Financial

Services in the Brazilian Retail Market: a Fallacy or an Opportunity?

by Luiz Otavio da Silva Nascimento With the development of the Brazilian retail market, some of the major chains particularly department stores have developed strategies to increase their bases of own- branded credit cards, generating an annual growth of 15.7% since 2006 in such number, and only the top 10 had more than 120 million cards in late 2010. And, according to consulting firm Euromonitor, the trend is that this expansion now will occur at an annual rate of 11.8% up to 2015. The strategy stemmed from something the late Nelson Rodrigues (a famous Brazilian author) called "blindingly obvious": the realization that credit is the great lever of sales and that the main stores in terms of sales were those that had the largest number of cards. So the recipe for increasing sales of a poor performance branch seemed to be simple: it only had to make efforts to raise its card base. And so it was done! They built and trained teams. Created incentive plans. Installed kiosks in the mall corridors and entrances to their own stores. It became almost impossible to go shopping and not be approached by an employee of these stores, armed with a clipboard and asking us if we had already his/her chain stores card. So the card base has grown, but partly due to the expansion of the number of stores. The major chains began to open units all over Brazil, trying to take advantage of the good economic moment experienced. The growth, however, hid three harsh realities. The first is that the mere granting of a card does not guarantee that it will be used. It is estimated that out of each two cards given, only one is activated and generates sales. The second truth is that, as a chain opens new branches, the own-branded card share tends to fall since the new units still lack maturity

and attractiveness to make the customers in their neighborhoods want to have and start using the chain card. The last reality is not reported in any conference of publicly-traded retailers: the loss of customers, i.e., those cardholders who no longer use the cards for whatever reason, and we do not know if that amount is deducted from the published base or not. So far these three realities have not been changed by any of the major chains. Perhaps because the unit and card base expansion activity has diverted their attention. The fact is that chains have reported declining shares of own cards in their sales and currently these shares are around 50%. This scenario reproduced in almost all chains was impacted by the fact that they have been seduced by the new "siren song", the financial services. By knowing that the bottom of the Brazilian social pyramid had no access to the services offered by the banking system, most of the chains that served or were beginning to serve Class C saw in them a chance to further increase their revenues. And, then, they embarked on this new challenge in partnership with financial institutions. An explanation must be given here. Financial services are understood as the offer of personal loans, insurance of all kinds and different types of capitalization bonds or securities. The offer of products from their usual assortment, but with longer installment plan and interest charges, should not be computed within this scope, specially because it has always been usually done by most retailers. Again, chains prepared. They built and trained teams. Created incentive plans. Transformed the existing spaces of their stores in the credit sales departments. At a given point it became impossible to go shopping and not be approached by an employee of these stores asking us if we had already the card of his/her chain and if we wanted to make an insurance policy, get a loan or buy savings bonds. But what seemed to be easy did not materialize. Sales of such services were lower than

expected. Some chains, for example, began to have trouble in combining the image of fashionable with the offer of life insurance policies! The reality was far from the dream and the promise to shareholders. In a first moment, as if wanting to tell the market that the situation was different, some chains began to present the financial service sales figures inflated by the revenue earned from the interest-bearing sales plans of the usual assortment and by the recovery of customers unpaid debts in sales plans with and without interest of such assortment. The effort made by these chains in the sale of financial services was shrouded in a mist, making difficult the analysis of the high delinquency rates of these services combined with the cost of their teams. This situation has given rise to the following doubt: are we in front of a fallacy or a real opportunity? The fallacy comes from the fact that financial services, after more than 5 years of efforts, represented in 2010 less than 4% of net sales of the major chains that publish their balance sheets. The metaphor to represent this could come from Shakespeare's play Much Ado About Nothing. This same effort applied to improving own-branded cards share in sales certainly would have generated higher and better results. Good lessons about it can be read in the good book by Chris Zook and James Allen, of Bain & Company, "Profit From The Core", published by the Harvard Business Press, Boston MA, USA, in 2010. The real opportunity, in spite of such fallacy, comes from the fact that companies sometimes develop good strategies, but they implement them wrongly. So, instead of fixing the implementation, they mistakenly choose to change the strategy. Several chains, upon embarking on financial services, sought to acquire competence in the analysis, provision and management of such services, which was correct. But they forgot to

get expertise in marketing such services, mainly in how to harmonize them with the usual assortment and generate real attractiveness to their regular target audience. The lack of this has given rise to autocratic managers at stores who ordered increasingly unmotivated teams to sell financial services to meet sales goals. The chain retailers were also arrogant and forgot that the same partner financial institutions, with plenty of financial, marketing, human and physical resources, represented by thousands of branches across the country, failed in providing financial services to the bottom of the social pyramid. However, the reasoning that led chains to offer financial products is valid. It is the implementation of this strategy that should be reviewed in the light of the confrontation with the stark reality, along with the analysis that the human and financial resources are finite, and that time is irreversible, leading chains to discuss about what is effective: to diversify and offer financial services or grow and profit from their core business? Paraphrasing Shakespeare again: thats the question!

Luiz Otavio da Silva Nascimento. Master in Business Administration (UFRGS - Brazil), specialization in Marketing (FGV - Brazil) and General Management (Emerging Leader Program - Darden Business School of the University of Virginia USA, Entrepreneurship - Babson College, Boston MA USA and Lcole des Hautes Etudes Commerciales HEC of Paris - France). He has a 25 year professional experience in management retail and consumer good companies, like Perrier, Owens-Illinois, Lojas Renner and Diadora. Currently, he is consultant and counselor. Author of the books Gestor Eficaz prticas para se destacar num ambiente empresarial competitive (Effective Manager practices to be succeeded in a competitive business environment), xodo da Viso Ao Uma Proposta para o Varejo Brasileiro (Exodus From Vision to Action A Proposal for the Brazilian Retailing Market) and co-author of the book Administrao de Empresas Comerciais (Administration of Commercial Companies). Professor of MBA courses at Laureate Universities in Brazil (Anhembi-Morumbi and Business School So Paulo).