RURAL MARKETING

(2nd Assignment)

CASAS BAHIA

Submitted by:

Bikash Doley-33248

Kunal Saha-33274

Raj Pegu-33223

Srushti Govinda-33233

Vipul Gupta-33222

(Marketing-B)
INTRODUCTION:

BOP (BOTTOM OF PYRAMID):

BOP has emerged as a dominant concept in business. BOP comprises of the vast unserved
market representing the poorest socio-economic group. But BOP is too vast a market to be
ignored. Around 72% of the world's population i.e. around 4 billion people comprise the BOP.
This represents around 40% of the world's total spending capacity. To convert the BOP into a
consumer market, the capacity to consume has to be created. Cash-poor and with a low level of
income, the BOP consumer has to be accessed differently.

In Brazil though low-income population did not have enough money, it wanted all kinds
of basic consumer goods like refrigerator, television and washing machines and the only way of
acquiring these goods was through credit. There were usually two sources for the working class
to obtain credit-financial institutions like bank and private money lending agencies. In Brazil, the
banking system credit policies are too conservative towards the low income population. Private
money lending agencies also charged high interest rate which didn't suit the requirement of the
BOP (around 14% for personal loans). Casa Bahia exploited this opportunity by fulfilling this
untapped financing need.

COMPANY:

The company which we have selected 'Casas Bahia' is built on converting this BOP into
consumers. Casas Bahia is a Brazilian retail chain which specializes in furniture and home
appliances. It was founded in 1957 in São Caetano do Sul, São Paulo, by Polish immigrant
Samuel Klein, who began his career as a peddler, selling products to immigrants from the
Brazilian Northeast. Around seventy percent of Casas Bahia's sales are from home appliances,
and the chain buys and sells 30 percent of all home appliances manufactured in Brazil(70% of
total Casas Bahia sales). Furniture account for another 25 percent of sales, and miscellaneous
goods such as clothing and bicycles for the remaining 5 percent. As of 2009, the company
employed 57518 people (16800 being salesman) and was generating $250 million in profits. By
2010, it had expanded to 560 stores across 11 states in Brazil and has about 31 million customers
registered in its systems. The chain is currently owned by Grupo Pão de Açúcar, Brazil's largest
retailer, which purchased it in July 2010. According to the deal, Casas Bahia will be merged into
Pao de Acucar's Globex home appliances unit and Grupo Pão de Açúcar will inject 690 million
reais ($387 million) into the combined unit, which will be named Nova Casas Bahia.

STRATEGIES

SEGMENTATION:

Brazil maintains a standard that stratifies individuals into one of five basic economic classes: A,
B, C, D or E.

Family Income Economic Segment

X- Minimum Wages 0-2x E
2-4x D
The Casas Bahia customer had an income ranging
from virtually nothing to ten times(i.e. segment 4-10x C

C,D,E) the monthly minimum wage of BRL 200 10-25x B

(about $70), a range that comprised 84 percent of >25x A
Brazil's population( 2003). Now it comprises of
around 72 percent of the Brazilian population
which represents 41 percent of the total spending capacity. The typical customer was only
earning twice the minimum salary, and half were not formally employed at all.

FINANCE:

Ninety percent of all sales were on credit, with the rest 6% in cash and 4% by credit card, an
option that Casas Bahia had introduced quite late. It was one of the last major Brazilian retailers
to do so. Using information technology, the chain had transformed its assessment of customer
creditworthiness to a near science. If a new customer applied for credit to buy merchandise
costing less than BRL 600 (about $200), no proof of income was required, only a permanent
address. Those applying for more credit were quickly evaluated, using a computerized system,
and offered a credit limit based on occupation, income, and presumed expenses. Those rejected
were directed to a credit analyst for further evaluation.

The company's credit analysts had been trained to formulate questions and interpret responses
carefully and with subtlety. Client information is given utmost information. All customers who
wish to finance their purchase must submit to an SPC (Service of credit protection- A Govt
agency) finance check. The entire process typically is finished in 10mins or less. In the end, an
estimated 16 percent of applicants were being denied credit. The company's default ratio of 8 to
8.5 percent was only about half that of its competitors. A team of "reminders" makes phone calls
and write letters to customers whose payments were past due and also makes it clear that the
company would support them in difficulties and might allow them to renegotiate their debts.

The proprietary system that determines the creditworthiness of new clients also evaluates
existing clients for potential new purchases. Based on the same drivers already noted, in addition
of checking out the history, the system automatically produces a new credit limit. This ability is
key in the cross-selling process. When customers come into the store to pay their monthly
installment, a new credit limit is available to the Casas Bahia salesperson. This sales person has
the opportunity to make a tailored cross-sale in the amount of the new credit limit.

Installment payments were made over a period of one to 15 months, with the average term being
six months and the average interest rate 4.1 3 percent a month. The interest portion of consumer
loans was sold to banks and consumer-loan companies.

The carne or the passbook system that allows customers to make small installment payments is
another innovative approach by Casas Bahia. The passbook is payable only at Casas Bahia
stores, and every month the customers must enter a store to pay their bill. This also helps to
maintain a relationship with the clients.

Casas Bahia makes the majority of its profit by charging interest on installment plan purchases,
making it possible for low-income customers to purchase products which they would not be able
to pay off in a single payment.

MANAGEMENT:
Casas Bahia retained its reputation for frugality and simplicity, operating with only three levels
between store manager and top executive. Managers enjoyed significant freedom as long as they
meet predetermined revenue and profit targets. A store manager has the right to cut prices by as
much as 10 percent, and a regional manager by up to 25 percent, without calling the CFO.
Deliverymen, as well as sales clerks, were held to a company standard of deportment and dress
and expected to make all deliveries within 48 hours, carrying away old appliances or furniture if
requested.

