Top 7 Board/CEO Lessons from the World's Most Successful Digital Transformation by GVG Capital

Top 7 Board/CEO Actions for Digital Transformation: Lessons from the World’s Most Successful Digital Transformation by Love Goel, Chairman & CEO GVG Capital From 2020-30, the digital market share of most industries from retail to health to finance will grow 4-5X. This has unleashed a frenzy across traditional businesses to accelerate digital transformation. Companies globally, from Walmart to Amazon, are chasing the holy grail: to build both the #1 physical and #1 digital businesses in their market. While physical markets still drive 90% of revenues, digital markets drive disproportionately higher shareholder value—creating 7 of the world’s 10 most valuable companies.

Yet, only one company in the world has succeeded in achieving the holy grail—Lojas Americanas, Brazil’s leading retailer, has built both the #1 physical and #1 digital businesses in a large market by outperforming digital giants like Amazon and traditional incumbents like Walmart—and created tens of billions in shareholder value.

From Near Death to #1 in 3 Years Things weren’t always so rosy. Lojas Americanas’ publicly-traded digital affiliate B2W had its own nightmare before Christmas 2011, and was fighting for survival. As sales outgrew capacity, it was being skewered on a daily basis by customers, media and analysts for missing all-important holiday deliveries and poor customer service. B2W had seen its stock price drop 95% and market share decline by 72%. Morgan Stanley projected that its top two competitors, Group Casino and Walmart, would surpass it in revenue by 2013. In 2012, Brazil emerged as the world’s fastest growing eCommerce market—attracting deep-pocketed foreign companies like Amazon, Alibaba, Walmart,

Top 7 Board/CEO Actions for Digital Transformation

Carrefour and Group Casino to invest even more heavily in the market. All this created tremendous pressure on Lojas Americanas’ board of directors to shut down the digital business or transition to an omnichannel retail model like Walmart and Tesco. However, they chose a different path.

From 2012-18, Lojas Americanas more than doubled its store count from 621 to 1,490 and grew EBITDA margins 400b.p. from 17% to 21%, making it the world’s most profitable and fastest growing general merchandise store retailer and the largest in Latin America’s trillion-dollar retail market. From 2012-15, B2W Digital was transformed into the world’s fastest growing multi-billion-dollar digital business and the largest and most profitable eCommerce business in Latin America—increasing market share 2X, revenue 4X and market capitalization 25X—growing shareholder value 3.5X more than Amazon, which grew market capitalization 7X over the same period. Together, Lojas Americanas and B2W transformed the store/digital revenue ratio from 80/20% to 50/50% and were ranked the #1 multi-channel retailer globally by Goldman Sachs. Along the way, they outperformed their Top 7 competitors—very successful global and regional companies: Walmart and Carrefour abandoned the Brazilian eCommerce market after heavy losses. Comprafacil and Saraiva went bankrupt. Alibaba and Amazon failed to win even 5% market share. Group Casino became irrelevant after losing massive market share.

So, what did Lojas Americanas/B2W do to beat the competition and execute the world’s most successful digital transformation? They took 7 critical actions—that every Board/CEO can take today to successfully transform their business:

Top 7 Board/CEO Actions for Digital Transformation

Action 1: 10X Customer Experience. Successful digital transformation is not about transforming your company or technology innovation, it is about improving customer experience by 10X in your market. Changing decades old consumer behavior requires blindingly obvious, massive—“10X”—customer benefits, not slightly better products, price or service. Lojas Americanas used a Digital Moonshot Methodology to rapidly reimagine the future of its industry and design a 10X customer experience + disruptive business model in 4 weeks; then built Latin America’s largest and most profitable digital business in 27 months. From 2012-14, Lojas Americanas/B2W improved delivery speed and customer service by 10X by building the world’s largest + fastest last mile delivery capability using kiosks, motorbikes and advanced logistics. It became the world’s only store retailer with the #1 eCommerce business in a large market and had the highest customer satisfaction ratings globally in eCommerce—higher than Amazon and Alibaba.

