Beating Amazon: The Future Of Retail by GVG Capital

Beating Amazon The future of retail Shift from stores to eCommerce is unleashing the largest, fastest economic value creation in human history—$10 trillion by 2035

Key Insights Retail, 1/3rd of the global economy and the largest sector by far, is facing a cycle of value destruction and creation—like we have never seen before eCommerce has already created more than $1 trillion in shareholder value—95% accrued to 4 companies— only 1 of 4 was founded by a store retailer   Retailer’s omni-channel pursuit has caused the largest, fastest shareholder value destruction in any sector ever—more than $1 trillion in 15 years

eCommerce companies crush store retailers with a predatory “digital jiu-jitsu” strategy— using retailer’s own operating margins against them

eCommerce has humbled the best Silicon Valley entrepreneurs, investors and companies— making them irrelevant Retail leads other consumer sectors like finance, health, transportation, travel in digital transformation— creating 5X more $1 billion digital businesses Multi-company, aka multi-channel, retail model outperformed Amazon’s pure-play digital model— generating 3,200% higher total shareholder returns Iconic companies can beat Amazon in twenty markets and build $100 billion+ eCommerce winners— by adopting the proven multi-company model

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World’s #1 digital transformation group

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World’s #1 digital transformation group

About GVG Digital

GVG is the world’s #1 digital transformation group. GVG Founder & Chairman, Love Goel is widely regarded as The Father of Multi-Channel Retail. Only four traditional companies have ever built a multi-billion dollar eCommerce market winner AND also created billions in shareholder value. All four companies were led through their digital transformation by Love Goel—blending proven operating + investing + governance expertise, GVG’s proprietary “multi-company” model, and unique performance-based partnership approach—unlocking $20 billion+ in shareholder value. Note: Since 1995, only 4 large, traditional publicly-traded companies have succeeded in digital transformation. Please read pages 18, 19, and 20 to learn more

About Beating Amazon: The future of retail

In 2010, GVG initiated the world’s largest study on the future of retail—5,000 companies across 100 countries. The study focused on the twelve dimensions of digital transformation—including customer experience, business model, structure, value creation, capital allocation, culture, innovation, and governance. In this brief report—Beating Amazon: The future of retail—we are pleased to share a few key insights from our comprehensive study.

Disclaimer THE OPINIONS EXPRESSED IN THIS PAPER ARE CURRENT OPINIONS OF GVG DIGITAL AS OF 2018, AND MAY CHANGE AS SUBSEQUENT CONDITIONS VARY. ANY PROJECTIONS, MARKET OUTLOOKS OR ESTIMATES IN THIS PAPER ARE FORWARD LOOKING STATEMENTS AND ARE BASED UPON CERTAIN ASSUMPTIONS. OTHER EVENTS WHICH WERE NOT TAKEN INTO ACCOUNT MAY OCCUR AND MAY SIGNIFICANTLY AFFECT RETURN OR PERFORMANCE. ANY PROJECTIONS, OUTLOOKS OR ASSUMPTIONS SHOULD NOT BE CONSTRUED TO BE INDICATIVE OF THE ACTUAL EVENTS WHICH WILL OCCUR. THESE MATERIALS DO NOT PURPORT TO BE ALL-INCLUSIVE OR TO CONTAIN ALL THE INFORMATION THAT AN INVESTOR MAY DESIRE. THESE MATERIALS ARE MERELY FOR DISCUSSION ONLY AND MAY NOT BE RELIED UPON FOR ACCURACY OR MAKING ANY INVESTMENT DECISION. INVESTORS SHOULD NOT CONSTRUE THE CONTENTS OF THIS PAPER OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM GVG DIGITAL OR ANY OF ITS REPRESENTATIVES OR AFFILIATES, AS LEGAL, TAX, OR INVESTMENT ADVICE.

Beating Amazon: The future of retail

Table of Contents Key Insights............................................1 The Age of Amazon...............................4 New Retail Game: 2017.........................6 How Amazon Wins: Digital Jiu-Jitsu.......7 Four Retail Models.................................8 Omni-Channel Retail..............................9 Multi-Company Retail...........................11 Future Of Retail: 2035..........................14 Beating Amazon................................. 16 $100 Billion eCommerce Opportunity...17 Lessons Learned.................................18 Conclusion...........................................20 Twenty Markets in Play.........................21 Digital Transformation Track Record.....22 3

