Monday, June 11, 2018

My Fifth Horseman-Inditex-And Why You Will Never Catch Them


In Professor Scott Galloway’s groundbreaking book, “The Four”, he describes why and how “The Four Horsemen” are dominating global business. They are Apple, Amazon, Facebook and Google. How did all this happen? Did we all fall asleep and wake up in a Brave New World? For some of us, maybe..

After explaining why they are so dominant, Galloway explains the factors they have in common, and the elements that a potential Fifth Horseman would need to have to sit alongside the Four in global business. He calls these elements The T Algorithm, which contains eight characteristics:

Product Differentiation
Visionary Capital
Global Reach
Likability
Vertical Integration
AI
Accelerant
Geography

In case you didn’t read the book, here is a brief explanation of each:

1. Product Differentiation
The product is king- marketing a mediocre product doesn’t work anymore; Map out the entire value chain of the product.
2. Visionary Capital-
Attract cheap capital by articulating a bold vision; Cash builds your MOAT.
I should elaborate on this one. Cash is king, right? And debt kills the mighty, even the (former) Category Killers like Toys R Us. Below is a chart I compiled for my Global Marketing class:


Company
Market Cap ($B)
Sales ($B)
Cash ($B)
Debt ($B)
Debt/Cash %
Debt/Market Cap %
Amazon
692.56
177.86
90.98
44.14
48.5
6.37
Apple
886.58
238.79
77.15
122.4
158.6
13.8
Google
720.36
111.02
101.87
3.69
3.62
.5
Facebook
477.91
40.65
41.71
0.00
0.00
0.00
Macy’s
8.64
24.83
1.49
5.88
394.6
68.1
Inditex
94.53
29.30
7.99
.02
.2
.02
Nike
108.78
35.26
4.75
3.48
73
3.2
L Brands
10.08
12.63
1.53
5.79
378.4
57.5
Walmart
253.81
500.34
6.75
46.48
688.6
18.3
The Four
2777.41
568.32
311.71
170.23
54.6
6.1
United Kingdom (GBP)
2629.41 (GDP)
152.88 (National Reserve)
2271.1 (National Debt)


Company





Company




A little bit shocking when you look at it this way, right?
1. The Four combined cash position is more than the UK National Reserve;
2. The Four combined are the worlds 5th largest economy;
3. The Four combined debt (colored a bit by Apple) is 54.6% of their cash position and only 6.1% of their market cap compared to, say, Macy’s at 394.6 and 68.1%, respectively, and the UK whose debt is (gulp!) times the national reserve.

3. Global Reach-
Product appeals to people on a GLOBAL scale; Product transcends cultural boundaries; Product needs a passport at a young age.

4. Likability-
Customers want to date the Prom Queen? Company image and product strikes and keeps a positive chord; negativity is fast and destructive.

5. Vertical Integration-
Control as much of your product supply chain and the user experience as possible.

6. AI-Behavioral Targeting-
Knowing what you want based on what you do or say; much more effective than demographic targeting, social targeting, focus groups etc.; Not only know your behavior, but control it. This is the new marketing.

7. Accelerant-
Attract top talent- be a career accelerant; Drains the pool for the rest- consequences?

8. Geography-
Need to be near a technology/business center with knowledge base and knowledgeable talent; major cities will see great growth.

The candidates for the Fifth Horseman Galloway gives are (for the most part, Uber and Airbnb possibly excepted now):

1. Alibaba
2. Tesla
3. Uber
4. Walmart
5. Microsoft
6. Airbnb
7. IBM
8. Verizon/AT&T/Comcast/Time Warner

Galloway points out that none of the above are a slam dunk for the position.

For me, the best candidate was missing and what I want to propose here- Inditex. Here’s how Inditex ticks the eight boxes of the T Algorithm:

Product Differentiation- All units have shown a great knack for moving product at just the price, just the style, just the color, just the time to have gathered a very loyal following
Visionary Capital- Take a look again at the chart above. Inditex debt is $.02 billion, a miniscule fraction of their cash position and market cap. Virtually debt free.
Global Reach- “The clothing retailer has more than 2,200 stores in 96 countries and is the flagship brand of the Inditex Group. Zara is renowned for its ability to develop a new product and get it to stores within two weeks, while other retailers take six months. Zara added a net of 51 stores in 2017, plus 38 Zara Home locations. Spain is the biggest market with 563 stores (including Zara Kids and Zara Home), followed by China (223 stores), France (150), Russia (144) and Italy.” https://www.forbes.com/companies/zara/
Likability-passionate customer following,;  Amancio Ortega just an ordinary good guy
Vertical Integration- Factory and logistics ownership setup in Spain will never be matched.
AI- Unknown, but must be very sophisticated to monitor product and customer; I believe Inditex has digitized their supply chain to a level people are only dreaming about today.
Accelerant- Who wouldn’t want to work for them?
Geography-Maybe the only question mark.
Plus-SCALE nobody will ever match- They can be imitated, but, unless somebody commits a lot of money and resources (most important human), they will not be caught.

So what is the point for the rest of us? For the companies who are not- and will never be-Inditex?

My advice would be;
1. Stop whining;
2. You have seen a formula that works. But you can’t copy it, if not only because it is too far ahead of you. So find your own formula to delight-yes, delight- the customer and dramatically collapse your supply chain.
3. Understand that the world of fashion and consumer goods is changing from a stable mass-market model to an SKU-rich, quickly changing environment.
4. If you are successful, it will chiefly be accomplished by improvements in technology-such as Blockchain for supply chains which I wrote about before in this blog. Today, there is an article per day about Blockchain or other digital technology, but mainly about the last mile-payment and logistics. In order to really collapse your supply chain, you must control the first mile- design to manufacturing- as Inditex does.

Warning- this may be a case of Creative Destruction- you probably will have to chuck out most of what you do and replace it with something better. Do you have the courage to kill the old man so the baby can grow?

Great thanks and acknowledgement of all materials quoted from (unless otherwise indicated):

The Four: The Hidden DNA of Apple, Amazon, Facebook and Google, by Scott Galloway

Publisher: Portfolio; First Edition edition (October 3, 2017)
Language: English
ISBN-10: 0735213658
ISBN-13: 978-0735213654
Available on Amazon (of course!)




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