Casas Bahia Comercial Ltda.

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Casas Bahia Comercial Ltda.

Avenida Conde Francisco Matarazzo 100, Centro
Sao Caetano do Sul, Sao Paulo 09520-900
Brazil
Telephone: (55) (11) 4225-6000
Fax: (55) (11) 4225-6431
Web site: http://www.casasbahia.com.br

Private Company
Founded: 1957
Employees: 21,425
Sales: BRL 9 billion ($3.08 billion) (2004 est.)
NAIC: 443111 Household Appliance Stores; 443112 Radio, Television, and Other Electronics Stores; 442110 Furniture Stores

Casas Bahia Comercial Ltda. is the largest nonfood retailer in Brazil. A mass marketer, it achieves very high turnover by selling furniture, appliances, and other household goods at low prices, chiefly on credit, to some of the poorest people in the urban parts of the Western Hemisphere. Conceived, created, and presided over by Samuel Klein, a rags-to-riches immigrant sometimes called the Sam Walton of Brazil, the retail chain remains privately held.

Selling to Brazil's Poor: 1957–89

One of nine children of a Polish-Jewish carpenter, Samuel Klein was sent to a German labor camp at the age of 19 during World War II. He escaped two years later as Soviet troops advanced westward, but his mother and five younger siblings did not survive deportation to a death camp. After the war he worked on his own—chiefly selling cigarettes and vodka to Soviet soldiers—in Germany for five years before immigrating to Bolivia with his wife and eldest son. Settling in the Sao Paulo industrial suburb of Sao Caetano do Sul in 1952, he became a backpack peddler armed with a list of 200 customers for bed linens, blankets, and towels obtained from another Jewish immigrant. After a while he was able to make his rounds in a horse-drawn cart. His clients were working-class people, many of them natives of impoverished northeastern Brazil who had migrated to the Sao Paulo metropolitan area looking for comparatively well-paid factory work. By 1957 he had 5,000 customers buying a large variety of merchandise.

Klein, in 1957, purchased a store in Sao Caetano with about 800 customers. It was named Casa Bahia because many of the customers came from the state of Bahia. He sold furniture and clothing, chiefly on installment payments (including 3 to 5 percent monthly interest) that he calculated on the spot to people who otherwise did not qualify for credit. "The poorer the customer, the more punctual his payments," Klein told Miriam Jordan for an article published in the Wall Street Journal in 2002. "The poor know they need to guard their reputations…. My talent is trusting the poor and giving the poor good service." When he opened a second store, restricted to clothing and tended by his wife, the two units became "Casas Bahia." In 1964 he opened a much larger store, specializing in furniture and appliances.

The growth of the business required more capital than Klein had been able to assemble, even though he was borrowing money from three lenders. The turning point in his career, as he saw it, came in 1970, when he purchased a half-share in a consumer-loan company named Financeira Intervest. Before the year was out, the capital from this company had enabled him to do so much more business that he was able to buy out his partner and, in effect, self-finance Casas Bahia. Klein then bought stores in neighboring cities and had 15 units in 1972. Before the year was out he had acquired a five-store chain in the port of Santos, about 60 miles southeast of Sao Paulo. He also secured a steady source of merchandise by purchasing a major furniture manufacturer, Bartira, in 1981. Casas Bahia continued to sell goods door to door until 1984, but all installment buyers had to make monthly payments at the nearest store, where other goods might catch the customer's eye. About two-thirds then made more purchases.

Klein practically doubled his chain in 1981, when he bought about 20 Lojas Colúmbia stores in the greater Sao Paulo metropolitan area. There were 43 Casas Bahia stores in early 1983. Although the Brazilian economy was sunk in recession and other chains cut back on credit to their customers, Klein forged ahead, stepping up spending freely to advertise his wares in newspapers and on radio and television and hiring the legendary soccer star Pelé as a pitchman. By 1990 Casas Bahia was the second largest advertiser in Brazil, spending $50 million a year but producing its ads in-house to save money.

