Expansion Magazine (Mexico)
Por Ulises Hernández
Mexico City, April 21, 2009.- The polemic businessman, king of the bottom of the pyramid banking, responds to the recession with international expansion; he wants to build a continental financial emporium with the Elektra-Banco Azteca model and he’s headed for the United States.
On the hot evening of March 27 last year, the central square of Olinda was all decked out. In the old colonial city, located in northeast Brazil, a strange mix of Ranchero and Frevo music could be heard. Mexican businessman Ricardo Salinas Pliego, the host of the gala event, was glowing. Hours before, he had inaugurated the first branch of Banco Azteca in Brazil and he was anxiously awaiting the arrival of his special guest. “Where is the mariachi and the tequila?” someone said to President Luis Inácio ‘Lula ' da Silva, a declared admirer of singer Miguel Aceves Mejía, when he arrived at the celebration.
The scope of the Brazilian-Mexican celebration could not be overestimated. Brazil is a key market in the plans of Salinas -the third richest man in Mexico- to build a financial emporium in the American continent, based on granting small scale consumer credits to the poorest strata of the population.
Salinas Pliego already has a presence in eight countries of Central and South America through the Elektra-Banco Azteca duo, which combines the services of the store and bank, and of other instruments such as the Elektrafin financial company. At the close of 2008 it had 444 points of sale in Latin America.
The Elektra-Banco Azteca duo has plans to soon enter Colombia, Paraguay, and Costa Rica. But the potential for all of Latin America is enormous. It could sell to 310 million people who meet the profile of its clients, and whose combined purchasing power totals US$660 billion.
His greatest ambition, however, is to enter the U.S. market, aiming not only for the Hispanic market, but at a broad range of the general population. “I believe that there is going to be a big opportunity at the base of the American pyramid. There are an enormous number of people who are not being attended to,” the businessman says. “More than 40% of the population earns less than US$25,000 annually.” This group totals 124 million consumers who have a combined income of US$2.8 trillion.
The commercial origin of the group dates from more than a century ago, when Salinas y Rocha opened its doors in 1906. But it was not until 1954 when Elektra, the store founded by Salinas Pliego’ grandfather, Hugo Salinas Rocha, granted its first loans, thus beginning the payment by installment program that has allowed Salinas Pliego to become the country’s third richest man, with a fortune of US$4.20 billion, according to a report published last month in Forbes magazine.
But the model is about to face its most difficult test: to operate abroad, where other rules and other competitors prevail and, above all, other governments. In addition, it must do so amid the worst global crisis in 60 years.
“There is empirical evidence that the micro-lending sector displays a certain resistance to crises,” says Manuel Reyes-Retana, an official at International Financial Corporation (IFC), the World Bank group institution that grants loans to the private sector. Several studies have also revealed that businesses that tend to finance the low-income sectors, such as Elektra, feel the effect of the crises less because most of their clients work in the informal economy and, therefore, are not so affected by a recession or unemployment.
Furthermore, the Brazilian economy will be one of the least affected. The International Monetary Fund (IMF) calculates that the U.S. economy will fall by -1.6% this year. The OECD estimates that the economies of its member countries will decline by -4.3%. The Mexican economy, according to JP Morgan, will decline -4%, while at the same time, the largest Latin American country will come out in better shape. Indeed, according to IMF calculations, the Brazilian economy will grow by 1.8% this year.
Others say that this expansion will be no picnic. In Brazil and the United States, Grupo Salinas will face more developed commercial and financial markets where heavy players compete.
The penetration of the banking system in Mexico, measured with regard to its assets and the total economy, is 35%. The corresponding indicator for Brazil is 43%, according to Banco Central do Brasil. In that country there are 101 banks, while in Mexico there are only 43.
The commitment to internationalize its operations is clear, but this is also the case with the note of caution with which the group acts, in these times in which the International Labor Organization warns that unemployment will be at its highest level since the Second World War.
“This year, investments will be modest,” says Luis Echarte, director of financial strategy for the group. Translation: the construction of the Chinese car assembly plant is canceled, where Salinas Pliego was to partner up with the Chinese FAW. The plant was to be built in Michoacán and its cost was calculated at 250 million dollars. “I believe that the world doesn't need another plant,” Salinas Pliego explains.
