Avenida Conde Francisco Matarazzo 100, Centro
Casas Bahia Comercial Ltda. is the largest nonfood retailer in Brazil . A mass marketer, it achieves very high turnover by selling furnitur e, appliances, and other household goods at low prices, chiefly on cr edit, to some of the poorest people in the urban parts of the Western Hemisphere. Conceived, created, and presided over by Samuel Klein, a rags-to-riches immigrant sometimes called the Sam Walton of Brazil, the retail chain remains privately held.
Selling to Brazil's Poor: 1957-89
One of nine children of a Polish-Jewish carpenter, Samuel Klein was s ent to a German labor camp at the age of 19 during World War II. He e scaped two years later as Soviet troops advanced westward, but his mo ther and five younger siblings did not survive deportation to a death camp. After the war he worked on his own--chiefly selling cigarettes and vodka to Soviet soldiers--in Germany for five years before immig rating to Bolivia with his wife and eldest son. Settling in the Sao P aulo industrial suburb of Sao Caetano do Sul in 1952, he became a bac kpack peddler armed with a list of 200 customers for bed linens, blan kets, and towels obtained from another Jewish immigrant. After a whil e he was able to make his rounds in a horse-drawn cart. His clients w ere working-class people, many of them natives of impoverished northe astern Brazil who had migrated to the Sao Paulo metropolitan area loo king for comparatively well-paid factory work. By 1957 he had 5,000 c ustomers buying a large variety of merchandise.
Klein, in 1957, purchased a store in Sao Caetano with about 800 custo mers. It was named Casa Bahia because many of the customers came from the state of Bahia. He sold furniture and clothing, chiefly on insta llment payments (including 3 to 5 percent monthly interest) that he c alculated on the spot to people who otherwise did not qualify for cre dit. "The poorer the customer, the more punctual his payments," Klein told Miriam Jordan for an article published in the Wall Street Jo urnal in 2002. "The poor know they need to guard their reputation s. ... My talent is trusting the poor and giving the poor good servic e." When he opened a second store, restricted to clothing and tended by his wife, the two units became "Casas Bahia." In 1964 he opened a much larger store, specializing in furniture and appliances.
The growth of the business required more capital than Klein had been able to assemble, even though he was borrowing money from three lende rs. The turning point in his career, as he saw it, came in 1970, when he purchased a half-share in a consumer-loan company named Financeir a Intervest. Before the year was out, the capital from this company h ad enabled him to do so much more business that he was able to buy ou t his partner and, in effect, self-finance Casas Bahia. Klein then bo ught stores in neighboring cities and had 15 units in 1972. Before th e year was out he had acquired a five-store chain in the port of Sant os, about 60 miles southeast of Sao Paulo. He also secured a steady s ource of merchandise by purchasing a major furniture manufacturer, Ba rtira, in 1981. Casas Bahia continued to sell goods door to door unti l 1984, but all installment buyers had to make monthly payments at th e nearest store, where other goods might catch the customer's eye. Ab out two-thirds then made more purchases.
Klein practically doubled his chain in 1981, when he bought about 20 Lojas Colúmbia stores in the greater Sao Paulo metropolitan ar ea. There were 43 Casas Bahia stores in early 1983. Although the Braz ilian economy was sunk in recession and other chains cut back on cred it to their customers, Klein forged ahead, stepping up spending freel y to advertise his wares in newspapers and on radio and television an d hiring the legendary soccer star Pelé as a pitchman. By 1990 Casas Bahia was the second largest advertiser in Brazil, spending &# 36;50 million a year but producing its ads in-house to save money.
By the end of 1988 the Casas Bahia chain had grown to 56 stores and h ad penetrated the interior of the state of Sao Paulo. Its number of r egistered customers had reached two million, and the number of sales transactions 100,000 monthly, of which 75 percent involved installmen t purchases, financed by Intervest. The chain kept in stock 2,000 dif ferent items, with enough merchandise on hand in a 40,000-square-mete r warehouse for its fleet of 150 trucks to supply the stores for two months.
Expansion on His Own Terms in the 1990s
By 1990 Brazilian journalists were describing Klein as the Sam Walton of Brazil. His chain now came to 100 stores, which in that year brou ght in $874 million in sales, 60 percent more than in 1989. His p ersonal empire also included two Volkswagen auto dealerships; Bartira , the furniture manufacturer; Intervest; a brokerage named Interbens; and the house advertising agency, Interjob. Casas Bahia was now Braz il's fifth largest nonfood retailer. Yet Klein looked anything like a tycoon, receiving journalists in the modest headquarters of his ente rprise, still located in Sao Caetano, clad in a cheap open-neck sport s shirt and slacks, with sandals on his feet.
Because Klein hated to pay rent, almost half of Casas Bahia's stores were the company's own property. In buying merchandise from about 300 suppliers, Klein preferred to pay immediately in cash, if possible. In dealing with them he had powerful leverage, since the chain was bu ying more than 10 percent of the production of the principal national manufacturers of home appliances. Even so, the suppliers liked deali ng with him because he came to a decision immediately and paid on the spot. Much of this work was being conducted by his younger son, Sa&u acute;l, while the older one, Michael, concentrated on finance. But K lein was not averse to micromanaging his enterprise by such means as personally determining the price of sale for any of the thousands of items that the chain was selling, using as a guide the newspaper ads of competing chains.
