Apple dives into display-making to cut reliance on Samsung. Apple is a great example of companies that thrive by owning key capabilities and unlocking vertical integration. The challenge for Apple; however, is to retain key personnel across multiple functions and maintain the collaboration to leverage what is an increasingly complex system.
Brian Chesky: I want Airbnb to become a physical social network. I am not happy with the lack of focus from AirBnb on guests. The company seems to constantly talk about what they do for hosts. Hence, I was happy to see Brian Chesky mindful of how expensive his platform has become for guests, especially Gen Z. Plus, his comment on running a business the size of AirBnb as a public entity is very interesting.
Bank of America launches fintech accelerator program. Participants in this program don’t need to give the bank equity in exchange for support and mentorship. What does Bank of America (BofA) hope to gain? I believe that nurturing fintech startups can help improve the deposits now and the future. If your startup already parks money at one institution, you are unlikely to move cash somewhere. Furthermore, BofA can have visibility into what potential technology is on the market. Such insight enables the bank to either build its internal solution or acquire external capabilities.
($) How America’s Largest Restaurant Franchisee Decides When to Raise Prices. Flynn Restaurant Group employs a team of data scientists to maximize revenue by using internal and competitors’ data. ““We had local marketing teams that would go out and steal all the menus and enter them into an Excel file,” said Ron Bellamy, Flynn’s chief operating officer. Data scientists collected prices for individual items across Flynn’s restaurants, then layered on variables that could impact sales, such as bad weather or a change in restaurant hours. They began regularly monitoring prices for competitor restaurants within a three-mile radius of their stores.“
How Bud Light Blew It. The urge to appeal to younger drinkers and stop the brand decline is understandable, but what Bud Light did is an own goal. The brewer could have attacked its marketing problem from different angles like other companies did. It did not need to risk angering a divisive society over a sensitive and polarizing issue. I applaud the marketing team at Budweiser for taking a stand. Had the tactic succeeded, the team would have won accolades. Unfortunately, failure means dismissal and that’s exactly what happened.
Dev Kantesaria – FICO: A High Score Business. This is one of my favorite Business Breakdowns episodes. I learned a great deal about Fair Isaac, the company that is more known for one of its products: FICO score. Sign up for a JoinColossus account to read the transcript if reading is your preferred learning method.
A traveler’s dream: Cash-free payment systems link up across Southeast Asia. “For the past several years, the central banks of these countries have been attempting to connect their systems, allowing their residents to use QR payments for cross-border transactions without any fees, generally at better conversion rates than those set by payment processors like Visa and American Express. After running a set of quiet pilot programs and sealing an official agreement in 2022, the system is beginning to catch on, anywhere from island party towns to high-end shops.“
The U.S. Needs Minerals for Electric Cars. Everyone Else Wants Them Too. To avoid over-reliance on China for minerals, the US must work with other resource-rich countries. Africa is the most notable option. The wealthiest country has long neglected to be a key player in Africa. Such an oversight must change.
When digital nomads come to town. This article discusses the pros and cons of having digital nomads. Like they always say, nothing is perfect indeed.
Online-Only Startups Adopt a Bold New Strategy: Opening Actual Shops. What is old is now new. Online-only startups thought they could do away with physical stores, but now pivot to a hybrid model and establish physical presence. Online-only retailers realized there were two problems with their business model. The first is that it’s increasingly expensive to acquire customers online. Competition gets fiercer. Factors such as Apple’s changes are also a contributor. The second problem is consumer behavior. Folks want to shop in stores and it’s exceedingly difficult to change that. Digital-native retailers would rather change their philosophy than stick to their guns and go bankrupt.