By the end of 1988 the Casas Bahia chain had grown to 56 stores and had penetrated the interior of the state of Sao Paulo. Its number of registered customers had reached two million, and the number of sales transactions 100,000 monthly, of which 75 percent involved installment purchases, financed by Intervest. The chain kept in stock 2,000 different items, with enough merchandise on hand in a 40,000-square-meter warehouse for its fleet of 150 trucks to supply the stores for two months.

Expansion on His Own Terms in the 1990s

By 1990 Brazilian journalists were describing Klein as the Sam Walton of Brazil. His chain now came to 100 stores, which in that year brought in $874 million in sales, 60 percent more than in 1989. His personal empire also included two Volkswagen auto dealerships; Bartira, the furniture manufacturer; Intervest; a brokerage named Interbens; and the house advertising agency, Interjob. Casas Bahia was now Brazil's fifth largest nonfood retailer. Yet Klein looked anything like a tycoon, receiving journalists in the modest headquarters of his enter-prise, still located in Sao Caetano, clad in a cheap open-neck sports shirt and slacks, with sandals on his feet.

Because Klein hated to pay rent, almost half of Casas Bahia's stores were the company's own property. In buying merchandise from about 300 suppliers, Klein preferred to pay immediately in cash, if possible. In dealing with them he had powerful leverage, since the chain was buying more than 10 percent of the production of the principal national manufacturers of home appliances. Even so, the suppliers liked dealing with him because he came to a decision immediately and paid on the spot. Much of this work was being conducted by his younger son, Saúl, while the older one, Michael, concentrated on finance. But Klein was not averse to micromanaging his enterprise by such means as personally determining the price of sale for any of the thousands of items that the chain was selling, using as a guide the newspaper ads of competing chains.

All Klein's efforts could not, however, keep Casas Bahia's sales from sinking during the economic crisis of the early 1990s. Sales dropped to $618 million in 1991 and nosedived to $353 million in 1992, almost, but not quite, putting the company in the red. Klein closed 15 stores, citing high rents, and slashed employment from 9,500 to 6,000. However, the units closed were in places where Casas Bahia already had a presence, and he opened in five more cities in the interior of the state of Sao Paulo while contemplating entering the neighboring state of Minais Gerais.

The year 1993 saw little improvement, but in 1994, when a reform program ended the hyperinflation that had eroded purchasing power, sales of $841 million came close to matching the 1990 peak. The following year Casas Bahia entered Rio de Janeiro by paying almost $60 million for the 33-unit Casas Garson chain. By the end of 1996 there were some 250 Casas Bahia stores in six states, with sales that year reaching an amazing $2.83 billion, making the chain the largest nonfood retailer in Brazil. One of the units was said to be the biggest in Latin America, with almost 150,000 square meters of space. But this headlong expansion did not come without problems. The expenses needed to field so many more units and extend credit to so many more customers had stretched the chain's finances to the point that ten banks refused to loan it more money without auditing the books. Greater transparency was also needed so that the firm could issue $250 million in debentures, since even Klein conceded that his firm's debt of $800 million was almost as large as its assets.

Buffeted by the fluctuating fortunes of the Brazilian economy, Casas Bahia sustained a 17 percent drop in sales in 1997 and its first recorded loss, about $7 million. "They had problems, but they adopted an intelligent strategy," an executive of a rival chain told José Roberto Caetano for an article in Exame. "They kept their prices high, at least 15 percent higher than ours. They relied on the loyalty of their clients. A majority of their customers … continued buying from Bahia because they were afraid of losing credit and not being able to get it from another store." After opening its books to outsiders for the first time, Casas Bahia successfully floated its debentures and a six-month promissary note. The firm made a comfortable profit in 1998 and, according to Klein, reduced its debt to only 15 percent of its assets. He continued to operate by his own rules, determined not to take on shareholders or deal with banks any more than absolutely necessary. Only he, his wife, and his sons had the authority to sign checks. Rejecting widespread just-in-time practices, he stocked his warehouse (at 230,000 square meters, the biggest in South America) with 60 days of merchandise and transported it to the stores solely in the company's own trucks.

