9-606-048 REV: DECEMBER 12, 2006 FRANCES X. FREI RICARDO REISEN DE PINHO Magazine Luiza: Building a Retail Model of “Courting the Poor” Thanks to [Trajano’s] hands-on management style and her knack for coming up with new sales strategies, Magazine Luiza has gone from being a relatively small department store chain to Brazil’s third-largest nonfood retailer in just over a decade. And it has done so by assiduously courting the poor. 1 — Todd Benson, The New York Times It was late on October 23, 2004 as Magazine Luiza’s corporate jet prepared to land 850 miles away from Franca, the company’s home base and operational center. Luiza Helena Trajano, CEO; Frederico Trajano, sales and marketing director; and several other members of the executive team were heading to the “Encontrão,” or “Big Meeting”: the company’s biannual off-site, which gathered 1,200 of its 5,700 employees to discuss strategy and reinforce the company’s unique culture. Despite the familiar ritual, Luiza Helena could feel the team’s unspoken tension. This would be the first time the Big Meeting would take place with such an uncertain future for the company. In June 2004, Magazine Luiza had purchased Lojas Arno, a traditional retail chain in southern Brazil (a part of the country that was new to the company). This acquisition—Magazine Luiza’s sixth in the past eight years—added 52 new stores to the existing 202, along with 800 more employees. It was its largest, most geographically distant, and most culturally distinct addition to date, adding stores in the states of Rio Grande do Sul and Santa Catarina. The company already had an active presence in five other states: São Paulo, Minas Gerais, Parana, Mato Grosso do Sul, and Goias. (See Exhibit 1 for a map of Brazil and Exhibit 2 for its store performance by region.) The pace of consumption—along with deep customer loyalty, a relentless focus on low-income segments, and an innovative use of technology—had driven Magazine Luiza’s exceptional growth. But the impact of such rapid expansion was weighing on the leadership team. Was the current pace of change compatible with the delicate formula behind their success? Luiza Helena believed that Magazine Luiza’s most important asset was its culture, and she wondered how quickly she could cultivate it in the new stores. She said, “Culture is the most difficult competitive advantage to copy. A marketing campaign or a specific technology or process can be easily replicated . culture, however, takes time to develop and consolidate. It took us almost 50 years to create a culture that is 1 Todd Benson, “A Brazilian retailer thrives courting poor: Magazine Luiza offers sales and loans,” The New York Times, July 15, 2004, available at Factiva, http://www.factiva.com, accessed December 11, 2004. ________________________________________________________________________________________________________________ Professor Frances X. Frei and Senior Researcher Ricardo Reisen de Pinho prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. 606-048 Magazine Luiza: Building a Retail Model of "Courting the Poor" genuinely customer centered and employee centered, capable of aligning minds, hearts, and pockets.” Luiza Helena spoke openly about her decision to host the 2004 meeting in the center of Lojas Arno’s market: This recent acquisition will challenge our capacity to maintain a homogeneous culture and streamlined organization when operating in so many different places and with such diverse employees. There may be a backlash, since we will have to change the way the Lojas group is paid, deals with clients, and communicates internally. We don’t know how they will react to this. Everyone at the company agreed that the success of the Lojas Arno integration would have serious implications for Magazine Luiza’s future. A Brief History of Brazilian Retail In 2004, Brazil was a large and diverse market. While it was the fifth-largest country in the world in terms of area—with a total population of approximately 170 million—84% of its 47 million households were located in urban areas, and regional development and income distribution were very uneven. Most of the country’s wealth was concentrated in the south and southeast, which were responsible for 18% of the total area and about half of the country’s gross domestic product (GDP).2 (See Exhibit 3 for Brazilian income stratification by region.) By the end of the twentieth century, the country had experienced a mixed record of economic growth. The 1970s saw 7.2% growth, which decelerated to 1.3% in the 1980s, ushering in a period of hyperinflation in the beginning of the 1990s that peaked at a staggering 2,477%.3 This had a devastating impact on the retail industry. Wages lost their value daily, and prices changed so quickly that retailers were unable to keep accurate price tags on their merchandise current. 