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Who Will Win Next Digital Race? Startups, digital giants like Amazon or incumbents like Walmart, Tata, Lidl by Love Goel, Chairman & CEO GVG Capital

The stakes could not be higher. There is room for only 1 winner—digital giant—in each large market, e.g. Amazon in US retail or Tencent in Chinese media. Digital giants are $100 billion+ winners that dominate their respective markets. The first digital race from 1995-2020 produced 8 digital giants, including 7 of the world’s 10 most valuable companies —6 from US (Amazon, Apple Facebook, Google, Microsoft, Netflix) and 2 from China (Alibaba, Tencent). In the next digital race from 2020-30, $50 trillion in global consumer spending is anticipated to shift online—unleashing 40 new digital giants from 15 other countries like Germany and India in dozens of trillion-dollar markets from health to food. Who will win this next race and build new digital giants—startups, current digital giants like Amazon, Alibaba or incumbents like Walmart, Tata, Lidl?

Window of Opportunity for Incumbents Incumbents, especially those with iconic brands and local roots, now have a window of opportunity because startups and digital giants face structural challenges, governmental backlash, populist resentment and investor skepticism. Governments globally—like US, Germany, India, France, Brazil, UK—are erecting tax and regulatory hurdles for digital giants. Moreover, dozens of countries like India and Indonesia still bear scars from allowing foreign giants like the British and Dutch East India companies to build the kind

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of presence in their markets that a $100 billion business would entail—ensuring they will not repeat the same mistake with foreign companies like Amazon, Alibaba, Netflix or Walmart. On the other hand, the ballooning cost of building a brand, delivery and technology platform at scale has become cost prohibitive for startups—which is why no startup founded in the past fifteen years has built a digital giant.

Critical to Build Digital Winner Why is it critical to build the digital winner—the #1 business—in a market? Only digital winners create massive shareholder value; even #2 ranked companies lose significant value. This happens because all digital markets become winner-take-all when the winner delivers a clearly superior customer experience. After Yahoo and AOL were relegated to the #2 position in their markets by Google, they lost $350 billion in value from their peak. Similarly, Walmart and Tesco, #2 in US and UK eCommerce markets to Amazon, lost $150 billion. Retailers pursuing an omni-channel strategy collectively lost $1 trillion because none of them were able to build the #1 digital business in a market. Perversely, it would have been better to not even try. From 2000-17, the top retailers in creating shareholder value: Globally—Inditex/Zara, US—CVS, India—DMart, Germany —Schwarz Group/Lidl, all shunned or underinvested in digital. However, that is not a viable strategy for the future, with the large shift to digital in consumer spending. Furthermore, it is especially instructive to study the retail sector where incumbents are farthest along—with 5X more billion-dollar digital businesses than any other sector.

Over the past 25 years, I was fortunate to lead the digital transformation of four iconic

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incumbents—Macy’s, ABInbev, Lojas Americanas and Fingerhut—to build multi-billiondollar digital winners in four trillion-dollar markets globally. Shockingly, no other incumbent has yet built a digital winner in a large market. Failure to build the digital winner has two more bad consequences for such incumbents—cannibalization and lack of profitability. More than 90% of their digital sales come from cannibalizing offline sales, but with worse margins. Moreover, their life-to-date capital and operating expenditures far exceed their digital revenue. By contrast, the four incumbents we transformed into digital winners had less than 15% cannibalization and were very profitable.

Despite Rosy Headlines, Incumbents like Walmart, Target Are Struggling “Walmart, Target outpace Amazon”, “Target same store sales up 3.4%, digital up 34%”, “Walmart same store sales up 2.8%, digital up 37%”. Recent headlines hint incumbents like Walmart and Target may be doing well and have cracked the code on competing with Amazon. Nothing could be further from the truth—they are in a 25-year secular decline, and things are only getting worse. In the last five years, they lost more market share than ever before while Amazon more than doubled its share of US retail sales.

In fact, Target and Walmart saw annual revenue growth rates shrink almost 90%—from 7.1% and 11.6% (1995-2005) to 3.3% and 4.5% (2005-15) to 0.9% and 1.4% (2014-19). To put it in context, their 2014-19 growth rate is much less than half the 3.2% US retail growth rate over the same period—implying they lost significant market share despite dozens of their peers like Sears and Toys “R” Us going out of business. To make matters worse, they also underperformed the 1.62% US inflation rate—meaning they

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most likely lost existing customers—sold fewer things to fewer people or both. This anemic growth is driven by changing consumer behavior and cannibalization. This is not just a US phenomenon—German retail behemoth Metro and the largest UK retailer Tesco have similarly under-performed. In sectors other than retail, digital transformation outcomes are even worse.

So, what can incumbents do differently to build the #1 digital business in their market?

10X Customer Experience The primary reason digital giants like Amazon and Netflix and those four incumbents— Macy’s, ABInbev, Lojas Americanas and Fingerhut—built digital winners: they improved customer experience 10X in their markets. Changing decades old consumer behavior requires blindingly obvious, massive—“10X”—customer benefits, not slightly better products, price or service.

