Weekly reading – 12th December 2020

What I wrote last week

How much money could you save from drinking coffee at home?

Business

The economics of the $2B+ Christmas tree industry

Bloomberg’s profile on OnlyFans, a potential major social media on the horizon

Uber sold its autonomous vehicle arm to Aurora. This move isn’t a surprise given that Uber has been trying to offload cash-intensive and loss-making businesses in order to focus on the ones that do make money. Though there is a big write-down from $7.5 billion to $4 billion, investors may find this deal good news

CNBC has a good article on AT&T, HBO and their effort to compete with Netflix and other streamers

Inside Google’s deal with French Media

Many Google employees came out with their version of the story involved Timnit Gebru, contradicting what the company publicly said

WSJ’s profile on a few men that helped build Microsoft’s gaming business today

Online grocery slowed down in the last few months compared to the height in the summer. The basket size continued to be relatively big, compared to the same period last year and pre-Covid months.

https://www.brickmeetsclick.com/stuff/contentmgr/files/1/495948404a0913f7ced51b6524a17539/files/bmc_scorecard_nov_2020_sm.png
Source: Brickmeetsclick

Clover, which belongs to Fiserv and sells hardware & software payment solutions to small businesses, a competitor of Square, seems to have a higher GPV as well as a higher percentage of sellers with $125k in annual GPV. As Clover has more than 90% of its sellers above the $125,000 GPV threshold, the figure is far smaller for Square.

Source: Fiserv

Technology

John Gruber’s review of Apple’s latest product: AirPods Max

What I found interesting

A story on a small coffee business in Vietnam that prioritizes sustainability

Benefits of walking

The US Department of Health and Human Services published a presentation on how unhealthy Americans’ diet is. The information is informative and use, but the presentation is hilariously terrible.

The old Americans get, the more they spend time alone

Weekly reading – 28th November 2020

What I wrote last week

I wrote about why I think Apple Card would be a significant credit card as Apple Pay grows more popular

I wrote about Target, Salesforce’s acquisition talk with Slack and Uber vs Lyft

I reviewed President Barack Obama’s new memoir “A Promised Land

Business

The difference in the business model between Booking.com and Expedia

NYTimes and The Washington Post expanded their subscriber base substantially in the last two years

Black Friday’s online shopping exceeded $5 billion

Amazon is strengthening its advantages with delivery capabilities that can rival UBS’

TikTok used its biggest stars in its legal fight against the US government

Research shows that unique visitors to Microsoft Teams far outnumbered those to Slack in October 2020

Technology

There are 123 Fintech startups in Vietnam in 2020. Most of them operate in the Payments area

Users of the new Macs with M1 referred to the hardware as having “alien technology”, “wicked” or “sockery”

What I found interesting

Hanoi and Saigon/Ho Chi Minh City is the second busiest domestic flight route in the world

This piece tells a story about how Utah uses collaboration and human touch to create policies that help foster the state’s equality and economy. Two quotes stand out to me

Utahns seem strongly committed to charitable works, by gov­ernment, alongside government or outside government. What­ever tools used are infused with an ethic of self-reliance that helps prevent dependency . . . when there’s a conflict between that ethic and mercy, Utah institutions err on the side of mercy

Betty Tingey, after seeing the news coverage about the Utah Compact, wrote to the Deseret News, “I don’t know much about politics except the sick feeling I get inside when there is constant arguing. . . . I don’t know how to settle debates, but I know a peaceful heart when I have one. I felt it when I read the Utah Compact.”

Source: American Affairs Journal

This clip about an 86-year-old baking master in Greece gave me mixed feelings. On one hand, I admire his work ethics, but on the other, it can be a condemnation of a system that forces old people to work this late in their life

Target’s growth, Salesforce reportedly about to acquire Slack and Uber vs Lyft

Target’s growth during the pandemic

Writing that 2020 is good for somebody or a company is weird as this year has been nothing, but a disaster. However, from a business perspective, Target has had a pretty good 2020 so far.

Before 2020, its comparable sales growth was often a low or middle single digit. In Q4 2019, its physical store comparable sale growth was even in the negative territory. 2020 flipped the switch. The company’s total comparable sale growth has been in the double digits with Q2 2020 recording the highest at 24%. Digital comparable sales growth is at least 9% or higher. Q3 saw a bit of a decline compared to Q2, but the overall growth was still higher than 20%. I find it interesting that the revenue YoY growth and the store comparable growth seem pretty in sync with each other, but that’s because physical stores make up at least 84% of Target’s revenue. Digital sales was responsible for almost 16% of the overall revenue in Q3 2020, an equivalent of $3.6+ billion in revenue for a quarter and up from 7.5% in the same quarter last year.

