Executive Cases: Interviews with Senior Executives of Early-Stage Companies:
Brochas y Productos (BYP) – Mexico
Prepared by George Foster
Brochas y Productos (BYP) is a paint applicators company founded in Monterrey, Mexico, in 2002. In a market controlled for decades by a duopoly and characterized by high prices and shortages, BYP emerged as a fresh alternative offering competitive pricing, innovation, higher quality products, attractive packaging and superior customer service. Between 2004 and 2008, BYP sales increased at a 58% compound annual growth rate, building a strong brand and becoming the market leader through its three main distribution channels: 1) traditional hardware distributors; 2) supermarkets and do-it-yourself stores; and 3) paint factories. In 2005, through a joint venture, BYP became part of a global group with operations in Asia, Europe and North America. Today, it has customers in 15 countries in Central and South America and offers the widest range of products for paint application.
Q1: What was the source of the initial idea, and how did that idea evolve into a viable, growing company? How did it change over time?
Schwarz: “For decades, my family had been successfully involved in the manufacturing and processing of vegetable and animal fibres for the production of brushes and other industrial and commercial applications. One day, one of our clients, a large paintbrush manufacturer, decided to enter the fibre industry and compete with us. So, we learned about their business, too, and made a great discovery: the paintbrush market in Mexico was shaped by a strong concentration with two major players, and as a result consumers faced extremely high prices, low service levels and very little product innovation. I realized there was a great opportunity to start a company to serve this market better. This is how Brochas y Productos was born.”
Q2: What were the major growth accelerators for your company in the early years of high growth?
Schwarz: “One of the most important factors that fuelled BYP’s growth was the relationship with some key customers. One of our first clients was Sherwin Williams, and we also started receiving orders from several major distributors early in the company’s history. We understood the significance of securing key clients in the market, including, of course, The Home Depot. We had been trying to sell to The Home Depot since it started operating in Mexico, and after many attempts, we finally got a chance when its supplier failed to deliver orders on time. The acquisition of a big customer like this is a game changer for a small company.
“Another key development in the history of BYP was the joint venture with Linzer Products, a leader company in the paint applicators market in the US and part of a large global group with operations in Japan, Europe, China, USA and Canada. They had been selling to The Home Depot in the US for many years and they were looking for a partner in Mexico. BYP was the perfect match. The joint venture provided technology, working capital and synergies to BYP.
“I view the foundation of BYP as a family strategic investment. During the first years of operation, things were made easier by having direct access to capital. Rather than raising funds, I could concentrate entirely on sourcing and sales. Only after a couple of years did we have to start talking to banks for working capital.”
Q3: What role did key aspects of the entrepreneurial ecosystem surrounding your company play in the growth of your company?
Ortiz: “Probably the most important aspect has been the open market. A border open for trade has definitely been crucial to the success of BYP. In the beginning, 100% of our products were imported, and even today we rely heavily on our manufacturing capacity in China. Since 2005, we manufacture and assemble some products in our Monterrey facility. We are continually increasing the product categories for which we can fabricate locally, but we still manufacture and purchase in China and buy raw materials in Asia, the Middle East and the US.
“We are based in Monterrey, the second largest city in Mexico, and human capital is widely available here. In BYP, we pride ourselves in having a strong culture of meritocracy. We believe in performance reviews and adequate feedback, an open door policy and promotions and compensation based on results. This is much easier to accomplish when you are in a city with some of the best universities and there is a supply of highly qualified professionals with an entrepreneurial attitude. On the manufacturing and warehousing front, availability of hard-working people at competitive labour rates has never been an issue for us.”
Q4: What key aspects of the entrepreneurial ecosystem surrounding your company that were absent (or existed only in a weak form) created the greatest challenges for growing your company? Please describe and discuss how you met/were impacted by these gaps in the ecosystem and their resultant challenges.
Ortiz: “Our legal framework is a challenge since we sell with credit to most of our clients. It is extremely hard to collect in Mexico, even for banks. Our government is trying to change this with new laws, but the fact today remains that in order to keep our bad accounts at a minimum, we must invest a lot of resources in credit screening and in collection efforts. It is always a huge competitive advantage to know who and where the customers are, but it is even more important here to know who pays well and who does not.
“Lack of funding for small and medium-sized companies is a major barrier for growth. Even with a successful track record and great future projections, it is difficult to secure debt without some collateral or backing. Fortunately, BYP did not have to limit its growth rate to its cash flow generation, and after the company had reached a certain size and a stronger balance sheet, it became easier.
