Business – Page 8 – shiqiv.com

Restaurant (Coffee Shop) Chains Coronavirus Responses: Starbucks

Starbucks (SBUX)

March 4, Open letter to all stakeholders
- increased cleaning and sanitizing for all company-operated stores
- pausing the use of personal cups and “for here” ware
  - continue to honor the 10-cent discount for anyone who brings in a personal cup or asks for “for here” ware
March 5, Updates on Starbucks China and Impact of COVID-19 on China Business
- Starbucks China was able to start re-opening doors again. On March 5, the company announced 90 percent of the stores are open again, operating under modified hours and conditions
- Last week, the Shanghai Reserve Roastery re-opened (Feb 26 in China) after being closed for more than a month
- During the month of February, Starbucks China’s comparable store sales were down 78% versus the prior year
- In the last fiscal week of February, relative to the prior week, average daily transactions per store improved 6% and total weekly gross sales in China grew 80%, reflecting the reopening of stores. In that last week, Starbucks China’s mobile orders accounted for approximately 80% of sales mix, with 30% Mobile Order & Delivery and 50% Mobile Order & Pay.
- currently estimate that comparable store sales in China for Q2 FY20 will be down approximately 50% versus the prior year. Therefore, we expect a COVID-19-related headwind of approximately $400 million to $430 million to China’s revenue in Q2 FY20 versus prior expectations.
March 6, Letter to partners
- First confirmed case: late last night (March 5), we learned one of our store partners at our 1st & University store in downtown Seattle was diagnosed with COVID-19 and is self-isolating at home for a period of time.
  - closed the store and initiated a deep clean overnight, following all recommended guidelines from the City of Seattle and King County public health authorities
  - these officials have encouraged us to reopen the store after further preventative cleaning, which we have already conducted, staffed by partners who have no known impact from COVID-19
  - look forward to welcoming our customers back very soon
March 11, Letter to partners
- temporarily expanding catastrophe pay for COVID-19 partner care, in addition to benefits like sick pay, vacation pay or personal time off as available. Any partner who has been diagnosed with or exposed to COVID-19, or comes in close prolonged contact with someone in their store or household who has, is eligible for up to 14 days of catastrophe pay – whether or not they are showing symptoms
- if have not had any known contact with someone diagnosed with COVID-19, but are showing symptoms, partners should stay home until remaining symptom-free for 24 hours. Can use temporary, expanded catastrophe pay for any scheduled shifts over a three-day period, and then similarly use additional benefits like sick pay, vacation pay or personal time off
- certain individuals may consider taking extra precautions. Should they choose to self-isolate, are also eligible for up to 14 days of catastrophe pay with a doctor’s noted recommendation
- The CUP Fund, started by partners, is always available. The fund is for partners to use when facing an unexpected financial hardship.
  - Starbucks is matching 50 cents for every dollar of partners’ donation
- Other free mental health/counseling programs, including Employee Assistance Program, Headspace
March 11, Letter to customers
- as we navigate this dynamic situation community-by-community and store-by-store, we may adapt the store experience by limiting seating to improve social distancing, enable mobile order-only scenarios for pickup via the Starbucks App or delivery via Uber Eats, or in some cases only the Drive Thru will be open
- we will close a store if we feel it is in the best interest of our customers and partners, or if we are directed to do so by government authorities
March 12, $1.75 billion note offering
- completed a public offering pursuant to an underwriting agreement, under which Starbucks agreed to issue and sell to the several underwriters (i) $500,000,000 aggregate principal amount of its 2.000% Senior Notes due 2027 (the “2027 Notes”), (ii) $750,000,000 aggregate principal amount of its 2.250% Senior Notes due 2030 (the “2030 Notes”) and (iii) $500,000,000 aggregate principal amount of its 3.350% Senior Notes due 2050 (the “2050 Notes” and, together with the 2027 Notes and the 2030 Notes, the “Notes”)
- prospectus
March 15
- Starting today, we will move to a “to go” model across the U.S. and Canada for at least two weeks to help prevent prolonged social gathering
  - pausing the use of all seating
  - Café, Mobile Order & Pay, Drive Thru and Delivery will still be open
- temporarily closing company-operated stores in high-social gathering locations like stores that are located inside malls or on university campuses
- In communities such as Seattle and New York with high clusters of COVID-19 cases, we will reduce operating hours or temporarily close select stores
- invest up to $10 million in the CUP fund
- temporarily expanding the Care@Work program to provide support for partners needing additional backup childcare options as a result of school closures.
March 17, Letter to customers
- track store hours and closures via our website or the Starbucks app
- delay the expiration of all Stars scheduled to expire between now and June 1, 2020
March 20
- Today, we are making the decision to close access to our cafés altogether for two weeks and limiting our services to Drive Thru and delivery only.
  - Some exceptions will be made for those cafés serving in or around hospitals and health care centers in our efforts to serve frontline responders and health care workers.
  - changes apply to company-operated stores in the U.S. and Canada; licensed partners will make decisions for their properties
  - Delivery continues to be another option from those Starbucks locations still open through Starbucks Delivers in markets across the United States and Canada through the Uber Eats app.
- To pay all store partners for the next 30 days, whether come to work or choose to stay home
- for stores in or around hospitals, or communities with limited food options, will remain open with partners who are explicitly choosing to continue to serve
  - continue to work very closely with local, state and the federal government to continually assess how best to stay open, stay safe, and be part of the solution during this time
March 21 (first day after store closure and drive-thru only)
- partners in every region around the U.S. and Canada showed up before dawn to open drive-thru-only experiences at their stores. They filled in for each other at short-staffed nearby stores. Stores that could open, did.
March 22 (Restaurant Business Article)
- employees who work their shifts Mar.21 – April 19 are eligible for Starbucks Service Pay, worth an additional $3 an hour

