SONAE SR: ZIPLINING INTO NEW OPPORTUNITIES HEC CONSULTANTS: MARJOLAINE BERGERON, FELICIA PARR, REBECA YANG, RYAN WILSON
Introducing your company Founded in 1959 diversified portfolio and up-and-coming brand Success through partnerships (i.e. Saudi Arabia) Four brands: Worten, Zippy, MO and Sportzone Organic growth vs. capital-light franchising model Current issues: Profitability Brand growth Sonae SR would like to expand and be more profitable by 2017
How can Sonae SR best achieve profitability and sustainable long-term growth?
Our Master Franchisee Plan 1 2 Expand internationally into Brazil & India via capital light model with Zippy brand Develop partnership with master franchisee in Spain to improve performance Develop SAP system to best control supply chain
Analysis EUR Millions 2014 Sonae SR 1,290 Portugal 930 International 360 Ebitda Ebitda 15.48 Mg 1.20% Estimated Net Income 9.75 Invested Capital 1,200 Return on Investment 0.81% Revenues EUR M 1H14 1H15 year over year Portugal 409 403-1% International 170 179 5% Sonae SR 579 582 1% Ebitda EUR M 1H14 1H15 year over year Portugal 10 5-50% International -17-16 -5% Sonae SR -7-11 N/A
Internal Analysis Strengths Operations and management Knowledge of Portuguese marketing Ability to develop capital light BM Accommodation of new partners Ability turn weakness into strengths Weaknesses Lack of partnerships Need to fine tune franchise model Improve competency to develop brands No appropriate IT system
Sonae SR Core Competencies 1 Experience in capital-light business models 2 3 Developed logistics network Experience in developing favourable partnerships via franchising
Sonae SR - Brands Sport Zone (sports clothing, 117 stores) 18% of revenues Location is very important Has to be adapted to the regional culture Only 50% of brand is sold Worten (electronic and home appliances, 239 stores) Consolidated market Need to be top player for success 10% of brand sold in stores Difficult previous expansion Requires a lot of investment 68% of revenues
Sonae SR - Brands Zippy (merchandise for children, 120 stores ) 14% of revenues 100% own brand sold High quality products Good results in Middle East Numerous stores closed MO (fashion store, 125 stores) Most stores in Portugal Strong competition (Zara) In smaller suburbs
1- Presence in Spain 1 2 3 4 5 Assumption of similar market Lack of partnership Not profitable Good handle of financial crisis Sonae SR s second market & very important
2- Where should you expand? Brazil B + Cultural & language similarities + Existing Sonae companies + Economic recovery - Regulatory Issues India I + Sonae SR Sports Zone presence + Existing partners + Population - Lack of infrastructure - Ownership issues (need 51% partner) Russia R + Geographic proximity - Governmental Issues - No existing presence China C + Population - Ownership issues (need 51% partner) - Intellectual property - Low cost competition/entrants
Why Brazil? Cultural Administrative Geographic Economics Similarities with Portugal (high immigration) Same language Population appreciates International brands Presence of large, international brands Accessibility or new entrants Requires good knowledge of regulations Continental size Large metropolitan, middle-class areas 200M population Growing middle class Recovering from crisis
Why India? Cultural Administrative Non-Western culture Variety of different cultures Language Barriers to ownership Open to new businesses Geographic Economics Continental size Large metropolitan, middle-class areas 1B+ population Growing middle class Rapid GDP growth
Recap What does this mean for you? - Spain is Sonae SR s second market and still holds potential - Core competencies lie in capital-light business models: particularly franchising - Zippy is a brand that can be easily franchised - Zippy will be fully owned - Acquisition has not previously been successful - Worten requires high investment and has not been successful with franchising - Emerging markets and middle class segments represent a high potential market - Expansion is necessary in order to grow
Alternative Selection & Evaluation 1. International Expansion 1. Organic growth 2. Joint Venture 3. Acquisitions 4. Master Franchisee 2. Presence in Spain 1. Divest from Spanish market 2. Divest from brands with lower profitability 3. Seek out master franchisee Evaluation Criteria: Will it increase profitability? Is it in-line with competitive advantage? Is it in line with YOUR values? Will it increase your market share? Will it increase brand presence? Positive impact Neutral impact Negative impact
