JS – Fascinating post, given the challenges you outlined it is hard not to think the future for Gamestop is looking pretty grim. In addition to your points on Gamestop’s potential to shift its business to new segments like digital, merchandise, and retro, I believe its greatest point of potential is simply time. Despite same store sales declines of as much as 7% year-over-year, the Company is still generating significant operating cash flow ($240m over last-twelve months). The underlying driver behind this is that Gamestop’s trade-in policy is keeping physical games relevant, albeit at a declining rate. This is because the Company’s customer base values its ability to trade-in used games for credit towards a new purchase. This allows them to receive some value for their obsolete past-purchases, avoid slow download times, and preserve space on their hard drives. Because of this dynamic, Gamestop will be able to remain relevant and undergo a “slow-burn” before ultimately becoming replaced by its digital competitors. I see this “slow burn” effect as a point of potential for the Company, because it will be able to use its consistent Cash Flow generation to invest in the growth areas you suggested, while also exploring new opportunities to preserve its business. With time ticking away, it should be interesting if it can leverage its declining revenue base for growth in new arenas.
BFM – It is amazing to see how producers of consumer goods are relying on new business models to preserve margins in light of increased competition across sales channels. You make the point that Nike can “increase the number of SKUs offered at a limited incremental inventory.” This causes me to wonder what type of long-term impact the shift to Nike ID sales will have on its bottom line?
I ask this question because as Nike continues to innovate and offer new styles there might be a higher chance that the Company’s raw material inventory will become obsolete at a faster pace. This problem has started to emerge in its recent earnings calls. Management has stated that its gross margin had declined 30 basis points due to write-offs in excess inventory . I assume that the thousands of iterations in color, materials, and sizes required by the Nike ID store will contribute to higher variation in the procurement of raw materials. This will create a unique challenge to Management, testing their ability to balance lean inventory with expanded offerings. Is there anything they can do to help mitigate this problem? Two simple solutions could be reducing the total number of product lines and leveraging past material patterns for future products. Would this compromise the Company’s strategy of constant innovation?
Cranberry Farmer – It is amazing to see how Amazon is using its advanced systems to stay so far ahead of its traditional retail competitors. This is a great example of how increased competition and technological advancement are being used to drive prices down and ultimately create tremendous value for consumers.
Another interesting aspect of Amazon’s Black Friday strategy is its willingness to offer black Friday deals over a longer period of time. Given the Company’s position as the fastest growing retailer in the united states, Amazon’s surge in demand during the holiday season has led to customers not receiving orders on time. To avoid shipment bottlenecks, like it has experienced over recent years, the Company has created larger “sale windows” to incentivize purchases to be spread out over a longer period of time. By rolling out limited time deals weeks before the traditional Black Friday sale period, it is able to influence customer behavior and match orders with its shipping capacity. This has also shifted competitive pressure to retailers by establishing price floors on comparable goods. Amazon’s actions have raised the question on if there is anything traditional retailers can do to stay competitive? As you stated these retail competitors face high inventory holding costs coupled with large wages payable in order to stay open during extended holiday hours. I believe this will ultimately handcuff their ability to lower margins through sales and keep up with Amazon’s asset-lite business model.
MD – It is amazing to see Netflix constantly adapting to maintain its competitive position. When the Company announced its strategy to produce more original content, few envisioned that it would be able to gain this much traction with its viewer base this fast.
Like the companies we have studied in TOM over the past few weeks, Netflix is also taking steps to increase efficiency in its supply chain. One example of this is through production of its original programming. When the Company first started developing its original content it would source a third-party production studio to produce the series, and ultimately make payment on final delivery. However, as its volume of original media increases, Netflix is now cutting out the middleman and producing original content in-house (i.e. Stranger Things series). Although this requires a larger upfront investment, it benefits from greater control in working with creative teams, lower overhead fees, and the ability to retain Intellectual Property for future uses like toys and games . Given Netflix recent success with in-house production, it should be interesting to see if the Company can continue to maintain its ability to produce products that captivate its customers.
Garet – It is amazing that ADT’s value proposition has been pretty much unchanged since the 1940s. Do you think the company will undergo any major near-term strategic shifts as a result of its new ownership structure?