Google staffers praise engineers for I/O, poke fun at execs because they ‘just kept saying A.I.’ While it’s not easy to manage a company like Google, Sundar Pichai, as CEO of Google, has not delivered a stellar performance in my opinion. He did appoint Kurian as Google Cloud CEO, which adds much needed capabilities and leadership. Besides that, there is not much else that gives me the same confidence as what Satya Nadella or Tim Cook has done. Mr Pichai’s employees don’t seem happy with him. He doesn’t show leadership by example when he had a raise after dismissing thousands of employees. As a company supposed to be the leader in AI, Google let ChatGPT and Microsoft take the lead and had an embarrassing launch of Bard, its high-profile rival of ChatGPT. All under Pichai’s watch.
Amazon Overhauls Delivery Network to Dispatch Packages Faster. Amazon used to ship items across the country to the hands of shoppers. they replaced that model with one that enabled shipping by region. The end results are lower costs, shorter delivery times and higher customer satisfaction. This is an advantage that is difficult and expensive for rivals to copy. In other words, a real competitive advantage.
Target wants shoppers to think of it for groceries as retailer braces for leaner spending. Costco and Walmart are the leaders in low-cost everything. Aldi and Lidl have the lowest prices in groceries. Trader Joe’s brings quirkiness, uniqueness in inventory and a cult. What does Target have that can compete in the grocery world? What draws consumers to Target are several chic-styled goods and convenience. But the retail chain needs to deliver to consumers a reason why they should shop groceries at its stores. Especially when the freshness is disappointing, the uniqueness is lacking and prices are higher than rivals’.
Other stuff I find interesting
How to Become a Morning Exercise Person. “Despite the challenge of waking up early enough for a workout, Dr. Friel said, mornings are better for most people because they have more control over their time before the commitments of the day kick in. In one study, Dr. Youngstedt and his team instructed 101 adults to do an hour of moderate exercise at eight different times for three days. As expected, those who hit the treadmills in the morning shifted their circadian cycles forward, meaning their bodies were ready to sleep and wake up earlier.“
($) The Surprisingly Effective Strategy for Buying on eBay. A study that investigated more than 25 million eBay transactions revealed that offering round percentages in discount resulted in higher conversion rates. That makes sense to me from a psychological perspective. Consumers don’t like to do mental maths when shopping. Anything that can make them arrive at the conclusion faster will aid the conversion.
Vicious Traps. “Or curiosity and boldness. They are wonderful on their own, but combined can easily create impulsiveness. How about humility and ambition? Excellent traits, but together they can create successfully disguised arrogance.”
The renowned venture capital firm, a16z, recently published an article named “The Future of Payments is… Red?“, whose content I find at best unconvincing. The gist of the article is that the author believed fintech startups could challenge the two dominant networks (Visa & Mastercard) by pushing for ACH transactions to replace credit cards. The example used to substantiate the thesis is Target Red Card. Per the article, and sorry for the lengthy excerpt:
Look at Target’s full-year revenue for 2022: they made $107.6 billion in sales and $3.4 billion in pre-tax income. Now imagine if every transaction at a Target store or at target.com were made with a credit card—which is currently not the case—at an average fee of 2%. This would result in $2.2 billion in incremental income if all payments shifted to ACH, which would be 65% more profit!
Target has impressively shifted 20% of their entire sales to their own cards. The only “illogical” part of this is that to save ~2%, the company is… giving up 5%, albeit to the user in the form of direct savings at Target, which is the primary benefit of the RedCard.
Target isn’t an outlier here. Most “frequent interaction” or high-frequency billing companies do the same. Verizon and AT&T, as additional examples, give you substantial monthly savings for moving your bill-pay off of credit cards and to ACH (or sometimes debit cards, given the lower average fee).
That said, while I think Target has been smart to roll this out, paying 5% to save 2% (and justifying it by showing increased engagement, which likely reverses cause and effect and shows sampling bias!) is not smart. A better alternative, in my opinion, would be to provide customers with a one-time benefit to make the switch. As an example, imagine if Netflix started offering such a benefit and started offering customers, upon log-in, a $2 one-time discount if they clicked and switched their payment method to direct debit. This would provide Netflix with long-term savings of more than $100 million a year in North America alone, based on their rough interchange costs.
