Banco Azteca and Elektra Cater to the BOP in Mexico and Central America
Growing up in Mexico, I’ve seen first-hand the difficulties that low-income earners have in purchasing goods or getting financial services. These goods and services many times are even more expensive than in a developed country, and are therefore inaccessible to low-income earners. I’ve been thinking a lot on what I should write as my first essay on this blog, so finally I decided that I should write about the first Mexican business that comes to my mind that focuses on the BOP market: Banco Azteca and its retail unit Elektra.
Banco Azteca was launched in Mexico in 2002, and is the banking unit of Mexican specialty retailer Grupo Elektra; both companies are part of the larger Grupo Salinas. The entire Grupo Salinas targets low-income earners, and its success has shaped business practices in Mexico toward the BOP, and its model has been imitated by other retailers in Mexico such as Wal-Mart.
Banco Azteca has expanded since 2002 and apart from Mexico it is also operating in Panam?, Guatemala and Honduras; in 2008, it is expected to launch operations in El Salvador.
Grupo Elektra sells electronics at almost double the price that you would find in a retail store. The “advantage” of Elektra is that it offers its customers the opportunity to buy goods and pay for them over a period of 12 to 24 months in very small weekly payments, sometimes even as low as 50 Mexican pesos per week. On the one hand, it’s great because the people can have access to buying TVs and stereos, even iPods. The problem comes when the obligation of making monthly payments over 2 years becomes too burdensome for the consumer, especially when his/her income does not leave much room for contingency spending. When consumers are unable to make their monthly payments, the item under contract can be confiscated and the consumer loses the amounts already paid. Are BOP consumers being taken advantage of? In a way, yes. These practices could be considered predatory, especially since consumer protection laws are less stringent in Mexico than in the U.S. or Europe.
After working in a poor community in Mexico, I met many people that bought huge stereos or plasma televisions for their home–often a small shack. Sometimes I would judge them and question why would they buy these expensive electronics and not spend this money on health care, insurance, or even clean water. The conclusion I got to was that it’s a matter of status. In a town where everyone is living under the same conditions, the most apparent way to gain status is by having an expensive television. It makes people feel that they are setting themselves apart. CK Prahalad in his book “The Fortune on the Bottom of the Pyramid” talks exactly about this brand-consciousness in the BOP:
“The experience in Casas Bahia in Brazil and Elektra in Mexico? Brand consciousness among the poor is universal. In a way, brand consciousness should not be a surprise. An aspiration to a new and different quality of life is the dream of everyone, including those at the BOP. Therefore, aspirational brands are critical for BOP consumers.”
Regardless, the success of these businesses demonstrates that there is significant willingness-to-pay in BOP markets for high-ticket items, provided that long-term financing is available. I propose that using this financing scheme for basic needs ?housing, water, energy, healthcare, etc.–may deliver greater development impact than consumer electronics does. Regardless, it is always the choice of the buyer as to how to spend his/her money. And it may be arrogant for “development professionals” and other “experts” to hold Elektra in contempt for selling consumer electronics; after all, the BOP proposition is all about choice. Who are we to say what is a “good” or a “bad” choice?
Banco Azteca and its retail unit Elektra offer a no-frills approach which is an interesting proposal to the BOP consumer. The Bank has found success by offering financial services to low-income earners ignored by other banks. The success of Elektra is apparent but I still have my doubts on businesses like these. They do cater to the BOP, but usually the consumer has to pay high interest rates sometimes as high as 70% a year.
BOP consumers are a great market to target as a big, multi-national corporation. BOP consumers value quality goods and are willing to pay for them, so corporations should not limit these financing models to offer to high-end electronic or household retail goods but also offer high quality services such as housing, water, communications and health care. Since people always have free choice, many will choose these services and thus lead to development in a larger scale.