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The Age of Amazon

“Amazon pharmacy rumors spur $69 billion CVS, Aetna merger”. “Amazon, Whole Foods deal disrupts largest retail category”. “Amazon plans $10 billion investment to dominate India, SE Asia, Middle East”. “Amazon spooks UK, German investors to abandon retail”. “US, Europe store sales decline three straight years—first time ever”. “eCommerce sales eclipse organized retail in China, India”. “Retail bankruptcies, store closings hit all time high”. These recent headlines highlight the panic Amazon is spreading in the retail sector—1/3rd of the global economy, the largest sector by far. Amazon has amassed more than 50% of the ~$1 trillion in shareholder value created by eCommerce. Over the next two decades, as the shift from

stores to eCommerce unleashes $10 trillion—the largest, fastest economic value creation in human history—who will take the lion’s share? Will it be Amazon again? Or, will it be other pure play digital companies like Alibaba and JD.com, which crushed Amazon in China? Or, could it be multicompany, aka multi-channel, retailers like Lojas Americanas and B2W Digital who handily beat both Amazon and Alibaba in Brazil? Or, can omni-channel retailers like Walmart and Tesco—who lost $1 trillion in shareholder value due to a failed model— reverse their digital fortunes? How will pure play store retailers like Costco, Aldi, Zara-parent Inditex, and D-Mart fare? Does Silicon Valley even have a role to play? The answers may surprise you.

Fig. 1 Global eCommerce Sales To Beat Stores By 2035 [US$, trillions]

10%

57%

of total retail

2017

$20.4T Stores

$2.3T

eCommerce

of total retail

2035

$18.6T Stores

$24.3T

eCommerce

Note: On an inflation adjusted basis, store sales projected to decline 52% by 2035

Beating Amazon: The future of retail

The Big 4 eCommerce Winners Of the world’s fifteen publicly traded eCommerce companies with more than $1 billion in net revenue, only four have at least 20% market share in their country. Fig. 2 The world’s four leading eCommerce companies

The Big 4 Share of Global eCommerce:

Sales: 55% | Market Capitalization: 95%

Note: B2W Digital is the eCommerce affiliate of Brazil’s leading store retailer Lojas Americanas

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New Retail Game: 2017

The world’s four leading eCommerce companies—the Big 4—crush store retailers with a predatory “digital jiu-jitsu” strategy: using retailer’s own operating margins against them. They have blown up the centuries old retail paradigm of making money by selling merchandise profitably. One—Alibaba—doesn’t even try to stock and sell its own merchandise. The other three—Amazon, JD.com, B2W Digital—tried it, and are running away from that model. Over the past five years, Amazon’s digital businesses generated billions in profits—enabling it to take ~2% operating losses annually in its retail business despite tripling volume to ~$250 billion—a predatory practice designed to kill retailers who can’t survive similar losses. Retailers don’t have a chance—they are not playing the same game. Retailers have a knife in a gunfight. This is not unique to retail—Google and Facebook don’t charge their billions of users for search or social media—making it impossible for information and media companies to compete with them. Compared to the world’s 4 largest store retailers, the Big 4 facilitate $100 billion more in merchandise sales, are growing 1,000% faster, and serve a billion more customers in 100 more countries— unsurprisingly, they also have a $500 billion higher market capitalization. Ironically, eCommerce already offers far superior economics than store retail—especially on their two largest 6

operating costs—labor and real estate. Warehouses in eCommerce mirror the importance of stores in retail. Retailers can only sell what customers see in the store, just like eCommerce companies can only guarantee availability and timely delivery of products in their warehouse. The closer a store or warehouse is to a customer, the more convenient and faster it is to get the product. Real estate productivity—sales/ rent per square foot—is 40X+ higher at eCommerce companies. Similarly, labor productivity, i.e. sales/employee, is 5X+ higher in eCommerce than store retail. These structural disadvantages will only get worse for store retailers as consumers channel shift. Digital has changed the game. Only winners—market leaders—create meaningful shareholder value, the rest usually lose money, or worse. Winners like Facebook, Netflix, and Google may only secure 20 to 60% market share, but usually win the lion’s share of shareholder value in a market. Likewise, the Big 4 generate 55% of global eCommerce global revenue and 95% of more than $1 trillion in shareholder value. By contrast, the world’s 4 largest store retailers represent less than 5% of global retail revenue and shareholder value. Traditional retailers were completely shut out of this eCommerce gold rush—sadly, they lost hundreds of billions in shareholder value, and dozens like Borders and Circuit City did not even survive.

Beating Beating Amazon: Amazon: The The future future of of retail retail

How Amazon Wins: Digital Jiu-Jitsu

Like in jiu-jitsu, Amazon uses a retailer’s strength—operating margin—against it. The higher a retailer’s margin, the bigger Amazon’s margin advantage to invest in crushing them. But, the lower a retailer’s

margin, the less money the retailer has to compete with Amazon. Companies in every sector face this same existential threat from digital disruptors.

