BTG Capstone - Executive Summary Final
Transcript of BTG Capstone - Executive Summary Final
Strategic Growth Options for CCRR Final Report
Anshul Ailwadi, Rohini Atal, Kelechi Ebi, Jamiah Harris, David McDonald, Emily Watts
ABSTRACT
BTG Pactual, a leading investment bank in Brazil, tasked our team with charting a growth strategy for CCRR, a company partly owned by BTG’s private equity arm. As part of its growth strategy, CCRR, a leading Brazilian company dealing in adhesives, labels and specialty paper in Latin America, recently began to expand its service offerings into RFID technology solutions, with a focus in the retail sector. BTG Pactual, in an effort to better understand the RFID technology and, more importantly, be convinced of its commercial viability for the Brazilian market, sought our analysis of the technology, and a means of quantifying its potential return on investment (ROI) to CCRR clients. Additionally, BTG Pactual asked that we analyze other potential strategic growth options for CCRR given current trends in the global market. Specifically, we evaluated the following questions for the client: 1. Is RFID the technology of the future? 2. Is a one-stop shop business model the best approach? 3. How can operating margins be improved? After extensive research, field study and analysis, we reached the following conclusions: 1. RFID is indeed the technology of the future, as global trends suggest that RFID is the next natural phase in the growth trajectory for leading firms in the paper and printing industry. 2. The one-stop shop approach is also consistent with current industry trends globally and offers opportunity for economies of scale across the RFID value chain. 3. Finally, the one-stop shop model would contribute to improved operating margins by bringing more of the value chain in-house.
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Table of Contents
INTRODUCTION: ..................................................................................................................... 3 The Client.......................................................................................................................................................................................3 The Problem.................................................................................................................................................................................3 The Scope of the Project..........................................................................................................................................................3 Is RFID the technology of the future?...................................................................................... 4 ROI Calculator..............................................................................................................................................................................5 Data Analytics Value .................................................................................................................................................................5 Future Trends..............................................................................................................................................................................7 Is a one-‐stop shop business model the best approach?........................................................... 8 Assessing Global and Regional Industry Trends ..........................................................................................................8 Technology Life Cycle...............................................................................................................................................................9 Importance of Advisory Services .....................................................................................................................................10 How Can Operating Margins Be Improved?........................................................................... 11
Conclusion............................................................................................................................ 12
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INTRODUCTION:
The Client The Client for this project was the Brazilian investment bank BTG Pactual. BTG Pactual (BTG) is one of
Latin America’s largest banks with a presence in the world’s financial capitals and operations in
Investment Banking, Asset Management and Wealth Management. The bank’s current net equity is over
US$6.2 billion with over US$66.2 billion under its Asset Management division and R$20.4bn in Wealth
Management.
Specifically, we were engaged by BTG Pactual’s private equity team, which operates within the firm’s
merchant banking group. The fund recently invested in a Brazilian company called CCRR. A market
leader in pressure sensitive materials, self-adhesives, labels and specialty paper, CCRR was formed in
June 2011 from the merger of Colacril (the largest self-adhesive plant in Latin America) and RR Etiquetas
(the pioneer of the barcode system and a leader in the labeling and tracking industries). This integration
solidified CCRR’s position as a leader in the fast-growing pressure sensitive materials industry in Brazil,
and enabled its progression into radio frequency identification technology (RFID).
The Problem Seeking to innovate in the labeling industry, CCRR sought to expand its product offerings into Radio
Frequency Identification (RFID) technology. CCRR intended to target and push RFID adoption through
the retail sector. Prior to investing in the expansion into RFID, BTG recognized the need to further
understand the technology, its scope and potential, its applicability in the Brazilian market as compared to
other developed and developing countries and, most importantly, its limitations. As a BTG portfolio
company, it is essential to BTG that CCRR implements a business strategy that will eventually yield
strong returns for the fund. Thus, it was important for BTG to be able to quantify the return on investment
(ROI) of RFID technology to CCRR clients, in order to ensure its commercial viability and rapid adoption
in the Brazilian market. In addition to analyzing CCRR’s expansion into RFID, they wished to analyze
other strategic growth opportunities to gain a comprehensive understanding of CCRR’s growth potential.
The Scope of the Project BTG asked us to evaluate the growth prospects associated with this technology; to determine what
complementary services, if any, would improve the value proposition of the technology; and to identify
opportunities to improve the company’s cost structure. The client summarized these goals with three
overarching questions:
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1. Is RFID the technology of the future?