In terms of profitability, Q2 and Q3 of 2020 saw the highest gross margin and operating margin in the last 5 years. Operating margin reached 10% and 8.5% in Q2 and Q3 respectively while gross margin was 30.9% and 30.6% in Q2 and Q3. During a year dominated by a once-in-a-lifetime pandemic, Target managed to pivot its business to adapt to the dire situation and improved not only its top line, but also its profitability. That’s proof of resilience and managerial competence.

Source: Target

Another aspect of their business that I find interesting is their branded cards’ penetration. Target measured its credit and debit card’s penetration as percentage of sales that took place on their cards. In other words, if there is about $200 million in sales in a week and $50 million of which is paid through Target’s credit and debit cards, the penetration rate is 25%. And shoppers have a reason to use those cards. Owners of these cards have exclusive benefits that other issuers can hardly match, such as: no annual fee, 5% off on purchases at Target stores and on its website, free 2-day shipping on select items and longer return period. Yet, there has been a slowly steady decline in terms of the RedCard penetration. The penetration rate in Q3 2020 was 21%, down from 23% from the year before. Given the increase in sales and the unique offerings of the RedCards, it’s surprising that the figure not only didn’t grow, but it also contracted. This indicates to me that Target can do much better in getting customers to apply for a RedCard. It is a good retention tool and it brings extra revenue to the company. In Q3 2020, credit card profit sharing was $166 million, but down from $177 in the same period last year.

In short, Target has been doing quite well. They succeeded in growing their online business which has been turbocharged by the pandemic, but that, in no way, means that the company didn’t put in the effort. Think about it this way, every retailer tried to grow its online business, but Target managed to do in a cut-throat industry and at their scale. So credit to them. Plus, they made appropriate and necessary investments in same-day services and deliver. In the last two earning calls, the management reported ridiculous numbers of same-day services’ growth, to the tune of several hundred percentages. Shoppers like options. With Target, they can now order online and have it delivered to their door, or drive up to the parking lot to pick the order up or fetch it in stores. The flexibility is there and it will bode well for Target in the upcoming holiday season that is unfortunately engulfed, still, by the pandemic.

Regarding the possibility of Target having a similar subscription to Walmart+ or Amazon Prime, I think Target is still missing the main hook, the main attraction. Amazon Prime has been around for more than 10 years. Over the years, Amazon kept adding more and more benefits for shoppers so that the subscription now offers a plethora of benefits ranging from unlimited 2-day shipping regardless of order size, movies, music, books, exclusive deals and so on. On Walmart Plus side, Walmart can offer affordable groceries and discount on fuel. Target doesn’t seem to me that it can match any of those benefits. Even though some pieces are there such as Target’s popularity, its network of stores across the country and its delivery flexibility, I don’t see a main selling point for a Target’s own subscription yet. We’ll see.

Salesforce reportedly in talks to buy Slack

Yesterday, after the news broke that Salesforce has been in talks to acquire Slack and a deal can happen next week, Slack’s stock price popped by more than 30% within a day. The reaction that I saw on Twitter was mostly positive for both parties. I can see why. But the fact that investors are happy about this prospect of an acquisition says something about Slack as a standalone business. Slack last reported its active daily user at 12 million back in October 2019. Within the past 12 months, Microsoft revealed the metric at least 3 times: 20 million in Q2 FY 2020, 75 million in Q3 FY 2020 and 115 million last month for Q1 FY 2021. There are two reasons why companies don’t make disclosures: 1/ they are legally obligated not to and 2/ there is nothing rosy to disclose. In this case, it’s squarely the latter case. My guess is that Slack hasn’t seen a meaningful increase in its Daily Active Users (DAU) numbers DESPITE a pandemic that turbocharged working from home, the same way that Microsoft Teams has achieved. In the face of a formidable challenge from Microsoft, Slack initially played it cool. Below was their reaction 6 months ago

“What we’ve seen over the past couple of months is that Teams is not a competitor to Slack,” Butterfield told CNBC in an interview after Microsoft’s Q3 earnings update. Butterfield also downplayed the impact on Slack’s growth caused by Microsoft “bundling [Teams] and giving it away for free” with Office 365 over the past three years. 

