A Venezuelan success story

Since we’re on the topic of FarmaPatria, I thought this paper from MIT’s Sloan School was interesting. The authors, Cyrus Gibson and Ari Levy, tell the story of Locatel.

It’s so rare to read something praising a succesful, innovative and, yes, private Venezuelan business initiative.

The money quote, discussing Locatel’s modest beginnings in an industrial section of Caracas:

“The results astounded John and Luis (the founders). From the opening day there were lines into the streets waiting to get in. Contrary to expectations the store attracted customers from far outside the neighborhood, including many from upscale parts of Caracas…

From 1999 to 2004 the number of stores grew from 6 to 37 (Exhibit 1). At one point, stores were being opened at the rate of one per month. Stores were almost universally successful. Most achieved breakeven in the first day of operation, compared to similar businesses in the United States which required over four years. Store sales grew from $10 million to $221 million. During this period, Locatel, through its stores and supply and wholesale business, became the number one player in the medical  equipment market, and the number two player among the pharmacy retail chains, accounting for 5% of total sales of medicines in Venezuela. At the same time, Locatel was able to maintain a uniformly high quality of store appearance and service. Ratings by large suppliers and third-parties showed Locatel’s brand image and consumer reputation were the best in its industry in the country.”

27 thoughts on “A Venezuelan success story

  1. Here, I’ve done Arturo’s work for him…

    Obviously, the company is so successful because it charges a large profit margin. A real socialist enterprise would be squalid, disgusting and nothing you need would be in stock, because it would charge solidarity prices and not spend money on silly prissy things like logistics and cleaning. What does this company even do!? They produce nothing, and just mark up prices!

    Chavez merely seeks to eliminate the middle man like this horrible company, that profits by gathering thousands of items from disparate locations around the world and selling them in a single place. Why should Venezuelan consumers pay extra money simply because they are not purchasing items in quantity of one million directly at the front door of the factory? This new enterprise will eliminate the mark up caused by transportation, stocking and so on, selling directly at the cost of production.

    • How many pharmacies were destroyed by the US in the bombing of Iraq and Afghanistan? you forgot this one

      • Yes, great point. Also all the pharmacies destroyed in the US invasion of Libya! Not to forget, the US invaded Libya three times, once in 1800 or so, again in 1942 to chase out some innocent pro-Palestinian German tourists, and now again to steal Ghaddafi’s oil wealth. They probably decimated the health care system every times. Will these Yankees ever stop?

        • That’s why Cuba deserves more respect, they did not destroy a single pharmacy when they invaded Venezuela, the only country to attempt to do so in the last 50 years. (Iam ignoring the current silent invasion)

    • The idea that one of the most corrupt governments on the planet is eliminating the ‘middle man’ by getting into the pharmacy business….
      What can i say? Why am i even responding to this?

      • Your response would amuse me, if it were not so depressing. I guess chavistas have devolved to the point that a satire of them is difficult or impossible to tell apart from the real thing. ;)

        • Where’s the emoticon for red face. Satire? Dude, I thought you were a chavista having some sort of psychotic episode. Bad. Very bad. ;)

  2. I have a cousin that have worked with this company for many years in the accounting area, and like the working environment in the company

  3. Oye Juan, erm, cmon my man, break even in the first day of operation? Cuanto cuesta montar una tienda en Venezuela Juan? Maybe un puesto en el mercado can break even in the first day -in fact it would have to, but a proper shop? I don’t believe that.

    • Alek,

      I don’t want to be overly cynical, but I just can’t stop myself…

      Medical supplies get preferential CADIVI dollars. Given the opportunities for playing games with the system, I wouldn’t be shocked to find out that they broke even long before opening their first store.

      • Well, I don’t how the gaming of CADIVI works Roy, but merely from a commonsensical viewpoint: there’s no such thing as a legit business of that size and type breaking even in the first day, unless we’re talking about selling lochas a fuerte, or as some do, purchase expired medical supplies for next to nothing and sell at full price.

        I did read the paper, and noticed that their performance in the US is less than stellar. Mind you, thinking that you can replicate Venezuelan conditions elsewhere is sheer lunacy. The Venezuelan businesses that have thrived outside Venezuela in the last few years are few and far between. Smartmatic is a good example, though you have to give to them the shrewdness to have realised in what type of market / environment could they replicate their Venezuelan success: utterly corrupt countries, where eager to be bribed officials are a dime a dozen (Mexico, Bolivia, Philippines, Zambia…).

        I was commenting about the Venezuelan business class the other day, tigres de zoologico I like to call them: phenomenal growth in Venezuela, with its unique set of conditions, where mercantilism still rules supreme, where CADIVI gaming antics may allow for breaking even in the first day… Throw them into the real jungle, and they last for about a day.

        As Locatel owners seem to have realised, only in Venezuela can you expect to grow at those rates.

        • So , if you have a bad performance in Venezuela it is because CADIVI and the primitive mercantilism and if you have good performance it is also because CADIVI and the primitive mercantilism. If “only in Venezuela you can expect those rates” what is everybody waiting to come and take advantage of this paradise instead of struggling in the “real jungle”?

          • Raul, I didn’t say that because of CADIVI you have to expect a bad performance. I simply said that I don’t believe that a legitimate business can break even in the first day of operations. Roy then said that given the possibilities with CADIVI it wouldn’t surprise him that some business could break even in the first day. I don’t know how CADIVI could be used to ensure a business to break even in a day, but I do know this: in the real world no one, nowhere, can expect to break even in the first day, though I am more than happy to retract if you show me examples of such success.

