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On November 23, 2017, Open Sesame commented on Brexit and BMW: Disintegration of European supply chains? :

Harald Krueger’s initial blase stance on Brexit was warranted. All pundits and polls pointed towards a Remain vote. Post Brexit, open-door policies have been reaffirmed on the European continent, with Macron’s ascent in France, Geert Wilders loss in the Netherlands, and Merkel’s stubborn grasp on power (assuming that she can form a government in the coming weeks). Abandoning the U.K. might be the best option for BMW.

Other companies are already moving across the channel en masse. One in ten German companies intend to scale back investments in the U.K. (1). Large banks, including Goldman Sachs, have already begun to expand offices in Frankfurt and Paris. Key government agencies are also moving back to the continent, including the European Banking Authority and the European Medicines Agency, redirecting high paying jobs and research funding to Paris and Amsterdam, respectively (2).

While currency declines might partially offset the risk of remaining in the country, the clock is ticking and minimal progress has been made towards an agreement. Businesses do not have the time to wait for slow moving and ineffectual administrations. BMW is clearly trying to pressure the U.K. to negotiate a deal, while pursuing a back-channel backup option in China. Deploying capital in the U.K. for factories that might not be economical for decades to come if Brexit takes a “hard” turn makes no sense. The U.K. was one of the fastest growing economies in the EU prior to Brexit. Following Brexit, interest rates are rising (3), inflation is rising, and the economy is stagnating. Hopefully this disastrous outcome will be a signal to the rest of the world: politicians frame isolationism as a panacea, it is nothing of the sort.




On November 23, 2017, Open Sesame commented on Lotte at the Whim and Mercy of Chinese Nationalism :

This is a real pickle for Lotte. Recent Chinese nationalism seems to stem from a different source than the current nationalism sweeping the West. Chinese nationalism appears to stem from a desire to create an economic powerhouse, as opposed to an appeal to identity politics to amass political power. The CPC is already powerful. They do not need to stoke identify politics, at least not as long as the economy booms.

Foreign companies are tolerated in China for as long as they add value and generate learnings for the Chinese economy. GE is still welcome because China has not yet mastered or surpassed the Western world in healthcare, wind energy, or airplane engine technology. Commercial Aircraft Corporation of China (“COMAC”) is trying to supplant GE rapidly, but replacing 100 years of engineering expertise will likely take time. Google was welcome in China, until Baidu was perfected. Facebook was never welcome in a world in which Weibo and WeChat already offer superior products.

I disagree that Lotte should stick around. China is in this game for the long-run, and CPC leaders no longer see a need for foreign companies to control food distribution – the industry is simply too easy to master. Food distribution can be managed by domestic firms. GE, Ford, and Burberry are likely okay until the Chinese economy has produced equivalents.

On November 23, 2017, Open Sesame commented on A Whole New World: The Digital Evolution of Disney :

This industry is in such rapid transition, it is really exciting. I see very little merit for Disney, unquestionably a pioneer and the current industry leader for original content, to acquire a large OTT provider. OTT platforms – Netflix, Amazon, Hulu – bring increasingly less to the table, in my mind.

OTTs provide two services for the end movie watcher: 1) aggregation and organization of content, and 2) scaled price negotiation for content. On the first point, the value added nature of organizing video content is becoming less valuable by the day as user experience design and user interfaces become increasingly friendly to use and easier to develop. Disney should be able to create simple platforms that allow it to share its deep treasure chest of rich content with consumers. I see no reason why in the future, I will not have an ESPN app, a Disney app, and an MSNBC app, likely the only three that I would utilize. Each app will cost a few dollars per month. For me, Netflix is nothing more than an organizer of apps on my device. The OTTs have started to realize this, explaining their rapid transition into content. Historically, all the powers rests with the content providers. The value of organizing data is less clear. Remember those DVD stands that hold 100 DVDs. They were the predecessor to Netflix.

