Opportunities to profit from the honourable poor
Tuesday, August 29, 2006
The idea that money can be made from the poor has attracted much interest in the past couple of years, fuelled by books such as The Fortune at the Bottom of the Pyramid and Banker to the Poor.? Brazil is one market with plenty of potential.
Excerpt: The real secret of Casas Bahia?s success, however, lies in its system of customer finance. Just 10 per cent of sales are paid for in full at time of purchase. Of the remainder, 20 per cent go on credit cards ? a recent innovation, introduced four years ago ? and the rest on hire purchase traditionally financed by Casas Bahia?s own capital (although since 2004, 25 per cent of this portfolio has been financed by Bradesco, Brazil?s biggest private sector bank).
To make sure they will pay, all customers wanting credit are interviewed by sales staff. To the customer, the interview may appear to consist largely of informal chat. If a customer says he is a house painter, for example, the interviewer will say she is thinking of painting her living room and ask roughly how much paint would be needed, to make sure the customer knows his trade. Once the customer?s income has been established, staff will make sure he is not committing to payments beyond his means, sometimes suggesting a smaller television, for example.
The strategy is not fool-proof and delinquency rates are high, at about 8 to 9 per cent. But interest rates are high too ? an average of 4.5 per cent a month, or about 70 per cent a year, with a top rate of 5.9 per cent a month. If a customer buys a cooker on a 12-month plan, for example, about half the total cost will consist of interest.
So why do customers not save for six months instead and pay half the price up front? ?Brazilians have no habit of saving,? Mr Klein says. ?They worry only about how much they can pay each month.? He says they would rather commit immediately to monthly payments and then work extra shifts or take a second job.
A business based on its customers? inability to plan ahead may sound precarious. But such behaviour seems firmly entrenched. At some of Casas Bahia?s stores, 80 per cent of sales go to customers who have used the store?s credit before.