social media: an exposing disruptive force · 2020-04-01 · social media: an exposing disruptive...

January 6, 2011

Barbara Gray, CFA [email protected]

604.761.2062

Greg Scott, Social Media Consultant [email protected]

604.306.6401!

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Social Media: An Exposing Disruptive Force

Look for Companies with “Heart” and “Soul” But Beware of “Empty Shells”

Social Media: An Exposing Disruptive Force January 6, 2011

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Barbara Gray, CFA | Greg Scott, Social Media Consultant

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Table of Contents

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Executive Summary ......................................................................................................................... 2!

I. Social Media: An Emerging Disruptive Force............................................................................. 3!

A. Social Media Empowers the Consumer................................................................................ 3!

B. Social Media Awareness and Usage is Growing Rapidly.................................................... 3!

C. Over Half of Consumers are Now on Facebook ................................................................. 5!

D. Over Half of Fortune 500 Companies are on Facebook and Twitter ................................ 7!

II. Social Media: A Valuable New Due Diligence and Screening Tool For Investors.............. 11!

A. Customer Relationships Will Be the New Driver of Firm Value .......................................... 11!

B. Social Media Exposes the Depth of a Company’s Customer Relationships................... 14!

C. Social Media Analytical Framework ................................................................................... 15!

D. Case Study Highlights............................................................................................................ 17!

E. Growth, Sales, and Valuation Metrics.................................................................................. 20!

Conclusion...................................................................................................................................... 23!

Appendix A: Social Media Analytical Framework Case Study ................................................ 25!

APPENDIX B: Recommended Business Strategy Book Reading List ......................................... 33!

APPENDIX C: Social Media Analytical Framework Table .......................................................... 35!


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Executive Summary Social media empowers the consumer and is emerging as a disruptive force. Social media awareness and usage is growing rapidly, with now over half of consumers and Fortune 500 companies active on Facebook.

As the power shifts from the company to the consumer, we believe customer relationships will be the new driver of firm value, with social media exposing the depth of a company’s

customer relationships and accelerating the value creation/erosion process. We believe the greatest investment opportunity will come from identifying companies with “heart and soul” that are ideally positioned to leverage their high level of brand enthusiasm and grassroots community marketing efforts through social media. We caution investors against the “empty shells” that are at risk of cracking as social media exposes the

inauthenticity and shallowness of their relationships with customers, employees, and other stakeholders. We developed an analytical framework for investors to assess a company’s level of “heart” and “soul” by bringing together social media and financial data to come up with the following four metrics: 1) Facebook “likes” per store; 2) Twitter “followers” per store; 3) Facebook “likes” to website visitors; and 4) advertising spend per Facebook “like”. To gain

further insight, we recommend investors pore over a company’s Facebook Page to assess its level of sales tactics, brand enthusiasm, and community engagement.

We believe it is worth tracking a company’s growth rate in the number of Facebook “likes” but until this starts to plateau, we do not believe there is any merit in attempting to establish benchmark valuations. However, we believe it is rational to assume that an “engaged” customer will spend more than an “unengaged” customer as he or she is likely

to become more emotionally connected to a company and keep current on its new product or service launches. So we can start to think about how the sales per “like” will differ between companies by looking at their average sales per store and how the market

cap per “like” will differ by looking at their valuation multiples. We conducted a case study on six consumer-facing companies to illustrate how investors can use our social media analytical framework. Based on our analysis, we classify the companies as follows: 1) Heart and Soul (lululemon and Starbucks); 2) Heart (Coach, Tiffany & Co., and Tim Hortons); and 3) Shell (Yellow Media). Please note these ratings only provide our quantitative and qualitative assessment of a company’s depth of customer

relationships and do not provide a recommendation to BUY or SELL the security. *

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* All social media and financial data in this paper are as of January 4, 2011, unless otherwise indicated.


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I. Social Media: An Emerging Disruptive Force

Social media empowers the consumer and is emerging as a disruptive force. The awareness and usage of social media is growing rapidly with over half of American and Canadian consumers now on Facebook and over half of Fortune 500 companies now on Facebook and Twitter.

A. Social Media Empowers the Consumer

We are witnessing a structural shift in consumer behaviour from passive to active as the recent advent of Web 2.0 and social media platforms are providing consumers with the

ability to conduct their own due diligence on companies. Instead of just relying and trusting traditional advertising claims by companies, consumers are now actively seeking out and sharing the truth on companies and their products and services through:

• online search engines such as Google (according to a March 2010 study by

eMarketer, 87% of consumers used the internet to browse, research and compare

products in 2009 and according to a 2009 study by Forrester, 45% of in-store purchases are influenced by online research)

• Web 2.0 user-generated review sites such as Yelp and TripAdvisor • social media platforms such as Facebook and Twitter (according to an April 2010

study by eMarketer, 34% of people have used social media as an outlet to rant or rave about a company, brand, or product)

And as a result of the viral nature of social networks, a single person has the potential to make or break a company and the products and services it sells. The bottom line is that the consumer, not the company, is now the judge at the end of the day.

B. Social Media Awareness and Usage is Growing Rapidly

Wikipedia defines social media as “consumer-generated media (CGM)…a group of

Internet-based applications that build on the ideological and technological foundations

of Web 2.0, which allows the creation and exchange of user-generated content”. The two largest social media platforms, Facebook and Twitter, have only been in existence since 2004 and 2006. Yet, as shown in Figure 1, the number of news articles (according to

Factiva) mentioning the words “social media, Facebook, Twitter” has grown rapidly from the first quarter of 2007 to the third quarter of 2010:

• Social media – from under 1,000 to over 25,000 • Facebook – from just over 3,000 to over 90,000 • Twitter – from under 1,000 to over 100,000


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Figure 1: Number of Factiva Articles Including the Words:

Source: Factiva

This growth in the awareness of social media has led to increased usage of social

networking sites by consumers. Figure 2 shows the results of a study done by Flowtown comparing social media usage by age group for May 2009 versus May 2010. The first observation we make is that social media usage is inversely related to age, ranging from

87% for 18 to 29 year olds, to 61% for 30 to 49 year olds, to 47% for 50 to 64 year olds, to only 26% for those over 65. But interestingly, the highest adoption rate in the past year for social media occurred amongst 30 to 65 year olds, with a 36-percentage point increase. Figure 2: Social Media Usage by Age Group (May 2009 versus May 2010)

Source: Flowtown


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People are increasingly using the collaborative and connective medium of social media to share content rather than email. According to a recent study by AddtoAny, the maker

of a popular content-sharing widget, email now accounts for only 11% of the way we share content, tied with Twitter at 11%, and behind Facebook at 24%.

As of the beginning of December, Twitter had a global user base of 200 million while Facebook had 570 million users. According to Google’s Double Click Ad Planner, in the month of November, 130 million Americans logged onto Facebook while only 16 million

logged onto Twitter. As shown in Figure 3, we calculate the average Facebook user spent a total of 25 hours on the site (visited average of 64 times for 23 minutes each time) while the average Twitter user spent only 3 hours on the site (visited average of 16 times for 11 minutes each time). This implies Americans spent a total of nearly 3.2 billion hours on

Facebook during the month but only 47 million hours on Twitter. Figure 3: U.S. Traffic Statistics – November 2010 – Facebook versus Twitter Traffic Statistics Facebook Twitter

Average # of visits 64 16

x Average time (min) on site 23 11

= Total min per visitor 1,472 176

/ Minutes in hour 60 60

= Total hours per visitor 25 3

x Unique visitors (mm) 130 16

= Total time (mm of hours) 3,189 47

Source: Google Double Click Ad Planner

C. Over Half of Consumers are Now on Facebook

Based on our research, the U.S. demographics for the user base of Facebook and Twitter are:

1. Geographic: Americans comprise 26% of Facebook users and 10% of Twitter users 2. Age: median age is 38 on Facebook and 39 on Twitter 3. Education: more than 80% on both platforms have at least some college

4. Household Income: half earn less than $50,000 per year due to youth-oriented nature of the user bases of both Facebook and Twitter

1. Geographic Demographics As shown in Figure 4, over a quarter of Facebook’s users are from the United States while the top ten countries account for 60% of the total. Canada ranks ninth in the world with 3% of the user base share.


