CHAPTER

8

Opportunities exist in times of crisis or big change, evidenced by Elektra’s expansion during one of the most turbulent decades in modern Mexican history, the 1990s. As I already said, at that time, approximately 80% of Mexico’s population had no credit rating and even though they had jobs, they were not considered credit-worthy by large banking institutions or retails chains. As a result they couldn’t borrow money and lacked the opportunity to establish themselves on the socio-economic map. They did not even have the means to purchase household goods from most of the major department stores in Mexico.

Then, when the financial crisis happened in December 1994, unemployment rose to an all-time high, the Mexican banks were sucked dry, businesses collapsed like dominos and many Mexicans fled to America in order to survive. They would take on whatever jobs they could find in the land of opportunity and send a large portion of their incomes back home. In the last two decades, the stricter measures to decrease illegal immigration have had an adverse affect: Border patrol has doubled and penalties for smuggling people has increased, obstacles that make staying in the U.S. indefinitely seem much more appealing than risking deportation. However, if they can’t go home in person, emigrants need to find an alternative means of sending money back to their families.

And out of this turn of events, Elektra seized yet another outstanding opportunity.

In the ’90s, if many didn’t even have a Mexican bank account, never mind a U.S. one, so a lot of the time, people would send cash informally across the border with a friend or by mail, even though 40-50% of the time it never got to the person it was intended for. By 1997, Mexican migration to the U.S. was escalating at an unprecedented level and, as a result, remesas—or remittances—rose from nearly US$5 billion to over US$13 billion by 2003, coming a close third to oil and tourism as Mexico’s largest foreign income.

Pedro Padilla, the CEO at Elektra, saw the huge potential in providing a speedy transfer service Mexican emigrants could access easily and rely on, especially when many of them were stranded in vulnerable situations so far away from home. With its 27,000 locations in the U.S., Western Union had a powerful distribution network and in 1993 Elektra negotiated a deal with the U.S. company to implement a money transfer service from the U.S. to Mexico, called Dinero en Minutos. With access to 521 Elektra stores across the country, most of the infrastructure was in place. In 1991, Elektra had reverted back to offering credit after a four-year cash-only policy, so the in-store financial-service departments that the money could be collected from were already set up.

As it was a service based on sharing information, there was no additional inventory to account for with minimal risk factor and a high margin of profit. Furthermore, attracting customers into the branches when they dispensed the transfers contributed to a noticeable increase in store traffic and free exposure for Elektra products. In 12 months, Elektra became the main operator of electronic transfers from the U.S. to Mexico.

In February 1996, Elektra further developed this model, introducing Dinero Express, which enabled Mexicans to transfer money between Elektra branches within Mexico. Elektra’s customer demographic had no way to make payments or transfer money from state to state because to do so banks required them to have a bank account, and so when Dinero Express was launched it supplied a huge demand. In virtually no time at all, it was doing more than 10,000 operations a week. This time, the enterprise was developed without partners and, in terms of volume, Dinero Express’ transactions soon surpassed Western Union’s.

Also, at the end of 1995, Pedro Padilla and I renegotiated a ten-year extension with Western Union, rocketing the company safely into green territory.

I decided to throw a party at my house and invited about 150 people, mostly employees, to celebrate our success. They all arrived more than fashionably late and didn’t leave until about 5 a.m. I was livid, cursing Mexicans for their disrespect and I vowed never to have another party in this godforsaken country. In the U.S. and England, people politely left no more than two hours after the meal.

Eventually, two years later, I was convinced to have another party. So I said, okay, this time I’ll show them, let’s have them for lunch. Again, I invited over a hundred people to my house and at 5 a.m. people were asking for breakfast! Apparently it’s the mark of a good host when all your guests don’t want to leave, and I should have taken it as a compliment, but I don’t think I’ll ever get my head around that custom.

As well as money transfer services, an under-looked opportunity existed with the need and desire for private transportation —although the latter was a more difficult nut to crack. Buying a new car in Mexico has been unattainable for all but the affluent. Since the 1960s, the government has charged two different taxes making the cost of a car even less affordable. The first tax is an annual luxury tax levied on most cars and trucks with Mexican license plates, but it does not end there. There is another hefty one-time tax on new cars, “Impuesto Sobre Automoviles Nuevos” (ISAN), which varies according to the car’s specs and value, carrying an even higher burden for new car owners. Additionally, car insurance in Mexico is above average. For a run-of-the-mill car—let’s say a VW Jetta—it would cost around US $800 per year.

In 2005, the average price of the cheapest new car was about US $8,500, but although interest rates on federal loans for vehicle purchases have decreased from 50 percent to close to 15 percent over the last 15 years, new cars and even lightly used ones remain far out of reach for millions of people in a country where the minimum wage is $5 a day.

