Showing posts with label Walmart. Show all posts
Showing posts with label Walmart. Show all posts

Tuesday, March 7, 2017

Snap Out of It: GoPro or Go Home

Most software is fungible these days. Snap (NYSE: SNAP) has called itself a "camera company," which is clumsy shorthand for its goal of becoming a premier consumer hardware company. While Snap has successfully created exciting marketing events with its filters and is well-situated to promote blockbuster movies, this expertise alone cannot justify its current valuation. Following Larry Ellison's unrelated comments many years ago about "going back to the future," hardware is becoming sexy again because software features are easily replicated.
My main concerns are 1) Snap's main user base is between 10 and 29 years old; and 2) GoPro (NASDAQ: GPRO) is already the premier camera company.

With respect to 1), this group lacks high levels of disposable income and isn't known for brand loyalty, indicating hardware margins or profit may be stressed. As for 2), if Snap plans on avoiding competition with GoPro by focusing on teenagers and younger adults with cheaper products, Polaroid and vintage cameras have already been done. Spectacles is not revolutionary, unless you count flashing lights as a remarkable innovation over Google Glass. How does Snap plan on differentiating itself long-term?
Unlike Amazon (NASDAQ: AMZN), Snap cannot displace existing software and hardware companies, which have entrenched users and their own "sticky" ecosystems. Furthermore, how many different ecosystems will consumers tolerate before they become frustrated? A quick online search shows several apps capable of adding both filters and special effects to pictures, such as BeFunky.com. In short, Snap lacks a "wide moat" from a technological standpoint and needs to quickly capitalize on its accomplishment of being first to market and capturing younger users.
Being first to market can be a long-lasting advantage in the consumer market. Success begets success as retailers provide more prominent shelf space to faster-selling products, leading to relationships between suppliers, advertisers, and manufacturers that are hard to displace. If a consumer company is first to market, competitors often end up vying for second place, fighting over shelf and virtual space that hasn't already been allocated to the market leader. Older readers might remember that Gameboy was first to market and maintained its leadership position in the videogame industry, even though Sega later produced a much better product. In fact, Nintendo continues to ride the success of the Gameboy today, while Sega sputtered with its Dreamcast console, becoming the Reebok to Nintendo's Nike.
How can Snap ride the wave of its younger user base and its "first to market" unique filters? One interesting scenario would be for Snap to partner with existing hardware companies like Fitbit (NYSE: FIT) and GoPro. More specifically, Snap could leverage the retail relationships smaller hardware companies have already built and offer access to its software and user base--for a fee, of course--as a way for smaller hardware companies to combat Apple and Samsung. Trying to displace Fitbit and GoPro shelf space in existing retail establishments doesn't make much sense--there's only so much shelf space to go around--and Snap doesn't have enough hardware products to open its own stores yet. If Snap tries to go against Apple, Google, and Samsung alone, it risks becoming exactly like Fitbit and GoPro, i.e., hardware companies desperately trying to hang onto to existing customers as larger companies copy their products and force the smaller companies to spend more dollars on each additional user, delaying profitability and making it harder to maintain margins.
One potential scenario involves GoPro CEO Nick Woodman pledging his own net worth as collateral and taking GoPro private, with the understanding that Snap would be a long-term partner and GoPro would design its products to be compatible primarily on Snap's software platforms. With either Snap or a consortium of equity funds buying a 49% stake in GoPro, Woodman could direct GoPro into new areas, diversifying his own user base and continuing to spend dollars on marketing and retail relationships rather than software engineers. (Note: most of GoPro's open technical careers are currently in Romania and the Philippines for software-related positions.)
Once software costs are minimized, GoPro could quickly move into new areas such as 1) food delivery by drone; and 2) tourism/travel.
Right now, Walmart (NYSE: WMT) is attempting to solve the "food desert" problem in inner cities, which tend to have cheap fast food and not enough healthy food. Using drones and online grocery ordering could revolutionize healthy eating in inner cities or isolated areas like First Nation lands. GoPro could offer to work with Walmart, Costco, and Target in delivering fresh food to consumers--a low margin business, but one that could serve as indirect advertising for its drones and other hardware products and a way to gain feel-good content.
Users, especially younger users, are tired of meaningless news and will quickly warm up to a software platform bringing them creative and positive content, such as tourism videos. GoPro CEO Woodman originally wanted to create content through an entertainment channel, but it wasn't profitable to do so, or he would have done it. As a private company in a cooperative setting, and with Snap handling the software, GoPro could focus on content development and capturing more users outside of Snap's existing demographic. Snap would broaden its demographic reach and save money and time leveraging GoPro's existing retail channels, and GoPro would maintain its financial strength by avoiding the costs of building and maintaining a competitive software platform.
Netflix once advertised with Amazon in its early days when it was trying to build its brand, and Jeff Bezos put a stop to it as soon as he found out about it, but GoPro and Snap don't compete directly with each other or larger food retailers, airlines, or travel agencies, making it easier to build relationships.
Once Snap demonstrates it can be a reliable partner, it can branch out to other consumer companies like Fitbit and discuss partnerships or demand a premium to reach its users in more substantive ways. For example, if Snap receives a movie licensing deal, it would normally create filters and receive payment for its marketing. However, in a longer-term partnership where its platform is used as a conduit to attract self-made content--such as mini-movies--it could become the purveyor of cool.
Right now, YouTube and other larger companies focus on all types of users to gain the most advertising dollars possible, but in doing so, fail to differentiate themselves. People sometimes go on YouTube to search for music and random videos, but they don't look forward to opening its app every day because Google relies on algos rather than curated content guaranteed to "wow" users. If Snap and GoPro create a mutually beneficial relationship establishing themselves as content curators and conduits for creativity, they can attract other companies experiencing difficulty breaking through the usual Apple, Google, and Facebook channels.
Snap's 12% drop on March 6, 2017 shortly after its IPO indicates it needs to think outside the box. In the hardware world, Apple and Samsung already dominate. Smaller companies like Snap need to figure out a coordinated way to take on the established behemoths or end up bleeding cash trying to avoid becoming fads. Meanwhile, GoPro CEO Woodman needs to do something soon. In 2015, he ordered a 180-foot yacht, to be delivered in 2017. It won't look good to be in a custom-made yacht while his shareholders suffer. Unless Woodman does something soon, his yacht might end up being called "French Revolution" or "Marie Antoinette." Will GoPro and Snap work together, or will they try to displace Apple and Samsung, two companies with marketing budgets larger than most companies' market capitalizations? Shareholders of Snap and GoPro should hope their CEOs make the right choice.