Luckily, inertia, one of the twin moats that protects so much of banking, is now decreasing thanks to improved technology, and consumers are more willing to switch up their payments methods. (Rewards, the process by which merchant fees fund customer benefits, with banks in the middle, remains a stubborn reason why “RedCard as a Service” hasn’t previously taken off.)
There are several points with which I disagree with the author and I’ll go over them one by one.
The claim that Target gives 5% discount on Target transactions to save 2% in interchange is not true. A loyalty program is more than just payments. First of all, loyalty programs existed way before credit cards came around. Brands understood that a loyalty program helped build customer relationship and retain customers. Second, a branded debit or credit card is a tool with which retailers collect valuable first-party information. Who a customer is, how often a customer visits a certain store, what they buy, what combination of goods they buy, what promotions they are most responsive to, whether they want to pick up goods at drive-through, in store or have them delivered. The kind of information not only assists a retailer in personalizing offers and making operational adjustments accordingly, but also powers a high-margin advertising platform. Look at the big retailers on the market. The Walmarts, the Amazons and the Targets of the world all have ambition to build an advertising machine popular with advertisers. How else do they provide targeting to those advertisers without data about their own customers?
There are a bunch of 2% cash back credit cards on the market. Some even offer a higher rewards rate on Target purchases. Consumers are pretty savvy. They will use whatever saves them the most money. Remember that Target would have no information on a customer if they used a non-Target card. Without offering a competitive earn rate, how could Target compete and gain valuable customer information?
The Target credit card is underwritten by TD Bank USA. Co-branded credit cards usually serve as a revenue stream for brands and Target credit card is no exception. According to the latest 10K, Target recorded $734 million in profit sharing from TD Bank as revenue. $734 million! Of course, that’s not entirely pure profit as I believe Target shoulders some of the rewards expenses, but it’s still one hell of a figure. Because Target debit card is issued by Target itself, in collaboration with a bank, they earn much less, if anything at all, from the debit card. So why do they have it in the first place? Why does Target have a reloadable account with the same 5% cash back?
One word: accessibility. Not everyone has a Social Security Number or an ITIN to open a checking account and get a debit card. Then, not everyone with an SSN can get a credit card. TD Bank must have some say in whom they want to give credit to. A FICO of 600 should disqualify a lot of folks from having a credit card. Hence, a lineup of different options helps Target widen their target audience. And if Target already offers a debit card or a reloadable account, they may as well give a reason to customers why they should use those options.
The author of this article argues that retailers should incentivize consumers to use ACH and abandon credit cards. His example is that utility providers already do so. There are two errors with that argument. First, consumers love credit card rewards. Why would they turn away from concrete savings and benefits? Second, using utility providers as an example doesn’t make sense. Consumers pay for utility once a month. Twice or three times at most. These providers charge 4%, which is substantially higher than most credit cards’ earn rate. The extra fee deters consumers from using credit cards as payment method. The gain is smaller than the expense. It doesn’t hurt because most of the time, it’s just one transaction every month. For retailers like Target, it’s different! They want consumers to shop as often as possible. Retailers rarely impose a transaction fee like utility companies do (they negotiate a favorable interchange rate with the networks) and consumers want their rewards. Hence, it’s exceedingly difficult here to change consumer behavior.
In addition, I don’t understand why the Target Debit Card is an example of how Visa and Mastercard can be disrupted. Visa and Mastercard are two of the most known and trusted brands in the world. Walk to a restaurant in a remote country and if you see the Visa logo, you know that your Visa card will work there and you are protected from fraud. How popular is Plaid globally? Is it as trusted as Visa and Mastercard? The networks built an incredible business model in that they are accepted by millions of merchants and millions of consumers trust them. Plaid has been around for a while and if they haven’t gained much traction, what are the odds that Plaid will build a similar business model like the networks?
Plus, how could we replicate that model with ACH? Mom-and-pop merchants want customers and frictionless payments that are proven and tested. Yes, saving 2% is great, but it’s still a lot better than losing business to a competitor nearby because that competitor enables card payments.
