Curated Insights 2019.11.29

With Tiffany, LVMH grows in jewelry. And Tiffany gets another chance to shine

“We expect to bring Tiffany time and capital, which are two things that are not too easy to get when you report quarterly to the stock market,” LVMH finance chief Jean-Jacques Guiony told analysts during a call Monday morning, after the deal was announced.

LVMH’s plans for Tiffany have three main parts: Increasing the brand’s value, improving its retail network and expanding its product offerings. LVMH hasn’t yet said how many of Tiffany’s 300 stores it may close. But LVMH is famous for finding the top retail locations in major markets, and for shuttering stores that don’t perform.

Tiffany has come under pressure as French luxury brand Cartier has been investing more in targeting younger shoppers. Cartier parent company Richemont’s jewelry business, which is headquartered in Switzerland, has an operating margin of about twice that of Tiffany.

Based on how he has handled a slew of other luxury brand acquisitions, including of Italian jewelry house Bulgari, LVMH CEO Bernard Arnault is expected to help Tiffany grow outside of the Americas, a market that represents about 41% of the jewelry company’s sales today.


​Charles Schwab stock could surge after a TD Ameritrade deal

“Schwab is the new breed of brokerage firm,” says Chip Roame, managing partner at Tiburon Strategic Advisors. Along with its 12.2 million brokerage accounts, Schwab is the largest custodian for registered investment advisors, or RIAs; a major sponsor of exchange-traded funds; and one of the industry’s biggest robo-advisors (offering managed portfolios of ETFs). Its banking division brings in 70% of the firm’s revenue from interest income (though it is under pressure as interest rates have come down). Customers are flocking, lured by the free equity-trading regime that Schwab helped instigate. The company added 363,000 brokerage accounts in the third quarter, up 6% year over year. Buying TD “makes huge strategic sense,” says Roame. TD would double Schwab’s brokerage accounts, add $1.3 trillion in assets, bring in custody service for 7,000 RIAs, and provide a thriving active-trader platform.


Why did PayPal pay $4 billion for a coupon browser extension?

Honey’s surprisingly reassuring privacy policy pledges that it won’t track “your search engine history, emails, or your browsing on any site that is not a retail (shopping or service) website.” That’s because it doesn’t need your data to make a profit. Just like Rakuten, Honey makes money by charging retailers a small percentage of sales made with the coupons it finds. But why would stores pay to let consumers buy their stuff for less? For the same reason they pay credit card companies and payment processors like PayPal: to make your experience as smooth as possible, and to do everything to prevent you from abandoning your shopping cart, even if that means offering you a lower price.

Kodali says one compelling aspect of Honey is its mobile app, where consumers can add items from different retailers to their cart and pay for them all at once. “That has been something that nobody in retail has solved,” she says. “That’s the only thing that I could imagine could take on a $4 billion evaluation.” Instead of shopping on Amazon, you can use Honey to buy from all your favorite stores at the same time, and automatically apply any available coupons. It’s a valuable service that could help differentiate PayPal from everyone else.

A fall in house prices would not devastate Germany’s economy

The first is that far fewer Germans own their own home. While more than three quarters of Spaniards are owner-occupiers, the figure here is just over half, according to Eurostat data.

A second factor here is that, if prices do crash, homeowners with mortgages are also less likely to be as exposed to increases in interest rates. While Spanish mortgages tended to be pegged to Euribor (which tends to reflect movements in rates set by the European Central Bank), Germans tend to go for fixed rate deals — insulating them just in case the ECB does ever manage to raise borrowing costs.

A bursting of a bubble here is also less pernicious as far as the jobs market goes, as it is not the case that almost 15 per cent of workers here are tied up in the construction industry, as was the case in Spain before the crash. The proportion is much smaller, so German unemployment is not about to soar to 25 per cent, as Spain’s did, should the market crash.

How quants and QE shook the cult of the stockpicker

The fees such funds can charge have been hit. The average performance fee for equity hedge funds, a loose proxy for stock pickers, has dropped from 19.1 per cent at the start of 2008 to 16.4 per cent in the second quarter of this year, according to data group HFR. That fall is roughly in line with the average for all hedge funds, but much steeper than for event-driven funds, the other strategy that focuses on stocks.

Curated Insights 2019.11.22

The new dot com bubble is here: it’s called online advertising

The benchmarks that advertising companies use – intended to measure the number of clicks, sales and downloads that occur after an ad is viewed – are fundamentally misleading. None of these benchmarks distinguish between the selection effect (clicks, purchases and downloads that are happening anyway) and the advertising effect (clicks, purchases and downloads that would not have happened without ads).