In February 2016, the Company announced it would be acquired by the private equity firm Apollo Management for ~$7 billion . Apollo stated that it intends to merge ADT with its existing portfolio companies in the security services space, Protection 1 and ASG. Given that these three companies will form the largest home security services firm in the United States, I could see ADT becoming less likely to innovate in the future. This is because the new pro forma entity will have such a strong competitive position that it won’t face as much pressure to find new ways to win subscribers. I could also see the merged company’s massive free cash flow profile de-incentivizing the new ownership team to make any radical changes. This is because they will be able to use the strong recurring-monthly-revenues to take massive dividends and realize immediate returns. What are your thoughts?
Orly – Great post. Although later then probably deserved, it is encouraging to see regulatory authorities taking measures to incentivize the adoption of environmentally friendly modes of transportation. In your blog, you state that some governments are moving towards taxes and privileges for low emissions vehicles. One leader on this front is the state of California with its Clean Vehicle Rebate Program. According to the Center for Sustainable Energy, since 2010 the CVRP has issued more than $291 million in tax rebates for more than 137,000 vehicles . These rebates are for fuel cell, electric, and plug in hybrid cars. At the time of purchase, the state refunds buyers up to $2,500 coupled with up to $7,500 in annual tax credits . Given these significant savings, the purchase behavior of consumers is being heavily influenced. In 2016, the Rebate Program was adjusted to further benefit low and moderate income families. This was done to ensure that drivers, especially those living in the communities most impacted by air pollution, can afford to benefit from and drive zero emissions vehicles . If additional states continue to follow California’s lead, this could truly open up the market for Companies like Ford that are investing in clean technologies, and ultimately have a real impact on CO2 emission levels across the United States.
1. California Environmental Protection Agency, California Clean Vehicle Rebate Project increases incentives for low- and moderate-income drivers
2. Plug In Electric Vehicle Resource Center, Vehicle Incentives
Jeremy – It is great that you shed some light on the controversial practices of our University. I was particularly interested in your point on the Harvard University Endowment’s decision to not divest its interests in organizations that benefit from the use of Fossil Fuels. One point that you may not have considered is Harvard Management Company’s (HMC, the endowment) campaign to promote sustainable investment in Natural Resources. One example of this is since 2005, HMC has been responsible for planting over 100 million trees in multiple countries and setting aside 300,000 acres of land for conservation purposes. The impact of this investment in the environment is estimated to sequester 2.5 million tons of carbon dioxide each year. Also HMC (like Ikea) requires its investment in timberland properties to be approved by the Forest Stewardship Council (FSC), the leading social and environmental certification standard for forestry . Although this may not completely offset the impact of its questionable investment practices in regards to fossil fuels, it is encouraging to see HMC focus on its impact through environmental, social, and governance factors.
1. Harvard Management Company, Sustainable Investment in Natural Resources
Pippa – I found your post very interesting. Well done. According to the International Monetary Fund, total GDP growth in China is expected to be 6.3% in 2016 and 6.8% in 2017, substantially lower than projections in 2015 of around ~8-9%. This faster than expected slowdown is mainly driven by weaker investment in infrastructure . You state that in 2013 China’s contribution to global output was 15.4% with an outsized consumption of natural resources (coal, steel, aluminum). With expectations of lower commodity prices globally in upcoming years and lower regulatory standards in China, do you envisage the country will look to capitalize on this trend my making up for its lost growth by “doubling-down” in industrial production? If so, will this have an adverse impact on the efforts the country has made to reduce wastewater and CO2 emissions from activity in the private sector?
1. IMF Subdued Demand and Diminished Prospects
Ricardo – well done on this post. On research for my blog on alleviating malnutrition in Africa, I found one major obstacle to be the ability to access these developing markets. Per the Food and Agriculture association of the United Nations, the areas most susceptible to the impact of climate change will be areas with poor infrastructure. In addition to Marcelo’s point, has this impacted Cargill’s efforts to promote the free flow of food to areas lacking supply? Furthermore, I assume that the local economies of the Amazon are reliant on the income generated from soy growth, despite being from environmentally devastating practices like deforestation. Has there been any research done on a shift in production methods or economic activity of local farmers in the area now that these anti-purchase agreements have been put in place?
