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Small Cap Idea: Global Blue (GB)
Blue sky ahead
Global Blue is the leader in tax refunds for tourism shopping. The company provides the backend for refund processing, which includes software installed at merchants and service locations like kiosks and counters at airports, among other services.
Global Blue helps to streamline the refund process, reducing the burden for merchants and shoppers. And in return, the business makes money by obtaining a cut of the refunded value.
Global Blue is the industry leader with 70% market share of a duopoly market. We believe the company’s competitive position is rock-solid and sustainable.
With Covid in the rear view mirror and travel recovery underway, profit has been inflecting. The business benefits from operating leverage (costs don’t change much if you process ten dollars or a billion dollars of tax refunds).
This was a profitable business pre-Covid, earnings 40% EBITDA margin.
The stock currently trades at 11x pre-Covid EBITDA.
Latest data in April paints an encouraging picture of Chinese shopper recovery in Europe and Asia.
We argue the “normalized” level of earnings for Global Blue is higher than pre-Covid levels, given luxury price inflation, cost cuts, and other structural drivers.
Global Blue has a unique ownership structure - private equity owns more than 80% (Silverlake 67.6% and CK Opportunities 13%), while public float is only 10.9% (float size ~$110m).
Maybe this is too small for some investors. But those who can invest can get in today at roughly the same cost base that Silverlake paid for the business back in 2012.
We argue that Global Blue is a highly strategic asset for potential acquirers, and believe Silverlake is being patient so that the business could be sold for much higher post-recovery. Our upside scenario for common shareholders is 2-3x.
It’s worth noting that Planet, Global Blue’s much smaller competitor, was sold for €1.8bn in 2021 - 60% above Global Blue’s current market cap
The main risks here are the speed of recovery of Chinese shoppers and the risk of a PE take-under.
Global Blue started its first tax-free shopping operation in Sweden in 1980. Then throughout the 1980’s and 1990’s it expanded into neighboring Scandinavian countries and then into continental Europe. Global Blue expanded outside of Europe for the first time in 1993 with Singapore, then during 2000’s accelerated its global expansion, getting into Oceania, South America, and other Asian markets including Japan and South Korea.
In 2012, Global Blue was acquired by Silverlake (for €1 bn), and in January 2020 became a publicly listed company. The SPAC listing was co-sponsored by Dan Loeb’s Third Point and Tom Farley, who is the former NYSE President. Tom Farley is now the Chairman at Global Blue and owns ~2% of the company.
Today, Global Blue operates in 50 countries and at over 300k points of sale. The origin of shoppers and destination (pre-Covid) was as follows:
Origin: 70% from emerging markets (China 40%, Russia 5%, India/SE Asia/Other EM 25%)
Destination: 70% Europe and 30% APAC
How does tax refund work?
The process differs by country, but the general version is:
Shoppers receive a form at the point-of-sale to fill out;
When leaving the country, the form must be stamped by a Customs officer (who might also inspect the goods and the receipts);
Prior to departure, shoppers present the stamped form at a Global Blue counter to obtain refund.
Technically all of these can be done without Global Blue, but let’s just say the process will be somewhat archaic. For example, shoppers will no longer be able to obtain refunds at the airport. Instead they will have to mail back the stamped form after they get back to their home country to the merchant who will process a refund to the credit card. This takes weeks if not months, creating extra work for both the merchant and the shopper. And what if you paid in cash instead of credit card? Err…you get the point.
Global Blue is constantly working on ways to eliminate the pain point for shoppers. For example, in more and more countries shoppers can obtain immediate refund either at point-of-sale or at a downtown location. Some shoppers actually take advantage of the immediate tax refund and use it to buy even more items.
Another major initiative is digitization, ranging from mobile forms to backend shopper tracking systems. Some countries are paper-based, some are fully digitized, while most are in between. In most places, the refund experience is still suboptimal. The paperwork, the queues, and the hassles makes it “not worth it” for many shoppers. Digitization is the best solution to a lot of these problems. The key point is that we are still far from the point where everything is digital and seamless. There is much runway for improvement in many countries. We will come back to digitization later since this is an important topic.
Global Blue’s customers are the merchants (or if you prefer - shops/retailers). Tourists don’t care about which refund vendor does the backend. So for Global Blue, it’s all about signing on the merchants.