2. Is the One-Stop shop business model the best approach?
3. How can operating margins be improved in either case.
To answer these questions, we conducted extensive research and field study in Brazil and New York. Due
to the relatively nascent stage of RFID in the Brazilian market, we sourced much of our data from
interviews with BTG Pactual, CCRR and, CCRR’s clients, which enabled our team to effectively address
the questions posed by BTG.
Is RFID the technology of the future? Yes, for the Brazilian market, RFID is the supply chain management technology of the future. It provides
three key advantages over traditional barcode labeling technology:
1. It contains a chip that is capable of holding significantly more information about the labeled
product, and it can be scanned from a greater distance, without line-of-sight contact between the
chip and the scanner. This feature gives a supply chain manager much more granular information
about the flow of products through the supply chain, this enables more efficiency in keeping track
of items on the SKU level, thus a reduction of stockouts1 in stores and theft levels throughout the
supply chain. And, since a manager is better equipped to predict when and where goods are
needed, inventory levels can be kept lower, thus freeing up cash.
2. The ease of scanning significantly reduces the amount of labor involved in the inventory tracking
process, thus reducing labor costs.
3. The technology enables the collection of massive amounts of data, which when analyzed over
various time cycles, help firms continuously adapt its business practices, develop more accurate
supply and demand forecasting, and gain a better overall understanding of the market.
The main hindrance to RFID adoption has been the high cost of RFID tags at 30 cents per tag compared
to 1 cent per unit for barcodes. However, as costs have declined, the benefits of RFID have become better
understood and its adoption rate has increased. RFID has been most readily adopted in developed
economies where companies have the scale and resources to take advantage of the larger amounts of
supply chain data (see discussion on analytics below). Another impediment to RFID adoption in Brazil is
that companies do not have Enterprise Resource Planning (ERP) systems capable of interfacing with
RFID technology, which imposes an additional cost to the companies that choose to adopt RFID. As
1 A stockout occurs when a customer wants a good, which is not available in the store.
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Brazil and neighboring Latin American countries continue to develop, we expect that they will follow a
similar adoption trajectory.
ROI Calculator Due to a general lack of data supporting the value of RFID in the Brazilian context, CCRR asked our
team to develop ROI calculators for two of their clients – Mondial and Leader – to complement their
respective RFID pilot programs. CCRR is using these pilot programs and company-tailored ROI
calculators as part of their sales pitch. The goal is that the pilot and ROI calculator will encourage their
clients to fully adopt RFID. Previously, CCRR’s ROI calculator only accounted for labor savings. To
further improve the ROI potential to CCRR clients, we enhanced the calculator to also account for the
other three major benefits of RFID: inventory savings, reduction in theft, and reduction in stockouts.
We balanced these financial benefits against the costs of RFID, effectively conducting a cost-benefit
analysis. These costs include minimal upfront expenses (tag readers, software, etc.) and the variable cost
of the tag itself, which is the primary expense related to RFID adoption: RFID tags can cost over twenty
times more than a barcode label. Nevertheless, in our research we discovered that the benefits outweighed
the costs: most businesses in the US that adopted RFID on some level intended to roll out the technology
on a wider basis due to the favorable ROI. Our calculator does not take into account benefits of RFID that
are more difficult to quantify, such as the value of analytics, discussed below.
Data Analytics Value Analytics are an important element in the ROI calculation. Although it is one of the more difficult
benefits to quantify it is still relevant in determining the value proposition of the technology. The capacity
to collect massive amounts of data, analyze this data over various time cycles, and readjust business
practices is a tremendous advantage to using RFID technology over other logistics systems such as the
barcode. Much of the potential of analytics in RFID integration depends upon a firm’s ability to translate
RFID data into value added. Studies show that apparel companies could yield a 40% increase in profits as
the result of effective utilization of internal RFID analytics. Furthermore, the value of data increases as it
is shared with business partners that are key to their supply chain matrix. Thus, companies could
experience as much as a 60% increase in profits as a result of the reduction in information gaps across the
supply chain. High quality analytics also leads to more effective marketing, merchandising, and overall
return on invested capital (ROIC) of a firm. Further, within the apparel industry, several customer touch
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points can be considered in optimizing the next-best offer, essentially providing data analysts with the
information necessary to determine future customer preferences. Partially, these include:
• Customer Information:2
o Customer Behavior within the store: Operational factors, such as the customer’s current
movements throughout the store; the products the customer has in his cart; the products the
customer triaged or otherwise spent time near, but did not put in his cart, what the customer is
wearing; and what credit cards the customer is carrying
o Syndicated RFID data could include when and where his wardrobe was purchased, and the
customer’s movements in previous visits to the store.
o Traditional syndicated marketplace data, such as credit history and FICO score, customer
demographics, customer psychographics, and customer econometrics.
