Cobranded Credit Cards and Apple Card

In this post, I’ll try to deduce the reasons why Apple and Goldman Sachs decided to collaborate on Apple Card. What follows in this entry is my deduction from available information and based on my experience working in the credit card industry. First, I’ll touch on the concept of cobranded credit cards and what brands and issuers often get out of a partnership. Second, I’ll talk a bit about Apple Card. Last, I’ll give my thoughts on why Apple and Goldman Sachs may benefit from their relationship. These are my own thoughts only and if you have any thought or material that can contribute to the topic, I’ll appreciate it that you share with me.

Cobranded Credit Cards

You probably have seen a few cobranded credit cards before at popular stores or when you fly with domestic airlines

Source: Google Images

So, what exactly do brands and issuers get for working on cobranded credit cards?

Every brand wants to establish as close a relationship with consumers as possible. One of the popular methods is through a credit card with exclusive benefits. However, brands would be subject to a lot of regulations if they issued credit cards on their own. There would be also a lot of expenses that’d go into servicing accounts. No brand wants that extra burden in addition to running their own business. That’s why they need financial partners.

To compensate an issuer for bearing the risks and operational expenses, a brand usually takes care of the cost of exclusive brand-related benefits. For instance, shoppers receive 5% cash back at Target when they use Target credit cards. I don’t know the exact detail, but my guess is that Target will be responsible for most of the cash back, if not all. Additionally, brands can assist issuers with acquisition costs. Issuers spend thousands of dollars, if not much more, every year to acquire new customers. Brands have an already established relationship with their customers, brand awareness and financial resources that can help issuers in this regard.

On the other hand, issuers are responsible for dealing with financial regulations and servicing accounts. That’s why issuers try to sign as many partners as possible to leverage economies of scale. A small number of partners wouldn’t make operational expenses justified.

Issuers also have to compensate partners for leveraging their brand names. Agreements between issuers and partners vary on a case-by-case basis, but I wouldn’t be surprised if an agreement featured:

  • An issuer pays a partner for each new acquired account and a smaller fee for a renewal
  • An issuer pays a partner a fixed percentage on total purchase volume
  • An issuer pays a partner a fee when accounts make the first purchase outside partners’ locations

What do issuers get in return?

Issuers, of course, keep all financial charges and fees such as annual fees, cash advance fees or late fees. Besides, issuers can generate revenue from interchange fees. In every transaction, a merchant bank which works with a merchant has to pay an issuing bank which issues a credit card to the consumer who shops at the merchant a small fee for accepting credit cards as payment. Payment networks like Visa or Mastercard act as a middle man between a merchant bank and an issuing bank, and decide how big the fee, which is called interchange, should be. What I just describe is a gross simplification of what transpires behind the scenes in a couple of seconds or less in a transaction. There is a lot more to it. Essentially, for the sake of simplicity, just imagine that for every transaction, an issue bank receives 2% of the transaction volume in interchange fees. So if an issuing bank handles $1bn in transaction a month, that bank will get $20 million in interchange fees. Lastly, as mentioned above, issuers can also leverage partners in terms of acquisition costs.

IssuersPartner Brands
Responsibilities– Service accounts and handle regulatory compliance
– Bear risks of charge-off
– Compensation to partners 
– Additional rewards expenses as selling points to consumers
– Assistance in acquiring new accounts
Benefits– Financial charges and fees
– Interchange fees
– Marketing leverage from partners’ outreach
– Deepen relationships with customers
– Compensation from issuers
Table 1

Apple Card

Apple Card is an Apple-branded credit card issued by Goldman Sachs. You can only apply for an Apple Card via your wallet app on Apple-produced devices such as iPhone or iPads. The Card is so synonymous with Apple that you can barely hear about Goldman Sachs.

Apple reportedly will offer monthly payment plans for iPads and ...
Source: The Verge

Apple Pay’s selling points include:

  • No fees
  • Simple application process
  • Premium look and feel
  • Unlimited 2% cash back when you pay with Apple Card using your Apple Watch or iPhone
  • 3% cash back from select merchants such as Uber, T-Mobile, Nike, Walgreens, Duanereade and of course, Apple itself
  • Security as each transaction must be verified either by Touch or Face ID
  • Apple and Goldman Sachs promise not to sell consumer data with a 3rd party for marketing purposes

What’s in it for Apple and Goldman Sachs in launching this Apple Card?

