James Militzer

NexThought Monday – Eight Takeaways from the BASE Forum III

It took me little more than a few minutes to experience both the potential and the challenges of BoP enterprise in Latin America. I’d recently arrived in Mexico City for the BASE Forum III, a gathering organized by Opportunities for the Majority at the Inter-American Development Bank (IDB) and focused on developing and promoting market solutions for the Base of the Pyramid in Latin America and the Caribbean. My wallet full of 500-peso (about USD $32) bills fresh from the ATM, I stopped by one of the countless mom-and-pop stores that populate the city – and the entire region – to buy a snack. But after selecting an unseemly number of local delicacies, I pulled out my cash to pay – only to be told by the owner that she didn’t have change for such a large bill. Like most small stores, this one didn’t accept payment cards, and I had no smaller bills. So I walked out empty-handed, and the proprietress – who likely needed the money more than I did – missed out on a sale.

This problem is played out countless times each day across the region, as millions of low-income people attempt to piece together a living through small commercial ventures – often without the knowledge, equipment or infrastructure to truly thrive as entrepreneurs. It was a major topic of conversation at the forum, as more than 100 panelists from across the region and around the world came together to discuss the ways that businesses both large and small can alleviate poverty in the region. We’ve put together the following key takeaways from the two-day event. (Note: Consider any quotes as close approximations – not verbatim transcriptions – of panelists’ comments, as they are based on simultaneous translation of conversations conducted largely in Spanish.)

The BoP Majority

As the IDB defines it, the Base of the Pyramid in Latin America and the Caribbean includes people who live on less than USD $10 a day. That includes 70 percent of the population in the region and more than 400 million people, in a market worth USD $760 billion per year. In Mexico alone, more than 90 million people are counted among the BoP.

Moving in the Right Direction

The region’s BoP market is neither monolithic nor static, with many earning between $4 and $10 a day – enough to be classified by the IDB as vulnerable, not poor. And there is significant upward mobility between these segments: Between 2000 and 2010, 54 million people moved out of poverty in Latin America and the Caribbean, reducing the percentage of people in the lower BoP segment from 59 to 45 percent.

More Purchasing Power = More Opportunities (and Responsibilities)

The BoP’s growing purchasing power has resulted in shifting spending patterns and emerging business opportunities, as millions of low-income people have money to spend on both needs (like education, housing and health care) and wants (like smartphones and other consumer goods) that were previously out of reach. This represents a major opening, not just for small businesses, but for major corporations. The opening plenary included senior leaders from PepsiCo Mexico, CEMEX Mexico (one of the world’s largest suppliers of building materials) and Grupo Bimbo, the world’s biggest bakery company. They each spoke of the importance of low-income customers to their companies’ respective business models.

As Juan Romero, president of CEMEX, put it, businesses overlook the BoP at their peril. And unsurprisingly, the panelists emphasized the importance of understanding these customers – their needs and their capacity to pay – before designing a business model to serve them. But perhaps surprisingly, at least for those who are skeptical of multinationals’ commitment to social progress, the executives also spoke strongly of the importance of supporting the BoP as a social goal. As Daniel Servitje, general director of Bimbo put it, “We’re all working to make things better for our children, and for humanity.” However, they also alluded to a more practical reason: According to PepsiCo Mexico President Pedro Padierna, most of his employees are Millennials, and the majority of them have said they wouldn’t work there if the company didn’t have a strong social focus.

Where to Focus?

In a presentation by the IDB, two specialists from Opportunities for the Majority, Maria Lourdes Gallardo Montoya and Vivianne Azevedo, provided a rich profile of the BoP customer in Mexico and the broader region. Across Latin America, they’re often self-employed, budgeting by day or week. Almost 70 percent have cellphones, and 64 percent own a home – though there are big differences between countries in how they allocate their monthly expenses. As Azevedo put it, the core challenge for serving the market is understanding where these customers are spending their money. Zeroing in on Mexico, Montoya laid out four sectors where growing BoP spending is producing particularly strong business opportunities: savings and credit; insurance; information technology; and food. This breakdown was reflected in the panels at the conference, which included a heavy emphasis on each of these industries. A few stats on the BoP in Mexico, from Montoya and Enrique Herández-Pons, general director of organic food retailer Aires del Campo, illustrate their potential:

· 30 percent of the jobs in Mexico are related to gastronomy.

· 48 percent of the BoP saves money only through informal methods.

· Just 27 percent of the BoP gets credit through financial institutions, with 74 percent getting it through department stores.

· Internet cafes, not homes, are still the main points of online access.

Failure to Launch?

In spite of the potential of the BoP market in the region, the growing interest among some pioneer companies, and the clear need for more businesses – especially social enterprises – that serve its needs, many panelists voiced a similar frustration. As Luiz Ros, manager of Opportunities for the Majority, put it, “We’ve been talking about this for 10 years. We see the size of the market. Why aren’t more BoP-focused businesses scaling? And why aren’t more players coming in to serve the market in Latin America?” Olivier Kayser, founder and managing director of Hystra, described the core dilemmas: Big companies are accustomed to focusing on their strengths, and doing business at the BoP forces them to leave their comfort zone.