Key Dates:

1957:: Samuel Klein purchases his first Casas Bahia store.
1970:: Purchase of a stake in a consumer-loan company enables Klein to self-finance his stores.
1981:: Purchase of a furniture manufacturer gives the chain a reliable source of merchandise.
1988:: The Casas Bahia chain has grown to 56 stores with two million registered customers.
1990:: Now a 100-store chain, Casas Bahia brings in $874 million in sales.
1996:: With 250 stores in six states, Casas Bahia has become Brazil's largest nonfood retailer.
1997:: The chain's too-rapid expansion results in its first recorded loss, about $7 million.
1998:: A return to profitability and a sale of debentures restore the chain to financial health.
2004:: The 400-odd Casas Bahia stores have estimated sales of BRL 9 billion (about $3 billion).

Still Doing It His Own Way: 2000–05

Casas Bahia had over 340 stores in seven states and the federal district of Brasilia in 2002, when its sales came to BRL 4.2 billion ($1.44 billion, based on the average currency rate for the year), and its profit to BRL 53 million ($18.15 million). The company had 20,000 employees, 500 suppliers, and 10,000 merchandise items, of which 4,500 were available online. A fleet of 1,040 trucks delivered the goods to the stores. The company had ten million registered customers, seven million of them active. Seventy percent of its sales were of home appliances, and the chain was buying and selling 30 percent of all home appliances manufactured in Brazil. Furniture accounted for another 25 percent of sales, and miscellaneous goods such as clothing and bicycles for the remaining 5 percent.

The Casas Bahia customer had an income ranging from virtually nothing to ten times the monthly minimum wage of BRL 200 (about $70), a range that comprised 84 percent of Brazil's population. The typical customer was only earning twice the minimum salary, and half were not formally employed at all. Ninety percent of all sales were on credit, with the rest in cash or by credit card, an option that Casas Bahia had only recently (and reluctantly) introduced, the last major Brazilian retailer to do so. Using information technology, the chain had transformed its assessment of customer creditworthiness to a near science. If a new customer applied for credit to buy merchandise costing less than BRL 600 (about $200), no proof of income was required, only a permanent address. Those applying for more credit were quickly evaluated, using a computerized system, and offered a credit limit based on occupation, income, and presumed expenses. Those rejected were directed to a credit analyst for further evaluation.

The company's 900 credit analysts had been trained to formulate questions and interpret responses carefully and with subtlety. If an applicant presented himself as a manual laborer, the analyst checked his hands for calluses and his clothing for stains. A stonemason might, for example, be asked to explain why he wanted to buy a computer. Perhaps he wanted it for his children, but perhaps he really intended to purchase it for another person, a practice that accounted for about half of all the chain's defaulted debts. In the end, an estimated 16 percent of applicants were being denied credit. The company's default ratio of 8 to 8.5 percent was only about half that of its competitors. A team of "reminders" made phone calls and wrote letters to customers whose payments were past due but also made it clear that the company would support them in difficulties and might allow them to renegotiate their debts. A 200l "amnesty" canceled the debts of a million customers blacklisted since 1997. Those customers who paid promptly received a yellow preferred-client card, sometimes proudly displayed, as in the case of the hot-dog vendor who Jordan visited in a two-room shack that she described as "a veritable Casas Bahia showroom, with a bed, bookcase, sofa and kitchen cabinet from the chain."

Installment payments were made over a period of one to 15 months, with the average term being six months and the average interest rate 4.13 percent a month. Furniture accounted for 31 percent of the goods purchased, with television sets accounting for 14 percent and audio equipment for 10 percent. The interest portion of consumer loans was sold to banks and consumer-loan companies, since Casas Bahia had sold Intervest by this time.