By 1996, Amazon had such a 10X advantage when it became the world’s largest bookstore with 2.5 million titles compared to ~170,000 at Barnes and Noble stores. The website and service were not that great, but good enough to go public for a few hundred million dollars. Similarly, by 2000, Macy’s beat Amazon to build the world’s largest eCommerce business by acquiring Fingerhut’s 10X advantage in delivery, customer service and analytics with 4 million square feet of warehouse capacity, 10,000 customer service agents and world class analytics capability vs. Amazon’s 100,000 square feet warehouse space, rag tag customer service team and primitive analytics. Fingerhut had

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already leveraged this 10X advantage to build the world’s largest 3rd party eCommerce logistics and services provider helping dozens of clients like Walmart, Intuit and DirecTV launch digital businesses. By 2010, Netflix capitalized on the abysmal customer experience in a video rental market fraught with hit movies perpetually out-of-stock, long lines and late fees to create a 10X advantage by solving all those problems and offering every single DVD title through its mail subscription service—driving Blockbuster into bankruptcy. More recently, from 2012-15, Lojas Americanas improved delivery speed and customer service by 10X in Latin America’s trillion-dollar retail market—growing eCommerce revenues, market share and market capitalization much faster than Amazon without cannibalizing store sales—becoming the world’s only company with both #1 store and #1 eCommerce businesses in a large market. From 2014-16, ABInbev exploited its 10X advantage with the world’s largest assortment of beer brands, cold beverage distribution infrastructure and CPG social media platform to build the largest global eCommerce beverage business.

Founder-Owner Speed This 10X advantage fades quickly as competitors catch up and customer expectations evolve. Incumbents struggle to keep up with the velocity of investment and innovation required to retain their 10X advantage—which is why all 4 above-mentioned incumbents were #1 only briefly. By contrast, founder-owner led Amazon and Netflix exponentially accelerated the market sensing to innovation loop—market sensing to capital allocation to execution to learning to innovation—retaining 10X advantage for decades with risky, expensive game-changers like Marketplace and Prime at Amazon and streaming and

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original content production at Netflix. This high velocity operating and investment model requires concentrated ownership—founder, family or private equity.

Historically, companies competed on product, price and service—usually differentiated by a few percent, not 10X; and the top few players in most markets did well—BMW / Daimler, CVS / Walgreen’s, LVMH / Kering and Aldi / Lidl. Startups were rarely a factor because of high switching costs. Now, as long as consumer spending keeps shifting online, companies must rapidly innovate for 10X advantage to stay #1; being #2 in a market can mean massive value erosion or even extinction—just ask mySpace.

Internet Enabled Innovation Five elements combine to create digital giants—$100 billion winners—i. technology maturity, ii. customer behavior, iii. corporate capability, iv. scale and v. internet enabled innovation. Companies can only do something about the fifth element today, the first four typically evolve over decades. Widespread adoption of Netflix streaming required decades of investment and improvement in fiber and high-speed data technologies. Amazon Prime’s roadmap came from hometown neighbor Costco—which proved tens of millions of customers will pay $100 in membership fees annually to shop. Apple’s capability of fusing world-class hardware and software with brilliant design honed over decades was critical to take the mobile world by storm with devices like iPod, iPad and iPhone. Google search is valuable primarily because of the scale of the information online accumulated over time. Clearly, the first four elements are necessary but not enough. The fifth, and most important, element—internet enabled innovation —is how

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companies disrupt their markets to build digital giants. We now know and use these seemingly obvious innovations in our daily lives—Google search, Netflix streaming, Amazon marketplace and Apple internet-connected mobile devices—disruptive new technologies or business models, only made possible because of the internet.

Digital Giants from New Countries, Markets The first digital race produced 8 digital giants—4 from Silicon Valley: Apple, Facebook, Google and Netflix, 2 from Seattle: Amazon and Microsoft and 2 from China: Alibaba and Tencent. In the next digital race, over 40 digital giants will emerge from fifteen more countries like India, Indonesia, Japan, Singapore, South Korea, France, Germany, Italy, Netherlands, Spain, Sweden, UK, Brazil, Mexico and UAE across trillion-dollar markets in health, real estate, food, retail, luxury, financial services, logistics, media, consumer products, transportation, telecom and technology. India will create more digital giants in the next race than Silicon Valley and China combined in the first race; similarly, Germany will create more digital giants than Silicon Valley did in the past—because of their large market size and world-class incumbents like Tata and Lidl. Incumbents must also learn to exploit their hidden gems—assets, capabilities—to build digital giants.

Conclusion Incumbents are best positioned to win the next digital race and build massive digital giants—only, if they can improve customer experience10X, operate at founder-owner speed and disrupt their markets with internet enabled innovation.