In addition, the businessman’s team will again raise the question of the marketing strategy of Iusacell, the mobile telephony carrier, after the company experienced a drop of half a million prepaid subscribers last year. “We will re-launch the Iusacell and Unefon product lines, clearly differentiating targets, with Unefon for the base of the pyramid and Iusacell for the high end,” the business magnate explains.
His thoughts and his ambitions, however, are somewhere else. Because there is no question that the grand plan is outside of Mexico. Salinas Pliego estimates that Elektra and Banco Azteca branches abroad will generate almost half of Grupo Elektra’s revenue in the near future. “Right now we are practically only in Mexico, but in six years, 40% of our business will come from abroad,” he says.
THE POOR MAN'S BANKER
Banco Azteca emerged eight years ago as an extension of the credit business already offered by Elektra stores for the purchase of appliances, furniture, and linens. It was designed to attend to the low-income strata of the population without bank accounts, such as street vendors, bus drivers, or domestic workers. Its client profile in Mexico are those who earn on average less than 6,000 pesos per month (segments C - and D+); but there are poor people the world over.
The model, based on loans that are paid in weekly installments and on savings accounts that can be opened with as little as 50 pesos, was a smashing success. At the close of 2008, the bank was number 10 in the system, measured by the amount of loans granted, and ninth based on the amount of client deposits. In addition, it has more branches than traditional banks such as Banorte and Santander.
Banco Azteca became ‘the jewel of the crown ' of Grupo Salinas, the holding company that, in addition to Grupo Elektra, is involved in television (TV Azteca) and mobile telephony (Iusacell). For two years now, the bank has been generating more than half of the group’s revenue.
The key to its success is deposits. Banco Azteca is funded with the deposits from its clients at a very low cost and it then grants consumer credit at very high rates. Banco Azteca pays an average rate of 4.5% for demand deposits, which represent 97% of its total, while the average total annual cost (TAC) of a consumer credit for P$2,500 to be paid off in one year (52 weeks) is 120%, according to the on-line calculator of Tiendas Elektra.
“Many people thought that we could not compete and it has been the other way around: the bank has become the model that everyone is following,” Salinas Pliego says. The store-bank model has been duplicated by its direct competitors Famsa and Coppel, and by supermarket chains such as Wal-Mart and Chedraui.
METHODS QUESTIONED
The Elektra-Banco Azteca model is as controversial as Salinas Pliego. Some acknowledge him for having given credit to millions of people who are ignored by the big banks. Other question him because of his high financial spreads and his collection practices.
Hugo V., former owner of a small clothing factory that made blouses in Ciudad Nezahualcóyotl, got to know the two sides of the coin of this model. With credits from Salinas Pliego companies, he furnished his home. He had enough to even buy a home entertainment system. For several years Hugo was a client who paid on time. There were weeks when he paid up to P$650. He even obtained a couple of loans -one for P$25,000 and another for P$15,000 -to finance his business.
But the factory did not prosper and Hugo V. wound up without any income. He fell behind in his payments and began to receive visits from bill collectors at his home. They demanded payment and threatened to repossess goods he had purchased. “They came at any hour of the day, once, at around nine in the evening, three guys, very arrogant and mean looking, saying: ‘We’ll expect your payment tomorrow and if we don’t get it, we’ll turn your home over to our legal department,'” Hugo V. recalls. The debt doubted due to the interest on late payments. In the end, he restructured his debt and today pays 495 pesos a month.
In December 2007, these practices got Elektra onto the front cover of the U.S. magazine BusinessWeek with an article entitled The Ugly Side of Microlending. The story emphasized that the store’s interest rates were three times higher than that of the worst lender in the United States and it criticized its bad collection tactics (it described the case of a collection agent who openly discredited those who did not pay on time, pasting up their photos on the street with the caption saying “don't lend them money because they don’t pay”).
COMPETITION
Beyond what the press says, the image of Salinas Pliego is undoubtedly one of an audacious businessman, but also of a polemic figure. If in the television business he competes against the chairman of Televisa, Emilio Azcárraga, in the cellular phone market he’s up against none other than Carlos Slim. And now, taking advantage of the boom in the sector, he is thinking of investing in mining, today run by Alberto Baillères (Peñoles) and Germán Larrea (Grupo Mexico), two of the most powerful men in the country. “I like to have big rivals so that there’s some point to the game,” the business magnate says.