Meanwhile, large corporations tend to be old, so they’re not always flexible or open to new business models. To help them see the potential of BoP markets, he said, we must often reinvent their business models for them. And according to Margarita Henao, a vice president at Colombia’s Banco Davivienda, it’s often unclear how BoP-focused businesses can move from progress at the individual level to the creation of entire ecosystems. Erik Simanis, head of the Frontier Markets Initiative at Cornell University, had a somewhat controversial suggestion for overcoming these challenges: Drop the social impact rhetoric and sell BoP-focused business to major players based on its financial potential. As he pointed out, it’s not enough for a business to just be profitable – it must also be scalable. For instance, he said, microfinance exploded because it was generating big returns, and that’s what’s missing in other BoP businesses. Yet some panelists also lauded the advantages of being small: According to Juan Carlos Domenzain, general director of Promotora Social México, small and early stage social enterprises can have major social impact, as these entrepreneurs are willing to make the financial sacrifices needed to make their business grow. That’s why it’s so important not to lose these businesses due to lack of investment, before they have a chance to advance to the next level.

’More Internet = Less Poverty’

The above quote summed up the argument of Diego Molano Vega, former minister of information and communication technology in Colombia, in what was perhaps the most rousing presentation I’ve ever seen on the results of a government program. In it, Vega described in impassioned detail the remarkable success of Colombia’s efforts to expand online access through public-private partnerships:

· 96 percent of municipalities are now connected to high-speed Internet.

· Internet connectivity has increased from 7 to 72 percent of small and medium businesses in the country.

· 7,600 Internet kiosks have been installed in hard-to-reach rural zones.

According to Vega, this infrastructure is “completely transforming communities” in Colombia, and the government has also worked with private sector partners to reduce the cost of tablets and other devices – an additional barrier to access. In countries like Mexico, where broadband access is low among both individuals and small businesses, this approach could serve as a model. According to some panelists, expanding broadband access and lowering the cost of smart devices could also help trigger the development of new applications focused on BoP needs – something that’s still lacking in many parts of the region.

The Big Impact of Small Stores

Perhaps the biggest topic of conversation at the conference was the value and potential of small, local “mom-and-pop” stores in Latin America. The numbers are impressive: According to Francisco César de la Torre Cevallos, president of the board of directors at FUNDES México, there are 5 million of these shops in Latin America, and they are crucial to its economic and social development. In Mexico alone, he says, small shops provide 2-3 million jobs. Though many people once predicted they’d be driven out of business by larger, more powerful retailers, they’ve not only survived, they’ve actually grown in number. As Jorge Ortega, senior director of financial inclusion at Visa America Latina, describes it, they’ve thrived thanks to some key advantages: proximity, perception of low prices and relationships and trust within their communities. And many entrepreneurs – including a number of major companies – view them as keys to reaching the region’s BoP customers with products and even social services.

For instance, Ignacio Giraldo, a VP at SABMiller, says small stores and bars account for about 70 percent of the beer and beverage company’s sales in the region. And Bimbo and Visa are collaborating to help Bimbo’s partner shops process electronic transactions and provide bill payment, money transfers and airtime top-ups through machines installed in the stores. Smaller companies like Barared and Virtual Market are also installing terminals that connect these stores to the Internet to provide them with financial services, inventory management, business training and other services that can boost their sales and efficiency. Yet in spite of the excitement around their potential as change agents, Barared Founder Jose Gonzalez brought up an important point: Most of the owners of mom-and-pop stores don’t really want to be shopkeepers – they just don’t have other employment options.

Show Me the Money

As a finance blog editor, a personal highlight of the conference was the panel “Impacting the BoP: Investment Funds’ Experiences in Latin America.” Full of frank talk and sharp insights, the panelists didn’t always agree on the solutions, but there was strong consensus on the problem: Size matters, and BoP businesses need more and larger investments. As Intellecap President Vineet Rai put it, investing small amounts won’t solve big social problems, and there are plenty of entrepreneurs with big, potentially transformative ideas. Yet impact funds often find it easier to raise money than to give it away to investees. According to Vox Capital Co-founder Daniel Izzo, many funds won’t invest until they’re 100 percent sure of an enterprise’s social impact – which often means they just sit on the money. One solution, according to the panelists, is for social enterprises to avoid overpromising on social impact and to prepare investors to wait a while for their ROI. But the problem will continue until investors develop a greater tolerance for risk – an inevitable part of doing business in challenging markets like the BoP.

Editor’s note: We’ll be publishing video interviews with several of the conference’s key panelists in the coming weeks, so stay tuned.

James Militzer is the editor of NextBillion Financial Innovation.

Base of the Pyramid, business development, financial inclusion