CEMEX: A Cement Company Which Crafted a Strategy to Serve the Impoverished in a Profitable Way

Urban poverty is as daunting an issue as rural poverty, which Professor C K Prahalad distinctly highlighted in his book, the fortune at the bottom of the pyramid, decades ago. Our subjective dominant logic, shaped by our own ideologies, experiences, interactions, and source of knowledge, has partially restricted our idea of poverty to the rural world.

As Prof. Prahalad says, the very assumption that the rural population is primarily poor and the urban population is relatively rich is a fallacy. In the developing world, more than one-third of the urban population lives in shanty towns and slums.

According to a recent World Bank report, fifty-five percent of the world’s population, which is approximately 4.2 billion inhabitants, live in cities, and by 2050 nearly seven out of ten individuals in the world would live in cities.

With more than eighty percent of global GDP generated in cities, urbanization can contribute to sustainable growth if managed well by increasing productivity, allowing innovation and new ideas to emerge (source: Worldbank.org).

However, the potential of growth and prosperity may remain a distant dream with impending challenges of poverty. More than one billion urban poor live in informal settlements contributing more to inefficiencies and chaos. The ability to build and finance a quality home has been beyond the means of most of the World’s impoverished.

The Genesis of private participation in deprived markets

Before the early 21st Century, the perceived role of private enterprises in addressing poverty and inadequacies in deprived markets was largely nonfigurative. The millennium development goals were originally developed without recognition of the role that the private sector could play.

The social contract of the private sector was later formulated and incorporated by the then Secretary-General of the United Nations, Mr. Kofi Annan. The Blue Ribbon Commission was organized by the United Nations Development Program on the private sector and poverty, which did most of the pioneering work.

The report of the Blue Ribbon Commission, which was issued in 2004, provided a significant impetus to active private participation in dealing with poverty-related issues, of which affordable and sustainable housing was one.

Building Houses Aren’t Similar to Selling Chips, Shampoos and Mobile Recharges

Over the past fifty years or so, most of the major multinational companies have discovered and realized the colossal potential of deprived markets. To serve them profitably, innovative and contextual business models have been developed.

Companies such as Unilever, P&G, Nestle, and ITC have been focusing and generating significant revenue and profit from this market. These companies not only had to work diligently on their marketing mix elements, i.e., product, price, place, and promotion but on their entire business model as well. 

Though profitably serving the deprived markets is a great challenge, the magnitude of this challenge increases multi-fold when the offer is a ‘home.’

CEMEX Strategy- Helping Poor Build Their Homes

We would all agree on the fact that any form of innovation is fundamentally meant to address a state of deprivation. Most, or rather, all innovative ideas were conceived to circumvent challenges when they are confronted with.

One such colossal challenge is helping people with extremely limited economic resources to build their homes, and mind it!! This help is not in the form of charity but the form of a profitable business.

One of the most basic and primary ingredients required to build a house is ‘Cement’. And ironically, the people who need it the most, have never been the target customers for cement companies.

My experience of internship with one of the largest cement companies in India twenty years back had provided me an opportunity to understand the business of cement in a closer way.

The trade sales of cement usually occur through channel partners, who cater to the mass retail market. In contrast, the non-trade sales are contributed by large institutional projects, which buy directly from the company, in most cases. The conventional network of distributors is a sort of a linchpin to tap the retail demand for cement. After charging their share of commission, retail discounts are provided on volume. So, it is obvious for impoverished with very little money to not get considered a customer ever, for something like cement.

However, an economic crisis during 1994 and 95 in Mexico, made a cement company, CEMEX, think differently to circumvent the crisis, which later became the core part of its business strategy. CEMEX is a Mexican multinational building materials company, founded in 1906 and has a revenue of around $20 bn.

The Mexican economic crisis led to a significant drop in domestic sales of cement. Part of this stemmed from legal barriers that broke down, paving the way for international competition. An analysis of hemorrhaging revenues by the company CEMEX led to a discovery of customer segments ignored for long by cement companies wilfully.