It gets worse: the brightest minds of this generation are creating algorithms which only increase the effects of selection. Consider the following: if Amazon buys clicks from Facebook and Google, the advertising platforms’ algorithms will seek out Amazon clickers. And who is most likely to click on Amazon? Presumably Amazon’s regular customers. In that case the algorithms are generating clicks, but not necessarily extra clicks.

I had never really thought about this. Algorithmic targeting may be technologically ingenious, but if you’re targeting the wrong thing then it’s of no use to advertisers. Most advertising platforms can’t tell clients whether their algorithms are just putting fully-automated teenagers in the waiting area (increasing the selection effect) or whether they’re bringing in people who wouldn’t have come in otherwise (increasing the advertising effect).

What powered such a great decade for stocks? This formula explains it all

Shockingly, a vast majority of the gains over the past decade can be explained almost exclusively by improving fundamentals. Earnings growth and dividends explain nearly 97% of the annual returns for the 2010s. So the change in valuations have played a minor role in explaining the gains during this cycle.

The 1980s and 1990s both experienced a massive repricing in terms of valuations outpacing the underlying corporate fundamentals. The 2000s saw a correction in terms of both fundamentals and sentiment because of the strong performance in those prior decades.

The mining of media (or the “streaming wars” are just a battle)

Today, however, the marginal cost of distributing content to an incremental consumer is approximately zero. And the consequence here is profound. Under this model, the unit economics of all viewers/subscribers improve as you add more viewers/subscribers (e.g. a $100MM show costs $100MM irrespective of how many users you have, but the per user cost goes down). This doesn’t mean giving away said service for free or at an artificially low price solve for profitability. However, it does mean that the more people who have your service, the less you require from each subscriber to generate a profit. And if you have a guaranteed business model – say, selling another iPhone, Showtime subscription, ad impression, datapoint, or two-year wireless subscriptions – there are incentives to maximize your userbase (more people you can upsell to) and the amortization of fixed costs (the higher your unit contribution).

Alibaba aims to deliver with $16bn courier venture

When it set up Cainiao six years ago, Alibaba was an asset-light company, spending only Rmb2.5bn that year. The logistics arm was a joint venture alongside a group of Chinese courier firms, a retailer, and a property company. In 2016, a group of private investors poured in a further Rmb10bn.

The original plan was to use Alibaba’s data in partnership with the networks of the courier companies. “We established Cainiao because we hope to use the power of our infrastructure, and the power of our data, to help these delivery companies, to provide better service to consumers,” said Jiang Fan, president of Tmall and Taobao.

But today, Alibaba is moving, like Amazon, to build out its own delivery platform, acquiring stakes in delivery companies, running a network of warehouses and installing 40,000 lockers across China so that customers can pick up their parcels.

In part, it has been forced to improve delivery by its rival JD.com, which has offered same day delivery in some Chinese cities for years. By contrast, shoppers have complained that items bought from Alibaba’s Tmall and Taobao platforms could be stuck in transit for days and battered by the time they arrived at your door.

The beauty of Singles Day

In fact, Estée Lauder broke its 2018 sales record a mere 25 minutes after pre-sales for the e-commerce festival started, and was the first brand in the history of 11.11 to reach one billion RMB in pre-orders alone. Meanwhile, the beauty brand that landed at the top of the list by midnight on November 12 was L’Oréal Paris, which surpassed Estée Lauder along with L’Oréal Group-owned Lancôme in the final 11.11 beauty ranking. These two brands, along with fourth-place Olay, also achieved over 1 billion RMB GMV in sales.


Why Nike quit Amazon, but doubles down on Tmall

Nike may have chosen to forgo its partnership with Amazon, but working with local e-tailers has become vital for consumer brands in China. 100% of activewear brands now sell on Tmall, and 82% sell on rival JD.com. As traffic to Baidu continues to decline and consumers begin their purchase journey on Tmall, the ecosystem is increasingly important as a content and marketing platform. According to Gartner L2’s most recent data, 96% of index activewear brands include video on Tmall, and 65% feature celebrity content on the platform. 83% of tracked activewear brands feature a “brand zone” at the top of search results, where brands put marketing messages front-and-center to crowd out third-party sellers.

Balsa shortage threatens wind power rollout

Better known for its use in model aircraft, table-tennis bats and surfboards, balsa is a key component of many wind turbine blade cores because it is both strong and lightweight. Prices have almost doubled in the past 12 months and suppliers are warning that the balsa shortage threatens a bottleneck in new wind farm developments next year. The wood is grown almost exclusively in Ecuador, Indonesia and Papua New Guinea. Producers in the Latin American country have benefited from the shortage, saying prices are likely to keep rising next year.