Source: ZDNET

Yet, Slack filed a formal complaint to the EU about Microsoft’s alleged anti-competition practice, the same practice that Butterfield downplayed. I wrote here about why that formal complaint is unlikely to succeed. But it shows Slack’s desperation. If Microsoft weren’t a competitor and its bundling practice was nothing, why would Slack sue to stop it? All of these factors and the fact that investors were happy about the prospect of being acquired by Salesforce paint a solemn picture of Slack as a standalone company. If it joins Salesforce, there will likely be a Salesforce bundle that includes Slack, the same way that Microsoft bundles Teams into Office 365. Slack would get more assistance in selling to corporate clients while Salesforce would get extra capabilities quickly without having to build them from scratch.

Uber vs Lyft

The pandemic has been a catastrophe for ride-hailing companies such as Lyft and Uber. According to Second Measure, the market in the US dropped to only half of the 2016 level and only recovered to the 2016 level in October 2020. That’s how big the impact of the pandemic has been on this business. Since Uber and Lyft are always compared to each other, you’d think that their business is faring similarly. Not really.

While Lyft essentially has only one business in ride-sharing, Uber successfully grew its food delivery service UberEats to be a $4.5 run rate business, making up 40% of Uber’s revenue in Q3 2020. Uber Eats’ $1.1 billion in revenue in Q3 2020 was more than double Lyft’s entire revenue in the same period. Additionally, the pandemic affects each other differently. Lyft’s main market is the US, which is, unfortunately, going deeper and deeper into the pandemic. There is no sign of things turned around here in the US, unless there is a vaccine. It severely handicaps Lyft’s business and Uber’s ride-sharing segment. Nonetheless, Covid-19 has been a boon to Uber Eats. It has grown substantially in the past few months and become a silver lining for Uber. Plus, Uber announced its effort to deliver groceries and its acquisition of Postmates indicates that it is serious about becoming a delivery-as-a-service business. In other words, while the two companies are often mentioned in comparison, they are vastly different now, with Uber becoming more of a diversified company. It is more diversified horizontally (more services) and vertically (if you consider being present in more countries). In this environment, I think that the Uber model is a much better one. Don’t take my word for it. Look at the stock prices. The two companies made debut on the stock market almost at the same time. While Uber soared past its IPO price, Lyft is trading nowhere close to its own IPO price.

It’ll be interesting to see how the next couple of years will be for these two companies. Would Lyft venture into another business like Uber did? What would a vaccine bringing back our previous life mean for Uber? Knowing that it would power up the ride-sharing business, but adversely affect the growth of Uber Eats?

Likely competition for Uber/Lyft in California. Grocery delivery is growing. Apple’s response to Epic’s lawsuit

Potential competition for Uber/Lyft in California

The two poster children of ride hailing companies in the US, Uber and Lyft, are having a legal fight with the state of California. The outcome of that battle remains to be seen, but if they lose, the companies already threatened to leave the state. Meanwhile, CNBC reported that at least 2-3 ride hailing startups talked about potentially swooping in to replace Uber and Lyft if they depart. One of those startups that I found interesting is Alto. Alto is a ride hailing startup that mainly operates in Dallas and Fort Worth. What differentiates Alto from their two bigger peers is that Alto’s drivers are salaried employees with benefits. Also, drivers don’t have to worry about gas or maintenance costs. Here is what their recruitment page says

Source: Alto

Some critics of AB5, the law that can potentially cause Uber/Lyft to leave California, say that the law is flawed in that it kills the flexible schedule that drivers, classified as contractors, enjoy. That is a valid point. Some do prioritize a flexible schedule over everything else. I have seen myself several drivers who just drive on the weekends to get some more money on this side gig. These drivers likely wouldn’t appreciate entering an employment contract that would likely require them to work more than they want. Clearly, in this case, AB5 likely won’t work.

That; however, doesn’t change the fact that Uber and Lyft’s refusal to classify drivers as employees can put drivers as disadvantage. Some drivers put in a lot of working hours, but do not earn enough after they take into account gas, car maintenance expenses and dead miles (hours when they drive around without any rides). Because they are not employees, they don’t have benefits like paid time off or insurance either.

