Magazine Luiza: Building a Retail Model of Courting the Poor Case - Admission/Application Essay Example

I. Introduction This paper delves with the case of Magazine Luiza, a major retail chain in Brazil. As the company grows, challenges are identified aswell as future implications on the companys operations. After the case is analyzed, recommendations are presented with regard to the long-term strategic considerations of the company as well as its future prospects. II. Body A. Situation Magazine Luiza is a retail chain in Brazil that carries mostly furniture, consumer electronics, and white goods which it sells to lower-income households. At the time the case is written, the retailer is active in five states: São Paulo, Minas Gerais, Parana, Mato Grosso do Sul, and Goias with 5,700 employees and 202 existing stores. The company has revolutionized the store formats by pioneering the virtual showrooms style of retail, with specific focus on consumer satisfaction with the help of its strategic human resource function. The company has grown from being a traditional mom-and-pop store into a major retail chain in Brazil by means of acquisition. With the increasing competition in the retail sector of the country, the company aims to grow by another acquisition when it purchased Lojas Arno. This acquisition will add 52 new stores to the companys operations and 800 more employees. This will enable the company to operate in geographically more distant regions such as Rio Grande do Sul and Santa Catarina. B. Complication Over the years, the Magazine Luiza has grown mainly by acquisition. With its sixth acquisition within the period of eight years, the companys decision to purchase Lojas Arno, a traditional retail chain in southern Brazil has been contemplated by the companys top management as regards the future of Magazine Luiza as a whole. The major complication in the companys decision is the integration of the newly acquired Lojas Arno into the companys operations, especially the companys organizational culture. According to Luiza Helena Trajano, the CEO of Magazine Luiza, the companys major competitive advantage is its customer-centric culture, with the training of its people. In the words of Frederic Trajano, the sales and marketing director of Magazine Luiza, “our challenge is therefore to keep our culture and business model going at the same time that the company is operating approximately 250 stores in 199 different and distant towns (11). Aside from the effect of this acquisition to the companys corporate identity, the company is also facing certain challenges in order to support its high-level of growth. For one, the companys choices of financing for growth is also an issue. Aside from it, the choice of where to expand is also an important consideration. Lastly, the choice of how to expand, whether with its traditional store formats or its virtual showroom formats is to be used for its stores. These considerations are also needed to be weighed. C. Analysis The challenges of Magazine Luiza can be broken down into two parts: its current challenge as regards its acquisition of Lojas Arno; and its future challenges as regards growth. From the information provided in the case, the companys newly acquired stores contribute 7.3% to the total consolidated sales of Magazine Luiza. These sales come from 1,300,000 customers of Lojas Arno which amount to 100 million reais. Clearly, the company has to facilitate change in order to increase the customer to sales ratio in this region. The changes include the decision to convert the stores from the traditional store formats to the virtual showroom formats in order to minimize operating costs. If the company maintains the traditional store formats of Lojas Arno, it still has to create a massive internal information dissemination and seminars in order for the employees of Lojas Arno to be trained in the ways of Magazine Luiza. If the company chooses to change its store formats, what it can save on operating costs in the future, it has to invest in employee training for the current in order to maintain the same quality standards of customer-employee relationships as in its existing stores, investment in major change management with an incentive system to reinforce it, as well as investment in its marketing communication activities in order to make the companys brand, which is partly associated with the virtual showroom format more widely known in its new markets. With the limited information, this analysis cannot incorporate the financial implications between these two major choices for implementing changes. Nevertheless, effective change management should be implemented. As for the future challenges of Magazine Luiza, the first challenge is the financing of its growth. According to the case, the companys is not a good investment choice among those who are in the investment community because of the companys low capacity for leverage in order to increase their returns. The companys sales projections are not enough to produce a return that will make these investors commit to a long-term investment. In order to attract investors, the companys new markets as prospects for growth should provide it a higher sales projection. Because the sales of the company is dependent not on high prices, but bigger volumes with the help of providing credit to customers, the new markets should have bigger numbers of customers that belong to the companys current customer profiles. As for the choice of how to expand, the company is faced between the traditional format where operating costs will be high, but the initial investments will be lower—investment in infrastructure as well as employee training and change management, as compared to the virtual showroom formats where the operating costs can be low but the initial outlays would be much higher: investment in technology, employee training, change management, bigger marketing expenses in order to create brand awareness in the new communities. D. Alternative Courses of Action The company has two sets of challenges to face: the current challenge that the acquisition of Lojas Arno; and the future challenges that Magazine Luiza faces. For the current challenge that the company faces, it has two alternative courses of action: