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Categorized | Financial

Disrupters, destruction and opportunity


Posted on December 28, 2014

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As buzz words go, it is an ugly one. But, in 2014, “disrupters” have been wreaking havoc on traditional business models everywhere, writes Sarah Gordon, Business editor.

As technology puts new tools into innovators’ hands, the old boundaries between sectors are breaking down. Amazon has transformed bookselling, branched out into general retail and is now experimenting with delivery by drones. Apple shook up both the music and telecoms industries, and now has designs on our wrists. Six years after it came into existence, Airbnb has more rooms available than IHG or Hilton, the world’s top hotel groups.

Innovation, of course, is as old as time. And there is nothing new about disruptive companies or about the imagination of the people who create them. “If I’d asked customers what they wanted, they would have said a faster horse,” Henry Ford reportedly said before turning the transport industry on its head with mass production of the motor car.

But what feels different about today is the range and number of individuals and companies that are upending business models around the world. Whether it is the plethora of social media that are challenging journalism to reinvent itself; or the advances in technology that have transformed the way we order clothes, the latest film or a taxi; or the increased price efficiency that allows retailers to sell us cheaper goods, the disrupters are everywhere.

Disruption is typically destructive, forcing companies out of business and, often, people out of jobs. But disruption also presents huge opportunities — for consumers, for the disrupters themselves, and for other companies as new techniques such as crowdfunding or big data mining become available to all.

Starting today, and continuing over the next two days, FT reporters have assessed the impact of disrupters in different industries across the globe.

1. Uber — Tim Bradshaw, San Francisco and Murad Ahmed, London

After a year of multibillion-dollar fundraisings, bans in cities around the world and massive expansion, Uber, the ride-hailing app provider, has become Silicon Valley’s poster child for disruption.

The five-year-old company has revolutionised the taxi market in more than 230 cities in 51 countries without owning a single car. Its marketplace connects drivers of regular cars and taxis with passengers through its smartphone app, backed by a “big data” team that tries to ensure a ride is never more than five minutes away.

Led by co-founder Travis Kalanick, Uber has crushed competition from other ride-sharing start-ups and taxi unions alike, delivering a valuation of $40bn as it raised $1.2bn in new funding in December.

This war chest allows it to slash fares as part of its attritional battle to win market share from rival apps and incumbent cab services. Its success has seen San Francisco taxi rides fall by two-thirds in less than two years and caused Hailo, a London-based taxi app, to exit North America complaining it was impossible to compete with Uber’s pricing tactics.

Some of Uber’s drivers have also complained they are forced to work longer hours to make the same amount of money.

A backlash has begun. Regulators, particularly in Europe, have launched probes into the company’s operations, while sometimes Uber disrupts itself. In November, one of its senior executives said Uber should hire investigators to dig up information about the “personal lives” of critical journalists. The comments created a firestorm of criticism.

The incident led many to ask whether the company’s corporate culture, embodied by the man at the helm, would prove to be its Achilles heel.

Mr Kalanick has spoken of Uber fighting political campaigns to expand into cities against taxi drivers’ resistance. To this end, he hired David Plouffe, a former adviser to President Barack Obama, as his head of policy in August.

“I don’t subscribe to the idea that the company has an image problem,” Mr Plouffe told Vanity Fair. “I actually think when you are a disrupter you are going to have a lot of people throwing arrows.”

And as it races towards a $10bn revenue target next year, Uber is not satisfied with taking on taxis alone. From burgers in Beirut and cycle couriers in New York to kittens in Seattle, it is already experimenting with moving more than just people.

2. Alibaba — Charles Clover, Beijing

Having claimed nearly $300bn-worth of online sales via its eBay-style marketplace in the year to June 30, ecommerce group Alibaba has already transformed retail in China.

But now the company, and its rivals, are making inroads into everything from taxi hailing to financial services — snapping up the low-hanging fruit in overly state regulated markets.

Alibaba’s part-owned taxi app Kuadi Dache has made hailing a ride more efficient, while the Yu’E Bao money market fund, which acts like a bank deposit and offers higher interest than the state regulated rate, had attracted Rmb534bn in funds as of the end of September.

