HBS Cases: How Magazine Luiza Courts the Poor

The inspiration for a new case can strike at any time. For Harvard Business School professor Frances X. Frei, the time and place was one morning at home while reading The New York Times. An article on the front page of the Business section about an innovative Brazilian retailer prompted an immediate e-mail to Gustavo Herrero (HBS MBA '76), executive director of the School's Latin America Research Center (LARC).

Herrero responded promptly, and with the assistance of LARC senior researcher Ricardo Reisen de Pinho (HBS PMD 74, 1999), Frei was soon on her way to researching and writing "Magazine Luiza: Building a Retail Model of 'Courting the Poor.'"

                   

Frances Frei is an associate professor in the Technology and Operations Management unit at Harvard Business School.

"Magazine Luiza has made a business of targeting the bottom of the pyramid and is beloved as a company by employees and customers alike," Frei says. "I couldn't think of a service business that fit that description in the United States. We've been unable to crack that code of 'courting the poor' in any systematic way, so I wanted to investigate further." Frei, a member of the HBS Technology and Operations Management Unit, uses the case in the second-year elective Managing Service Operations.

The company had an amazing influence on customer behavior.

Launched in 1957 with a single department store, Magazine Luiza operated as a family-run business until 1991, when the niece of one of the founders, Luiza Helena Trajano Rodrigues, assumed the role of CEO. Described by Frei as "a force of nature," Luiza Helena initiated a reorganization that replaced family members with professional management and launched a campaign to reinforce the company's mission to serve customers and employees. Despite the volatile nature of the Brazilian economy, Magazine Luiza posted a profit every year from 1992 to 2004.

"When it comes to services, a fundamental question is whether you are competing with a new idea or building a better mousetrap," Frei says. "Magazine Luiza is indeed a better mousetrap." The store sells a mix of furniture, consumer electronics, and white goods, but it does so in an innovative manner, through virtual showrooms ... that use computers and sales staff to help customers navigate the store's inventory and make a purchase.

"The company had an amazing influence on customer behavior," Frei notes. "People were happy to buy a refrigerator without touching it because they can look at images of it on the computer from every angle. The employees teach people how to use the computer and let them come back to surf the Internet. It's not about offloading work to the customer; it's about treating them with dignity."

Magazine Luiza has also developed a flexible procedure for credit approval, using nontraditional metrics to enable customers with lower, less easily established incomes (a pushcart vendor, for example) to make purchases. "Their loan repayment rates are the envy of the world, and the customers are deeply appreciative," Frei notes.

Employee training relies on a management approach summed up by Luiza Helena as "assisted freedom," with a focus on self-development, open communication, and participation. For most workers, about 65 percent of their salary is fixed, with the remaining 35 percent based on sales, credit, and service productivity.

One of the questions posed by the case is the classic conundrum of where and how Magazine Luiza should expand while preserving its identity and culture. The case describes a large acquisition of another Brazilian retailer with a very different culture. The students are challenged to assess the viability of this merger as well as to lay out guidelines for future growth initiatives. Throughout this discussion issues of cultural fit for employees and customers as well as the limitations of the CEO's charisma are investigated.

Frei hopes that students will see the potential offered by underserved consumers at the bottom of the pyramid. "We used to think we could figure things out in the developed world and dumb it down for emerging markets," she says. "In fact, it needs to happen the other way around-the bottom of the pyramid insists upon it. If we frame it that way, our best and brightest will see that's where the innovation is happening. I find that incredibly exciting."