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Growth Markets

Brazilian retailer Lojas Renner keeps pace with the country’s hot economy.

by David Rosenbaum, February 2011

There’s an old joke: “Brazil is the country of the future . . . and always will be.”

Today, however, the punch line no longer hits the mark.

In 2009, with a GNP of US$1.6 trillion, Brazil had the world’s eighth-largest economy. With its GDP growing 7.5 percent in 2010, Brazil stands poised to become one of the world’s top five economies by 2014, which is when it will host the world’s second-largest sporting event, soccer’s World Cup. (It will host the world’s largest sporting event, the Olympic Games, in 2016.)

Brazil’s furious economic growth is creating, for the first time in the country’s history, a stable and vibrant middle class with an increasing hunger for consumer goods. This presents opportunities and challenges for Lojas Renner, the country’s second-largest department store chain. Lojas Renner management is responding by expanding the number of stores (from 99 in 2008 to 135 by the end of 2010), moving into new geographic territories throughout the country, and implementing a new IT strategy in partnership with Oracle to manage and leverage growth. “We plan to double the size of the company in the next five years,” says Lojas Renner CIO Leandro Balbinot.

To do that successfully, management realized, Lojas Renner needed a more flexible, standardized, and sophisticated IT architecture. Balbinot’s team selected Oracle tools and capabilities that could be deployed to old and new stores while the company focused on the business rather than depleting its energies by building an enormous and expensive internal IT function.

The strategy Lojas Renner developed to meet those needs, says Balbinot, calls for what he describes as an “IT-free” model leveraging software as a service (SaaS). This, he believes, will enable the company to access Oracle’s global expertise and scale without a great deal of preplanning—and keep Lojas Renner’s IT focused on growing the business rather than on maintaining and upgrading (at great expense) its own systems, applications, and processes.

This model, Balbinot says, was once a dream but “is now a strategy.” And according to Balbinot, Oracle’s suite of e-business and retail applications, delivered in a SaaS environment, makes the strategy possible—and one Lojas Renner’s management hopes to use to capitalize on in this unique moment in Brazil’s history. 

Brazil’s Future Arrives

According to São Paulo, Brazil–based analyst Rogerio Rizzi, a Monitor Group partner, “Brazil is living one of the greatest moments in its history.” 

As the twentieth century began, Rizzi says, Brazil was an agricultural country, exporting commodities such as coffee and utterly dependent on the prices those commodities could fetch on the world market. In the 1930s, Brazil began to industrialize, building steel mills and, by the 1950s, manufacturing automobiles. By the 1970s, Brazil’s economy was booming; the country’s population was growing and, following the traditional path of developing nations, migrating from the countryside to the cities.

But that growth was fueled by borrowed money. As Brazil’s debt rose, so did inflation. In the 1980s, inflation was rising 30 percent a month, and when global commodity prices collapsed, Brazil went broke, the slums that ringed Rio de Janeiro and São Paulo exploded with misery and crime, and the joke about Brazil’s being a country with a future that was forever receding began making the rounds.

According to Rizzi, paying off Brazil’s massive international debt led to a wave of privatization, the opening of the economy to entrepreneurship, and a more stable currency. By 1995 inflation had settled in at 10 percent a year. Today it’s 3 percent—a rate that Brazil has maintained for the past decade.

“Right now,” Rizzi says, “inflation is under control and Brazil has something it never had before: credit. Before, if you bought a car, you paid cash. Today, credit is fueling the economy. And last year, for the first time, Brazil became a creditor nation, not a debtor. Its reserves are higher than its foreign debt. That’s almost unthinkable for a Brazilian who grew up in the 1980s.

“Today, the middle class is growing,” continues Rizzi. “By serving that growing middle class, Lojas Renner has become one of Brazil’s success stories. Right now Lojas Renner is in the sweet spot.” 

Choosing Oracle

When Balbinot—who grew up in the south of Brazil and had been familiar with Lojas Renner since childhood—joined the company as CIO in 2008, he knew the company could expand to satisfy Brazil’s growing consuming class. But he also found a company whose outmoded IT architecture was difficult to scale and lacked the functionality to leverage massive stores of collected retail data. This prevented Lojas Renner managers from planning for demand at the individual store level, a problem that constrained potential revenue growth and drove operating costs up as the number of stores grew. 