Joe Tsai, executive vice-chairman of Alibaba and right hand man to founder Jack Ma, told the Financial Times in November that financial services and healthcare were “very large industries where technology can roll out to reform the current system because some of these industries are very antiquated”.

But Mr Tsai admitted that moves into cosy state-owned industries providing services, such as finance, have not gone as smoothly as they would have liked.

He admitted that plans for expanding into financial services, such as online money market fund Yu’E Bao, had been dealt “a setback” by the central bank’s decision to block plans for a virtual credit card last spring. It felt the introduction of internet competition would have hurt Union Pay, the state credit card monopoly.

“The central bank obviously said ‘let’s slow things down a bit. Let’s understand what these innovations are really about, and let’s bring reform rather than disruption’,” said Mr Tsai.

3. Bob Diamond in Africa — Javier Blas, London

Bob Diamond may not have disrupted a market or an industry, but he has challenged the traditional view that money cannot be made by investing in sub-Saharan Africa.

Since quitting Barclays after it was fined for manipulating the Libor interest rate benchmark in 2012, Mr Diamond has since raised more than $600m on the London Stock Exchange to invest in African banks through his Atlas Mara venture.

Although the American banker is not alone among a new wave of investors in the continent, which includes private equity firms such as KKR and Carlyle and state-owned funds including Investment Corporation of Dubai and Temasek of Singapore, Mr Diamond has become one of the most recognisable faces, competitors say.

“Wall Street investors would put money in Africa just because of him,” says an Africa-focused investment banker. “He has name recognition.”

Mr Diamond initially raised $325m through an initial public offering in London in December 2013, and tapped the market again this year, although he missed a target of $400m. The American banker has partnered with Ashish Thakkar, head of Mara Group, a $1bn conglomerate with business in 19 African countries.

Atlas Mara has already sealed three deals in Africa, building operations in countries including Botswana, Mozambique, and Tanzania. And Mr Diamond anticipates more. “Global banks not in Africa are not looking at it all. It is fantastic — the heart of the reason we are doing this for,” he told the Financial Times in November.

4. Aldi — Andrea Felsted, London

German discounters Aldi and Lidl are disrupting the grocery market around the world — from their heartlands of continental Europe to the UK, US and Australia. Aldi is even exploring a move into China.

In the UK, they have almost doubled their market share over the past four years. At the same time, all of the big four supermarkets — Tesco, Asda, J Sainsbury and Wm Morrison, have lost market share.

Aldi has opened 1,350 stores in the US, and plans to take this to almost 2,000 by 2018. Lidl is also preparing to enter the US market, creating further headaches for the market’s big players, such as Walmart, which are already grappling with the threat from the dollar stores.

Mike Paglia, a director of Kantar Retail, says the arrival of Lidl will increase the pressure on established retailers, particularly as it sells more branded goods than Aldi.

“When Lidl comes in . . . I think that is where it gets scary for the Dollar Generals and Walmart,” he says.

According to consultancy Planet Retail, Schwarz Group, which owns Lidl, is already Europe’s biggest food retailer with sales including VAT of €81.7bn in 2013. Aldi had global gross sales of €67.4bn in 2013.

But incumbent retailers are fighting back. In the UK, the big four supermarkets have pledged to spend billions of pounds cutting prices, while in the US chains such as Walmart are opening swaths of smaller stores.

There are tentative signs that the growth of the discounters is beginning to slow in the UK, but Aldi and Lidl have become such mighty forces in global grocery that they are unlikely to ever revert to the niche positions they once occupied.

5. Ford — Robert Wright, New York

When the first redesigned version of the US’s bestselling pick-up truck rolled off the production line in November, it was not obvious how revolutionary it could be.

But, under the paint on Ford’s new F-150, the body was made of aluminium — a metal that had never before been used on a vehicle produced in such high volumes.

This switch in materials trimmed 700lbs — 13 per cent — from the vehicle’s weight, slashing fuel consumption by between 5 and 22 per cent compared with previous F-150s depending on the model type.