I understand that a16z wants to push a narrative that is favorable to their fintech investments, but this is not a good one as the reasons mentioned above.
Consumer Trends 2022: Mid-Year Update. An interesting study on consumer behavior by Coefficient Capital. One thing that stood out as terrifying to me is that 39% of the surveyed folks sayed they’d vote for Donald Trump if he runs for President in 2024
($) 71 Cities and Towns Are Paying Tech Workers to Abandon Silicon Valley. It’s Working. Local economies need bodies, tax revenue, consumption and entrepreneurship. Without these incentive programs, smaller cities have little chance to stand out and be the next destination for highly skilled workers. I really hope that somebody will conduct a wide range study on how effective such programs are.
($) CFPB to Push Banks to Cover More Payment-Services Scams. Up to now, banks only have to repay the money that customers lost in fraudulently induced transactions. If the report is true, banks will soon have to provide more protection for consumers, investigate more transactions and potentially have to repay the money lost in scams that were even authorized by the end users. I welcome the proposal. Fraud is the number one concern when it comes to real time payment. Zelle, to the industry insiders, is littered with frauds. Having the regulatory push from the CFPB will force major banks to take more actions to protect the end users. On the flip side, more oversight may curtail the investment and interest in real time payment from financial institutions. But I think it’s a risk worth taking.
Target puts the squeeze on suppliers after inventories pile up. Relying on major retailers boosts a supplier’s scale tremendously, but also means that an abrupt change can seriously hurt the supplier’s margin. Dealing with expensive excessive inventory, retail giants like Target or Walmart pressures their suppliers to hold what they previously committed to take on and eat the cost. These suppliers are likely to swallow this bitter pill since a lot of future business is on the line here
Lessons from Germany’s Midsize Giants. A great collection of great mid-size companies from Germany that have the same formula to success as Aldi. I believe you get more value from reading this article and studying these companies than from a lot of business strategy textbooks at school
The 2022 13-Inch MacBook Air. John Gruber’s review is excellent, as usual. I have to admit that it nudges me towards buying one later this year
($) Afghan Economy Crumbles Since Taliban Takeover. The economy collapsed. Demand evaporated. Financial support from other countries was cut off. 90% of the citizens don’t eat sufficiently while half of the population face acute hunger. The Talibans do not know how to run the country. What a catastrophe!
($) MBS’s $500 Billion Desert Dream Just Keeps Getting Weirder. “MBS, as he’s known abroad, was in the early stages of one of the largest and most difficult construction projects in history, which involves turning an expanse of desert the size of Belgium into a high-tech city-region called Neom. Starting with a budget of $500 billion, MBS bills Neom as a showpiece that will transform Saudi Arabia’s economy and serve as a testbed for technologies that could revolutionize daily life.” As I read this article, I couldn’t help but feel sad. The amount of money and resources poured into this grandiose project fueled by the ambition, if not delusion, of one powerful man could have helped a lot of unfortunate people around the world.
Case Study 8: How Hertz Paid Accenture $32 Million for a Website That Never Went Live. It’s mind-blowing that Accenture couldn’t even deliver the responsive design and decent security features after receiving a lot of money from Hertz. I don’t know how complicated Hertz wanted their website and mobile application to be nor do I know how the office politics involved is. But based on the description of the requested elements, I have a feeling that a $2 million to a Vietnamese ads agency would get the job done.
U.S. Wind Energy Is (Finally) Venturing Offshore. “Capturing offshore wind in the U.S. has long been an uphill battle, with various stumbling blocks in the terrain. Objections from fisheries, skepticism from conservationists and tenuous support from tourism have all stalled development in the past decade. That is, until May of 2021, when the U.S. Department of the Interior approved construction of a sprawling wind facility several miles off the coast of Martha’s Vineyard, Massachusetts.”