Update: SBUX 1-month chart as of March 27

US Delivery System (4): Aircraft & FexEx

Industrialization: Aircraft

The United States Post Office Department created the nation’s commercial aviation industry. From 1918 to 1927, the Post Office Department built and operated the nation’s airmail service, establishing routes, testing aircraft and training pilots.

The year 1952 brought a separation of airline subsidies from airmail. The Post Office Department paid airmail compensation and the Civil Aeronautics Board made all airline subsidy payments, based on national interests aside from airmail.

The needs of passenger traffic overtook those of mail cargo in the second half of the 20th century. Airline companies organized their routes to maximize passenger needs. By 1975, airmail had become a fundamental part of the U.S. Postal Service’s transportation plan. That October, first class mailers no longer had to pay an extra fee for airmail service.

FedEx

In 1971, Smith incorporated Federal Express with his college idea of an integrated delivery system specifically designed to accommodate time-sensitive shipments with airfreight as the core.

By the end of the 20th century, FedEx operated the world’s largest all-cargo air fleet. And it still is the largest now with over 650 aircrafts.

The average age of its aircrafts is 22 (in 2017) as many cargo aircraft are decommissioned passenger jets, stripped and repurposed for carrying freight.

Nowadays, FedEx is still the busiest cargo airline in the world with volumes improving by 3.8% year on year to 17.5bn freight tonne kms (FTK) in 2018.

US Delivery System (2): Railway & Steamship

Industrialization: Railway & Steamship

Postal system has its political importance, which is why it’s included in the constitution. As the US expanded, how information / news / mails were transmitted were directly influencing the limit of a united society.

The Railway mail service began as early as November 1832. In 1835, railroads accounted for only one percent of mail transportation and connected only two major cities – Washington and Baltimore.

On July 7, 1838, Congress declared all railroads to be post roads and enabled the railways to make contracts as long as sending mail by rail cost no more than 25 percent above transporting it by stagecoach.

But it’s the industrialization that enabled the US to include / connect California and other lands that are far away from the initial states.

In 1848, US acquired California at the end of the Mexican War. Under the Treaty of Guadalupe Hidalgo, Mexico also recognized the U.S. annexation of Texas, and agreed to sell California and the rest of its territory north of the Rio Grande for $15 million plus the assumption of certain damages claims.

In November 1848, Postmaster General Cave Johnson dispatched a special agent to California to establish Post Offices. By Christmas, steamships were carrying mail from New York to California via the Isthmus of Panama. This was before the construction of the canal. When the ships reached Panama, the mail was taken off and transported in canoes or on pack animals – and later by railroad – about 50 miles to the Pacific coast. Another steamship collected the mail on the Pacific side and headed north.