There are two separate camps in this argument with virtually conflicting interests. Whether AB5 alone is a sufficient fix remains to be seen, but the existence of companies like Alto and its willingness to enter California’s market offer proof that there is an alternative model to what Uber and Lyft stand for.

Online grocery continues to grow amid the pandemic

Since March, Covid-19 has pushed online grocery to new heights that few could have predicted. According to Brickmeetsclick, even though growth has plateaued in June, online grocery sales reached $7.2 billion and an incredible 85 million orders.

Recent market developments suggest that the trend is likely to continue in the upcoming months. Shipt announced the drop of membership requirements and instead let customers pay $10 for a single order, $9 per delivery for 3 orders and $8 for 5 orders. Additionally, Walmart and Instacart recently partnered to provide same-day delivery in four markets across California and Oklahoma. Last Thursday, DoorDash entered the grocery delivery market with DashPass, a $10/month subscription which allows customers to order and receive groceries in about an hour. Last month, Uber joined the party with their own grocery delivery option through the main Uber and Uber Eats apps. Moreover, FreshDirect unveiled its expansion into New Jersey, New York and Connecticut.

Grocers and delivery services are working in tandem to facilitate more online grocery spend. Grocers let customers receive orders at their front door, pick up and drive up at stores. Delivery services lower barriers and compete with one another to acquire users. In the near future, this battle will be very fierce and the biggest beneficiary will be the end consumers.

Apple’s legal issues with Epic Games

Apple responded to Epic Games’ lawsuit over the App Store policies. In the response, Apple offered reasons why the court should let Apple continue to ban Epic Games’ apps while the legal battle rumbles on, including:

  • Epic’s alleged harm is not irreparable. Epic’s apps will be reinstated on the App Store if the game maker removes its own payment option, the cause of its violation of the terms of services, and adheres to the guidelines that Epic agreed to from day one.
  • Epic’s alleged harm is its own doing. The game maker first asked Apple for a special treatment by creating an Epic Store inside the App Store. Then, it asked Apple to open up the App Store by allowing more payment options. After the requests were declined, Epic Games decided to circumvent the App Store policies by offering its own payment scheme, suing Apple and launching a coordinated PR attack.
  • Apple does not engage in anti-competition practices and the App Store policies are to make sure that 1/ consumers’ privacy and safety are protected and 2/ Apple gets paid for its investments

The legal document is here and if you’re interested in this kind of stuff, you should have a read.

Personally, I don’t think Epic will win this legal battle. The App Store is Apple’s investment and intellectual property. Hence, Apple is entitled to enforcing the policies on the app marketplace, the same policies that Epic Games has agreed to when it launched its apps on the App Store. Whether Apple is wielding too much power is another matter for discussion, but if you created a marketplace and invests a lot of resources into it, it’s pretty difficult to understand the sentiment that you’re not allowed to benefit from your own investments or to enact and enforce policies that you see fit.

Plus, what happened, based on the emails exchanged between Apple and Epic, seems pretty distasteful and bully-like from the latter. On 6/30/2020, Tim Sweeney wrote to Apple the following, which is part of a longer email. His requests were rejected by Apple on 7/10/2020:

Source: Scribd

On 8/13/2020, Epic wrote to Apple, declaring its intention not to follow the App Store guidelines and to take legal actions if Apple retaliated. Apple subsequently wrote to Epic twice, informing the app maker of its violations and asking it to remedy the situation. Epic Games instead sued Apple for enforcing rules on…Apple’s own app marketplace.

Source: Scribd

Since I am not a lawyer, I’ll leave the argument on legal standings to the court and the lawyers from both sides, but from a common sense perspective, I don’t see a chance for Epic here. Hey app from Basecamp had trouble with Apple before. Instead of raising a legal fuzz, Basecamp raised the issue publicly on Twitter and engaged in discussions with Apple to resolve conflicts, which it did. And Hey didn’t even demand to have its way in the App Store like Epic Games did. That’s the way to do it, not the course of actions and manner that Epic Games pursued here.

This legal battle will leave Epic’s reputation tainted while also not doing Apple’s any favor.