International Expansion Alternatives Increase profitability In line with our competitive advantage In line with the management values Increase market share Increase brand presence 1) Organic growth 2) Joint venture 3) Acquisition of foreign brands 4) Master franchise plan
Presence in Spain Alternatives Increase profitability In line with our competitive advantage In line with the management values Increase market share Increase brand presence 1) Divest from Spanish market 2) Divest from non profitable brands in spain 3) Seek out master franchisees for the Spain market
Our Master Franchisee Plan 1 2 Expand internationally into Brazil & India via capital light model with Zippy brand Develop partnership with master franchisee in Spain to improve performance Develop SAP system to best control supply chain
What is the Master Franchisee? What do you have to offer? Zippy baby clothes line is high quality, has high brand awareness and is a valuable brand Financial capabilities for marketing Franchisee model knowledge and experience The right personnel to implement
What is the Master Franchisee? What should you look for? Local partner with good knowledge of the market (repeat Middle East success) Partner should have good reputation & expertise Should be eager and motivated to help you grow
Implementation Master Franchisee 1. Invest in SAP to increase IT capabilities 2. Find local retail operators via investment bankers 3. Develop quality control team in each region (Brazil & India) 4. Open 2 flagship stores 1. RIO 2. MUMBAI 5. Open 10 stores per year per country 1. India: 100 sq ft 2. Brazil: 300 sq ft
Implementation Timeline Tactic 2015Q2 2015Q3 2015Q4 2016Q1 2016Q2 2016Q3 2016Q4 Invest in SAP Implement SAP Find local operators via investment bankers Find outsourcing production partner Develop quality control team Develop regional marketing plan Open 2 flagship stores Open regular stores
Spain turnaround 2014 % Square Feet Revenues EUR M Ebitda EUR M Ebitda Mg Portugal 67% 930 48 5% Spain 30% 326-29 -9% International 3% 34-3 -9% Goal: Breakeven by 2017 How a master franchisee agreement will work?
Spain master franchise agreement Spain number o stores 120 Worten 44 Sport Zone 35 MO 6 Zippy 35 EUR Millions 2016 Q2 2016 Q3 2016 Q4 2017 Q1 Down payment EUR 100K/store 12 Revenues on store level 82 82 82 Royalties / Fee 3% 2 2 2 Franchisee Model uses a ad-on pricing model
India and Brazil master franchise Store numbers 2017 2018 2019 2020 India 5 15 25 35 Brazil 5 15 25 35 EUR Millions 2017 2018 2019 2020 Down payment EUR 100K/store 1 3 5 7 Revenues on store level 7.5 22.5 37.5 52.5 Royalties / Fee 5% 0.38 1.13 1.88 2.63 Avg sales per store EUR 750,000
Combined Financials Summarized Income Statement 2014 2015e 2016e 2017e Revenues 1290 1,303 1,013 1,025 Additional Marketing -1 EBITDA 15 11 16 18 Capital Expenditures 2016e 2017e Investment in SAP EUR 200 in 5 Years -40.0-40.0 Investment Bankers Fees -2.0 0 Flagship Stores -1.2 0 Total Capex -43.2-40.0 Cash from Investments 2016e 2017e Cash from Store Sales 12 1 Total Cash Flow to Firm -15.31-20.67 Total Cash Flow to Firm ex-sap 24.69 19.34
Risk Analysis Risk Prevention Mitigation Impact Likelihood Unable to find master franchisees in Brazil, Spain, India Seek out high profile investment firms: Santander and Itau Revisit franchisee contract and offer more favourable terms Volatility of Euro n/a Review costs for inefficiencies Unable to achieve breakeven in Spain Unable to control master franchisee (standardization and quality) Investment in SAP does not pays off New marketing plan for Spanish market Management visits and quality control team Start with small modules Divest from lowest profitability brands High Medium Low Low Low Medium Seek out new partner High Low Set revisions to determine return High Low
Conclusion Sonae SR is a dynamic firm that has achieved remarkable growth: Diversification, Branding, Geography Competitive advantage: Partnership, logistics Sonae SR has excellent opportunities for growth We recommend: Master Franchisee plan in India and Brazil for internationalization Master Franchisee in Spain for profitability Development of ERP (SAP) system to support these new initiatives Result Sustainable growth and profitability in 2017: ***EBITDA WILL REACH 18M EUROS IN 2017 A 60% INCREASE SINCE 2015****
THANK YOU
Appendix Revenues 1290 14% 180.6 Revenue per store 0.74 Total MO + Zippy 244.00
Appendix Stores K sqm Stores K sqm Portugal 417 258 71% 67% Spain 120 115 20% 30% Others 53 12 9% 3% Total 590 385