• Front Store/Back Store Information
o Inventory and Out-of-Stocks3
o Lead Times - i.e. tells how long an item's been on the floor, showing how long it takes for an
item to be sold4
o Process Cycles - traces where a product has gone within the store, i.e., through an elevator or
hallway multiple times, illuminating inefficiencies.
o Misplaced Merchandise within the store
o Utilization of Fitting Rooms - showing which items were tried-on and (not)purchased
o Complements and Substitutes - which items were bought/tried-on with other items
o Correlations between Sales/Try-ons, and Inventory
• External elements like news and weather (at the time of purchase)
2 Taking a Broader View of Supply Chain Resilience, Wright, Jonathan. Supply Chain Management Review Apr 2013: 26-31. 3 New Models for Addressing Supply Chain and Transport Risk, World Economic Forum, 2012. 4 Transport and Logistics, QFinance, 2011.
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Figure 1
Future Trends From our discussions with RFID experts there does not appear to be an alternative to RFID in the
foreseeable future. However, our research suggests that the chiplets technology could be a game changer
for the chip industry. As a major component of RFID tags, the new chip manufacturing process could
further reduce the cost of RFID technology in the medium to long term.5 While the technology is still
very much in the research and development phase and not yet commercially viable, it could be highly
disruptive to the chip industry and by extension the entire electronics industry. The growth drivers for
5 http://www.nytimes.com/2013/04/09/science/tiny-chiplets-are-a-new-level-of-micro-manufacturing.html?pagewanted=all
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RFID in Brazil will be the harmonization of global EPC6 standards, pressure from stakeholders.
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Figure 2 shows the evolution of identification technologies from 1953 until 2011.
Is a one-‐stop shop business model the best approach?
Assessing Global and Regional Industry Trends
We assessed the competitive landscape within individual market segments of the RFID value chain to
determine trends among global industry leaders in adapting their business model to the evolving RFID
technology. Over the past decade, paper and printing companies have gradually consolidated their product
offerings along the RFID value chain.
As the most developed market in the self-adhesives and materials industry, the North American and
Western European markets provided a framework for our assessment of market trends. In 2004, the self-
adhesives and materials industry in North America and Western Europe were highly saturated. The
pressure-sensitive adhesives industry was also experiencing weakening demand, leading to pricing wars
among major competitors in the industry. In response to the market conditions, Avery Dennison, a
leading supplier of pressure-sensitive materials, anticipated the rapid growth of RFID applications, and
created a special division dedicated to their design, manufacturing and marketing. By 2011, Avery
6 Electronic Product Code is a product identification standard 7 Chart sourced from seonic.com
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Dennison’s RFID division was its faster growing division, tripling its revenues from $50 million in 2010
to over $150 million in 2011.
Recently, R. R. Donnelley & Sons Co., another industry leader in paper and printing services in the U.S.,
announced the introduction of RFID and Near Field Technology production capabilities as part of its
printed electronics initiative enabling the company to provide its customers integrated RFID solutions
combined with its wide array of digital, logistics and printed products and services.
The Brazilian market appears to be following the trend of the U.S. market with a 5 to 6 year lag. In 2010,
Valid and Haco Etiquetas entered into a strategic partnership to serve the apparel RFID market in Brazil,
developing integrated solutions using the RFID inlays manufactured by Valid in the woven labels
produced by Haco. CCRR is already on the same track as Avery, as it represents a consolidation of the
paper and lamination operation of Colacril with RR Etiquetas conversion capabilities and RFID know-
how.
