By Manuel Bueno, Financial Services Strategy Consultant, Deloitte, Madrid
Codensa is a very successful utility company that serves 2.2 million customers in Colombia. It is controlled by Endesa, the largest electric utility company in Spain, which in 1997 took control of Codensa and Emgesa (this second company accounts for 21 per cent of the generated electric capacity in Colombia).
Codensa’s return over equity (that is, the rate of return over shareholders’ investments) has grown from 4 per cent in 2003 to nearly 12per cent in 2006. This is a measure of the current company's profitability. Furthermore, in July 2007, Codensa’s debt offer was oversubscribed three times, despite being in Colombian pesos rather than a more stable international currency and despite the jittery markets at the time (they still are). This was a bet the market made in favor of Codensa’s future stability and profitability.
Codensa caters to the Colombian low-income segment. According to the company’s 2006 Annual Report (in Spanish), almost 9 out of 10 of their customers were households. Out of the customers that are households, more than 80 per cent belong to the socio-economic population strata 1, 2 and 3, with an estimated annual household expenditure of US$ 250-450.
In value terms, households represented nearly 60 per cent of total sales out of which three quarters belong to the above mentioned social strata. In both these cases, strata 2 and 3 represent the lion’s share in volume and value terms.
Customer growth has averaged around 3 per cent since 2000, with the increase in the value of energy sales rising from 1 per cent in 2003 to 5.77 per cent percent in 2006.
How does Codensa do it?
Click here to see the table outlining Codensa's increase in customer penetration
First, it is run very efficiently. When Endesa bought Codensa a decade ago, loss of energy was nearly one quarter of its total energy output. Now it is less than 9 per cent. Loss of energy can be due to many reasons, ranging from theft to poor infrastructure management. To be able to reduce energy losses requires a constant, well-coordinated and interdepartmental effort. Only well-run firms can accomplish this for several consecutive years.
Codensa realized that even its success in the energy market would not bring long term growth. As current Colombian legislation sets market concentration limits of 25 per cent on companies in energy distribution, this would be a ceiling on growth for Codensa, which in 2006 had 21.4 per cent of the market. To keep growing regardless, Codensa decided to try something new in 2000.
Codensa’s management noticed that it had a critical mass of customers whom it knew relatively well. At the same time, it noticed that most of its customers did not own electrical appliances. By offering credits to stimulate ownership, the firm’s revenues would increase. When no bank stepped forward at this opportunity, Codensa decided to go solo. They offered loans to customers to enable them to purchase electric appliances while allowing them to pay back the loans through their utility bills. The loan rate was fixed at the average rate in Colombia. Codensa also signed agreements with retailers to offer appliances targeted to their customers.
It was a runaway success. Today, up to 18 retailers have joined into agreements with Codensa, offering up to 90 different brands of electronics to their customers. These are some telling figures:
- 74 per cent of the customers who ask for a loan are successful in obtaining it.
- 95 per cent of its borrowers belong to the population strata 1, 2 and 3. Out of this percentage 32 per cent have never had any relationship with the banking sector (not a surprise in a country where 60 per cent of the non-banked population does not even know where to find a banking branch).
- Only 5 per cent of their borrowers default, even though Codensa is not allowed to cut electricity on those customers who do not pay back their loans (and this is written in every bill).
Codensa now sells approximately 30 per cent of all legally sold electric appliances in Bogotá. Notice the fact that, by selling electric appliances to its customers, it increases revenues in two ways:
1) Through the purchase of equipment
2) Through increased electrical expenditure when using the acquired products.
Energy consumption has increased by 4.7 per cent in every household with outstanding loans. Thus there has been an increase in energy usage per customer, thanks to non-energy services.
This means that, according to the slide shown above, the increase in customer penetration happened because of an increased penetration in the firm’s customer base.
But it has not stopped here. After issuing payment cards (often used as credit cards because they enable customers to purchase appliances deferring payment) it has started offering insurance services and expanded the scope of the electric appliances program to include household improvements of all sorts – including building refurbishments.
A new pre-paid utility card for paying electricity bills in advance will probably be launched in 2008. This service wants to encourage more efficient energy use and raise awareness of energy costs in the lower population strata. Moreover, Codensa shares customer information with other credit institutions, and hence allows the building of a credit history for its customers. Service diversification is increasing with offers ranging from funeral arrangements to the direct debit sale of magazines.
One might think that Codensa is putting too much on its plate and losing focus. In 2005, its operational income fell by 4 per cent in non-energy services, while operational income for energy services rose by 4.2 per cent.
In 2006, it was a different story — operational income from energy services increased by 7.1 per cent. Operational income for non-energy services (such as financial services) increased by 7.5 per cent in the same period.
In 2006, non-energy services represented nearly 9 per cent of the total operating income. In 2007, they are expected to reach 12 per cent of the total operating income. It seems that there is no going back.
Where might Codensa head now?
This is only a guess, but considering its penetration into their customer base and the loyalty they have built, it would not surprise me if they made inroads in the small and medium enterprise sector as an energy associate.
This article was originally published on NextBillion.net, a website and blog of the World Resources Institute about how business drives positive social and environmental change in low-income communities.
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