Strategic  Growth  Options  for  CCRR  Final  Report  

Anshul  Ailwadi,  Rohini  Atal,  Kelechi  Ebi,  Jamiah  Harris,  David  McDonald,  Emily  Watts  

ABSTRACT  

BTG Pactual, a leading investment bank in Brazil, tasked our team with charting a growth strategy for CCRR, a company partly owned by BTG’s private equity arm. As part of its growth strategy, CCRR, a leading Brazilian company dealing in adhesives, labels and specialty paper in Latin America, recently began to expand its service offerings into RFID technology solutions, with a focus in the retail sector. BTG Pactual, in an effort to better understand the RFID technology and, more importantly, be convinced of its commercial viability for the Brazilian market, sought our analysis of the technology, and a means of quantifying its potential return on investment (ROI) to CCRR clients. Additionally, BTG Pactual asked that we analyze other potential strategic growth options for CCRR given current trends in the global market. Specifically, we evaluated the following questions for the client: 1. Is RFID the technology of the future? 2. Is a one-stop shop business model the best approach? 3. How can operating margins be improved? After extensive research, field study and analysis, we reached the following conclusions: 1. RFID is indeed the technology of the future, as global trends suggest that RFID is the next natural phase in the growth trajectory for leading firms in the paper and printing industry. 2. The one-stop shop approach is also consistent with current industry trends globally and offers opportunity for economies of scale across the RFID value chain. 3. Finally, the one-stop shop model would contribute to improved operating margins by bringing more of the value chain in-house.              

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Table  of  Contents  

INTRODUCTION: ..................................................................................................................... 3  The  Client.......................................................................................................................................................................................3  The  Problem.................................................................................................................................................................................3  The  Scope  of  the  Project..........................................................................................................................................................3  Is  RFID  the  technology  of  the  future?...................................................................................... 4  ROI  Calculator..............................................................................................................................................................................5  Data  Analytics  Value .................................................................................................................................................................5  Future  Trends..............................................................................................................................................................................7  Is  a  one-­‐stop  shop  business  model  the  best  approach?........................................................... 8  Assessing  Global  and  Regional  Industry  Trends ..........................................................................................................8  Technology  Life  Cycle...............................................................................................................................................................9  Importance  of  Advisory  Services .....................................................................................................................................10  How  Can  Operating  Margins  Be  Improved?........................................................................... 11  

Conclusion............................................................................................................................ 12  

 

 

 

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INTRODUCTION:  

The  Client   The Client for this project was the Brazilian investment bank BTG Pactual. BTG Pactual (BTG) is one of

Latin America’s largest banks with a presence in the world’s financial capitals and operations in

Investment Banking, Asset Management and Wealth Management. The bank’s current net equity is over

US$6.2 billion with over US$66.2 billion under its Asset Management division and R$20.4bn in Wealth

Management.

Specifically, we were engaged by BTG Pactual’s private equity team, which operates within the firm’s

merchant banking group. The fund recently invested in a Brazilian company called CCRR. A market

leader in pressure sensitive materials, self-adhesives, labels and specialty paper, CCRR was formed in

June 2011 from the merger of Colacril (the largest self-adhesive plant in Latin America) and RR Etiquetas

(the pioneer of the barcode system and a leader in the labeling and tracking industries). This integration

solidified CCRR’s position as a leader in the fast-growing pressure sensitive materials industry in Brazil,

and enabled its progression into radio frequency identification technology (RFID).

The  Problem   Seeking to innovate in the labeling industry, CCRR sought to expand its product offerings into Radio

Frequency Identification (RFID) technology. CCRR intended to target and push RFID adoption through

the retail sector. Prior to investing in the expansion into RFID, BTG recognized the need to further

understand the technology, its scope and potential, its applicability in the Brazilian market as compared to

other developed and developing countries and, most importantly, its limitations. As a BTG portfolio

company, it is essential to BTG that CCRR implements a business strategy that will eventually yield

strong returns for the fund. Thus, it was important for BTG to be able to quantify the return on investment

(ROI) of RFID technology to CCRR clients, in order to ensure its commercial viability and rapid adoption

in the Brazilian market. In addition to analyzing CCRR’s expansion into RFID, they wished to analyze

other strategic growth opportunities to gain a comprehensive understanding of CCRR’s growth potential.