Technology Life Cycle
In general, the technology life cycle has four distinct stages (see Figure 3):8
1. Research and Development:
2. Ascent Phase:
3. Maturity Stage
4. Decline (or Decay) Phase
After reviewing the US RFID industry, we conclude that it is now well into the maturity stage. This
implies that the technology is firmly established resulting in increased competition and eventual market
saturation. During this stage, returns begin to slow as the concept becomes standard. RFID has been
adopted by a broad array of industries, such as the US government, retail and technology. In addition, the
price of the technology is no longer a barrier to adoption. Brazil’s RFID technology adoption on the other
hand is in the ascent stage and is expected to reach the maturity phase in about 2 to 3 years. The ascent
stage covers the timeframe from the invention of the product or service to the point where out-of-pocket
costs have been recovered. At this junction the goal is to achieve rapid growth and distribution of the
invention, leveraging the competitive advantage of having the newest and most effective product. These
8 https://www.boundless.com/management/organizational-culture-and-innovation/technology-and-innovation/technology-life-cycle/
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stage estimations are exemplified by CCRR’s current plans to bring more of the RFID supply chain in-
house, and the firm’s focus on promoting RFID adoption. Also, in the US market there is now a focus on
asset management and advisory services, which is a sign of a mature market. With this timeframe in
mind, it would be prudent for CCRR to start building up their advisory service offerings, so that they can
compete directly with international competitors that are entering the Brazilian market.
Figure 3
Importance of Advisory Services
The entry of Avery Dennison (AD) and upcoming entry of UnitekBlue (UB) and other international
competitors into the Brazilian market is an additional threat to CCRR’s market share. The products
provided by CCRR and its various local, regional, and international competitors are all imitable. These
firms cannot differentiate based on products. Because of the lack of differentiation between firms’
products, achieving competitive profit margins is difficult. In order to compete and add value, CCRR
should expand and improve the marketing of its advisory services.
Product and service differentiation through advisory services is a strong strategy that is currently the trend
in the United States. Avery Dennison, a top provider of RFID in the United States, has dedicated its RFID
department to enabling significant improvements in asset management, product quality, process
improvement, and consumer experience. Specifically, Avery Dennison provides field services, an in-
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house repair center, RFID solution support and software development. Similarly, IBM RFID Services
helps its clients define a strategy for, plan, design, integrate, implement and manage the RFID
environment in order to increase productivity and reduce costs.9
Figure 4
As shown in Figure 4, firms that successfully pursue a differentiation strategy such as adding advisory
services can achieve a higher Willingness to Pay (WTP) from their client, directly increasing a firm’s
revenues.
In the US, the emergence of RFID advisory firms, such as Blue Bean RFID shows the need for advisory
services in the US RFID space. Blue Bean RFID10 offers an “RFID Rapid Start” Package, which helps
potential clients determine the feasibility of RFID adoption. RFID4U provides project management, site
assessment and RFID lab setup services for its clients. These examples of advisory service expansion in
the US market directly support the need for a similar expansion in the Brazil market.
How Can Operating Margins Be Improved? Given the nascent stage of CCRR’s RFID Division, improving operating margins gained from synergies
in mergers and acquisitions may not be a viable option for BTG Pactual and CCRR. However, CCRR’s
plan to start manufacturing inlays in 2013 and chips in the future will bring more of the RFID value chain
in-house, thus cutting out the high import tariffs and improving RFID profit margins. Since the RFID 9 http://www-935.ibm.com/services/us/en/it-services/rfid-services.html 10 http://www.bluebeanrfid.com/#
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division’s financials are not broken out from the parent company, it was difficult for our team to ascertain
the exact cost structure and specific areas where efficiencies could be improved. Going forward, the
following are areas in which CCRR can achieve improved operating margins: cost savings from
outsourcing/off-shoring, lobbying for favorable government policies (e.g. tax incentives and subsidies),
implementing a lean six sigma approach to improve operating efficiency and quality of service, and
identifying potential acquisitions or mergers that will help CCRR boost its competitive advantage through
synergies found in economies of scale, human capital and economies of scope.
Conclusion
After extensive research, field study and analysis, we reached the following conclusions:
1. RFID is indeed the technology of the future for supply chain management. CCRR should pursue
their strategy in anticipation that their clients will increasingly want to adopt RFID, for the sake
of its cost-saving and value-creating benefits. From our understanding of the North American and
Brazilian markets, RFID adoption should be on par with the North American market in 2-5 years.
2. The one-stop model approach is also in line with current industry trends globally and offers
opportunity for economies of scale across the RFID value chain.
3. Finally, the one-stop shop model would contribute in improving operating margins by bringing
more of the services on the value chain in-house.