Thanks Meghan! This business model was so great, they rejected a competitive offer from a private equity buyer that was attracted by their growth, margins and defensibly of the concept.. I’m not overly familiar with US market but believe cardboard boxes are more prevalent over here and plastic trays aren’t as penetrated as they are in Europe (for instance, http://www.smurfitkappa.com/vHome/us/Products/Pages/Fruit_A_vegetables.aspx).
Agree this mostly makes sense for chains as you need volume to justify investment (think Tesco in UK, Carrefour in France). US is a market with great potential in that sense, especially in more populated areas. Corner shops are indeed common in Europe but they mom&pop shops typically source their products at cash & carry stores (think of it was warehouse for small business owners pick up products themselves). You’re absolutely right that they couldn’t feasibly manage handling the trays. I could see, however, smaller regional chains pooling their logistics to benefit from scale and improve efficiency with EPS. The proposition is rather compelling!
Great read JM! Rocket Internet is an interesting beast as you lay it out nicely. From one side, it’s a force behind some very fast growing businesses (HelloFresh in Europe is one that comes to mind), setting up hungry entrepreneurs with a big mandate, required funding and some support. On the other hand, their stock price has halved from the peak of Dec 2014 as a result of a series of weaker investments in SE Asia and questions about profitability of the ‘unicorns’ (which, of course, is not unique to Rocket). I have heard a number of personal stories about their ruthless approach to their ‘entrepreneurs’ who experience high levels of pressure from the company, don’t always receive the expected support from HQ and as you mention, don’t even always get to participate in the upside. This in turn, arguably constrains their success rate: short term focus might ‘kill’ solid ideas that don’t perform in first 100 days, and ‘tough’ business model is likely to put off truly talented entrepreneurs who should be able to find ‘better’ sources of capital elsewhere. Their unique approach has certainly brought a lot of wealth to the founders and has created value in the process. I do, however, question if risk mitigation is really at the core of what they do and whether their operating model really supports their strategy. Speed is critical when you’re in the business of copying existing business but so is execution. I’d argue that a more focused, committed and patient approach is likely to create similar, if not better results for company, its investors, customers and especially employees .
Interesting analysis Jennifer! I really see the strength of their proposition given large distances (especially US) and cost of alternatives (e.g. train, flights). I’ve used Megabus on a number of occasion and generally find them a great value-option for getting from A to B. Given the number of complaints you mention, I do wonder how they can improve the customer experience and whether their ability to address this issue will determine their performance in the future. I draw parallels with Ryanair which has become one of the most successful European airlines by capturing the no-frills, low cost segment of the market. Despite numerous complaints about treatment of customers (and employees), they were very profitable for a number of years. Somewhat, however, recently there was a backlash against their poor service, forcing company to make a number of changes in the operating model to improve customer experience and remain competitive against a number of low-cost challengers (EasyJet, Wizzair). I would imagine that bus transportation is even more competitive given lower required investment which leads to a question whether they can maintain growth and profitability with the current approach. Lowest fares attract passengers but might come at expense of investment in customer service or improved operations. Cost-conscious segment (students) is quite sticky, but I wonder what their operating capabilities are unique enough in the long run. If I’m not mistaken, they’ve had a few tough years in the US and were forced to cut a number of routes due to profit reasons.
So that’s how it works! Great read – thanks Alex. Spotify has clearly taken the works of music streaming by surprise and I’m another big fan and user of their service. Main question in my mind after reading this is around the core competencies of their operating model and sustainability of their competitive advantage. They have an innovative business model, have executed it well and as a result have experienced fast growth by accelerating user’s shift towards ‘free’ streaming not purchase of music (i.e. CDs, iTunes). Seemingly organic Squad approach has worked, however, I am curious to see where do they go from here – how they manage and continue to innovate in both business and operations. Apple Music gathered 15m users in about 3 months since it’s launch. It’s a fraction of Spotify’s 75m but only 20m of them use for-fee subscription, making this an interesting contest to watch.