The  Scope  of  the  Project   BTG asked us to evaluate the growth prospects associated with this technology; to determine what

complementary services, if any, would improve the value proposition of the technology; and to identify

opportunities to improve the company’s cost structure. The client summarized these goals with three

overarching questions:

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1. Is RFID the technology of the future?

2. Is the One-Stop shop business model the best approach?

3. How can operating margins be improved in either case.

To answer these questions, we conducted extensive research and field study in Brazil and New York. Due

to the relatively nascent stage of RFID in the Brazilian market, we sourced much of our data from

interviews with BTG Pactual, CCRR and, CCRR’s clients, which enabled our team to effectively address

the questions posed by BTG.

Is  RFID  the  technology  of  the  future?   Yes, for the Brazilian market, RFID is the supply chain management technology of the future. It provides

three key advantages over traditional barcode labeling technology:

1. It contains a chip that is capable of holding significantly more information about the labeled

product, and it can be scanned from a greater distance, without line-of-sight contact between the

chip and the scanner. This feature gives a supply chain manager much more granular information

about the flow of products through the supply chain, this enables more efficiency in keeping track

of items on the SKU level, thus a reduction of stockouts1 in stores and theft levels throughout the

supply chain. And, since a manager is better equipped to predict when and where goods are

needed, inventory levels can be kept lower, thus freeing up cash.

2. The ease of scanning significantly reduces the amount of labor involved in the inventory tracking

process, thus reducing labor costs.

3. The technology enables the collection of massive amounts of data, which when analyzed over

various time cycles, help firms continuously adapt its business practices, develop more accurate

supply and demand forecasting, and gain a better overall understanding of the market.

The main hindrance to RFID adoption has been the high cost of RFID tags at 30 cents per tag compared

to 1 cent per unit for barcodes. However, as costs have declined, the benefits of RFID have become better

understood and its adoption rate has increased. RFID has been most readily adopted in developed

economies where companies have the scale and resources to take advantage of the larger amounts of

supply chain data (see discussion on analytics below). Another impediment to RFID adoption in Brazil is

that companies do not have Enterprise Resource Planning (ERP) systems capable of interfacing with

RFID technology, which imposes an additional cost to the companies that choose to adopt RFID. As

1 A stockout occurs when a customer wants a good, which is not available in the store.

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Brazil and neighboring Latin American countries continue to develop, we expect that they will follow a

similar adoption trajectory.

ROI  Calculator   Due to a general lack of data supporting the value of RFID in the Brazilian context, CCRR asked our

team to develop ROI calculators for two of their clients – Mondial and Leader – to complement their

respective RFID pilot programs. CCRR is using these pilot programs and company-tailored ROI

calculators as part of their sales pitch. The goal is that the pilot and ROI calculator will encourage their

clients to fully adopt RFID. Previously, CCRR’s ROI calculator only accounted for labor savings. To

further improve the ROI potential to CCRR clients, we enhanced the calculator to also account for the

other three major benefits of RFID: inventory savings, reduction in theft, and reduction in stockouts.

We balanced these financial benefits against the costs of RFID, effectively conducting a cost-benefit

analysis. These costs include minimal upfront expenses (tag readers, software, etc.) and the variable cost

of the tag itself, which is the primary expense related to RFID adoption: RFID tags can cost over twenty

times more than a barcode label. Nevertheless, in our research we discovered that the benefits outweighed

the costs: most businesses in the US that adopted RFID on some level intended to roll out the technology

on a wider basis due to the favorable ROI. Our calculator does not take into account benefits of RFID that

are more difficult to quantify, such as the value of analytics, discussed below.

Data  Analytics  Value   Analytics are an important element in the ROI calculation. Although it is one of the more difficult

benefits to quantify it is still relevant in determining the value proposition of the technology. The capacity

to collect massive amounts of data, analyze this data over various time cycles, and readjust business

practices is a tremendous advantage to using RFID technology over other logistics systems such as the

barcode. Much of the potential of analytics in RFID integration depends upon a firm’s ability to translate

RFID data into value added. Studies show that apparel companies could yield a 40% increase in profits as

the result of effective utilization of internal RFID analytics. Furthermore, the value of data increases as it

is shared with business partners that are key to their supply chain matrix. Thus, companies could

experience as much as a 60% increase in profits as a result of the reduction in information gaps across the

supply chain. High quality analytics also leads to more effective marketing, merchandising, and overall

return on invested capital (ROIC) of a firm. Further, within the apparel industry, several customer touch

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points can be considered in optimizing the next-best offer, essentially providing data analysts with the

information necessary to determine future customer preferences. Partially, these include:

• Customer Information:2

o Customer Behavior within the store: Operational factors, such as the customer’s current

movements throughout the store; the products the customer has in his cart; the products the

customer triaged or otherwise spent time near, but did not put in his cart, what the customer is

wearing; and what credit cards the customer is carrying

o Syndicated RFID data could include when and where his wardrobe was purchased, and the

customer’s movements in previous visits to the store.

o Traditional syndicated marketplace data, such as credit history and FICO score, customer

demographics, customer psychographics, and customer econometrics.