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About the Author

Love Goel is Chairman & CEO of GVG Capital, the #1 ranked private equity firm in digital transformation globally. As Executive Chairman/Co-Founder of Digital at Macy’s, ABInbev, Fingerhut and Lojas Americanas—he transformed the only four incumbents to ever beat Amazon and build #1 digital businesses in trillion-dollar markets. Over 25 years, he built 30 digital market leaders and 18 billion-dollar startups across four continents—creating more than $100 billion in shareholder value.

The Wall Street Journal and CNBC called him “Digital Whiz-Kid” and “Father of MultiChannel Retail”—for selling his first software company at age 12, for being the only Silicon Valley CEO to build 4 billion-dollar startups in his 20’s, for building the first billion-dollar eCommerce business inside a retailer and helping dozens of icons like Apple, Walmart, P&G, American Express, New York Times, Marriott, Nike and BMW launch their digital business. He has built and led five successful venture capital/private equity funds, acquired more than 100 companies and served on 25 corporate boards.

A globally recognized thought leader, he recently led the world’s largest study on digital transformation, is frequently interviewed by CNN, Wall Street Journal and CNBC, wrote for Chief Marketer and Barron’s and served as visiting faculty at many universities.

An active philanthropist, he runs marathons, is a Henry Crown Fellow at Aspen Institute, Co-Chair of the Goel Foundation and Founder of the Digital CEO Roundtable.

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#1 in digital transformation

GVG Framework for Building Digital Winners GVG’s proprietary digital toolkit enables companies to build billion-dollar digital winners—#1 company in their market—3X faster, more profitably than others

Years to Build1 Others GVG

Digital Revenues

What it Takes to Build The Digital Winner

GVG Toolkit Advantage 3X faster, more profitable

$1Billion+

10X customer experience

5

1.5

Digital Moonshot Methodology —enabled GVG led companies to build 18 $1B+ digital winners

$10Billion+

10X customer experience + 10X speed (operating velocity)

10

3

High Velocity Operating Model —enabled GVG led companies to build this multiple times globally

$100Billion+

10X customer experience 17 + 10X speed (operating velocity) + 10X innovation (internet enabled)

5

Internet Innovation Framework —designed to help GVG led companies build digital giants faster, cheaper

GVG’s success is also due to 40 proprietary processes—4-week projects—that accelerate value creation from supply chain to AI, the world’s largest digital KPI database of operating and financial metrics and a global network of 10,000+ professionals 1

median

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#1 in digital transformation

Only private equity firm successful in transforming incumbents to beat Amazon and build #1 digital businesses in trillion-dollar markets Top 4 key performance indicators:

1

Created 10X customer experience—built multi-billion-dollar digital winners in large markets (other incumbents yet to do it)

2

Did it profitably—equal/more than core business (other incumbents yet to breakeven on life-to-date capex + opex)

3

Minimized cannibalization—under 15% (other incumbents suffer from more than 90% cannibalization)

4

Unlocked massive shareholder value—10X-25X investment returns (other incumbents yet to deliver meaningful returns)

___________________________________________________________________________________________________ DISCLAIMER THE OPINIONS EXPRESSED IN THIS REPORT ARE CURRENT OPINIONS OF GVG CAPITAL AS OF 2019, AND MAY CHANGE AS SUBSEQUENT CONDITIONS VARY. ANY PROJECTIONS, MARKET OUTLOOKS OR ESTIMATES IN THIS ESSAY 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. THE INFORMATION CONTAINED IN THIS REPORT IS INTENDED ONLY FOR THE PERSON OR ENTITY TO WHICH IT IS SENT OR ADDRESSED AND CONTAINS CONFIDENTIAL AND/OR PRIVILEGED MATERIAL. PLEASE DO NOT RETRANSMIT, DISCLOSE, DISSEMINATE, USE OR TAKE ANY ACTION IN RELIANCE UPON, THIS INFORMATION. THIS REPORT MAY CONTAIN “FORWARD-LOOKING STATEMENTS” WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, AS AMENDED. BECAUSE SUCH FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, ACTUAL RESULTS MAY DIFFER MATERIALLY FROM ANY EXPECTATIONS, PROJECTIONS OR PREDICTIONS MADE OR IMPLICATED IN SUCH FORWARD-LOOKING STATEMENTS. INVESTORS ARE THEREFORE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. 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 ESSAY OR ANY PRIOR OR SUBSEQUENT COMMUNICATION FROM GVG CAPITAL OR ANY OF ITS REPRESENTATIVES OR AFFILIATES, LEGAL, TAX, OR ADVICE. | Page 10 of 8 © AS GVG Capital. AllINVESTMENT Rights Reserved

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Who Will Win Next Digital Race: startups, digital giants like Amazon or incumbents like Walmart?  

The stakes could not be higher with room for only one winner—digital giant—in each large market, e.g. Amazon in US retail or Tencent in Chin...

Who Will Win Next Digital Race: startups, digital giants like Amazon or incumbents like Walmart?  

The stakes could not be higher with room for only one winner—digital giant—in each large market, e.g. Amazon in US retail or Tencent in Chin...