Fig. 3 A mazon’s sustainable, predatory strategy—deliberately lose ~2% in retail, make money elsewhere—is designed to crush retailers

Retail Business [1P + 3P]

Digital Business [eg. AWS]

Total

Revenue

90%

10%

100%

Operating Margin

-2% 50% N/A

Operating Income

-1.8% 5% ~3%

Note: In FY 2018, Amazon’s estimated total operating income is US$5-6 billion. Amazon numbers are a composite of 2016 and 2017 financials, simplified for illustration

Fig. 4 Amazon uses its 10% margin advantage to give customers lower prices and better service—stealing market share Retail sector operating margin [average]

% of revenue

8% Amazon retail business target margin

-2%

Key Takeaway:

% of revenue

Amazon’s 10% margin advantage over retailers

4.5% 5.5%

Amazon prices are 4.5% lower on average than other retailers

Amazon invests 2-3X more than other retailers on better service—5.5% more of revenue

Traditional companies must fundamentally change their business model, or risk extinction

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Four Retail Models

Retailers have pursued four models in response to digital disruption—three models succeeded in creating shareholder value, one failed. Most store retailers,

sadly, embraced that one failed model— omni-channel retail. This experience, gained over two decades, might provide useful insights into beating Amazon.

Fig. 5 The four models [US$, billions] Retail Model

Market Capitalization Value 01/2000 09/2017 Created/Lost (%)

Market Leader

Pure Play Store1 Inditex Pure Play Digital

$10B2 $117B $462B

1416%

Lojas Americanas Multi-Company Retail and B2W Digital

$0.2B $12B

4661%

Omni-Channel Retail

$298B

Amazon

$30B

1122%

Walmart

eCommerce revenues <1% of total sales or <$1B

$233B

-22%

Inditex began trading May 2001

Fig. 6 Structural difference between Omni-Channel vs. Multi-Company models

Omni-Channel Synergy Focus

cost, operations driven

One Company

runs Stores, eCommerce

Shared Brands, Inventory, Customers One Senior Team/Board one incentive option pool

Multi-Company Customer Focus

customer experience, growth driven

Store Company runs Stores

Store Brands, Inventory, Customers Store Team/Board

store company options

Digital Company runs eCommerce

Digital Brands, Inventory, Customers Digital Team/Board

digital company options

Note: Multi-company is more than a spin-off—it has unique operating, governance requirements. Store and digital companies negotiate arms-length, market-based contracts to work with each other

Beating Amazon: The future of retail

Pure Play Store

This model—ignoring digital or minimally investing in it—helped store retailers create the most shareholder value on an absolute basis: Globally—Zara-parent Inditex [$100 billion+], US—CVS [$70 billion+], India—D-Mart [$10 billion+], Germany—Lidl [private]. Globally, in the food sector, Lidl and Aldi are estimated to create over $100 billion in shareholder value by ignoring digital while their peers—Walmart, Tesco, Carrefour and Metro—invested more than $200 billion in digital only to lose hundreds of billions in shareholder value over the same period. CVS recently doubled down on its offline business with the $69 billion Aetna deal. Unfortunately, this is not a viable long term strategy—as stores sales shift online.

Pure Play Digital

This is the most successful model in producing the world’s two most valuable retailers—Amazon and Alibaba. But, it is very hard to execute at scale, and only getting tougher. After 22 years, only 15 publicly traded eCommerce companies exist globally with $1 billion+ in revenue and market cap. No eCommerce company founded since 2010 has created meaningful value. One should not misconstrue Amazon and Alibaba store experiments as an omni-channel shift. Whole Foods’ in-store sales, since Amazon’s buyout, are down. Analysts explain the goal of

these deals is not store sales, but to use the physical spaces as showrooms and delivery hubs for eCommerce. The stores are unlikely to survive as configured— rents are too high, productivity is too low— they won’t scale for use in eCommerce. No one has ever successfully used stores to fulfill in-home even 1% of Amazon’s annual sales volume.

Omni-Channel Retail

Omni-channel retailers have lost more than $1 trillion in shareholder value—the largest, fastest value destruction in any sector—because the model is flawed. The omnichannel model entails running stores and eCommerce as two complementary channels, like Walmart and walmart.com, inside one retailer—with one senior team making sub-optimal decisions for each business, as they try to balance priorities and resources. Consequently, omni-channel retailers who invested the most in digital, lost the most shareholder value in their respective market—geography or category: US— Walmart, UK—Tesco, Germany—Metro, France—Carrefour, India—Tata, South Korea—Lotte, Department Stores— Macy’s, Electronics—Best Buy, and the list goes on. To add insult to injury, the top 10 global omni-channel retailers saw total revenue growth decline 3X and net income decline 5X from their pre omnichannel [1995-2005] to omni-channel [2005-2015] years, despite increasing 9

