At first glance, it may seem like an impossible challenge for any retailer: Sell consumer goods to people who don’t have any formal jobs or bank accounts, providing them with the loans they need to pay for your products. Figure out which potential buyers can repay those loans and which cannot — even if they all get paid in cash, have no credit histories, and they barely earn enough money to save a penny. Do all this — and increase your profits, too — during one of the worst economic recessions in decades.

Those challenges haven’t stopped Mexico City-based Grupo Elektra from expanding its network of specialty retail shops and banks in Mexico, and later throughout much of Latin America. Rather than wait for low-income consumers to open their own bank accounts, Elektra launched its own banks with its network of specialty retail shops. Beginning in October 2002, the retailer opened more than 800 bank branches under the Banco Azteca brand, inside its Elektra, Salinas y Rocha, and Bodega de Remates stores in Mexico. After adding pension fund and insurance company subsidiaries as well as a micro-credit program, Grupo Elektra expanded its banking operations into Panama in 2005, Guatemala and Honduras in 2006, Peru and Brazil in 2008, and El Salvador in 2009.

By 2009, Grupo Elektra’s total assets had reached US$9.130 billion, more than six times its 2000 figures (US$1,477 million). Over the same period, its revenue doubled to US$3.279 billion (compared with US$1.534 billion); and its gross profit more than doubled to $1.549 billion, versus $655 million. Despite the economic crisis, its net income reached US$381 million in 2009, compared with US$117 million in 2000.

A labor-intensive Operation

How did Elektra do it? It all begins with the way that Elektra figures out how much money its new customers can really afford to borrow — and then pay back. This “is a very labor-intensive operation,” requiring a great deal of face-to-face contact with individual loan applicants, says Felipe Monteiro, professor of management at Wharton. Through Elektra’s Banco Azteca division, the company has established its own procedures. Within just 24 hours, the bank can approve or deny a client’s loan application using the information gathered by the credit officer at the branch, following a visit to the customer’s house to determine his or her income and expenses. “We do our own analysis to establish [an applicant’s] capacity, and the [appropriate] line of credit,” says Carlos Septien, chief executive officer of both Grupo Elektra and Banco Azteca. The bank establishes weekly installment payments that match the capacity of each borrower.

Many of these efforts must be undertaken in remote locations that are not easily accessible. On a visit to Mexico, says Monteiro, “we even had to take helicopters to stores in the middle of slums” because there were no modern roads to those locations. Septien notes that Banco Azteca employs some 5,000 people to go to the homes of loan applicants to analyze their credit worthiness, and to collect payments from customers when necessary. The typical consumer loan is US$250; the typical personal loan is $800, and the average balance of the bank’s credit card is US$350.00. Unlike traditional bank loans and credit cards, these payments are usually made once a week; not once a month. Consumers who have access to the Internet may pay their bills online, but that is rarely the case, says Septien. “They don’t use [the Internet] because their financial [sophistication] is very low. However, we also offer them other services like automatic [bank debits], so they don’t have to go to the bank each week, as well as payments by phone. We offer the best technology available to our customers.” He adds, “At the same time, we want to be considered as a low-cost producer.”

Proponents of this business model argue that it has significant social benefits as well. They say that it has improved prosperity near “the bottom of the pyramid,” to use the phrase popularized by management guru C.K. Prahalad in his popular book, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits. The approach has enabled thousands of low-income consumers to acquire goods – such as refrigerators, washing machines and televisions — that have long been inaccessible to them because they lacked formal jobs and bank accounts. “Traditionally, people put their money in a cookie jar or below their mattress,” says Septien. Now, they can establish a bank account for a minimum of only about US$5 with access to a debit card as well.

Mixed Feelings about the Benefits

Keith Weigelt, professor of management at Wharton, says “there are mixed views and feelings about this approach.” Some argue that the focus of selling at the bottom of the pyramid – or close to it – should be on building productive capacity, not on expanding poor people’s consumption capacity. “You try to give money to [poor] entrepreneurs to develop businesses, not to buy appliances,” says Weigelt. If the focus is on buying consumer goods like TVs and washing machines, he notes, there is a danger that “people can get too far into debt.” Enabling people to buy a sewing machine so they can earn money by sewing garments that they sell, for example, is something quite different from enabling them to buy a TV. “A lot of these people [currently] have no debt,” he adds.

However, Septien notes that many of Banco Azteca’s borrowers do use the opportunity to buy modest capital goods that enhance their productivity and income – such as when small laundries buy presses that make their operations more cost-effective, farmers buy cows and chickens, or house painters buy paint to use in their businesses. By U.S. standards, the interest rates on these loans may appear high; an average annual rate of about 50%. But Septien says the rates people pay “are more or less the same as what traditional banks charge for their traditional credit cards in the region.”