American cars are roughly a third cheaper than Mexican cars without extortionate taxes tacked onto the asking price. These incentives have propagated the illegal trade, which Mexicans term “autos chocolates”, not exactly a black market industry but a sort of “brown” one. Even though U.S.-registered cars are forbidden in Mexico, 2.5 million contraband cars between 10-15 years old have crossed the border as thousands of car dealers pay customs officials up to 6,000 pesos in pure mordidas—the Spanish word for bribes. Every week, they drive fleets of used cars and trucks across the border, which are sold to local customers hoping to save a few hundred dollars under the table. It is their only option.

Public transport in most major Mexican cities is not in good shape, and the traffic in Mexico City is disastrous. Motorcycles were penetrating markets in most other countries across the world, even in Latin America. They just weren’t selling in Mexico, but there was clearly a lot of potential to change that, so in 2005, Ricardo Salinas took the initiative to do so.

Elektra negotiated a deal with one supplier from China and another from Mexico and assembled motorcycles locally. It developed a brand, Italika, and in six years it captured 63% of the market share, selling over 1,000,000 motorcycles.

The new business simultaneously serves Elektra stores, which sell the motorcycles; Banco Azteca, which finances 70 percent of its sales; and Seguros Azteca, which offers casualty insurance at competitive prices.

In summary, with all of its targeted services and product offerings, from televisions to motorcycles, Elektra established again itself to cater to a clearly defined market sector: those who were financially below the radar. Most than to satisfy their greater needs than being able to afford a TV and a fridge, Elektra helped those people to escape the quagmire of poverty and establish an identity in our capitalist system—a role Elektra made it a mission to fill.

Ricardo Salinas shares the late C.K. Prahalad’s clear vision of progress and eradicating poverty by building self-sustaining market-based systems. Prahalad’s book The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits argues that “five billion people seeking a better quality of life is the biggest motor of growth that the world has seen in its history. The challenge is to incorporate this enormous population into the global market.” However, it is a challenge that cannot be undertaken with a traditional mindset because of the bottom of the pyramid sector’s innate restrictions.

As I said before, the bottom of the economic pyramid (BOP) is a segment of Mexican society estimated to comprise over 70% of total households, or about 17 million families with combined incomes of $250 to $2,000 a month. However, despite their vastness in numbers, up until we opened that market these families have been alienated from the capitalist society we live in. It is the responsibility of business leaders in the private sector to be involved in collectively creating self-sustaining solutions for the world’s poorest consumers, thereby creating a stream of lucrative opportunities for themselves.

“The primary task of the private sector is often converting the BOP consumers from unorganized, inefficient local monopolies (for example, local moneylenders, local medics) to an organized and efficient private sector. In some cases it is to ensure that BOP consumers are aware of the new products and services. Awareness, Access, Affordability and Availability are the key ingredients to market development at the BOP.”¹

Even though the Mexican mass market’s resources are limited, businesses like Elektra need to find ways to entice the new plethora of potential customers, now even more so as others have recognized the value of the lower-income sector and are offering them increasingly competitive options. What used to be key to success was to have highquality products, which could be sold easily, encapsulated in the saying, “Build a better mousetrap and the world will beat a path to your door.” People turned to countries like China and Korea for better, cheaper goods because the products in the U.S. and Mexico were too expensive. Now we are oversaturated with products at competitive prices and anyone can have access to any type of product and so we have moved into the “service era,” where the customer selects and remains with the business that provides the best service, quality and experience.

The customer has become the driving force behind all strategic business decisions and every operation within a company should be examined in terms of what value it adds in the eyes of the final customer. The bottom of the pyramid customers expect to have the most advanced technology.

Giving them the best possible product at the lowest price is a prerequisite, but it is evident that dramatic price reductions without diminishing the quality of the product requires companies to focus on not just vanguard but also unconventional uses of technology and science.

A company has to find other ways to stand out from and stay ahead of its competition: a weapon that lies in innovation and customer service. But how do you sell highlevel performing goods to people who can barely afford to eat? By creating a capacity for them to consume through alternative lending and purchase schemes.

Grupo Salinas is constantly striving to acquire and develop more advanced technology for the benefit of its customers. One of the most obvious examples is Elektra’s investment in its financial services institution. In April 2002, when Elektra was granted the first banking license catered to low-to middle-income groups, almost overnight it established the second largest network of branches in the country—Banco Azteca. This set a world record of a bank opening more than 800 branches at once, which were introduced into the existing stores of its parent company.

Millions of informal businesses and the self-employed, such as taxi drivers, waiters, plumbers or sidewalk vendors who operate outside regulatory frameworks benefitted of the opening of Banco Azteca. By capitalizing on Elektra’s 48 years of experience in making small installment loans for its merchandize, rich data belonging to about 4 million of its borrowers, and established information and collection technology, the bank was uniquely positioned to target this segment of the population. Many of those customers were already buying Elektra’s products, developing film or collecting money transfers at its stores, giving Elektra valuable access to its customers’ purchasing habits and financial needs.

