Bringing low-income consumers into the market in Colombia: Home
Improvements that Make a difference
Roberto
Gutiérrez
Ana Delia
Ibarra, a 40 year-old mother of three, is one of 80,000
Community Mothers who work in poor neighborhoods in the cities
of Colombia. Back in 1986, when President Virgilio Barco
created the Community Homes day-care program, many of these
women were already organized to care for children — their own
and those of other mothers. Ana was able to join the program in
1996 because she had her own house, a high school diploma and
experience with children. She brought together 20 of her
neighbors’ children, but although she was an experienced
childcare provider, she faced typical difficulties such as
financial deficit, criticisms and lack of formal training.
As a girl,
Ana and her family moved to Bogotá from the faroff city of
Palmira for better opportunities. She lived with her mother on
the outskirts of the city even after she was married and had
children of her own, until a friend of her husband Noel offered
the family a lot in Usme, a neighborhood of some 250,000
residents on the fringes of Bogotá. Recalls Ana, “We paid a
third of the price and the rest in monthly quotas. When we
finished the payments we moved close by and began
construction.” The family laid the foundation and, two years
later, raised the house in slabs and later added other material
piece by piece.
Ana’s day care functioned on the first floor of her house;
there were two rooms, a kitchen and a bathroom with plumbing but
no tile. The upper floor was halfway constructed. In early
2006, a Bogotá Health Department visitor said she would have to
tile the bathroom and kitchen for “hygienic reasons.” Since
2001, the health department had been promoting such
improvements, and daycare facilities that did not meet hygienic
standards were shut down. Ana, like the other 670 Community
Mothers of Usme, didn’t have the income to upgrade their homes
and they would be visited again in six months.
In February 2006 social worker Haidy Duque, who had worked
for 11 years in Usme with women seeking refuge there from
Colombia’s long-lasting internal war, arrived to Ana’s Community
Mothers cooperative with an offer. Ceramics of Colombia (Colcerámica),
a branch of the Corona Company founded in 1952, invited them to
participate in a project to improve their housing. Ana and her
colleague Patricia Abril accepted.
An offer long in the making
In the beginning of the 1990s, Colcerámica enjoyed a monopoly
position in the market. The company’s different businesses such
as tiling, porcelain toilets and faucets were managed as one
business and were offered on the market as distinct brands
which, according to Carlos Espinal, director of Mass Marketing,
“we would continually invent to compete with ourselves.” The
marketing of products with the Corona label, with high technical
and design specifications, was geared to middle and high-income
groups; the Mancesa label was geared to the lower-middle and
lower-income markets.
When Colombia’s government lifted most of its trade
restrictions in 1991, foreign companies entered the market with
better prices for the middle and lower segments. Colcerámica’s
participation in the market diminished. To recuperate lost
terrain, in 2000, the company decided to manage three
independent business units. Tiling remained with the Corona
name, but the company sought to offer a new product with lower
design specifications at a very low cost, launching the Ibérica
line in 2003.
More than particular product characteristics had to change in
order to achieve a low cost with Ibérica; for one, the portfolio
of products within the line had to be austere and efficient.
Its value proposition was different from that of Corona;
according to the Sales Director of Ibérica, “It’s a product with
an excellent ratio of quality and price, with no publicity, no
marketing, made for purchasing in large volumes.” Part of the
strategy was to separate the outlets of the two brands; local
wholesale and large retail stores were used as channels to
attend to strata 2 and 3 (the Colombian Department of Statistics
classifies the population in six socio-economic strata; the
highest income earning Colombians belong to level 6), and where
the Corona brand was sold at a lower price, the product was
collected and offered as the Ibérica brand. Local wholesalers
were in charge of having the product closer to the final
consumer. Several other internal changes were required
to lower the cost; for example, Ibérica orders were consolidated
and sent by the bulk to distributors in 15-ton trucks.
Transportation of small orders was limited to the high-end
product lines.
The Ibérica line allowed the company to compete in the lowest
income segment of the market. By 2006, the Ibérica line was so
successful that sales surpassed production capacity.
Nevertheless, the growth goals of the company kept the directors
attuned to new business opportunities.