Without the ability to forecast demand in a granular and comprehensive manner, or scale to manage the ever-growing volume of retail data collected, individual stores were forced to predict demand in a seat-of-the-pants fashion. This led to stocking too many of some SKUs (forcing spontaneous sales and eroding overall profits, even as per-store sales rose) and too few of others (leading to out-of-stock situations and loss of sales). Without the ability to leverage point-of-sale information such as which stores were selling more SKUs in one category and which were selling more in another, inventory costs escalated, because it was necessary to keep items in stock to supply stores uncertain of what would sell at what rate. Lojas Renner’s demand planning “was done at upper levels, was not detailed, and was done by average,” Balbinot says. “So we got average results.”

But Balbinot and Lojas Renner wanted better-than-average results, so executives needed better IT and, with it, better forecasting and operating capabilities. Local IT suppliers, “although good,” according to Balbinot, lacked the world-class capabilities required to reduce markdowns, cut inventory costs, and manage growth. So management turned to Oracle.

“We wanted access to the global knowledge and expertise of Oracle,” Balbinot says, citing Oracle Retail Demand Forecasting, the solution his team selected to help managers plan per SKU in every Lojas Renner store. Oracle Retail Demand Forecasting, tightly integrated with Oracle Hyperion Planning (which connects financial and operating planning models), can predict demand item by item and store by store, and integrates with replenishment, merchandise planning, promotions, and pricing —providing a single forecast to drive the entire enterprise. And, as in any other retail environment, improving sales efficiency depends on getting a handle on supply and demand. 

Supply and Demand: Old Story, New Technologies

“What we needed to do,” says Lojas Renner Director of Process and Corporate Projects Nicolas Simone, “was focus more and more on demand forecasting. We needed more accuracy; we needed to be more specific in our forecasting. Oracle Retail Demand Forecasting could provide that, and we knew that Oracle has lots of specialists to support the system.”

Simone says management is starting to understand the model and the new workflows for allocating SKUs to stores according to demand forecasting and believes Lojas Renner will begin reaping the full benefits of the tool in 2011.

But the implementation of Oracle Retail solutions, including Oracle Retail Markdown Optimization and Oracle business intelligence solutions (which monitor business activities in real time, providing alerts on out-of-stock situations and thereby solving critical supply chain problems), already allows Lojas Renner staff to measure customer behavior and modify product offerings based on local tastes. Now managers can clear stock (avoiding markdowns) and accurately meet market demand (avoiding out-of-stock situations). In fact, managers have been able to reduce markdowns by as much as 20 percent through better demand planning. This, in turn, has lowered inventory costs and enabled inventory managers to focus on the right products for each store. As a result, Oracle Retail applications have helped Lojas Renner increase gross margins by 2 percent, a significant improvement.

On the supply side, the company needed to be flexible with its suppliers. “Supply chain excellence,” Simone says, “goes directly to the bottom line.”

According to Simone, Lojas Renner’s suppliers are a key to the company’s continued success, because one challenge that comes along with Brazil’s growth is competition. “Suppliers have more options now for whom to work with,” he says. “We need loyalty from our suppliers.”

To help ensure that fidelity, Simone says, Lojas Renner is trying to give its suppliers more visibility into its demand forecasts so they can adjust their capacity in advance. Simone and his team built a portal with Oracle iSupplier Portal (part of Oracle E-Business Suite) to give suppliers visibility into the company’s demand system.

“We have between 700 and 800 suppliers, both big and small, from L’Oréal to Chinese suppliers to suppliers with home-based businesses,” Simone says. The portal enables Lojas Renner to give all of them “the big picture of their future with the company: volumes, order anticipation, a working partnership. We can say to our suppliers, ‘Let’s start booking production for next year.’” That, in turn, enables the suppliers to perform with greater efficiency and keeps them doing business with Lojas Renner. 

Retail Cloudburst

Lojas Renner’s greatest technological leap forward was its decision to move into the cloud, taking advantage of Oracle’s SaaS offerings. According to Balbinot, the advantages of the SaaS model are multiple and substantial.

