Kellogg Consulting Club

2020 Industry Primers

Industrial machinery and components Pharmaceuticals Household durables

Energy (hydrocarbons) Medical Devices Household non-durables
Energy (renewables) Hospital Facilities Restaurants
Airlines Healthcare payers Non-alcoholic beverages
Automotive Banking and Financial services Alcoholic beverages
Online data services and storage Media end entertainment Mining and Precious metals
Computer software Telecommunications Utilities
Semiconductors Retail Private Equity

23rd October 2019

Industrial machinery and components (IM&C)

Overview Trends Framework Considerations

• Industry that provides goods to produce other • Tighter consumer spending / stagnant growth • Revenue:
goods • Trend towards concentration o New products
• Sub-categories: • Increasing emerging market demand o Quality/defects
o Electrical equipment • Local assembly simplifies shipping o After-sales service
o Industrial automation o Specialized components for specific
o Heavy machinery • Aftermarket service revenue customer segments
o Construction and engineering • Omnichannel and digital sales • Costs:
o Aerospace and defense • Pay-per-use revenue model (EaaS) o R&D
• Plug-and-produce o Raw materials (metals to oil)
• Smart products, IIoT, Big Data o Shipping
• Software/firmware revenue model o Import duties

“GE spun off their ‘GE Digital’ business to position themselves to capture a larger share of the IIoT space. IIoT is expected
to grow 4x to $1 trillion.”

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Energy (Hydrocarbons)
Integrated Oil Companies National Oil Companies Upstream Drillers Md-stream

Overview Trends Framework Considerations

• Upstream (E&P): • Upstream • Revenue:

o Exploration o Post-BP regulation o Economic environment
o Drilling/Well completion o Liability for spills $1-4k per barrel o OPEC prices
o Production o New drilling technology for previously o Rig count/utilization
• Midstream (links production and consumption): uneconomic fields (eg. fracking) o Drilling revenue: per day, foot drilled, all-inclusive
o Gathering o 45% cut in upstream capex is now reversing • Costs:
o Field processing o Deferred maintenance to save costs. o Upstream: E&P
o Transportation (incl. Pipelines) o Supply-related challenges following ongoing o Midstream: Transport, storage
o Storing decline in new discoveries – 3.5bbbl discovered o Downstream: Refining, marketing
• Downstream (refinement and sale of end-products): in 2017 (10% of demand) o Lobbying
o Refining • Midstream:
o Petrochemicals o New oilfields have limited access to pipelines (rail
o Marketing growing importance)
o Distribution • Downstream:
• OPEC

“The Trump administration is opening up lease sales for oil and gas drilling in 1.6m acres in the Arctic National Wildlife
Refuge, where there is an estimated 12 billion barrels of crude”

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Energy (Renewables)
Equipment manufacturers Energy generators Energy retailers

Overview Trends Framework Considerations

• Players: • Better technology to store energy (eg. Tesla • Revenue:

o Equipment suppliers Powerwall) o Government subsidies
o Renewable energy production • Improving generation efficiency (eg. solar) • Costs:
o Energy retailers • Scarcity of raw materials o High upfront capex
• Sources • Increasing cost efficiency beyond hydrocarbons o Low ongoing
o Wind • Government targets for % energy from
o Wave renewables (176 as of 2016)
o Solar • State subsidies
o Hydro
o Biofuel
o Geothermal
o (Nuclear)

“In many instances, renewable energy generation is more efficient than fossil fuels. We just need a better way to store.”

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Airlines
Major Airlines ($1b+) National Airlines ($100m - $1b) Regional Airlines (up to $100m)

Overview Trends Framework Considerations

• US market deregulated in 1978, transforming • Declining profit margins • Revenue:

travel into a mass-market business
• Intra-regional growth domination o Passenger / Cargo
• Smaller aircraft growing fastest o Business / Economy class
• Increased stock of fuel-efficient aircraft o Meals / Duty free
• Digital – get social ‘Meet & Seat’ o Internet / In-flight entertainment
• Historical trend towards consolidation o Extra baggage
• Emergence of no-frills long-haul o Seat charges
• Costs:
o Fuel
o Takeoff / landing fees
o Capital / operating leases for aircraft
o Unionized workforces

“American and United have been using Big Data to predict which airports are likely to see the biggest growth. Austin is
predicted to be a city to watch as tech firms leave San Francisco for the growing Texan tech hub.”