Carlos Espinal was put in charge of developing a market for
Ibérica. To avoid the problems faced by other companies
entering this segment, Carlos contacted Ashoka to identify a
social entrepreneur who could facilitate contact with potential
consumers. This multinational organization has invested in
social leaders, since 2003, in an initiative called Full
Economic Citizenship that develops capacities and
opportunities so that citizens may participate in the global
economy. Ashoka’s mediation role was not immune to the problems
of lack of confidence between business people and social
entrepreneurs. Among Ashoka’s fellows, Haidy Duque liked the
proposal. She thought the Colcerámica products would improve
the living conditions of the women she worked with and,
furthermore, she knew Corona to be a socially responsible
organization. The Corona Foundation was one of the best known
corporate foundations in the country, part of its work being
with grassroots organizations.
Three months later Haidy and Carlos set to work to create a
friendly external environment to Colcerámica and its
Ibérica line. They understood that “a social entrepreneur must
continue his or her activity in order to develop a hybrid value
chain, and to join knowledge and action to construct a model.”
The first actions were to choose a location and study its
housing issues, to understand very well the cultural and
political context in which they were to operate, and to identify
where the project could begin with a certain amount of
guaranteed success. Because of her experience, Haidy suggested
Usme, where the entire population belonged to strata 1 and 2.
Using student interviewers, they gathered basic information with
80 surveys in the area. Having determined the potential market,
Ashoka and Colcerámica were convinced of the viability of the
project. For Carlos, “the contact with Usme was excellent. The
only thing I missed was bringing people from marketing here to
undermine the idea that executives won’t get their feet muddy.”
For low-income consumers, buying materials from traditional
merchants meant buying more than they wanted, paying in cash and
doing all the work oneself: design, purchase, pick up of
material, and all the labor. Haidy and Carlos devised several
options to change the way in which the company related to its
final customers. A new model for selling Ibérica products to
low-income citizens was proposed, but it created uproar within
Colcerámica’s sales force. In the new model, a community
promoter offered the product directly at the home of the
low-income consumer, providing advice and a variety of payment
alternatives. Colceramica’s professional sales force expressed
its doubts about the capacity of unskilled women to become
knowledgeable in product characteristics and in sale processes.
However, community members as sellers were in a much better
position to overcome three barriers: the lack of income of
consumers, their belief that they could not bring about their
own development, and the barrier of entering the home of a
potential consumer.
To create a new channel, Haidy and Carlos thought of the
possibility of setting up a cooperative among community leaders,
extending beyond the already-existing daycare cooperative. Yet,
while Colcerámica wanted to formalize everything, the community
held informality as the norm. In discussing the project with
the community, they identified organizational and administrative
strategies that, while informal, could be effective. For
Carlos: “we became more relaxed about the issue of formalization
when we had more contact with people. I met a woman who managed
a lending chain for years; she managed a lot of money and
everyone had confidence in her. There weren’t any papers nor
contracts.”
After six months of work, Haidy and Carlos held a community
meeting to present the model. According to Haidy, “It was the
moment of truth: they challenged us for proposing cooperatives.
The community said that if they already had their organizations,
why should we create new ones?” Carlos recalls, “After hearing
the community leaders I asked myself, who are the experts here?
We hadn’t recognized the real value of the contribution from the
community. We had been cocky, and we needed to be more
humble.” The meeting also served to identify other interests of
the participants that could be contrary to those of
Colcerámica. For example, one attendee expressed the following:
“Two years into this and I’ll get to be elected to the city
council.” The team concluded, “In order for this to work we
need to find an intermediary point between being naive and
arrogant.”
After the meeting, Carlos and Haidy defined the elements of
the model: the product, easy financing, communications,
community participation and custom design. They also decided to
use existing networks in the community. With community’s input,
they named the project “Your House Made New, Step by Step” and
defined a vision: “to provide options to low-income citizens to
reach the personal dream of improving their homes through
collective support, to commercialize ceramic tiles and to
improve the quality of life of communities.” Furthermore,
something more than tiling would remain in the community:
strengthened management skills in their organizations.
Women only were chosen to be promoters for three reasons:
they were more sensitive to the idea of home improvement, they
had the time necessary to carry out the sales work, and they
encountered less resistance when they offered products door to
door (e.g. “issues of suspicions and jealousies”). Their
responsibilities included visiting clients, advising them,
measuring spaces and quoting the price of products, closing the
sale and following up on payments. The women had a good sales
argument: “Who doesn’t want their house to look nice?”
The income for the sales promoter was 7% of sales and it was
estimated to reach, on average, US $94 per month. In December
2005, the first group of promoters visited the factory where
Ibérica was produced. There they became convinced that the
product was indeed new, produced for their community, and that
it was not in fact leftover materials from other production
lines.
