This week's announcement of Sainsburys merger with Asda, to create the UK's 'biggest retailer', is another example of the decline of European enterprise business models, a concept I introduced a few weeks ago.
Sainsburys' price to sales ratio (PSR) is at 0.3x, nearly as low as Europe's biggest retailer, Carrefour which is at 0.17x. Investors don't think there is any growth in these firms, whose business models were developed in the 1960s and have barely changed.
The chart above shows the result: significant decline in market capitalisation.
In January this year Carrefour announced a plan to 'restructure its business model', including what it called a 'massive investment' in digital over the next five years. The 'massive' investment is less than 1% of its annual revenues. So, very much a 'restructure' rather than a transformation, and unlikely to dramatically change investor sentiment.
Sainsburys' are further behind, and are adopting the traditional defensive approach of a company with a declining business model by merging with a rival to try to create economies of scale. (At least the rival is part of Wal-Mart which is - slowly - trying to upgrade its business model).
But the economies of scale in this merger are all on the supply side, rather than on the demand side. And it is this relatively new concept of demand-side economies of scale (also called 'Network Effects') that win in an increasingly connected digital economy. Amazon - uniquley - has managed to incorporate both demand-side and supply-side economies of scale (a video case study explains it here).
The fundamental challenge for traditional enterprises is shown in the chart below (and explained in more detail here).
They are competing with companies who saw the future a long time ago and managed to transform their business models by investing a significant amount into 'Intellectual Capital' based services (software and data services like Amazon Web Services; Alexa) and 'relational capital' based services (for example, Amazon Marketplace, Twitch, Advertising, developer communities) as part of their overall business model mix.
We know how well this has worked for Amazon, compared to those who haven't transformed their business models...
...and for start-ups like the food delivery marketplace, Just Eat, which is now worth more than Marks & Spencer and (until recently) Sainsburys too. Just Eat operates an asset light pure play platform business model. It generates a valuation multiple 27 times higher than Sainsburys', with 6% of the number of employees.
One final telling statistic for now: Carrefour, Sainsbury and Tesco's R&D spend as a percentage of annual revenue = 0%. Amazon's R&D spend = 14%.
Who's likely to win in the future, and which are the best companies to invest in? The answer is here.
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