Curated Insights 2019.10.25

The cloud kitchen brews a storm for local restaurants

The mere prospect of Amazon using cloud kitchens to provide cuisine catering to every taste — and delivering these meals through services such as Deliveroo — should be enough to give any restaurateur heartburn.

For restaurant owners who ignore the shift, the latest development in the gig economy spells big trouble. Ingrained habits and the cost of delivery, particularly in the west, means that it will take several years for restaurants to feel the pinch. But as cloud kitchen companies proliferate, and the cost of delivery declines, consumers will eventually find they can have their favourite meals delivered within 30 minutes at the same price, or conceivably lower, than a restaurant now charges.

The large chain restaurants that operate pick-up locations will be insulated from many of these services, as will the high-end restaurants that offer memorable experiences. But the local trattoria, taqueria, curry shop and sushi bar will be pressed to stay in business.


‘Cloud kitchens’ is an oxymoron

Let me tell you from the world of media: Relying on other platforms to own your customers on your behalf and wait for “traffic” is a losing proposition, and one that I expect the vast majority of restaurant entrepreneurs to grok pretty quickly.

Instead, it’s the meal delivery companies themselves that will take advantage of this infrastructure, an admission that actually says something provocative about their business models: that they are essentially inter-changeable, and the only way to get margin leverage in the industry is to market and sell their own private-label brands.

All of which takes us back to those misplaced investor expectations. Cloud kitchens is an interesting concept, and I have no doubt that we will see these sorts of business models for kitchens sprout up across urban cities as an option for some restaurant owners. I’m also sure that there will be at least one digital-only brand that becomes successful and is mentioned in every virtual restaurant article going forward as proof that this model is going to upend the restaurant industry.

But the reality is that none of the players here — not the cloud kitchen owners themselves, not the restaurant owners and not the meal delivery platforms — are going to transform their margin structures with this approach. Cloud kitchens is just adding more competition to one of the most competitive industries in the world, and that isn’t a path to leverage.

A different view on Apple and China

Cook then alluded to “The Man in the Arena” passage from U.S. President Theodore Roosevelt’s “Citizenship in a Republic” speech:

“It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

There is no playbook for Apple management to follow when it comes to leading a trillion dollar company with a billion customers around the world. Cook’s decision to engage Apple will mean that there will be more controversies such as HKmap.live. Apple may not be completely ready for such controversies, but the company will likely be willing to confront them. Such a stance shouldn’t take anything away from Apple’s steadfast pursuit to leave the world a better place.

Trade Desk can double: TAM analysis and valuation

TTD’s position looks even stronger if you consider that Amazon actually let Trade Desk bid on its CTV advertising inventories. The other credible competitors are Adobe and MediaMath. I consider Adobe to be the bigger threat just from a sheer resource perspective, and I would note that Adobe is an “independent” that doesn’t own content/ad inventory, unlike Google or Amazon. This lack of conflict of interest gave TTD an edge over other platforms, and it might also give Adobe an edge.

AC Milan and Elliott: the hedge fund trying to crack Italian football

Top European teams are reliant on income from the Champions League. Around €2bn was shared between participating clubs last season. But to regularly qualify, AC Milan must overcome intense domestic competition from the likes of Juventus, Inter and Roma. 

Some argue that Elliott is exacerbating the tension between winning now and building for the future. A person close to club operations says Elliott had set up a “weird power struggle” by elevating familiar figures like Mr Maldini and Mr Boban, while also hiring people underneath them who advocate a modern “Moneyball” approach of using statistics to locate undervalued players.

Curated Insights 2019.10.11

Three big things: The most important forces shaping the world

Lower births are a global phenomenon, particularly in the developed world. And while America ages and population growth slows, the rest of the world’s major economies turn into a Florida retirement community and population growth in many cases is on track to turn negative.

When people talk about what nation will own the next century they point to leadership in AI and Machine Learning, where China looks so competitive. But it’s staggeringly hard to grow an economy when you lose a fifth of your working-age population in a single generation. China could invent something as big as the next internet, but when mixed with its demographics have an economy that muddles along. Europe, Japan, and South Korea are the same or worse.

Demographics will slow America’s economy, but they’re a five-alarm fire for other countries. So even assuming equal levels of productivity growth, the U.S. is head and shoulders better off than other developed nations, just given its demographics alone. America could drop the ball on technology while China/Europe/Japan make all the right moves, and America could still remain a much larger and more powerful economy.