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Fig. 7 Top 10 omni-channel retailers: shareholder/owner view1 [US$, billions] Market cap growth + dividends received + capex invested [in lieu of dividends]

Market Cap Market Cap Market Cap Capex Dividends Shareholder Company 2005 2015 Growth Invested Received Value Created

$194.9 $196.3 $1.4 -$144.7 $50.3 -$92.9 -$54.9 $14.8 -$59.9

$37.5 $17.7 -$19.8

$29.4 $20.3 -$9.1 -$34.5 $7.7 -$35.9

$48.3 $44.7 -$3.6 -$30.9 $7.9 -$26.6

$18.6

$14.3 $10.3 -$4.0 -$20.9 $4.9 -$19.9

$24.4 $10.4 -$14.0 -$8.1 $2.5 -$19.6

$16.8

$9.0 -$7.7 -$9.8 $1.6 -$16.0

$7.0

$5.5 -$1.4 -$12.7 $0.4 -$13.7

$2.2 -$16.4 -$4.5 $0.0 -$20.9

$17.7 $11.0 -$6.7 -$9.8 $2.8 -$13.7

Shareholder value calculated on a nominal cash basis. Does not include the opportunity cost of investing in other fully secure financial instruments

Fig. 8 Top 10 omni-channel retailers: cannibalization effect

Omni-channel [2005-2015] vs. Pre omni-channel [1995-2005] performance

Revenue CAGR

Net Margin

10%

-90bps less than inflation from [2005-2015]

-68% Pre OmniChannel

3.8%

3% OmniChannel

-82% Net Income Margin 2005

Net Income Margin 2015

0.7%

Note: Top 10 omni-channel retailers invested 98%+ of capex in digital between 2005-2015; <2% invested before 2005 [many did not even have a digital business prior to 2005]

Beating Amazon: The future of retail

capex investment by 40%. Perversely, the Top 10 lost both digital and retail market share over the past five years. Unfortunately, store retailers can’t buy their way out of this mess—Walmart’s Kosmix deal, Walgreens’ drugstore.com, Saks’ Gilt, and Nordstrom’s Hautelook all failed to alleviate their digital crisis. Omni-channel is clearly a disaster for shareholders, but even worse for customers. No omni-channel retailer has ever created the best digital customer experience in any market. In fact, in every single market, customers always prefer two different companies—best in class— for their store and eCommerce needs.

Multi-Company Retail

Multi-company retail, a better name for multi-channel retail, is the most successful retail model in creating shareholder value—enabling Lojas Americanas and its eCommerce affiliate B2W Digital to generate 3,200% higher total shareholder returns than Amazon or Inditex since 2000. The model consists of two independent, preferably publicly-traded, companies—a pure-play store and a pureplay digital company—both avoiding the synergy trap, unfettered by each other, and focused intensely on their own customers and markets. Multi-company retailers’ product inventory and sales overlap less than 15% across store and eCommerce, compared to 95% cannibalization commonly seen in omni-channel retailers. Multicompany retailers avoid cannibalization

by diverting traffic from their high-traffic store brands to their portfolio of digital only brands, with different brand names and merchandise than the physical stores. Using this strategy, B2W Digital built the world’s only company with 4 of the 20 largest eCommerce brands in its continent, and has the lowest marketing expense—only 1-2% of net sales vs. 5-15% at its global peers. This model has enabled B2W Digital to become the leading technology company in its continent with the best regional talent in search, mobile, AI, logistics, and big data, and to build the world’s largest proprietary last mile delivery network. Of the top ten global, public eCommerce companies— it has the lowest operating expense as a percentage of revenue, the highest customer experience ratings, and the largest market share by revenue in its core market. Not to be outdone, its store affiliate, Lojas Americanas is the world’s fastest growing and most profitable general merchandise store retailer with 10X+ revenue growth rate and 2X+ operating margin of its global peers. This model has succeeded at several companies globally, including Federated Department Stores aka Macy’s—which owned the world’s largest department store and eCommerce businesses in the 90’s, before mistakenly boarding the omnichannel bandwagon. Multi-company retail is the only model where both stores and eCommerce thrive—with customer demand driving strategic outcomes. 11

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Fig. 9 Best customer experience across global markets Geography (country)

#1 Store

#1 eCommerce

Walmart

Amazon

China

Suning

JD.com

Germany

Lidl

Amazon

Brazil

Lojas Americanas

B2W Digital

Category (global) #1 Store

#1 eCommerce

Food

Walmart

Amazon

Home

Home Depot

Amazon

Apparel

Walmart

Vipshop

Personal Care

Walgreens Boots

Amazon

Note: Customer experience determined by net revenue in a market

Fig. 10 O nly 1 large store retailer built an eCommerce market leader, and created meaningful shareholder value from 2005-2017