• Front Store/Back Store Information

o Inventory and Out-of-Stocks3

o Lead Times - i.e. tells how long an item's been on the floor, showing how long it takes for an

item to be sold4

o Process Cycles - traces where a product has gone within the store, i.e., through an elevator or

hallway multiple times, illuminating inefficiencies.

o Misplaced Merchandise within the store

o Utilization of Fitting Rooms - showing which items were tried-on and (not)purchased

o Complements and Substitutes - which items were bought/tried-on with other items

o Correlations between Sales/Try-ons, and Inventory

• External elements like news and weather (at the time of purchase)

2 Taking a Broader View of Supply Chain Resilience, Wright, Jonathan. Supply Chain Management Review Apr 2013: 26-31. 3 New Models for Addressing Supply Chain and Transport Risk, World Economic Forum, 2012. 4 Transport and Logistics, QFinance, 2011.

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Figure 1

Future  Trends   From our discussions with RFID experts there does not appear to be an alternative to RFID in the

foreseeable future. However, our research suggests that the chiplets technology could be a game changer

for the chip industry. As a major component of RFID tags, the new chip manufacturing process could

further reduce the cost of RFID technology in the medium to long term.5 While the technology is still

very much in the research and development phase and not yet commercially viable, it could be highly

disruptive to the chip industry and by extension the entire electronics industry. The growth drivers for

5 http://www.nytimes.com/2013/04/09/science/tiny-chiplets-are-a-new-level-of-micro-manufacturing.html?pagewanted=all

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RFID in Brazil will be the harmonization of global EPC6 standards, pressure from stakeholders.

Figure 27

Figure 2 shows the evolution of identification technologies from 1953 until 2011.

Is  a  one-­‐stop  shop  business  model  the  best  approach?  

Assessing  Global  and  Regional  Industry  Trends  

We assessed the competitive landscape within individual market segments of the RFID value chain to

determine trends among global industry leaders in adapting their business model to the evolving RFID

technology. Over the past decade, paper and printing companies have gradually consolidated their product

offerings along the RFID value chain.

As the most developed market in the self-adhesives and materials industry, the North American and

Western European markets provided a framework for our assessment of market trends. In 2004, the self-

adhesives and materials industry in North America and Western Europe were highly saturated. The

pressure-sensitive adhesives industry was also experiencing weakening demand, leading to pricing wars

among major competitors in the industry. In response to the market conditions, Avery Dennison, a

leading supplier of pressure-sensitive materials, anticipated the rapid growth of RFID applications, and

created a special division dedicated to their design, manufacturing and marketing. By 2011, Avery

6 Electronic Product Code is a product identification standard 7 Chart sourced from seonic.com

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Dennison’s RFID division was its faster growing division, tripling its revenues from $50 million in 2010

to over $150 million in 2011.

Recently, R. R. Donnelley & Sons Co., another industry leader in paper and printing services in the U.S.,

announced the introduction of RFID and Near Field Technology production capabilities as part of its

printed electronics initiative enabling the company to provide its customers integrated RFID solutions

combined with its wide array of digital, logistics and printed products and services.

The Brazilian market appears to be following the trend of the U.S. market with a 5 to 6 year lag. In 2010,

Valid and Haco Etiquetas entered into a strategic partnership to serve the apparel RFID market in Brazil,

developing integrated solutions using the RFID inlays manufactured by Valid in the woven labels

produced by Haco. CCRR is already on the same track as Avery, as it represents a consolidation of the

paper and lamination operation of Colacril with RR Etiquetas conversion capabilities and RFID know-

how.

