Foundations

Volume 4 Letter 4

CEMEX is Mexico’s largest cement manufacturer and the third largest cement supplier in the world. This highly sophisticated company found a very basic yet effective strategy to deal with a significant change in the market place.

CEMEX sells to two distinct markets the “Do It Yourself” market and the “Construction Industry” market. Back in 1994 – 95 when the economic crisis hit Mexico sales to the construction market plummeted almost 50% while sales to the Do It Yourself Market only dropped 10% – 20%. CEMEX, in an effort to reduce its dependence on the cyclical construction industry, decided to focus more on the Do It Yourself market. Here’s what they did.

The biggest difference between the two market segments was the average revenue per customer. Individual “Do It Yourselfers” typically earned $5.00 per day. Customers in this segment produced small but very steady sales. Even though individual orders tended to be small they produced very significant revenues for CEMEX as a group.

Most of the cement used by Do It Yourselfers was for the construction of one room projects, often the start of a family home or a house addition. The Do It Yourself group paid cash meaning they had to accumulate all the money upfront before a project could begin. It was obvious to CEMEX that if this group could obtain credit they would start their projects sooner and potentially construct larger projects.

Taking a page from other lending programs initiated in developing countries CEMEX launched a credit program called Patrimonio Hoy – (Savings/Property Today) to finance building materials for low income families so they could develop and upgrade their homes.

Initially the program was targeted at neighborhoods where the average daily income was $5 – $15. Since women are the primary money savers in Mexico, CEMEX managers contacted them and met with them in groups of three. These groups of three were called a “Socio Group” and members of each group took turns collecting payments from family members that would be put toward the cement purchase. Each Socio group was visited by a technical advisor who, for a small fee, advised Socio Group members helping them to decide which rooms to develop next and how to best lay out the project. They also helped prepare a list of materials that would be needed to complete the project.

Typically, Socio Group collections for materials were made over 10 weeks. After five weeks CEMEX delivered the cement effectively granting five weeks of credit. This granting of credit was an important step in developing rapport with the neighborhood and generating the demand for more Socio Groups. After ten weeks when the first loan was paid off and the Socio Group wished to continue with another construction project the group would then be granted eight weeks of credit rather than five.

The CEMEX distributors who participated in the project typically saw lower margins (12% rather than the normal 15%) for these projects but these smaller margins were easily offset by the steady demand for cement and other raw materials needed in these projects (rock sand etc).

At first it may seem risky dealing with a low income group with no steady income but the default rate for Socio groups is less than 0.5%. Three years into the project there were 36,000 customers with extended credit over $10 million. The customer base continues to grow at the rate of 1,500 to 1,600 per month.

What can we learn from CEMEX:

1. Segment your markets: different segments- different needs
2. Fulfilling the customers’ needs: in this case supplying credit to the Do It Yourself segment is an integral part of the product
3. Develop structures and systems to serve your target segments: CEMEX developed a credit facility (and process) for this customer segment
4. Sometimes the services bundled with the product can be as important as the product itself

I’m sure CEMEX has an R&D department working on new cements but the development of a credit facility for low income customers is as essential to the product as limestone, sand and gravel. CEMEX developed their market not by providing better cement but by developing a credit facility that allowed their customers base to grow. Not only has this process enhanced CEMEX’s business, it is also developing an economic foundation (both literally and figuratively) for this low income segment. As well, CEMEX is providing homes for families that otherwise wouldn’t have them. Sometimes making money is just good for everyone!

For the full story please see:
The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, C. K. Prahalad

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