Baby's First Birthday: Lessons from a Brazilian E-commerce Start-upPublished: January 02, 2013 in Knowledge@Wharton
The e-commerce story in Brazil is one of tremendous opportunity, but with significant barriers to entry. While the country's growing middle class and its ranking as the fifth most Internet-connected country would suggest a good fit for e-commerce, consumers still harbor skepticism about making purchases online. Brazilians generally do not believe that a product will actually be delivered, that it will be the correct item in good condition and that the credit card information they must provide to a third party will be secure. Bureaucracy and corruption further complicate the situation but amplify the rewards for entrepreneurs willing to take on these challenges. Consider baby.com.br, one of Brazil's leading baby-products e-commerce companies, co-founded in October 2011 by Davis Smith and his cousin, Kimball Thomas.
Genesis of a Company
Already a successful entrepreneur -- following the launch of pooltables.com, the largest independent retailer of pool tables in the U.S. -- Smith arrived at Wharton knowing he wanted to start another business. During his first year, he sold the pool table company and worked closely with his cousin to compile 60 new business ideas. The following summer, they winnowed the list down to four ideas and eventually to one -- a baby-products e-commerce website in Brazil. Smith said that he wanted to "build something in Brazil that is completely different than what you know." He was changing the e-commerce experience and catering to a large and growing market.
With the idea in hand, Smith and Thomas moved quickly to make it a reality. Knowing that the more people who knew about his idea, the more likely he was to be connected to valuable resources, Smith asked his classmates for feedback. Before travelling to Brazil, he contacted 100 to 150 people via LinkedIn and other social networks, targeting investors who believed either in Brazil's long-term economic growth or in the country's market for baby products. These efforts proved successful when baby.com.br received US$4.4 million in Series A funding in February 2011 from Tiger Global, Monashees Capital and SV Angel. Asked to explain the motivation for investing in this new company, a representative from Monashees Capital -- a Brazilian venture capital firm focused on the Internet and education -- explained that the three main factors were the strength of the team, the large market and the weak competition. Other companies either focused strictly on retail baby apparel or were unfocused, offering much more than just baby products.
With the first round of financing in place, baby.com.br launched its website in October 2011, just a few months after Smith and Thomas graduated from business school.
Operationally, an e-commerce company is much different than a retailer. While a brick-and-mortar store involves a simple transaction, an online purchase includes a security analysis to determine whether a sale is likely to be fraudulent, verification that the product is in stock, either a credit/debit payment or a voucher-like payment system called boleto, order-processing by operations and, finally, shipping and delivery. While these aspects of doing business are difficult to change, baby.com.br has found other ways to be innovative.
Baby.com.br emphasizes quality and a commitment to customer service, offering clean, high-quality baby products to its customers, who expect that their purchases will arrive in excellent condition. Its user-friendly website offers products in 11 different categories: clothing and shoes; food and accessories; toys; strollers and car seats; diapers and accessories; outlet; accessories for trips; bath and hygiene; bedding; books/CDs/DVDs; and safety and protection. In addition, baby.com.br provides dedicated in-house customer service to help customers navigate the website and resolve any post-purchase issues.
Baby.com.br has built trust with Brazilian consumers by securing the endorsement of Angélica, a well-known television host and actress, who signed on both as an investor and as "chief mom officer." This gave the company immediate credibility and additional publicity. Through public-speaking opportunities and an "Angélica recommends" area on the website, Angélica has become the company's public face.
Many aspects of baby.com.br's internal structure are unique among both multinationals and start-ups. First, the merchandising team is in charge of demand planning, inventory planning and inventory management. In established multinationals globally, the division of tasks/roles is focused much more on dividing these three functions across several products. For example, a typical sports company might integrate demand planning vertically by assigning soccer, basketball and tennis goods to one team that works only on this specific purpose. Baby.com.br, on the other hand, decided to form merchandising teams based on its 11 product categories, with each team ultimately being responsible for its respective category from start to finish -- e.g., sales, units and margins. Thus, any issues in production, development and distribution are identified and resolved quickly.