TechCrunch founder Michael Arrington recently wrote: “I thought Twitter was driving us apart, but I’m slowly starting to think half of you always hated the other half but never knew it until Twitter.” This is a good point that highlights something easy to overlook: 1) everyone belongs to a tribe, 2) those tribes sometimes fundamentally disagree with one another, 3) that’s fine if those tribes keep their distance, 4) the internet increasingly assures that they don’t. Opening your mind to different perspectives is good and necessary. But when fundamental, unshakable views that used to be contained within tribes expose themselves to different tribes, people become shocked to learn that what’s sacred to them isn’t always a universal truth. The range of political opinions has always been extreme, but what we’ve seen over the last decade is what happens when the warm blanket of ideological ignorance is removed.

The best economic news no one wants to talk about

So, let’s play a game of wish-casting. Imagine a world where wage growth was truly stagnant only for workers in high-wage industries, such as medicine and consulting. Imagine a labor market where earnings growth for low-wage workers, such as those who work in retail and restaurants, had doubled in the past five years. Imagine an economy where wages for the poorest Americans were rising twice as fast as hourly earnings for high-wage earners. It turns out that all three of those things are happening right now.

One reason you haven’t heard this economic narrative may be that it’s inconvenient for members of both political parties to talk about, especially at a time when economic analysis has, like everything else, become a proxy for political orientation. For Democrats, the idea that low-income workers could be benefiting from a 2019 economy feels dangerously close to giving the president credit for something. This isn’t just poor motivated reasoning; it also attributes way too much power to the American president, who exerts very little control over the domestic economy. Meanwhile, corporate-friendly outlets, such as The Wall Street Journal’s editorial pages, have reported on this phenomenon. But they’ve used it as an opportunity to take a shot at “the slow-growth Obama years” rather than a way to argue for the extraordinary benefits of tight labor markets for the poor, much less for the virtues of minimum-wage laws.

Democrats don’t want to talk about low-income wage growth, because it feels too close to saying, “Good things can happen while Trump is president”; and Republicans don’t want to talk about the reason behind it, because it’s dangerously close to saying, “Our singular fixation with corporate-tax rates is foolish and Keynes was right.”

But good things can happen while Trump is president, and Keynes was right. “Tighter labor markets sure are good for workers who work in low-wage industries,” Bunker told me. “This recovery has not been spectacular. But if we let the labor market get stronger for a long time, you will see these results.”

Charles Schwab and the new broker wars

Schwab now derives more than half of its revenue from net interest income, and the company estimates that it will lose $75 million to $150 million in revenue for every quarter-point cut by the Federal Reserve. If we get four more cuts over the next 12 months, Schwab could lose $600 million, about 6% of its estimated $10.6 billion total.

“People underestimate how much the economics of Schwab’s business comes from investing client cash,” says Steven Chubak, an analyst with Wolfe Research. “Rising rates were a very good story for them, but rates may now be going in the other direction, and that will create headwinds,” says Devin Ryan, an analyst with JMP Securities.

Schwab can withstand the revenue loss. It is one of the most broadly diversified brokerages, including asset-management, custodial, and back-office services for institutional investors. Based in San Francisco, the firm oversees $3.7 trillion in client assets, including $1.55 trillion custodied by registered investment advisor firms, or RIAs. Schwab is the largest RIA custodian in the country. The company sponsors mutual funds and exchange-traded funds. Its Intelligent Portfolios service—automated managed accounts of ETFs—has grown into the largest robo-advisor with $30 billion in assets.

The big profit center for Schwab is now its bank. With more than $276 billion in assets, Schwab Bank is larger than Ally Financial, KeyCorp, and Fifth Third Bancorp, according to S&P Global Market Intelligence. Schwab Bank recently crossed a regulatory threshold, subjecting it to stiffer federal stress-test, capital, and liquidity requirements.

As rates increased in recent years, Schwab Bank became the tail that wags the company dog. Net interest revenue from the bank amounted to $5.8 billion, or 57% of Schwab’s total revenue of $10.1 billion in 2018, up 36% year over year. Management and administrative fees were 32% of revenue in 2018, with trading and related revenue rounding out the pie.