A deeper investigation of cement sales during the crisis by the CEMEX analysts revealed that though cement sales plummeted as much as fifty percent in the formal market, sales in the less quintessential low-income segment that consisted of people who mostly build their own houses without employing professional masons, registered a fall only by ten to fifteen percent. The leadership team of CEMEX understood that the over-dependency on the formal segment actually made it vulnerable and decided to reevaluate its strategy.

The most primary and obvious reason for cement companies to focus on the formal segment is the average revenue per customer. Though fewer big-ticket customers could generate most of the company’s revenues, the situation is just the opposite for low-income customers. At that time, it was estimated that sixty percent of the Mexican population earned less than $5 a day. The segment was relatively virgin and could become an engine for growth in the future.

The potential of this colossal low income relatively unserved market was also accompanied by its own set of challenges. Headed by Francisco Garza Zambrano and a consulting team from Business Design Associates, CEMEX performed in-depth market research, which provided key insights into serving this segment profitably.

Three key areas of improvement were identified;

• the first was to make credit accessible for the poor before selling cement;
• the second was to improve brand perception of CEMEX among these customers through building trust;
• and the third was to change or improve distribution methods and construction practices so that they deliver more efficiency and cost-effectiveness to low-income customers.

Inducing and sustaining behavioral change at the Bottom of the Pyramid

It is a known fact that the low-income segments lack financial discipline and hence, not considered to be creditworthy. Saving money is not standard practice for most low-income families, and Mexicans are no exception.

The best form of savings that a low-income Mexican family does take the form of tandas– a local neighborhood, family, and network of friends who pool money if and when they have to create an informal mini-corpus. Once a week, one of the members bids for the pool by deep discounting or lottery. However, this tanda system was not nearly as effective for housing. The Mexican men mostly ended up spending such amount on anything but constructive or meaningful activities.

CEMEX realized that women are the key drivers of savings in families, and particularly in Mexico, they are highly entrepreneurial. As a bold cultural innovation, CEMEX modified the existing tanda system and renamed it Patrimonio Hoy, in 1998.

The system not only created a trust-based platform to save money but also provided access to credit based on their savings and payment discipline. Patrimonio Hoy consisted of socios or partners, who get together to form a group, restricted to a maximum of three members. Each of these three members registered groups had to make a commitment of contributing 120 pesos per member per week for 70 weeks. The company charged 15 pesos per member per week as a membership fee and in return, provided benefits that were unprecedented.

The raw materials including cement were provided at a frozen price anytime during these 70 weeks. Technical consultation pertaining to the right quantity and quality of raw materials required to build a house or a single room was provided free of cost, which optimized the utilization of raw materials and minimized wastage. The personal visits of architects to customer locations created a great deal of trust in the low-income society.

In tandem with this system, it was also necessary for CEMEX to modify its distribution network. The conventional distribution system in which the distributors primarily cared about prices and discounts and the industry was driven by a price war, seemed to be a misfit. The new system demanded distributors to have excellent delivery capabilities, the high storage capacity of raw materials and inventory, and a good understanding and appreciation for this new low-income segment. It was also necessary to take a cut in commission to serve this segment, which would be compensated by volume of business.

After successfully rolling out Patrimonio Hoy in Mexico, CEMEX launched another initiative called Construmex, a platform for remittances, which would help many Mexican Diasporas residing in the United States to send money directly to CEMEX distributors and reserve construction materials for building their houses in Mexico. The system turned out to be way more efficient than other money transfer agencies.

Today, CEMEX is the fifth largest cement company globally, producing 87.09 million tonnes of cement a year, with an estimated cement production capacity of 93 million tonnes across its 56 cement production plants. It is present across America, Africa, Europe, Middle East, and Asia. It is a company focused on creating sustainable value by providing industry-leading products and solutions to satisfy customers’ construction needs across the world.   

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