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Figure 4: Facebook’s User Base Geographic Demographics

Source: checkfacebook.com

2. Age Demographics According to Google Double Click Ad Planner, the average age on Twitter is 39 and on Facebook is 38. But based on Facebook’s own statistics, the median age appears to be closer to 29. As shown in Figure 5, Facebook is most popular amongst the digital natives

(those born after 1980), with 15 to 29 year olds accounting for over half of Facebook’s total user base. The next largest user group is 30 to 44 year olds, with these Gen Y’s accounting for a quarter of total users. And those over 45 account for the remaining quarter of users, with 45 to 64 year olds comprising nearly 20% and those over 65

comprising less than 5%. Figure 5: Facebook’s U.S. User Base by Age Group

Source: Facebook.com


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3. Education Demographics As shown in Figure 6, both Twitter and Facebook attract an educated user base, with 80%

of Facebook users and 86% of Twitter users having at least some college education. Due to its Ivy League origins, Facebook has more appeal amongst the college-age crowd, with 55% of its users either still being in college or having some college education versus 49% for

Twitter. Figure 6: U.S. Education Demographics – Facebook versus Twitter Education Facebook Twitter

Less than high school 10% 7%

High school 10% 7%

Some college 55% 49%

Bachelors degree 18% 28%

Graduate degree 8% 9%

At least some college 81% 86%


4. Household Income Demographics Due to the youth-oriented nature of both Facebook and Twitter, many of its users are still in school and single, which skews downward the household income demographics. As shown in Figure 7, nearly half of the users on both sites have a household income of under $50,000 and only 11% have a household income of over $100,000. Twitter appears to have

a slightly higher mid-range income base, with 16% of its users earning between $75,000 and $99,999, versus only 12% for Facebook.

Figure 7: U.S. Household Income Demographics – Facebook versus Twitter Household Income Facebook Twitter

$0-$24,999 12% 15%

$25,000-$49,999 34% 33%

$50,000-$74,999 32% 25%

$75,000-$99,999 12% 16%

$100,000-$149,999 7% 7%

$150,000+ 4% 4%

Low income (<$50,000) 46% 48%

High income (>$100,000) 11% 11%


D. Over Half of Fortune 500 Companies are on Facebook and Twitter

According to Frank Eliason, the former Customer Service Manager at Comcast, who is

legendary in social media circles for being one of the early corporate embracers of Twitter and coming up with the idea of using Twitter to interact with customers of Comcast, there were only a handful of companies active on Twitter back in 2008: Starbucks, SouthWest,

JetBlue, and Dell. But the corporate world was quickly convinced of the value of interacting with their customers on Twitter as according to a 2010 study by the Center for


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Marketing Research at the University of Massachusetts Dartmouth, the percentage of Fortune 500 companies on Twitter rose from 35% in 2009 to 60% this year.

In November 2007, Facebook expanded its platform from individuals to the business world with the launch of Facebook Pages. Companies were quick to move to where their

consumers were and jump on the Facebook wagon, setting up their own Facebook Pages and encouraging Facebook users to become a “fan” (later changed to the term “like” in April 2010). According to the Center for Marketing Research 2010 study, 56% of Fortune 500

companies now have a corporate Facebook Page.

According to the December 2009 Marketing Sherpa “2010 Social Media Marketing Benchmark Report”, the main reasons corporations use social media are to drive their:

• Brand (improve reputation, increase awareness) • Sales (improve search engine rankings, increase website traffic, increase lead

generation) • Customer retention and acquisition (improve customer support quality, reduce

customer acquisition costs)

Given the high value-add and cost effectiveness of social media, we believe the corporate penetration rate for Facebook and Twitter will continue to increase. And although over half of Americans and Canadians over the age of 14 are now active on

Facebook and 8% on Twitter, many are still unaware of the existence of corporate Facebook Pages and corporate Twitter accounts. According to a February 2010 study done by Chadwick & Martin Bailey & Immoderate Research Technologies, the primary

reasons that U.S. Internet users are “fans” of a brand on Facebook are that they were already a customer of the company or someone recommended it to them and to:

• Obtain discounts and promotions • Gain access to exclusive content • Be the first to know information about the brand

• Show others that they like/support the brand • Be part of a community of like-minded people.

As more and more consumers discover this opportunity to “like” and “follow” their

favourite companies, we expect the number of Facebook “likes” and Twitter “followers” for companies to continue their rapid growth rate.

Back in December 2009, we started researching social media metrics and looked up the number of Facebook “fans” (since changed to “likes”) on the corporate Facebook Pages of over 100 mall retailers. As shown in Figure 8, the number of Facebook “likes” for the

popular mall retailers increased by a median of just over 250%.


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Figure 8: Year-over-Year Growth in Facebook “Likes” for Popular Mall Retailers Facebook Fans Facebook Likes Growth Rank

Company Dec 2009 Dec 2010 Number % 09 10

Starbucks 5,214,815 18,827,300 13,612,485 261% 1 1

Victoria's Secret 2,326,841 10,624,941 8,298,100 357% 2 2

Nike 1,697,411 3,405,404 1,707,993 101% 3 5

Zara 1,645,083 7,540,809 5,895,726 358% 4 3

McDonald’s 1,493,760 6,420,793 4,927,033 330% 5 4

Orange Julius/DQ 729,551 2,427,021 1,697,470 233% 6 9

American Eagle 631,069 3,368,158 2,737,089 434% 7 6

Gap 494,402 1,185,434 691,032 140% 8 15

Coach 488,997 1,442,821 953,824 195% 9 11

Tim Hortons 473,207 1,325,370 852,163 180% 10 13

Toys ‘R’ Us 453,992 1,195,498 741,506 163% 11 14

Old Navy 363,519 1,476,668 1,113,149 306% 12 10

MAC Cosmetics 345,574 1,409,602 1,064,028 308% 13 12

Aeropostale 344,705 3,356,041 3,011,336 874% 14 7

Yogen Fruz 238,899 357,258 118,359 50% 15 20

Tommy Hilfiger 195,105 692,603 497,498 255% 16 17

Whole Foods 179,521 421,178 241,657 135% 17 18

American Apparel 162,859 391,454 228,595 140% 18 19

Foot Locker 158,263 778,044 619,781 392% 19 16

Sears 157,524 316,040 158,516 101% 20 21

Levi’s Store 155,375 2,596,909 2,441,534 1571% 21 8

lululemon athletica 77,859 272,452 194,593 250% 22 22

Median Growth 252%


Note: Companies in our case study are highlighted


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In January 2010, we looked up the number of Twitter “followers” on the corporate Twitter accounts of the mall retailers. As shown in Figure 9, the number of Twitter “followers” for the

popular mall retailers increased by a median of just over 130%. Interestingly, this is just over half the growth rate of the number of Facebook “likes” which would suggest to us that consumers are engaging more with companies on Facebook than Twitter.

Figure 9: Year-to-Date Growth in Twitter “Followers” for Popular Mall Retailers Twitter "Followers" Growth Rank

Company Jan 2010 Dec 2010 Number % 09 '10

Whole Foods 1,737,500 1,836,662 99,162 6% 1 1

Starbucks 723,358 1,165,358 442,000 61% 2 2

Coach 247,673 271,224 23,551 10% 3 3

Louis Vuitton 66,241 148,926 82,685 125% 4 5

XXI Forever 63,465 114,950 51,485 81% 5 7

American Apparel 52,085 266,657 214,572 412% 6 4

Sephora 44,818 109,742 64,924 145% 7 8

Game Stop 35,960 71,703 35,743 99% 8 11

Betsey Johnson 29,619 59,256 29,637 100% 9 12

H&M 22,746 80,235 57,489 253% 10 9

lululemon athletica 22,069 50,691 28,622 130% 11 15

Nordstrom 21,164 46,999 25,835 122% 12 16

Toys 'R' Us 20,308 75,720 55,412 273% 13 10

Gap 19,027 45,459 26,432 139% 14 17

Best Buy 18,045 117,439 99,394 551% 15 6

Colette 17,811 52,338 34,527 194% 16 14

Oakley 15,005 36,697 21,692 145% 17 19

Chick-fil-A 13,860 52,644 38,784 280% 18 13

REI 13,588 40,929 27,341 201% 19 18

Old Navy 13,541 28,480 14,939 110% 20 20

Median Growth 134%

Source: Twitter.com


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II. Social Media: A Valuable New Due Diligence and Screening Tool

For Investors We believe social media is a valuable new due diligence and screening tool for investors. The heart of our investment thesis is that customer relationships will be the new driver of

firm value, with social media emerging as the core value accelerator and exposing the depth of a company’s customer relationships. We developed a social media analytical framework to assess the level and quality of a company’s customer relationships, which we have illustrated through a case study on six consumer companies.