All policy decisions are centralized at headquarters. Due to the fast pace of expansion all HR
related functions except for specialized training and administrative aspect of the function have
now been moved to the local stores.

If a store did not meet sales or profit targets, a team was assembled at headquarters to address the
problem. 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 high
rents and the tendency of buyers to pay in cash rather than seek credit resulted in lower profits.

TECHNOLOGY:

All Casas Bahia stores were linked electronically so that headquarters could monitor sales by
product and store. Store and distribution-center inventories were monitored the same way. All
customer information is now centralized and available to all stores. In addition to personal
information, purchase history and credit score, Casas Bahia also maintains records on the
personality traits of its customers. The role of technology is to enable productivity, low-cost
production and client satisfaction. Technology has also helped to reduce fraud.

However Casas Bahia, unlike many of its competitors, does not rely on an internet presence as a
cornerstone of its strategy—only in February 2009 it launched its online store, pressed by an
increasing number of online sales in Brazil. It’s mainly to do with the segment that they cater to
and their business model.

PRODUCT:
Casas Bahia sells almost all major Brands. However in pursuit of higher margins, Casas Bahia
also ventured into in-house manufacturing of Furniture. Producing the furniture internally also
helped ensure that the company can continue to provide customers great-looking furniture while
controlling costs. When designing its products, Casa Bahia utilizes a reverse engineering
process. First, the company determines the terms it will pass along to the customers, both price
and number of installments. Based on experience and research, Casas Bahia understands what
the customer is willing to pay. The product then is developed. In addition to the cost, product
size and appearance are considered.

Casas Bahia’s purchasing power is one of its keys success factors. In 2002, Casas Bahia sold 18
percent of the 4.5 million televisions produced in Brazil. Consequently, the company can
determine the success or failure of a supplier in local markets.

DISTRIBUTION & DELIVERY:

There were three distribution centers: the largest in Sao Paulo, the others in Rio de Janeiro and
Ribeirao Preto. The company was planning to build four more in the biggest northern cities:
Belém, Fortaleza, Recife, and Salvador. Casas Bahia owns and maintains a fleet of more than
1500 trucks to support their distribution and delivery.

All major appliance deliveries are made from one of the three distribution centers or six cross-
docking facilities and are guaranteed by a specific date. No deliveries are made from the stores.
The merchandise in the store is mainly for display purposes. Once a display item begins to get
old, they are moved to the clearance section for sale as an “open item”. Stores utilize a system
that automatically reorders their inventory based on predefined reorder points. On average, each
store has 15 days of merchandise on hand for small appliances. Customers can pick the date they
wish to have the merchandise delivered .In general, deliveries are made within 48 hours of
purchase. However, a customer can make the purchase and have it delivered six months later.
Also, a customer can purchase any item at any store and have it delivered to any location in
Brazil where Casas Bahia operates. Casas Bahia believes that a successful delivery can
determine whether the customer makes a second purchase at their stores. Respecting the
customer was given the top priority. The drivers and the loaders went through a formal training
process. Once the delivery is complete, customers are given a phone number to call if they have
any complaints.

One strategy that Casas Bahia has undertaken is building several stores close together. This
strategy serves two distinct purposes. Bringing the store to both the customer and employee is
crucial. Also, having several stores located in close vicinity effectively saturates the area, making
it difficult for outside competition to enter. Some cannibalization has taken place. Although
individual store sales have decreased, the overall sale of Casas Bahia has increased dramatically.

Casas Bahia emphasizes a lot on supplier negotiation process. The company strives to make best
possible deals with its suppliers, negotiating huge volumes at low prices. This is one reason why
Casas Bahia has built the largest warehouse in South America (one of the largest in the world). It
gives the flexibility to make deals of any size which the company deems good for business.

MARKETING & SALES STRATEGY:

Since there is not much differentiation in Casas Bahia’s product offering, they focus heavily on
marketing and try to occupy the mind-space of the customers. Casas Bahia invests approximately
3 percent of its revenues in advertising. It maintains one of the largest advertising budgets in
Brazil. The company’s strategy to attract the customers to stores is to advertise its low prices
with brand-name products. Casas Bahia’s main advertising venue is television, which reaches
more than 90 percent of all Brazilian households. The company also uses significant radio time.
Because there is little product differentiation, sales are often made on the basis of emotion,
leveraging famous singers, actors, and television personalities. In 2002, Casas Bahia used a
campaign utilizing client testimonials for the first time, which intended to show the emotional
relationship between the company and its consumers.

An interesting sales technique of Casas Bahia stores is to locate cashiers in the back of the store,
which requires clients to pass by all the products on the floor each month in order to pay their
next monthly payment. Salespeople also consider the lines at the cashier’s appropriate potential
sales targets

Unique Features of Business Mod el

 Credit Financing.
 Scoring process
 Personal Rapport (creditworthiness).
 Centralization Of Information.
 Records Based On Personality Traits.
 Carne System (the passbook).
 Art of Vender (selling).
 Informal way Of Treating Customers.

Reasons for Casas Ba hia’s Success

 Focused on untapped market.

 Innovative installments sales schemes.
 Mass marketing.
 Company’s low default rate.
 Cross selling of latest products.
 Changing the finance terms and timely special promotion.
 Strategic location of stores.
 Focus on efficient distribution & delivery.
 Bulk purchasing power and supplier negotiation process.