CEMEX is through sale of cement, but the project has strategic implications for CEMEX. According to the general manager of Patrimonio Hoy, the operation is generating positive cash flows from operations of one million pesos per month as of April 2003.

The more important and critical factor is that Patrimonio Hoy has successfully created, with sustainability, an entirely new channel for selling cement and other construction materials. Patrimonio Hoy has helped CEMEX triple its cement sales in places where the operations of Patrimonio Hoy are set up. This has increased from 2,300 pounds of materials consumed once every four years per family, on average, to the same amount being consumed in 16 months.

By offering a complete and comprehensive solution for housing, Patrimonio Hoy has made it difficult for consumers to let go of this opportunity, and has fundamentally changed consumer behavior, even if on a small scale. As part of its effort to maintain sustainability, it has introduced various innovations around Patrimonio Hoy—Patrimonio Hoy Escolar, Patrimonio Hoy Te Impulsa, Patrimonio Hoy Calle Digna:

Patrimonio Hoy has partnered with the Mexican government to work on public infrastructure projects. Many projects that local governments had yet to implement, for various reasons, have been implemented by collaborating with Patrimonio Hoy. The local government provides drainage facilities, Patrimonio Hoy provides material to pave the streets. The payment structure differs slightly. The weekly payments are 150 pesos for x number of weeks, depending on each family. Patrimonio Hoy provides ready-mix or raw materials starting on the eighteenth week of the payment cycle.

Though customer enrollment is increasing at a rapid pace, customer retention is a huge problem for Patrimonio Hoy, not because of poor quality of products and services, but because of the nature of the business. After a room is done, the probability of returning customers to build another room is not 100 percent. Many take a break from the rigors of payment. The biggest challenge for Patrimonio Hoy is to retain those customers for a longer period of time and motivate them to return for additional rooms or other expansions.

In many cases, the socios cannot afford weekly payments for raw materials and mason fees for construction at the same time. So, they first buy raw materials over 70 weeks, build houses later, and then may return to save for the next room. To facilitate the continuity of the socios with the program, Patrimonio Hoy has established masonry training facilities for “self-construction” where socios can obtain technical training to build homes on their own. The socios not only get to build their own homes, but they also gain a new competency.

Construmex is one more way in which CEMEX seeks sustainability. Having successfully launched Patrimonio Hoy in Mexico, CEMEX turned to another possibility. It was obvious that a large number of Mexican immigrants live and work in the United States. They send remittances home every week. These remittances in aggregate total about $10 billion. Although the size of the average remittance transfer is miniscule—$200 to $300—in the world of international finance, the cumulative sums are significant. Further, an estimated 10 percent of these funds is intended to build additions to immigrant families’ homes.

CEMEX saw an opportunity to capture a share of the remittance market to Mexico. This would further its business of helping the poor build good-quality houses.

CEMEX knew a significant portion (approximately 10 percent) of remittances to Mexico is used for construction of houses. Most of these people remit money using traditional money transfer companies like Western Union. This process is fraught with inefficiencies:

CEMEX identified the need for an easier and cheaper way to help the Diaspora build houses back in Mexico. A subsidiary, Construmex, was formed to serve this need. Following small-scale market research, Construmex set up its first experimental office in Los Angeles in July 2001. The significant Mexican population of Los Angeles made it the natural choice for trying out this business model. In short, Construmex allows Mexicans living in the United States to send their money directly to cement distributors in Mexico. Distributors receive the order and the money, and deliver cement and other building materials to the site of the person’s future home or business.

Broadly, there are two types of customers:

The express purpose of Construmex is to channel as large a share of the remittance flows to CEMEX as possible. It is not a profit center and has little revenues. Hence, the primary activities of Construmex center around generating customer awareness, customer education, and trust building in the Mexican community. Its reputation spreads through word of mouth and working with HTAs to capture a share of the HTA remittances. Not surprisingly, 60 percent of Construmex’s budget is dedicated to marketing.

Construmex offices typically have one to two sales representatives. These sales representatives are multifunctional in that they do the following:

Dolex is the money-transferring agency that transmits the money from the customer to the Construmex account in Monterrey, Mexico. The money is transferred in dollars, and there is no exchange of currency. Construmex is still trying to define the perfect business model according to its general manager, Luis Enrique Martinez. However, it has tried two variants up to this point:

Dolex started its U.S. operations in 1998, and is still a young player in the money-transfer business. Dolex has 600 sales offices in the United States, and Construmex wants to scale up its operations by using this existing network. Construmex will try out the second model in Chicago, where Dolex has around 25 counters. There will be one Construmex sales office to answer any questions and provide consultation. The lean cost structure in the later model is obviously appealing to an organization that has no revenues and for whom controlling costs is critical, because that is the only variable under its control.

The Construmex office in Mexico does the following:

According to the general manager of Construmex, the quality of service provided in the United States as well as Mexico is critical for generating trust and acceptance. Because of this, Construmex carefully selects distributors for its program. The different criteria applied are (1) accuracy of materials delivered, (2) adhering to the five-day delivery guarantee, and (3) prompt service. Until now, 1,600 of the 6,000 CEMEX distributors are part of the Construmex program. They cover all states of Mexico except Tijuana. These distributors are typically known to the beneficiaries and hence help in building trust with the clientele. They are happy to work with Construmex since this means more business for it. In 2002, a team from CEMEX Philippines visited Los Angeles to study the operations of the Construmex program. CEMEX Philippines has a strong interest to replicate this model; their program has great potential since they send much more money back home than Mexicans.

Patrimonio Hoy and its sustaining programs have helped CEMEX gain a good understanding of the low-income population. It has helped CEMEX clear the misconception it originally had about the poor, and realize they could indeed form a good and profitable segment of the market. CEMEX also learned the traditional methods of operation would not work. However, it remains to be seen whether CEMEX can continue to provide housing for the poor to serve a social cause and at the same time remain profitable in the long run by expanding this program globally.