Technology  Life  Cycle  

In general, the technology life cycle has four distinct stages (see Figure 3):8

1. Research and Development:

2. Ascent Phase:

3. Maturity Stage

4. Decline (or Decay) Phase

After reviewing the US RFID industry, we conclude that it is now well into the maturity stage. This

implies that the technology is firmly established resulting in increased competition and eventual market

saturation. During this stage, returns begin to slow as the concept becomes standard. RFID has been

adopted by a broad array of industries, such as the US government, retail and technology. In addition, the

price of the technology is no longer a barrier to adoption. Brazil’s RFID technology adoption on the other

hand is in the ascent stage and is expected to reach the maturity phase in about 2 to 3 years. The ascent

stage covers the timeframe from the invention of the product or service to the point where out-of-pocket

costs have been recovered. At this junction the goal is to achieve rapid growth and distribution of the

invention, leveraging the competitive advantage of having the newest and most effective product. These

8 https://www.boundless.com/management/organizational-culture-and-innovation/technology-and-innovation/technology-life-cycle/

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stage estimations are exemplified by CCRR’s current plans to bring more of the RFID supply chain in-

house, and the firm’s focus on promoting RFID adoption. Also, in the US market there is now a focus on

asset management and advisory services, which is a sign of a mature market. With this timeframe in

mind, it would be prudent for CCRR to start building up their advisory service offerings, so that they can

compete directly with international competitors that are entering the Brazilian market.

Figure 3

Importance  of  Advisory  Services  

The entry of Avery Dennison (AD) and upcoming entry of UnitekBlue (UB) and other international

competitors into the Brazilian market is an additional threat to CCRR’s market share. The products

provided by CCRR and its various local, regional, and international competitors are all imitable. These

firms cannot differentiate based on products. Because of the lack of differentiation between firms’

products, achieving competitive profit margins is difficult. In order to compete and add value, CCRR

should expand and improve the marketing of its advisory services.

Product and service differentiation through advisory services is a strong strategy that is currently the trend

in the United States. Avery Dennison, a top provider of RFID in the United States, has dedicated its RFID

department to enabling significant improvements in asset management, product quality, process

improvement, and consumer experience. Specifically, Avery Dennison provides field services, an in-

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house repair center, RFID solution support and software development. Similarly, IBM RFID Services

helps its clients define a strategy for, plan, design, integrate, implement and manage the RFID

environment in order to increase productivity and reduce costs.9

Figure 4

As shown in Figure 4, firms that successfully pursue a differentiation strategy such as adding advisory

services can achieve a higher Willingness to Pay (WTP) from their client, directly increasing a firm’s

revenues.

In the US, the emergence of RFID advisory firms, such as Blue Bean RFID shows the need for advisory

services in the US RFID space. Blue Bean RFID10 offers an “RFID Rapid Start” Package, which helps

potential clients determine the feasibility of RFID adoption. RFID4U provides project management, site

assessment and RFID lab setup services for its clients. These examples of advisory service expansion in

the US market directly support the need for a similar expansion in the Brazil market.

How  Can  Operating  Margins  Be  Improved?   Given the nascent stage of CCRR’s RFID Division, improving operating margins gained from synergies

in mergers and acquisitions may not be a viable option for BTG Pactual and CCRR. However, CCRR’s

plan to start manufacturing inlays in 2013 and chips in the future will bring more of the RFID value chain

in-house, thus cutting out the high import tariffs and improving RFID profit margins. Since the RFID 9 http://www-935.ibm.com/services/us/en/it-services/rfid-services.html 10 http://www.bluebeanrfid.com/#

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division’s financials are not broken out from the parent company, it was difficult for our team to ascertain

the exact cost structure and specific areas where efficiencies could be improved. Going forward, the

following are areas in which CCRR can achieve improved operating margins: cost savings from

outsourcing/off-shoring, lobbying for favorable government policies (e.g. tax incentives and subsidies),

implementing a lean six sigma approach to improve operating efficiency and quality of service, and

identifying potential acquisitions or mergers that will help CCRR boost its competitive advantage through

synergies found in economies of scale, human capital and economies of scope.

Conclusion  

After extensive research, field study and analysis, we reached the following conclusions:

1. RFID is indeed the technology of the future for supply chain management. CCRR should pursue

their strategy in anticipation that their clients will increasingly want to adopt RFID, for the sake

of its cost-saving and value-creating benefits. From our understanding of the North American and

Brazilian markets, RFID adoption should be on par with the North American market in 2-5 years.

2. The one-stop model approach is also in line with current industry trends globally and offers

opportunity for economies of scale across the RFID value chain.

3. Finally, the one-stop shop model would contribute in improving operating margins by bringing

more of the services on the value chain in-house.