To structure the “Your House” program, community
organizations (COs) were selected that could manage promoters
(including their selection, support, supervision and payment,
under criteria defined by the company), administer money from
sales and exhibit the products. Each CO received a 3% commission
on sales. The first group consisted of three local city council
associations (Juntas de Acción Comunal) and one Community
Mothers association. On December 19, 2005, these four
organizations in Usme, together with seven promoters, began
sales using a database of prospective clients that had been
collected during promotional events in the community.
While the selling hurdles were just beginning, other internal
adjustments had to be implemented. For example, procedures that
had been established to pay all of Colcerámica’s suppliers had
to be changed. For the ISC outlet, the promoters provided a
service for which they should be paid in cash every two weeks.
Colcerámica was accustomed to pay its suppliers by check or
transfers to bank accounts in periods of 30, 60 or 90 days.
Initial operation based on
internal adjustments and the creation of an ecosystem
Much had changed within Colcerámica to launch the Ibérica
line and sell it through a group of community promoters; and a
great deal of organization had happened beyond Colcerámica’s
boundaries. The first sales came after the company had a
product line to offer and after it had taken its time to design
with a specific community how to make its offer available.
The promoters delivered concrete business orders to the
community organizations, which in turn passed on the orders to
the factory. During the following six months, sales doubled
those from the previous month. In the beginning of “Your House”,
the monthly demand of materials from the COs (an average of 760
square meters) was a decisive factor for Colcerámica as it
determined how to deliver the products to clients. When it
received an order, the factory generated a purchase order from
one of the Ibérica distributors in the area. The high capacity
of the factory didn’t allow it to respond directly, since the
orders weren’t sufficiently large enough to program an
independent run. And since the roads in the outskirts of Usme
were narrow and unpaved, the large trucks that were part of
Colcerámica’s fleet could not be used for delivery.
Distributors received 6% of the purchase price from the
factory. Once the factory sent the delivery order to the
distributor, the client could pick up the product at the
distributor’s point of sales. Each distributor managed its own
factory orders independently, based on its own sales. “Your
House” would function under this scheme of distribution and
inventory control. Investment in logistical aspects was basic
and if the program didn’t succeed, Colcerámica could abandon it
with minimum loss and without reducing sales of the Ibérica
line.
At first, Colcerámica did not issue credit to clients; it
did, however, freeze the price of the product from the moment a
client began to make payments, but it only delivered the product
once the product had been fully paid. Nor did the company, or
anyone under its control, interact with the client. Colcerámica
offered a lot of flexibility to its community clients, both in
terms of forms of payment as well as product. Soon, Colcerámica
agreed to give Community Mothers credit and to deliver the
product when 50% of payments had been made, since this group had
fixed incomes that made them more prone to pay their monthly
quotas.
In the first semester of 2006, “Your House” went from being a
pilot project to becoming a company program in the Marketing
Area. Until that point, the costs of the pilot had reached
$40,900. In March of that year, the Usme Service Center was
created with the objective of supporting the work of promoters
and the COs, and to generate confidence among people. The
company wanted to show the population that it supported the
program and that it had a physical presence in the area; people
could go and see the products even though purchases should be
made through a promoter. The idea was that the Service Center
would also become the place where training in handling and
installation of ceramic products took place. An employee was
transferred there as a Service Center Auxiliary and two others
worked as Sales Coordinators, responsible for accompanying
promoters and COs. At the time, the team at Colcerámica had
constructed, together with the COs and the promoters, a manual
called Associative Norms to regulate interactions. The rights
and obligations of COs and Colcerámica were defined there.
Soon after, financing became a critical element. Different
forms of financing were considered, among them small consumer
credits. Because of the difficulty in access to these credits,
and thanks to the newly acquired knowledge of the market,
management of the tiles company approved extending credits to
all clients once they had paid for 50% of their materials.
Managing Director Reinaldo Aragón did not place a maximum amount
on these credits, but he established that they would cease
financing when unpaid credits reached 1% of those issued: “with
this population, if you take care not to exceed [clients’]
payment capacity, the credit risk remains low; people are
willing to pay and they pay.”