Bonus: the kind of partnership I envision is similar to the way Disney runs international resorts, i.e., a hybrid licensing and royalty model. Basically, Snap could license its software and platform to GoPro (and other smaller hardware companies like Fitbit) and also negotiate royalties based on revenues to incentivize a true partnership.  In the first few years, the licensing fees would be smaller and the royalty percentages higher, but as both companies learn each other's channels and execute more efficiently, the licensing fees could increase while royalty percentages to Snap decrease. More here on the overall model. 

Update on March 8, 2017: great comment from another website: "I like your Nintendo vs. Sega analogy but you compared apples to oranges. Gameboy was a portable handheld. Dreamcast was a console system. A better comparison would be how Sega's 16GB Genesis was better than Ninendo's 8bit NES system or how their full color GameGear portable was better than Ninendo's black and white, dinky Gameboy. But like VHS and Beta, Nintendo won out." 

Wednesday, November 26, 2008

Walmart Trip

I went to Walmart yesterday just to do some window-shopping and to check out its products. I told myself I wouldn't buy anything, and I was just doing some personal market research. I enjoyed walking around the store. Walmart stores are so huge, it's easy to get lost in them, and at one point, I "found" an entire area I had missed in my first walk-around.

My point in writing this article is to compliment Walmart on its store set-up. Even though I, an avowed cheapskate, had no intention of buying anything, I actually ended up leaving with a bunch of household products, drinks, and NBA cards for around $60. I never spend $60 when I shop, at least not on myself. Walmart's ability to get tightwads like me to spend a relatively large sum is a testament to how well they operate. The only product I didn't see at a substantial discount was aftershave--which had a surprisingly limited selection--but everything else I usually buy was cheaper than I've seen at other stores.

Here is a fairly popular post I did earlier on Walmart:

http://willworkforjustice.blogspot.com/2008/05/walmarts-wmt-annual-report.html

Sunday, May 25, 2008

Walmart's (WMT) Annual Report

Walmart's (WMT) annual report is clear, concise, and so well-written, it could function as a lesson in basic accounting terminology. WMT actually explains why it includes one measure of accounting over another, and then provides both numbers, GAAP and non-GAAP. In providing more than the usual information, WMT ends up giving its readers some accounting definitions that make it easier to understand financial statements.

For example, what is the difference between diluted and basic earnings per share? "Diluted" earnings per share include options and share-based awards and therefore provide a more complete picture of how the company is doing.

On the very first page, Walmart actually tells you exactly what its free cash flow is, which is an important measure of a company's success. (If consumers aren't buying your products, your cash flow will decrease--and that one number can tell you if your products are in demand.) "Free cash flow" is basically net cash from operations. Walmart's cash flow increased 25% from the previous year. In addition, Walmart had more than $100 billion--yes, billion, with a "b"--in sales in just the fourth quarter alone.