On average, time spent – with family peaks at <15yo – with friends peaks at 18 – with coworkers peaks at 30 – with children peaks at 40 – with your partner peaks at 70 – alone peaks at the end
An excellent review of the new Apple store in Rome. Apple’s retail stores are great valuable assets. They build up the brand image of the company and function as hubs where customers can try out products, receive services and just really connect with the brand.
Instacart kicks off Priority Delivery. This new move by Instacart to deliver items in 30 minutes shows how cut-throat this market is. Competitors such as Instacart, Uber Eats or DoorDash strive to cut the delivery time to gain customers and market share. What remains to be seen is how it would affect Instacart’s bottom line. I don’t think that they are profitable yet. So, we’ll see when they release their S-1.
more unsealed docs, this time in the Google case led by Arizona Attorney General. The newly unsealed material is underlined in green unsealed this week (left). Last year, Google proactively unsealed less risky material (right) when Judge first ruled. /1 pic.twitter.com/EQe3UxFxh9
Financial and emotional risks of working for a startup. Somebody took the time to write about the potential downsides of working at a startup. There are a lot of things to love about startup life and I am pleased to see people talk about it. But it’s also important to shed light on the risks as well
Google now lets you password-protect the page that shows all your searches. Privacy and security are powerful user preferences that are NOT going away any time soon. In fact, they will only get stronger. Google should do more and talk more about what they do in this area. I haven’t seen a lot of marketing efforts in talking about their initiatives to protect user data and privacy
Earlier I found a screenshot of a dashboard from a few years ago when we hit $2.4m during all of Black Friday. Seeing $3.5m in a minute now is really something. https://t.co/eJVVELFkVJ
This piece tells a story about how Utah uses collaboration and human touch to create policies that help foster the state’s equality and economy. Two quotes stand out to me
Utahns seem strongly committed to charitable works, by government, alongside government or outside government. Whatever tools used are infused with an ethic of self-reliance that helps prevent dependency . . . when there’s a conflict between that ethic and mercy, Utah institutions err on the side of mercy
Betty Tingey, after seeing the news coverage about the Utah Compact, wrote to the Deseret News, “I don’t know much about politics except the sick feeling I get inside when there is constant arguing. . . . I don’t know how to settle debates, but I know a peaceful heart when I have one. I felt it when I read the Utah Compact.”
This clip about an 86-year-old baking master in Greece gave me mixed feelings. On one hand, I admire his work ethics, but on the other, it can be a condemnation of a system that forces old people to work this late in their life
Writing that 2020 is good for somebody or a company is weird as this year has been nothing, but a disaster. However, from a business perspective, Target has had a pretty good 2020 so far.
Before 2020, its comparable sales growth was often a low or middle single digit. In Q4 2019, its physical store comparable sale growth was even in the negative territory. 2020 flipped the switch. The company’s total comparable sale growth has been in the double digits with Q2 2020 recording the highest at 24%. Digital comparable sales growth is at least 9% or higher. Q3 saw a bit of a decline compared to Q2, but the overall growth was still higher than 20%. I find it interesting that the revenue YoY growth and the store comparable growth seem pretty in sync with each other, but that’s because physical stores make up at least 84% of Target’s revenue. Digital sales was responsible for almost 16% of the overall revenue in Q3 2020, an equivalent of $3.6+ billion in revenue for a quarter and up from 7.5% in the same quarter last year.
In terms of profitability, Q2 and Q3 of 2020 saw the highest gross margin and operating margin in the last 5 years. Operating margin reached 10% and 8.5% in Q2 and Q3 respectively while gross margin was 30.9% and 30.6% in Q2 and Q3. During a year dominated by a once-in-a-lifetime pandemic, Target managed to pivot its business to adapt to the dire situation and improved not only its top line, but also its profitability. That’s proof of resilience and managerial competence.
