The Corporate Life Cycle Jeremy Thomas
Life Cycles 1
Life Cycles 2
Companies have a lifecycle 3
Companies have a lifecycle 40% 4
Investment process Idea generation Thematic Stock selection Stewardship Portfolio construction Company life cycle 5
Measuring company lifecycle using CFROI 10,000 5,000 5,000 Cash flow 5,000 5,000 5,000 return on investment n = Life - 25,000 Asset Life 5 years IRR or CFROI 10% 6
Companies have a lifecycle 7
Companies have a lifecycle MEASURING COMPANY LIFECYCLE USING CFROI - UPS 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CFROI CFROI Forecast Discount Rate % Source: Holt 8
Companies have a lifecycle MEASURING COMPANY LIFECYCLE USING CFROI - NOKIA 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CFROI CFROI Forecast Discount Rate % Source: Holt 9
Return on invested capital Corporate life cycle 20 START DISRUPTIVE UP GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL 15 10 5 0 Time -5-10 10
The Corporate Life Cycle: Case Study The US and UK Retail Industry 11
Analysing the Corporate Life Cycle in Retail. The Retail Holy Trinity Price/Value TIME = $ Range/Variety Convenience/ Service 12
Start Up: Ocado 13
Start up: Ocado A better business model than the traditional supermarket? MEASURING COMPANY LIFECYCLE USING CFROI 15.0 5.0-5.0-15.0-25.0-35.0 CFROI CFROI Forecast Discount Rate % A unique model in a large sector: The UK grocery market alone = 185bn in 2017 (IGD) 14
Ocado through the lens of the Holy Trinity 60,000 50,000 50k Price/Value 40,000 30,000 30k 20,000 10,000 Range/Variety Convenience/ Service 0 15
Is Ocado a credible business model? Operating costs incurred by traditional supermarkets 16
What are Ocado s operating costs? Two main buckets: Picking - From an automated, centralised warehouse Delivery - From the warehouse to your door Less land, buildings and bills Fewer people 17
Cost Bucket 1: Picking - extraordinary, unique technology 2017 18
Cost Bucket 2: Delivery 19
Is Ocado a credible business model? Imagine a 100 order 100.00 90.00 80.00 70.00 Cash margin pre admin 10.50 Cost of delivery 12.50 Cost of picking 9.50 10.5% Cash Margin (pre admin) vs Tesco 7.2% 60.00 50.00 40.00 30.00 Cost of goods 67.50 20.00 10.00 0.00 20
Near term profitability shrouded by investments Targeted investments in R&D that reinforce Ocado s leadership and have the potential to transform an industry: 950 people technology team 200 qualified engineers 21
This R&D supports Ocado.com in the UK, and is now also being monetised via partnerships with overseas retailers 22
Disruptive Growth: Amazon 23
Eureka! Amazon through the lens of the Holy Trinity Price/Value 606 million Range/Variety Convenience/ Service Previously mutually exclusive consumer needs are satisfied Source: Scrapehero 24
$ Billions Amazon s extraordinary growth 300 250 200 150 100 50 0 FY 2009 FY 2011 FY 2013 FY 2015 FY 2017 FY 2019 Est Source: Bloomberg as at 5.2.2018 25
Defensive Franchise: Costco 26
Defensive franchise: Costco The store that s so cheap, millions of people actually pay to shop there! MEASURING COMPANY LIFECYCLE USING CFROI 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1993 1998 2003 2008 2013 2018 CFROI CFROI Forecast Discount Rate % 27
Defensive franchise: Costco Their business model Membership fees form a stable income stream that account for c75% of profit. Thereafter everything sold close to cost. Most retailers think about how much they can sell their merchandise for. We think about how little we can sell it for We re trying to create a retailer fit for the next hundred years Rich Galanti, CFO 28
Defensive franchise: Costco designed to minimise invested capital and operating costs 29
Defensive franchise: Costco Low costs = low prices, and retail s virtuous circle begins 34.0% Mark-Ups 22% Operating Costs 21% 12.6% 10% Amazon Wal-mart Costco Wal-mart Costco 30
Defensive franchise: Costco Huge price gaps with discounter Walmart Rotisserie Chicken Costco: $1.66 per lb Walmart: $2.40 per lb 31% Cheaper Cake Costco: $9.49 Walmart: $18 47% Cheaper Cheese Costco: 15c per oz. Walmart: 25c per oz. 40% Cheaper Vanilla Extract Costco: 62c per oz Walmart:$1.84 per oz 66.3% Cheaper 31
Defensive franchise: Costco Treasure Hunt Atmosphere : what you go to Costco to get Costco is known for its treasure hunt atmosphere, offering constantly changing selections of low priced but very high quality discretionary goods among inexpensive, regularly stocked staples. 32
Defensive franchise: Costco What you might also come home with 33
Costco through the lens of the Holy Trinity Most retailers think about how much they can sell their merchandise for. We think about how little we can sell it for - Rich Galanti CFO Price/Value Range/Variety Convenience/ Service 34
Cyclical Franchise: Home Depot 35
Cyclical Franchise: Home Depot The US Home Improvement Giant 36
Sales ($bns) Cyclical franchise: Home Depot 2,278 stores in key locations throughout a very large country DUOPOLY: US HOME IMPROVEMENT SALES 100 90 80 70 60 50 40 30 20 10 0 Home Depot Lowes Menards Source: Home Depot and Lowes Company Reports, Forbes 37
Cyclical franchise: Home Depot Proved immune to the disruption caused by Amazon etc. Why? Bulky/low value Immediate need Consultation Hard to ship Hazardous to ship Exclusive Brands 38
Cyclical franchise: Home Depot Outstanding franchise, but subject to the vagaries of the housing market HOUSING MARKET FHFA US House Price Index Purchase Only SA 270 250 230 210 190 170 150 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Source: Federal Housing Finance Agency 39
Cyclical franchise: Home Depot US Home Improvement Giant MEASURING COMPANY LIFECYCLE USING CFROI HOME DEPOT 25.0 20.0 15.0 10.0 5.0 0.0-5.0 2002 2007 2012 2017 CFROI CFROI Forecast Discount Rate % Terrific business with high barriers to entry, great cash generation, but absolute level may fall in a tough housing market. 40
Fading winner: traditional supermarkets 41
Fading winner: Traditional Supermarkets e.g. Kroger (USA) MEASURING COMPANY LIFECYCLE USING CFROI KROGER 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CFROI CFROI Forecast Discount Rate % 42
Kroger through the lens of the Holy Trinity Price/Value 50,000 Range/Variety Convenience/ Service >500 million 43
Return on invested capital Summary START UP DISRUPTIVE GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL Time 44
Conclusion 45
Measuring company lifecycle using CFROI NOKIA 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CFROI CFROI Forecast Discount Rate % Source: Holt 46
Measuring company lifecycle using CFROI APPLE 35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0-5.0 2004 2006 2008 2010 2012 2014 2016 2018 2020 2022 2024 2026 2018 2020 CFROI CFROI Forecast Discount Rate % Source: Holt 47
Return on invested capital Where is Apple in its life cycle? APPLE DISRUPTIVE GROWTH FRANCHISE FADING WINNER CASH HARVEST SPECIAL SITUATIONS DEFENSIVE CYCLICAL Time 48
Conclusion Themes Stewardship 20 Life-Cycle 15 10 5 0-5 -10-15 49
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