Goldman Sachs isn’t know for consumer banking. It’s known for its investment banking business. Apple Card is the first attempt at consumer banking from the renowned company. As the issuer, Goldman Sachs (GS) will have to deal with all regulatory and security challenges while bearing the risk of charge-off. They will also take part in servicing accounts, but the work is shared with Apple as Apple Customer Service agents handle upfront communication with users. Since Apple Card has no fees whatsoever, what GS can benefit from this collaboration, I allege, include

  • Interchange fees
  • Insane marketing power from Apple and its global footprint in the form of millions of installed iphones
  • I imagine that if this collaboration succeeds, GS will want to sign more partners to achieve economies of scale, leveraging what they learn from operating Apple Card

Apple allegedly wants to launch Apple Card for two reasons: 1) to deepen relationship with users, to motivate them to buy their hardware more 2) to generate more service revenue. As a technology partner, I don’t imagine Apple will have to deal with fraud, regulatory or security concern. In exchange, Apple provides marketing outreach and technical assistance in incorporating Apple Card into its ecosystem. Additionally, from what I read, customers who need technical assistance will reach out to Apple Customer Service agents. Hence, that’s also what Apple brings to the table. Also, the company may allegedly be responsible for Apple-only rewards and interest free payment plans when customers buy Apple products. In terms of rewards with 3rd parties such as Nike or Uber, I can’t find any relevant information. If I have to guess, my money will be on Apple taking the bill for extra rewards as well.

Goldman SachsApple
Responsibilities– Service accounts and handle regulatory compliance
– Bear risks of charge-off
– Compensation to partners 
– Market Apple Card to users 
– Offer technology to make the card work with Apple Pay and its devices
– Help service accounts 3% cash back on Apple products and services
– Interest-free payment plan for customers when buying Apple products
Benefits– Interchange fees
– Leverage marketing power from Apple and its footprint
– Deepen relationships with customers
– Compensation from Goldman Sachs
Table 2

According to Apple, the number of transaction through Apple Pay has grown substantially since it was launched. As of Jan 2020, the annual run rate for Apple Pay reached 15 billion transactions. Not all Apple Pay transactions are through Apple Card. The card debuted only in August 2019. Since Apple doesn’t offer details on Apple Card transactions, let’s run some scenarios by assuming that the annualized transaction count for Apple Card is 500 million to 2 billion. If average ticket size (dollar amount per transaction) ranges from $20 to $60, the transaction volume will be as follows

 Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
$20$10,000,000,000$20,000,000,000$40,000,000,000
$40$20,000,000,000$40,000,000,000$80,000,000,000
$60$30,000,000,000$60,000,000,000$120,000,000,000
Table 3

Interchange fee rate varies depending on numerous factors. However, if we assume that the rate is 2% of purchase volume, based on the scenarios above in Table 3, GS would receive the following as interchange fees

Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
$20$200,000,000$400,000,000$800,000,000
$40$400,000,000$800,000,000$1,600,000,000
$60$600,000,000$1,200,000,000$2,400,000,000
Table 4

As you can see, the more Apple Card transactions, the bigger the interchange fees for GS. Given that Apple has legendary marketing prowess, an installed base of millions of devices and rising demand for contactless payments, the numbers may even grow bigger in the near future.

On Apple’s side, it is reported that Apple takes 0.17% cut on each Apple Pay transaction. In terms of Apple Card transactions, I think the cut will be even bigger, but won’t be bigger than GS’ interchange fee rate. Since we assume that GS receives 2% in interchange fee rate, let’s say Apple receives somewhere from 0.2% to 1% on purchase volume. How much would Apple receive, using the lowest purchase volume for each scenario of transaction count (first row respectively in Table 3)?

 Annualized Apple Card Transactions
             500,000,000                         1,000,000,000                2,000,000,000 
0.20%$20,000,000$40,000,000$80,000,000
0.50%$50,000,000$100,000,000$200,000,000
1%$100,000,000$200,000,000$400,000,000
Table 5

A few days ago, Apple and Walgreens announced that new Apple Card customers would receive $50 bonus in Apple Cash after spending at least $50 at Walgreens using the card. The promotion is valid till the end of June. It signals to me that 1) Apple wants to acquire more customers for Apple Card and 2) Apple may also receive a fee whenever a new customer comes on board. I don’t imagine $50 bonus would be paid for Walgreens or GS. Why would they do so when there is no sustainable benefit? If Apple shoulders the cost of the acquisition bonus, or at least most of it, it will likely not make financial sense to just rely on fees from card purchases to recoup the investment.

