November 19, 2020
Situational awareness: China issued five-year notes this week at a yield of -0.152%, the first time it has managed to borrow at negative interest rates.
Lots of companies are filing to go public before Thanksgiving, in the hope that they'll be able to IPO this year.
- In this week's newsletter I look at three of them in particular — DoorDash, Airbnb, and Affirm. Also: WeWork's hourly rentals, China's new world order, BBVA gives up on the USA, lots of charts, and much more. All in 1,776 words, a 7-minute read.
1 big thing: Small-town home runs
The race to scale isn't always won by the companies that dominate the largest markets.
Why it matters: DoorDash and Airbnb both filed to go public this week, ratifying the thesis that for real-world businesses, the road to multi-billion-dollar valuations does not need to go through major cities.
- The big picture: Many new companies first concentrate on the biggest markets with the most demand. DoorDash and Airbnb, by contrast, became dominant in their sectors by focusing on places where there was little if any competition.
How it works: Truly innovative businesses create value by unlocking economic potential where it was previously entirely untapped. Suburban restaurants never used to deliver meals, while vacationers wanting to stay in such areas had almost no good choices at all.
Context: Platform businesses such as meal delivery tend towards local monopolies — local success breeds more success, as the platform become the place where all the local restaurants and the customers are. As a result, most cities are dominated by one of the big three companies — DoorDash, Uber Eats, and GrubHub (which owns Seamless).
- DoorDash is the largest of the three, despite dominating no big U.S. city. That's by design.
- "We started our business with a strategic focus on suburban markets and smaller metropolitan areas," says the company in its prospectus. Its first city was Palo Alto, population 65,000.
By the numbers: "Tier 1" cities — New York, Los Angeles, Chicago, Philadelphia, Washington D.C., San Francisco, and Boston — might make up 36% of the food delivery market, but they're also the slowest-growing segment.
- "Tier 4" cities, by contrast — anywhere with a population greater than 100,000 that isn't in the top 100 cities by population — are growing almost twice as fast in terms of food delivery.
- DoorDash dominates those suburban markets, where checks are family-sized and where parking and traffic are much less of a problem.
Airbnb has similarly dominated the suburbs, where there is much less competition from hotels and where demand for family-friendly accommodation is greater. It also has a dominant position in rural getaways, for much the same reasons.
- Airbnb's top 10 cities — London, New York, Paris, Los Angeles, Rome, Barcelona, Tokyo, Toronto, San Diego and Lisbon — collectively account for only 11.9% of Airbnb's revenues, and no city has more than 2.5% of Airbnb's total market.
Between the lines: Both companies have made acquisitions to get a foothold in big cities (HotelTonight for Airbnb, Caviar for DoorDash). But those purchases weren't necessary for either company's success.
The bottom line: Big cities by their nature are already full of choices and amenities. Smaller towns can present much greater opportunities.
2. Affirm's 2-in-1 business model
Buy-now-pay-later lender Affirm, which also filed to go public this week, is similar to Doordash and Airbnb in many ways. It seeks out the kind of customers that most lenders tend to shun, treats them very well, and builds loyalty that way.
- Affirm also has a roaring business financing the purchase of Peloton exercise equipment, which is generally bought by a more well-heeled clientele, most of whom have abundant access to credit.
How it works: Affirm finances purchases on an item-by-item basis, often on a 0% interest basis.
- In most cases Affirm gets paid by the merchant, out of the gross profit margin.
- Consumers also sometimes pay simple interest, with no unpleasant surprises like late fees.
The big picture: Many younger millennials are sensibly wary of taking on debt. They prefer debit cards to credit cards, and like to feel in control of what little money they have.
- For large purchases, Affirm offers what is effectively an old-fashioned installment plan, where you pay for the item over time.
- CEO Max Levchin has said he likes to finance the purchase of items that last at least as long as the installment plan — things like mattresses or furniture or kitchen equipment. When consumers feel that they're paying off something they're still getting benefit from, he says, they're less likely to default on their payments.
Between the lines: Affirm has a longstanding deal with Peloton, which has been growing so fast during the pandemic that it now accounts for 30% of Affirm's revenues.
- Peloton buyers are often older and richer than the core Affirm customer base, and more likely to be happy to use credit cards. But given the option to get 0% financing on their exercise bike, they'll take it.
- By the numbers: Peloton paid Affirm more than $50 million just in the third quarter of this year. That more than makes up for the credit risk that Affirm is taking by lending to Peloton's customers.
The bottom line: The Peloton relationship has done a great job of boosting Affirm's revenues. But it's largely separate from the company's core business of providing simple credit products to the underbanked.
3. WeWork's big-city capitulation
WeWork took the opposite tack from Airbnb and DoorDash, rushing to dominate the biggest markets in the world, especially New York City. That didn't work out so well.
Its solution to the problem of empty offices, reports Axios' Erica Pandey: Hourly rentals.
What's happening: WeWork is expanding WeWork On Demand, which it piloted in New York City over the summer, to 160 of its locations in 11 cities.