A visit to Ford’s bodyshop complex in Dearborn, Michigan, shows how much of a gamble the company has taken: it has had to replace its arc welding equipment with machines to screw, rivet, glue and laser-weld panels together.

All of this represents a significant risk, given that some analysts say the Ford 150 provides 90 per cent of the group’s operating profits.

“It’s a huge change,” Michelle Krebs, an analyst at autotrader.com, says. “Aluminium has been used in cars before, but on a much more limited basis than Ford is using it.”

Ford — whose history of bold innovation goes back to the invention of modern manufacturing by founder Henry Ford a century ago — hopes it is taking a decisive step to win an advantage over rivals.

The company believes that General Motors and Chrysler will also have to redesign their vehicles to meet strict new fuel-efficiency standards. The first manufacturer to make the transition successfully may be able to cement a long-term dominant position.

6. Just Eat — Kadhim Shubber, London

David Buttress, chief executive of Just Eat, describes himself as an “anti-cooking activist”, an apt label for a man who wants to tempt time-poor consumers out of the kitchen and on to its takeaway delivery app and website.

The UK’s largest takeaway group, which was founded in Denmark in 2001 but moved to Britain five years later, has changed the way takeaways are ordered. It acts as a middleman, connecting thousands of restaurants with consumers who want to be able to shop around on one platform.

In 2013, Just Eat processed more than 40m orders, charging about 10 per cent commission on each and generating £96.8m in sales.

After years growing on investor capital, the group went public in April in a float that valued the business at about £1.5bn.

The company soon joined the ranks of 2014’s disappointing initial public offerings as its shares languished beneath its float price of 260p for months. But the shares are now trading at more than 300p and its debut half-year results in August showed revenues up 60 per cent to £69.8m for the six months to June 30.

Just Eat operates in 13 countries, including Brazil, India and Canada, but the UK’s £5bn takeaway market is its most lucrative, accounting for almost all of its profits. Globally, it has more than 40,000 restaurants on its app and website, all of whom it charges a signing on fee to be listed.

Some analysts are sceptical, arguing that the business model is easily replicated. With Amazon now trialing a takeaway delivery service in Seattle, it is possible Just Eat could see their lunch eaten by a big US tech company.

7. Aereo — Shannon Bond, New York

Aereo was the little disrupter that could not disrupt. Launched in 2012, the New York-based start-up had an audacious pitch: for $8-$12 a month, viewers could stream high-definition, broadcast TV signals to their smartphones, tablets, laptops and web-connected televisions. It raised nearly $100m, largely from Barry Diller’s IAC, and set about challenging TV’s economics.

“We know there’s demand for this,” Chet Kanojia, Aereo’s chief executive, told the FT. “We don’t know if it’s 30 per cent of the market or 5 per cent or 2 per cent, but even at 5 per cent this could be a massive business.”

But Aereo’s dime-sized antennas sparked opposition from powerful broadcasters including ABC, NBC, CBS and Fox, which have seen their businesses transformed in recent years by the ability to charge pay-TV providers growing fees to carry their free-to-air channels. Aereo threatened those “retransmission” fees, which SNL Kagan estimates at $4bn a year.

The networks sued to shut Aereo down on claims the service violated their copyrights by rebroadcasting signals without consent. Aereo countered that it was offering a more convenient form of rabbit ear antennas.

In June, the Supreme Court sided with the broadcasters and ordered the service to shut down. IAC took a $66.6m writedown on its investment and by November, Aereo had filed for bankruptcy protection.

Mr Kanojia wrote in a note to customers that the legal and regulatory challenges “have proven too difficult to overcome” but said his company had “push[ed] the conversation forward, helping force positive change in the industry for consumers”.

Aereo never disclosed revenue, but filings revealed it had just over 77,000 subscribers in 2013. In the end, said CBS chief executive Les Moonves, it was “a lot of attention for a service that virtually nobody was using”.

Day 2 disrupters to be featured: Lending Club, Tesla, Lazada.com, SoundCloud, Three, Appear Here, Mario Costeja González

Day 3 disrupters to be featured: Netflix, Tinder, Xiaomi, Embraer, iMatchative, eMoov, Indian e-commerce

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