Current Challenges for E-commerce and baby.com.br
Brazil is a difficult market for e-commerce companies because of several structural problems, including burdensome regulations for starting a business and a weak infrastructure for shipping products across state lines. Indeed, according to Miguel Fernandez, baby.com.br's chief financial officer, "Brazil is a complicated place to do business. It's a bureaucracy. It has an inadequate infrastructure to carry out business."
In the U.S., starting a company can be as simple as forming a limited liability company (LLC) in a tax-favorable jurisdiction, such as Delaware. The entire process might take a day or two, depending on whether a lawyer needs to be consulted beforehand. A representative of Veirano Advogados notes that the process in Brazil is very lengthy, especially for foreigners, often taking up to 180 days.
The shipping industry in Brazil is not as developed as in other areas of the world, so the country does not have the capacity to handle the current growth in e-commerce. For example, instead of depending on one or two national carriers, baby.com.br depends on 11 partners to deliver its products. Most of these partners are family businesses that lack basic features, such as tracking numbers. As a result, the company is obliged to maintain Excel spreadsheets and an internal database to track orders. This process is complicated further because a small percentage of ground shipments are at risk of theft. Although these situations are typically covered by insurance, this does not mitigate the reputational risk for the company. Baby.com.br's shipping experiences are similar to those faced by a local fashion e-commerce start-up company that was forced to re-evaluate its free-shipping policy to include Belo Horizonte and Minas, in addition to Rio de Janeiro and São Paulo, to satisfy demand. Indeed, the infrastructure has vast implications for both companies' abilities to deliver their products.
Margin sales are an interesting aspect of the Brazilian e-commerce market. Baby.com.br, like many other companies, has problems with huge working capital requirements. Much like car payments in the U.S., Brazilian customers can purchase items over a fixed period of time via installment payments, but with no interest charges. This even applies to relatively inexpensive items. The seller carries inventories, but approximately 90% of its sales are on credit. Payments and, thus, the number of days payables are outstanding, can stretch out to several months, a common practice in Brazil. For example, diapers, strollers, car seats, etc., are delivered a few days after the purchase, but the company does not receive the funds in full until a few months later. Baby.com.br, like other companies in Brazil, needs to finance this operational aspect through either banks or other means. Other e-commerce start-ups have been able to negotiate with their suppliers, but this is an area where baby.com.br has faced challenges. Indeed, interacting with suppliers in general was a challenge at first. Each of baby.com.br's retailers, producers, and distributors has its own unique internal coding system. As a result, the company established its own internal system.
A major problem in Brazil generally has been the lack of talent. A contact at a successful fast-fashion start-up explained that both established companies and start-ups struggle to find prospective employees with the necessary technical skills and interests. The problem is further compounded at start-ups in emerging industries, such as e-commerce, because entrepreneurship is not regarded as highly as traditional employment options.
While baby.com.br has been able to establish itself in a relatively short amount of time, its growth has been stifled by challenges, such as a lack of data and a lack of industry standardization.
A business requires data to carry out customer analytics and optimize operations. For example, a company's historical performance can be used to conduct spot analysis and plan sales optimization. And entrants into established markets can rely on published information about competitors. This was not an option for baby.com.br, which had to design its projections from scratch and then improve upon them through the internal data collected during the first few months of sales.
To promote sustainable growth, processes and capacity need to be determined systematically. For example, detailed projections are needed for purchasing decisions and to optimize existing inventory. In addition, warehouse capacity requires an advanced warehouse-management system coupled with appropriate capacity. After months of applications for federal, state and local permits, baby.com.br recently moved into a new warehouse that is nearly four times larger than its previous site. However, the new warehouse-management system will not be in place until early 2013.