Action 2: High-Velocity Execution, Governance, Innovation. To retain its 10X advantage, which fades quickly as competitors catch up and customer expectations evolve, it adopted a High-Velocity Operating and Governance Model—to ensure they did not miss out on the next big technology or business model e.g. AI, cloud or marketplace. They created a quick response capability to triage new ideas and rapidly test and execute the most promising ones. The idea-to-innovation loop at traditional companies is 3 years—driven by the schedule of quarterly board meetings and annual budgeting cycles. Lojas Americanas accelerated its idea-to-innovation loop down to 3 months, by creating three new elements—for innovation, execution and governance: •

SWAT Team: small multi-disciplinary team of superstars reporting directly to the Digital CEO to rapidly triage every idea, and collaborate with cross-functional

Top 7 Board/CEO Actions for Digital Transformation

groups to develop new projects for implementation, if they passed muster •

100-Day Plan/Execute/Learn Cycle: Refine annual budget/plan for each quarter by force ranking vs. new projects (10 days), and then execute/learn (90 days)

•

Digital Committee of the Board: consists of key board members authorized to approve and allocate capital for 100-Day Plans on ad-hoc, accelerated basis

More importantly, they now stuck to a plan and that allowed them to focus on execution and innovation for 100-days without distraction. With practice, they got better. From 2012-15, they quadrupled their innovation capability and created 5 more billion-dollar digital businesses using innovative new business models and technologies.

Action 3: Multi-Company Structure to Optimize Synergy, Cannibalization, Investors, Talent. Lojas Americanas, and its publicly-traded digital affiliate B2W, adopted a Multi-Company Structure consisting of two independent businesses—a pureplay legacy and a pure-play digital business—each intensely focused on its own customers and markets, collaborating when it suited them and competing when they must. Further, Lojas Americanas and B2W leveraged mutual strengths by negotiating arms-length, market-based contracts—which ensured the value was actually delivered and did not fall through the cracks or get de-prioritized, as often happens in co-mingled, informal structures. The Structure also helped create two separate vehicles to attract the “right” capital and investors—aligned with the volatility, risks and investment horizon of the two businesses. More importantly, the Structure helped minimize cannibalization to under 15% versus 90%+ at the Top 20 omni-channel retailers globally. They also grew faster than all their digital peers including Amazon and Alibaba—with the lowest marketing expense—only 1-2% of net sales vs. 5-15% for their peers. The Structure’s

Top 7 Board/CEO Actions for Digital Transformation

most important contribution was to help attract and retain the best digital talent in Latin America because they could offer stock options for their high-growth digital business, an entrepreneurial work environment and a clear vision to dominate the market. By 2015, Lojas Americanas’ was the world’s only traditional company to consistently beat Google, Amazon, Apple and Facebook for digital talent in its market.

Action 4. Maximize Digital Profitability. From 2012-15, B2W was the world’s most profitable multi-billion-dollar eCommerce business because it dramatically increased transparency/accountability and prioritized long-term free cash flow over short-term EBITDA margin. Lojas Americanas and B2W increased transparency/accountability by using GAAP based EBITDA Decomposition—where all revenue and costs are fully accounted for both legacy and digital businesses. It revealed surprises: real estate productivity—annual sales/rent per square foot—it turns out is a key metric for both retail (store) and eCommerce (warehouse) businesses with millions of square feet in real estate each; productivity is 43X higher at eCommerce warehouses vs. stores. The second benefit of this methodology is prioritizing profit dollars (free cash flow) over profit margin (EBITDA margin). For decades, leaders in traditional companies have prioritized profit margin because it is easier to control costs and margin than drive growth in mature markets. By contrast, in high-growth digital markets, maximizing market share and becoming #1 by prioritizing free cash flow over profit margins can be the difference between success and failure. For example, a company could try to operate its digital business similar to its legacy business by prioritizing profit margins: 10% profit margins, 5% revenue growth. Alternatively, it could pursue a market share maximization strategy and invest 500bps more in customer experience—shrinking profit margins to 5% but

Top 7 Board/CEO Actions for Digital Transformation

boosting revenue growth to 30%. The growth maximization strategy yields superior results in both growth and profitability over time: •

