While it may be a cliché, Allen Paulos’ words in “A Mathematician Plays the Stock Market” certainly ring true when looking at the macroeconomic factors driving business performance over the past 3 years. As the period of cheap money supply in the US comes to an end, stagflation settles into Europe and the realities of Brexit become more and more apparent in the UK, many would look with defeatist eyes towards the future. Read more about our tips for thriving in a recessionary environment.
However, with the negativity leading up to the shutdowns across the west and the warnings of "hell is coming", from TV talking heads there were great opportunities for businesses and companies to grow at expeditious rates. While there are very different factors driving the current economic outlook, there is little to say such opportunities do not similarly exist.
What happens if you choose the wrong avenues for growth?
For one meme-worthy household name, the pandemic provided a fantastic opportunity for growth. Peloton as the drive for at-home fitness was at its peak. They recorded a meteoric rise as sales soared 172% for Q3 2020 against their prior year. In 2021 Peloton’s first billion-dollar quarter continued to drive the stock price up to $171 with a $50bn market cap. So how is it that Peloton's price has crashed nearly 95% since its peak?
With growth comes investment opportunity, and this is where Peloton doubled down on its growth strategy, investing in greater logistics across its operations to deliver more products to consumers quicker. At one point spending over $100mn to sure up deliveries to customers. However, while tragic incidents involving their treadmills, and product recalls have impacted overall brand quality Peloton’s key mistake was a failure to plan or understand the impact on their business of a re-opened economy.
"It is clear that we underestimated the reopening impact on our company and the overall industry”
John Foley CEO and Founder
As a victim of the bullwhip effect as costly supply chains were unable to react to falling demand, Peloton’s bikes began to pile up in warehouses. In an attempt to move product, second-hand sales only continued to add price pressure on an already premium product.
For Peloton, perhaps slower more sustainable growth decisions, more investment in product design or revenue diversification as the world opened up could have helped Peloton cement its position as a premium fitness product provider. Crucially, Peloton enjoyed their rise without asking themselves the key questions along the way.
The pandemic impacted few bigger household names than Hertz car rental which went through perhaps one of the most interesting stories over the past two years. While other car rental firms were able to weather the storm brought on by the unprecedented drop in travel numbers, Hertz declared bankruptcy in May 2020. Even, in their own statutory reporting, dating back to 2014, Hertz is open about how their business hinged on air travel. However, while the stress came from the pandemic it was the underlying business model that failed the test. While debt-backed M&A activity is no doubt one of the biggest drivers of growth historically, the $18bn of debt accrued by Hertz, in part due to the acquisition of Dollar and Thrifty could no longer be serviced.
The drastic fall in used car value in 2020 reduced the overall value, poor purchase decisions when selecting sedans over the ever-popular SUV and the long tail of acquisition all impacted the ability to raise cash quickly and repay creditors. Could these conditions be avoided through greater stress testing or investment planning? While very few could predict the impact of the pandemic, data-driven stress testing can continually provide better guidance and a greater focus on bringing in data to form an accurate view of consumer trends can help make sure the right decisions are made.
Where Hertz may have failed in the past is perhaps, where they can now see the greatest success. On the back of bankruptcy, and after jettisoning over a third of the car stock Hertz is now in a position to complete an order for 100,000 new Tesla EVs right when the market for electric cars is becoming ever more popular.
What happens if you get it right?
While there are many cases of poor timing or rapid and unsustainable growth there are many cases where timing and opportunity meet perfectly. The tech industry has made an unprecedented stock market run since the 2008 financial crisis. The giants of Apple, Facebook, Amazon and Microsoft have benefitted hugely from innovation, the increasing penetration of the internet in our lives and perfect macroeconomic conditions. While the macroeconomic trade winds have turned, they set an example for how companies, both big and small can take advantage of business conditions around them.
For example, ETSY, originally a niche player in the online marketplace has taken full advantage of not only the overall e-commerce boom, but also the freedom more individuals have to set up businesses from home often to the side of their current jobs, or as a way of supplementing income lost in the pandemic. While growth has slowed following reopening, ETSY still recorded 11% growth year on year up to September this year. Having already doubled sales in 2020 alone continued growth is still impressive. Furthermore, ETSY was able to effectively increase its user fee by 1.5% without succumbing to significant user churn.
