The Program Patrimonio Hoy of Cemex Corporation - Case Study Example

I. Introduction This paper aims to examine the program Patrimonio Hoy of CEMEX Corporation from a financial perspective. While the program has been perceived as social responsibility on the part of the company, Francisco Garza, the President of CEMEX North American operations feel it is better to make the customers feel like consumers getting value from the project, instead of receiving acts of charity. This paper aims to provide recommendations to the case of Patrimonio Hoy as to how its profitability can be improved. II. Body A. Situation CEMEX is a top global manufacturer of cement which is housed in Monterrey, Mexico. The company operates outside Mexico, in different countries across the globe which include Egypt, Colombia, Venezuela, and the Philippines. In order for CEMEX to respond to the self-construction market, Francisco Garza, the companys President of North American operations has designed in 1998 a program called Patrimonio Hoy, or Patrimony Today, as its direct translation. CEMEX has started Patrimonio Hoy, or PH for a market research initiative of learning a market segment that it does not have any idea about—the self-built segment. Research has later found out that the majority of the people who belong to this market segment are lower income earners who build a 100-square meter room for an average of 208 weeks. Garza has seen this as an opportunity to reach out to the lower-income segment by providing them a program that provide them quality service and materials in finishing the rooms that they built. The PH program is built around the idea of tanda, a type of savings and loan program where members contribute a certain amount to a communal pool and the total of the communal pool is given to a member weekly. Receipt of the total of the communal pool is rotated among the members, and the order is determined by drawing lots. The PH program serves as substitute because of the lack of financing sources, and high financing costs for the low-income earners in the country. B. Complications The PH program has earned a lot of accolades because they system has been perceived as a corporate social responsibility move on the part of CEMEX. The PH system works as follows: members are required to pay 120 Mexican pesos each week, which comprised 105 pesos to be allocated to the funds in buying construction materials, and the remaining 15 pesos each week. These communal funds are used in order to revolve the fund among a group of three families, to finish their construction within the 70-week period. However, because inflation is a major consideration in many Latin American countries such as Mexico, the fixed 105 Mexican pesos, is being affected by inflation which reduces the profitability of the program to CEMEX. The 105 Mexican pesos is allocated into cement and non-cement materials. The cement materials go to CEMEX in the form of gross profits as well as commissions to its dealers. The non-cement materials are adjusted for inflation, which reduces the amount that is allocated to the cement materials. Production costs of CEMEX are also subject to inflation. This reduces substantially the net profit that is available for CEMEX from the PH program. Aside from issues of profitability, issues as regards the sustainability of the programs operations, which concerns long-term capital investments, project management, and quality control are also needed to be incorporated in Garzas decision for recommendation to the companys top management. If Garza chooses to continue with PH, as he thinks that the program is a good one, how will it solve the issues on profitability? What are the options of CEMEX regarding this? C. Analysis In order to analyze the problem, the issues have to be traced back in the companys financial positions, by looking at its various financial statements. The income statement of Patrimonio Hoy is first assessed. By looking at the schedules pertaining to the breakdown of costs in relation to the operations of Patrimonio Hoy, the cost items that impairs profitability will also be determined. Then, by linking these financial statements with the consolidated financial statement of CEMEX, weaknesses will be determined, which warrants some recommendations. By looking at the income statement of Patrimonio Hoy, two sources of revenues are identified—the membership fees that it collects, which amount to 15 Mexican pesos for each family per week, as well as the 7% commissions from its non-cement distributors. In 2003, the total revenue of PH amounts to 34,871,000 pesos. However, the programs operating expenses amount to 46,413,000. The program has a net loss before taxes of 11,542,000. This is one major issue for the company. In order to ensure the profitability of PH, the company has to do something with the sources of revenues, or cut down on its operating expenses in order to make the project profitable. The collections from the members amount to 120 Mexican pesos each week, where 105 pesos go to a communal pool as funds to buy construction materials. This is allocated to cement and non-cement materials. Because the non-cement materials are adjusted for inflation, what remains to CEMEX as its gross profit from the PH program is less. The net contribution margin from the sale of cement is also therefore lower. Because the production costs of cement are also rising as it is subject to inflation, the net profit of CEMEX from the PH program has been eaten up. All these lead to one implication: the major issue of inflation in the country, with prices in relation to the companys revenues are not adjusted. All the other costs increase, which leaves very little margin for the company to profit. The company should address this issue of inflation as regards its prices. By looking at the consolidated financial statements of CEMEX, especially its income statement for the past three years, it is apparent that the decrease in the companys consolidated net income is due to the huge decrease in the companys income from its affiliates. This includes the decrease in the net income from its PH operations, which is eroded by inflation. Clearly, this is a major issue that the company has to address in order to ensure profitability of the program. III. Alternative courses of action Patrimonio Hoy contributes to the profitability of CEMEX in three ways: first, through the net profit margin in cement sales that comes from the implementation of the program; second, by the membership fees that it collects from its members; and third, by the 7% commissions that CEMEX gets from the non-cement distributors. The first two have remained constant in the past and are not adjusted against inflation. If the company wants to increase the contribution of PX in terms of profitability to CEMEX as a whole, the company can: either increase the total contributions, adjust it according to inflation in order to keep the net profit from sales higher over the duration of the whole 70-week cycle. Because the companys commissions will only come according to the sales from non-cement materials, this will only increase in proportion to the number of projects being done. This is not a good alternative to focus upon, in terms of policy-changes because it is somehow beyond the scope of the company. The companys membership fees will also increase, which will contribute to the sole profitability of the PH program. The only disadvantage about this is that, less people may be able to afford the increase in the total price paid, and others may find it hard to sustain because the collection is not fixed. This can be solved by presenting a stream of payments on the part of the consumers, in the form of a plan, what the consumers need to contribute to the funds, while explaining that inflation has to also be covered. The only major issue with this is the potential political changes in relation to government policies for the lower-income earners. Other than focusing on the revenue side, CEMEX can focus on the cost side. PH as a stand-alone program suffers because of its high operating expenses. A range of alternatives will include addressing this one—whether to streamline the staff functions of the company, in order to cut down on overhead costs. Because the costs are not fully listed, the cost side may not be tinkered with more recommendations in order to improve profitability. Another alternative in relation to the costs is for CEMEX to bring down its production costs to a level lower than 70% in order to have margins for inflation. However, since this cost is not broken down, no other recommendation, such as improvement in cost management system, etc. cannot be prescribed as a recommendation. IV. Recommendation From the alternative courses of action, it is very much apparent that in order to keep Patrimonio Hoy profitable and contributing value to CEMEX, the option of increasing the collection price of 120 Mexican pesos is crucial. The company cannot let inflation to eat up its profits. Because the company treats the consumers of this self-built segments as its customers through its business proposals, the company can present a stream of collections which are adjusted with a predicted inflation, just enough for inflation to not affect the companys bottom-line profitability. Since the increase are more predictable on the part of consumers, these increases will let consumers prepare to adjust their personal budgets. Although this is not as convenient as the previous collection price of fixed 120 Mexican pesos each week, this is crucial in order for CEMEX to continue PH in the long-run, which is more mutually beneficial to the company as well as the consumers. Without addressing the profitability side of the operations of PH, the program cannot expect to expand its scope because of issues of capital investment considerations, as well as to gain economies of scale and bring down total costs for the longer-term. Read More