A. Customer Relationships Will Be the New Driver of Firm Value

We believe customer relationships will be the new driver of firm value. As the power shifts

from the company to the consumer, we believe investors will start to focus less on a company’s brand and more on its customer relationships. As evidenced by the recent high-profile bankruptcies of Fortune 500 companies such as Lehman Brothers and

Washington Mutual, a company’s brand equity is a reflection of its past accomplishments and reflects current, not future value.

We believe the transparent nature of social media will peel away the layers of a

company, exposing the true authenticity and depth of its customer relationships. As shown in Figure 10, we visualize companies as having one to three layers. The basic outer layer of a company is its “shell”, which represents the utility value proposition (financial and functional elements) that its product or service offers to customers. Some companies go

one layer deeper and have a “heart”, which represents the emotional connection its customers have to the brand. However, the companies with the deepest level of customer relationships are the ones with “soul”, who were founded with authentic passion, purpose,

and vision and have cultivated a real community and loyal following. Figure 10: Layers of a Company’s Customer Relationships


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We believe a good example of a company with heart and soul is lululemon. Many investors dismissed lululemon, stating the company was a fad and nobody would pay $90

for a pair of yoga pants, no matter how good they were, especially in a recession. But if we peel back the company’s layers, we get a much deeper insight into the company:

First layer: the shell - We believe lululemon has a very solid “shell” as although its apparel is premium-priced, this is more than offset by its long economic life and the high quality of both the company’s product and service.

Second layer: the heart - We believe lululemon has “heart” as it has created a strong emotional attachment by offering its customers the promise of a more active, happy, and healthy lifestyle and the brand symbolizes being fit and active and looking good while

doing it. Third layer: the soul - We believe what differentiates lululemon from most companies is its

“soul” as its mission statement is “creating components for people to live longer, healthier,

more fun lives” and its vision is “elevating the world from mediocrity to greatness”. The company’s culture was born from a group of yogis, dancers, runners, and customers who

follow the brand like a religion and act as volunteer evangelists. We initiated coverage on lululemon on September 11, 2007, shortly after its IPO, with a BUY recommendation based on our investment thesis the company had created a unique

“blue ocean strategy”1 and was positioned for superior sustainable earnings growth. Part of our conviction also came from the parallels we saw between lululemon and Starbucks after reading “Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time”

in which Howard Schultz, CEO of Starbucks, shared “our goal was to build a great

company – one that stood for something – one that valued the authenticity of its product

and the power of its passion”. We note that Christine Day, who joined lululemon as

President in early 2008, was a 20-year Starbucks alumni and one of Schultz’s first hires. However, many investors dismissed this “girlie yoga” stock as a high-priced fad and balked

at its astronomical price-to-earnings multiple of 100 times. But despite being a retailer of highly discretionary, premium-priced athletic apparel operating in a recessionary environment over the past three years, lululemon’s stock price is up nearly 100% from when we initiated coverage and its enterprise value is up over 80%. We believe the increase in

the firm’s valuation is a function of a change in the following variables:

• Growth rate (g) increased – Earnings per share more than quadrupled from $0.36 in

2007 to $1.40 in 2010E • Discount rate (k) decreased - Economic Moat widened as the company’s grassroots

community marketing program created a positive network effect

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1 Blue Ocean Strategy; How to Created Uncontested Market Space and Make the Competition Irrelevant, W.C. Kim & R. Mauborgne,

HBS 2005.


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As shown in Figure 11, this simultaneous increase in the company’s growth rate and

decrease in its discount rate expanded its core “soul”, resulting in a positive multiplier effect with the simultaneous expansion of its “heart” and “shell” layers.

Figure 11: Expansion of lululemon’s “Soul” Leads to 80% Increase in Firm Value

On the other end of the customer engagement spectrum is Yellow Pages (which recently changed its name to Yellow Media), which we believe exemplifies what happens to a

company with an “empty shell” that starts to crack. On January 12, 2008, we went against the Street and downgraded the stock to “SELL” based on our investment thesis that Yellow Pages’ formerly strong economic moat was narrowing as we would start to see customer

attrition as the traditional yellow pages directory business model was disrupted. However, many on the Street remained in denial of these structural changes and maintained their conviction in the company’s strong brand name and customer relationships.

Over the past three years, the company’s “shell” contracted, with its stock price declining by over 50% and its enterprise value declining by a third. We believe this erosion in the firm’s value is a function of a change in the following variables:

• Growth rate (g) – Earnings per share growth fell short of analyst expectations as it

went from $0.97 in 2007 to $0.98E in 2010, essentially staying flat

• Discount rate (k) increased - Economic Moat narrowed as disruptors lowered switching costs for its SME (small and medium-sized enterprise) customers


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As shown in Figure 12, this simultaneous decrease in the company’s expected growth rate and increase in its discount rate resulted in a contraction in its “shell”.

Figure 12: Contraction in Yellow Pages’ “Shell” Leads to One-Third Decrease in Firm Value

B. Social Media Exposes the Depth of a Company’s Customer Relationships

We expect the greater transparency generated by social media platforms to accelerate the value erosion and creation of companies. As Mark Zuckerberg, the CEO of Facebook,

recently stated at the Web 2.0 Summit in San Francisco on November 16th, “Facebook will

be an “enabler” for many companies that will disrupt verticals by introducing social

functionality over the next five years”. Thus, we believe investors will no longer be able to

rely on traditional valuation metrics and will need to find new ways to start looking at and analyzing consumer-facing companies.

We believe investors need to start looking beyond the numbers to the depth and authenticity of a company’s customer relationships. We believe that over the next few years, social media will emerge as the core value accelerator, creating four different classes of consumer-facing companies:

• “Heart and Soul”. We believe the greatest investment opportunity exists in identifying

the companies with true “heart and soul”. These select companies, with authentic

and deep customer relationships, are ideally positioned to leverage the high level of enthusiasm for their brand and their grassroots community marketing efforts through social media, resulting in a positive multiplier network effect.


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• “Heart”. We believe companies with “heart”, whose customers have a deep emotional attachment to their brand, are positioned to leverage this high level of

enthusiasm through social media, resulting in a positive network effect. • “Shell”. We believe companies with just a “shell”, whose customers have no real

emotional attachment to their product or service and view it as more utilitarian or

convenient in nature, will not be successful in their attempts at social media. • “Empty Shell”. We believe investors should red-flag and avoid or short the

companies with “empty shells” that are at risk of cracking as social media exposes

the inauthenticity and shallowness of their relationships with customers, employees, and other stakeholders.

C. Social Media Analytical Framework

Although the social media data for companies, in terms of their number of Facebook “likes” and Twitter “followers”, is changing daily, we believe investors can still gain valuable insight into consumer-facing companies by starting to incorporate social media metrics in

their due diligence process. Interestingly, when we attended the 5-day 2010 Interactive Conference at SXSW (South by Southwest) in Austin, Texas and the 2-day 140 Character Conference in New York City, the financial community was noticeably absent. And in

speaking with our colleagues on both the buy and sell sides, it appears that most of the Street is not yet looking at companies’ social media efforts. With Goldman Sachs’ recent decision to invest in Facebook, we believe it will not be long before these two domains come together, but until then, we believe there is a unique window of opportunity for

investors to gain an edge over the competition. We believe investors can use social media metrics and characteristics to gain insights into

any consumer-facing, or business-to-consumer (B2C) company. Even business-to-business (B2B) companies like Yellow Media we would classify as being consumer-facing, as the company’s whole business model depends on the individual customer using its product or

service. As shown in Figure 13, the industry sectors with the highest presence of consumer-facing companies include consumer discretionary, consumer staples, information technology,

telecom, and financials. Industry sectors with a medium presence of consumer-facing companies include industrials, healthcare, and utilities. And the sectors with the lowest presence of consumer-facing companies include the natural resource energy and

materials sectors.


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Figure 13: Presence of Consumer-Facing Companies in Industry Sectors High Medium Low

Consumer Discretionary Industrials Energy

Consumer Staples Healthcare Materials

Information Technology Utilities

Telecom

Financials

We recommend investors highlight all the consumer-facing companies in their portfolio to check to see if they have any companies that have not yet established a social media presence. The easiest way to check to see if a company is on Facebook or Twitter is to

conduct an Internet search for the company name in quotations followed by the word “Facebook” or “Twitter”.