In sum, I hope that the information I shared and my thoughts are useful in helping you understand more about the credit card world that is complex yet fascinating. I spent quite some time thinking about the collaboration between Apple and Goldman Sachs as the presence of a tech giant and an investment bank in the consumer banking area is quite interesting. There isn’t much information out there so I would love to learn from whoever has useful information to contribute to the topic at hand.

Disclaimer: I own Apple stocks in my personal portfolio

Target’s turnaround strategy

Retail apocalypse has been the rage for a few years. The competition from Amazon is said to be the main reason why many retailers closed shops permanently. The truth is that Amazon serves just another change in the competition to which failure to react will doom any business. Retailers are no exception. As Amazon is the master in eCommerce, retailers likely will not match the Seattle-based company on the digital front. What retailers can do is to find their competitive advantages and exploit them while being at least competitive digitally. I think Target can serve as a good example of a retailer that successfully transformed itself to stay competitive.

Remodeling stores and building digital & shipping capabilities

In 2017, Target announced an ambitious plan to invest $7 billion in remodeling existing stores, opening new ones, launching private labels and building out digital infrastructure. In March 2020, Target revealed that the company completed 700 remodels over the past 3 years and aimed at finishing 1,000 in 2020. Since the announcement of the turnaround strategy, Target has launched 20 private labels. With regard to shoring up its shipping and digital capabilities, Target made a strategic decision to take the task of building out its website internally, instead of farming it out to Amazon like they did before 2013. Crucially, Target’s CIO McNamara reduced the IT headcount from 10,000 to 4,000 engineers. Not only did Target strengthen its core capability organically, but they also brought in external expertise by acquiring two same-day delivery startups in Shipt and Grand Junction. Due to the new acquired capabilities, Target introduced pickup, Drive-Up and Shipt services to most of its stores. Now, customers can order online and receive the goods via:

  • Delivery at home in one-two days
  • Pickup at a local Target store
  • Drive up to a Target store to pick up the goods
  • Have the goods delivered within the same day

Results of those initiatives?

2019 total revenue, gross margin rate and operating income margin rate increased compared to 2018. Walmart’s YoY increase in the latest year’s revenue is 1.9%, lower than what Target posted. Considering the cut-throat competition that Target is in, that increase in the top line and margin should be a positive sign.

For the improved financial performance, Target credited its increased efficiency and customer engagement through both its stores and digital channels. he company revealed that 80% of online orders were fulfilled by its stores. Additionally, “during 2019, over 70% of our comparable digital sales growth was driven by same-day fulfillment options: Order Pickup, Drive Up, and delivery via our wholly-owned subsidiary, Shipt”. In its latest business update amid Covid-19, Target said that digital sales grew more than 100% YoY. The growing importance of digital channels to Target’s business can be seen in the below graph which shows digital sales made up an increasing share of Target’s overall sales in the last 5 years.

In February 2019, Fast Company reported that six of Target’s private labels generated more than $1 billion each in revenue a year. In 2019, 1/3 of Target’s revenue came from its own private labels.

Other initiatives & opportunities

In September 2019, Target launched a loyalty program called Target Circle. The program was introduced after racketing 2 million subscribers in 18-month trial. In March 2020, the number of Target Circle subscribers hit 50 million, from 35 million reported in November 2019. According to Target in Q3 investor call, Circle members spend 2-5% more than non-members. The program has no membership fee, but comes with only a modest of 1% back on purchases. Hence, it’s quite encouraging to see the membership base.

Target has branded debit cards and credit cards issued by TD. According to the quarterly filings, the cards were responsible for around 10% of the purchase volume at Target

Target-branded cards not only allow the retailer to gather so much data on consumers, but also provides a healthy boost of revenue. For the past 3 years, Target has received $680 million of credit card profit sharing from TD. I am not familiar with the agreement between Target and TD, but I think that if more folks sign up for the branded credit cards and spend more using the cards, Target will get more revenue from its issuing partner.

