Cemex grew its profits by helping the poor to help themselves
November 22, 2011CENTRAL AND SOUTH AMERICA
Area of innovation: Services
Cemex, the Mexican construction materials giant, with $15 billion in revenues and over 50,000 employees, is the world's third-largest seller of cement and - if its other products are added in, such as readymade cement - the world's biggest supplier of building material.
In 1994/95, Mexico went through an economic crisis and Cemex saw a 50 per cent drop in revenue. However, during the same period, revenue from low-income families building their own houses reduced by less than 10 per cent. Cemex believed that this $500-million market had the potential for growth, and could help in diversifying its customer base and hedging it against business cycle fluctuations.
But building houses for the poor had often proved a lengthy and risky endeavour in the past. To establish a profitable and scale business by serving this segment, Cemex designed and rolled out a unique programme "Patrimonio Hoy" (Property Now) in 1998. Patrimonio Hoy innovatively addressed the key issues faced in dealings with this segment. Broadly, there were three issues that Cemex was faced with: Issue: With no savings or access to credit, lowincome families could only buy small amounts of building material at a time. Construction of a single room sometimes stretched over years.
Despite its success with the Patrimonio Hoy scheme, Cemex's sales for the latest quarter in Mexico were flat at $856 million (Rs 4,280 crore). Mexico accounts for about one-fifth of the company's sales. Debt-laden Cemex, which recorded its eight straight quarter of losses, hit a bad patch after a multi-billion acquisition in 2007.
Cemex's Approach: Through a membership system based on small monthly fees, Cemex provided collateral-free microfinancing.
Issue: Distributors had little interest in delivering small volumes of building material to remote areas where the poor lived, while materials saved up over years deteriorated for lack of adequate storage space.
Cemex's Approach: Provided professional storage space and served as an intermediary for distributors of building material other than cement, increasing the volumes by bundling requirements of several families.
Issue: Lack of expertise led to many constructions being started but never completed or being of very low quality. Cemex's Approach: Provided engineering and architectural expertise as part of the membership.
Cemex divided the market into areas comprising 100,000 people each, and established small managerial cells in each area consisting of just one to four full-time staff members - typically a manager, an engineer and an architect. It contracted promoters from the local community, mostly women, and paid them a commission for attracting clients. Linking the commission to the customer's membership ensured that promoters had an interest in ensuring long-term financial discipline of participants.
It is not surprising that Patrimonio Hoy turned out to be a success: Cemex reports the programme has reached 265 million families so far. Over the years, it has been rolled out in other countries, too, including Colombia, Costa Rica, Nicaragua, and the Dominican Republic.