If a company has not yet embraced social media, it is likely not a highly innovative and forward-thinking company and is still accustomed to one-way communication with customers. Its corporate culture possibly does not fit with the open, immersive, engage,

and connected community model of social media. We believe investors should question the management of these companies to find out whether they are just slow in terms of coming up with and implementing a social media strategy or aware of social media but

have decided to instead hide behind their corporate logo We believe investors should be wary of companies that have decided to hide behind their corporate logo as they may be “empty shells” trying to cover up serious customer

relationship or other stakeholder issues that could be exposed by social media. The reality is that many of these “empty shell” companies have been able to get away with offering an inferior value proposition to their customers which have had limited alternatives due to

restricted competition resulting from either monopolies, government regulation, or high switching costs. However, as advancements in technology have driven the cost of marginal distribution to zero for many industries, these companies have seen their

traditional business models disrupted as new entrants have entered the market and lowered switching costs. But many of these traditional companies are still in denial, believing their customers will

stay with them forever and they will be able to retain their brand glory. However, the reality is that these “empty shells” are at risk of cracking as industry de-regulation and disruptors pose a significant threat of substitutes. And we believe social media will start to

expose the lack of authenticity and shallowness of these companies’ relationships with their customers, employees, or other stakeholders.

Given our investment thesis that customer relationships will be the new driver of firm value, with social media emerging as the core value accelerator, we have attempted to classify whether companies have a “shell”, “heart”, or “heart and soul” by looking at seven social

media metrics and characteristics factors. The first three determine the size of a company’s “heart” while the last four determine the size of a company’s “soul”:


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1. Level of sales tactics. We view a company’s social media efforts negatively if it resorts to sales tactics such as offering deals/discounts, contest/sweepstakes, and

marketing campaigns as users who “like” the company could just be bargain-seeking and are not “sticky” customers.

2. Level of brand enthusiasm. The companies with “heart” are the ones whose

customers enthuse about their products and services and share positive feedback, testimonials, and self-created content (e.g. photos and videos).

3. Facebook “likes” per store. This number measures the level of brand enthusiasm on

a per store basis. The higher the number, the greater the level of brand enthusiasm. 4. Level of community engagement. The companies with “soul” share their passion,

purpose, and vision with their customers and build a community focused around these shared values, rather than just their products and services.

5. Twitter “followers” per store and Klout Score. The first number measures the level of customer interaction on a per store basis while the Klout Score measures the company’s level of online influence. The higher the number, the greater the level

and quality of customer interaction. 6. Facebook “likes” to website visitors. This ratio measures where a company falls on

the spectrum of social (i.e. Facebook) to search (i.e. corporate website). The

companies with the highest level of engagement are the ones with a “social to search” ratio greater than 1 and the lowest are those with a “social to search” ratio well below 1.

7. Advertising spend per Facebook “like”. This number measures the effectiveness of a

company’s traditional advertising and marketing campaign in attracting “engaged” customers. The lower the number, the greater the effectiveness.

D. Case Study Highlights

To illustrate how investors can use social media to gain value-added insights into consumer-facing companies, we have conducted a case study on the following companies we formerly covered (with the exception of Starbucks):

• lululemon athletica inc. (LULU-NASDAQ, LLL-TSX) • Coach Inc. (COH-NYSE)

• Tiffany & Co. (TIF-NYSE) • Tim Hortons Inc. (THI-TSX, THI-NYSE) • Starbucks Corporation (SBUX-NASDAQ) • Yellow Media Inc. (YLO-TSX) – formerly Yellow Pages Income Fund (YLO.UN-TSX)


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As shown in Figure 14, we rate each company’s level of “heart” and “soul” based on seven different social media metrics and characteristics. For further background on how

we calculate each metric and what it means please refer to Appendix A for the detailed case study. We remind investors, however, that the ratings only provide our quantitative and qualitative assessment of a company’s depth of customer relationships. These ratings

are not a recommendation to BUY or SELL the security. Figure 14: Summary of Social Media Metrics & Characteristics Social Media Metrics & Characteristics

Company LULU COH TIF SBUX THI YLO

Heart BIG BIG BIG MEDIUM LITTLE NO

Sales Tactics NONE LOW NONE LOW HIGH NONE

Brand Enthusiasm HIGH HIGH HIGH HIGH MEDIUM LOW

"Likes" per Store 2,076 2,186 3,249 1,130 360 n.a.

Soul BIG LITTLE NO BIG LITTLE NO

Community Engagement HIGH LOW LOW HIGH MEDIUM LOW

"Followers" per Store 395 396 51 70 1 n.a.

Twitter "Klout" Score 70 62 56 76 18 49

"Likes" to Web Visitors 1.98 0.79 0.81 9.88 18.47 0.00

Ad Spend per "Like" $12 $120 $219 $9 $143 n.a.

Source: Facebook.com, Twitter.com, Klout.com, Compete.com, Bloomberg, Company reports

Based on our analysis, we classify the six consumer companies in our case study as follows:

lululemon: Big Heart and Soul. lululemon is a high-growth “active community lifestyle” brand that has built a cult-like following for its high-quality athletic apparel products

through its unique ambassador and community grassroots marketing program. The company has a “big heart” as it does not engage in sales tactics, has a very high level of brand enthusiasm, and has a relatively high level of over 2,000 Facebook “likes” per store.

The company has a “big soul” as it has a very high level of community engagement and customer interaction, has a relatively higher level of nearly 400 Twitter “followers” per store and a Twitter Klout Score of 70. The company is very social-oriented with 2.0 Facebook “likes” to website visitors and as a result of its grassroots marketing approach, it spends only

$12 per “like” on marketing at the individual store level. We note lululemon’s Facebook “like” count is likely even higher as each of its retail stores has its own Facebook Page and “like” base.

Starbucks: Medium Heart and Big Soul. Starbucks is a “Third Place lifestyle brand” that has built a loyal and passionate following for its coffee by offering its customers the romance

of the coffee experience and a feeling of warmth and community in its stores. We believe the company might have lost some of its “heart and soul” in its rapid global expansion but now that Schultz has reclaimed the helm it seems to be coming back. We classify the

company as having a “medium heart”. Although it has a very high level of brand enthusiasm, it does engage in low-level sales tactics and has only 1,100 “likes” per store. The company has a “big soul” as it has a high level of community engagement and


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customer interaction and a very high Twitter Klout Score of 76 despite only 70 Twitter “followers” per store. The company is very social-oriented with 9.9 Facebook “likes” to

website visitors and as a result of its grassroots marketing approach, its advertising spend is only $9 per Facebook “like”. Coach: Big Heart with a Little Soul. Coach is an “accessible luxury” brand that is a handbag “powerhouse” with dominant market share and intense customer loyalty. The company has a “big heart” as it has a very high level of brand enthusiasm and over 2,100

Facebook “likes” per store. We classify the company as having a “little soul”. Despite having a low level of community engagement, it has a high level of nearly 400 Twitter “followers” per store and a Twitter Klout Score of 62. The company uses both social and search equally and still uses traditional advertising, spending over $100 per Facebook

“like”. Tiffany & Co.: Big Heart. Tiffany & Co. is an iconic highly trustworthy 173-year old brand

whose “little blue box”, representing sophisticated style and romance, elicits an intense emotional connection with females. The company has a “big heart” as it does not engage in sales tactics and has a very high level of brand enthusiasm and over 3,200

Facebook “likes” per store. In keeping with its reserved and exclusive culture, it has a very low level of community engagement and only 57 Twitter “followers” per store with a Twitter Klout Score of 56. The company uses social and search somewhat equally and devotes a large number of dollars to traditional advertising, spending over $200 per Facebook “like”.

Tim Hortons: A Little Heart and Soul. Tim Hortons is a nostalgic legacy Canadian brand that has built up a strong level of customer goodwill and loyalty for its fresh coffee and baked

goods over the past four decades through the philanthropic philosophy of its founders and high level of community involvement. Like Starbucks, we believe the company lost some of its “heart and soul” as a result of the departure of its founder, Ron Joyce, and its rapid

unit expansion. We classify Tim Hortons as having a “little” heart. The company appears to resort to a high level of sales tactics, has only just over 360 “likes” per store, and has a medium level of brand enthusiasm with mixed customer sentiment. We classify the

company as having a “little soul”. Although Tim Hortons has a medium level of community engagement on its Facebook Page and is very social-oriented with 18 Facebook “likes” for every website visitor, it only has one Twitter “follower” per store and a very low Klout Score of 18. We note it spends just under $150 on advertising per Facebook “like”.

Yellow Media: Shell Yellow Media is a “legacy brand” that has had a virtual monopoly over the local

advertising market for SMEs (small and medium enterprise) through its publishing of directories. However, the rapid erosion of the print directory market, combined with the intense competition developing in the online local search market, has ended Yellow

Media’s market dominance. We classify the company as having no “heart”. Although it does not resort to sales tactics, it has almost no brand enthusiasm (except from its employees) and it has only 3,800 Facebook “likes”. The company has no “soul” as it has a


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very low level of community engagement and customer interaction, it has only 1,600 Twitter “followers” and a Twitter Klout score of 49. As it is a local search engine, it does

receive 11.3 million unique visitors but this seems disproportionate to its very low number of Facebook “likes”.