one, to implement change and integrate the operations of Lojas Arno by extensive employee trainings and change management in order to ensure that the companys organizational culture is reinforced without changing the store formats; or by changing the store formats and re-organizing the stores in order to integrate them into the companys organizational culture. As for the first choice, the pros include the companys savings from investing in additional technology, higher marketing expenses to educate the new customers as regards the format while achieving its goal of implementing change management and integrating the stores of Lojas Arno to the operations and culture of Magazine Luiza. The cons, however include higher distribution costs because of the traditional formats. As for the second choice, the pros include lower operating costs because of the lean format of the virtual showrooms; as well as future implications on the companys brand identity, image and association. The cons include higher initial investment costs in the form of investment in technology as well as as more specialized employee trainings, in order to follow the standard of the other virtual showrooms of the company. The first consideration as for the companys growth has something to do with the choice of financing. On one hand, the company can fund its growth by entering an initial public offering. The pros to this include the huge availability of funds in the capital market. The cons include the potential lower trading prices and market valuation because of the new acquisition which is not yet fully consolidated with the companys operations, as well as the higher costs in the form of high underwriting and other transaction costs, as well as implications on regulations for publicly-listed companies. The other financing choice to the company is through private equity fund, or private placement memorandum. While the availability of capital is less than the primary capital market, the company has to deal with less regulations, as well as pleasing fewer investors in the long run. The lower transactions costs are also included in the pros to this choice. The cons however include the decrease in management control to the company, as some of the representatives of these private investors will have to guarantee a seat on the board of directors in order to influence decisions. As regards the choice of market, the company can choose to enter São Paulo City or not as one of the major prospects for expansion. According to the case, the pros include the higher concentration of the companys target market in the city—most of the inhabitants of São Paulo state are concentrated in the city. The cons include the tougher competition with other established players of the retail industry, as well as potential higher costs of operations. Lastly, Magazine Luiza has to decide on how to expand—introducing its virtual showroom formats or the traditional retail store formats. The pros for the first choice include the long-term implication on the companys brand identity and image—the virtual showroom format is unique to Magazine Luiza which can be used as part of its unique selling proposition, as part of its overall competitive advantage which revolves around its culture and employees; operating costs will also be lower because of lower distribution costs. The cons include the higher marketing expenses in order to build brand and compete with the established players of the industry, as well as higher investment in technology as well as improvement on its IT platforms and systems. The pros of the other choice, the traditional store formats is that the format is less risky for new markets. However, the cons include the potential reduction in profitability because of higher distribution costs, as well as the lack of a unique selling proposition in order to properly compete and differentiate itself from the established players of the market. III. Recommendations The major recommendation for the company as regards its current challenge that is brought by acquisition of Lojas Arno is to adopt the virtual showroom formats for its new stores. With regard to the implications on the companys long-term strategy of consolidating its brand identity, image and corporate culture, this seems to be the better choice. The company caters to its customers effectively with the virtual showroom formats; therefore, in order to reinforce the culture, the way things done or the norms is also important to be included in the change. As regards financing for the companys growth, private equity fund is recommended. For one, initial public offerings carry out higher costs in the form of underwriting costs and other transaction costs. If the company chooses to go to IPO in order to raise funds, because of the higher portion of the companys debts, public investors may demand a higher required rate of return on capital. Therefore, the companys cost of capital becomes higher. With a private equity fund, costs are lower, which makes it the more favorable among the two choices. In order to attract private equity investors, the company has to expand big and increase its sales projection in order to produce the profit level that will justify the investments of these investors in the form of higher returns. São Paulo City is a good choice for the new market—according to the case, where the percentage of the population of the São Paulo state is more concentrated on the city. In order to address the issue of how to expand, the recommendation is to adopt the virtual showrooms in its store format. The virtual showrooms are a part of the companys unique selling proposition in order for the employees to effectively deal with the customers of Magazine Luiza. In the long run, if the company adopts the virtual showrooms format in most of its stores, what it spends in its large scope marketing communications activities will provide the company with the economies of scale as it brings a stronger brand association. The company must then spend on building its brand based on its consumer-centric culture, which is supported by its unique store formats in order to be able to replicate the consolidated business systems in the new markets that it decides to enter in the future. Read More