Innovation in Designing a Blueprint for Growth

Using data and facts to drive value, returns, change and results

Rethinking Retail

Top Performers Have Superior Sales and Profit Growth

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Top Quartile Second Quartile Third Quartile Bottom Quartile

2

Sales Growth

Operating Profit Growth

Total Shareholder Returns

(2010-2014)

Quartile Total

Return+28.7% +18.2% +12.1% -3.9%

Gro

wth

-P

erc

en

t

(20

10-2

014

)

Source: 60 randomly selected US public companies (rev: $1bn-$10bn; random selection from all industries); OneSource;

Thomson-Reuters; Quincy Analytics

In an endless pursuit of top-line growth, managers often lose sight of the very

simple fact that it is growth of revenue AND profits that generate superior returns.

A New Approach

A Framework for Identifying Opportunities for Profitable Growth

Applying this approach in Retail: Amazon

3

Potential Growth Drivers

Core Business Development/ Improvement

First Tier Adjacencies

Beyond the Core Second Tier Adjacencies

4

Growth Drivers Construct

High

Medium

Build Buy

Likelihood of Success

Low

Low HighDegree of Risk

Straying from The Core Reduces Prospects for Profitable Growth

Core1-Step

Adjacency

2-Step

Adjacency

3-Step

AdjacencyDiversification

Shared

Customers

Shared Costs

Shared

Channels

Shared

Capabilities

Shared

Competition

Odds of

SuccessN/A 35% 15% 8% <5%

5Source: Bain & Company

= Strong Overlap

= Little to No Overlap

Rela

ted

ne

ss t

o C

ore

Bu

sin

es

s

• Less Competitive Advantage

• Less Potential Profitability

• Lower Share and Customer Loyalty/NPS

Economic

Distance

from Core

However, Adjacencies Are How Most Businesses Grow

Core

New Products

and Services

New Customer Segments

New Distribution Channels

New Related Businesses

New Parts of the Value

Chain

New Geographies

6

But Managing Costs and Improving Margins Also Key

7

Common Drivers of Margin Erosion:

Lack of assiduous expense management

Expense control must be led from the top and be the CEO’s priority

Growth can often be used as an excuse for “expense creep”, e.g. “we need more staff to handle all these new customers” – matching true needs with growth achieved must be managed carefully

Customer churn

A recent Harvard study found that companies with significantly higher churn rates to competitors/comparables experienced a 20-30% profit disadvantage to their rivals

Acquiring new customers, with steep acquisition costs, is always costlier than expanding existing customer wallets

• Target greater “share of wallet” not just “new wallets”

Low Net Promoter Scores (NPS)

NPS is widely acknowledged as “the one number you need to grow”; however, low NPS is also associated with higher costs owing to customer churn and the additional cost of servicing unhappy customers

High relative employee turnover

Enormous costs can be incurred recruiting, hiring, and training new staff

Loss of key players can put key customer relationships in jeopardy as well

Poor merger integration

For companies pursuing growth through acquisition, significant dollars can be “left on the table” owing to poor merger integration (planning and thoughtful execution);

• Redundancies missed

• Inefficient or unnecessary processes not identified and eliminated

A New Approach

A Framework for Identifying Opportunities for Profitable Growth

Applying this approach in Retail: Amazon

8

Amazon Performance Over Time

9

$48,077

$61,093

$74,452

$88,988

$107,006

$0

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

2011 2012 2013 2014 2015

Mill

ion

s o

f D

olla

rs

Amazon Sales

CAGR: 22%

1.2%

5.9%

0%

1%

2%

3%

4%

5%

6%

AMAZON QA Retailer Composite

Average Operating Margin

Source: 5 Year Average; Company Financials; Morningstar; Quincy Analytics Retailer Database

Composite: WMT; TGT; SPLS; KR; M; BBBY; TJX; HD; COST – does NOT include AMZN

Amazon looks fantastic from a sales growth perspective, but not so much from a

profit perspective, right? NOT SO FAST….is this the right way to view profitability?

Using a More Relevant Retailer Profit Metric – Amazon Excels

10Source: 5 Year Average; Company Financials; Morningstar; Quincy Analytics Retailer Database

6%9%

13%15%

17%

21% 22%

31%

50%

62%

0%

10%

20%

30%

40%

50%

60%

70%

SPLS M WMT KR TGT BBBY COST HD AMZN TJX

Retailer Average ROIC Return on Invested Capital is the more relevant profitability metric

ROIC takes into account the large capital requirement of traditional retailers

Retailers earning greater than their WACC (12% for AMZN; ~7% for traditional retailers) are creating, those below destroying it

Using ROIC, Amazon is bested only by TJX

However, Amazon has achieved superior profit performance by redefining the value chain –creating sustainable competitive advantage – while traditional retailers like TJX often resort to financial maneuvering (in TJX’s case, through aggressive working capital management)

Amazon Has Systematically Exploited the Blueprint for Growth

Core

New Products

and Services

New Customer Segments

New Distribution Channels

New Related

Businesses

New Parts of the Value

Chain

New Geographies

11

Everyone knows how Amazon has fueled profitable growth in the green shaded areas….

but let’s deep dive on the reds

From “Earth’s Biggest Bookstore” to

“Earth’s Biggest Selection” – “The

Everything Store”

Amazon Business grew to

400,000 B2B customers and

$1bn in Rev in 1 year

AWS is the preferred IaaS

provider for government

including NASA and the CIA

Kindle for digital content, especially media

Disintermediation of UPS/FedEx/USPS Dependency:

Amazon Locker Amazon Flex (“Uber”-like

network) Amazon own delivery fleet Amazon Prime Air (drone

delivery?)