When Global Blue processes a refund for shoppers, it takes a cut of the refund value, and splits it with the merchants in the form of rebates. The rebates can be significant, and major luxury houses often get 50% or even upwards of 60% (which becomes an additional revenue stream for them).
Take France as an example. The country’s VAT is 20%. Suppose a tourist pays €1,200 total price for a handbag (bag at €1,000 and VAT at €200). When the tourist claims tax refund at the airport, the tourist keeps €140 and €60 is deducted as fee for Global Blue. Global Blue then pays a €30 rebate to the merchant, and records €30 as revenue (2.5% of purchase value). Global Blue recognizes revenue net of rebates.
Working capital is as follows:
Global Blue has to process refunds to tourists before it gets paid the VAT from merchants, typically with a 30 day gap.
Global Blue gets paid 100% of the VAT from merchants first, before rebating them back their share, typically with a 100 day gap.
Due to the latter, payables are typically greater than receivables, resulting in a business with negative working capital. However, during periods of strong growth (such as Covid recovery), working capital requirements temporarily surges due to a higher amount of tourist refunds that needs to be processed.
See below for summarized financials up to 9 months ended December 2022.
Global Blue has 70% market share and is often said to be three times larger than the second place competitor Planet. But interestingly, a former employee of Planet thinks Global Blue could be ever bigger:
“Obviously, the key focus for the first couple of years, basically until the pandemic, was, how do we compete against and win against Global Blue? Because they were, obviously, 3X, 4X, maybe 5X bigger than us revenue-wise, at least in terms of market share. It was a bit of a duopoly in the market between ourselves and them. The perception though was that they were several times bigger, maybe 10X bigger according to different surveys and research pieces that we did of the customer base”
Management teams often likes to exaggerate their own market shares, but in this case we should feel confident that Global Blue’s dominance is real.
Not only is Planet much smaller, but it’s also not a pure play. We tend to see this in many industries, where the number one player is a dominant pure play while the #2 is a more diversified player. And oftentimes the #2 player has no coherent strategy for beating the #1, other than vaguely claiming to be able to “add value to customers in more ways” while not dominating in anything it does.
Seems like this is the case here.
“Planet has not left the VAT refund business, but when you have several babies to worry about, you spend less time on one of them…Planet as I’ve said got some diversification that took them a little bit away of developments in VAT refund. If you’re not the state of the art, you lose points”
“Global Blue has today a team that has been in place for a good five, six years. They have rebuilt the team, Jacques Stern (CEO) has really put in place a very strong machine… he has, I would say, implemented a very strong organization, which I found stronger than the one we had in Planet at this time when I left.
But the bigger question is perhaps this: Isn’t this a pretty commoditized business? Why aren’t there more competitors in the market?
There are three points to note:
First, luxury brands are risk averse clients and it’s a classic case of “if you go with Global Blue you don’t get fired”. With tax refunds, there is simply no upside to doing things correctly, but only downside for not doing so. The last thing luxury brands want is trouble with the tax department, or bad customer experience which translates to impaired brand image. The rational choice is to go with the incumbent, which:
Has track record of tax law and regulatory compliance;
Has the best implementation (integration with in-store POS systems) and most reliable product so that downtime is minimized.
Second, unlike most other software, Global Blue doesn’t charge merchants anything. In fact, merchants make money via rebates. So this creates a unique and interesting dynamic.
Merchants don’t view this as a cost item;
With Global Blue, they can go with the most reliable vendor and still be entitled to a very lucrative profit share. Why the need to look for other vendors?
Third, it’s actually not as easy as it looks. Integrating in-store software at 300k+ locations, airport systems, and consumer app and getting all of these to work without error is pretty complicated, as an expert recalls below:
“Now what was interesting was a lot of tenders went to pilot phase first. The pilot phase is where you can actually win or lose the deal…Every pilot we did, there were issues”
Typically, clients don’t leave a vendor unless there are some serious problems. This could be a vendor that abuses its market position or neglects to service its clients properly. Should we be worried about this at Global Blue? Not according to this former employee:
“What I can say is, first of all, as far as company and its culture and the relationships with the market, with the customers, and merchants, I think that was really top-notch, on high level. Also, from my experience, the merchant, they were very happy with Global Blue service. That’s beyond question or questioning even.”