5 Years: 3X higher revenue, 45% higher profits

•

10 Years: 8X higher revenue, 323% higher profits

Action 5. Digital Growth to Unlock Shareholder Value. In winner-take-all digital markets, the key to unlocking meaningful shareholder value is to be #1. Create a digital growth plan to be the market leader, or suffer the fate of Yahoo, AOL and Walmart— each #2 in its respective digital market. As a result, each has lost over hundred billion dollars in shareholder value. Using MC3 Methodology, Lojas/B2W developed a 3-year growth plan and a detailed 1-year budget/plan to build the dominant digital business in its market. It also created an “ownership culture” where every person in the organization was involved in building the plan and could clearly see their role and results in real time on Gantt charts and TV screens on walls around the office every single day. By 2014, it became the only traditional company with a dominant digital business in its market; unlocking tens of billions in shareholder value.

Action 6. Create Ecosystem to Accelerate Growth. Amazon, Google and Facebook have proven the key to building dominant digital companies requires creating an ecosystem of capabilities, assets and talent—through incubation (AWS), M&A (WhatsApp) and acquihire (Android). Lojas Americanas used a similar approach to achieve 10X advantage in delivery and customer service by creating the world’s largest last mile delivery platform. It used the 8C Methodology to acquire, invest in and incubate over 20 companies for talent and capabilities. From 2012-15, B2W was the world’s

Top 7 Board/CEO Actions for Digital Transformation

fastest growing multi-billion-dollar digital company outperforming Google and Amazon.

Action 7. Use Data for Performance Improvement. Lojas Americanas and B2W were able to build the largest and most profitable businesses in their market because they used data wisely: (i) to give customers the right offer at the right time at the right touchpoint (kiosk, store, TV shopping, mobile, website) by building the largest customer database in Latin America with more customers and more datapoints/customer; and (ii) improving their financial + operating performance by benchmarking their results on key metrics against best in class peers by using the world’s largest digital KPI database. This is how they outperformed Amazon globally by 6,153% in creating shareholder value from 2000-20, as measured by market capitalization.

Conclusion From 1995-2020, only three other traditional companies globally have built the #1 digital business in a trillion-dollar market. Their Top 7 Board/CEO actions were similar. Boards and CEOs of all 4 successful traditional companies share a similar view of their digital transformation: It is hard. It takes time. It takes courage.

Love Goel is Chairman and CEO of GVG Capital, the world’s #1 digital transformation group. From 2012-18, he served on the board of directors of Lojas Americanas as Chairman of the Digital Committee, with overall responsibility for B2W. Over 25 years, he has led several iconic companies globally to consistently beat Amazon and build the #1 digital business in their market. He has built 30 digital market leaders and unlocked over $100 billion in shareholder value. For more, link

Top 7 Board/CEO Actions for Digital Transformation

About GVG Capital Partners with iconic companies to build digital market leaders In first 100 days, GVG typically partners with companies to execute two to three 4-week projects. Over the next 3-4 years, GVG helps companies build multi-billion-dollar digital market leaders— using its proven operating + governance + sector expertise, unmatched digital toolkit, vast global network and smart capital. Uniquely, ~100% of GVG’s economics are tied to companies’ success.

4-week projects to accelerate transformation, value creation 4-Week Project

Key Project Deliverables

Proprietary Methodology

Customer Experience

10X customer experience; reimagine industry value chain, business model

Digital Moonshot

Digital Growth

3-5 Year plan to build market leader; 1-year operating plan/budget

MC3

Digital Profitability

Full GAAP financials - digital, legacy; free cash flow maximization plan

EBITDA Decomposition

Innovation

SWAT team; 100-Day plan/execute/ Learn cycle; Board Digital Committee

High-Velocity Operating and Governance Model

Synergy, Talent

Restructure both legacy and digital business; cross-business contracts

Multi-Company Structure for Digital Transformation

Ecosystem (M&A, fund)

Set up fund; deal sourcing; diligence; portfolio value creation plan; exits

8-C

Performance

Benchmarking results; performance improvement; targeted action plan

World’s largest digital KPI database

Trusted by dozens of iconic companies and investors over the past 25 years

Top 7 Board/CEO Actions for Digital Transformation

#1 in digital transformation

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