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Automotive

Overview Trends Framework Considerations

• Activities • Duties on imports • Revenue:

o Design • Driverless technology o Novel products
o Production • Developing markets o Engineering quality
o Marketing • Alternative fuel and hybrids o Gas prices
o Sale (dealerships) • Car sharing o Discounts/Rebates/Financing
o Servicing • IoT connected cars o Economy/employment
• Heavy capital investment required for product • Car health monitoring / Big Data 2020 • Costs:
development • Cross-over vehicles o Plants
• Parts market fragmented • 3D printing o Raw materials
• Competitive o Designers
o Engineers
o Distribution
o Warranty / repairs

“Nissan-Renault alliance shows that synergies may not be realized because of culture clashes and integration difficulties
across diverse product portfolio. Same for Daimler-Chrysler”

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Online data services and storage

Overview Trends Framework Considerations

• Virtual-environment services and products • Freemium business models mainly used • Revenue:
o Data search • SaaS growth o Advertising
o Cloud data storage • Privacy concerns (GDPR) o Subscriptions
o Social networking • Cyber security concerns o Direct sales
o Big data analytics • Quantum computing is a massive carrot o F(Cost of mobile data)
o Music / video streaming • Hybrid solutions (eg. Cloud-on-premise) • Costs:
• Competition focused around o Innovation
o Innovation o Engineers
o Consumer / Business segments o IT infrastructure

“Google and Dropbox (and cryptocurrency miners) are heading to the Arctic circle to save on datacenter cooling costs”

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Computer software

Overview Trends Framework Considerations

• Development, maintenance and publication of • Freemium revenue models • Revenue:

software for business and consumers
• Subscription models o See previous slide (online data and storage)
• Piracy an ongoing issue • Costs:
• Inorganic growth growing versus organic o Development costs
• Microsoft’s reemergence as an innovative force o Engineering
• Two-speed software: Basic and Advanced o Testing
o Piracy and litigation

“The age of physical distribution is pretty much over. Piracy remains an issue”

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Semiconductors

Overview Trends Framework Considerations

• R&D, production and marketing of semi-
conductors used in computers and digital
devices
o Memory
o Microprocessors
o CICs (commodity integrated circuit)
o SOCs (system on a chip)
• 80%+ are in East Asia
• Highly cyclical industry
• Moore’s law (semiconductor speeds double
every 2 years)
• Movement away from vertical integration to
outsourcing manufacturing
• Fabless companies (design and sale only)
means foundries gain supplier power from
learning curve
• Increasing demand from:
o IoT
o Autonomous vehicles
o 5G
o AR/VR
• Regular litigation from patent infringement
• Revenue:
o New chip price can fall 50% in a year
o Long lead time before R&D > revenue
• Costs:
o Cost-efficiency critical in industry
o Moore’s law expectation means R&D
critical
o Long lead time before R&D > revenue
o Fabless

“The global quantum computing market will be worth $1.9 billion in 2023, increasing to $8.0 billion by 2027.”
“Qualcomm’s patent gives it unimaginable supplier power versus Apple”

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Pharmaceuticals

Overview Trends Framework Considerations

• Discovers, develops, produces, and • Ageing population in the West • Revenue:

markets drugs for use as medications for • Growing use of western medicine in developing o Insurers coverage and plan economics
patients markets o OTC to combat generics when patents
• Types of drugs • Big Pharma often purchase or partner with small expire
o OTC companies with potential • Costs:
o Prescription • Insurers often need to cover a drug for it to be o R&D (10 years plus)
• Sales commercially successful o Sales & Marketing
o Europe and NA make up 70% markets • Regulatory landscape uncertain o Regulatory compliance
o High barriers to entry • Consolidation of patient access