All Klein's efforts could not, however, keep Casas Bahia's sales from sinking during the economic crisis of the early 1990s. Sales dropped to $618 million in 1991 and nosedived to $353 million in 199 2, almost, but not quite, putting the company in the red. Klein close d 15 stores, citing high rents, and slashed employment from 9,500 to 6,000. However, the units closed were in places where Casas Bahia alr eady had a presence, and he opened in five more cities in the interio r of the state of Sao Paulo while contemplating entering the neighbor ing state of Minais Gerais.
The year 1993 saw little improvement, but in 1994, when a reform prog ram ended the hyperinflation that had eroded purchasing power, sales of $841 million came close to matching the 1990 peak. The followi ng year Casas Bahia entered Rio de Janeiro by paying almost $60 m illion for the 33-unit Casas Garson chain. By the end of 1996 there w ere some 250 Casas Bahia stores in six states, with sales that year r eaching an amazing $2.83 billion, making the chain the largest no nfood retailer in Brazil. One of the units was said to be the biggest in Latin America, with almost 150,000 square meters of space. But th is headlong expansion did not come without problems. The expenses nee ded to field so many more units and extend credit to so many more cus tomers had stretched the chain's finances to the point that ten banks refused to loan it more money without auditing the books. Greater tr ansparency was also needed so that the firm could issue $250 mill ion in debentures, since even Klein conceded that his firm's debt of $800 million was almost as large as its assets.
Buffeted by the fluctuating fortunes of the Brazilian economy, Casas Bahia sustained a 17 percent drop in sales in 1997 and its first reco rded loss, about $7 million. "They had problems, but they adopted an intelligent strategy," an executive of a rival chain told Jos&eac ute; Roberto Caetano for an article in Exame. "They kept their prices high, at least 15 percent higher than ours. They relied on th e loyalty of their clients. A majority of their customers ... continu ed buying from Bahia because they were afraid of losing credit and no t being able to get it from another store." After opening its books t o outsiders for the first time, Casas Bahia successfully floated its debentures and a six-month promissary note. The firm made a comfortab le profit in 1998 and, according to Klein, reduced its debt to only 1 5 percent of its assets. He continued to operate by his own rules, de termined not to take on shareholders or deal with banks any more than absolutely necessary. Only he, his wife, and his sons had the author ity to sign checks. Rejecting widespread just-in-time practices, he s tocked his warehouse (at 230,000 square meters, the biggest in South America) with 60 days of merchandise and transported it to the stores solely in the company's own trucks.
Still Doing It His Own Way: 2000-05
Casas Bahia had over 340 stores in seven states and the federal distr ict of Brasilia in 2002, when its sales came to BRL 4.2 billion ($ ;1.44 billion, based on the average currency rate for the year), and its profit to BRL 53 million ($18.15 million). The company had 20 ,000 employees, 500 suppliers, and 10,000 merchandise items, of which 4,500 were available online. A fleet of 1,040 trucks delivered the g oods to the stores. The company had ten million registered customers, seven million of them active. Seventy percent of its sales were of h ome appliances, and the chain was buying and selling 30 percent of al l home appliances manufactured in Brazil. Furniture accounted for ano ther 25 percent of sales, and miscellaneous goods such as clothing an d bicycles for the remaining 5 percent.
The Casas Bahia customer had an income ranging from virtually nothing to ten times the monthly minimum wage of BRL 200 (about $70), a range that comprised 84 percent of Brazil's population. The typical c ustomer was only earning twice the minimum salary, and half were not formally employed at all. Ninety percent of all sales were on credit, with the rest in cash or by credit card, an option that Casas Bahia had only recently (and reluctantly) introduced, the last major Brazil ian retailer to do so. Using information technology, the chain had tr ansformed its assessment of customer creditworthiness to a near scien ce. If a new customer applied for credit to buy merchandise costing l ess than BRL 600 (about $200), no proof of income was required, o nly a permanent address. Those applying for more credit were quickly evaluated, using a computerized system, and offered a credit limit ba sed on occupation, income, and presumed expenses. Those rejected were directed to a credit analyst for further evaluation.
The company's 900 credit analysts had been trained to formulate quest ions and interpret responses carefully and with subtlety. If an appli cant presented himself as a manual laborer, the analyst checked his h ands for calluses and his clothing for stains. A stonemason might, fo r example, be asked to explain why he wanted to buy a computer. Perha ps he wanted it for his children, but perhaps he really intended to p urchase it for another person, a practice that accounted for about ha lf of all the chain's defaulted debts. In the end, an estimated 16 pe rcent of applicants were being denied credit. The company's default r atio of 8 to 8.5 percent was only about half that of its competitors. A team of "reminders" made phone calls and wrote letters to customer s whose payments were past due but also made it clear that the compan y would support them in difficulties and might allow them to renegoti ate their debts. A 200l "amnesty" canceled the debts of a million cus tomers blacklisted since 1997. Those customers who paid promptly rece ived a yellow preferred-client card, sometimes proudly displayed, as in the case of the hot-dog vendor who Jordan visited in a two-room sh ack that she described as "a veritable Casas Bahia showroom, with a b ed, bookcase, sofa and kitchen cabinet from the chain."