In my opinion, the turnaround strategy by Target has been a fair success so far. However, Amazon and Walmart haven’t stood still either. They also push and innovate every day. If Target wants to avoid the fate the likes of Sears did, they will have to continuously push and innovate as well. But they can serve as a case study against any generalizing claim that anyone not named Amazon is facing retail apocalypse.

China using capital as a strategic competitive advantage

Forget SoftBank. China is a great example of how you can use capital as a competitive advantage.

Yesterday, I came across a clip on China’s investing in one of Montenegro’s infrastructure projects and using it to benefit itself geopolitically. The European country doesn’t have sufficient infrastructure and badly needs capital assistance. China came in and loaned a huge sum of money to the country. The loan came with a few catches. Chinese suppliers would have to be involved in the project. The loan came with interest after the first few years. Failure to pay back the loan could result in China’s repossession a part of Montenegro.

The same thing happened with Sri Lanka. The country had to give China 99-year access to a strategic port due to its inability to pay back what was owed.

African countries such as Kenya and Djibouti face the risk of losing strategic ports to China as a payment for their outstanding debt.

Securing maritime keypoints isn’t the only thing China is after. In Africa, China also lends capital to help with infrastructure projects in exchange for natural resources.

“The Chinese come and they want your iron, your bauxite, your petroleum. In return, they’ll deliver you turnkey projects, where they supply the materials, the technology and the labor, with salaries that are mostly not paid in the country and do not contribute to the economy”

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

A booming natural resources exporter, with large exports of gold, cocoa and now oil, Ghana was one of a rapidly growing number of African countries where China had recently structured a huge package deal of loans and investments in order to gain a seat at the banquet. Early in their discussions, it appeared likely that Ghana would agree to a resource-for-infrastructure swap, similar to big financing packages that had been pioneered a few years earlier by Angola and Congo, both large African countries that were immensely rich in oil or minerals, and, significantly, lacking in any meaningful practice of democracy.

In Ghana’s much more vibrant political system, though, public debate helped nudge things in a different and arguably more prudent direction. The country’s recently tapped commercial oil production would not be used as a direct collateral, but paid into an escrow account, as had been the case in Angola. Ghana would remain free to sell its oil on the international market, even if under the contract terms China legally reserved the right to pocket income from its production if Ghana fell behind in its payments

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

In Zambia

There, the state-owned China Nonferrous Metal Mining Company bought the mothballed Chambishi Copper Mine, once one of the crown jewels of Zambian mining, for a mere $20 million…

The new Chinese owners poured over $100 million into rehabilitating and modernizing Cambishi, where production resumed in 2003. By 2008, the Chinese buyers had reportedly recoued their investment. And by 2010, according to the Chinese newspaper Southern Weekend, the Chambishi mine was producing a regular profit

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

China is in Africa for not only natural resources, but also for food security.

This doesn’t mean, of course, that China doesn’t need African farmland, or indeed that it doesn’t aim to eventually obtain control of as much of it as it can. China has 20% of the world’s population, and only 9% of its farmland. There were only two large developing countries with less arable land per capita: Egypt and Bangladesh, and massive construction, pollution and erosion were whittling away at China’s farmlands all the time.

Vaclav Smil, a prominent environmental scientist who studies China’s land use and food security, has said that as the country’s living standards rise, by 2025 its food needs will far surpass what is available on today’s open market.

Africa alone has 60% of the world’s uncultivated arable land and whatever Beijing declares, it stands to reason that China will come to see its food security as increasingly bound up in bringing that land into intensive production.

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

China uses its massive capital to gain influences around the world, help Chinese companies with new businesses and secure natural resources, strategic checkpoints as well as food security while putting in place measures to protect its investments. What’s there not to like? What’s the point of accumulating capital if you can’t put it to great use?

News Outlets and How NOT To Stand Up Paywalls

News websites generate revenue mostly through either subscriptions, contributions or ads. Some offer exclusive content via subscriptions such as Washington Post, some offer content for free such as cnbc, bbc and others operate as a hybrid, providing free access to most articles while holding out a select few for only subscribers.

To get readers to subscribe, you need to deliver not only great content, but also a pleasant user experience. TechCrunch has been particularly awful in this regard of late. As a frequent reader or at least I used to be, I am disappointed by their new approach. A short while ago, you could read TechCrunch with your adblock app on. Now, here is what you are greeted on the website

Unless you turn off your adblock or subscribe, you can’t even see what is available. Even Washington Post lets you see the homepage and only shows the paywall after you click on a specific article. But even after you turned off all ads blockers, the annoying message still shows up

Meanwhile, CNBC, which is another major business news outlet, takes a much more user-friendly approach with adblock

The design trick is aimed to implicitly persuade you to turn the blocker off, but you can certainly leave it on and continue reading CNBC articles.