E. Growth, Sales, and Valuation Metrics

We believe one metric that is worth tracking is a company’s growth rate in the number of Facebook “likes”. However, as many companies have recently launched their Facebook Page and their customers are just starting to discover their presence on Facebook, the

number of “likes” is still on an early growth projectile. As shown in Figure 15, since our last count at November 8th, the six companies in our case study have achieved an average monthly growth rate in their “like” base of 8%, which we believe is significantly higher than their sales growth rate. We note the growth in Facebook “likes” over the past month

ranges from a low of 4.6% for Tim Hortons to a high of 11.3% for Tiffany & Co. Figure 15: Monthly CAGR in Number of Facebook “Likes” Company LULU COH TIF SBUX THI YLO

"Likes" at Jan 4, 2011 278,191 1,497,712 731,012 19,053,781 1,334,546 3,828

- "Likes" at Nov 8, 2010 242,524 1,259,662 596,018 16,832,079 1,225,703 3,437

= Change in "Likes" 35,667 238,050 134,994 2,221,702 108,843 391

% Growth in "Likes" 14.7% 18.9% 22.6% 13.2% 8.9% 11.4%

Monthly Growth in "Likes" 7.5% 9.5% 11.3% 6.7% 4.6% 5.8%


Until the growth rate in the number of Facebook “likes” starts to plateau and fall more

in-line with a company’s actual sales growth, we do not believe there is any merit in attempting to establish a benchmark value for companies in terms of sales or market cap per Facebook “like”.

As of yet, there is no statistical data showing how much more a customer who “likes” a company on its corporate Facebook Page spends in a year on a company’s products or services than an “unengaged” customer. However, it makes sense that an “engaged”

customer who “likes” a company will be more emotionally connected to a company and keep current on its new product or service launches, resulting in either a higher spend per transaction and/or higher frequency of transactions. Based on this assumption that these

new “engaged” customers will lead to a future increase in a company’s sales, we can start thinking about how the following metrics will differ between companies:

1. Sales per Facebook “like”

2. Market cap per Facebook “like”


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1. Sales per Facebook “Like”

As shown in Figure 16, the sales per Facebook “like” ranges from a low of under $600 for Starbucks to a high of over $430,000 for Yellow Media.

Figure 16: Sales per Facebook “Like” Company LULU COH TIF SBUX THI YLO

Sales ($000s) 626,902 3,757,868 2,965,459 10,707,400 5,344,969 1,662,762

/ Facebook "Likes" 278,191 1,497,712 731,012 19,053,781 1,334,546 3,828

= Sales per "Like" $2,253 $2,509 $4,057 $562 $4,005 $434,368

Source: Facebook.com, Bloomberg, Company reports

To gain a greater understanding of the relative top-line contribution of an “engaged” customer we need to first look at the average annual customer spend. Although

companies do not disclose their average annual customer spend, we can calculate their average sales per store, which is a function of their customer traffic, conversion rate, and average price per transaction. Not surprisingly, as shown in Figure 17, the three luxury

brand retailers, Tiffany & Co., Coach, and lululemon generate the highest level of average sales per store, likely a reflection of the high-end products they sell. Although the two coffee shops, Tim Hortons and Starbucks, have a much higher level of customer traffic in

each store as their regular customers stop by on a daily basis for their caffeine fix, this is not enough to offset the much lower average transaction price, resulting in a much lower sales per store.

Figure 17: Sales per Store ($000s) Company TIF COH LULU THI SBUX YLO

Sales ($000s) 2,965,459 3,757,868 626,902 5,344,969 10,707,400 1,662,762

/ # of Stores 225 685 134 3,703 16,858 n.a.

= Sales per Store ($000s) 13,180 5,486 4,678 1,443 635 n.a.

Source: Bloomberg.com, Company reports

2. Market Cap per Facebook “Like” As shown in Figure 18, the market cap per Facebook “like” ranges from a low of just under $1,300 for Starbucks to a high of over $800,000 for Yellow Media.

Figure 18: Market Cap per Facebook “Like” Company LULU COH TIF SBUX THI YLO

Market Cap ($000s) 4,788,990 15,494,814 7,653,043 24,038,448 7,186,141 3,211,675

/ Facebook "Likes" 278,191 1,497,712 731,012 19,053,781 1,334,546 3,828

= Market Cap per "Like" $17,215 $10,346 $10,469 $1,262 $5,385 $838,996

Source: Facebook.com, Bloomberg, Company reports

To understand how an incremental dollar of sales from an “engaged” customer will

translate into increased shareholder value for different companies, we need to look at how the valuation multiples differ between companies.


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One way to value a company is to look at its price-to-sales ratio, which is the multiple that the market currently places on a company’s present level of sales. This is a function of a

number of factors, including the company’s net margin, future growth prospects, risk profile, competitive position, economic moat, and confidence in management. As shown in Figure 19, the market assigns the highest price-to-sales valuation multiple to lululemon at

7.6 times and the lowest valuation multiple to Yellow Media at 1.9 times. Figure 19: Price-to-Sales (P/S) Multiple Symbol LULU COH TIF SBUX YLO THI

Market Cap ($000s) 4,788,990 15,494,814 7,653,043 24,038,448 3,211,675 7,186,141

/ Sales ($000s) 626,902 3,757,868 2,965,459 10,707,400 1,662,762 5,344,969

= Price-to-Sales Multiple 7.6x 4.1x 2.6x 2.2x 1.9x 1.3x

Source: Bloomberg, Company reports

* THI has actual P/S of 2.9x (as THI has a franchise model, we used system-wide sales in place of its actual

sales)

Another valuation metric is the price-to-earnings (P/E) multiple, which takes a company’s net margin into account and is the multiple that the market currently places on a

company’s estimated level of earnings per share. Note that for our purposes, we use Street consensus estimates. As shown in Figure 20, the market assigns the highest price-to-earnings ratio to lululemon at 48.0 times and the lowest valuation to Yellow Media at 7.8 times.

Figure 20: Price-to-Earnings (P/E) Multiple Symbol LULU COH TIF SBUX YLO THI

Stock Price $67.20 $52.28 $60.61 $32.48 $41.47 $6.26

/ EPS (2010E) $1.40 $2.86 $2.64 $1.50 $2.07 $0.80

= P/E Ratio 48.0x 18.3x 23.0x 21.6x 7.8x 20.1x

Source: Bloomberg, Company reports


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Conclusion

Social media is empowering the consumer and emerging as a disruptive force in the corporate world as it exposes the depth and authenticity of a company’s relationships

with its customers, employees, and other stakeholders. We believe social media will accelerate the value creation/erosion process for companies. Consequently, we believe investors will no longer be able to rely on just traditional valuation metrics and will need to

start looking beyond the numbers. As social media continues to grow and evolve over the next few years, we believe there will emerge four distinct classes of consumer-facing companies:

• “Heart and Soul”. We believe the greatest investment opportunity exists in identifying

the companies with true “heart and soul”. These select companies, with authentic

and deep customer relationships, are ideally positioned to leverage the high level of enthusiasm for their brand and their grassroots community marketing efforts through social media, resulting in a positive multiplier network effect.

• “Heart”. We believe companies with “heart”, whose customers have a deep emotional attachment to their brand, are positioned to leverage this high level of enthusiasm through social media, resulting in a positive network effect.

• “Shell”. We believe companies with just a “shell”, whose customers have no real

emotional attachment to their product or service and view it as more utilitarian or convenient in nature, will not be successful in their attempts at social media.

• “Empty Shell”. We believe investors should red-flag and avoid or short the

companies with “empty shells” that are at risk of cracking as social media exposes the inauthenticity and shallowness of their relationships with customers, employees, and other stakeholders.

We developed an analytical framework for investors to assess a company’s level of “heart” and “soul” by bringing together social media and financial data to come up with the following four metrics:

1. Facebook “likes” per store 2. Twitter “followers” per store

3. Facebook “likes” to website visitors 4. Advertising spend per Facebook “like”

To gain further insight, we recommend investors pore over a company’s Facebook Page to assess a company’s level of sales tactics, brand enthusiasm, and community engagement.

We believe it is worth tracking a company’s growth rate in the number of Facebook “likes” but until it starts to plateau, we do not believe there is any merit in attempting to establish benchmark valuations for companies. However, as an “engaged” customer is likely to


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become more emotionally connected to a company and keep current on its new product or service launches, we expect he or she will spend more than an “unengaged”

customer. So we can start to think how the sales per “like” will differ between companies by looking at their average sales per store and how the market cap per “like” will differ by looking at their valuation multiples.