Towards the end of 2006, greater access to credits resulted
in the triplication of sales from previous months. During the
first five months of the year, the promoters had sold $16,500
worth of products; and the program closed the year with total
sales of nearly $88,400, including sales through the Service
Center that had recently been opened in the Agua Blanca district
in Cali. The experiences of the communities in Usme differed
from those of Agua Blanca. As one promoter in Usme pointed out,
“thanks to the work with Colcerámica in our organizations and
communities, new ties were created and capacities were developed
through training and administration of the program.” Although
the promoters in Cali also recognized gains, the social
entrepreneur who coordinated work with COs there said, “when it
came to Cali, the model was already set up; there was less joint
construction than there was in Usme and, as a consequence, the
company had more control.”
The sales outcomes and the payment behavior of clients in the
pilot phase showed the “Your House” program’s growth potential.
The majority of clients finished paying off materials in 8
months, rather than the foreseen 12 months; and 23% of clients
in 2006 began new projects in their homes (i.e. return
clients). As the program grew, more organizational adjustments
were required.
Growth of the Program
In 2007, the “Your House” program was structured as a new
sales outlet for the Ibérica brand. The name of the program,
“Your House Made New, Step by Step,” was maintained for
communities and the company called the sales outlets Ibérica
Service Centers (ISCs). These centers were administered jointly
by sales and marketing; the former had the responsibility over
levels of sales and the latter was in charge of making strategic
decisions. Adjustments were necessary in different areas of the
organization. For example, within the ISCs it was necessary to
guarantee the delivery of a uniform product for a minimum of
three years, whereas traditionally the product was taken off the
market after just two years.
Diego Ángel, who was named Chief the ISC outlets, organized
the sales coordinators according to zones, defined a sales
objective in each and made coordinators responsible for the
sales performance of promoters. Any problems in the interaction
with the community, in the COs or in daily operations were taken
up by the ISCs. The centers collaborated with the promotion and
the organization of orders; they provided an institutional
presence, despite being far from the more removed
neighborhoods. Clients could see product samples there, not
having to depend solely on traditional catalogues, and could get
information about probable delivery dates and existing
mechanisms of finance.
The ISC grouped together the orders from different promoters,
which were done via COs, and the factory could better plan its
production and delivery of greater volumes. The increase in
sales generated orders of larger volume of certain product
references, but those references that did not reach a minimum
volume to be produced independently, had to be collected by the
plant from excess production of other orders. In these cases
the turnover for orders took longer than traditional
distributors, but ISCs were informed.
Ángel also considered specific plans to expand the production
capacity of the Ibérica brand. Colcerámica had attracted the
attention of a variety of players for its model directed at
low-income populations. For example, the company received an
offer from the InterAmerican Development Bank to finance a new
oven that would allow the company to double its capacity. The
offer caused concern for several directors, who questioned the
risks of having made the model public and given it visibility
before assuring its sustainability.
As sales grew, Colcerámica tackled the issue of developing
the distribution chain to respond to the growth of the model. A
great difficulty was that Ibérica’s strategy had been developed
along the lines of “delivering the product and nothing more”,
and the distributor had been considered as the client. The
company had repurchased from distributors during 2007, in spite
of the overhead costs that this implied, and delivered to them
using large 15-ton trucks. The discussion about how to deliver
the product close to consumers’ homes required convincing the
Logistics Department, among others, that it was possible to do
things differently. The final distributor was eventually
discarded to reduce costs and pursue a profit margin similar to
that generated by Ibérica in other channels.
Colcerámica started to invest in expanding the ISCs in each
location by using a smaller transportation system to get the
product there. The ISCs assumed the role that the distributor
previously played, but as part of Colcerámica. Since customers
had not opposed picking up the product at the point of sales of
the distributor, getting to the ISC, located in the same
neighborhood, did not inconvenience them. Given that
communities were already familiar with the company, in a period
of about two years the ISCs could even sell directly to the
community. Each ISC would administer its own inventory, plan
its own requirements for future periods, place orders with the
factory and receive them without intermediaries.
As the expanded ISCs managed inventory, they needed
specialized personnel and machinery, as well as larger storage
facilities. Within Colcerámica this meant another shift; as
inventory control became more decentralized, it could become
obsolete if it was not adequately managed. Good demand
estimates and coordinated efforts with COs were the keys to high
inventory turnover, so they could keep product lines going for
three years; and the larger ISCs could anticipate the need for
some orders before production of the reference ended. While the
scheme implied investments in larger ISCs, and probably the
quantity of references had to be diminished, these changes would
result in shorter delivery time. By strengthening its ISCs,
Colcerámica attempted to resolve once and for all the problem
that it would have when “Your House” reached 36 cities; although
the solution would take time, would require greater investments
and could risk “cannibalizing the market” with traditional
distributors.