Weekly readings – 22nd August 2020

What I wrote last week

I compared what is happening in Vietnam and New Zealand in the fight against Covid-19 and why it looks very bleak for America

I wrote a bit of analysis on Square, the owner of Cash App

Business

Instacart dominated the grocery delivery in the US

Second Measure on pandemic grocery spending
Source: Second Measure

A startup that promises to deliver groceries in less than 13 minutes in Turkey

An interview with the CEO of New York Times. He grew the subscriber base from the rock bottom of 22,000 in Q2 2013 to 6.5 million today

How Uber Turned a Promising Bikeshare Company Into Literal Garbage

Technology

Ben Evans on App Store and antitrust issues

A deep dive into iPhone 5C plastic cases

John Gruber on TikTok as a security threat

What I find interesting

The Canva Backlink Empire: How SEO, Outreach & Content Led To A $6B Valuation

To all Americans who are told all the nasty and misleading facts about Socialism & Communism whenever social benefits and safety nets are mentioned, please read this from your fellow American, who considers his move to Vietnam the best decision

Confessions of a Xinjiang Camp Teacher

A dazzling civilization flourished in Sudan nearly 5,000 years ago. Why was it forgotten?

Epic vs Apple, Goldman Sachs trying to get into consumer banking and Uber potentially leaving California

Goldman Sachs wants GM’s credit card business

WSJ reported on 12th August 2020 that Goldman Sachs was in the running for GM’s credit card business. Since it launched Apple Card with Apple last October, it is just a matter of time before Goldman Sachs tries to land another partner. No bank in the right mind would invest in consumer credit card infrastructure just to work with one partner.

A deal with GM would advance Goldman’s ambitions on Main Street. Since launching its consumer arm, Marcus, four years ago, the firm has amassed $7 billion in loans and is aiming for $20 billion by 2025. Holders of the Apple Card had $2.3 billion in outstanding balances as of June 30.

In deals like the one being discussed, a new bank typically agrees to pay a small premium to buy an existing card portfolio and hopes to make up the money by encouraging more spending, signing up more cardholders, and cross-selling them on other products. The deals typically involve sharing of card interchange fees and other revenue.

Source: WSJ

I am working at a bank which has a partnership with a different car brand than GM. One of the issues that we have to deal with is gamers who sign up for a credit card and spend on their first purchase at a dealership to take advantage of big signing bonuses and low interest rate. These gamers, after the first month on book, will subsequently use the card much less. As a result, gamers become less profitable than other cardholders who use their cards more regularly. If they manage to land GM, Goldman Sachs may likely find out that issue which I suspect is NOT among their learnings from Apple Card. Another point worth calling out is that Goldman Sachs relies on Apple’s marketing expertise to acquire Apple Card’s users. With other brands, they may have to develop that skillset and invest; something that they may not find easy or cheap.

The article provided an interesting reference point for Apple Card. It had $2.3 billion in balance as of the end of June 2020. The GM’s portfolio has around $3 billion in balance. As mentioned above, the purchasing behavior of Apple Card holders may differ from that of GM credit card users, but it’s worth pointing out that Apple Card was launched only last October and GM credit cards have been available for much longer. It indicates that Apple Card is likely regularly used and has a decent growth.

Epic Games picked an ‘epic’ fight with Apple and Google

In its latest update of Fortnite, Epic Games offered users a payment option designed to circumvent the App Store and Google Play Store’s rules on commission fees. Using Epic Games’ new payment scheme, users would save around 20% compared to using the in-app payment on the App Store and the Google Play Store while the game maker avoids paying Apple and Google 30% commission. The two giants promptly removed the game from their stores. Epic Games went on to sue both companies for anti-competition practices and abuse of power. In a move conspicuously aimed at provoking Apple, Epic Games released an ads mocking the company’s legendary 1984 campaign.

Source: The Verge

The quick releases of the ads and lawsuits showed that Epic Games WANTED this fight and expected retaliation from Apple and Google. The game maker has enough money and popularity to think that they have leverage. Plus, it’s likely banking on public pressure and the recent scrutiny into big tech companies from lawmakers. Given the level of planning and what is at stake here, Epic Games clearly thinks they have enough to win, but Apple doesn’t back down. If Apple caves into Epic Games’ demands, it will set a dangerous precedent that any developers that want to get more margin can corner the company. While I do not think Epic Games will win their lawsuits, Apple and Google will ultimately be hurt in terms of brand equity and reputation. Plus, it will give lawmakers more ammunition in their investigation into the Cupertino-based company’s alleged anti-competition practices.