We conducted a case study on six consumer-facing companies to illustrate how investors can use our social media analytical framework. Based on our quantitative and qualitative

analysis, we classify these companies into the following three classes:

1. “Heart and Soul”: lululemon and Starbucks 2. “Heart”: Coach, Tiffany & Co, and Tim Hortons

3. “Shell”: Yellow Media Based on the noticeable absence of the financial community at the social media

conferences we attended and our conversations with buy-side and sell-side colleagues, it appears the domains of social media and investment research have not yet come together. However, we expect the Street will soon start to focus in on social media,

especially following Goldman Sachs’ recent announcement on January 3rd that it is investing $450 million in Facebook, valuing Facebook at $50 billion. But right now we believe there is a unique window of opportunity for investors to gain an edge over the competition by incorporating social media metrics into their due diligence and screening

of consumer-facing companies.


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APPENDIX A: Social Media Analytical Framework Case Study

To illustrate how investors can use our social media analytical framework to determine

whether companies have a “shell”, “heart”, or “heart and soul”, we have conducted a case study on the following companies we formerly covered (with the exception of Starbucks):

• lululemon athletica inc. (LULU-NASDAQ, LLL-TSX) • Coach Inc. (COH-NYSE)

• Tiffany & Co. (TIF-NYSE) • Tim Hortons Inc. (THI-TSX, THI-NYSE) • Starbucks Corporation (SBUX-NASDAQ) • Yellow Media Inc. (YLO-TSX) – formerly Yellow Pages Income Fund (YLO.UN-TSX)

To assess the size of “heart” a company has we look at the following three social media metrics and characteristics:

1. Level of sales tactics. We view a company’s social media efforts negatively if it

resorts to sales tactics such as offering deals/discounts, contest/sweepstakes, and

marketing campaigns as users who “like” the company could just be bargain-seeking and not “sticky” customers.

2. Level of brand enthusiasm. The companies with “heart” are the ones whose customers enthuse about their products and services and share positive feedback,

testimonials, and self-created content (e.g. photos and videos). 3. Facebook “likes” per store. This number measures the level of brand enthusiasm on

a per store basis. The higher the number, the greater the level of customer brand

enthusiasm. 1. Level of sales tactics We view a company’s social media efforts negatively if it resorts to sales tactics such as offering deals/discounts, contest/sweepstakes, and marketing campaigns as Facebook

users who “like” the company could just be bargain-seeking and not “sticky” customers. As shown in Figure 21, the three companies that do not engage in sales tactics on their Facebook Page are lululemon, Tiffany & Co., and Yellow Media. Coach and Starbucks carry out a low level of sales tactics while Tim Hortons engages in a high level of sales

tactics. Figure 21: Level of Sales Tactics Company LULU TIF YLO COH SBUX THI

Sales Tactics NONE NONE NONE LOW LOW HIGH



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Although Coach does not engage in price discounting in its retail stores, the company does promote sales on its “Wall” with a link that takes customers direct to their website

which has a page showing pictures of products, such as shoes, for sale. The company also uses its “Notes” page to promote sweepstakes such as its Mother’s Day event. Starbucks does not offer deals and discounts but it does host promotional campaigns on its “Events”

page like a “free tall drink with purchase of VIA coffee. Tim Hortons engages in a high level of sales tactics on its Facebook Page such as posting limited-time deals on its “Wall” and posting promotional campaigns customers on its “Events” page like “free hash brown with

the purchase of any breakfast sandwich”. 2. Level of brand enthusiasm The companies with “heart” are the ones whose customers enthuse about their products and services and share self-created content such as photos and videos. We assess a company’s level of brand enthusiasm based on its brand tactics, level of transparency,

and how passionate its customers are about its products or services on Facebook. As shown in Figure 22, we judge four companies to have a high level of brand enthusiasm or “heart”: lululemon, Coach, Tiffany & Co., and Starbucks.

Figure 22: Level of Brand Enthusiasm Company LULU COH TIF SBUX THI YLO


Source: Facebook

Lululemon actively promotes selected products on its “Wall” by including a picture and talking about “why we made this” or “why we love this”. It also encourages customers to

check out the ecommerce page on its corporate website by posting pictures of products with links on its “This Just In” page. We note the majority of customer comments and feedback is highly positive and enthusiastic. The company has a rich level of content with

486 photo albums and 6 videos and an additional 1,916 photos and 2 videos posted by customers and it permits people to both “like” and comment on each photo.

Coach promotes new arrivals and selected products/collections and pictures of celebrities carrying or wearing Coach products on its “Wall” page. The “Coach” page is interactive and allows people to click on pictures with links that take them to their corporate website. We note the majority of customer comments and feedbacks on

Coach are very positive and enthusiastic. The company currently has 75 photo albums and 2 videos but no longer allows customers to post their own photos.

Tiffany & Co. features pictures of celebrities adorned in its jewelry and accessories attending events or appearing on TV shows and movies on its “Wall” and highlights its collections on its “Boxes” page that allows people to click on picture which takes them to

its website. Tiffany has very rich content with 20 photo albums and 5 highly professional and captivating videos as well as 664 photos posted by customers.


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Starbucks, unlike many companies, does not promote products on its “Wall” but instead

promotes seasonal items on special pages. The company also does not moderate the “Wall” but allows people to post whatever they want and empowers its employees to discuss topics on its “Discussion” page. Starbucks has only posted 9 photo albums and 30

videos but it has rich customer-generated content with currently 7,301 photos and 60 videos.

Tim Hortons posts pictures of its products on its “Wall” page and features selected products with photos that link customers back to their corporate website. We note that although there is a lot of positive customer feedback, there are also a lot of negative customer comments. There are currently 9 photo albums and 14 videos as well as 887 photos and 16

videos from customers. Yellow Media promotes its new products and services on its “Wall” such as the Yellow

Pages Mobile Application for Windows Phone 7 and the Auto Trader Canada app for the Blackberry. The company also provides its online search directory on its “YellowPages.ca” page, which takes customers to a separate Facebook app. We note that many of the

positive comments on its “Wall” appear to come from employees and there is not much real customer interaction on the page. The company has posted 8 photo albums and 24 videos and 56 photos posted by others, but people are not allowed to “like” or comment on any of the photos or videos.

3. Facebook “likes” per store

Facebook appears to be about people making a statement about their identity and their enthusiasm for a company or its product/service by declaring they “like” a company’s Facebook Page. We believe one of the best ways to measure the relative brand

enthusiasm level of retail consumer companies is to look at the number of Facebook “likes” on a per store basis. As shown in Figure 23, the three companies with the highest relative level of brand enthusiasm, representing a “heart-like” characteristic are Tiffany &

Co., Coach, and lululemon. Tiffany & Co. has the highest relative level of customer brand enthusiasm, which we believe is reflective of its smaller retail footprint, combined with its iconic status and the intense emotional connection its “little blue box” elicits from girls of all ages. Coach and lululemon follow next, although lululemon’s “like” count is likely much

higher given each of its individual stores also have their own Facebook Page and “like” base.

Surprisingly, although Starbucks is currently the number one brand on Facebook with over 19 million “likes”, when you take into account it has nearly 17,000 retail locations, this equates to just over 1,100 “likes” per store, half the level of Coach and lululemon. Similarly,

Tim Hortons looks to have a lot of “heart”, with 1.3 million “likes” but as it has over 3,700 retail locations, this equates to only 360 “likes” per store.


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As Yellow Media is not a retailer, we cannot compare its “likes” on a per store basis, but its number of absolute “likes” appears very low, implying the company does not have much

“heart”. We note that if we were comparing it to other directory companies, we could use a common unit measurement in place of “likes” such as “number of advertisers”. The same principle applies for other consumer-facing companies.

Figure 23: Facebook “Likes” per Store Company TIF COH LULU SBUX THI YLO

Facebook "Likes" 731,012 1,497,712 278,191 19,053,781 1,334,546 3,828

/ # of Stores 225 685 134 16,858 3,703 n.a.

= "Likes per Store" 3,249 2,186 2,076 1,130 360 n.a.

Source: Facebook.com, Company reports

To assess the size of “soul” a company has we look at the following four social media

metrics and characteristics:

1. Level of community engagement. The companies with “soul” share their passion,

purpose, and vision with their customers and build a community focused around these shared values, rather than just their products and services.

2. Twitter “followers” per store and Klout Score. The first number measures the level of

customer interaction on a per store basis while the Klout Score measures the company’s level of online influence. The higher the number, the greater the level and quality of customer interaction.