“Another challenge comes from infrastructure. As we ship from our warehouse to every state in the country, we experience first-hand the great disparity in infrastructure in our country. It takes some shipments less than 24 hours to be delivered, but more than five days for others going to the most remote places. Therefore, customer service is critical to manage our logistics and post-sales process. Recently, security has also been an issue, as crime increases the cost of doing business and we must invest in security measures and insurance premiums skyrocket.”
Q5: At what stage did you invest significant resources seeking to grow your company internationally/beyond your domestic country or region? What factors were pivotal in deciding when to seek growth internationally and where to seek that growth?
Schwarz: “Of course, sales growth is the great benefit of having a big company as a client. In our case, The Home Depot is one clear example of these key customers. We have grown with The Home Depot, as the number of its stores has almost tripled during the years we have been serving them. In some aspects, we have structured the company around their needs and we were proud to receive the “Vendor of the Year” award in 2009, a recognition given to only one supplier each year.
“But there are also other great benefits of having a large client. Higher requirements in product quality (both level and consistency), image and packaging, logistics and service force us to become a better company. It raises the bar for all our operations at every level. For new products, having a certain guaranteed volume allows us to introduce a new product line with a lower risk, and then offer it to other customers.
“Surely, it also poses some challenges and problems. Big companies have strict policies and mistakes are not easily forgiven. Moreover, there is a risk in having a large share of sales in one client, as investments are made over the years to serve it better and the health of the company – at least in the short run – could be at risk if we were to lose the client for some reason.
“As mentioned before, our joint venture with a much larger and established partner also made us a stronger player in Mexico.”
Q6: What were the biggest challenges in building growth internationally? How did you meet or adapt to those challenges?
Schwarz: “With a population of more than 110 million, the Mexican market represented a sizable opportunity for BYP. Before aggressively pursuing other geographic markets, we found it more important to become strong and profitable within our region. We had developed a strong customer base and we decided to leverage it to increase our product offering and sales. Ten years ago, we were selling only paintbrushes, but today we have a catalogue of more than 1,000 SKUs, with everything a painter needs for a job including aluminium ladders, compressors, spray guns, etc.
“And in addition to our growth with paint applicators in BYP, we – the founders – have started several separate companies to serve the same hardware market, including a company of lighting and electrical products and another dedicated to faucets and plumbing. Our focus has been in developing the knowhow and expertise to quickly and efficiently develop new product categories, source them in China and use our existing distribution network to sell. Of course, we must know about the products, but we really concentrate our efforts in continually improving the process of purchasing, quality control assurance, logistics and packaging. This is how, as a group, we are now selling more than US$ 100 million a year. And given the size of the market we are in, we see the potential to double or triple this in the next few years. We employ over 300 young professionals in Mexico, and have developed a system that enables us to compete with direct global offices from companies such as Wal-Mart, and are still able to sell them here and in South America as we have the ability to move and source faster.”
Q7: What major role, if any, did key aspects of the ecosystem in the country (or countries) you first sought international growth either promote or impede your ability to grow in those international markets?
Schwarz: “Our natural expansion strategy is Central and South America. Even though it was not our initial focus, today we have an important presence in some markets and we are growing fast. One of the most important challenges for going after the markets in these countries faster is credit risk.
“Another problem is the regulatory framework in terms of trade barriers. In some countries (e.g. Argentina), we cannot sell our products made in Mexico or in China because of tariffs. This means that in order to enter the market we would have to set up a manufacturing operation there.
“In 2013, we got our first major opportunity for the US market. This is a big challenge, but one that we will be able to conquer, without a doubt.”
Q8: Seeking international growth often has both high moments and dark (low) moments. Briefly describe one high moment and one dark (low) moment in seeking international growth.
Ortiz: “One of the biggest threats we have faced in the past few years was a regulatory situation related to a trade investigation by the Mexican government. It started after a complaint by one competitor, the former market leader. After several years of a steady market share decline, and because they could not compete in price, service and quality, they turned to this kind of legal action (among others) to try to stop us. They filed for an antidumping investigation for paintbrushes imported from China. There was absolutely no basis for this accusation as they provided false information, but the risk made us very uncomfortable, as a change in import tariffs would have transformed the entire industry. Over the course of two years, we fought this process and, in the end, we came out stronger as we had deepened our ties with some clients (i.e. The Home Depot) who shared our side of the battle.”