Even though I think Apple has contributed immensely to the distribution of software around the world and the app economies, and in some cases, they didn’t do anything outrageous or wrong, it’s time for them to sit down and rethink the App Store. Recent clashes with developers and increasing pressure from lawmakers, if dragged out too long, will harm the company in the long run. It’s fair to say that despite getting close to the unprecedented valuation of $2 trillion, Apple still enjoys quite some goodwill from many consumers and developers. While the goodwill is still in the bank, it should start rethinking its position on the App Store and avoid future trouble.

California vs Gig Economy

California’s law that requires gig economy companies such as Uber and Lyft to classify workers as employees is going to be in effect on 20th August 2020. The two companies went to the California Supreme Court to seek for an injunction that would table the law temporarily. Today, the Court rejected the motion from Uber and Lyft. Earlier on this week, Uber CEO threatened to suspect operations in California and potentially leave the state for good if their legal fight failed.

This is a far more complicated issue than it may appear. On one hand, I am in favor of the authority looking out for workers by forcing companies such as Uber to acknowledge them as employees and give them benefits accordingly. That is exactly what an authority should be doing. Without legal mandates, how would the likes of Uber cave and treat workers as they should? The fact that these companies have fought ferociously to defeat the new law says all about their intention. Both Uber and Lyft are unprofitable. Their survival may be in jeopardy if they have to endure more expenses as a consequence of AB5, the shortened name of the new law.

On the other hand, if Uber and Lyft actually leave, their departure may hurt some drivers whose livelihood depends on business with the gig economy companies and negatively impact consumers. Imagine what would be like when you could no longer order an Uber in San Francisco or California. Critics of AB5 lament that the law isn’t thought out well and the unintended consequences will outweigh possible benefits. They do have a point.

That’s why I think AB5 alone isn’t enough. It needs complementary initiatives. With regard to protecting the end users’ benefits once gig economy companies leave, I think there will be space for other startups with new ideas and implementation to come in and serve the available demand. AB5, to some extent, will foster competition and innovation. Plus, it does help to have a lot of venture capital fund available in California, that is waiting to be deployed. Another potential opportunity is to build out public transportation infrastructure so that the reliance on ride hailing companies will be alleviated.

Furthermore, the state of California needs to make sure that workers who are affected by the departure of the likes of Uber will be taken care of. Skill training, job opportunities and social safety nets will need to be extended. Of course, there are workers who prefer a flexible schedule that a full-time job doesn’t usually offer, but if the money and benefits are sufficient, given the uncertain time that we are in, I do think many people will change their position.

Disclaimer: I own Apple stocks in my personal portfolio

Weekly readings – 11th July 2020

What I wrote last week

I wrote a bit about the challenges of corporations in addressing different stakeholders’ needs

Here is a what I wrote about the company behind FICO score

My thoughts on the latest suspension of H1B visas till the end of the year, a self-inflicting move by the US

Business

How I grew my Shopify micro-SaaS to $25k MRR and 20k users in 14 months

A very good analysis on Twitter, discussing the company’s valuable network and challenges

Exclusive: Inside Uber’s billion-dollar bet to deliver food, people, and everything else

Technology

The Post-Covid-19 Agenda for Technology and Media Companies.

What I think is interesting

How to understand things

Charlie Munger: Turning $2 Million Into $2 Trillion

Peter Kaufman on The Multidisciplinary Approach to Thinking: Transcript

In Praise of Idleness

Growth without goals

Money Is the Megaphone of Identity

Notes from Uber’s Q1 2020 Earnings

As a student of business, I find Uber an interesting business. It is interesting because there are a lot of aspects that go into the operations of this ride sharing player, including geographical segments, different lines of business with different margins (Eats, Rides, Freights), add-on services to improve profitability (Rewards, Credit Card), exiting marketings where it is losing money and focusing on the ones where it is a dominant player, and different stakeholders (riders, drivers, restaurants, corporate customers and authorities).