BlueMountain: the hedge fund that lost its way

As it outlined its conviction to investors last December, BlueMountain said the shares could be worth $60 because the market was overestimating the utility’s wild fire liabilities. BlueMountain’s opening $200m bet on PG&E had been at an average share price of close to $46. Last November, it added another 3.7m shares at an average share price of about $24, regulatory filings show. Late last month PG&E shares slumped to a record low of below $4 after the company cut off power to almost 3m Californians in an attempt to avoid the risk of more wild fires. Analysts at Citigroup have warned that the stock may become worthless.

Curated Insights 2019.11.08

Learning from Costco's Jim Sinegal

Here’s a way you can help fight Alzheimer’s

We don’t have the scientific tools we need to stop Alzheimer’s. There hasn’t been a new drug for it approved in more than 15 years. That’s in part because it’s so hard to run clinical trials for this disease; the average clinical study for Alzheimer’s takes 4 to 8 years, versus just 1.5 years for a typical study of cardiovascular disease, and is also much more expensive to run.

For one thing, it’s difficult to identify qualified people early enough in the disease’s progression who are willing to participate. People might experience symptoms but not realize they have the disease, and simply not bother to see a doctor. Many doctors have only a limited time with each patient, and they don’t make it a priority to talk about early Alzheimer’s—especially if the person isn’t showing any symptoms.

But suppose the patient makes it to a doctor and the subject of Alzheimer’s does come up. There’s still no cheap, effective way to diagnose the disease. The definitive tests are expensive or invasive—one of them requires a spinal tap, which involves using a needle to puncture your spinal cord—and the doctor may not order them. If she does, her patient might not want to take them. Many people don’t want to find out if they have the disease earlier, because there’s no way to treat it.

As a result, we found that 80 percent of trials don’t meet their recruitment goals on time, which greatly increases the cost of running a trial for pharmaceutical companies. And of all the patients in the healthcare system who could be eligible to participate in a clinical trial on Alzheimer’s, only 1 percent actually do.

Curated Insights 2019.11.01

GrubHub shareholder letter (October 2019)

A common fallacy in this business is that an avalanche of volume, food or otherwise, will drive logistics costs down materially. Bottom line is that you need to pay someone enough money to drive to the restaurant, pick up food and drive it to a diner. That takes time and drivers need to be appropriately paid for their time or they will find another opportunity. At some point, delivery drones and robots may reduce the cost of fulfillment, but it will be a long time before the capital costs and ongoing operating expenses are less than the cost of paying someone for 30-45 minutes of their time. Delivery/logistics is valuable to us because it increases potential restaurant inventory and order volume, not because it improves per order economics.

Earlier, we talked about the great progress we are making with enterprise brands. We love working with large enterprise brands because they help drive new diners to our platform and keep diners from going to other platforms. That said, the biggest enterprise brands don’t need Grubhub to bring them new diners in the same way independents and small chains do because they spend billions a year on developing their own brands. What they need most is a driver to take the food to their diners. And, as we just noted, that isn’t cheap, or particularly scalable, so the unit economics and long term profit outlook for our business would look very different if a majority of our business was coming from large enterprise brands.

Life of pie: A closer look at the Domino’s Pizza system

The key to operating a successful Domino’s master franchise is to have the Domino’s brand stand out against all the other pizza options that are available in the marketplace. In other words, the brand has to be put to work to generate demand, which can only be achieved with significant marketing spend. Tv is still quite important for Domino’s and generally requires a significant advertising budget. That budget has to be levered on a good number of restaurants in order to make sure the marketing expenses stay at a reasonable level per store.

Every new market that’s entered starts more or less from scratch, with limited consumer awareness and entrenched behavior that benefits the incumbents. This is why it is so difficult for a new Domino’s market to get to a scale that makes economic sense. Once you manage to reach that scale that the flywheel can start spinning, because at that point the business can self-generate its growth through reinvestment in marketing.

It appears that the entire Domino’s franchise has come under a bit of pressure from aggregators like Takeaway, Uber Eats, Grubhub and Doordash, which are oftentimes operating at a loss. Since the aggregators are providing access to technology platforms that many small operators would not be able to afford or operate on their own, they’ve essentially levelled the playing field for pizza restaurants again. In my opinion this has decreased Domino’s Pizza’s advantage in the mobile ordering space. Domino’s Pizza Inc.’s CEO conceded recently that the aggregators are indeed having an effect on their same store sales growth (item below). For now I have no strong conviction on Domino’s but it is a business with some fascinating developments.