Retailers with largest eCommerce businesses

Created meaningful shareholder value1

Built an eCommerce market leader2

Double digit annualized growth or >10% CAGR in market capitalization; 2 Largest eCommerce business in either the primary country or merchandise category 1

Beating Amazon: The future of retail

Two Different Sectors Not Just Two Channels

Is it possible retailers have been misled for two decades to believe physical and digital storefronts are just two different channels in the same sector? What if they are not two different channels, but different sectors altogether—requiring different customer experiences, capital allocation, operating focus, governance, and investor expectations? The same holds for every other consumer sector—travel, health care, financial services, packaged goods—no incumbent has ever built the best digital customer experience. The big mistake store retailers make is to confuse sector with channel, just because they sell products like eCommerce companies. It is akin to thinking that Fedex and American Airlines are in the same sector, because both fly planes. Nothing could be further from the truth. Just like Fedex has more in common with a trucking company transporting cargo than it does with American Airlines, eCommerce companies have more in common with digital companies like Google than they do with store retailers. The world may be omnichannel, but the best model to serve customers is clearly not. Incumbent brands are usually a liability in digital markets—they can’t stretch to sell new categories online—fatal problem in a digital world of endless aisles. Incumbents’ legacy hurts their digital credibility—95% of digital sales occur by cannibalizing traditional channels. In fact, iconic brands that originate in one channel

have never succeeded in becoming a market leader in another channel.

Retail Leads Other Sectors

Retail leads other consumer sectors like finance, health, travel, and transportation in digital transformation. Thirty store retailers—5X more companies than in any other sector—have built $1 billion+ digital businesses.

Silicon Valley Is Irrelevant

eCommerce is hard—it has also humbled the best Silicon Valley investors, entrepreneurs, and companies. Of the world’s ten largest public eCommerce companies, only one is from Silicon Valley—eBay, the worst performer in revenue growth—10X lower than its peers over the past two years. Silicon Valley’s two biggest digital companies—Google and Facebook—have failed to produce a meaningful eCommerce business despite spending billions. Top Silicon Valley investment firms like Kleiner Perkins, Sequoia, and Accel-KKR all failed in their joint ventures with leading retailers like Walmart, Tesco, Future Group, and even Lojas Americanas. Dozens of retailers like Target have closed Silicon Valley innovation centers due to dismal results. Silicon Valley has failed to produce a single eCommerce market leader in two decades. Unsurprisingly, adding a Silicon Valley board member or executive by a retailer has also failed to produce a single eCommerce market leader. 13

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Future of Retail: 2035

The future of retail has never been brighter. eCommerce is already 10% of global retail sales because it gives customers lower prices and more convenience. Advances in Artificial Intelligence [AI], Mixed Reality [MR], and Rapid Autonomous Delivery [RAD], over the next two decades, will accelerate the shift from stores to eCommerce—providing customers superior shopping experiences, and retailers with better business models. 90% of retail sales would occur online today—because of lower prices and higher convenience—if customers received products faster than buying in a store. It explains why the Big 4—the world’s leading eCommerce companies— invest more in delivery than anything else, and why each of them have spun out their delivery function in a separate business. Today, more than 50% of customers in most large countries can receive products with same day delivery—because they are conveniently located in 2-5 densely populated cities in each country. The Big 4 race to build warehouses in the most optimal locations for fast and cheap lastmile delivery is reminiscent of the way store retailers historically chased the best locations for foot traffic. The evolution of Rapid Autonomous Delivery—automated warehouses, autonomous electric

vehicles, and drones—will make it possible for all customers to receive any product faster than going to a store by 2035. Only 10% of global retail sales are social or sensory—touch, feel, taste, smell, sound—primarily in food, personal care, softlines, audio, and home categories. More than 50% of audio products in most developed countries are now sold online. The customer usually only needs the sensory perception 1-2 times before they know what to expect from a product or brand— which explains why we see more single product brands like Cuties oranges, Allbirds shoes, Warby Parker sunglasses, or Alyssa’s cookies. Mixed Reality is already helping customers visualize Ikea furniture in their living room, design a new Volkswagen with their friends, or shop virtually for their wedding with bridesmaids and groomsmen. By 2035, advances in MR will bring the store to the customer—with all its sensory and social elements, and an even richer experience. Artificial Intelligence—analyzing trillions of data points from billions of customers—is making computers much better at discerning patterns to design superior shopping experiences for customers. AI promises to create

Beating Amazon: The future of retail

Fig. 11 Middle class population growth, emerging market shift [in billions] driving eCommerce Global Population