Like many other companies, Uber had its operations seriously disrupted by the Coronavirus. Rides bookings had a YoY growth of 20% in the first two months through February before plummeting to a decline of 40% and 80% in March and April respectively when the lockdown took hold. Eats, on the other hand, had a 54% YoY growth in bookings and 124% YoY increase in net revenue with take-rate of 11.3%, not too far from their long-term goal of 15%. Eats, for this quarter, remains the biggest loss-making segment, even though Freights’ loss growth is significantly bigger while Rides is still the only profitable business

Source: Uber

Uber shed a bit of light on the effect that Covid-19 had on its business. Airports make up 15% of Rides bookings and 16% of its EBITDA. Obviously, when traffic to airports declined substantially, that significant chunk of business was gone. In terms of cities and countries, Uber provided the following

Last week, we saw 9% [indiscernible] growth and 12% gross bookings growth globally weak-on-weak. We believe the U.S. is of the bottom. U.S. gross bookings were up last week by 12% overall week-on-week, including New York City up 14%, San Francisco up 8%, Los Angeles up 10%, and Chicago up 11%. Perhaps more interestingly, gross bookings in large cities across Georgia and Texas, these are two states that have started opening up significantly, are up substantially from the bottom at 43% and 50%, respectively. Hong Kong is back to 70% of pre-crisis gross bookings levels.

Second, at a time when our Rides business is down significantly due to shelter-in-place, our Eats business is surging. We’ve seen an enormous acceleration in demand since mid-March, with 89% year-over-year gross bookings growth in April, excluding India.

Source: Uber’s Earnings Call

According to the quarterly filing, Eats bookings annual run-rate was about $18.8 billion. However, on the Earnings Call, the CEO said: “And just last week, Eats crossed the $25 billion gross bookings annual run rate”. If I understand that statement correctly, it meant that for the 3rd or 4th week of April, Eats bookings was around $480 million. Given that it reported the annual run-rate around $18,8 billion for the first three months through March, the increase to $25 billion only in April was extraordinary. Plus, Uber seemed to be confident that this level of growth in Eats would be sustainable, moving forward. So it’ll be interesting to see how it is 3 months later.

As for now, it’s an encouraging sign for Uber that their economies of scale seem to go in the right direction as revenue increased disproportionally compared to the driver incentives required.

Picking their battles

Uber commented on the recent exit of 8 Eats markets:

Uber Eats: On Monday, consistent with our long-term strategy, we announced a change to the geographic footprint of Uber Eats operations affecting 8 markets. We will discontinue Uber Eats in the Czech Republic, Egypt, Honduras, Romania, Saudi Arabia, Uruguay and Ukraine, and will transfer Uber Eats operations to our Careem subsidiary in the United Arab Emirates. The discontinued and transferred markets represented 1% of Eats Gross Bookings and 4% of Eats Adjusted EBITDA losses in Q1 2020.

Source: Uber

For what it’s worth, the management team deserved credits for exiting unprofitable markets, especially some that bled them dry such as China or Southeast Asia. In their presentation as of 31 Jan 2020, Uber presented their footprint map like this. Obviously, it’s better than being in more markets, yet with smaller presence

Source: Uber

Some other interesting points

  • As of Q4 2019, Uber for Business made up around 9% of Uber’s Rides bookings
  • Uber reported in Q1 2020 that there were 31 million members of Uber Rewards Program. Given that they have 103 million monthly active users, that means out of 3 active users, one is a Rewards member. It’s promising and interesting especially because Rewards had been available in 5 markets only, with France recently added to the fold
  • In Q4 2019, an average Rides trip was $9.5. Uber reported in the same period that an average Eats order was 50% bigger than a Rides order. That means an average Eats order in Q4 2019 was about $14.25
  • “Eats insurance costs as a percentage of Gross Bookings are <1/5th that of Rides”
  • Uber claimed that 46% of US national vehicle trips were less than 3 miles. It can be an opportunity for micro-mobility. However, it’s worth noting that scooter companies like Lime or Bird are notoriously not profitable. Lime recently saw its valuation plummet to around $510 million after previously being valued at $2.4 billion
  • “Finally, we expect that shared Rides will be less important in the near-term. This was historically sweet spot for a primary competitor in the U.S. with around a 50% category position on shared Rides.”
  • 23% of our Rides Gross Bookings from five metropolitan areas—Chicago, Los Angeles, New York City, and the San Francisco Bay Area in the United States; and London in the United Kingdom” – Source: Uber 2019 annual report
  • In 2019, cash-paid trips accounted for approximately 11% of Uber Global Gross Bookings, about $7.5 billion.

Revenue and margin makers

What I noticed in many businesses is that there are revenue makers and margin generators. Revenue makers refer to activities that draw in the top line numbers in the income statement, but small margin. In other words, these activities can bring in $10 of revenue, but about $1 or less of gross profit (revenue minus cost of revenue). On the other hand, margin generators refer to activities that don’t bring in as much revenue as revenue makers, but act as the source of most margin. Usually. these two complement each other. Let’s take a look at a few examples.