However, there are fixed costs that come with offering a loan, regardless of the amount. Whether it is for $50 or $50,000, the application costs $20 to $30 to process with additional service costs. Every loan requires investigation, documentation, monitoring, management, and collections—besides shouldering the losses incurred by people who don’t pay up—which is why interest rates are naturally higher on smaller loans. And who needs the smaller loans? Those who can least afford them.

Despite the high interest rates, two years after Banco Azteca opened in December 2002, its loan portfolio increased from around 2 billion Mexican pesos to 10 billion in the last quarter of 2004, compared with the combined portfolio of 0.5 billion Mexican pesos from the largest microfinance institutions in Mexico in the same quarter.

By loaning the BOP the money to buy goods, as well as start small self-sustaining businesses, without relying on the usurious interest rates from the loan sharks they had previously depended on, Ricardo Salinas is striving to create a new buying power. Azteca’s microfinancing program offers loans of up to US$3,000 each with terms that expand from 13 to 104 weeks. These loans do not need future entrepreneurs to present the same credit guarantees that commercial banks require and, as a non-traditional commercial bank, Banco Azteca encourages the trust of the people who normally would not go to a bank at all. However, the probability of success is stacked against budding entrepreneurs, especially those with no prior experience or support system.

Instead of just giving them money and sending them on their way, Grupo Salinas created the Empresario Azteca to nurture business development. At its core, microfinancing is focused on the local level and creates entrepreneurs who, in turn, create jobs in their communities. This model allows for sustainable development in societies and ultimately across the country.

The organization’s aim is to use the managerial experience, financial capabilities, market strength, buying power and extensive distribution network of the companies in Grupo Salinas to offer education, healthcare, financing, free training on How to Start Your Own Business, legal support, affordable information technology and equipment and other resources.

Banco Azteca also launched a new product: Inversión Azteca (Azteca Investment), which gives savers the best opportunity to watch their money grow by keeping it in savings accounts for as long as possible before making withdrawals. They can decide how long they want to leave their funds invested (30, 60, 90, or 180 days) and it pays the highest interest rates on the Mexican market—rates that were previously solely available to the wealthiest investors in Mexico.

By helping the BOP sector emerge into a new more powerful middle class, Grupo Salinas is developing a “trickle up” economic strategy, which it will benefit from as its customers’ wealth proliferates. By elevating the purchasing power of its customers, Banco Azteca will be in a position to grow with the people it is serving and, to a smaller degree, Elektra will be at a similar advantage (although transforming a “value-for-less” -driven brand into a more upscale one will be more of a challenge).

Banco Azteca has used its sophisticated technology and collection systems to reduce the fixed costs of offering loans and to meet the escalating demand. The group has spent millions of dollars on information technology, including high-tech fingerprint readers that eliminate the need for customers to present IDs or passbooks. It has 800 engineers working to improve the system with 7,000 more to investigate or collect the payments, including a 3,000-strong army of motorcycle-riding loan agents. They tote handheld computers loaded with Elektra’s rich database, which includes customers’ credit histories and even names of neighbors who might help track down delinquent debtors.

The wireless handhelds are connected to the main system so that information can be transmitted there and then. The state-of-the-art system keeps the cost of processing more than seven million transactions a day to a mere three cents per transaction as there is no need to return to headquarters to process the application, saving time and money. Processing information in real time enables the bank to approve or deny the loan with its promised 24-hour turnaround, and adjustments can be made, problems amended, and outstanding payments processed on the spot.

The BOP is an especially challenging market sector to penetrate and so catering to their needs is critical. This is where the customer services weapon mentioned early comes into play. Elektra prides itself on making its customers feel at ease and giving them the best service possible. All store employees wear a button on their uniform that says, “the customer comes first,” and Elektra provides educational and entrepreneurial programs available to encourage business development.

In 1997, Elektra introduced “extended warranties,” which gave an additional two-to-five-year guarantee on the purchase of any major household appliance or electronic equipment, and there are helplines available for additional queries about Elektra’s products and services without them having to travel to the store.

Access is a prerequisite for Elektra’s customers as most of them have to work long hours and have limited mobility. Elektra has extended working hours, opening 365 days a year from 9 a.m.-9 p.m. You can go into an Elektra store and ask for a loan on 25th December at 9 p.m. and still receive an answer within 24 hours. It’s the best option on the market.

Pedestrian flow, proximity of a subway or bus station or large low-income housing projects and demographic density were taken into account by Elektra when it opened stores nationwide, which in 2012 added up to 2,800. Now, in the more urban areas, customers are usually not more than four kilometers away from their nearest branch.