10: Grocery retail valuation with Dan McCarthy


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Sylvain and Mark begin by discussing two big developments in the grocery industry. One is Amazon’s launch of “pay-by-palm” technology at Whole Foods.

The other is the entry into the market of what Mark calls “pure eGrocery” companies — online companies that sell food direct to consumer. The pair look at the example of Misfits Market, which recently raised $200 million in series C funding, speculating on the implications for other industry players as well as how the valuations are derived.

To shed some light on the issue of valuations is this week’s guest: Dan McCarthy from Emory University, whose research interests include customer lifetime value and marketing finance. Dan has popularized a valuation methodology known as “customer-based corporate valuations,” or CBCV.

What is CBCV? In Dan McCarthy’s own words:

“It's really helpful to know what total revenue is, but it’s even more helpful and more diagnostic to be able to break it down into all of the underlying customer behaviors that brought that revenue about. Customers being acquired, staying with the firm, placing orders, having some spend associated with the order and then having that spend flow through into variable profits.”

Dan’s research suggests that by assessing revenue durability this approach can uncover value that’s not always evident from traditional financials — or conversely, identify overvaluation. To illustrate how this plays out, he compares two online marketplaces, luxury goods retailer Fartech and ridesharing company Lyft.

Dan McCarthy also notes that this approach is starting to gain traction, with more analysts and including customer disclosures in some form in their reports. Sylvain wonders whether there are barriers to using this model. Dan replies that data availability is a potential barrier for grocers.

The conversation then turns back to those food retailers with very large valuations. Sylvain asks what’s driving these valuations. Dan McCarthy says it’s in part a function of the nature of grocery:

“The market size that we're talking about here is going to be tremendous because we are talking about people buying food and obviously people spend not only a lot of money on food, but it's also a very regular purchase.”

When customer lifetime value is large, and the model scales well, these companies can use the concept of network effects to sell their story, and a virtuous cycle sets in.

Discover how regional grocers can use CBCV, even if they don’t have full customer data, by tuning into the podcast.

Did you like this podcast? Check out these other great shows and subscribe for notifications on upcoming shows!

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