Profs. Edgard Barki and Juracy Parente from FGV-EAESP explain the particularities of Brazil’s poorest socio-economic market and what it takes to be in business at the base-of-the-pyramid.
By CoBS Editor Tanvi Rakesh. Related research: Edgard Barki and Juracy Parente: “Challenges and opportunities of the last mile for the base of the pyramid: the case of Brazil”.
Touching base
The base of the pyramid market (BoP) is used to refer to the demographic of a population which is the largest, but poorest socio-economic group in a marketplace. Since the 1940’s there has been plenty of discussion about the poverty penalty, which means that despite being poor, this population usually pays more than the wealthier population for the same products. There are several reasons that explain this phenomenon, such as the need of credit, the behaviour of buying in smaller packages, and the difficulty to access larger, more efficient and cheaper retailers. In Brazil, covering the last mile to reach this market is the toughest, yet some companies have made it. In recent years, businesses have developed new strategies and business models to reach this demographic in an efficient manner, which has had a two-fold impact. For the business, performing well in this tough-to-reach market implies a distinct competitive advantage, while for the population itself, it implies a reduction in vulnerability, improvement in well-being, and access to basic products. Profs. Barki and Parente have identified the three criteria which have led companies to success in this market.
Jumping through hoops and hurdles
To start off, Profs. Barki and Parente describe the obstacles that companies accessing this market are confronted with. First, retailers in this market face higher transaction costs. Usually the marketing channel is longer, and for a product to reach its destination, it must pass through several intermediaries. This is made more difficult by the infrastructure – such as roads and transportation – which is poor and costly. Moreover, in the shanty towns of metropolitan regions, there is a lack of urban infrastructure and safety. Geographically speaking, this market is defined by a network of capillaries and as a result, customers are usually far and difficult to reach. Profs. Barki and Parente explain that these factors are responsible for making distribution relatively costly and more challenging. Many decades have thus seen small retailers as the only force that powers this market. The institutional voids and challenges have inhibited large retailers to set shop in Brazil’s poor socio-economic areas. As a result of their prolonged exposure to this market, small retailers have managed to build a distinct competitive advantage with their customers – an emotional relationship. Although small retailers tend to be more expensive, these emotional bonds have developed high loyalty among customers, and have transformed the small stores into fierce competitors for large retailers who more recently have been trying to enter the base-of-the-pyramid market.
The magic DNA
Due to the very distinct nature of this market, some companies have designed specific business units to serve the particularities of this demographic. ‘Base-of-the-pyramid DNA’ is the term Profs. Barki and Parente use to refer to the strategy and tactics, the fundamental aspects of company culture that are deeply ingrained in an organisation, and which are specific to a typical company successfully doing business in this market. Profs. Barki and Parente emphasise that only a business which 1) recognizes the market potential of the BoP and gives priority to sell and serve this market; 2) develops deep knowledge and understanding of the needs and peculiarities of the market; 3) treats this market with the same respect as it does others and 4) develops an empathic and two-way communication with the BoP players can claim to possess this particular DNA. Companies with base-of-the-pyramid DNA, that understand the peculiarities of the market and have an aligned strategy, are likely to possess a strong willingness to serve this demographic, and consequently more likely to create a satisfactory distribution strategy.
Pushing costs down
Execution is the second ingredient to attain success within this demographic. The institutional void presented by the market, which is characterised by lack of professionalisation, informality, unsafe routes, tedious network capillarity, distance, and lack of infrastructure are responsible for higher transactions costs for businesses. Profs. Barki and Parente’s research finds that given the complexity of the market combined with the need to provide ‘affordable’ goods, business execution is a competitive advantage successful players laud over the rest. Efficient and suitable business execution ensures that overall costs stay low in a price-sensitive and tough-to-reach market. Consequently, small companies are known to be more successful since they are more flexible, more agile and operate in a small region, which ensures efficient distribution and low costs.
Everlasting bonds
Finally, relationships. Given that the base-of-the-pyramid is characterised by a low level of professionalisation and a high level of informality, relationships, although important in any market, have a higher degree of relevance for this one. Difficult-to-access regions, different tastes, and customers are easier accessed with a network of strong partners. Partnerships tie the barely held together network of suppliers and retailers. Smaller retailers – often under the impression of isolation from suppliers – are exceedingly receptive to supplier friendliness. Part of the same community, retailer-supplier relations are friendly, intense and key to ensuring a strong and extensive distribution network.
The successful case of Coca-Cola Brasil
Coca-Cola’s Collective Platform has managed to make significant headway to the base of the pyramid while developing a mutually beneficial relationship with the community. The objective of the Collective Platform is ‘to provide and contribute to the improvement of life of the base of the pyramid, offering tools for income generation and education and training to develop working and job skills.’ This project, developed in partnership with local NGOs, illustrates how Coca-Cola Brasil was able to generate positive socio-economic outcomes for the community, while at the same time reaping benefits from the value chain it helped establish. So far, the project has served more than 248,000 youngsters in 67 cities of Brazil. Surely, the company ticked the three checkboxes identified by Profs. Barki and Parente.
- BoP DNA: To kick-off the program, and in order to develop its understanding and knowledge of the market, Coca-Cola Brasil created a dedicated ‘social’ business unit and engaged in extensive market research.
- Execution: The company defined a set of metrics to accompany the project which included a mix of business and social indicators. These metrics, such as youth employment, confidence in the future, retail sales increase etc. allowed Coca-Cola Brasil to monitor, evaluate and execute its business operations in a way which was cost-effective and adapted to the functioning of this particular demographic.
- Relationship: The Collective Platform has established two distinct relationships. On one hand, it has developed partnerships with NGOs. The company works directly with local NGOs to facilitate interaction with communities, and to help identify potential NGO partners. Moreover, Coca-Cola Brasil developed partnerships with other corporate giants, such as McDonald’s and Microsoft. On the other hand, Coca Cola Brasil has organised community mobilisation programs, which necessitate the active participation of the community. To ensure this involvement, the company has developed programmes that are relevant and focused on the youth’s need to become financially independent. Combined, these initiatives have helped increase brand love and improve Coca-Cola’s relationship with the community.
A mutually beneficial relationship
Other crucial sectors face their own set of problems in reaching this set of customers. Health, financial, and education services across Brazil have all seen the development of new business models and innovative alternatives to reach the base-of-the-pyramid consumers. Interestingly, many businesses have employed technology as an ally to distribute services and diminish the distance to the base-of-the-pyramid. Technology has helped bridge the gap between business and this hard-to-reach demographic. Profs. Barki and Parente summarise the impacts of an efficient distribution as threefold: ‘It allows consumers to access products and services that otherwise would be difficult to reach,’ they state, ‘which is more especially pertinent when we think of basic services, such as health, education, and financial services. Secondly, an efficient distribution is likely to diminish the poverty penalty and therefore reduce the vulnerability of the population. And thirdly, it might be developed into a meaningful source of competitive advantage for companies, both large and small.’
Useful links:
- View Prof Edgard Barki and Juracy Parente’s academic profiles
- Study in Brazil at FGV-EAESP
- View more articles based on FGV-EAESP research
- Discover the FGV-EAESP Center for Sustainability, GVces.
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