Weekly reading – 28th November 2020

What I wrote last week

I wrote about why I think Apple Card would be a significant credit card as Apple Pay grows more popular

I wrote about Target, Salesforce’s acquisition talk with Slack and Uber vs Lyft

I reviewed President Barack Obama’s new memoir “A Promised Land

Business

The difference in the business model between Booking.com and Expedia

NYTimes and The Washington Post expanded their subscriber base substantially in the last two years

Black Friday’s online shopping exceeded $5 billion

Amazon is strengthening its advantages with delivery capabilities that can rival UBS’

TikTok used its biggest stars in its legal fight against the US government

Research shows that unique visitors to Microsoft Teams far outnumbered those to Slack in October 2020

Technology

There are 123 Fintech startups in Vietnam in 2020. Most of them operate in the Payments area

Users of the new Macs with M1 referred to the hardware as having “alien technology”, “wicked” or “sockery”

What I found interesting

Hanoi and Saigon/Ho Chi Minh City is the second busiest domestic flight route in the world

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.”

Source: American Affairs Journal

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

Target’s growth, Salesforce reportedly about to acquire Slack and Uber vs Lyft

Target’s growth during the pandemic

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.

Source: Target

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. 

Source: ZDNET

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?

Target’s turnaround strategy

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.

Stats on retail store size & revenue per square feet

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