1. Food and Agricultural Organization of the United Nations ftp://ftp.fao.org/docrep/fao/012/ak915e/ak915e00.pdf
Alex – Awesome post. I first heard about the work Partners Healthcare is doing when I read Paul Farmer’s Mountains Beyond Mountains as part of an undergrad course. I subsequently went on to do some volunteering at Edesia Nutrition (which I wrote my post on), a nonprofit that collaborates with Partners. In doing research on Edesia, I noticed that they have many similar challenges as those P.H. faces. One of these parallel themes is the concentration on cost. As the US government continues to face budget constraints, I assume they will have less capital to donate to organizations like Partners. Is this part of its motivation to cut operating costs? Or is this goal driven by maximizing production and ultimately its broader impact? Additionally, one point that you made that I would like to have suggested to Edesia is focusing on preventative measures. I believe Edesia could help mitigate the almost unlimited demand for its supplements in Africa by better communicating best practices for basic nutrition with the children in the areas it serves. Thanks for the interesting read!
Beth – Your post was very well written and informative. Incorporating a haircut to valuations for end-market and “business-model” deterioration due to climate change was something that I had never considered. I agree that agencies should be including this in their analyses. I say this because one of the aspects of the financial crisis that I find most interesting was how so many different parties, in so many different parts of the global economy, were reliant on the accuracy of Moody’s, S&P, and Fitch. Given this dependence, I feel that there should be an increased amount of scrutiny put on the methodologies and publications of these agencies, and your valuation point is a great reason why. The only argument that I disagree with is that a widespread fall in bond prices is enough to cause a crisis. The reason I disagree with this is because I believe it would take a more material event then the market being surprised in the damage that climate change could do over the long-term. This type of selloff of corporate bonds would not be related to the near-term (1-2yrs) financial health of the underlying issuers. A sudden drop in corporate bond prices, especially one large enough to cause a crisis, is usually seen as a catastrophic event because it implies that the companies that issued the bonds are no longer able to service their coupon payments and are likely to default. In the case of devaluation due to climate change, I don’t think the issuers would be in jeopardy of immediate insolvency, but would face long-term credit profile deterioration, which would have more of a “slow burn” impact on the global economy.
Hey Zack – I enjoyed reading your blog. I never considered heat-related illness to be as big of an issue as concussions. However, in seeing your statistics on fatalities, I find it crazy that we do not find this problem frequently addressed by the media. Through friends in Georgia I learned about the strict policies the State has on athletic participation in heat and humidity. Georgia, like many other southern states, has instituted rules on the length of time spent and level of exertion demonstrated in different temperature ranges. They even specify what types of uniforms players can wear and what types of drills can be done, with material fines issued to schools that violate these policies. One additional mitigant to the health issues caused by heat-illness, would be for the NFL to get in front of this issue and help raise awareness. I look at the league’s campaign to promote children exercising and can’t help but think the caveat of doing so in appropriate weather would do a lot of good and potentially save some lives. However, I also see how your point on jeopardizing their talent pipeline would be factored into their decision not to address this matter, and could see the league prioritizing its best interests as it has done so frequently in recent years.
Margaret – I grew up doing a lot of deep-sea fishing in both Massachusetts and Maine, so I found your post extremely interesting. Over recent years the commercial fishing of Striped Bass has also been a hotly debated topic, with populations continuing to dwindle since 2004 (Massachusetts Website of Energy and Environmental Affairs). I found your point about the impact further reduced quotas would have on the livelihood of local fisherman to be particularly interesting, especially in regards to the competitive dynamics of international demand. With the election coming up next week, I was wondering if quotas are currently a political issue in any of New England’s coastal communities? It would be interesting to learn about the dynamics around balancing the rights of a time-honored profession like cod-fishing with maintaining a healthy local ecosystem.
Sayan – I am very impressed with your post. It is great to see some pushback on Coke’s actions. I remember seeing a Wall Street Journal article on this issue in February. After reading your post, I pulled it back up (http://www.wsj.com/articles/coca-cola-closes-plant-in-india-1455122537). One of the most surprising aspects of the efforts to prevent Coca Cola’s erosion of the water supply is how the local farmers are generating results. In the article, it states that construction of the $73m plant at Tamil Nadu was met with opposition because farmers feared that it would further reduce groundwater availability and pollute neighboring bodies of water. Despite the Company’s efforts, the farmers were able to draw enough attention to these issues and convince the regulatory authorities construction would cause irreversible damage. Its refreshing to see normal people take on one of the world’s largest brands over an ethical issue and ultimately win!