Map showing mail routes that steamships traveled along the Atlantic Coast, from New York south to Charleston, Savannah, Havana, New Orleans, and on to Panama. On the Pacific side, the mail route followed the coast from Panama north to Oregon, with stops in Mexico and California. — The first U.S. Mail traveled to California by steamship, via the Isthmus of Panama, in 1848 | Source: USPS

Congress authorized funding for the overland routes not because they brought any financial profit to the Post Office Department or the federal government, but because they helped build and bind together a nation.

Also briefly mentioned in 一朝风雨一代王：Sears, Walmart, Amazon, the expansion of the US rail transportation contributed to the growth of USPS (Post Office Department at the time).

Map railroads 1870 — Source: gorhistory.com

Map railroads 1890 — Source: gorhistory.com

In 1862, mail was sorted en route, as a train moved between two points, using converted baggage cars.

On August 28, 1864, the first U.S. Railway Post Office (RPO) route was established officially.

By the early 1900s, railroads were critical to postal operations. Like Union Station in Washington, D.C., located adjacent to the City Post Office Building, the Post Office Department ordered that all new main post offices in large cities be built as near as possible to the principal railroad station.

Delivery System (1): Manpower, Horsepower & USPS

When the current coronavirus (COVID-19) hit the world and people prepare to stay at home for weeks, some of the social infrastructures are receiving increased attention.

The delivery system is a very good one to start. As uber not only provides uberEATS but also grocery delivery, Walmart / Target / CVS increasingly focus on delivery, etc., I will try to review the development of US delivery system recently and what is implied for the future.

Pre-industrialization: The Origin And Natural Power

The origin of United States Postal Service (USPS) can be dated back to 1775 when Benjamin Franklin was promoted as the first postmaster general.

In 1778, the US Constitution, Article I, Section Eight, known as the Postal Clause, says “The Congress shall have Power to establish Post Offices and post Roads”. This explains the importance of the postal system and its position as a government branch nowadays.

In 1792, the Postal Service Act was signed into law, which established the United States Post Office Department, the predecessor of the USPS.

In the early days, mails were mainly carried by manpower and horsepower. In 1785, the Continental Congress authorized the Postmaster General to award mail transportation contracts to stagecoach operators, in effect subsidizing public travel and commerce with postal funds. Despite their higher costs and sometimes lower efficiency, stagecoach proposals were preferred over horseback.

The Philadelphia Stage Coach (about 1800) | Source: https://peterpappas.com

to be continued…

Jumia And Africa E-commerce (2): GMV And Consumers’ Online Spending

Below is the chart for Jumia’s performance in terms of GMV.

- A spike in 2018Q4 just before IPO is controversial..
- Although with the “artificial” growth in 18Q4, the trend looks good
- The more worrying part is the slowdown in GMV growth – especially when Jumia is still has a long way to go

Jumia’s full year 2019 GMV is €1.1 billion, up 33% compared to 2018.

Comparatively, Pinduoduo’s GMV in the twelve-month period ended December 31, 2018 was RMB471.6 billion (US$268.6 billion), an increase of 234% from RMB141.2 billion in the twelve-month period ended December 31, 2017.

Combined with Jumia’s annual active customer base, we can see the GMV per AAC declining over time.

In its Q4 press release, Jumia says “we have reduced promotional intensity and consumer incentives on lower consumer lifetime value business. While most product categories experienced GMV growth in the 20 to 50% range, phones and consumer electronics contracted by approximately 20% on a year-over-year basis. This aspect of the business mix rebalancing will likely continue to negatively impact GMV development over the next two quarters.”

“…we have increased our focus on everyday product categories such as Fast Moving Consumer Goods (“FMCG”), fashion, beauty and personal care as well as digital services which provide affordable entry points into the Jumia ecosystem…”

We could also see that Pinduoduo’s GMV per active buyer is a little bit insane..

approx. annual GMV per active buyer = $268.6 billion / 418.5 million = $641.8

Jumia is at ~€180 in 2019, using annual GMV divided by ending AAC.

To compare it with consumers’ e-commerce purchase across the globe..

- World avg. $499
- US $1,389
- China $1,021
- South Africa $109
- Egypt $96
- Ghana $59
- Nigeria $44
- Kenya $42
- Morocco $41

Prepare For A Future Where FinTech Firms Dominate: Buy & Be FinTech

In the future where Fintech firms dominate, established companies are reacting with three main strategies:

Cut costs for legacy business lines – like what we said in a previous post Banking Headcount Cut
Consolidate with other legacy companies to gain more market share and thus more say/power, further cutting expenses and trying to get more economy of scale – like what we said in the last post From TD Ameritrade To E-Trade: A Wave Of Consolidation
Acquire Fintech startups or replicate what they are doing – like the title of this post Buy & Be FinTech

Visa x Plaid

In Jan 2020, Visa said it will acquire Plaid $5.3 billion. The deal includes a $4.9B cash consideration and $400M of Visa stock as retention equity and deferred equity consideration.

