Youtube comments of (@ModernMBA).
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Thank you for the kind words and support! It truly does mean a lot to me.
The overall entertainment industry as you've very accurately pointed out has followed the same fundamental change. Less risk-taking, less creativity, more reboots, and a strong preference for stable, safe cash flow over moonshots. While there's no one cause, I do think the strong stock market in the past few years has deeply influenced executives and decision-makers at large companies.
I doubt any executive would ever admit it, but when your compensation is so tied to equity and you've seen the insane 4-6 year bull-run of so many tech stocks (nearly all subscription / service based businesses), it's very hard to not subscribe to those trends. With the impending recession and the bull market coming to an end, there's a chance we may see a reverse back to tradition - for the better.
Monetization isn't the priority. My focus is to make better content (better editing, audio, balance of insights / information / analysis, more frequent episodes). Similar to Take-Two, I think monetization and viewership will naturally take care of itself with great content.
Once the first season wraps up (4 more episodes to go) the current plan is to spend a few weeks convert the S1 into podcast form before diving into S2. Would also be a great opportunity to remaster some of the not-so-great audio from earlier videos.
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Viewers may find some clips in this episode to be pixelated and low quality (480p at best or 240p at worst). It was an intentional decision to use pre-2010's footage for certain segments. I felt it would be a more authentic viewing experience to use footage directly from the era that this episode covers - notably the mid 2000's when Internet was dial-up, information was communicated exclusively through magazines or cable news, and Americans were coming to terms for the first time with obesity / nutrition / health / diet.
Topics that didn't make the final cut of this episode to read after watching:
- M&A is truly the tool of corporate America. Pepsi did acquire SodaStream in 2018 for ~$3B in an effort to bring sparkling waters directly into consumers' homes as a few commenters have kindly shared their experience below. To me, SodaStream's at-home sparkling water maker (having a machine that can carbonate your water and consumers mix in the syrups / flavors they want) is eerily similar of Keurig's Kold at-home soda maker. Kold was eventually discontinued due to product issues and too high of a price point at ~$350. SodaStream on the other hand has a significantly more favorable entry point (starting at ~$100).
- It's interesting that both SodaStream and Kold have elements of the old HP printer model, where consumers pay for one fixed $$$ cost upfront (machine) but have to regularly spend $-$$ over the lifespan of the product to continue using the product (gas canisters with SodaStream, pods for Kold / normal Keurig, ink cartridges for printers).
- To me, the appeal of sparkling water consumption is the opening of the physical aluminum can that's identical to soda. That crack and sip sound is engrained deep and primed in consumer psychology as a satisfying sound. I can't speak for SodaStream or Keurig, but the notion of filling up a mug or Hydroflask with sparkling water without that cracking opening the can feels like it would take away from some of the appeal.
- Topo Chico was acquired by Coca-Cola for ~$220M, which has a cult following in Texas. But the strategy Coca-Cola is taking Topo Chico sparkling mineral water these days is less in La Croix / bubly / AHA's direction and more in the alcoholic Truly / WhiteClaw / High Noon hard seltzer market.
- In the context of United Airlines only serving bubly comment, I'm fairly confident what's happening with La Croix is that it's losing its seat at the table when it comes to B2B institutional deals, where PepsiCo and Coca-Cola have a much more established sales network and stronger existing relationships with corporate clients. If I put myself in the shoes of a major airline, hotel, restaurant, gas station or any business that sells beverages for $$$, it is far easier for me to procure all my beverages (soft drinks, juice, sparkling water, bottled plain water, diet soda) through 1 single contract with PepsiCo or Coca-Cola. In return, I'll probably get a discount because of my exclusivity with PepsiCo or Coca-Cola so my beverage profit margins are even better + consumers will get what they want.
- If I really want La Croix in my business, I have to sign my own contract with National Beverage which adds operational overhead and supply chain complexity when I don't need it - while they can give me a leading sparkling water brand and some juices, I would still need another entirely different supplier to give me my plain bottled water, soft drinks, diet sodas and more. I'm sure the same is playing out in grocery stores where La Croix's shelf-space is being eaten away by Bubly and AHA as Big Soda can easily cut deals with the supermarkets to get the best shelves / aisles / exposures.
- Not sure why international expansion is not a strategic investment for National Beverage Corporation. Big Soda has made APAC and EMEA as its most strategic high-growth markets and the demand for sugary soda in those regions has not declined (in some cases, has even gone up) vs. America. As the episode says, sparkling water seems to still be mostly an American phenomenon.