Installment payments were made over a period of one to 15 months, wit h the average term being six months and the average interest rate 4.1 3 percent a month. Furniture accounted for 31 percent of the goods pu rchased, with television sets accounting for 14 percent and audio equ ipment for 10 percent. The interest portion of consumer loans was sol d to banks and consumer-loan companies, since Casas Bahia had sold In tervest by this time.
Casas Bahia retained its reputation for frugality and simplicity, ope rating with only three levels between store manager and top executive . Managers enjoyed significant freedom as long as they met predetermi ned revenue and profit targets. A store manager had the right to cut prices by as much as 10 percent, and a regional manager by up to 25 p ercent, without calling Michael Klein. Salespeople were guaranteed a salary of BRL 500 (about $165) a month, in conformity with the la w, but expected, and were expected, to make their living instead by a 2 percent commission on sales. The average salesperson was earning a bout BRL 1,500 (about $500) a month. Deliverymen, as well as sale s clerks, were held to a company standard of deportment and dress and expected to make all deliveries within 48 hours, carrying away old a ppliances or furniture if requested.
All Casas Bahia stores were linked electronically so that headquarter s could monitor sales by product and store. Store and distribution-ce nter inventories were monitored the same way. If a store did not meet sales or profit targets, a team was assembled at headquarters to add ress the problem. About 30 stores were closed in 2003, but about the same amount were opened, based on a standard of attracting at least 1 00,000 customers to any given store. A few Casas Bahia stores were in neighborhoods that catered to customers with incomes above the chain 's target level, but these were not considered attractive because hig h rents and the tendency of buyers to pay in cash rather than seek cr edit resulted in lower profits.
Casas Bahia's sales rose to almost BRL 6 billion (about $2.11 bil lion) in 2003 and to an estimated BRL 9 billion (about $3.08 bill ion) in 2004, when its profit nearly doubled to about BRL 150 million (about $50 million). Its sales exceeded those of its next four c ompetitors combined. There were about 400 stores. Furniture from the group's own Bartira unit provided a profit margin twice as high as fr om the appliances sold by Casas Bahia but made by others. A second, & #36;25-million, furniture production facility opened in 2003. There w ere three distribution centers: the largest in Sao Paulo, the others in Rio de Janeiro and Ribeirao Preto. The company was planning to bui ld four more in the biggest northern cities: Belém, Fortaleza, Recife, and Salvador.
Casas Bahia's amazing growth put the chain's finances under strain an d led to a contract with Banco Bradesco S.A., the nation's largest ba nk, whereby the bank assumed the direct financing of part of the chai n's customer purchases, freeing funds for further expansion. Michael Klein said that Casas Bahia wanted to have 1,000 stores and annual sa les of BRL 20 billion by the end of 2010. But to do so the chain woul d have to expand into unexploited terrain, that of Brazil's tropical north and northeast, a task one competitor compared to Napoleon invad ing Russia. The chain's growth was also having an effect on the Brazi lian economy at large. An article in Exame by Tiago Lethbridge quoted Michael Klein in these words; "Today, in Brazil, whoever want s to have relevant participation in his market has to sell to us. If a large company doesn't approve our conditions, others will form a li ne to seek a place on our shelves." One of these suppliers told Lethb ridge: "Negotiations always take place at the end of the month, when the industry seeks to meet its sales goals and empty its stock. There fore, hard-pressed, the suppliers offer big discounts." Some firms we re willing to take a loss simply to maintain their share of the marke t. Casas Bahia was accounting for 36 percent of all the washing machi nes, 25 percent of the refrigerators, and 20 percent of the televisio n sets and DVDs made in Brazil.
With Casas Bahia having little to fear from its traditional competito rs, the company was looking over the horizon to do battle with a perh aps more dangerous rival than it had ever faced, the hypermarkets. On e of the great unknowns was the capability of such hypermarket chains as Carrefour, Extra, and Big to meet the needs of lower income Brazi lians. Another potential problem was the rapid spread of credit card use, which by 2005 had grown to account for one-fifth of Casas Bahia' s sales and thus threatened both its considerable income from interes t and new purchases by customers reentering the stores to make instal lment payments. Finally, there was the question of succession, since the chain's founder had passed the age of 80. Michael, who cited Jewi sh tradition favoring the eldest son, was in day-to-day-charge of fin ance, stores, distribution, fleet, technology, and employees. Sa&uacu te;l was in charge of supplies, customer sales, and marketing.
Principal Competitors: Globex Utilidades S.A.; Lojas Cem S.A.; Lojas Colombo S.A. Comércio de Utilidades Domésticos; Magazine Luíza.
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