Another aspect of their business that I find interesting is their branded cards’ penetration. Target measured its credit and debit card’s penetration as percentage of sales that took place on their cards. In other words, if there is about $200 million in sales in a week and $50 million of which is paid through Target’s credit and debit cards, the penetration rate is 25%. And shoppers have a reason to use those cards. Owners of these cards have exclusive benefits that other issuers can hardly match, such as: no annual fee, 5% off on purchases at Target stores and on its website, free 2-day shipping on select items and longer return period. Yet, there has been a slowly steady decline in terms of the RedCard penetration. The penetration rate in Q3 2020 was 21%, down from 23% from the year before. Given the increase in sales and the unique offerings of the RedCards, it’s surprising that the figure not only didn’t grow, but it also contracted. This indicates to me that Target can do much better in getting customers to apply for a RedCard. It is a good retention tool and it brings extra revenue to the company. In Q3 2020, credit card profit sharing was $166 million, but down from $177 in the same period last year.
In short, Target has been doing quite well. They succeeded in growing their online business which has been turbocharged by the pandemic, but that, in no way, means that the company didn’t put in the effort. Think about it this way, every retailer tried to grow its online business, but Target managed to do in a cut-throat industry and at their scale. So credit to them. Plus, they made appropriate and necessary investments in same-day services and deliver. In the last two earning calls, the management reported ridiculous numbers of same-day services’ growth, to the tune of several hundred percentages. Shoppers like options. With Target, they can now order online and have it delivered to their door, or drive up to the parking lot to pick the order up or fetch it in stores. The flexibility is there and it will bode well for Target in the upcoming holiday season that is unfortunately engulfed, still, by the pandemic.
Regarding the possibility of Target having a similar subscription to Walmart+ or Amazon Prime, I think Target is still missing the main hook, the main attraction. Amazon Prime has been around for more than 10 years. Over the years, Amazon kept adding more and more benefits for shoppers so that the subscription now offers a plethora of benefits ranging from unlimited 2-day shipping regardless of order size, movies, music, books, exclusive deals and so on. On Walmart Plus side, Walmart can offer affordable groceries and discount on fuel. Target doesn’t seem to me that it can match any of those benefits. Even though some pieces are there such as Target’s popularity, its network of stores across the country and its delivery flexibility, I don’t see a main selling point for a Target’s own subscription yet. We’ll see.
Salesforce reportedly in talks to buy Slack
Yesterday, after the news broke that Salesforce has been in talks to acquire Slack and a deal can happen next week, Slack’s stock price popped by more than 30% within a day. The reaction that I saw on Twitter was mostly positive for both parties. I can see why. But the fact that investors are happy about this prospect of an acquisition says something about Slack as a standalone business. Slack last reported its active daily user at 12 million back in October 2019. Within the past 12 months, Microsoft revealed the metric at least 3 times: 20 million in Q2 FY 2020, 75 million in Q3 FY 2020 and 115 million last month for Q1 FY 2021. There are two reasons why companies don’t make disclosures: 1/ they are legally obligated not to and 2/ there is nothing rosy to disclose. In this case, it’s squarely the latter case. My guess is that Slack hasn’t seen a meaningful increase in its Daily Active Users (DAU) numbers DESPITE a pandemic that turbocharged working from home, the same way that Microsoft Teams has achieved. In the face of a formidable challenge from Microsoft, Slack initially played it cool. Below was their reaction 6 months ago
“What we’ve seen over the past couple of months is that Teams is not a competitor to Slack,” Butterfield told CNBC in an interview after Microsoft’s Q3 earnings update. Butterfield also downplayed the impact on Slack’s growth caused by Microsoft “bundling [Teams] and giving it away for free” with Office 365 over the past three years.
Yet, Slack filed a formal complaint to the EU about Microsoft’s alleged anti-competition practice, the same practice that Butterfield downplayed. I wrote here about why that formal complaint is unlikely to succeed. But it shows Slack’s desperation. If Microsoft weren’t a competitor and its bundling practice was nothing, why would Slack sue to stop it? All of these factors and the fact that investors were happy about the prospect of being acquired by Salesforce paint a solemn picture of Slack as a standalone company. If it joins Salesforce, there will likely be a Salesforce bundle that includes Slack, the same way that Microsoft bundles Teams into Office 365. Slack would get more assistance in selling to corporate clients while Salesforce would get extra capabilities quickly without having to build them from scratch.