WeWork is betting on a hybrid remote and in-person future of work, says Prabhdeep Singh, the company's global head of marketplace, who sees the new app surviving the pandemic.
- The company is hoping that, on days when people don't go into the office, they will grab space at a WeWork — instead of a coffee shop or the local library — to make some calls or just get out of the house.
The bottom line: The new program is only available in New York and other big U.S. cities — Atlanta, Austin, Boston, Chicago, Denver, Los Angeles, Philadelphia, Seattle, Washington D.C., and the Bay Area.
- In smaller metros, WeWork feels comfortable sticking to its initial — and much more profitable — model of forcing would-be office tenants into longer memberships. Tenants might have the upper hand in New York, but in minor cities, WeWork has more market power.
4. China's new world order
The largest free trade area in the world came into existence over the weekend — and the U.S. was not even invited.
Why it matters: For the first time in living memory, the hegemon at the center of a major global free trade agreement is not the U.S.
- China has stepped into Uncle Sam's shoes, and now anchors the Regional Comprehensive Economic Partnership, or RCEP, an area covering 2.2 billion people and $26 trillion of GDP — bigger than USMCA's $24 trillion or the European Economic Area's $19 trillion.
The big picture: President-elect Joe Biden is expected to seek a broad multilateral alliance to pressure China on everything from trade to human rights once he becomes president. But China is making broad multilateral alliances of its own.
- RCEP includes rich democracies such as South Korea, Japan, and Australia. Their position in this major free trade area will make it that much harder for Biden to unite them against China.
Flashback: The Obama administration was explicit that the U.S. should be the anchor of a Pacific Rim trade agreement, the TPP, that pointedly excluded China.
- "China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense," wrote then-President Obama in 2016.
- That trade deal is now reality, while the TPP, sans the USA, has been reborn as the CPTPP. There is very little chance that the U.S. will rejoin it under Biden's presidency.
The bottom line: Big new trade pacts are extremely difficult to negotiate. China showed real determination in getting this one done, even as the U.S. demonstrated almost no interest in improving or even maintaining economic relations with the region. China's partners in RCEP are likely to remember for many years which of the two giants was more reliable.
5. The end of a cross-border vision
Spanish banking giant BBVA has decided to exit the U.S. market. It remains the owner of BBVA Bancomer, the largest bank in Mexico.
Why it matters: In the 2000s, BBVA went on something of a spending spree in Texas and other border states, buying up a series of banks culminating in the $9.6 billion acquisition of Compass Bancshares in 2007.
- It was the high point of North American globalization, and it was reasonable to envisage the continent's economies converging, much like Europe's, especially near the border.
- BBVA is no longer as optimistic, has now agreed to sell all of its U.S. holdings to PNC for $11.6 billion.
Among the casualties of BBVA's strategic retreat from the U.S.: Tuyyo, an innovative mobile app that allowed Mexicans in the U.S. to send money back to their families for free.
- The funds could be withdrawn any time at any Bancomer ATM, just with a code — no ATM card needed.
- Tuyyo was quietly shuttered last year.
The bottom line: The net flow of migrants from Mexico to the U.S. — part of the reason for BBVA to expand from Mexico to Texas — turned negative about 15 years ago, and has remained that way ever since.
- Strong supply chains still bind the two countries. But if you want to find a part of the world where regional integration is getting visibly stronger, then you would not look first to North America or Europe. Asia and Africa are much better bets on that front.
6. America's economic outperformance
2020 is going to be a terrible year for the U.S. economy — but we're still doing a lot better than many other countries.
- The Eurozone already looks as though it's tipping back into recession in the fourth quarter.
7. The education crunch
The one area where employment is unambiguously getting worse rather than better is in education, where state and local governments are rapidly running out of money to keep teachers employed.
- Expect this chart to continue to deteriorate unless and until the federal government steps in to help. Other state and local government services will also suffer massive layoffs, including transit systems.
8. Corporate branding campaign of the week
This is the video; in case you can't read the subtitles, they read "co-creation / cross-pollination".
- Other rhymes include: "By data, blockchain, chip and code / Working with our customers across the globe."
A seven-pointed star goes to anybody who can guess the multinational company responsible for this magnificence before clicking through to find out.
- Hint: The company's shares are up more than 150% from their March lows.
9. Coming up: Thanksgiving
- Nevertheless, Thanksgiving is shaping up to be a superspreader event. My advice is to simply enjoy the day off.
- Axios Capital will be following that advice and won't come out on Thanksgiving Day; I'll be back in your inbox on Dec. 3.
10. Building of the week: Biosphere, Montreal
Buckminster Fuller designed the Montreal Biosphere as the U.S. pavilion for the 1967 Expo — the same occasion that was responsible for the construction of Moshe Safdie's magnificent Habitat 67, a short drive away across the river over the Pont de la Concorde.
- The U.S. government donated the structure to the City of Montreal in January 1968.
- Fire burned off the geodesic dome's acrylic skin in 1976; since then it has simply been open steel trusses.
The Biosphere reopened as an ecological museum in 1995. It is now known as the Environment Museum.
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