There was also some discussion of ROI (return on investment, non-GAAP) vs. ROA (return on assets). Typically, GAAP numbers are more accurate, but that's not always the case. After the era of pro forma earnings, which allowed Enron to keep growing based on speculation about how it would do in the future, I always look at GAAP numbers. GAAP numbers can can still be fudged, but if I'm going to be fooled, at least I'm going to be fooled by looking at the most realistic numbers.

WMT has most of its stores in TX, FL, and CA. With the mortgage crisis, will WMT benefit from more traffic in its FL and CA stores as consumers become more price conscious?

I recommend that you read Walmart's annual report first if you've never read one before. I am still deciding whether I can go to the annual meeting in Fayetteville, AR. After all the hoopla in the press about Walmart, it was interesting to read about it in its own words. WMT's 10K front cover says, "We save people money so they can live better." It's interesting when a large, powerful retail company focuses its mission on saving consumers money rather than appealing to the quality of its products or some other non-concrete advantage, but it's hard to argue with more cash in your pocket at the end of the day.

Many economists have said that WMT helps the poor because the poor buy more fixed, or "hard" materials, like shampoo, cleaners, detergent, razors, clothing, etc., which are cheaper at WMT, while the rich buy more expensive items or high class services (like vacations and Gucci), which Walmart doesn't sell. I agree with that assessment, but the unresolved question is whether WMT negatively or positively affects the growth of a middle class in the areas it operates. At this point, I don't think that WMT affects the middle class in areas that have diversified economies. WMT may drive out smaller mom-and-pop retail stores, but when was the last time anyone in a large city bought their detergent or razors from a mom-and-pop shop? If smaller cities lose small businesses because they sell the same things WMT does, but at higher prices, does the benefit of cheaper prices offset the unemployment of the small business's employees (who now probably also lack health care)? It probably depends on how many small businesses are displaced.

Most likely, as long as WMT doesn't expand its offering of services, like haircuts, food service, gourmet coffee service, massages, cell phone sales and service, tax preparation, car repair, or other non-concrete products, the average small business won't suffer or will survive by competing based on quality. For example, I doubt the local Panera Bread franchise or the local gourmet coffee shop is concerned about WMT, even if WMT did decide to expand its food service operations. Large, less efficient corporations that sell products rather than services, like Circuit City, are the real entities who should be concerned about Walmart.

With its tens of thousands of employees, WMT might believe that if it offers full benefits to part timers, it might not be able to sustain its growth. Many have argued that WMT is a burden on local resources because its wages are too low and it doesn't offer medical benefits to all its employees, causing them to go on the dole. WMT may not be overly concerned about its employee benefits because its competitive advantage isn't based on its employees. (Sadly, lower level retail employees are not difficult to find, especially in the developing countries where WMT is expanding.) WMT's advantage is that no one its size has been able to replicate its handling of its worldwide supply chain and inventory management, which allows WMT to offer lower prices by being efficient and leveraging (arbitraging?) global operations. This is where the problem of capitalism comes to light--what is best for shareholders isn't always great for employees. The case of whether to criticize WMT for not offering full benefits is especially difficult, because WMT isn't polluting like Exxon Valdez or forcibly demanding its American employees work in dangerous conditions like coal mines. Therefore, you could argue that WMT deserves to be left alone, because if you don't like its products or way of doing business, you don't have to shop there, and WMT doesn't affect you directly unless you choose to work for them.

Also, at the end of the day, WMT's numbers don't lie--$100+ billion in sales in just four months means enough people believe in the company and its products to continue shopping there, and until that changes, WMT opponents are basically resorting to the argument that because a company is big and can afford it, it should offer more benefits to its employees.

I run a small business. If a non-customer came to my door and told me how to run my business, I'd feel that it was my right to choose my own path, because it was my money and time at stake. Why does that principle of the "right to be let alone" change just because Walmart makes more money than I do? I don't know Walmart's requirements for receiving benefits, but Walmart may want to offer its employees working at least 24 hours per week and with 6 months of tenure some kind of subsidized health care coverage. Costco (COST) demonstrates that you can grow and offer reasonable benefits to employees. At some point, Walmart's sales will decline if consumers gravitate to COST because of its presumably happier, more motivated employees, or better reputation. Few consumers want to save a few bucks by breaking the backs of local employees. At the same time, Walmart has many long time employees--by one count, they had 20,000 associates who had been with the company 20+ years. That's a reputation for retention not too many companies can boast.

See 2007 report of annual shareholder meeting:

http://www.bloggingstocks.com/2007/06/01/
liveblogging-wal-marts-annual-shareholders-meeting/