Schwab’s revenue base now looks well balanced between RIA sources (such as custodial fees) and retail brokerage, Chubak says. The company’s low-cost ETFs and robo-advisory service are marketplace winners. Schwab recently rolled out a premium subscription advisory service offering “unlimited guidance” for $30 a month and a one-time planning fee of $300. Schwab CEO Bettinger said on a recent call with analysts that the premium subscription service “seems to have really taken off in terms of client interest and response.”

Schwab’s platform for RIAs is considered one of the strongest suites of tools and software in the industry. And it is benefiting as advisors break away from Wall Street brokerage houses. The trend has been going on for a decade, but it may be gaining momentum. Bettinger said recently that the breakaway RIA trend began “to pick up a bit again in the second quarter.” Schwab recently launched an upgraded version of its portfolio-management software to compete more effectively.

“Schwab’s competitive strength is their enormous stronghold on the advisor community,” says Thomas Peterffy, chairman of Interactive Brokers. “They have cultivated that for years.” The RIA industry is also consolidating into firms with 50 to 100 advisors, says Chip Roame, managing partner of Tiburon Strategic Advisors, a financial consulting firm. That’s good news for Schwab, since larger firms with more trading, analytics, and custodial requirements are likely to bring assets to the firm.

The tech stock that Apple, AMD, and Nvidia can’t do without

TSMC’s client list includes the world’s top technology companies, such as Apple (AAPL), Qualcomm (QCOM), Huawei Technologies, Nvidia (NVDA), and Advanced Micro Devices (AMD). They all rely on TSMC to make the most demanding chips used in smartphones, servers, artificial intelligence applications, and networking devices.

JPMorgan estimates that TSMC accounts for about 50% of the world’s foundry revenues and 80% to 90% of the industry’s profits.

TSMC has consolidated its market share in recent years because its foundries were the first to offer 7-nanometer chip production at significant volume. Smaller chips offer greater performance and improved power efficiency. The entire chip industry is rapidly trying to get to a 7nm (and lower) manufacturing process, but most manufacturers have yet to make the transition. Intel (INTC), which fabricates most of its own chips, is unlikely to have 7nm products before 2021.

Curated Insights 2019.10.04

There are no secrets

The biggest sign that an industry’s experts are not truly experts is when the industry has a large variance in its popular opinions. For example, if some people believe that you should do X and another group believe that you should not do X, then that field is likely not well understood. I am not saying that there are no experts in investing or diet/nutrition, just that a large variance suggests that the experts know less than what we might initially perceive.

Besides variance of opinion, the other thing to look out for are “simple” or “easy” solutions to these complex problems. Humans have been trying to solve certain kinds of problems (i.e. investing, health, etc.) for thousands of years, so you should be skeptical of anyone who claims to have a simple solution. Yes, some people will have useful tips, but no one person will have all the answers. And remember, what worked for them may not work for you.

BlackRock, Tencent tie-up is a match made in Wall Street

Tencent’s LiCaiTong wealth management platform already has 800 billion yuan ($112 billion) in aggregated assets, making the social media company a major financial institution in its own right. And let’s not forget the trillions of yuan that sloshes through the Weixin Pay system every year.

Southeast Asia’s internet economy to top $100 billion this year

Southeast Asia’s internet economy is on track to exceed $100 billion this year before tripling by 2025, becoming one of the world’s fastest-growing arenas for online commerce thanks to a youthful population increasingly comfortable with smartphones.

The value of online transactions in areas from internet retail to car-hailing should reach $300 billion by 2025, fueled by an existing population of 360 million online users, according to a research report by Google, Temasek Holdings Pte and Bain & Co. The region, home to ride-hailing Grab and Alibaba Group Holding Ltd.’s e-commerce site Lazada, includes four countries — Thailand, Philippines, Indonesia and Malaysia — in the top 10 globally in terms of time spent by users online, the study showed.

If you aren’t rich by 45, you might as well give up

For the rich and poor alike, the economists found that “the bulk of earnings growth” happens in the first 10 years of work, typically between the ages of 25 and 35. During the next decade of their career, men can expect smaller raises overall.

After 45, those in the bottom 90 percent of lifetime earners see their earnings decline as a group, in part because people often start cutting back their hours around that time, especially if they do manual labor for a living. Meanwhile, even 1 percenters only see relatively minor pay bumps after middle age.