7.5B

eCommerce Buyers

Global Population

1.5B

8.8B

41%

2035

2015

50%

Emerging Market

Middle Class

63%

Middle Class

eCommerce Buyers

6.6B

85%

Emerging Market

Note: By 2021, more than 50% of the global population will be middle class

Fig. 12 G lobal consumer spending shifting to countries where Amazon is not #1 in eCommerce

2015:

Global consumer spending segmentation

2035 Scenario I:

If Amazon remains #1 in all the countries it is today

30%

Countries where: Amazon is not #1 in eCommerce

Local retailers displace Amazon as #1, in countries it is weak

20%

25% 45%

2035 Scenario II:

62%

18%

Countries where: Amazon #1, <20% market share

80%

Countries where: Amazon #1, >20% market share

Fig. 13 Shift from stores to eCommerce driven by superior customer experience and innovation Customer Experience

Lower prices, more products, convenience

delivery social + Faster + Sensory, + than stores eCommerce

Personalized, automated shopping

Innovation

Better business model, selection, user experience

+ Autonomous + Mixed Reality + Delivery

Artificial Intelligence

eCommerce sales as a % of total retail

Rapid

50%+

Note: Less than 10% of global retail sales are social or sensoryâ&#x20AC;&#x201D;touch, feel, taste, smell, soundâ&#x20AC;&#x201D;primarily in food, personal care, softlines, audio, and home categories

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World’s #1 digital transformation group

thoughtful, personalized offers that stimulate desire and delight from customers; and automate sensor based replenishment for staples. AI can similarly make far superior commercial decisions— purchase, pricing, promotions, markdowns—taking into account market, competitor, and customer information collected over decades. It is impossible for even the world’s best merchants to compete—just like the world’s best chess grandmasters couldn’t keep up with Deep Blue twenty years ago.

Historically, Amazon has struggled i  n foreign markets. It lagged local retailers—even in Germany and UK— about a decade ago. There is good reason to believe this can be reversed, and local iconic retailers could beat Amazon. Over the past decade, Alibaba kicked Amazon from first place to irrelevance in China—using a pure play digital strategy. But, this strategy hasn’t succeeded against Amazon elsewhere—primarily because China is a unique market in both customer behavior and scale.

Many of the technologies driving eCommerce can also help store retailers improve four-wall profitability by 10-12X over the next decade with a modest investment—only 5-10% of the capex required to build a new store. These digital technologies—mobile handshake, beacons, near-field computing, robots, automated point-of-sale, intelligent interfaces, AI enabled sales agents, mixed reality dressing/design rooms—must be implemented on a staggered basis as the payback on these technologies improves.

Lojas Americanas and its affiliate B2W Digital have crushed both Amazon and Alibaba in Brazil using the multi-company retail model—running eCommerce and store businesses as two independent public companies. They only adopted this model after all other options failed— including Silicon Valley joint ventures and omni-channel retail, which resulted in 70% eCommerce market share loss and 90% collapse in B2W’s stock price. Since adopting the multi-company model in 2012, B2W Digital’s eCommerce revenue market share in Brazil is higher than Amazon’s in the US and Alibaba’s in China. Meanwhile, Lojas Americanas is the world’s most profitable store retailer in its category. Together, they have generated 3,200% higher total shareholder returns than Amazon. ABInbev, similarly, beat Amazon to build the largest eCommerce business globally in the beer category.

As the global middle class almost doubles over the next two decades—comprising younger, digital natives from emerging markets like India and China with weak modern store retailing—they are likely to skip stores for eCommerce, much like their parents who skipped landline phones in favor of mobile.

Beating Amazon

Beating Amazon: The future of retail

Amazon’s size doesn’t insulate it from digital disruption—which killed both AOL and Yahoo—the world’s two largest digital companies worth $222 billion and $140 billion respectively, not long ago.

Building $100 Billion eCommerce Winners

In this winner-take-all digital age, Iconic companies could beat Amazon in twenty markets and build $100 billion eCommerce winners by adopting the proven multi-company retail model—and avoiding the omni-channel retail trap. These twenty markets—countries, categories— include more than a dozen countries like Germany, UK, Sweden, Spain, Brazil, India, South Korea, Indonesia, Singapore and UAE, and several categories globally like food, apparel, home, health, personal care and luxury. eCommerce sales in these emerging digital markets will soon surpass US and China sales in 2011—the year Amazon and Alibaba became $100 billion winners in their own markets—in less than two decades. As eCommerce explodes by 10X, it is likely twenty new $100 billion+ winners could emerge over the next two decades. For perspective, the store retail model has produced only three such companies—Walmart, Home Depot, and Inditex—after hundreds of years.