3. Facebook “likes” to website visitors. This ratio measures where a company falls on

the spectrum of social (i.e. Facebook) to search (i.e. corporate website). The companies with the highest level of engagement are the ones with a “social to search” ratio greater than 1 and the lowest are those with a “social to search” ratio

well below 1. 4. Advertising spend per Facebook “like”. This number measures the effectiveness of a

company’s traditional advertising and marketing campaign in attracting

“engaged” customers. The lower the number, the greater the effectiveness. 1. Level of community engagement The companies with “soul” share their passion, purpose, and vision with their customers and build a community focused around these shared values, rather than just their products and services. We believe companies with a passionate following built upon an

authentic mission statement will be able to truly benefit from social media by engaging in customer community and knowledge-building programs. In our view, as shown in Figure 24, lululemon and Starbucks have a high level of community engagement, revealing a

“soul-like” characteristic, while Coach, Tiffany & Co., and Yellow Media have a low level of community engagement.


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Figure 24: Level of Community Engagement Company LULU SBUX THI COH TIF YLO

Community Engagement HIGH HIGH MEDIUM LOW LOW LOW


lululemon builds communities around its mission of “helping people live a happier,

healthier life” by encouraging all of its employees to get out in the community and participate and volunteer in a wide range of fitness activities. The company is focused on spreading its lifestyle proposition and manifesto and encourages its employees and

ambassadors to provide personal stories and inspirational comments that it features on its “Wall” and “Notes” pages. On its “Wall” the company posts blogs written by its employees and ambassadors about these community events. The company recently launched a community program titled the “Gift of Yoga campaign” designed to create a community

with its yoga studio partners by giving away over 6 million minutes of complimentary yoga to its guests. In terms of knowledge-building programs, lululemon actively solicits ideas from customers on its “Discussions” page such as “where should the next lululemon store go”

and “suggestions for future products”. This listening creates a strong feedback loop. Starbucks uses Facebook as another medium for customers to manage their Starbucks

loyalty card by allowing them to check their balance, count their Stars, or set up auto-reload. On its “Links” page, Starbucks encourages its customers to check in at Starbucks with Foursquare to earn a Foursquare badge, receive virtual gifts to share with their friends on Facebook, or help save forest land. Starbucks also recently partnered with Facebook

Places to launch its “Check In” page, which allows its customers to check in with their iPhone at any Starbucks location to unlock special virtual gifts. The company promotes community-building programs on its “Events” page such as its “Make a Difference and

Get Free Coffee” environmental campaign. Tim Hortons is actively involved in the community and on its “Events” page it promotes

charitable events such as “Smile Cookies”, Tim Hortons Camp Day. On its “Every Cup” page, the company encourages people to share their story about Tim Hortons which takes them to a separate “Every Cup” website which ties into its nostalgic identity brand.

Coach hosts special events for its clientele such as “Fashion’s Night Out” and “Launch Party for the Coach Holiday 2010 Blogger Campaign” but does not appear to have any customer community or knowledge-building programs.

Tiffany & Co. engages in community programs such as its sponsorship of the 2010-2011 season of the Artists Den.

Yellow Media, on its “Eco” page, promotes its Eco Initiatives and clicking on the link takes customers to the company’s ecoGuide website which allows them to choose their region

and then browse through the scanned local ecoGuide book.


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2. Twitter “followers” per store and Klout Score Twitter is more of an interactive platform than Facebook as customers “tweet” to either make complaints or enthuse about a company and its products/services; actively engage in a dialogue with the company to seek customer service or share their views; or ‘”follow”

a company to keep-up-to-date on frequent product/service launches or one-time deals/promotions. We believe one of the best ways to measure the relative level of customer interaction of retail consumer companies is to look at the number of Twitter

“followers” on a per store basis. We recommend looking at this in conjunction with a company’s Klout Score, which was developed by Klout, a privately-held social media company based in San Francisco. The Klout Score measures a company’s overall online influence using over 25 variables to measure the size and influence level of its engaged

audience and the likelihood the content will be acted upon. As shown in Figure 25, the three companies with the highest relative level and quality of

customer interaction are lululemon, Coach, and Starbucks. Coach has the highest relative level of customer interaction as its customers like to “follow” the company to keep up-to-date on new product and collection launches. While lululemon also “tweets” out new

apparel launches, the company has a higher quality of interaction score as it uses Twitter a lot more to engage in one-on-one conversations with customers. Although Starbucks ranks well below Coach and lululemon in terms of relative level of customer interaction, Starbucks has a much higher Klout Score. We believe the low interaction score is due to

the fact its customers frequent their actual stores on a daily basis so they have little need to “follow” the company to keep up-to-date on new product launches. However, the quality of interaction is high as Starbucks uses its Twitter account, rather than Facebook, to

actively interact directly with customers. Interestingly, although Tiffany & Co. had the highest relative level of customer brand

enthusiasm, it falls short in terms of customer interaction. We believe this is reflective of the traditional conservative and reserved culture of the company.

Tim Hortons once again ranks the lowest as it has only one follower per store on Twitter and a very low Klout Score, implying both a low level and quality of customer interaction. Like Starbucks, people frequent Tim Hortons’ locations daily so they have little need to “follow” the company. But unlike Starbucks, the company has a very low level of customer

interaction on Twitter and uses its account mainly to “tweet” out deals and promotions. Yellow Media has a very low number of Twitter “followers” and a relatively low Klout Score,

indicating both a low level and quality of customer interaction. Looking at its Twitter account, we observe the company “re-tweets” a lot of news articles and tweets out its “Deal of the Day”.


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Figure 25: Twitter “Followers” per Store and Klout Score Company COH LULU SBUX TIF THI YLO

Twitter "Followers" 271,529 52,956 1,188,142 11,513 3,405 1,610

/ # of Stores 685 134 16,858 225 3,703 n.a.

= "Followers" per Store 396 395 70 51 1 n.a.

Klout Score 62 70 76 56 18 49

Source: Twitter.com, Company reports, Klout.com

3. Facebook “likes” to website visitors

Social media is starting to replace search engines as people become aware of the power of community over just eyeballs and traffic, as evidenced by the fact that in August 2010, the time spent on Facebook passed Google. We believe consumers will start to migrate

from a company’s corporate website to its corporate Facebook Page which allows them to interact directly and transparently with the company and its fellow customers and stakeholders. For example, when we were recently looking for a baby stroller, we used

Google to search reviews and went to different companies’ websites to check out their strollers but what made us finally decide on the Bugaboo Cameleon stroller was going to Bugaboo’s Corporate Facebook Page to its “Ask a Bugaboo Owner” tab and receiving

honest, unbiased responses from eight different people around the world. Given the pending shift from corporate websites to corporate Facebook Pages, we believe it is important to look at where companies fall on the spectrum of social versus

search to see whether they are positioned to capitalize on this opportunity. One way to measure this is to divide a company’s number of Facebook “likes” by its number of monthly unique website visitors.

As shown in Figure 26, Tim Hortons, Starbucks, and lululemon have a social to search ratio of over 1, implying they are interactive. Yellow Media has a social to search ratio of

basically zero, implying it could be losing relevance with consumers. Figure 26: Facebook “Likes” to Website Visitors Company THI SBUX LULU COH TIF YLO

Facebook "Likes" 1,334,546 19,053,781 278,191 1,497,712 731,012 3,828

/ Website Visitors 72,240 1,928,690 140,780 1,886,884 904,745 11,300,000

= "Likes" to Visitors 18.47 9.88 1.98 0.79 0.81 0.00

Source: Facebook.com, Compete.com


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4. Advertising spend per Facebook “like”

As shown in Figure 27, lululemon and Starbucks appear to have the most effective advertising and marketing campaigns, with by far the lowest advertising spend per Facebook “like”. As Schultz shared in his book “Pour Your Heart into It”, “Starbucks built up

brand loyalty one customer at a time, communicated through out people, in the setting

of company-owned retail stores”. lululemon has embraced this grassroots marketing approach and is leveraging it with social media as management stated on September 10,

2009 in their Q2 2009 earnings conference call, “we are pleased to report strong sales

results built with grassroots marketing via our internal social media strategies and strong

retail customer base.” This community building approach represents a “soul-like” characteristic.

Figure 27: Advertising Spend per Facebook “Like” Company SBUX LULU COH THI TIF YLO

Advertising Spend 176,200 3,350 179,400 190,200 159,891 n.a.