Not everyone believes in this declaration of principles. In an open letter to Salinas Pliego, political specialist Denise Dresser said, among other things,that “you state that you ‘like to compete.' But how can we forget the campaign of demonization that -from the TV screen- was launched against anyone who might have thought of promoting the idea of a third television chain. How we forget the insults heaped upon Isaac Saba when he contemplated the idea.”
The businessman's most recent scandal is the confrontation with the Federal Electoral Institute (IFE) due to their differences concerning the rules for broadcasting the spots of the political parties.
When dealing with investments, this attitude generates its own reaction. Lawyers' offices, in charge of conducting investigations for their clients, what is known as due diligence, know that if the name Ricardo Salinas Pliego appears on any file, it is necessary to be doubly careful concerning the form and degree of involvement of the Mexican businessman. His name is scrutinized with a magnifying glass as a result of his skirmishes with the SEC in the Codisco case. The U.S. government has disqualified him from once again heading a publicly listed company in that country until 2011 (see box on page 47).
Some mutual fund managers who have invested in stocks and debt of Grupo Salinas companies, admit that there is a sort of “Salinas risk” associated with such securities. “They are good businesses, but there is always a lot of noise around them. There is definitely some type of discount applied to his companies based on this type of noise,” according to Wilbur Matthews, chairman of the Global Cowboy Investment, headquartered in San Antonio, who has handled Elektra and TV Azteca bonds.
This does not mean that it would be bad business to have the magnate as a partner. “He has very good businesses and he runs them in a very specific way. This way is sometimes good and it is sometimes bad for his investors -it depends if their investments are in capital or debt- but, in general, he has very solid and stable businesses,” Matthews concludes.
THE FIRST STEPS
The new entry into international markets is not the first. In 2005, barely three years after having opened its first branch in Mexico, Salinas Pliego began putting the Banco Azteca model to the test internationally. In doing so, Salinas Pliego chose Central and South America, where there are countries with large low-income populations that lack banking services.
Entering the Brazilian market, even gradually, is like entering the major leagues in retail and banking. Both sectors are characterized as having very developed markets and heavyweight national competitors.
Salinas Pliego chose the coastal state of Pernambuco, President Lula's native province, to begin operations in that South American country. This area, in northeast Brazil, has historically been one of the most backward in terms of economic development. During the Lula administration, its economy has received a new boost and now it is one of fastest-growing areas of the country.
The region is in full development thanks to its port and agricultural activities and a growing maquiladora industry. It is also home to a new joint refinery between Brazil and Venezuela. The metro Olinda-Recife area has about 30 million inhabitants and it is there where Salinas Pliego launched his offensive. There is also little competition for Elektra. There is only Cencosud, the Chilean supermarket chain and some regional retailers such as Casas Maia, Ricardo Eletro, and Insinuante.
In 2008, Elektra and Banco Azteca inaugurated 19 branches in Brazil. The group wants to extend its operations to other nearby states, such as Ceará and Bahía. “We have focused our batteries there,” reports Luis Niño de Rivera, vice-chairman of Banco Azteca.
Salinas Pliego estimates that in the next five years, the group could have 2,000 stores in Brazil, and that this operation could even be bigger than what the group currently has in Mexico.
For some analysts, Elektra’s plans will not be easy to cement. To grow at such high rates, it would have to extend its operations to other areas and face the big national retailers, such as Casas Bahía, Magazine Luiza, Ponto Frío, and Colombo. These companies have major financial resources and broad experience in granting credit to the low-income strata of the population. In addition, they too are beginning to enter northeast Brazil.
“To arrive at 2,000 stores it would be necessary for them to be present in the entire country. For the time being, it would be more important to, in a certain way, be protected against the direct competition from the market leaders,” according to Marcos Gouvea, director of GS&MD, consultancy firm specializing in retail, with headquarters in São Paulo.
Nor will Salinas Pliego enjoy the competitive advantage that he had in Mexico when Círculo de Crédito was created. It is a system of credit information and analysis focused on the low-income strata of the population that made the Elektra and Banco Azteca model take off. In Brazil they are very focused on lower cost centralized systems of credit information that all the banks and retailers use, Gouvea adds.
