After going through Prof.Bakshi’s note and the talk given by Sunil Agarwal,l got answers for most of my questions.
1.How will they maintain their marign if they start selling third-party products?
They are not planning to sell third-party branded products because brands are expensive due to their advertisement expenses.They will sell the third-party produtcs on which their margin can be sustained.This will be achieved through the scale in which they source from suppliers.Due to their huge scale of buying,they can buy cheap.They can also buy the components separately and give it to sub-contractors for assembling to reduce the cost.Anyways,VGL is very keen on maintianing the gross margins of 60% even in thrid party products as well.
2.Customer shift from TV medium in the future:
Long-distance shopping in US is not something new,it is happening over 100 years where people will buy over phone or mail ordering without even touching the products /seeing the products.HSN and QVC are in this business for over 3 decades and they are very successful.So,this trend is not going to change anytime soon.Even if it changes,already their platforms are very well integrated with web to make the business medium agnostic.If the shift would have happened,HSN and QVC would have been out of business long ago ever since ecommerce boom started.Current TV home shopping trend is here to stay,how long it will remain has to be seen.
3.Average sellling price(ASP):
This is the single most differentiating factor for VGL with their competitors like HSN and QVC whose average selling price is over $60 whereas VGL is $21.This is something unique in this home shopping jewelry business.None of the competitors addressing this discount retail segment which VGL is operating.Also,it is not selling any branded products thus its ASP is less.Another major advantage to this low cost discount model is it is almost recession proof.Jewelry being a discretionary item,but for VGL model it is almost not.Nobody thinks twice for spending $20 whether you are in recession or in booming economy.This insulates VGL from the looming recession which almost killed it in 2008.Current ASP of around $20 remains the key to stay long and being a recession-proof business.
In retail,however solid the business model is it all boils down to inventory management and what will you do with your unsold inventory especially when you are into fashion jewely where the trend gets changed rapidly.Especially when you are operating your business in the highly-competitive western retail environment where you rub your shoulders against big daddies who are very ruthless in killing competition,you need to be extremely vigilant about invenotry management.VGL is again very smart and nimble by selling their unsold TV inventory over web through bidding(reverse Acution).This kind of tight inventory management led to fall in inventory days drastically from over a year in 2010 to 100 days now.Zara has negative working capital because of its scale.
More over,VGL is not a trend setter,rather they are trend spotters.As soon as they identify a new trend in a product,they start with minimal quantity to see how the sales are happening,then based on the sales they increase or decrease that product inventory.Inventory management is exceptional so far.
On a high-level,if we think,the competition in the jewlry space in quite intimidating.On the whole we have jewelry specialized brick mortar stores like Kay jewellers,Tiffany,Zale, home shopping players like QVC, and HSN and ecommerce players like amazon,ebay etc.Where does the competitive edge lies for VGL:
Customers that VGL targets,the medium it operates predominantly, the average selling price(non-branded items) at which it sells,if combine all of these,there is not much competition in this space here.It addresses the discount jewelry space where there is negligible competition.If that is the case,can someone copies it model and replicate it? That is where VGL’s low cst producer model along with end-to-end vertical integration comes into play which acts an entry barrier for a new player.
How solid a business model is,as an investor we should get a visibility of future growth>Market pays for predictable and consistent growth.If a company’s growth is clearly visible,PE gets expanded and it remains in that high PE band as long as the growth sustains.
Here in the case of VGL,we have a nice story that has been unfolding over the years.Now,we have to convert the story into numbers to check if we can predict its future growth.
1.No of households left in US and Uk to tap into (???)
2.Population of US over 60 years old is around 90 millions out of 300 millions as per latest census which shows lot of old women sitting home and watch TV,shop over internet.Similar percentage in UK.
3.Increase in number of repeat purchase from existing customers.
4.Expansion in other countries like Germany,Japan(not now,may be in 3-4 years down the line)
Need other members(Karan,Anil,Krishna) help in adding as many data points as possible to see if we get some visibility into its future.
Please add your views if you find any holes in my above points.I am here to learn from other valuepickrs in this amazing forum and always ready to accept counter views/opinions.
Disc: No investments,still studying to get a better understanding.