By 2015, 33% of Amazon’s revenue

was from international (non-US)

markets

Amazon Focuses Religiously on the Core

Source: Quincy Analytics Retail NPS survey; 637 consumers; 2015

37

43

64

0

10

20

30

40

50

60

70

Walmart Target AMAZON

Exceptional Net Promoter Score The Power of NPS:

NPS is a powerful metric that measures how enthusiastically customers would or would not recommend you to a friend or colleague

The metric is powerful because hundreds of studies and actual examples show that higher relative NPS leads to:

1. Higher top line growth as consumers return for repeat business and enthusiastically recommend you to others and disproportionately more growth than lower NPS rivals

2. Lower costs to serve and lower churn and acquisition costs (a repeat customer has virtually no incremental acquisition cost)

US Retailer Average NPS

Amazon tops almost every retail customer satisfaction metric (e.g. ACSI #1);

however none is more important in yielding profitable growth than NPS

“We’re not competitor obsessed, we’re customer obsessed. We start with what the

customer needs and we work backwards.” - Jeff Bezos, 2013 Interview

Exploiting New But Related Businesses – Amazon Web Services

Core3-Step

Adjacency

Shared

Customers

Shared Costs

Shared

Channels

Shared

Capabilities

Shared

Competition

Odds of

SuccessN/A 8%

13

= Strong Overlap

= Little to No Overlap

Rela

ted

ne

ss t

o C

ore

Bu

sin

es

s

1-Step

Adjacency

50% +

…but to Amazon it looked

like a very near adjacencyTo everyone else, AWS looked

like a risky, unlikely bet….• AMZ created the

infrastructure as a

service (IaaS) industry

• NOT born out of

“excess capacity” as

some have suggested,

but out of a

fundamental IT need

stemming from its core

operations

• Seized on opportunity

and now is now the

market-leading IaaS

public cloud computing

company.

• AWS was estimated by

Gartner to have a public

cloud that is five times

larger than its next 14

competitors combined.

AWS Revenue, Profits and Market Share

14

Source: Company financials; Forester

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2015 Market Share

And AWS’ Competition is High Tech, NOT Retail

AWS MS IBM

Google Oracle Others

4%

34%

5%

37%

7%

42%

0%

10%

20%

30%

40%

50%

Revenue Op. Inc. Revenue Op. Inc. Revenue Op. Inc.

Pe

rcen

t o

f R

eve

nu

e/O

pe

ratin

g In

co

me

AWS Accounts for Less than 10% of AMZ Revenue, but Over 40% of Profits

2013 2014 2015

AWS now dominates a space many would have assumed was not a core adjacency

AWS also allows Amazon to target customers far outside its retail consumer roots –

e.g. government (from NASA to the CIA) and corporate (from GE to MLB to Airbnb)!

Traditional Retail Value Chain and Amazon’s Strategy

15

Merchandis

ing/Procure

ment

Inbound

Logistics/

Warehousing/

Outbound

Logistics to

Store

Store

Operations/

Stocking

Store

Promotions

and

Marketing

POS

Service

Firm Infrastructure – Management & Governance

Human Resource Management

Technology

Real Estate – Store Site Selection

Marg

in

After Sales

Support/

Returns/

Etc.

Product

Manufacture

/

Sourcing

Amazon succeeded by re-defining the industry’s value chain, reducing costs, and delivering a

unique new value proposition to consumers. Amazon effectively eliminated or minimized

costly elements of the value chain, executed with precision on those that remained, and strives

to shore up those where it sees areas of weakness or opportunities for greater margin

AMZN either eliminated,

redefined, or minimized expense

of traditional value chain step

AMZN improved and excelled

at the value chain step

Remaining “Pain Point” for AMZN

Addressing Pain Points and Identifying Margin Expansion Opportunities

0

500

1,000

1,500

2,000

2,500

3,000

2009 2015E 2016F

Num

ber

of A

B P

rodu

cts

AmazonBasics –AMZ’s Private Label Push

16Source: Fortune; Bloomberg, Forbes; New York Times; Payscale.com; US BLS

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

CO

ST

WM

T

BB

BY

HD

KR

TJX

WF

M

BB

Y

TG

T

NR

D

AP

LS

eB

ay M

DD

S

DG

FD

AM

ZN

Median Retailer Tenure (Years)

Amazon’s push into private label (AmazonBasics) is one attempt to shore up a

perceived weakness in its value chain, but is its Human Resource approach and

‘bruising workplace’ its Achiles’ heal?

Management Team Brainstorm

Primary Research Execution and Financial Plans

17

Typical Approach and Process for Core and Adjacency Growth Assessment

Approach:

Full day session

Core company Management

team

Facilitated senior professionals

with operational expertise

Supported by broad industry

experts as needed

Expected Outcome:

Inventory of complete list of

examined and hypothesized

adjacency opportunities

Narrowed list of “high potential”

opportunities for primary research

validation

Approach:

Field surveys with customer and non-

customer decision makers,

competitors (and potential

competitors), industry experts, and

broader company management team

and advisors

Validated against available secondary

research, internal company data, and

prior management findings

Expected Outcome:

Core business assessment: health

and opportunities for growth in the

core

Further narrowed list of “highest

potential” adjacency opportunities

based on:

Revenue/profit opportunity

Viability/Credibility

Capital requirement

“Fit” with core business

Target or partner identification and

vetting (e.g. availability, willingness to

partner, etc.)

Approach:

Integration of business and execution

plan with existing company business

plan

Financial modeling, sensitivity and

scenario analysis, range analysis

Expected Outcome:

High level financial plan and revenue

and profit expectations

Timing and sequencing of steps

Action plan for management

Timeframe: 6-8 Weeks