Lessons from Magazine Luiza’s Digital Transformation

by Michael Endler and John Rethans

The secret to enduring business success? Transformation.

Mobile gaming is one of Nintendo’s biggest focuses, for example — but in the recent past, the company was known primarily for TV-based consoles that sat in your living room, and before that, Nintendo spent seven decades as a card company.

Or think of a company like Corning, which began as the glassmaker for Thomas Edison’s light bulbs but has since transformed its portfolio to include optical fibers, telescopic mirrors, clean air technologies, and glass that keeps the screen safe when you drop your phone. The examples could go on and on.

Here’s why this is important today: As digital transactions have conquered the global economy, the urgency to transform has increased exponentially. Businesses can no longer simply roll out a mobile app or website — they have to have the agility to be everywhere their customers demand, on any device, integrated into any platform, and accessible via any interaction model.

Brazilian retailer Magazine Luiza has navigated this urgency with remarkable vision and effectiveness. The company has spent the last several years transforming its business for modern omnichannel strategies and digital ecosystem participation — and despite the brutal regional economy and the complexity of its transformation, Luiza has surged. The company has achieved breakout e-commerce revenues, for example, and became one of Brazil’s hottest stocks of 2016, gaining over 400% in value.

This momentum has continued into 2017. A Bloomberg article from earlier this year included predictions that Magazine Luiza could become “the Amazon of Brazil.” In Q2, the company posted a 25.6% year-over-year increase in gross revenue. This included 23.7% growth in same-store-sales and blistering 55.4% growth in e-commerce, which swelled to almost 28% of total sales.

Through Magazine Luiza’s work with Apigee, we’ve had a firsthand view on its tactics and accomplishments. What can other businesses learn from the company’s success? Let’s take a deep dive into the moves Luiza made to enable its transformation.

Building the Vision

About half a decade ago, Magazine Luiza’s then-COO — and current CEO — Frederico Trajano had grown accustomed to the typical challenges of Brazilian retail, from political turmoil to regulatory and supply chain complexities. He was also well-versed in technology, having led the company’s earliest e-commerce efforts. Still, as Trajano watched the rise of mobile e-commerce, he perceived a new kind of challenge — one he knew Luiza would have to tackle quickly if it was going to remain competitive.

Like many other corporate leaders, Trajano formed an innovation team to address the shift — but unlike a number of his peers, he recognized innovation can’t occur at the fringes of the company, walled off from any opportunities to disrupt the main business. Consequently, he both removed this team from the organization’s existing governance processes, allowing it to experiment with technologies without running into bureaucratic obstacles, and empowered it to work directly on Luiza’s core e-commerce business.

Led by software developer Andre Fatala, this team, called Luiza Labs, quickly expanded to over 100 developers and eventually required its own building.

“The idea was to try to break the entire system — to show that it’s possible to have IT close to the business guys,” Fatala, now the company’s CTO, said in an interview. “We make sure everything we create benefits customers. Even with innovations where we are not sure of the results, we understand user behavior to improve the solution.”

Luiza Labs produced new products quickly, and company leaders began to take notice. “We were delivering results that had real business impact — fast — so the board accelerated their investment in our approach,” Fatala recalled. It was a turning point in the company’s transition from a brick-and-mortar company with e-commerce elements to a digital business with physical points of sale.

Adopting an API-First Approach

Apigee, which was acquired by Google last year, began working with Magazine Luiza in 2014. At the time, the company’s APIs were accessing a monolithic app built with 150,000 lines of code. This slowed deployment of new APIs, created undesirable dependencies, presented scalability challenges, and distributed responsibilities across siloed teams. To keep pace with increasingly nimble competitors, the company had to increase its digital agility.

Simultaneously shifting the entire company to new methods wasn’t practical, so Magazine Luiza adopted a two-speed IT approach to first accelerate the customer-facing parts of the business, then phase in new approaches elsewhere. This effort involved using APIs to decouple back-end systems from the front-end, allowing developers to quickly begin iterating on customer experiences while back-end teams maintained system of records and adapted to new strategies at their own pace.

“We used a two-speed IT approach as a transitional strategy to get everyone [united] in the same culture,” Fatala explained. “We couldn’t go straight from waterfall development to full agile style across the company. We couldn’t do everything at the same time, so we decided to speed up the front-end first, because we weren’t moving fast there and needed to move closer to the customer.”

Ultimately, Magazine Luiza shifted to a microservices-based architecture built for the cloud, using a set of APIs so that mobile apps and partners could easily connect to e-commerce services. The company leveraged Apigee’s API platform to host API proxies for its mobile apps and web apps, get fine-grained visibility into consumption and performance of services, and enable a consistent security framework for all the retailer’s microservices and legacy services.

“All the information about the stores and inventory was in the back-end … It was real tricky to get information,” said Magazine Luiza IT manager Thiago Catoto at the 2015 “I love APIs” conference. “When we do it with Apigee … we just expose it with one API and then bam, we just connect and get the information.”