“Fierce rivalry among hunters/drug companies to buy new medicines. Pfizer seeks smaller pharma companies’ specialty
drugs to revive their overall portfolios”

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Medical devices

Overview Trends Framework Considerations

• Healthcare products that achieve intended • Same as Pharmaceuticals • Same as Pharmaceuticals

purpose not through chemical action or being
metabolized
• Examples
o Surgical instruments
o Electro-medical equipment
o In-vitro diagnostic substances
o Irradiation equipment
o Dental equipment

“3D printing provides flexibility to make changes quickly and easily during product development and refinements.”

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Hospital facilities

Overview Trends Framework Considerations

• Types • Shortage of qualified medical staff • Revenue:

o Acute care • US government accounts for 50% spend o Inpatient admissions
o Rehabilitation • Consolidation to reduce costs o Outpatient procedures
o Psychiatric o Reimbursement rates
o Nursing homes o Employer-based coverage tied to
o Assisted-living facilities unemployment
• Many hospitals are non-profit (some are US • Costs:
government owned) o Labor
o Bad debt
o Tax / exemption

“Americans will no longer need to make 30 phone calls to figure out how much it will cost to deliver a baby or get an X-
ray. A price list will be available online.”

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Healthcare payers

Overview Trends Framework Considerations

• Underwrite health insurance policies • Healthcare reform pressures payors’ bottom • Revenue:
• Plan offerings lines: o Government-paid
o Fee-for-service o Eliminates coverage caps o Employer-paid
o Health maintenance org o Increasing medical loss ratios o Individual-paid
o Preferred provider o Control of rate hikes • Costs:
o High deductible o Payors forced onto exchanges o COGS (medical goods and services)
o Pharmacy benefits • Consolidation expected
• Evolving customer expectations
• Preventative model of care using IoT
• Shift to value-based model of care
• Advancements in technology
• Regulatory uncertainties

“AI, IoT, Big Data can help drive medicine towards more preventative care which is cheaper for insurers.”

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Banking and Financial services

Overview Trends Framework Considerations

• Types • Regulation following 2008 financial crisis • Revenue:

o Diversified FS firms
o Consumer retail banking
o Consumer loans and credit cards
o Cryptocurrency
• Sales
o x
• Consolidation of banks o Retail: Investments / loans with deposits
• End to proprietary trading (betting with own o IB: Fees for advisory work
assets) o CC: Fee per transaction paid by merchant
• Dodd-Frank drove strict capitalization o Crypto: Fees earned by miners
requirements • Costs:
• Challenger ‘neo-banks’ like Monzo o R&D
• Cryptocurrencies like Bitcoin o Labor
• Movement to online-only banking o Systems
o Security
o Compliance

“FinTech operators from Monzo to Bitcoin seek to radically remodel consumer financial services. However, though
massively beneficial to consumers, their benefits are all easily replicated.”

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Media and Entertainment

Overview Trends Framework Considerations

• Create, license and distribute content • Much dependent on economic growth • Revenue:
o TV & Film • Some inelastic segments (cable, internet) o Subscription
o Radio • Movement to internet streaming: o Pay-per-view
o Books o Piracy o Streaming royalties
o News o Big data and customization o Product placement
o Video games o Expectation of free content o Infomercials
• Conglomeration common o Reduced costs • Costs:
o Consumption on mobile (5G) o Creative talent
o Geographic convergence o Data centers
o Targeted advertising o Streaming facilities
o 4K and AR

“Over half of Netflix’s top 50 shows are licensed from NBCUniversal, WarnerMedia etc. who are planning their own
streaming services.”