Five factors will determine who wins: (i) Amazon’s reduction of its high operating costs, and adapting to local markets; (ii) Amazon’s global regulatory exposure for taxes, counterfeits, and monopolistic behavior; (iii) Consumer reluctance to depend on a foreign company for most of their digital shopping; (iv) Retailers ability to create the best eCommerce customer experience in their own markets; and (v) Retailers instilling a “founder/owner mindset” culture to compete with aggressive founder led eCommerce companies. The future of retail is not doing retail better, faster, cheaper. The new retail game is to create the best digital customer experience in your market. Once you get that, it changes everything. Iconic companies have the customers, brand, talent, and capital to beat Amazon and win the digital war, but the real question is—can they embrace the future before it is too late?

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Lessons Learned from failed digital transformation strategies In this winner-take-all digital era—to create meaningful shareholder value— companies have to build the market leader. In the pursuit of building an eCommerce market leader—largest in a country or category—retailers deserve credit for trying several strategies, which all unfortunately failed:

Omni-channel retail. Led to the

largest, fastest shareholder value destruction in any sector ever—$1 trillion in 15 years.

Partner with Amazon, Alibaba.

Only strategy worse than omni-channel— abdicates customer experience, relationship— led to Circuit City, Borders extinction.

Silicon Valley satellite office. Failed to produce an eCommerce market leader at Walmart, Target, Uniqlo, and many retailers— most shut down due to dismal results.

Silicon Valley board members. Failed to produce an eCommerce market leader at Walmart, Nordstrom, Richemont, and several iconic companies.

Digital acquisitions. Walmart—

Kosmix, Walgreen’s—drugstore.com, Saks—Gilt, Nordstrom—Hautelook, and all such deals failed to produce an eCommerce market leader.

Joint Ventures (JV) with tech investors. All JVs failed despite top

retailers like Walmart, Tesco, Lojas Americanas, and Future Group partnering with top investors like Kleiner Perkins, Sequoia, and Accel-KKR.

Digital spin-offs. Failed to produce

an eCommerce market leader at Groupe Casino, Walmart, Tesco, and many retailers.

Hire consultants. Fundamental change

requires founder/owner leadership. Consulting firms don’t build digital market leaders.

Digital partnership with startup accelerators. Failed to produce an

eCommerce market leader at Metro, Target, and many retailers.

Corporate venture capital. Failed

to produce an eCommerce market leader at Gap, Patagonia, Tesco, and many retailers.

Avoiding The Omni-Channel Retail Trap

The world’s best store retailers like Zara-parent Inditex, CVS, Aldi, Lidl, Future Group, Landmark, D-Mart, Mitra Adiperkasa, and Primark have largely ignored digital and remained pure play store businesses—avoiding the omni-channel trap—instead, creating massive shareholder value and profitability. They have built a war chest to make major eCommerce investments in the future using the correct model. By contrast, omni-channel retailers are stuck with a distracted and poorly performing store business, weak eCommerce platform, and horrific declines in shareholder value—limiting their future options. Unsurprisingly, most pure play store retailers are led by founders/owners with a long-term view similar to the Big 4—Amazon, Alibaba, JD.com, and B2W Digital. It was clearly better not to invest in digital at all, than pursue a flawed omni-channel strategy.

Beating Amazon: The future of retail

Lessons Learned from twenty years of digital transformation It is hard. It takes time. It takes courage. Why did all previous digital transformation strategies fail? Focused on the wrong thing—eCommerce sales. 95% of eCommerce sales at omni-channel retailers are cannibalistic— without fundamental change in the business model, products sold, or target customers. Combine cannibalization with massive capital + operating expenses—it’s a recipe for shareholder value destruction.

What does it take to succeed? Profound change in strategy, structure, culture. Strategy. Reimagine value chain, business model, and customer experience unfettered by the current business. Structure. Redesign to attract superior digital talent and capital to create the best eCommerce customer experience. Culture. Instill founder/owner culture to drive continuous innovation to keep creating the best customer experience as the market evolves.

Why has GVG Digital succeeded? GVG Founder created the only successful digital transformation model for large companies—the multi-company model. He built the first billion dollar eCommerce market leader at a Fortune 500 retailer—eventually beating Amazon to build the world’s largest eCommerce company at the time. GVG has proven the multi-company model more than a dozen times globally, and perfected it over two decades. GVG’s proprietary digital toolkit, methodologies, and processes were refined to build eCommerce market leaders across four continents and fifteen categories with iconic partners—including Lojas Americanas in Brazil, ABInbev in beer, Federated aka Macy’s in US, and JC Whitney in auto parts—unlocking more than $25 billion in shareholder value. GVG works differently. Partners with iconic companies only in a founder/owner role to launch or reboot the digital business—strongly aligned with shareholders, board, and management. This helps GVG’s partner companies to consistently beat Amazon in several large markets globally.