To the second point, Netflix is nothing more than a slimmer version of cable. Yet with Netflix, I am still paying for a lot of content that I do not utilize. I am happy to forgo Netflix’s minimal pricing power with the studios to benefit from a truly slimmer, customized bundle. If cable is the VCR, then Netflix is the DVD. I’ll skip both and opt for the digital option.

The gravest threat to U.S. airline carriers over time has been the macro-economic cycle, specifically when unpredictable downturns result in a decline in travel. Airline margins are incredibly tight. According to The Economist, the airline industry generates a 1% profit margin and averages profit of $4 per passenger (1). Large fixed operating costs (airplanes) are expensive and stubbornly fixed in nature. Customers also tend to show zero loyalty. Further, despite a recent onslaught of combinations in the U.S. airline industry (American – U.S. Airways; United – Continental; Delta – Northwest), average ticket prices have continued to decline (2).

I agree that the cost side of the equation has historically been the only lever that airline management teams can pull. Predictive analytics might help with forecasting demand, scheduling plane operations, communicating flight schedules with air traffic control; however, such measures seem like band-aids on the larger problem.

It is interesting that more bookings are going through the airlines websites as opposed to OTAs. I wonder though how many of those buyers first comparison shopped on Kayak or Expedia, a behavior that would question the notion that customer loyalty is increasing in any meaningful way. I believe the best hope for airlines is to try to generate some degree of brand loyalty or monopolistic pricing power by focusing on certain regional routes. Investments in digital have a lot of potential to cushion profits during good times. It is the bad times that I am still worried about.



On November 22, 2017, Open Sesame commented on Where in the world will our wine come from? :

Despite the uniqueness of Scandinavian wine (would it be blue?), I do not think that France and California need to be applying for visas any time soon. The cachet of Napa and Bordeaux will continue to drive consumer preferences. Even temperate Napa has wide swings in average temperatures by month (average high of 55 in January and 80 in July, per U.S. Climate Data), allowing wineries to offset spikes in temperatures by shifting crop cycles to earlier or later in the year.

As temperatures become more volatile, I do believe that the industry will consolidate to offset the risks of operating a single vineyard and producing a failed vintage. Across several sectors in the United States, industries are consolidating. Airlines, hospital systems, consumer packaged goods, and telecommunications are less competitive than in the past. In recent years, we have already started to see several large acquisitions in wine, such as the acquisition of Prisoner Wine by Constellation Brands for $285 million in 2016. The trend could accelerate quickly considering that several Northern California wineries were founded in the age of the “Judgment of Paris” in the 1970s. The founders are prime for retirement.

Warming temperatures should not be brushed aside. Yet, I also question the threat of consolidation, rising prices, and a reduction in variety. Large wine corporations with deep pockets for marketing dollars will also begin to take on the heavily advertised spirits industry. Diageo and its peers should be wary.

On November 22, 2017, Open Sesame commented on Never mind the calories, how much CO2 is in your meal? :

Very thought provoking and demonstrates the complexity of reducing carbon emissions.

Perception is so often disconnected from reality as can be the case with carbon emissions in the fishing industry. Consumers oftentimes view ocean, wild-caught fish as healthier and more sustainable, while forgetting that wild-caught fish requires diesel chugging boats that spend weeks out at sea. Fish farms, oftentimes viewed as less sustainable and producing fish that are exposed to higher levels of toxins via industrial waste run-off, have been under pressure in the eyes of the casual shopper. Whole Foods has raised awareness through partnerships with the Marine Stewardship Council, but I often wonder if the everyday consumer who only takes a cursory glance at the labels at Whole Foods ends up considering the complexities of sustainable fish sourcing. I am afraid that fear of fish farming could misdirect capital and reduce pressure for fisherman to invest in cleaner boat technology.

Unfortunately, the fishing industry is highly fragmented and finding money for capital investment is challenging. Consumers, as with so many environmental concerns, will likely have to be the force to drive change. But as stated, do consumers have the time to educate themselves correctly to make well informed buying decisions that reflect their underlying preferences for long-term sustainable fishing? For change to occur, consumers must be well informed and discerning. More articles such as this are needed to drive change.