Luxury goods prices have gone up significantly in the last three years, surpassing the rate of inflation in many cases. For example, one can look at the price index for Rolex watches, which despite undergoing a huge correction over the past year, still sits at 30-40% higher than pre-Covid levels.
What does this tell us about Global Blue’s “normalized” level of profit? If purchase volume simply went back to pre-Covid levels, Global Blue’s topline would be 30-40% higher (and profits even higher due to operating leverage).
Luxury stocks are popular among investors and the thesis for them mainly boils down to pricing power. Global Blue inherits the pricing power for these brands as the business model essentially clips a royalty off of global luxury sales. This is a highly attractive model.
Another structural growth driver is the exposure to EM consumers. In business, there are few correlations that’s as strong as the one we see when income levels rise, more people travel and more people purchase luxury items.
While these are fairly obvious growth drivers, here’s a more nuanced one: “what percentage of sales that are eligible for tax refund actually gets issued refund”?
Theoretically there is a 2.5x opportunity to grow Global Blue’s topline simply by improving the conversion (called “success ratio”), even assuming we see no more growth in transaction value.
There’s a bunch of reasons why refund is not completed. Shoppers may not have bothered filling in the forms. They might have the impression that the refund process is too complex, thus abandoning it. Maybe they lost their receipts. Maybe the queue was too long at the airport and they had to catch their flight.
“In France, prior to the electric validation systems, the process became crazy and tourists were crazy as well because there were hours of waiting at the airport to get the stamp. We were telling the customers, “be at least two hours before takeoff if you want to get your stamp validated”
One of the main ways to improve success ratio is through digitization. According to Global Blue, countries that are digitized have 2x the success ratio as non-digitized countries.
Digitization encompasses initiatives from front to back-end. Mobile app allows tourists to fill in the forms digitally. The system remembers them so there is no need to re-fill basic personal information at every shop they go. The system can also track all the purchases made under the same passport, so that shoppers no longer need to manually populate all their items at the airport. This saves a lot of time. In some countries, you can lose physical receipts and still get refund.
Another opportunity lies in better educating the stores. Missed opportunities are everywhere during the sales process. Perhaps the cashier didn’t bother asking the shopper. There are also typically minimum purchase amounts to qualify for tax refund (e.g. €100 Euro in France, €150 Euro in Italy). If store reps can tell customers “if you spend X more at the store you are eligible for tax refund”, this will be a win-win for all the parties.
The point is that with success ratio at only 39%, many places are still operating sub-optimally and there is a long runway for improvement.
What’s happening with Chinese shoppers?
The chart below shows the state of Chinese personal luxury spending since the pandemic.
Before the pandemic, 70% of Chinese personal luxury shopping was done overseas, but after the pandemic, this dropped to just 5%.
The pandemic has been an absolute boon for China’s domestic luxury sales.
The Chinese government most definitely likes this trend, as it helps to boost domestic consumption and stem capital outflow.
Right before the pandemic, China started to significantly crack down on the practice of Daigou (cross-border resellers). We have also seen Hainan Island (often referred to as "the Hawaii of China”) turned into China’s own tax-free shopping haven under a successive series of policies.
In 2020, the annual duty free exemption at Hainan was greatly expanded from RMB 30k to 100k per person as well as the eligible categories of duty-free goods
Starting 2025, the entire island will be made duty-free, not confined to the 12 designated malls as of current.
We must recognize these developments as headwinds. However, does this have to be a zero-sum game? Can we have booming domestic luxury sales and a strong overseas recovery at the same time? We think so.
Hainan’s biggest competition should be Hong Kong. If this is indeed a zero-sum-game, then we envision a scenario where Hong Kong retail has the most to lose.
The latest data from Global Blue paints an encouraging picture. As of April, the recovery rate (relative to 2019) for Mainland Chinese tourists to Continental Europe reached 47% (compared to 22% in January). For Asian destinations this is even stronger, with South Korea reaching 105% in April (47% in Q1) and Singapore reaching 83% in April (40% in March). These are measured in spending value.
Global Blue is in a good position to capture the strength in Asian destinations given its presence in Japan, Singapore, South Korea, and Australia.
Survey results indicates that more Chinese are planning for long-haul travel over the summer break (below).