Uber vs Lyft
The pandemic has been a catastrophe for ride-hailing companies such as Lyft and Uber. According to Second Measure, the market in the US dropped to only half of the 2016 level and only recovered to the 2016 level in October 2020. That’s how big the impact of the pandemic has been on this business. Since Uber and Lyft are always compared to each other, you’d think that their business is faring similarly. Not really.
While Lyft essentially has only one business in ride-sharing, Uber successfully grew its food delivery service UberEats to be a $4.5 run rate business, making up 40% of Uber’s revenue in Q3 2020. Uber Eats’ $1.1 billion in revenue in Q3 2020 was more than double Lyft’s entire revenue in the same period. Additionally, the pandemic affects each other differently. Lyft’s main market is the US, which is, unfortunately, going deeper and deeper into the pandemic. There is no sign of things turned around here in the US, unless there is a vaccine. It severely handicaps Lyft’s business and Uber’s ride-sharing segment. Nonetheless, Covid-19 has been a boon to Uber Eats. It has grown substantially in the past few months and become a silver lining for Uber. Plus, Uber announced its effort to deliver groceries and its acquisition of Postmates indicates that it is serious about becoming a delivery-as-a-service business. In other words, while the two companies are often mentioned in comparison, they are vastly different now, with Uber becoming more of a diversified company. It is more diversified horizontally (more services) and vertically (if you consider being present in more countries). In this environment, I think that the Uber model is a much better one. Don’t take my word for it. Look at the stock prices. The two companies made debut on the stock market almost at the same time. While Uber soared past its IPO price, Lyft is trading nowhere close to its own IPO price.
It’ll be interesting to see how the next couple of years will be for these two companies. Would Lyft venture into another business like Uber did? What would a vaccine bringing back our previous life mean for Uber? Knowing that it would power up the ride-sharing business, but adversely affect the growth of Uber Eats?
Retail apocalypse has been the rage for a few years. The competition from Amazon is said to be the main reason why many retailers closed shops permanently. The truth is that Amazon serves just another change in the competition to which failure to react will doom any business. Retailers are no exception. As Amazon is the master in eCommerce, retailers likely will not match the Seattle-based company on the digital front. What retailers can do is to find their competitive advantages and exploit them while being at least competitive digitally. I think Target can serve as a good example of a retailer that successfully transformed itself to stay competitive.
Remodeling stores and building digital & shipping capabilities
In 2017, Target announced an ambitious plan to invest $7 billion in remodeling existing stores, opening new ones, launching private labels and building out digital infrastructure. In March 2020, Target revealed that the company completed 700 remodels over the past 3 years and aimed at finishing 1,000 in 2020. Since the announcement of the turnaround strategy, Target has launched 20 private labels. With regard to shoring up its shipping and digital capabilities, Target made a strategic decision to take the task of building out its website internally, instead of farming it out to Amazon like they did before 2013. Crucially, Target’s CIO McNamara reduced the IT headcount from 10,000 to 4,000 engineers. Not only did Target strengthen its core capability organically, but they also brought in external expertise by acquiring two same-day delivery startups in Shipt and Grand Junction. Due to the new acquired capabilities, Target introduced pickup, Drive-Up and Shipt services to most of its stores. Now, customers can order online and receive the goods via:
Delivery at home in one-two days
Pickup at a local Target store
Drive up to a Target store to pick up the goods
Have the goods delivered within the same day
Results of those initiatives?
2019 total revenue, gross margin rate and operating income margin rate increased compared to 2018. Walmart’s YoY increase in the latest year’s revenue is 1.9%, lower than what Target posted. Considering the cut-throat competition that Target is in, that increase in the top line and margin should be a positive sign.