Casas Bahia retained its reputation for frugality and simplicity, operating with only three levels between store manager and top executive. Managers enjoyed significant freedom as long as they met predetermined revenue and profit targets. A store manager had the right to cut prices by as much as 10 percent, and a regional manager by up to 25 percent, without calling Michael Klein. Salespeople were guaranteed a salary of BRL 500 (about $165) a month, in conformity with the law, but expected, and were expected, to make their living instead by a 2 percent commission on sales. The average salesperson was earning about BRL 1,500 (about $500) a month. Deliverymen, as well as sales clerks, were held to a company standard of deportment and dress and expected to make all deliveries within 48 hours, carrying away old appliances or furniture if requested.

All Casas Bahia stores were linked electronically so that headquarters could monitor sales by product and store. Store and distribution-center inventories were monitored the same way. If a store did not meet sales or profit targets, a team was assembled at headquarters to address the problem. About 30 stores were closed in 2003, but about the same amount were opened, based on a standard of attracting at least 100,000 customers to any given store. A few Casas Bahia stores were in neighborhoods that catered to customers with incomes above the chain's target level, but these were not considered attractive because high rents and the tendency of buyers to pay in cash rather than seek credit resulted in lower profits.

Casas Bahia's sales rose to almost BRL 6 billion (about $2.11 billion) in 2003 and to an estimated BRL 9 billion (about $3.08 billion) in 2004, when its profit nearly doubled to about BRL 150 million (about $50 million). Its sales exceeded those of its next four competitors combined. There were about 400 stores. Furniture from the group's own Bartira unit provided a profit margin twice as high as from the appliances sold by Casas Bahia but made by others. A second, $25-million, furniture production facility opened in 2003. There were three distribution centers: the largest in Sao Paulo, the others in Rio de Janeiro and Ribeirao Preto. The company was planning to build four more in the biggest northern cities: Belém, Fortaleza, Recife, and Salvador.

Casas Bahia's amazing growth put the chain's finances under strain and led to a contract with Banco Bradesco S.A., the nation's largest bank, whereby the bank assumed the direct financing of part of the chain's customer purchases, freeing funds for further expansion. Michael Klein said that Casas Bahia wanted to have 1,000 stores and annual sales of BRL 20 billion by the end of 2010. But to do so the chain would have to expand into unexploited terrain, that of Brazil's tropical north and northeast, a task one competitor compared to Napoleon invading Russia. The chain's growth was also having an effect on the Brazilian economy at large. An article in Exame by Tiago Lethbridge quoted Michael Klein in these words; "Today, in Brazil, whoever wants to have relevant participation in his market has to sell to us. If a large company doesn't approve our conditions, others will form a line to seek a place on our shelves." One of these suppliers told Lethbridge: "Negotiations always take place at the end of the month, when the industry seeks to meet its sales goals and empty its stock. Therefore, hard-pressed, the suppliers offer big discounts." Some firms were willing to take a loss simply to maintain their share of the market. Casas Bahia was accounting for 36 percent of all the washing machines, 25 percent of the refrigerators, and 20 percent of the television sets and DVDs made in Brazil.

With Casas Bahia having little to fear from its traditional competitors, the company was looking over the horizon to do battle with a perhaps more dangerous rival than it had ever faced, the hypermarkets. One of the great unknowns was the capability of such hypermarket chains as Carrefour, Extra, and Big to meet the needs of lower income Brazilians. Another potential problem was the rapid spread of credit card use, which by 2005 had grown to account for one-fifth of Casas Bahia's sales and thus threatened both its considerable income from interest and new purchases by customers reentering the stores to make installment payments. Finally, there was the question of succession, since the chain's founder had passed the age of 80. Michael, who cited Jewish tradition favoring the eldest son, was in day-to-day-charge of finance, stores, distribution, fleet, technology, and employees. Saúl was in charge of supplies, customer sales, and marketing.