Saigoneer, a news website that covers happenings in Vietnam, has a similar idea to CNBC, though the homepage is covered completely by this message. I turned ads blocker off a few times before I realized that clicking on the black bar will allow me to continue reading it freely.

Or news outlets can just follow what The Guardian does: offer content for free and ask nicely for contribution

Here is the success that The Guardian had from their approach

Today the Guardian has 650,000 regular paying members, 360,000 of which are recurring paying members and 290,000 pay for print papers and digital memberships, according to the publisher. In the last year, it received more than 364,000 single contributions from around 318,000 contributors. In the last three years, the title received 1 million paid donations — a mix of one-offs, recurring paying members, and print sales.

Source: Digiday

In short, I hope that whatever TechCrunch is trying to do has been working for them. Personally, I became frustrated with their paywall and since their free articles are available on other news channels anyway, I have frequented to other websites more and abandoned what used to be one of my favorite sites.

Amazon Secured Credit Card for those with low credit profile

Amazon partners with Synchrony to offer a secured credit card to those who have a low credit score. Normally, a low credit score results in a rejection of a credit card application at a financial institution due to default concern; which, in some real-life cases, can lead to significant trouble. With the Amazon Secured Credit Card, potential customers put in an amount of money that serves as collateral and their credit limit. Customers then gradually build up credit profile by being financially responsible before graduating to a better credit card.

I think it’s smart of Amazon to implement this initiative

They can tap in a new customer segment

It’s hard to imagine that folks with low customer score can be Prime members and Amazon’s profitable segment. Yet, after years of exploiting the higher customer tier, Amazon will likely need to widen the customer pool for growth and more than 11% of the population in the US is a sizable segment to appeal to.

This will increase switching costs and customer loyalty

Amazon Secured Credit Card comes with 5% cash back on purchases like the ordinary Store Card. A pretty competitive cash back rate on every purchases. Convenience, a variety of choices and generous cash back can definitely encourage purchases on the Seattle-based company’s website.

More customers and purchases mean more vendors and advertisers

Vendors who wish to appeal to low-credit-score customers will want to get on the e-commerce platform if there is enough demand. Advertisers will be willing to pay to put their products, services or brands in front of the new customer segment, in addition to the existing customer base.

Disney+

Thursday was a big day for Disney as the company announced the much anticipated streaming service called Disney+. You can learn more about it from this link. The top executives went through a lot of aspects of the new service, including programming, roll-out plan, pricing, investment in future original content and forecast financial impact. The service will offer users ad-free access to an incredible library of content owned by Disney, such as Marvel movies, Pixar, Star Wars, Disney and National Geographic. Users will also be enjoying some new original content such as WandaVision, Loki or Falcon and The Winter Soldier. The price is very attractive at $6.99/month or $69.99/year with all content downloadable for offline consumption.

It is a serious challenge to Netflix as Disney has plenty of content that can appeal viewers across demographics, the brand name, the marketing expertise and the financial resources. It can be argued to some extent that Netflix also has a brand name (apparently “Netflix and chill” is quite popular in our society), content (it invests billions of dollars in originals) and the marketing power. But there are two things that Disney has going for them: additional revenue streams and the ability to bundle more.

Firstly, below is the segmentation of Disney’s revenue and operating income. (Figures are from Disney 2018 & 2017 annual reports and in $ millions)

Metric2018201720162015
Revenue – Services        50,869         46,843         47,130         43,894
Revenue – Products          8,565           8,294           8,502           8,571
Revenue – Media Networks        24,500         23,510         23,689         23,264
Revenue – Parks and Resorts        20,296         18,145         16,794         16,162
Revenue – Studio Entertainment          9,987           8,379           9,441           7,366
Revenue – Consumer Products & Interactive Meida          4,651           4,833           5,528           5,673
Operating Income – Media Networks          6,625           6,902           7,755           7,793
Operating Income – Parks & Resorts          4,469           3,774           3,298           3,031
Operating Income – Studio Entertainment          2,980           2,355           2,703           1,973
Operating Income – Consumer Products & Interactive Media          1,632           1,744           1,965           1,884

In 2018, Parks and Resorts’ operating income is almost three times that of Netflix in total, let alone other segments of Disney.