Weigelt notes that Banco Azteca has a “high cost structure” because of the labor-intensive challenges of qualifying new borrowers and monitoring their payments. Although Banco Azteca’s operations are highly automated, “it takes the same effort to process a loan of US$100,000 as a US$10 loan.” In any case, this business model has been a major success. Banco Azteca now has deposits of more than US$4 billion, and around US$2 billion in loans. “We are very liquid,” says Septien. “We want to continue lending, but people are being more conservative and cautious” because of the economic slowdown.

Vast Opportunities in Brazil

Can Banco Azteca enjoy the same sort of success in Brazil as it has in Mexico and elsewhere in Spanish-speaking Latin America? In March 2008, the company began to pilot test its business model in Recife, the capital city of Pernambuco State, in Brazil’s northeast.Monteiro says that after expanding successfully through much of Central America — Guatemala, Honduras and Panama — Banco Azteca could reap much greater benefits from the enormous market in Brazil. “These other markets are nothing compared with Brazil in terms of size,” Monteiro says. “Brazil can be the growth moment for Grupo Elektra.”

Septien says that before the pilot program began, the Grupo Elektra brand was not recognized in Brazil. In Honduras, Guatemala and Peru, the company had established Elektra shops for at least ten years before opening its Banco Azteca branches. “People knew us, and we knew our customers” from the company’s retail branches in those countries. But in Brazil, as well as in Argentina and Panama, “we had to start from scratch,” Septien says.

In a positive sign for the company, Brazilian President Luiz Inacio Lula da Silva, a native of Pernambuco, attended the opening ceremony in the Agua Fria district of Recife. There, Lula chatted happily with employees and said he was very excited that Banco Azteca do Brasil would provide financial services to the lower-income segment of consumers. According to Monteiro, Lula’s presence at the inaugural ceremony demonstrated that Elektra has been skillful at making political connections in Brazil.

With its vast territory and population of 192 million, Brazil offers all sorts of opportunities for Banco Azteca, so why start in Brazil’s northeast, one of the poorest regions in the country? Why not, say, start in the state of São Paulo, which, despite its great wealth, also has a significant number of would-be consumers who fit the target profile? The answer, says Septien, is that the people in the Pernambuco pilot test “are the ones who have the greatest needs.”

It remains to be seen how quickly the pilot program of 18 stores and one street branch will expand within Brazil. According to Septien, “We will be analyzing the portfolio so we feel comfortable about whether we can expand.” Monteiro notes, “Brazil is pretty much a laboratory for Grupo Elektra,” an opportunity for them to learn more about how this business model can best be adapted to other countries that have similar groups of would-be consumers but which also have very different cultural patterns from those in Mexico and other Spanish-speaking countries. Brazil “is very different from the rest of Latin America,” with respect to such factors as its labor unions and fiscal policies, Septien adds.

Monteiro believes “it is culturally very important that [Elektra has] local people” managing relationships with their customers, and collecting information about new customers. “Brazil is so different from Mexico; there is not much commonality with the rest of Latin America.” He adds, “Socially, northeast Brazil is a very traditional region; it is pure Brazil. It is much less cosmopolitan and more conservative. So it is more important there to understand how the local community behaves; it will be more important [for Grupo Elektra] to adjust to local conditions…. Even a Brazilian company that goes into Northeast Brazil has to do local adaptations.”

Fortunately for Grupo Elektra, “a lot of the growth in Brazil in terms of consumption is not coming from the very high income levels” now that Brazil’s economy is expanding so rapidly, says Monteiro. Many people near the bottom of the pyramid in that country “now have some disposable income and they no longer have to deal with high inflation,” he adds. The government’s social programs have also provided these population segments with a basic income.

Can the Model Work outside Latin America?

Monteiro wonders whether the same business model can eventually be exported to countries like India or China. Already, he says, “we see a new breed of multinational coming out of the developing countries that are developing business models better suited” to consumers in developing countries and “that can do better in those countries” than many companies that have their origins in wealthier nations. These companies may be able to target consumers who have significantly lower incomes than those who buy regularly from discount retailers such as Wal-Mart, which has enjoyed success in Mexico, China and elsewhere around the world.

Weigelt says that other banking institutions and non-profit organizations are already pursuing a three-fold approach to this segment of society in developing countries, using a “triple bottom line” view of their benefits. The three aspects are profitability, community development and environmental improvement. According to Weigelt, “This is the good side of capitalism,” in which the goal is not simply to make money but to raise people’s incomes in low-income communities; improve those communities, and strengthen the quality of their environment. But, he says, if banks such as JPMorgan Chase, Goldman Sachs and Deutsche Bank, which are now moving into this arena, wind up “thinking only about their profits, then they will be losing the whole spirit” behind providing these micro-loans to people with very limited incomes. “You want to be very careful to keep the spirit of ‘We want to develop the community.’”

Customer Value-based Management: Competitive Implications