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Telecommunications

Overview Trends Framework Considerations

• Allow consumers to communicate with one- • Growth a by-product of serviced delivered over • Revenue:
another through a complex network of phones, mobile networks o Subscription fees
mobile phones, and computers. o Bundling
o Telephone • Cybersecurity o Network capacity / signal sub-leasing
o Fiber optics / Broadband Internet • 5G o Replacement of wired broadband with
o Radio • Often bundle with similar products (media and wireless 5G
o Satellite entertainment) • Costs:
o Cell phone networks (3G / 4G / LTE) • Opportunities to segment through Net Neutrality o High capital-intensity
• A commodity market o Billing systems

“Many telcos around the world have already developed 5G architecture and initiating their field tests this year. 5G network-
related expenditure might have to increase 60%, roughly doubling TCO through 2025.”

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Retail

Overview Trends Framework Considerations

• Second largest industry in the US • High-street dying and online growing • Revenue:
• Sub-industries: • Intense price competition o 80% revenue from top 20%
o General merchandise • Intense cost pressures • Costs:
o Apparel • Growth of private-label o Inventory management
o Consumer electronics • Niche specialty offerings o Real estate
o Home improvement • Tax avoidance o Minimum wage
o Office supplies • Targeted promotions through analytics
o Drugs
o Automotive
o Specialty
o Food
o Hypermarkets / Super-centers

“The number of shoppers visiting retailers on Boxing Day has fallen for the third year in a row as worries about the
economy and the rise of internet shopping takes its toll on high streets.”

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Household Durables
Furniture Appliances Home electronics

Overview Trends Framework Considerations

• Durable goods with lifespan of 3 years+
• Types of products
o Furniture
o Appliances (white)
o Electronics (brown)
• Moderate growth in developed markets • Revenue:
• High growth in developing markets with growing o Seasonal
middle class o Higher margin (due to long purchase cycle)
• Tied to economic and housing growth o Planned obsolencence
• Raw material prices increasing • Costs:
• Shift towards online purchasing o Large inventories
• Sustainable and environmentally friendly o Capital intensive manufacturing
products o R&D
• Consumer IoT (CIoT) and brand loyalty o Compliance and regulation
o Currency and tariffs
o Supplier network
o Distribution network

“CIoT products have a payback period that consumers are not yet aware of. For example, smart washing machines that
start when energy prices are lowest, or smart home security that lowers your insurance premiums”

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Household non-durables

Overview Trends Framework Considerations

• Consumables / non-durables with lifespan of
less than 3 years
o Household – soap, detergent
o Personal – skincare, haircare, cosmetics
• Competition
o Concentrated markets (big players and
specialized local players)
o Shelf-space / scale / promotions critical
• High growth in emerging, low in developed • Revenue:
• High customer power (mass-market retailers) o Non-seasonal
• Sustainability and environmentally friendly • Costs:
packaging matters o Capital intensive
• Private labels gaining share o Marketing
• Scarcity of raw materials o R&D
• 1B new middle-class consumers o Raw materials
• The rise of the digital consumer o Compliance
• The shift to value
• Demographic shifts, including aging
• Increasingly volatile input costs (natural-resource
shortages and a few big suppliers)

“One billion new middle-class consumers in emerging markets…critical for all industries but especially FMCG / CPG”

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Restaurants

Overview Trends Framework Considerations

• Types of restaurants • Increasing food and energy prices hurting profit • Revenue:
o QSR • Minimum wage and high rents for service people o Food and beverages
o Casual Dining make hiring difficult o Catering
o Full table service • Growth overseas (growing middle classes) o Merchandise
• Large employer (10%) • Fast casual stealing share from QSR o Licensing
• Franchising model: • Often hit first by poor economy o Tips at counters and waiters
o Franchiser licenses brand, know-how, • Changing customer preferences: • Costs:
procedures and IP o Healthy o Ingredients
o Franchisee pays fee o Organic o Labor
o Sustainable o Rent
o Local o Customer research
o Vegan / Vegetarian

“Tipping options on touch-screen tills: a new way to raise high-margin revenue and pave the way for reduced labor in QSR
and Casual Dining restaurants”