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My (unfounded) read is that Zuck is hoping to branch out from advertising. If you can pull off this fundamental transition from being a services company => hardware/software company, you give yourself the autonomy to change your business model as well.
The same way Apple's business model changed dramatically once it won the smartphone market. With iPhone, they profit from the hardware ($1000 per phone), the physical services (support/repair) but they make way more money + margin off the software ecosystem that surrounds iPhone.
The App Store 30% cut, the App Store runs ads of its own, it all just prints money when things are exclusively in the world of pixels. Whereas with advertising, you are limited to monetizing by eyeballs (pay-per-view or pay-per-impression).
With metaverse, I'm sure Zuck believes if FB owns the App Store for VR e.g they take some royalty from every VR transaction (digital clothing, currency, furniture, gaming). Roblox is an example that I'm sure Zuck is looking to emulate.
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Hi Philip and everyone, I've been heads down on the next episode but wanted to take a moment to quickly chime in on this thread. Thanks everyone as well for the thoughtful comments and sharing perspective. Discussion and debate like this is far more fulfilling to me (personally) than view / subscriber counts.
My intention wasn't to portray agile as the reason for the declining quality games. The coverage of the software development models was meant to explain the R&D evolution happening behind-the-scenes that supported the customer-facing trends (cloud updates, services, digital distribution). Will reflect on how I could have worded / scripted it better.
Your comment is wonderfully spot on that ultimately, it is greed and poor management that directly leads to shitty outputs, not the model of development. For every disaster under agile, there are plenty more examples of games that went wrong under waterfall e.g Duke Nukem, Watch Dogs, Cyberpunk, Madden, COD (sans MW).
As someone who has worked in the trenches first in engineering and then in management under both models, I personally prefer agile. Agile is more forgiving from an R&D perspective but also unfortunately (to your point) welcomes greater "tolerance / influence" of poor management.
ReclusiveGamer's point is also on point. The unfortunate brainless MBA-fication of boiling everything down to cost / benefit analysis has meant that product teams have lost autonomy over time => less bottoms-up decision making => more top-down mandates. And until the numbers actually go down (which they rarely ever did in the past 4-6 year bull run), the top-down decision consistently wins.
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You hit the nail on the head. Because Crumbl's business is now based on selling supplies and collecting royalties, they have less financial incentive than ever to procure ingredients and push on product like they did when they were first starting out.
It's much easier and more profitable to squeeze generic, wholesale, mass-produced, premade fillings out of a bag onto the cookies (less opportunity for stores to mess up, less perishability, more rebates / kickbacks from suppliers = more money in the pocket, even if the end result is inferior).
Crumbl's Thanksgiving lineup is the most obvious offender as the Chocolate Silk, Apple, Cookies & Cream are made from the exact same ingredients in those frozen, cheap, supermarket thaw-and-serve pies - the kind that most Crumbl customers would ironically thumb their noses at.
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If you look at the numbers, you can see that the "diversification" of having lots of brands really doesn't make a meaningful difference in the business. The average spend per passenger, whether measured in ticket or in onboard amenities or both, is still lowest for Carnival across all their brands (Princess, Holland, America, etc.), then second for RCCL (Celebrity, etc.) and then highest for NCL. Hence by extension, the business of cruises are best represented by the single core mass-market brand (NCL, Carnival, Caribbean) rather than the significantly smaller, underrepresented sister brands.
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It would be interesting to see what you deem to be mathematically sound. There is always subjectivity and assumptions in hypotheticals.
1. Employers spend on average ~$7,000 per employee on benefits (assuming single coverage). Starbucks doesn't specify of its 248,000 retail workers in the United States, how many were part-time, how many were full-time, and how many qualified for benefits. If we assume that all 248,000 workers were full-time employees with single coverage, total benefits would have cost $1.7B. $1.7B in benefits would be 20%, not "half" of the $8.1B paid out in total wages and benefits.
2. You might be overestimating the number of managers / GMs and their wages. The unions are demanding $20 per hour as the starting minimum with higher rates depending on tenure and position. A shift supervisor would have a minimum wage of $25.40 an hour. Based on LinkedIn, there are currently ~2,500 district managers and ~2,500 GMs working in the US. The average nationwide salary for a district manager is ~$70K and for a GM it's ~$95K.