One challenge baby.com.br has faced is in the area of original website/technology use. The company originally relied on a third-party platform for its source code. Any technological change made to the website's appearance requires a complex roll-out process, and not all changes are rolled out at once. For example, female consumers of specific products may be targeted in the process of rolling out certain new aspects of the website. The company invites input from current users and then modifies as needed. As baby.com.br's dedicated social media specialist Guilherme Lenz observed, "We won't decide; moms will decide."
Social-media-specific challenges are important for baby.com.br's future. Currently, Facebook is a cheap way for e-commerce businesses to grow their companies. Baby.com.br's Facebook page "likes" may transform into sales. Lenz explained that some current tactics involve targeting followers of Angélica's husband, featuring sponsored stories, evaluating the integration of open-graph technology in customer registration and offering promotions that encourage customers to sign up for e-mail blasts.
A general opportunity for all e-commerce companies in Brazil involves simply penetrating the market further. As an interviewee at a furniture e-commerce website commented, "The growth opportunities are limitless. Only 1% of furniture sales in Brazil are currently transacted online." As more and more Brazilians gain access to the Internet and consumers become more comfortable with online purchases, the population of potential e-commerce consumers will continue to grow exponentially.
Going forward, baby.com.br will need to improve its website. A few features are missing and others are inadequate. Currently, the search function is not relevant, so the company must develop new algorithms and mechanisms. Indeed, developed markets often include complex product recommendations as part of this package. Baby.com.br's technology team has set a goal of putting together a new platform.
Baby.com.br aims to review its overall strategy and focus. Different areas of the company need to realign their goals with the overall purpose. Growth is often intrinsic for a start-up at the beginning of the process. Now, the company is faced with making choices tactically or strategically. It must be forward-looking, making projections in a volatile market where data are often limited.
Take-aways for Entrepreneurs
Having attained first-year sales targets within its first six months, baby.com.br has been growing rapidly, and the company's new ambitious goal is to reach US$1 billion in revenue within the next few years. The company plans to accomplish this by focusing on launching more verticals instead of international expansion. Smith wants to focus on Brazil because it is an enormous market and because it is easier to move existing customers to another vertical than to get new customers.
To accommodate this growth, baby.com.br is prioritizing technical innovation by planning a new website. Beyond making this website warmer and more approachable, Lenz's team is working to make the overall user experience very positive. Among the features being considered are single-click checkout, instead of the current seven-step process; free shipping with no minimum order size; delivery within 24 hours anywhere in the country, and a relaxed return policy. It is also essential that baby.com.br understands its customers. The company is focusing on the importance of client relationship managers (CRM). Buying/stocking certain products and altering inventory will all come from CRM analysis. These managers will also help the company identify its customers and how best to allocate resources to target them.
Another priority for baby.com.br is the development of additional product verticals that offer better margins. A line of strollers and car seats is in development. In addition, the company is experimenting with flash sales through the launch of a separate website called Dinda.com.br. (Dinda is Portuguese for "godmother.") This latter website offers deep discounts for short periods of time but without the customer-service gold standard available on baby.com.br. With two models, customers have the flexibility to purchase according to preferences.
Reflecting on his experiences in Brazil, Smith offers a few key take-aways for aspiring entrepreneurs. First, "market size matters." Choosing a large market affords the entrepreneur maneuverability to adjust or re-scope a business, depending on market conditions. Second, "retail stores are hard to scale." Online advertising is much cheaper and can be modified quickly. Third, "people matter." A company is only as strong as its team, and bootstrapping talent can have a high cost in the long run. Fourth, "swing for the fences." Modest goals are not necessarily safer than ambitiously daring goals.
Beyond changing the customer-service experience for Brazilians in search of baby products, Smith hopes to serve as a model to "change e-commerce in [the] country." And he has some advice for MBAs in general: "Change the world. Change lives. Big impact. Try something different."
This article was written by Vasco Bilbao-Bastida, Wharton Lauder 2014, and Lucia Bonilla, Wharton 2014.