If Salinas Pliego wants to enter the ring, he will have to compete by offering lower credit costs, which will not be easy in such a competitive market. A year ago, Banco Azteca do Brazil began to stand out due to its rates, but more recently, they have become among the highest in the country.
According to data from Banco Central do Brazil, at the beginning of March Banco Azteca interest rates on personal loans (18.72%) were the third highest among the country’s 96 banks. The same occurred with interest rates on consumer credits for acquiring goods (8.54%), which were the third highest among 49 credit institutions.
Heading for the north
Salinas Pliego is heading south but dreaming of the north. During the past year, the businessman acquired equity in Circuit City, the second largest computer and electronics retailer in the United States, which had filed under Chapter and was in talks with its creditors.
In November, he boosted his equity stake to 28% and began negotiations with the company and its creditors to acquire it. With a network of 1,500 stores in the United States and Canada, Circuit City was a company in line with the Elektra business model. In addition, it was the passport for entering the retail industry in North America with an enviable market share. Since Salinas Pliego cannot run a publicly traded company for three years, the businessman's proposal was to buy Circuit City and delist it from the stock exchange.
However, in January of this year, Circuit City and its creditors decided to liquidate the company and Salinas Pliego lost the 39 million dollars that he had invested. “We wanted to rescue the company. I thought that someone had to compete with Best Buy, but regrettably the group of banks that had the senior debt decided that they wanted to liquidate the company and recover their money immediately,” Salinas Pliego explains.
But he is not willing to throw in the towel. Encouraged by the good performance of Azteca America, the group’s television subsidiary in the United States, and the large population at the base of the pyramid, the businessman is awaiting opportunities.
“We do not contemplate an alternative option at this time for the United States, but we are attuned to any opportunity that might arise in the future,” he indicates.
An acquisition or a joint venture with a retail or electronics firm would be an ideal move for Salinas Pliego, who would not require a banking license to grant credit in the United States. Through Elektra or another company, credit can be granted without the need to receive deposits.
However, this would also come up against strong rivals. Among the potential competitors of the Elektra model in the United States is Rent-a-Center, a company that rents of furniture and electronic and other appliances with the option to buy, with more than 3,000 points of sale. It would also compete with savings and loan associations and several credit card companies.
The regulatory problems and the authorizations for its bank abroad can also represent a delay in Salinas Pliego’s plans. Peru took 10 years to grant him the license. Argentina has taken two years and still has not made a decision.
With the situation with Codisco, Salinas Pliego delisted all his companies in the United States and was slowly doing without financing via the stock market. But that is not an impediment to growth. Elektra alone closed 2008 with a cash account of almost P$12.62 billion.
But would Salinas Pliego again list his companies in the United States some day?
“Never say ‘never,’ ever,'” the businessman concludes.
(With information from Bárbara Anderson, Alejandro Ángeles, Gonzalo Aránguiz, and Adolfo Ortega).
THE SPECTER OF THE SEC
At the end of 2008, when Ricardo Salinas Pliego wanted to buy Circuit City, the second largest electronic and electrical appliance chain in the United States, he sent a letter to the Securities and Exchange Commission (SEC). The businessman argued that the sanction that he had accepted in 2006 as part of an agreement with the SEC, did not prevent him from closing the purchase, because his plan was to remove Circuit City from the stock market and to transform it into a “private” company.
In January 2005, the SEC accused Salinas Pliego of earning 109 million dollars on the New York Stock Exchange behind the backs of the minority shareholders of TV Azteca. It accused him of “not properly reporting” an alleged triangulation with Unefon debt for 325 million dollars, acquired by a offshore company known as Codisco (property of Salinas and his then partner and chairman of Unefon, Moisés Saba) at a third of its value. According to the SEC, Codisco resold the debt to TV Azteca at its original price. Grupo Elektra admitted afterward that Codisco was “indirectly” tied to Salinas and Saba, but denied the accusations.
In September 2006 and without admitting to the charges, Salinas Pliego paid a fine of US$7.5 million and agreed to refrain from running any company with shares trading on U.S. stock exchanges for five years (up until 2011).
Finally, Salinas' plans were not realized. Circuit City chose bankruptcy.
Hernán Iglesias Illa / New York