By volume, 5,000 managers + GMs combined represent just 2% of the 248,000 retail workers in the US. The remaining 200,000+ employees (we can say 90% if you want to be conservative) are frontline hourly baristas. Lastly, managers and GMs are salaried positions. Baristas are hourly. The union's are not just asking for $3-5 more per hour but also guaranteed 37-hour work weeks. The combined impact of higher minimum hours and higher minimum wages should not be understated.
3. Starbuck's margins are not "lower than what they should be." They are low because that is how the company has built itself over the past 40 years. As explained in the licensing segment, it was an deliberate decision by the company give up margins in exchange for control and not follow a conventional franchise model. From Howard's perspective, control is more important to Starbucks than profits - protecting the brand and maintaining the store experience at scale has been critical to justifying Starbuck's premium positioning and establishing high WTP from consumers around the world.
4. As mentioned and visualized, even if the projections are wildly over the mark and you cut the estimate by 50%, the operating margin goes down by 2%. Starbucks wouldn't let it come to this, which is why anecdotally, baristas nowadays have reported it's getting harder to get more hours despite being paid $17 / hour. The projections are not designed to be a magic calculation of the future but a demonstration of how much is at stake.
Starbucks makes it difficult for outsiders to piece together its economics for this very reason. They recently started blending Asia and Europe together to disguise Europe and China's underperformance within the greater international business.
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The content is intentionally nuanced. Our hope is that every viewer can exercise their independent thought to reach their own conclusions versus us prescribing how people should think. That seemingly "small difference" of 2-4 percent in margin can have a snowball effect much greater than less profits. Starbuck's greatest asset is its brand - and brands are shaped by perception. People don't pay $5 for coffee, they pay $5 for coffee in a white cup with a green mermaid on the side. It is branding that enables Starbucks to command this premium and also why people around the world are so willing to pay so much for their drinks.
A material negative change in the margins (through increased labor cost of unionized workers) would expose Starbucks as just a run-of-the-mill, high-volume, established but ultimately low margin, commoditized food business. This is why the segment about Howard Schultz is integral. Howard knew this risk so he smartly wove broad threads of corporate social responsibility, volunteerism, sustainability, and community to elevate the company's image beyond just a basic food business and reinforce why customers should pay so much for their coffee ("because the money all goes to hard-working farmers overseas, store baristas, the local community, etc...").
Once consumer perception is established, it is impossible to change. This is the same reason why McDonald's, despite burning hundreds of millions of dollars over many years, has continually failed to elevate itself into the upscale, high-end burger market. Customers have never cared for McDonald's artisanal, fancy, premium items because McDonald's as a brand is engrained in cheap, simple, basic fast food. Willingness to pay will never go beyond $2-6 for a MCD item - no matter the ingredients.
Starbuck's branding is its moat. The company lives and dies on optics. If the perception of Starbucks declines at the investor level, the inherent brand value and consumer willingness-to-pay will also drop. Customers will start second-guessing why they're paying / spending so much at Starbucks when the coffee is not special and the company operates just like any other basic big food & beverage corporation i.e Nestle. Hence, this episode is the survival of Starbucks as it exists today - and of the same moat that the company has built its business on for the past 40 years.
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Thanks jsherm! Your comments are always a pleasure to read and fascinating to reflect on. I added my full closing thoughts which touch on some of these topics in the top pinned comment if you'd like to take a look - no surprise we both separately agreed on the retail / supplier / contractor constraints.
National Beverage doesn't have the portfolio to win the corporate accounts when its drink selection is really just 1 leading sparkling water brand, some juices, and an energy drink. If I'm a resort, restaurant, or theme park I'll likely not waste my time signing a contract with National Beverage when I'd have to find another supplier to give me the other essentials for my beverages (plain bottled water, soda, diet soda, and so forth). If PepsiCo or Coca-Cola can give me all of those and a zero-calorie sparkling water brand, I doubt many businesses would care about whether it's called bubly, Hint, La Croix as long as it sells.
Strong agree on the natural flavors. That's a whole can of science that hasn't been touched.
I would love to have dived more into the keto or Atkins diet which to your point, drove a lot of this change as well - but was keeping a close eye on the episode length and focus. My concern with introducing food, even if it was a 5-second visual only clip of of someone eating McDonald's in early 2000's in the episode, would open an unavoidable rabbit hole tangent of fast food, carbohydrates, Super Size Me, and processed foods. Ultimately, the clips from Big Soda lobbyists were simply too jaw-dropping to not include.
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For the reactionary viewers:
Instead of thinking of things in a binary fashion in that every incident must have one aggressor and one victim, you could consider that both can be true.
