Insights of the week – 42nd week 2020

Transparency in the front-end leads to customers spending more at the back-end. Catchy phrase, but what does this mean though? Many purchases can be split into front-end (main purchase) and back-end (aftermarket). For cars, for example, the car itself is the front-end purchase, and the upgraded seats, battery, and sound system are the back-end purchase. When the front end is more transparent, it means that the salesperson is open about costs of the main purchase.

This study found that when a salesperson is up-front about the costs at the beginning of the discussion, the customer had a higher average back-end spend. The authors theorise that this is because up-front transparency builds trust, especially when the customer can verify the cost of the front-end purchase using the wealth of information available online. This trust leads to more back-end spending.

Paul Heyer, Text from Crush, 2020

Hi All,

Nine weeks left of this year, how are you planning on spending them? I’m not sure where this year has gone, but at the same time I feel like a lot has changed. For me, I continue applying for jobs, with some exciting interviews coming up soon. For other job hunters I would like to point out that Glassdoor is not a reputable service. A recent reddit post detailed the ways Glassdoor exists to serve the businesses, not the employees. In Glassdoor’s own words, “if a company doesn’t have an ‘engaged employer’ profile on Glassdoor, then they start to stand out, and not in a good way.” (An engaged employer is a company that pays for Glassdoor’s services.) Just be careful where you get your information from.

This week I talk about the details of selling a company and I talk some strategy about Asda’s recent purchase. Additionally, I’ve realised how frustrated I am trying to use LinkedIn’s algorithm to get my writing in front of people, so if you find my writing interesting, consider signing up to get my article into you inbox on a Tuesday morning.

All the best, Callum

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Selling a Company

This week I read about the creator of RxBar, and how the company sold for $600 million, making the owner an overnight millionaire. Peter Rahal, ex-owner of RxBar, now spends his time reading and going to parties with other wealthy bachelors in Miami. This opened my mind to how valuable consumer goods companies can be, and how much can be made based on the cashflow, the value to the buyer, and the expected growth.

But selling a company isn’t all cash and dreams. If you work at a startup which is undergoing a sale and own equity, it is entirely possible that you get nothing from the sale. This is because of preferred shares and a possible bridge note (I’ll explain below). Preferred shares get paid in a sale before common shares do, and the bridge note gets paid first. The example in the above article goes like this: you work for a company that is being sold for $100m, and you own 1% in common shares. You’d expect a tidy $1m pay day on sale, but you end up with nothing. How?

Let’s say that seed, series A, and series B investors put $60m in over the rounds. They expect their money back at a minimum 1x multiplier, sometimes more, and these investors get paid before employees do due to their “preferred shares”. Bankers fees are $3m, and key employees are paid $17m to stick around throughout the transaction, a “carve out”. The carve out is treated as a debt that the companies owe, which means that it is also paid before common shares. Let’s also say that the company needed a bridge loan of $20m to keep operating through the transaction and not go bankrupt, and this also needs to be paid as it is a debt. So, 60+17+3+20=100, and the $100m gets shared around without anyone with “common shares” seeing a penny.

This seems like an innately unfair way of doing things. Employees slave away, expecting a big pay day when the company is sold. But this is the world of common vs preferred shares. If a company is being sold, or about to be liquidated, it is better to be a lender than a common owner, whether that is in public markets (bonds paid before equity) or in a privately owned company.

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Asda back in British Hands

Asda has recently come back under British ownership after two decades of being owned by the American Walmart. Back in 1999, Asda was bought at a valuation of £6.7bn (£11.7bn adjusted for inflation) and was sold earlier this month to the Issa brothers at a valuation of £6.8bn. When Walmart bought Asda back in 1999, is was heralded as the end of British supermarkets. This BBC article says “Richard Hyman, analyst at Verdict Research, called Wal-Mart’s move a “nightmare coming true” for UK retailers.” But Walmart’s acquired entry into the UK clearly hasn’t been the bloodbath that analysts expected.

Walmart in the US has succeeded on the backs of low prices and high efficiency, driven by regional scale advantages. The management of the US stores was different from other stores at the time – regional managers would spend most of their week visiting stores to understand employees problems and customer needs, rather than staying at a central office making phone calls. But this model, for some reason, didn’t carry over to the UK.

This might just be because the UK grocery market is more competitve than the US market, and the niche of “budget prices decent quality” had already been filled. Lidl entered the UK in 1990 and Aldi in 1994. This year Aldi has had an 8% market share, and and Lidl had a 6% share, both significantly less than Asda’s 15% and Tesco’s 27%. It is a well known fact that in markets that are sufficiently big, even the smallest players can get an equal footing with the giants by erasing the cost advantages of scale.

Another possible reason for Walmart’s failure to thrive is because their model of carefully placing distribution centers to serve as many supermarkets as possible doesn’t carry over to the UK. The US and the UK have very different geographies, and distribution networks are less important in the UK because of a much higher population density.

Can the Issa brothers succeed where Walmart have failed? Maybe. The Issa brothers have experience in convenience. They made their money with Euro Garages, a chain of petrol stations across Europe, and are planning on bringing that experience to Asda. While Sainsbury’s have Sainsbury’s Local, and Tesco has Tesco Express, Asda have nothing convenient. Future moves towards more convenience stores and better delivery services will, in my mind, help make Asda more competitive in the UK.

(Little note, Deloitte have just quit working for EG Group, the main company that Issa brothers run. Auditors don’t normally just quit, especially when there is the chance to work on one of the UK’s biggest supermarkets. Maybe something is up with this deal, maybe not. Something to keep in mind in the future.)

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Artificial sweeteners don’t taste the same as real sugar, and actually make people fatter than real sugar. But what if it was possible to change the shape of sugar to make it sweeter? And maybe social media is a waste of time and makes us all feel more lonely/depressed/anxious, but maybe that is what we want? And the story of Vanilla Ice, of Ice Ice Baby, is more interesting than you ever thought.

I hope you enjoyed this week’s summary. I’m going to take a break next week to get back to the Sunday schedule, and maybe start posting articles separately from the rest of the summary.

Thanks for reading, Callum

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