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. This scenario ensured relative isolation of the market until the mid-1990s, facilitating the growth of small family-run operations and medium-sized chains that developed local expertise.4 With economic stabilization in 1994 and a broader trend toward globalization, the Brazilian retail market experienced rapid change. Inflation rates dropped to single digits, which helped strengthen Brazilians’ purchasing power and allowed for the emergence of new consumer groups. Rapid consolidation within the industry created local retail giants such as Casas Bahia, Ponto Frio, Lojas Americanas, and Pão de Açucar. The opening of the market also allowed the entrance of international players such as Wal-Mart, Casino, Leroy Merlin, and JCPenney. Although confident of the company’s position as the third-largest nonfood retailer behind Ponto Frio and Casas Bahia,5 2 Adapted from “Síntese de Indicadores Sociais – 2003” and “Sistema de Contas Nacionais – Brasil – 2000 – 2002,” Instituto Brasileiro de Geografia e Estatística, 2003, available at www.ibge.gov.br. 3 Adapted from the Brazilian Central Bank, available at www.bc.gov.br. 4 Carrefour was the only relevant international player in the retail industry operating in Brazil before the 1990s. 5 Ponto Frio was focused on appliances, while Casas Bahia was most similar to a department store. 2 Magazine Luiza: Building a Retail Model of "Courting the Poor" 606-048 which were twice and six times its size in 2004, respectively, Luiza Helena anticipated increasingly intense competition: “What we foresee is an arena with flexible, creative, and deep-pocket retailers fighting fiercely for additional new sales per square meter.” Transforming the Family Business Magazine Luiza was founded in 1957 by an entrepreneurial couple, Pelegrino José Donato and Luiza Trajano, when they bought a small “mom-and-pop” store in downtown Franca, a small city in the rural interior of the state of São Paulo. Until the end of the 1980s, the company grew primarily through the acquisition of small local chains near its headquarters. It was family owned and family run, led by Luiza Trajano and her relatives on the executive team. Unrelated businesses as diverse as car dealerships, farms, and real estate operated under the same corporate management. In 1991, Luiza Trajano’s niece, Luiza Helena, assumed the role of Magazine Luiza’s CEO and began an aggressive reorganization of the group. A shareholders’ agreement was signed mandating that all family members step down from their executive responsibilities. A professional management team was formed to replace them, combining experienced staff with new, young talent. In addition, Luiza Helena launched an internal campaign to revive and reinforce Magazine Luiza’s mission to serve customers and employees. The effort was aimed at capturing the company’s legacy of external focus. Luiza Helena remembered: When my aunts started the business, the very first thing they did was to promote a public contest through a popular local radio [show] to choose a new name. It was a huge success. After a few days of amazing participation, the [audience] chose “Magazine Luiza” as the winner.6 From the very beginning the company was truly customer centered, and we have tried to maintain this essence. The company weathered the country’s notoriously volatile economy, turning a profit every year from 1992 to 2004. In 2003, when the economy shrank 0.2%, Magazine Luiza experienced a 35% return on equity. In 2004, as the economy began to recover, the company expected revenue to jump 56%. (See Exhibit 4 for Magazine Luiza’s financial statements.) Operational Evolution Up until 1991, Magazine Luiza operated like many other specialized retailers. The stores themselves sold approximately 8,500 stock-keeping units and covered about 1,400 square meters, with an average of 0.04 employees per square meter. Its cheap but cheerful ambiance was an integral part of its marketing and was essential to its operational strategy, which encouraged growth while limiting costs. (See Exhibit 5 for a picture of a traditional Magazine Luiza store.) Procurement and distribution—always key elements in retail businesses—were even more critical in Brazil, with its history of economic volatility and vast geographic area.