/ Facebook "Likes" 19,053,781 278,191 1,497,712 1,334,546 731,012 3,828

= Ad Spend per "Like" $9 $12 $120 $143 $219 n.a

Source: Company reports, Facebook.com


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APPENDIX B: Recommended Business Strategy Book Reading List Always Fresh: The Untold Story of Tim Hortons (Ron Joyce) http://www.amazon.ca/Always-Fresh-Ron-Joyce/dp/0002554143

Blue Ocean Strategy: How to Create Uncontested Market Space and Make the

Competition Irrelevant (W. Chan Kim & Renee Mauborgne) http://www.amazon.com/Blue-Ocean-Strategy-Uncontested-

Competition/dp/1591396190/ref=sr_1_1?s=books&ie=UTF8&qid=1289928673&sr=1-1

The Brand Bubble: The Looming Crisis in Brand Value and How to Avoid It (Peter Stringham) http://www.amazon.com/Brand-Bubble-Looming-Crisis-Value/dp/047018387X/ref=sr_1_1?s=books&ie=UTF8&qid=1289929316&sr=1-1

Denial (Richard S. Tedlow) http://www.amazon.com/Denial-Business-Leaders-Facts-Face---/dp/B0042P56D0/ref=sr_1_2?s=books&ie=UTF8&qid=1289929111&sr=1-2

Different: Escaping the Competitive Herd (Youngme Moon) http://www.amazon.com/Different-Escaping-Competitive-Youngme-

Moon/dp/0307460851/ref=sr_1_1?s=books&ie=UTF8&qid=1289928983&sr=1-1

Double-Digit Growth (Michael Treacy) http://www.amazon.com/Double-Digit-Growth-Companies-Achieve---

No/dp/159184066X/ref=sr_1_1?s=books&ie=UTF8&qid=1289929514&sr=1-1

Driving Customer Equity (Valarie A. Zeithaml and Roland T Rust) http://www.amazon.com/Driving-Customer-Equity-Reshaping-

Corporate/dp/0684864665/ref=sr_1_1?ie=UTF8&s=books&qid=1289929542&sr=1-1

FREE: The Future of a Radical Price (Chris Anderson) http://www.amazon.com/Free-Future-Radical-Chris-Anderson/dp/B00342VEP6/ref=sr_1_1?s=books&ie=UTF8&qid=1289928837&sr=1-1

The Innovator’s Solution: Creating and Sustaining Successful Growth (Clayton M. Christensen & Michael E. Raynor) http://www.amazon.com/Innovators-Solution-Creating-Sustaining-

Successful/dp/1578518520/ref=sr_1_1?s=books&ie=UTF8&qid=1289928872&sr=1-1

The Long Tail: Why the Future of Business is Selling Less of More (Chris Anderson) http://www.amazon.com/Long-Tail-Revised-Updated-Business/dp/1401309666/ref=sr_1_1?s=books&ie=UTF8&qid=1289928796&sr=1-1

The Lords of Strategy: The Secret Intellectual History of the New Corporate World (Walter Kiechel) http://www.amazon.com/Lords-Strategy-Intellectual-History-

Corporate/dp/1591397820/ref=sr_1_1?s=books&ie=UTF8&qid=1289929735&sr=1-1

The Mesh: Why the Future of Business Is Sharing (Lisa Gansky) http://www.amazon.com/Mesh-Why-Future-Business-Sharing/dp/1591843715/ref=sr_1_1?s=books&ie=UTF8&qid=1289929066&sr=1-1

The Momentum Effect: How to Ignite Exceptional Growth (J.C. Larreche) http://www.amazon.com/Momentum-Effect-J-C-Larreche/dp/0137067216/ref=sr_1_1?s=books&ie=UTF8&qid=1289929361&sr=1-1


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Pour Your Heart Into It: How Starbucks Built a Company One Cup at a Time (Howard

Schultz) http://www.amazon.com/Pour-Your-Heart-Into-Starbucks/dp/0786883561/ref=sr_1_1?s=books&ie=UTF8&qid=1289928603&sr=1-1

Trade-Off: Why Some Things Catch On, and Others Don’t (Jim Collins) http://www.amazon.com/Trade-Off-Some-Things-Catch-Others/dp/0385525958/ref=sr_1_1?ie=UTF8&s=books&qid=1289928717&sr=1-1

Viral Loop: From Facebook to Twitter, How Today (Adam Penenberg and Adam L. Penenberg) http://www.amazon.com/Viral-Loop-Facebook-Businesses-

Themselves/dp/B0040RMF7U/ref=sr_1_1?s=books&ie=UTF8&qid=1289928912&sr=1-1

What Would Google Do? (Jeff Jarvis) http://www.amazon.com/What-Would-Google-Jeff-Jarvis/dp/0061709719/ref=sr_1_1?s=books&ie=UTF8&qid=1289928765&sr=1-1


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APPENDIX C: Social Media Analytical Framework Table

Company lululemon Coach

Tiffany &

Co. Starbucks

Tim

Hortons

Yellow

Media

Symbol LULU COH TIF SBUX THI YLO

Currency US$ US$ US$ US$ C$ C$

FYE Jan 31 Jun 27 Jan 31 Oct 3 Jan 3 Dec 31

Social Media Data


Website Visitors 140,780 1,886,884 904,745 1,928,690 72,240 11,300,000

Facebook "Likes" 278,191 1,497,712 731,012 19,053,781 1,334,546 3,828

Twitter "Followers" 52,956 271,529 11,513 1,188,142 3,405 1,610


Financial Data (in $mm, unless otherwise indicated)


Stock Price $67.20 $52.28 $60.61 $32.48 $41.47 $6.26

x Shares O/S 71 296 126 740 173 513

= Market Cap 4,789 15,495 7,653 24,038 7,186 3,212

+ Debt & Other -225 -687 167 -893 315 3,347

= Enterprise Value 4,564 14,808 7,820 23,146 7,501 6,559

# of Stores (recent qtr) 134 685 225 16,858 3,703 n.a.

Advertising Spend (2009) 3 179 160 176 190 n.a.

Sales (12-mo trailing) 627 3,758 2,965 10,707 5,345 1,663

EPS (2010E) $1.40 $2.86 $2.64 $1.50 $2.07 $0.80

Social Media Metrics & Characteristics


Heart BIG BIG BIG MEDIUM LITTLE NO

Sales Tactics NONE LOW NONE LOW HIGH NONE


"Likes" per Store 2,076 2,186 3,249 1,130 360 n.a.

Soul BIG LITTLE NO BIG LITTLE NO

Community Engagement HIGH LOW LOW HIGH MEDIUM LOW

"Followers" per Store 395 396 51 70 1 n.a.


"Likes" to Web Visitors 1.98 0.79 0.81 9.88 18.47 0.00

Ad Spend per "Like" $12 $120 $219 $9 $143 n.a.

Sales & Valuation Metrics


Sales per "Like" $2,253 $2,509 $4,057 $562 $4,005 $434,368

Sales per Store ($000s) 4,678 5,486 13,180 635 1,443 n.a.

Market Cap per "Like" $17,215 $10,346 $10,469 $1,262 $5,385 $838,996

Price-to-Sales Multiple 7.6x 4.1x 2.6x 2.2x 1.3x 1.9x

P/E Ratio (2010E) 48.0x 18.3x 23.0x 21.6x 20.1x 7.8x

Sources: Facebook.com, Twitter.com, Klout.com, Compete.com, Bloomberg, Company reports

*

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* All social media and financial data in this table are as of January 4, 2011, unless otherwise indicated


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RESEARCH DISCLOSURE As per Section 8.25 of the Ontario Securities Commission’s Companion Policy 31-103CP Registration Requirements and Exemptions, Somedios Partners Inc. is exempt from the

requirement to register as an adviser as our advice is not tailored to the recipient. We note this paper is educational and thematic in nature and the ratings on the six companies in our case study only provide our quantitative and qualitative assessment of each company’s

depth of customer relationships and are not a recommendation to BUY or SELL the security. As in accordance with subsection 8.25(3), we disclose that Barbara Gray and Greg Scott have a long position in the shares of the following issuers mentioned in this paper:

Coach Inc. (COH-NYSE) lululemon athletica inc. (LULU-NASDAQ, LLL-TSX)

Tiffany & Co. (TIF-NYSE) Any opinions contained herein are our own as of the date hereof and are subject to

change without notice. The information contained herein is for information purposes only and this paper is not, and is not to be construed as, an offer to sell or a solicitation of an offer to buy any securities. The information and opinions contained herein have been

compiled or derived from sources believed reliable, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. Somedios Partners Inc. does not accept any liability whatsoever for any loss arising from any use of this paper or its contents.

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Somedios Partners Inc.

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