            What is everybody waiting to go and take advantage of that paradise, when those returns can be realised? Could it be because Locatel’s phenomenal “success” -of breaking even in the first day- exists only in that academic paper? Why would businesses not take advantage of such conditions, replicate Locatel’s model, and laugh all the way to the bank, right? If we look at inward investment in Venezuela it would seem that, actually, very few are willing to risk it, while most international businesses operating in Venezuela wanting to get out. Why? Very simple, because break-even-in-the-first-day is a crock of shit.

            But hey, if you run another one of those businesses that “break even in the first day” please do share the knowledge bro, I, for one, would love to move back, and break even before arriving.

            • Alek,
              I just think that Sloan´s faculty wrote the paper because they thought there was something interesting to learn from Locatel´s experience, even for students living in “the real jungle”. I don´t think it is just a business case to illustrate how “exchange control gambling” works in an underdeveloped country.
              BTW when you know how to breakeven the first day, you don´t share de knowledge due to strategic reasons.

              • Y dale con lo del exchange control gambling. Eso no lo traje yo a colacion panita, entiendes, o no? Simplemente hice un comentario sobre otro previo sobre CADIVI, y sigo sin creer que Locatel haya recuperado en el primer dia el costo de montar una tienda, en ningun lado, a pesar de lo que digan ellos, o el paper de Sloan. Es muy dificil entender eso?

            • Guys I’m pretty sure they mean Operational Break Even, meaning that the stores start earning money in the first day of operations, that does not mean that they get back their investment in the first day!…No matter what CADIVI connections you have no Retail business in Venezuela can recuperate all the invested money in 1 day

        • Here is how you “game the system”:

          Suppose you have $100,000 to invest in your U.S. bank.

          1. Set up a business in Venezuela that allows you to import goods into Venezuela with CADIVI dollars. Medical equipment is a good choice. It is on the list CADIVI priority items.

          2. Purchase Bs. with your $100,000 using the parallel market. This will currently net you about Bs.F 900,000.

          3. Find a Panamanian supplier who will sell you $200,000 worth of medical supplies. However, you request that he provide you with an invoice for $400,000, double the actual value.

          4. Place your order for CADIVI dollars with this invoice. You will have to pay CADIVI for these dollars at the official rate of 4.3, so you will pay CADIVI Bs.F about Bs.F 900,000, the amount you got for your $100,000.

          With me so far?

          5. When your supplier receives the $400,000 he then kicks back to you the extra that you had him pad the invoice with, or in this case, $200,000, which goes directly back to your U.S. bank account.

          See? You have already doubled your money, and you haven’t even opened your store yet!

          6. Finally, the merchandise arrives in Venezuela, where you sell it, probably for double the Bolivar price that you paid for it, and receive Bs. 1,800,000.

          7. You can now use these Bs. to fund your next shipment, or you can sell them and receive dollars outside in the amount of $200,000., so you would then have $400,000 in your U.S. bank, instead of your original $100,000.

          Now, in practice, you have overhead costs, legal costs, shipping costs, and, most of all, payoffs to all of the officials in the chain of the CADIVI approval process. This system has to feed a lot of hungry hungry, greedy mouths. Let’s say you spend $100,000 on all of that. You have still tripled your original seed money. Not a bad day’s “work”…

          Look, this was a vast oversimplification of how the system works, and I used nice round numbers just for the example. But, I hope this explains how a business in Venezuela can “break-even the day they open”, or even before.

          • Thanks for illuminating me Roy, I was certainly in the dark ages when it comes to ways of gaming CADIVI. That being said, Locatel might, notice the conditional, be able to pull that one in Venezuela and tell the naive kids from Sloan that they break even in the first day. But my argument still stands: such a sweet deal you may be able to do in Venezuela, but where else? And this is why I say that believing that Venezuelan unique conditions can be replicated elsewhere is sheer lunacy. The fact that Locatel has ventured into the US market, and has failed to grow as it has done in Venezuela just proves my point.

            • Alek,

              You are right. Only in an irrational economy is such a thing possible. And only in an economy fueled with petrodollars could this insanity have been sustained for this long.

              In fairness to these kids, they may not be gaming the system quite as grossly and as blatantly as in my example, but I would bet long odds that their U.S. and other foreign operations are being subsidized by their Venezuelan operations to remain afloat.

          • I’ll say it was a vast oversimplification, Roy. It also has HUGE holes of magical realism, appropriate to a poet’s offering. Let me explain.

            So you have $100K to invest in supplies, where you can make a nice profit from your dealings with Cadivi. Dat so? Depending on what those medical supplies are — huge range in costs and complexities — in no way will you have enough to pay for: first and last month’s rent on your ‘local’, payable on day one if not before; monthly salary/salaries pro-rated for that first day; signage; ‘estantes’ for merchandise and POP displays, where applicable; counter; desk; chair(s); cash register(s); petty cash; flooring; paint; repairs, where needed; advertising, payable on day one; utilities, pro-rated for that first day; etc.

            • I probably forgot a few other expenses, as I did the legal and accounting fees, pro-rated for day 1. Dreaming is free.

  4. I think Locatel, Pharmatodo, Farmapatria, and demas are missing the point, the drug is in the water!

  5. Guys I’m pretty sure they mean Operational Break Even, meaning that the stores start earning money in the first day of operations, that does not mean that they get back their investment in the first day!…No matter what CADIVI connections you have no Retail business in Venezuela can recuperate all the invested money in 1 day

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