In May 2011, Magazine Luiza successfully raised R$926 million (400 million euros) from its initial public offering (IPO) on the São Paulo stock exchange. Not bad for a company that started life in 1957 as a small family business and has since become one of the three biggest retailers of household goods and electronics in Brazil.
The Donato family initially set up a gift shop 400 km north of São Paulo, and named it after the matriarch, Luiza. In 1991, a niece, also named Luiza, became CEO and embarked on a new wave of development, setting up a division to professionalize the family business and organize the shareholder structure.
The management philosophy was always the same: Think big and expand. Brazil’s turbulent economic environment has felled many players, but Magazine Luiza has managed not only to survive but to thrive: Sales went up by more than 600 percent.
The key behind such outstanding growth was a finely tuned strategy based on customer and employee care. Employees provided outstanding yet cost-effective service to underserved market segments. In particular, Magazine Luiza fostered deep ties with customers at the lower end of the income scale. Magazine Luiza recognized that these customers were looking for more than low prices: They also needed “affection.”
On this front, the store more than delivered. It staged live music concerts, put on special entertainment for children and gave away free food. This “human touch” attracted repeat business, and stores became focal points of the community. When a new store opened, whole communities celebrated: It heralded new jobs; greater opportunities; a better neighborhood.
Magazine Luiza also demonstrated its human touch by extending credit and offering a range of financial services to consumers who normally didn’t qualify. The close proximity they enjoyed with customers enabled local employees to better judge the credit worthiness of each applicant. Financial services became an inherent part of the business model: In the first quarter of 2011, they accounted for more than a third of Magazine Luiza’s profits.
Humanistic values, training and promotion opportunities infused Magazine Luiza and led to multiple awards for “best place to work.” The company believed in hiring employees from the local community where each store was based, because if employees were to have intimate knowledge of their customers, then they needed to have local connections.
As proof of the vested interest that employees had in seeing the company succeed, at the time of the IPO, Magazine Luiza employees purchased 25 percent of all outstanding shares – remarkably high when compared with the usual 10 percent.
Experimenting With New Channels
More than 60 percent of Internet users in Brazil enjoy the convenience of e-commerce – though they disproportionately belong to the higher income segments. Users cite the benefits of price, ease of purchase, speed and security, in that order. However, two factors limit e-commerce growth: access to broadband (particularly among the lower income brackets, though this is changing) and consumer credit.
Among Magazine Luiza’s managers, there was a clear consensus that e-commerce should form part of the company’s strategy; the question was to what extent. In the year 2000, Magazine Luiza started selling through its website, learning through a process of trial and error. Magazine Luiza was soon offering around 8,000 products through its website versus the 5,000 typically found in a traditional store. By 2011 the website represented its fastest-growing sales channel – more than double the growth rate of conventional stores.
In 2010, Magazine Luiza acquired another local retailer, Lojas Maia, adding 150 new sales points in the north of the country. Yet many felt it was time to make e-commerce the cornerstone of the future growth strategy. But would doing so move the company away from what made the business successful in the first place?
Can Magazine Luiza’s competitive advantage be sustained in an online world? Can the deep customer relationships and high levels of customer service for which the store is famous be extended to the online model? Should Magazine Luiza go after the top of the pyramid or stick to its current segments? How do you change focus without losing all focus and damaging your brand in the process?
WHAT I WOULD DO
September 16, 2011 17:49:02
Luiza should conquer the whole pyramid. From the case, we can conclude there are two types of customers and distribution channels. First, we have the low-income customers (underserved market segments) who use the traditional channel and benefit from the services provided by Luiza’s employees: financial support, advice and the human touch. The employees’ competences allowed Luiza to succeed in this segment, because they knew their customers. However, if they want to grow, they definitely have to use other channels – like e-commerce, for example – which allow Luiza to reach new customers, in this case, the high-income segment. From my point of view, there is cannibalization between the channels because they serve two different customers. Luiza has to consider that maybe it will need to have a different organizational structure and different employee competences to serve each segment: one for the traditional (low-income) market and one for the e-commerce (high-income) segment.
September 29, 2011 16:00:06
Angeles Peinado, Consultor
Si consideramos el comercio electrónico como un canal de ventas más en retail es una alternativa. Sin embargo, tanto si la empresa está integrada hacia delante o hacia detrás, tendríamos que considerar algunos aspectos que el comercio electrónico matiza: Difumina el valor de la marca excepto en casos de gran consumo (vamos a ver qué tal con Zara), requiere un esfuerzo logístico muy coordinado (vemos los problemas de El Corte Inglés en este sentido ), anima a la guerra de precios con lo que la rotación tendría que ser brutal y se tiene que reforzar con call centers muy especializados. Vamos a ver como le va a Amazon en España buen sitio para hacer una prueba de mercado tal y como están las cosas.