Schwab kills commissions to feed its flywheel of scale

“ we did not expect such a swift reaction in the sense that we thought that we come out with IBKR Lite as an additional offering and that we go on for a while, and will attract some customers and then eventually, other people will start reducing and maybe all go to zero. So this — this very swift reaction was a surprise to us.” – Thomas Peterffy, Founder and Chairman, Interactive Brokers Group (IBKR), 3Q 2019 Earnings Call

We believe Schwab’s business stands to benefit the most because of the relatively small impact to its revenue and income and the broad, efficient set of high quality service it offers to clients. While the commission cuts mean Schwab offers an even more compelling value to its customers for its existing suite of high quality services, a disadvantaged competitor like TD Ameritrade is trying to figure out how to charge for its “premium” services for customers, effectively raising prices for service in other ways and depressing its value proposition.

Decades of experience indicates the companies offering higher value propositions win more customers. By continuing to pursue aggressive reinvestment in both client service and technological efficiency, Schwab can continue to leverage its growing scale to further improve upon the value proposition it provides clients while continuing to drive down its expense (efficiency) ratio. We believe the gap in differentiation will only get wider now that the smaller competitors are much weakened financially, which is why it made sense for Schwab to be so aggressive in cutting commissions both in 2017 and again October 2019.

An Elastic technical review

Elastic isn’t building a cloud side and a on-prem side to their platform like MDB is. It’s all Elastic Stack in the Elastic Cloud, just hosted at whatever cloud provider the customer desires, and managed by the finest experts one could find — thems that wrote it! There isn’t tooling appearing in Elastic Cloud that isn’t in core platform, unlike MDB with their Stitch serverless platform. However, the downside is that their Elastic Stack releases must bundle the proprietary modules side-by-side with the open-source products.

One striking difference as I walked through the product line, is the number of use cases it solves that DO NOT INVOLVE CODE. MDB is for developers only, to embed into their application stack. Elastic is for that, but also for non-developers to use without needing any custom development. IT can hook up Beats for monitoring infrastructure or network traffic. Enterprise users can feed in datasets with Logstash, for staff to query, visualize, or apply ML in Kibana. I expect this trend to continue, as it really opens up the applicability as to who can use the product line.

Best of all, Elastic is making exciting moves that are moving their company beyond being a do-it-yourself tool provider.


Third Point’s Q3 letter: EssilorLuxottica thesis

Our analysis of potential merger synergies points to over €1 billion in additional profit through efficiencies and revenue growth, almost double the Company’s current targets. In the near‐term, this will be driven by cross‐selling to wholesale customers, insourcing lens procurement, and supply chain efficiencies. The longer‐term opportunity to disrupt the industry value chain is even more appealing: combining lens and frame to shrink raw material need and waste, reducing shipping costs by merging prescription labs with global distribution hubs, and providing a true omni‐channel sales offering. These initiatives will transform the way glasses are sold, significantly improving the customer experience.


Ensemble Capital client call transcript: Mastercard update

While you might hear about how merchants pay 2% or more in credit card fees, Visa and Mastercard are only collecting about 1/20th of that fee, with the banks, the ones taking the credit risk, earning the bulk of the fee.


Ensemble Capital client call transcript: Tiffany & Co update

Tiffany is one of just a few global American luxury brands and the casual observer cannot tell a Tiffany diamond engagement ring from one purchased elsewhere. There’s no room on a diamond for logo placement, after all.

As a company, Tiffany is older than Cartier (founded in 1847), Louis Vuitton (founded in 1854), and Burberry (founded in 1856). This durability matters in luxury because it communicates a brand’s ability to endure all kinds of major socioeconomic changes and remain relevant over successive generations. It also communicates a certain timelessness of core products that remain in fashion despite intermittent fads and trends.

The advertising industry has a problem: People hate ads

“It’s harder to reach audiences, the cost of marketing is going up, the number of channels has exponentially proliferated and the cost to cover all of those channels has proliferated,” Jay Pattisall, the lead author of the report, said in an interview. “It’s a continual pressure for marketers — we’re no longer just creating advertising campaigns three or four times a year and running them across a few networks and print.”

That includes automation and machine learning technologies, which Forrester expects will transform 80 percent of agency jobs by 2030. In July, JPMorgan Chase announced a deal with the ad tech company Persado that would use artificial intelligence to write marketing copy.

Steven Moy, the chief executive of the Barbarian agency, said that multiyear contracts had shortened, with budgets tightening and performance metrics becoming more stringent.

For the first time ever next year, Facebook, Google, YouTube and other online platforms are expected to soak up the majority of advertising dollars, according to WARC.

Last year, 78 percent of members of the Association of National Advertisers had an in-house agency, up from 58 percent in 2013 and 42 percent in 2008.