Source: Netflix

I think it’s great for Disney to offer an attractive penetration pricing model to quickly sign up viewers and scale up. Additional revenue streams, in my opinion, can help finance the play. Meanwhile, a Netflix plan is almost twice as expensive as Disney+, at least in the US market. I doubt that Netflix will lower its price to match Disney+’s, given their increasingly big investment in content and troubling negative free cash flow.

Source: Netflix

It’s not a zero-sum game. I believe that a lot of viewers will have both streaming services or even have Netflix exclusively, but on the other hand, some will likely choose Disney+ over Netflix. If the economy is still strong and folks have disposable income to spare, I think it will be beneficial for Netflix. However, if the economy contracts in the future and spending cut is required, I suspect that Disney+ at this current price will appeal more than Netflix.

Secondly, Disney now also has ESPN+, a sports subscription, and Hulu. Disney already said that there was a chance they would bundle Disney+, Hulu and ESPN+ together. It will be even more attractive to viewers.

With all that being said, execution matters. Though it seems Disney has a lot going for them, this is a new territory for them while Netflix is the trail blazer in video streaming services. I am excited about this competition in the future and Disney+ itself, as a big Marvel fan.

Disclaimer: I have Disney in my portfolio, but this post stems from my curiosity and is not an investment suggestion or anything more than just my opinion.

Book: Retail Disruptors: The Spectacular Rise and Impact of the Hard Discounters

For the past two months, I lost interest in picking up a book for some reason. Nonetheless, the streak ended today as I finished this book.

The book offers a detailed and insightful view on hard discounters which usually act as disruptors in a local retail market. The book defines hard discounters as follows:

Hard-discount retailers offer basic goods and daily necessities at the lowest possible prices, while maintaining high-quality standards. A hard-discounter store differs from discount supermarkets or hypermarkets like Asda, Kaufland, or Walmart. Hard-discount stores are typically about 8,000-15,000 square feet, less than one-tenth the size of a Walmart Supercenter, with probably lower staffing levels.

To reduce costs, hard discounters often display items on shipping pallets and in the boxes in which they arrive. The store is minimally decorated and offers a limited assortment of consumer packaged goods and perishables – typically less than 2,000 stock-keeping units (SKUs). In contrast, the average US supermarket carried 40,000 to 50,000 SKUs in 2017, while a Walmart Supercenter sells over 100,000 grocery and non-grocery items.

Here is what I learned from it

Beware of potential threats in the market. The book told stories of retailers around the world that paid the price for under-estimating hard discounters. They dismissed the arrival of hard discounters at first and when they realized the threat was real, it was already too late to stop the hard discounters.

Benefits of offering a limited assortment of SKUs. I am usually overwhelmed by a plethora of choices at restaurants or supermarkets. As the book says, to shoppers who are under time pressure or who intend to buy rather than browse, a better shopping experience is to be offered streamlined options or a limited range of choices. Plus, retailers who sell a limited assortment, especially private labels, can negotiate a better economic deal with suppliers due to economies of scale. A better deal will help the margin of hard discounters. Additionally, a limited assortment of goods means smaller stores – lower rent, saved costs on logistics and staff.

Go-to-market strategy. Hard discounters tend to enter a new country through a specific market first. Get the foot in, the logistics and operations in and then expand. Also, each go-to-market strategy varies from one country to another due to a host of factors such as household income per capita, economic growth, shopping preferences. Blindly adapting a blanket strategy to different markets may lead to failures.

The book offers a comprehensive view on different aspects of hard discounters and retail in general. It confirmed my belief that a competing strategy can be made up of so many factors that are intertwined together, including to not limited to:

  • The size of assortments
  • Whether a retailer carries more private labels or national labels
  • How man perishable items a retailer carries
  • Whether it has a good brand name
  • Whether it has economies of scale
  • Whether the shopping preferences of local shoppers are a good fit
  • How much a retailer spends on marketing, promotions and discounts; and for how long it can sustain the effort.
  • A retailer’s culture

After penetrating a market, whether a retailer can survive the competition depends on the retailer’s ability to carve out a niche in the market where it can be competitive, using a combination of the above factors or more.

