Saturday, October 29, 2011

MBA Career Fair Provides Cautious Optimism for Spain

Esade recently hosted an MBA career fair and it was exciting to see both Spanish companies and MNC's defiantly saying, "We are growing; we are hiring." This jives with a recent Victor Mallet assertion (Victor is the FT's Madrid Bureau Chief) that Spain doesn't have an innovation problem - it has a construction problem. There are two reasons:
1) Too many people work in construction. Construction still employs an astonishing 10% of the workforce, though that has fallen from 12% in 2008.
2) Cronyism and corruption impedes productivity in the Spanish construction industry, as the recent Sacyr scandal illustrate.

Though certain brands continue to thrive, with Zara's sales growing 8% last year and Desigual planning to add 1000 workers in Asia alone, times are tough in many sectors. As alternative energy subsidies dry up several firms announced lawsuits against the government for failing to deliver promised subsidies. Any healthcare firms stated one after the other that demand is stable (or growing) but they feel the pressure to innovate at cost.

Finally, we take a moment to remember our fallen comrades: the MNC's with significant headcount in Barcelona that were conspicuously absent from the career fair. Among them were Deloitte, Sony, HP, and Ricoh.

Wednesday, October 26, 2011

The Next 10 Years

I want to take a step back from my focus on Spain to talk about a few broad innovations I expect to see in the next few years. These are big ideas and whoever can execute them will make a ton of money.


1. Medical adherence: In developed countries, chronic lifestyle diseases (diabetes, hypertension, asthma) kill more people and cost more money than cancer. The reason? People simply can't take care of themselves. Even after diagnosis, the regime of diet, exercise, and medicine is overwhelming - particularly considering the correlation between these conditions and income/education. What's needed is some kind of system - with the right monetary incentives in place - so that physicians and health coaches actively manage a patient's recovery. All the players, from big pharma to insurance payers and governments, already know this, but it's a monster to operationalize.


2. Do-it-all device: I still carry too much in my pockets. Cell phone, car keys, wallet - it's a lot to keep track of and it's heavy. How about a device that does it all? Not just a phone, but also a virtual wallet and remote car starter. It requires a broad series of industry partnerships and vastly improved security standards but the technology basically exists.

3. Stop pirates: Not in Somalia, but in Asia. Software companies like Microsoft lose 3 revenue dollars to piracy for every revenue dollar earned. No matter your opinion of software prices, it's not fair for companies to earn nothing for their R&D. Computer use increases exponentially in China each year, almost all of it on Windows, and Microsoft sales grow at a snails pace.

4. Selling solar: Today, wind energy is far ahead of solar in market share due to its cost effeciency. Solar gets installed basically only when governments offer large subsidies or feed-in tariffs. But solar energy is far more available and reliable than wind, and easier to incorporate into urban design (you can put solar panels on top of any building; not so with windmills). So it's just a question of finding radically cheaper ways to produce the components in solar panels, and also continuing to increase the energy storage capacity of the panels.

More to come...

Saturday, October 22, 2011

Export Friction

Yesterday the third leading Spanish export insurer announced it would no longer insure exports destined for Italy, Greece, and Portugal. This was not a front page item but is nonetheless an important one as policymakers try to curb contagion resulting from the EU sovereign debt crisis.

The news makes it more difficult for exporters to protect against accidents, spoilage, and non-payment. Contracts typically specify that ownership of goods is not transferred until they reach their shipping destination. Exporters can pass along 50% of the potential liability to an insurer.

One could see this development driving up prices for insurance - and hence the prices for goods - and forcing companies to cut back on exports. Goods with high spoilage rates could be particularly affected, which is is relevant for Spain as the EU's leading exporter of fruits and also a significant exporter of dairy products.

The magnitude of the news is not excessive. Coface is responsible for only 10% of the Spanish export insurance market and the three countries account for 16.6% of Spanish exports. Furthermore, contract terms vary so not all exports are affected. Still, this is yet another example of the kid of corporate contagion governments are keen to prevent at such a critical juncture in the Euro's survival.

Friday, October 21, 2011

Death of the Taller

One of the most common sights these days around the streets of Barcelona are storefront signs reading, "Liquidación de stock." Another taller, or small independent retailer, going out of business.

Maybe the surprise shouldn't be that they're going under but that they weathered the assault from big box retailers, national chains, and e-commerce for so long. This can be attributed to two factors:

1. Big-box sellers and chains (lumping together such diverse companies as El Corte Inglés, FNAC, Decathlon, Zara, etc.) are a relatively recent phenomenon. And Spain still requires national chains to close on Sunday and some Saturdays to protect the little guys. El Corte Inglés grew mainly from 1995-2005. Compare that to Wal-Mart, whose explosive growth period was 15 years earlier.