Apple sells their products and services that can only be enjoyed on Apple devices. Products bring in multiple times as much revenue as services, but products’ margin is much smaller than that of services. Take a look at their latest earnings as an example. Products’ margin is about 32% while services’ margin stands at 65%. Folks buy Apple devices mainly to use the services and apps that are on those devices. Apple continues to sell devices to maintain their own monopoly over their unique operating systems and ecosystem.

Source: Apple

Amazon’s eCommerce segment is a revenue maker. They warehouse the goods and ship them to customers. It generates a lot of revenue, but the cost is high as well. Built upon the infrastructure Amazon created for eCommerce, 3rd party fulfillment is a margin generator. In this segment, Amazon acts as a link between buyers and sellers to ensure transactions go smoothly without having to store and ship the goods itself. Margin is significantly higher than that of eCommerce. Amazon takes it to another level with Prime subscriptions and AWS. While trying to figure out how to keep their sites up and running 24/7 smoothly, Amazon came up with the idea of selling unused IT resources. Long behold, AWS is now a $40 billion runrate business and Amazon’s arguably biggest margin generator.

Costco is a household name in the US. Families go to their warehouse-styled stores to stock up essentials and groceries. Due to the volume they sell every year, Costco manages to keep the prices low, but thanks to the cut-throat nature of the industry they are in, the margin is low, about 2-3%. That’s their revenue maker. To compensate for the low margin, Costco relies on their membership fees. Whatever customers pay to be able to shop at Costco is almost pure profit to Costco. There is virtually no cost to process an application and issue a card.

McDonald’s essentially has two business segments: their own McDonald’s operated restaurants and franchising. The brand’s own operated restaurants serve as references to franchise owners for how good McDonald’s brand is as an investment. However, it offers the brand way lower margin than their franchised restaurants.

Airlines make money by flying customers, but there are a lot of costs involved such as planes, airport services, food and beverage, fuel, etc…Airlines can generate more margin with their branded credit cards. Many airline-branded credit cards come with an annual fee. Plus, card issuers may pay airlines a fixed fee for new issued cards and a smaller fee for renewals. Plus, there may be a small percentage for first non-airline purchases. Agreements vary between airlines and card issuers, but it brings a lot of margin to airlines.

Ride sharing apps are notoriously unprofitable. Uber and Lyft lost billions of dollars in their main operations. Recently, they tried to launch a subscription service and in Uber case, a credit card, hoping that these services could help generate the margin they need.

We all know the saying in business: cash is king. Cash can only increase, from an operating perspective, when margin increases. Revenue is crucial because, well, a business needs to convince folks to pay for products or services first. Nonetheless, a business is more robust and valued when margin increases.

Weekly readings – 25th April 2020

IEEE has an article outlining the role of mainframes even before the crisis. I am always of opinion that mainframes aren’t going anywhere soon. The legacy system has its strengths that work in favor for data-processing companies such as financial institutions. I had a professor in Omaha before who was an executive at Mutual of Omaha. He told me in 2018 that one of the important applications at the insurance company is still on mainframe and they fly periodically a mainframe developer from Chicago for maintenance work.

In the last 70 years, the physical size of Kansas City has quadrupled while the population has remained relatively stable. (Put another way, every resident of Kansas City is on the hook for maintaining four times as much of the city as his or her predecessors.)

Source: We’ve Built Cities We Can’t Afford

Everyone is baking — and entrepreneurs are rising up to meet the demand

Uber’s Paid Sick Leave Policy Is a Perpetually Moving Goal Post

Magic Keyboard for iPad Pro: A New Breed of Laptop

Bloomberg’s story on AirBnb and the state of the known startup

Gruber’s review of iPhone SE

A report by WSJ on how Amazon allegedly uses merchants’ data to launch its own private labels. There is nothing wrong with Amazon launching private labels. The problem is that the company vehemently denied using merchants’ data to help it do so

A decision by Supreme Court that can prove to be defining in the future. I understand the logic behind deporting folks who committed crimes. What concerns me here is that the process didn’t take into account the recent behavior.

A damning report on Bird. I haven’t been a fan of the company or products. I get its value proposition, but coming from a country where scooters are the primary transportation method, I am as enthusiastic about Bird scooters as others. Plus, the high valuation in a short period of time, despite an unproven unit economics, always feels wrong to me.