A few notable stats

  • Private labels account for somewhere between 70-90% of hard discounters’ assortment
  • In 2017, middle-class shoppers in the UK account for 60% of shoppers at Aldi and Lidl
  • In Germany, hard discounters accounted for three out of every ten euros spent on grocery purchases or 60 billion euros in 2017
  • Aldi entered Australia in 2001, and by 2017, had cost conventional retailers like Woolworths and Coles AU $16 billion in lost annual revenues
  • Trader Joe’s offers around 3,500 different items, Lidl between 1,500 and 2,000 while Aldi carries between 1,200 and 1,400 products
  • In Germany, Lidle was the largest advertiser among grocery retailers in 2017 (almost 280 million euros) and the sixth-largest advertiser in the country ahead of McDonald’s, Daimler, Unilever and Samsung
  • Trader Joe’s sales per square foot is $1,633, twice that of Aldi and Lidl, four times that of a Walmart supercenter and 8 times that of Dollar General
  • In Australia, 26% of Aldi shoppers were from high-income families in 2006. The figure shot up to 50% in 2014
  • For the average US grocery retailer, a loss of 1% in sales leads to a loss of 17% in operating profit

Bundling and Unbundling with Apple

“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”

Barksdale

Bundling is the act of adding several individual services or features together in one package. Think of Amazon Prime as the example of bundling. With Prime, you’ll get fast deliver (my experience lately hasn’t exactly matched that), free return, Prime Videos, audiobooks and access to exclusive deals, just to name a few.

Unbundling refers to the act of selling a service/feature separately from an usually bundled service or product. Think of flight tickets as an example. Before low-cost no-frill, flights tickets had many features, but low cost fliers such as Ryan Air were the pioneers of selling only flight tickets and making the other features such as luggage, priority check-ins as add-ons and additional revenue.

With Apple, an example of their bundling is Apple Card/Pay. I have seen quite a bit of criticisms online about the features of the service aren’t anything new. To some extent, yes, that may be true. The thing is that Apple managed to bundle all the following features together to make an attractive product that is yet to be seen elsewhere.

  • Beautifully and elegantly designed titanium card
  • No fees
  • Rewards and immediate cashback
  • Acceptance everywhere (Apple claimed) for Apple Card and 40+ countries for Apple Pay
  • In-app management
  • Security as in that biometric validation is required for payments with both Apple Card and Apple Pay
  • Privacy as in that consumer data won’t be used or shared with advertisers
  • Application process is fairly easy, reportedly, through Apple Wallet, which is loaded on your phone by default
  • Integration between Apple Card and Apple Pay

With regard to unbundling, I think that’s what Apple is doing with their hardware and services. Most services can only be enjoyed on Apple devices, yet such services lure consumers to the luxury devices which have been highly profitable to Apple. On the top of my head, there are three subscription services from Apple that an average consumer may likely use: Apple News+, Apple Music and iCloud. Soon there will be Apple Arcade too. Selling services separately and services from hardware gives users freedom to choose. If Apple bundled everything into, let’s say, $100/month for 1.5 years for the use of a new iPhone and all services, that would make some customers pay for what they didn’t use. Nonetheless, if the usage of paid services is high and consistent, I wonder if Apple will have an optional bundle for services alone for power users.

Concern over Facebook’s new privacy-focused vision

A few days ago, Mark Zuckerberg shared with the world his privacy-focused vision for Facebook moving forward. I understand that it may make sense strategically for the company, but I have real concerns over the feasibility of the strategy.

Lack of trust

Facebook has been littered with scandals for the past two years. The trust between the blue brand and users isn’t particularly at its all-time high. There have been documented evidence on the exodus of users from Facebook or the significant decrease in activities. If the trust is already shaky, why would users trust Facebook with every aspect of their life by using their proposed super app? (The super app concept is similar to WeChat, which users can use to do many things while on the platform such as booking movie tickets, paying bills, transferring money to friends and families…). If we can’t trust Facebook with just daily communication, how can we entrust it with more aspects of our life? If you can’t trust a dentist to treat your teeth, would you trust that dentist if he said he could fix your eyes?