The extent of “revenge spending” is also another factor. Since 2019, there’s been about €100bn of pent-up luxury demand accumulated by the Mainland Chinese.
Note that duty-free shoppers from Hong Kong and Taiwan have been spending at 300-400% of their pre-pandemic levels.
A more subtle point is that China’s Ant Financial owns 5.5% of Global Blue. Ant Financial should have a better read on Chinese consumers than anyone. It’s worth monitoring any changes to their stake, as it could be a valuable read-through on their conviction of the Chinese traveler story.
Potential for a buyout
Global Blue possesses two kinds of assets that would be attractive to an acquirer:
Relationships with major luxury houses and other branded retailers across Europe and Asia
Customer purchase data, down to the SKU level and linked to passport data
Two types of acquirers will be interested in this:
Payments providers, like Adyen, which can position duty-free as an adjacent offering to its payments solutions. There will be integration and cross-selling benefits.
Financial conglomerates in EMs (China’s Ant Financial as one example)
Tax-free shoppers are some of the wealthiest consumers in any country, and the shopping habits of the rich are prized assets. For conglomerates, it’s all about getting a complete picture of their consumers so that they can cross-sell a variety of products and services.
Global Blue collects a lot of shopping data, but this data probably becomes much more valuable under another company that can actually monetize this better.
Assuming the business is capable of a normalized €500m in topline at 50% EBITDA margin.
Topline 20% higher than pre-Covid
At 10-15x EV/EBITDA (corresponding to current luxury sector multiples), the business is worth €2.5~3.75bn in EV.
Taking €3bn as the midpoint, and deducting net debt and preference shares, the market cap is €2.2bn or US$12.60 per share (2x upside)
Return could be augmented by a potential company sale. Assuming a takeover premium of 40%, shares become $17.60 (3x upside).
We’ve seen Planet passing hands at €1.8 bn, 60% higher than Global Blue’s current market cap. And this happened in 2021 when the world wasn’t even out of the weeds with the pandemic!
A PE take-under is probably the biggest risk at this point. This is less likely if we continue to see a strong momentum in recovery. However, if recovery halts abruptly then shares could take a beating.
Terminal risk considerations
One can reasonably ask: are there obvious terminal risks to this business? Aside from another global pandemic or war, we don’t think so. Here, we’ll address the three common concerns:
Can governments compete with private players or drive them out of the market?
For whatever reason, if governments wants to eliminate private refund providers like Global Blue, they’ll have to invest in systems of their own. In most countries, it’ll be politically unsavory to propose investing millions of dollars in a new system that ends up benefitting rich foreigners and only to reduce the amount of taxes they pay.
Most tourism tax refunds in developed countries are handled by private players, whereas state operators are sometimes seen in developing countries (e.g. Thailand). We don’t believe the government can do this more efficiently than private players, and if anything, represents business opportunity for Global Blue if more governments decide they want to privatize this area.
Can governments interfere in other ways?
We believe governments are happy to let private players participate in the refund market, as long as fair practice is ensured. In certain countries (e.g. Germany) governments dictates the maximum fees that can be charged, while other countries (e.g. France) are unregulated.
The risk here is that in unregulated markets, governments can start to impose a fee cap if they see refund players as predatory to tourists. This risk is real, but our thesis on Global Blue does not rely on fee increases. Global Blue can cap its own fees and still have pricing power via the pricing power of the underlying luxury brands.
What if countries pull out of VAT refunds?
This is what happened to the UK when it decided to pull out:
“So far it was I think in Jan 2021, if I'm not mistaken, they have completely stopped issuing VAT refund to tourists in the U.K. We've seen a lot of shoppers turning down London and coming to Paris or Milan or Europe and there were discussions recently to reintroduce in the U.K. the VAT refund, which has not been confirmed yet but it can happen”
Global Blue was able to generate more sales through neighboring countries, helping to offset - to a great degree but not entirely - the lost sales in the UK.
Seeing what happened to the UK, the chances of other countries pulling out of VAT is probably slimmer than before. According to Global Blue, countries that implement VAT refund attract 40% more tourists than those that don’t. The long-term trend has been the increase in countries offering VAT refunds, and this trend seems likely to continue.
Disclosure: The author is long shares of GB
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