2. Spain has not been quick to adopt e-commerce. A recent white paper from Oracle says Spanish consumers (along with French) exhibit very low satisfaction levels with e-commerce compared to German, UK, and Benelux consumers. Hence e-commerce's share of total retail in Spain is a paltry 0.06% of total retail sales - 1/6 that of the UK, for instance - and data suggests it is almost exclusively airfare purchases. It's difficult for e-retailers to overcome the importance of habit and relationships in Spanish buying patterns.

The economic crisis has turned the tide. The Spanish statistics office reports a decrease of 3% per year since 2008 in the number of registered small businesses (or PYMES). In particular, sole-proprietor businesses have reverted to 2001 levels - wiping out a decade of Euro-fueled growth. Talleres are not tracked specifically but we can at least assume that the sole-proprietor trend is not simply a reflection of the faltering construction sector, since those companies are unlikely to be sole-proprietor.

Similarly, sales volume is shifting towards large chains. The statistics of sales growth (2010, YOY) by store size are perhaps most telling:
- Single store retailers: -0.9%
- Small chains: -2.1%
- Large chains: 2.3%
- Department stores: -0.1%.

What can we expect looking ahead? More of the same. Shrinking disposable income and poor credit conditions favor the behemoths, particularly value players like Decathlon (see case study below) over premium sellers like El Corte Ingles.

Meanwhile, Amazon Spain's recent launch implies an all-out assault on one of the last remaining Taller powerhouses, the corner bookstore. It's a sink or swim situation. Surely there will be stores that transform into online vendors leveraging the Amazon platform, but it's hard to imagine older, less savvy owners following this path.

Case Study: Decathlon

In Spain, sporting goods has become synonymous with Decathlon. Guided by a mission to bring sporting goods to the masses, the French company sells everything from dry-fit apparel and footwear to camping gear, surf boards, and scuba equipment. Stores are in every major city (with 75 stores, Spain is Decathlon’s largest foreign market).

Decathlon’s competitive advantage is its private label branding. There is a separate brand for every segment. For instance, there’s the Quechua brand for hiking and camping gear, capitalizing on outdoorsy associations with the Andean region (where Quechua is spoken). There are also brands for track and field, tennis, water sports, and so on.

Store-branded products are manufactured in China and Taiwan and sourced through a distribution facility in Aragon. Decathlon also stocks premium brands but they only account for about 5% of stocks and 10-15% of revenue. Competitors such as Intersport report the exact inverse ratio of premium brand to store brand sales. It’s like Wal-Mart on steroids, and it’s permitted Decathlon to realize double digit year-over-year sales growth for the last 5 years.

In fact, Decathlon isn’t just growing its own sales – it’s expanding the size of the pie for everyone. It’s easy to see why. A camping tent that was once impossible to find for less than 300 € now costs 100 € at Decathlon. Or, say you’d like to start running regularly. Compare a 7 € dry-fit Kalenji (Decathlon) tank top to an ostensibly identical product from Nike or Underarmor which costs 25 €.

Here are a couple other strategic and operational hurdles Decathlon has passed on its way to capturing 60% of the Spanish sporting goods market:

Quality Matters
Many value brands forget that budget consumers still expect a minimum level of quality. All the products I have tried from Decathlon brands meet expectations. That includes running shoes, dry-fit shirts, hiking shoes, and running accessories.
The running shoes probably illustrate best the minimum quality principle. They cost 35 € and I wore them out over 6 weeks of intense use. Though perhaps they lasted less than branded options, I put a lot of miles on them and found no fault in their comfort or performance. For me, they met my mimimum quality standard – and I was confident enough to wear them in a 10k run, where a defect in the footwear would have had serious implications. Compare that to Nike shoes at 120 € apiece and it’s easy to see the writing in the sand. Decathlon even offers an ultra-cheap 15 € running shoe, though frankly I wasn’t willing to take the risk.

Inform & Educate
Many of the new consumers Decathlon brings into the sporting market are not familiar with product features so it becomes the store’s job to educate them. In footwear, for example, display placards indicate which shoe is right for different sporting situations. As someone that had never hiked before, I found this information helpful in choosing the right pair of shoes for the Camino de Santiago. The practice also funnels traffic to the store brands since the premium brands sit off to the side without any fanfare.