digital

Worldâ&#x20AC;&#x2122;s #1 digital transformation group

Conclusion 2017

[US$, trillions]

The Age of Amazon

2035

The Multi-Company Era

Global Retail Sales $22.7T

$42.9T

Global Store Sales $20.4T

$18.6T

Global eCommerce Sales

$2.3T

$24.3T

eCommerce as a % of Total Retail Sales

10%

57%

Shareholder Value due to eCommerce

$1T+

$11T+

$100B+ Companies due to eCommerce

2 pure play digital companies

20 multi-company retailers, 5 pure play digital companies

eCommerce Shareholder Value Created: % Of Total Amazon Pure Play Digital Multi-Company Retail Pure Play Store Omni-Channel Retail

50%+ 10-15% 98% 30-40% 2% 60-70% 0% 0% -$1T -$5T

2000-2017

Digital Transformation 1.0

Omni-channel sales and infrastructure

Focus

2018-2035

Digital Transformation 2.0

Digital customer experience, shareholder value

What Is Successful Digital Transformation?

Successful digital transformation of a large company requires: Building the largest digital business in its market1

and

Creating billions of dollars in shareholder value2

est KPI (key performance indicator) for digital customer experience; only market leaders create B meaningful shareholder value in this winner-take-all digital era 2 Best KPI for digital ROI (return-on-investment); critical to securing continued investment capital 1

Beating Amazon: The future of retail

Iconic companies can beat Amazon in twenty markets and build $100 billion eCommerce winners by adopting the proven multi-company model1â&#x20AC;&#x201D; and avoiding the omni-channel retail trap. Twelve Markets: Countries [Regions] Sweden [Scandinavia] UK [West Europe] Spain [South Europe]

Germany [DACH] Russia [CEE]

Mexico [Central America]

UAE [GCC] India

Korea [East Asia]

Indonesia [ASEAN] Brazil [South America]

Australia [Australasia]

Eight Markets: Categories [Global] Apparel

Luxury

Health/Beauty

Sports/Fitness

Food

Auto Parts

Home

Electronics/Media

Over two decades, several iconic companies have used GVGâ&#x20AC;&#x2122;s proprietary digital toolkit, methodologies, and processes to beat Amazon in more than a dozen markets

digital

World’s #1 digital transformation group

Digital Transformation Track Record [1997-2017]: Global Retail/Consumer Sector [US$, billions] Firms Offering Digital Transformation Services

Large and Mid Cap1 Clients/ Partners

Successful Digital Transformations

Shareholder Value Created / Lost

Bankruptcy Filings

GVG 4 4 0

$22 billion

All Others

-$1 trillion

500+

Companies with annual revenues of more than US$2 billion

GVG uniquely brings together execution, governance, and investment expertise to create value— through its three world-class specialty firms:

digital Execution

capital Investment

int’l Governance

Beating Amazon: The future of retail

Trusted by top brands as Investors, Board Members, Strategic Advisors

Select list of GVG clients from 1995-2017. GVG partnered with only four large companies, and a few middle market companies where it led the digital transformation

Recognized globally as Digital Pioneer, Innovator, Change Agent Digital Whiz-Kid, transforming icons and industries…

Father of Multi-Channel Retail

Digital visionary, global perspective

Pai do varejo multi-canal

Led digital turnaround, created billions in value…

Revolutionary ideas for growth in India…

Pioneering innovator, renowned for building market leaders…

Vater des multi-channel einzelhandel

Built Fortune Top 10 new economy market leader…

Top 10 Silicon Valley start-up CEOs…

Disclosure

GVG Digital Chairman Love Goel was the Co-Founder and COO of Federated Department Store aka Macy’s eCommerce business in the 1990’s. Since 2012, GVG has partnered with 3G Capital, and Mr. Goel has served as a Board Member and Chairman of Digital of Lojas Americanas, with oversight responsibility for B2W Digital. GVG also has a management agreement with B2W Digital, and worked with ABInbev in formulating and launching its disruptive digital business. GVG and its affiliates are shareholders of B2W Digital, Lojas Americanas, ABInbev, Amazon, Alibaba, JD.com and Netflix. Over the past twenty-five years, GVG principals have advised 25 of the 100 largest retailers, and 30 of 50 largest eCommerce companies globally—including many in this white paper.

“

Iconic companies can beat Amazon in twenty markets and build $100 billion eCommerce winners by adopting the proven multi-company model— and avoiding the omni-channel retail trap. — Love Goel, Founder & Chairman, GVG Digital

”

digital

World’s #1 digital transformation group