For the improved financial performance, Target credited its increased efficiency and customer engagement through both its stores and digital channels. he company revealed that 80% of online orders were fulfilled by its stores. Additionally, “during 2019, over 70% of our comparable digital sales growth was driven by same-day fulfillment options: Order Pickup, Drive Up, and delivery via our wholly-owned subsidiary, Shipt”. In its latest business update amid Covid-19, Target said that digital sales grew more than 100% YoY. The growing importance of digital channels to Target’s business can be seen in the below graph which shows digital sales made up an increasing share of Target’s overall sales in the last 5 years.
In February 2019, Fast Company reported that six of Target’s private labels generated more than $1 billion each in revenue a year. In 2019, 1/3 of Target’s revenue came from its own private labels.
Other initiatives & opportunities
In September 2019, Target launched a loyalty program called Target Circle. The program was introduced after racketing 2 million subscribers in 18-month trial. In March 2020, the number of Target Circle subscribers hit 50 million, from 35 million reported in November 2019. According to Target in Q3 investor call, Circle members spend 2-5% more than non-members. The program has no membership fee, but comes with only a modest of 1% back on purchases. Hence, it’s quite encouraging to see the membership base.
Target has branded debit cards and credit cards issued by TD. According to the quarterly filings, the cards were responsible for around 10% of the purchase volume at Target
Target-branded cards not only allow the retailer to gather so much data on consumers, but also provides a healthy boost of revenue. For the past 3 years, Target has received $680 million of credit card profit sharing from TD. I am not familiar with the agreement between Target and TD, but I think that if more folks sign up for the branded credit cards and spend more using the cards, Target will get more revenue from its issuing partner.
In my opinion, the turnaround strategy by Target has been a fair success so far. However, Amazon and Walmart haven’t stood still either. They also push and innovate every day. If Target wants to avoid the fate the likes of Sears did, they will have to continuously push and innovate as well. But they can serve as a case study against any generalizing claim that anyone not named Amazon is facing retail apocalypse.
I have been doing some industry research for work, specifically on the retail industry. One trend that CBInsights mentioned in their report was that retail stores were shrinking in size. CBInsights argued that retailers wanted to more conscious of how they made use of their retail space. The competition is so fierce that retailers cannot afford to do everything, be everything and sell everything. They tend to get more nimble in operations and conscious of what they have on display. Nonetheless, CBInsights’ latest year in their data was 2015. So I went through the financial reports by several retailers to find out if retail stores are actually shrinking in size. Before I go through the findings, below are a few important notes:
The list of retailers was from this article by WSJ. There are several retailers whose information was not retrieved. The omission was attributed to the way such retailers structured their data, making it time-consuming to retrieve data and complicated to explain. Hence, I decided to omit those retailers
Retail is a complex industry. The data is for reference only and may represent to some extent the players or trend in the industry. By no means do I believe that the data represents 100% the retail industry
Data from 2015 to 2017 was from the chosen retailers’ annual reports. Data in 2018 was from the latest quarterly reports. Only Walmart already filed their 2018 annual report
Apart from Walmart and Sam’s Club, no other companies had their revenue data retrieved. It doesn’t make sense to analyze revenue per square feet with only 3 quarters’ data recorded
Data is for the retailers’ US segment only
Revenue by Sam’s Club excludes fuel revenue
Number of stores
Among the surveyed companies, only Best Buy, JC Penny and Sam’s Club lowered their store count
Average Store Size
Best Buy, JC Penny and Sam’s Club increased their average store size. The rest decreased theirs, except Dick’s, which keeps their store size more or less the same for the past 4 years
Revenue per square feet
Only Target saw their revenue per square feet decrease in 2017, compared to 2016 and 2015. As the chart can show, 2018 looks to be a good year for Walmart. Both Walmart (the brand) and Sam’s Club increased revenue per square feet, especially the latter.
Summary
The majority of the surveyed companies reduced their total retail space, but managed to make the most of their selling space. This is in line with what CBInsights mentioned (I touched on it above as well).
The data I collected is available here on my Tableau profile
Minh Quang Duong 