Most importantly, Oracle’s SaaS solutions can provide his company with best-in-class applications on a continuing basis without incurring the time lag (and costs) that typically comes with upgrades implemented onsite. As soon as a new tool is developed, it’s available to Lojas Renner through the cloud. “A service can be updated by Oracle immediately after launch,” Balbinot says. And along with instant upgrades, the SaaS model ensures higher service levels than onsite applications. “High system availability is a great benefit of SaaS,” Balbinot says.

The CIO also stresses the cost flexibility SaaS can provide. Because in the SaaS model, the company’s IT costs are based on actual usage rather than on a fixed number of licensed seats and a fixed estimated usage of computational power, Lojas Renner can save money by reducing the number of users and cutting back on computing power if demand falls. And it can do so without a price penalty. Costwise, Balbinot says, “it’s a very flexible model.”

Along with its ability to save money over the course of the year, SaaS has a similarly low cost of entry. “You don’t need to invest a lot in the beginning,” says Balbinot. “You pay only for what you use.”

Finally, Balbinot points out that Lojas Renner not only is growing organically but is also looking to grow through mergers and acquisitions. Given that aspect of its strategy, SaaS enables the company to implement its Oracle applications in acquired stores and integrate them into its enterprise system much faster than if it had to rip out each store’s old IT system and install its own.

One reason the company was able to move relatively easily into the cloud, according to Balbinot, was that its core systems were all on the Oracle platform to begin with, so Lojas Renner could be confident that it would have the best Oracle experts working on each of its software tools. But first, all of the company’s business processes had to be mapped so they could be integrated with the SaaS applications they needed to talk to. That task of mapping the businesses processes and old applications fell to Simone, who had to take into account all supply, IT, maintenance, and supply chain processes—and then all the processes for designing stores, doing architecture and construction, and opening stores.

Says Simone, “We want to create a platform for growth, and our plan is very fast.” (See “ Clear Reasons for Moving into the Cloud”). 

Challenges Ahead—for Brazil and Lojas Renner

The pace of Brazil’s economic growth—although it improves the nation’s overall standard of living and generates optimism inside the country and enthusiasm in global financial markets—does not come without challenges for the nation as a whole and for Lojas Renner in particular.

There are, according to the Monitor Group’s Rizzi, two big threats to Brazil’s continued prosperity, one external and one internal. Although Brazil’s economy is still growing in the wake of 2008’s global financial meltdown, neither the U.S.’s nor the European economy is growing. “Right now the world is continuing to buy what Brazil produces,” says Rizzi, “but if the global economy worsens and the world moves to a more protectionist model, it will be bad for Brazil.”

Internally, Rizzi says, Brazil’s economy is still being driven by government investment in infrastructure. “We’ve had good government for the past 20 years,” says Rizzi, “but we’re starting to see some complacency.”

Right now at Lojas Renner, complacency is certainly not an issue. Even as it thrives along with Brazil, the company is bent on improving its processes and looking for efficiencies.

Simone says the company is “working on basic execution inside our stores. When we launch a new process, we launch it not with just KPIs [key performance indicators] but also with performance monitoring enabled by the automation provided by Oracle business intelligence solutions. We’re always asking ourselves, ‘What is the best way of working to guarantee that our customers are comfortable in our stores, and what is the best way to improve our selling?’

“We’re working to motivate store personnel,” Simone continues. “We have daily meetings to create a focus on indicators. We analyze our SKUs. We walk around the store, and that creates a positive psychological core that gives our people the power to sell.”

As Lojas Renner pushes into new territories, opening new stores in malls and points of sale throughout Brazil, Simone stresses the importance of standardizing stocking processes and stock layouts. “If a customer doesn’t find a product, we can’t sell it,” he says. “We want to automate the positioning of SKUs with alerts from RFID tags, supported by Oracle Retail. We hope to begin implementing this by 2011. We need to.”

“The economic growth in Brazil and the investment the government is making in infrastructure are pushing the whole market and driving our growth, especially in the regions hosting the World Cup and the Olympics,” says Balbinot, “We have to be prepared for all this growth, and Oracle will help us do that.”

In a country as vast as Brazil, where the long-hoped-for future of sustainable prosperity seems finally to have arrived, “we have a lot of space to grow,” Balbinot says. “Our brand is strong. The opportunity is here, and it is very large.”

 

For More Information
Clear Reasons for Moving into the Cloud

 


 David Rosenbaum is the former editor of CIO Magazine.

 
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