Overhauling the Organization

The API-first approach accelerated application development — but Trajano recognized that true digital transformation is about not only adopting new technologies but also reshaping the organization to enable new business models. That is, digital transformation means IT doesn’t exist just to maintain infrastructure — it exists to power value exchanges and enable business models.

In an interview last year with Diginomica, Fatala explained that API-first platform strategies “created a more digital culture” across the organization. “Instead of having the typical arrangement of a project [development] team and an IT maintenance team, everyone now works in smaller teams of five or six people, and each of those groups takes care of a different parts of an application on the platform — so we have a team that takes care of online check-outs; a team that takes care of check-out in physical stores; a team that’s responsible for order management across the company; and so on,” he said. “It makes us more aligned with and supportive of the company strategy.”

Indeed, organizational changes reached across nearly all of the company’s 20,000-plus employees, extending even to new training programs to empower employees to leverage apps and other digital technologies to improve customers’ in-store experiences.

Transforming the Business Model

The Marketplace: Expanding the Brand’s Reach

As Magazine Luiza applied the Luiza Labs blueprint throughout the organization, the company’s ability to enter new markets soared.

In June, 2016, for example, Luiza launch a new digital marketplace that enables third parties to sell under the Magazine Luiza banner. Participants join this ecosystem via Magazine Luiza’s API platform, which means there’s virtually no marginal cost to add new customers.

The marketplace replaced a legacy integrated sales and distribution system that supported only 35,000 SKUs. In part by allowing many merchants outside Brazil to collaborate with Magazine Luiza for the first time, the marketplace dramatically expanded the e-commerce inventory. It had eclipsed 1 million SKUs as of September 2017.

The App Ecosystem: Growing the Business Through Employee Empowerment and New Customer Service Models

Enabled by a platform approach that allows the company to more easily assemble data, systems, functions, and applications into new products, Magazine Luiza has created an ecosystem of mobile apps to support new customer service models.

The first of these apps was designed to help in-store associates provide better answers to customer questions. The app, which helped reduce time-to-sale in many of Luiza’s stores, might help an associate to determine which smartphones would be most useful to a customer interested in mobile gaming, for example.

This initial project grew into a larger ecosystem. In-store associates can use an app not only to look up product and inventory information, for example, but also to allow customers to pay on the spot, without waiting in line. Magazine Luiza built ways for customers to apply for credit, to buy technical support and other add-on services, and even to enjoy faster delivery.

“We developed another mobile app for logistics. We now have 900 delivery contractors delivering packages using a mobile app. It’s like Uber,” Fatala said. “The app tells them the deliveries they have to do, then the guy just delivers the package, scans the box, and then we can notify customers, saying, ‘We delivered the package.’ Delivery time is dropping.”

Because Magazine Luiza built the new apps using a platform approach, scaling up — whether adding a new bank to its credit program or more contractors to its delivery service — is much faster than would have been possible using previous IT approaches.

“In the past, each new service that we had to put in the ecosystem via legacy systems took around six months,” Fatala described. “But now we have a platform. We created the [credit] platform in a few months, and put the first bank in. The second bank, we integrated in weeks.”

Analytics: Using Data to Achieve Outside-In Perspectives

In addition to using APIs to connect data, applications, and systems, Magazine Luiza also leverages its platform for analytics, both to maintain performance (critical, given the large number of microservices being managed via APIs) and to inform future strategies.

“We have metrics about everything,” Fatala said. “I know what my back-end can handle, and I know if any targets are not running well, and what I can do to solve the problem. I can understand application latency. Things like that.”

“Analytics help us to understand things we need to change about the way we’re developing,” he continued. “We’ve changed components in the platform after seeing analytics about the behavior of the API in Apigee.”

For example, when building the solution to give in-store employees on-demand access to product information, Magazine Luiza initially centralized all the information, leading to performance problems with the app. “We saw during the pilot phase that merging the information to just one place was causing a lot of problems in the stores. If something happened [with the centralized data], the store associate would be blinded. We decided not to have one API responsible for everything but one API that gets information from different catalogs and returns that. If the e-commerce catalog has a problem, we can create a breaker for this that cuts the request, so the sales associate still has access to other data, like the entire inventory of the physical store, and can continue the sales process.”

Transformations Only Happen from the Top Down

Only a top-down commitment can achieve change like Magazine Luiza’s, a point the company’s executive team made explicit in their Q4 2016 earnings statement: “Technology [must move] from the background to center stage — and [be] seen as the brain of the business … Hierarchical structures, paralyzed by excessive bureaucracy, the fear of change and attachment to past successes, usually strongly reject the digital culture.”

This commitment manifests in many ways. Fatala is given freedom to define governance processes and to use platform funding to proactively solve problems, for example.

“Before, there were very heavy processes. It would take like two months to get all the information,” Fatala said, explaining that as the company began to invest in digital transformation, it invested less in heavy governance and “instead spent more money on people that were going to make things happen.”

Because the company is unified around core priorities, such as the marketplace, and because leaders understand the API platform’s role in executing on these priorities, when a high-priority project starts to show promise, it is usually to justify more spending, he added.

[Looking for more insights about digital transformation? Check out this interview with the CTO of Magazine Luiza here.]