Bimbo, Thomas’ English Muffin, Entenmann’s, Sara Lee, Mrs. Bairds, and Canada Bread are just a few of the brands that Mexican bakery giant, Groupo Bimbo (affectionately referred to as Bimbo) owns and manages. Today, the company grosses more than $14 billion annually, operates 165 plants in 22 countries, and employs more than 128,000 people globally. With a market-capitalization of over $11 billion, Bimbo also owns more than 100 brands and sells its products in 95% of Walmarts, Krogers, and Costcos in America. But in 1945, when the six founders of Bimbo started the company, they set their sights on manufacturing and distributing bread to people in Mexico City, for whom access to fresh bread was very difficult. In other words, they were focused on targeting nonconsumption in Mexico.
In the beginning…
It is easy to look at Bimbo’s success and not appreciate the company’s humble beginnings. The odds of success were stacked against Bimbo. In 1945, Mexico, like many other countries at the time, was very poor, and certainly much poorer than it is today. The country’s GDP per capita was just over $2,000 and it had a population of just 22.5 million. For comparison, the United States’ GDP per capita was around $12,000, with a population of 140 million. Life expectancy was around 45 years and more than half the country lived in rural areas and engaged in agriculture—typically a sign of poverty in poor nations. But it was in these circumstances that the founders of Bimbo saw immense opportunity to create a company that would serve the average Mexican a loaf of bread and several other pastries.
Although today Bimbo sells more than 10,000 different products, the company started by baking and selling small loaves of white and rye bread. Innovation, however, has always been at the heart of the company. In 1945, Bimbo executives noticed that many Mexicans were being sold moldy bread wrapped in opaque packaging. Capitalizing on this opportunity to differentiate itself, Bimbo’s first product innovation was wrapping its bread in cellophane bags. The transparent packaging allowed customers to inspect their products before purchasing, and the innovation succeeded. Four years after its founding, Bimbo had tripled its product offerings and built its first depot outside Mexico City.
Bimbo was growing, but if growth was to continue, the company needed to adopt a new strategy.
Integrating to cut costs
One of the many complaints investors have when assessing opportunities in “frontier or emerging markets” is the region’s lack of adequate infrastructures and institutions. Indexes such as the World Bank Ease of Doing Business and Transparency International’s Corruption Perception Index only serve to bolster the notion that poorer countries must fix these institutional and infrastructural challenges before they can attract investments. It is a perfectly understandable notion, but unfortunately also an incorrect one.
One of the distinct features of an economy with vast nonconsumption is the lack of infrastructural and institutional competency. Harvard Business School professors, Tarun Khanna and Krishna Palepu, call these institutional voids. Instead of running away from them, bold and courageous innovators who choose to target nonconsumption integrate around them. And that is exactly what Groupo Bimbo did.
In order to guarantee a predictable supply of wheat used in its factories, Bimbo built and acquired several flour mills. With a milling capacity of 2,000 tons per day, in 1997, it became the number two flour mill in the country. While the upfront investment was high, Bimbo’s mills quickly transitioned from a cost center to a profit center as the company began selling excess output to outside customers.
As if flour milling wasn’t enough, another area where Bimbo needed to integrate was in the actual farming and cultivation of wheat. In the 1980s, more than 60% of the wheat Bimbo used was imported. In order to reduce its dependence on foreign wheat, Bimbo decided to invest in Mexican farmers. The company provided capital to Mexican farmers to purchase quality seed stock and then purchased the harvest from the farmers.
The low quality of education in poorer countries and the lack of human capital is a constant complaint heard from employers. But instead of complaining, again, Bimbo integrated. The company put employees through a structured two-year management program where they learned both technical skills and the intricacies of the Bimbo business.
Bimbo integrated in many other areas and its integration paid off—Bimbo was able to keep its prices 15% to 25% lower than its competitors. It’s important to note that the company’s success is neither an anomaly nor an accident. It happened because Bimbo executives and managers understood that they would have to make investments in Mexico that they might not make in other more developed markets.
The Mexican Prosperity Paradox
Today, while circumstances in Mexico are much better than they were 70 years ago when Bimbo was founded, Mexico is still struggling. Between 2012 and 2014, Mexico unhappily welcomed two million more people into poverty. Even with Free Trade Agreements (FTA) with more than 40 countries, including the United States and members of the E.U., and with the hardest-working workers in the world, Mexico still struggles to prosper. Mexico’s GDP per capita has increased by a little over one percent per year since its 1994 NAFTA deal while America’s and Canada’s have increased by over three percent per year and five percent per year respectively. We must ask, why?
The answer lies in the “Mexican Prosperity Paradox.” Considering Mexico’s proximity to, and FTA with, America, the country understandably tries to take advantage of that opportunity. As a result, it invests heavily in innovations it can sell to America. For instance, more than 80% of Mexico’s $400 billion of exports in 2014 went to the United States.
Mexico is running so fast on the Prosperity Treadmill but isn’t making as much progress as one would expect. That’s because many of the innovations that Mexico sells to America are efficiency innovations, and these have a different impact on the economy than innovations targeted at nonconsumption. While they are important, their primary purpose is not to foster economic prosperity.
For Mexico to prosper, it needs to go the way of the $14 billion Bimbo and invest heavily in the nonconsumption economy. Mexican investors, development practitioners, and policy makers need to encourage investments that can transform nonconsumption to consumption. This will be difficult. It will feel counterintuitive. It will require integration. But it is the surest path to prosperity because not only does it provide a product to the average person in society, but it also creates much needed employment while doing so. Mexico needs to copy the Bimbo playbook.
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