Additionally, companies like ETSY do not seek to outgrow their foothold, understanding that Amazon and other platforms seek to capture the speed and value segments, ETSY can continue to forecast performance for the Christmas period positively, despite huge stress on cost-of-living for many people.
"There's a lot going on in the economy that's very concerning for a lot of people. This holiday season... maybe they're going to buy fewer things, but those things are going to mean even more”
Josh Silverman CEO of ETSY
Another company that has remained true to its core fundamentals, away from the tech space is Home Depot. Home Depot has perfectly positioned itself for the increased uptick in home improvement driven by initially the increased time people spend at home, the dramatic rise in the housing market and the increase in demand for building materials. With revenue growing 15% year on year in 2021 and total sales hitting $150bn Home Depot is in the middle of a record-setting period. Critically as the housing market took off the company benefitted from consumers looking to improve their new purchase and increase space right when the commodity prices were at their highest. Now, as the housing market cools the lock-in effect is taking hold. House buyers locked into historically low-interest rates do not wish to move but make the best of the property they currently have. With $200bn of sales targeted for the future Home Depot continues to reap the rewards of investment into supply chain at the right time when the economic trade winds are in their favour.
But how do you select the right opportunity?
So, while there may be an element or art as well as science in identifying the right opportunities, it is key that growth strategy and decisions must be made with a consideration of timing and as much data, both internally and externally as possible.
To achieve this, the first step is to gain a deeper understanding of what drives business performance through deeper insight and greater data analysis, both of which can aid in developing a model of the business’s current but crucially future performance. While FP&A teams can typically use Microsoft Excel as their tool of choice, spreadsheet tools struggle to create an efficient and robust reporting ecosystem to meet this complexity and data volume. This is where corporate performance management (CPM) tools can become hugely beneficial, to allow integrated reporting of past and future modelling.
An investment in leading CPM tools can enable FP&A teams to integrate rich internal data sets with external benchmarks, customer trends and macroeconomic factors to model scenarios on the fly and provide the data backing for leaders to make the right decisions.
Where other businesses have understood how their business model fits within the market, Hertz and Peloton are clear examples of how having a limited view can severely harm business performance. It is not for us to know what data Hertz used to forecast their model and they were certainly aware of the risks of carrying such a large debt position, however, could greater competitor benchmarking, business stress-testing and understanding consumer trends have helped them avoid the chapter 11 filings? Similarly, for Peloton, not understanding that the biggest drivers for their growth were the external forces keeping their consumers at home perhaps was the biggest mistake leading to their unsustainable growth.
It is clear, that not only the data for decision-making but also the mechanism must be robust and trustworthy. For many businesses, the first step is spreadsheet models. However, a system where numbers can be overwritten or hard coded without audit, calculations cannot be effectively traced, and versioning is an afterthought, does not live up to the level of scrutiny, collaboration, and precision that FP&A teams need. Teams should be able to work together effectively, trusting the underlying model has the complexity across a large data set to understand the business and the market.
Robust models and data sets that tell the full picture are critical, but efficiency is often overlooked. Leaders want the answers to questions in a timely matter, leading tools support FP&A team’s abilities to run scenarios and what-if analysis in a matter of hours not weeks. This speed to answer allows more scenarios to be run, increasing confidence in stress tests and risk analysis which fundamentally allows for better decision-making .
A recent McKinsey study reiterated the challenge that businesses face when looking to make decisions in this uncertain environment. The study highlights that in a period COVID-19 savings are being drawn down to support expenses on a day to day basis and three-quarters of consumers changing their purchasing behaviour to ‘trade-down’ businesses should be focusing on resilient growth more so than ever.
“Companies that make bold moves during uncertain times generate greater returns in future business cycles.”
If companies want to make the right moves, they need to have the right technology in place to help them quickly and robustly create scenario models that incorporate various data inputs – internal and external.
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