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Non-alcoholic beverages

Overview Trends Framework Considerations

• Highly concentrated: 90% with • Soft-drinks flat or declining in developing • Revenue:

o Coca Cola countries but some growth in emerging o Supermarkets
o PepsiCo • Fastest growing: sports, energy, water o Restaurants
o Cadbury-Schweppes • Packaging preferences vary by market o International
• Categories: o New, niche products
o Carbonated soft-drinks • Niche products: o High-end premium labels to extract max
o Juice drinks o Protein drinks customer benefit as profit
o Sports / Energy drinks o Packaged coffee • Costs:
o Bottled water o Marketing
• Usually not vertically integrated (bottlers) o Advertising
o Packaging
o Taxes
o Wages

“Is Coke getting boring? The Coca-Cola company seeks to reverse decline in developed markets with questionable new
flavorings from peach to mango”

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Alcoholic beverages

Overview Trends Framework Considerations

• Categories • Low calorie • Revenue:

o Beer • Trend towards micro-breweries and crafts o Restaurant Sales
o Wine • Consolidation in beer manufacturers o International
o Spirits (Liquor) • Premium-ization o Niche and premium products
• More drinking at home o New products / packaging
• Taste trends: • Costs:
• Tequila o Packaging
• Whiskey o Raw materials
• Brandy o Shipping
• Cognac o Taxes & Regulation
o Lobbying
• New products:
o Pre-mixed canned drinks

“Craft spirits are the next big thing, and larger brands are starting to hop on the craft bandwagon as well.”

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Mining and Precious metals

Overview Trends Framework Considerations

• Construction and operation of mines as well as
building and operating production facilities
• Types of firms (non-integrated)
o Exploration: find areas to mine
o Development: develop identified mines
o Production: extract from mines
• Output
o Gold, silver, diamonds
o Copper
o Minerals
• Gold growth is inversely related to stock market • Revenue:
• Most gold used for jewelry o Output x Market Price
• Technology makes mining more efficient • Costs:
• High capital requirements o Location
• Supply impacted by regulation o Ore Quality
• Remember scrap recovery o Mine Type (underground/open-pit)
• Trends:
o S: Smart-mining, final frontiers, regulation
o D: Slow consumption,

“Advanced technology will become a necessity for competitiveness. Digitalized mining, enabled by IoT applications shift
competitive edge to developed markets because of the availability of network connectivity, power and skilled labor.”

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Utilities

Overview Trends Framework Considerations

• Generate, manage and provide energy and • Electricity demand growth (40% more needed • Revenue:
resources to the general population. by 2020) o Mainly from billing and extras
• Often state-owned, but move towards • Price-inelastic o Smart-meters reduces household
privatization • Commodity business consumption
• Supplier segments • Trends: • Costs:
o Generators o Regulation o Hedges to mitigate volatility
o Network operators o Demand fluctuation o Marketing
o Traders o Price volatility o Billing systems
o Providers / Retailers o Competition
• Types of utility: o Smart-meters
o Water
o Electricity
o Gas

“Smart-meters allow for better understanding of usage and allows for provision of better rates along with Nest-like benefits.
However, there are privacy, accuracy and price discrimination concerns”

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Private Equity

Overview Trends Framework Considerations

• Investment funds that buy and restructure • Record levels of ’dry-powder’ ($1T) • Revenue:
private companies • Cheap debt o OPM funds
• Process: • Costs:
o Uses OPM (hedge funds, pension funds, o 2 & 20
university endowments, HNWIs)
o Usse debt financing to purchase
companies (also reduces tax burden)
o Buys and restructures (often cost-cutting)
• Targets:
o Promising companies
o Fixer-uppers
• Sales
o Insurers

“The spread of digital technology across all industries has played to private equity’s strengths of identifying trends early and
having the space to manage businesses through change, away from the glare of public markets.”

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Author: Rohan Maini (Kellogg 2020)

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