As the discussion around distribution issues to achieve
greater scale waned, dilemmas about other aspects of the program
took center stage. One of them had to do with the working
relationship with sales promoters. Some financial modeling gave
the company assurance that if they needed to hire them, the
program could still be economically viable. However, the
preferred option was to help promoters create their own
cooperatives.
On another front, there were a number of difficulties in the
development of the ISCs; one main issue was that of financing.
At the end of 2007, “Your House” had loaned $700,000, of which
Colcerámica financed 96%. To work with other financiers,
according to Ángel, “would have been more difficult and slower
than what was budgeted.” For the financial area of the company,
this situation was a latent risk since working with these
communities was notably informal and because providing credit
was not its line of business.
In December of 2007, ISC outlets had achieved and even
surpassed sales forecasts. In one year ISC outlets were opened
in 13 localities in five cities (Bogotá, Cali, Medellín,
Cartagena and Barranquilla), with a direct sales team consisting
of 183 promoters bringing 2,300 families into the program. The
Ibérica brand sold 134,000 square meters in addition to the 14
million square meters sold through other channels during the
year. According to more optimistic projections, by 2010 “Your
House” would sell 1 million square meters monthly and would have
an oven with the capacity to produce 1.5 million square meters
per month.
In Usme, Colcerámica sold 20,000 square meters of
Ibérica products during 2007, but the potential sales according
to the company were 45,000 square meters monthly. However,
working dynamics of COs take much more time than traditional
commercial dynamics. This was a big consideration for the goals
that were established; to fulfill them meant opening an ISC
every two months and beginning sales two months later. However,
growth for the tiling business was on its way; and the
experience had opened avenues for the company to think about new
markets for its faucets and porcelain toilets and sinks. An
encouraging sign came from community leaders who asked the
company for offerings of these products that would suit them.
They surely appreciated the Ibérica line and they were willing
to make more home improvements if Colcerámica offered them a
good deal.
Coming full circle
From the start of Colcerámica’s explorations with low-income
citizens, the company struggled to reconcile the “formal” world
of conventional business with “informal” practices common to
communities. These efforts entailed the parallel creation of a
new business model and an ecosystem for it to thrive in. The
design and development of a new product was the starting point.
Several changes to the logistics systems came later; billing,
paying and distribution systems were adjusted to a different way
of doing business with citizens who had not been in
Colcerámica’s radar in the past.
The input for a number of changes in Colcerámica’s systems
came from community members. The partnerships that have been
established do not rely on a formal contract and the company has
given up, to its advantage and that of others, part of the
control it used to have. Colcerámica and its partners have
created the conditions for “Your House” to flourish, no small
feat where a climate of distrust between companies and
low-income citizens prevails.
The socially inclusive strategic network that has been
created includes heterogeneous parties who share responsibility
for performance outcomes and are aligned by incentives that
generate win-win relationships. “Your House” is inserted within
the core value chain of Colcerámica and it is of central
importance to the social entrepreneur who mediates between
company and communities, to COs, to sales promoters and to
consumers. The established collaborative arrangements allowed
Colcerámica to create a new market by leveraging the existing
social infrastructure and expert field knowledge, and by
externalizing some of the costs of doing so.
A lot of positive changes in the lives of promoters and among
the families who bought the products have been witnessed.
Community organizations are building capacities along the way.
Economic and social aspects have changed for the better, and
quality of life has improved.
Since March 2006, Ana Delia Ibarra has participated in “Your
House” both as a promoter and as a client. As a promoter, she
brought in 37 Community Mothers who like herself, faced pressure
from the health department to raise their hygienic standards
through tiling. With the proper renovations achieved as a
result of the program, the daycare centers continued to serve
481 children. For Ana, this meant nearly doubling her income. As
a client she finished tiling her kitchen and continued with her
bathroom. According to Ana, “We have benefited from all of it…
training, development of values; one becomes enriched as a
person and learns many new things.”
Roberto Gutiérrez
is an Associate Professor and directs the Program on Social
Initiatives in the School of Management at the University of the
Andes (Universidad
de los Andes), Colombia. This article is based on research carried on with his colleagues Diana
Trujillo, Luz Elena Orozco, and Marcus Thiell, and could not
have happened without the collaboration of community leaders and
Colceramica’s employees. Copyright 2008.