Plaid is a Fintech firm that enables a lot of other Fintech apps & digital transaction based businesses, providing underlying APIs. It counts Venmo, Robinhood, Coinbase, Acorns, etc. as customers.

Previously in Dec 2018, Plaid raised $250 million Series C at a valuation of $2.65 billion, led by Mary Meeker with capital from Kleiner Perkins’ growth fund. The growth.

In its mid-2016 financing tho, Plaid was only valued at $200 million.

The growth of valuation is supported by the growing business, the network effect and the sticky/recurring nature.

Through the Plaid acquisition, Visa secured a very strong spot in the future of Fintech and can expand/build upon the Plaid’s platform.

In Visa’s presentation, there is a list of Fintechs with rapidly growing users, on the top of which is Credit Karma with 100 million users.

Intuit x Credit Karma

On Feb 24, Intuit (Nasdaq: INTU) announced that it has agreed to acquire Credit Karma for $7.1 billion in cash and stock. (50/50).

Credit Karma lets people check their credit scores, shop for credit cards and loans, file taxes and more. It had close to nearly $1 billion revenue in 2019, growing at 20%.

In 2018, Credit Karma was valued at $4 billion when Silver Lake purchase $500 million in the secondary market.

The company started out originally in 2007 providing free credit scores, later extending that to full credit reports. Credit Karma’s launch of a financial planning tool in 2013 drew a direct comparison to Intuit’s Mint. And since then, Credit Karma has launched other products that directly rival Intuit, for example a free tool to help people file their taxes. These not only represented direct competition, but a disruptive threat, since Credit Karma’s products skewed younger and were built on a “free” premise (offering the products at no charge and instead making money off showing users and selling relevant, related products). The fact that Credit Karma partners with so many other financial services providers also means it’s sitting on a huge data trove that it leverages to build and personalize products, representing a data science angle for Intuit here, too. [TechCrunch]

Meanwhile, besides the notable acquisitions of Fintechs, companies are building similar services by themselves.

In Jan 2020, Goldman Sachs launched a long-awaited app of its online bank Marcus for customers . The bank launched Marcus in 2016.

And BofA’s AI-powered assistant Erica has pulled in more than 10 million users. Zelle peer-to-peer (P2P) payments increased 76 percent year-over-year in the fourth quarter of 2019.

While JP Morgan has closed its experimental mobile banking app Finn last year, its own branded mobile app is ranked one of the best. The idea was for Finn to reach locations—St. Louis among them—where it didn’t have branches.

By mimicking the experiences/apps offered by startups, established players are essentially becoming Fintechs themselves, thus evolving internally and embracing the future more positively.

From TD Ameritrade To E-Trade: A Wave Of Consolidation

Following the underlying trend of growing Fintech companies grabbing more customers & market shares (also discussed in a previous post about job cuts in banks), traditional financial service providers such as brokerage firms are thinking about their future.

And one answer is to consolidate the industry with mega M&As.

Charles Schwab x TD Ameritrade

In November 2019, Charles Schwab agreed to buy smaller rival TD Ameritrade in a stock-swap transaction valued at about $26 billion. Schwab will issue 1.0837 shares for each TD Ameritrade share.

The deal will create a company with more than $5 trillion in assets under management. TD Ameritrade will contribute approximately 12 million client accounts, $1.3 trillion in client assets.

The press release also says, “on expenses, current estimates are for approximately $1.8 to $2 billion run-rate expense synergies, which represents approximately 18-20% of the combined cost base” – a $2 billion cut in headcount and operating budget.

TD Ameritrade had a LTM revenue of $5.665B as of 2019Q3, thus receiving a roughly 4.6x revenue multiple. Or taking the revenue declines into account, it represents a 5.0x NTM revenue ($5.2 billion) multiple. Also, it’s around $2,167 per client account.