The audience

I think one of the reasons why WeChat is successful is because of the target audience. Coming from that part of the world, I can say from personal experience that we Asians tend to not care as much as Western audience about privacy. I think there is a reason why WeChat hasn’t been as successful overseas as it is in China. If it were marketed to Western audience, given its relationship with the Chinese government and Western users’ concern over privacy, I don’t think it would be a triumphant effort. Hence, to convince Western users to use Facebook for everything, the trust has to be pretty solid. It’s not there now for sure.

Regulatory hurdles

Facebook has attracted unwelcome attention from lawmakers recently. And for a good reason. Even if they had done nothing wrong, which is definitely not the case, I suspect that the road to the super app vision wouldn’t be without robust challenges from the regulatory perspective.

Essentially, it’s all well and good for Facebook to change its stance on privacy. However, the trust isn’t there. I would love to see more concrete actions to transition from a company whose more than 95% of its revenue is from ads to a company that values privacy first. I am not a believer at the moment since Facebook has used up the rope we gave them already. If they want us to trust them again, they have to do it the hard way. And I think they have to hurry as well as the world won’t stand still for them. If this is the vision that makes business sense, others will go for it as well.

If they are committed and succeed in the future, kudos to them. Until then, I choose to remain skeptical of the vision.

Facebook’s privacy-focused vision

Yesterday, Mark Zuckerberg released a blog post on a “privacy-focused vision” that centers on:

Private interactions. People should have simple, intimate places where they have clear control over who can communicate with them and confidence that no one else can access what they share.

Encryption. People’s private communications should be secure. End-to-end encryption prevents anyone — including us — from seeing what people share on our services.

Reducing Permanence. People should be comfortable being themselves, and should not have to worry about what they share coming back to hurt them later. So we won’t keep messages or stories around for longer than necessary to deliver the service or longer than people want them.

Safety. People should expect that we will do everything we can to keep them safe on our services within the limits of what’s possible in an encrypted service.

Interoperability. People should be able to use any of our apps to reach their friends, and they should be able to communicate across networks easily and securely.

Secure data storage. People should expect that we won’t store sensitive data in countries with weak records on human rights like privacy and freedom of expression in order to protect data from being improperly accessed.

Be that as it may that this vision can bring business and strategic benefits, meaning that Facebook has a reason to follow suit. Nonetheless, I have nothing, but skepticisms about this vision.

First of all, the majority of Facebook’s revenue comes from ads. By majority, I meant 98.5% of their revenue in 2018 comes from ads

Source: Facebook

When something is 98.5% of you, any claim that you will do something threatening that 98.5% part tends to raise genuine concerns about its legitimacy.

Second of all, Facebook’s track record on keeping its promise isn’t that great. For the last two years, it will be a hard ask to find a tech company that is involved in more scandals than the blue brand. I came across this disturbing article from Buzzfeed on Facebook. Here is what it has on decision-making at Facebook

Zuckerberg and Chief Operating Officer Sheryl Sandberg do not make judgment calls “until pressure is applied,” said another former employee, who worked with Facebook’s leadership and declined to be named for fear of retribution. “That pressure could come from the press or regulators, but they’re not keen on decision-making until they’re forced to do so.”

Buzzfeed

On Facebook’s attention to privacy

One former employee noted that Facebook’s executives historically only took privacy seriously if problems affected the key metrics of daily active users, which totaled 1.52 billion accounts in December, or monthly active users, which totaled 2.32 billion accounts. Both figures increased by about 9% year-over-year in December.

“If it came down to user privacy or MAU growth, Facebook always chose the latter,” the person said. 

Buzzfeed

On their denial to admit problems:

Other sources told BuzzFeed News that Facebook executives continue to view the problems of 2018 fundamentally as communication issues. They said some insiders among leadership and the rank and file could not understand how Facebook had become the focus of so much public ire and floated the idea that news publications, who had seen their business models decimated by Facebook and Google, had been directed to cover the company in a harsher light.

Buzzfeed

On a new feature called Clear History:

“If you watch the presentation, we really had nothing to show anyone,” said one person, who was close to F8. “Mark just wanted to score some points.”

Still, nine months after its initial announcement, Clear History is nowhere to be found. A Facebook executive conceded in a December interview with Recode that “it’s taking longer than we initially thought” due to issues with how data is stored and processed. 

Buzzfeed

By now, you should see why I am skeptical of Facebook’s new vision. We all have to take a side and so does Facebook. It just happens that taking advertisers side means Facebook is not on ours as users.