One, John made a racist remark and by extension is a racist. Two, the Board and leadership was fully aware of his remarks and only weaponized it to take power. Steve was in the exact same call himself along with other Papa John’s executives - none of them stopped to reprimand or correct John when he said the n-word. In fact, none of them did anything about it with their collective silence on the call and after the fact.
They all suddenly distanced themselves months later when the call finally leaked out pretending as if they had no idea why, how, and that John had said such an unacceptable word in the first place - which speaks volumes about their own agenda, the overall culture, and the implicit complicity.
Hence, both can be true: John is a racist and the Board changed the narrative to seize control over the company.
The video explicitly doesn’t refer to anyone - much less John - as a victim nor justifies any aspect of his misconduct. Even the narrative that he was such a “good” CEO that his misconduct could be “offset” is not even implied.
Lastly, if you spend enough time in upper management, you will hear plenty of things said on calls, meetings, work events, client meals, etc that are much worse (and actually directed at specific individuals or groups) compared to what John said. The only difference is that John was recorded and the people on that call had the direct incentive / agenda to bury him.
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Thank you all for the feedback.
The intention was to hyper-focus on dairy so that viewers could independently surmise that the dairy industry and meat industry are essentially parallels - they have the same dynamics and regulations, just applied in slightly different ways. Our concern was that it would have been far too redundant, dense, and long (60+ minutes) if we were to break down the major regulations and events of poultry, pork, and steak after doing so with dairy.
Beyond Meat / Impossible Foods have the same core issues as Oatly - they're processors trying to survive as premium brands in these traditional industries that are barely alive with subsidies and political backing. The underlying (implicit) thesis throughout the episode is that for veganism to "succeed", they have to be able to grow their numbers - hence the explicit mention at the intro that vegans still account for less than 1% of the world's population. The best way to meaningfully increase the number of vegans in the world is through substitutes that make it easy for meat-eaters and dairy-lovers to switch. But as aforementioned in the introduction, someone has to take on that R&D and foot the bill.
After the product has been "invented" or "manufactured", strong branding / marketing is needed to galvanize customers to make the switch / pay the premium. But because all these companies (Beyond Meat, Impossible Foods, Oatly) are all now failing despite their massive fundraising - it is and will only be harder for future vegan startups to get funded and by extension, for better substitutes to be created. It's a Catch-22. Vegan startups need to be thriving, sustainable businesses but they can't be without funding and conversely, that funding is only possible if they are thriving, sustainable businesses.
Hence the grand framing that veganism doesn't work as the environments they're competing against are fundamentally broken. Farmers are the sole beneficiary throughout all this yet lack the vision and ambition (as evidenced through dairy) - they won't invent the products needed to push consumption and they lack the marketing / branding skills. They'll only ever follow the lead of others to keep their own pockets filled and subsidies flowing i.e oat farmers now producing private label oat-milk only after Oatly has "sacrificed" themselves proving the market.
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I appreciate your comment and critical thinking.
If Airbnb's moat is as robust as you believe it to be, then Airbnb should hold an inherent cost advantage. During the global lockdown and pandemic in 2020, the airline and hotel industry all went bust as no one was traveling domestically or internationally. Hotels went without guests for months. In this worst case scenario that actually happened, the fixed fees and management income that the hotels collect would like you say, be completely "dried up".
Let's look at the net income of the hotel giants in 2020:
Hilton: -$720M loss
Hyatt: -$703M loss
IHG: -$203M loss
Marriott: -$276M loss
Compare to Airbnb's net income in 2020:
Airbnb: -$4.6B loss
If Airbnb doesn't own any real estate, doesn't have any direct operating costs, but still has a robust moat over the hotels as you say, then how could this "asset-zero" platform business burning cash and incurring 6-20X losses of an average hotel?
Let's repeat the same exercise for 2021.
Hilton: $407M profit
Hyatt: -$222M loss
IHG: $361M profit
Marriott: $1B profit
Airbnb: -$674M loss
So in a real-life scenario where demand for both Airbnb and hotels were "dried up", the hotel business model is far more resilient than Airbnb's. You can see how stable their collective moats are in how fast the hotels have been able to recover from a disastrous year of no business. Meanwhile, Airbnb has burned 5 billion dollars (pure cash) in 2 years...on what, exactly? Preserving a moat for a radically different, emerging type of traveler who won't stay at hotels and will net the company trillions in the future?
It's easy to say every tech company is "disrupting" on paper but much harder to prove it in business results.
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