Morgan Stanley x E*Trade

On Feb 20, 2020, Morgan Stanley said it agreed to buy discount brokerage pioneer E*Trade for $13 billion. Also an all stock deal, E*Trade stockholders will receive 1.0432 Morgan Stanley shares for each E*Trade share, which represents per share consideration of $58.74.

Combined platforms will have $3.1tn client assets, 8.2 million retail client relationships and accounts, and 4.6 million stock plan participants. E*TRADE has over 5.2 million client accounts with over $360 billion of retail client assets.

Similarly, the acquisition price represents a 4.5x LTM revenue multiple. Also, it’s $2,500 per retail client account.

What We Can Learn From GrubHub’s Earnings

As a pure-play food delivery public company, GrubHub has a lot to provide for investors interested in this field.

When it went IPO in April 2014, GrubHub had an average of 135,000 orders daily in 2013.

In 2019Q4, that number has grown to 502,600 (almost 4x). But the year-over-year growth rate has dropped to single digit.

One slowly growing number is the gross dollar value per order, which was $30.74 in 2017Q1 and $33.56 in 2019Q4.

The per order value could implies that group buying (>1; friends gathering, small corporates/teams, etc.) is probably a major purchasing behavior on GrubHub. It’s also a natural choice when people can “split” the overhead (all sorts of fees).

The average order value increases by ~10% in two years and could continue to grow if more business users order food deliveries.

Of the GMV, GrubHub only takes commission, delivery and others as fees (revenues). That “take-rate” has increased from 17.4% in 2017Q1 to 22% in 2019Q4.

The increase could be due to the increased marketing spending by restaurants. See a brochure for Grubhub pricing. But eventually, the take-rate will be reflected in foods’ prices and split with consumers.

That increase is good for the company but consumers may feel that food delivery has become more expansive while what they are buying is not better.

Cross major marketplace platforms, due to the delivery part of business, those food delivery companies might take a bigger % of the GMV as revenues.

The most concerning part of the costs is called “Operations and Support”, which grew from 38% in 2017Q1 to 56% in 2019Q4.

A large part of that increase is due to the shift from independent contractors to GrubHub employees – on which regulators and other gig economy companies spent a lot of efforts.

Food delivery is still a very competitive space and market share needs to be won city by city. Compared with ride-hailing, which two big players remain in the US, we might see a few more players competing without major consolidation in the near term.

a16z: 100 Marketplaces

Andreessen Horowitz introduced the Marketplace 100, a ranking of the largest and fastest-growing consumer-facing marketplace startups and private companies.

The top 4 companies (Airbnb, Doordash, Instacart, and Postmates) account for 76 percent of the list’s total observed GMV

Fast-growing marketplace startups grow quickly in the early years—often >3-5x year-over-year

Banking Headcount Cut

HSBC recently surprised the outsiders with a 35,000 job cut plan in three years.

The largest bank by asset in Europe, London-based HSBC does most of its business in Asia.

Financial Times reported last year in October that HSBC has embarked on a cost-cutting drive that threatens up to 10,000 jobs, as its new interim chief executive Noel Quinn seeks to make his mark on the bank.

It will now cut the headcount from 235,000 to about 200,000 in 2022.

It is also not a surprise as fintech companies are becoming more compelling and providing more superior services efficiently.

The long-term trend is inevitable. For example, in retail banking, every major bank is shutting down branches. The previous “comparative advantage” of having more footprint in the last century has become a liability. The bigger they were, the more pain they were feeling.

In a Jan 2017 report, The Guardian said HSBC “will be left with 625 branches by the end of the year [2017], which means it will have more than halved its high street presence since June 2011 when it had 1,301 branches.”

And in today’s report, HSBC US said the bank will close about 80 branches this year in the U.S. alone, a reduction of about 30%.

Other retail banking services such as trading and wealth management are also shifting online + automation. Younger generations just don’t need much face-to-face financial services and digital infrastructure has become more potent than ever. The industry’s reduction in cost structure leads to lowering fees and squeezes every player who couldn’t adapt (fast).

Many Institution services are also digitalized/automated.

Not surprisingly, many parts of the investment banking world such as trading are cutting headcount as well.

Last August, Financial Times reported that

Almost 30,000 lay-offs have been announced since April at banks including HSBC, Barclays, Société Générale, Citigroup and Deutsche Bank. Most of the cuts have come in Europe, with Deutsche accounting for more than half the total, while trading desks have been hit hardest.

A graphic with no description — Source: FT