RedBlue Newsletter: 02Jun22

Date
June 2, 2022

A concise yet comprehensive picture into all things mobility

Podcast: The Auto Analyst Series

Episode 2: Itay Michaeli, Autos Equity Research Analyst at Citi

The Automotive Analyst Series: Each episode opens the floor to an equity analyst covering the space. We go beyond the latest earnings to dive into the narratives & frameworks to understand where and why the industry is moving.

You can listen on Spotify & Apple as well

This episode, we speak with Itay Michaeli, who leads Autos coverage at Citi. Itay has covered autos since just before the ‘08 crash, and emerged from that period making early and correct calls on, among other things, the strong rebound of trucks & SUVs which of course are today the most important profit drivers for American OEMs. We covered everything from how to use - and not use - consumer sentiment & purchase activity to forecast trends, to the impact that COVID will have on long term US car ownership rates.

Commentary

You can listen to a short discussion between RedBlue Partners Olaf & Prescott about the themes in this newsletter here:

You can listen on Spotify & Apple as well

🤔 Did 10 min delivery ever make sense?

As investors have switched focus from growth to profit, we’re seeing a wave of quick commerce flame-outs and layoffs.

What’s been happening?

Layoffs: Getir - 14% (link), Zapp - 10% (link), Airlift - 31% (link), Gorillas - 50% of Berlin HQ staff (link), GoPuff - already gone through two rounds of layoffs (link)

Flameouts: Jiffy (link), Buyk, Fridge No More (link) [literally]

Consolidation: Appetito acquires Lamma in MENA (link)

WTF: Zepto (link) just raised $200m and Yummy (link) raised $47m 🤔

Was there ever a point?

  • Grocery isn’t as bad a business as people think: A lot of people mistakenly think grocery is defined by razor thin margins. In reality, many products (”SKUs”) have quite high gross margins. The trick is to get customers through the door to buy them - say with a luscious $5 rotisserie chicken. The first step is to exist nearby customers, and the second is to lure them in with attractive offers. Once they’re inside, they can monetize the attention of people in their stores. That last part is the key.
  • Attention is the most important part of retailing: About 1/4 of CPG revenue is reinvested into advertising, a major portion of which is paid to stores - e.g. to keep your brand at eye level. When a brand launches, it has to plow hundreds of millions into getting people to pay attention and it turns out ads & paid placements in stores are more effective than Instagram.
  • Being “the default” place consumers shop is therefore key - it means you are the place brands “pay to play”: Amazon and Instacart became the place many people now start their buying journeys by delivering a lot of stuff for not much money. They have enormous operational costs to do this, but it doesn’t matter - by being the starting point, they generate huge ad revenues that make them whole. In 2021 Instacart generated $550M in ad revenue, while Amazon generated a monster $31.2B.
  • Quick commerce’s play to win the attention game: The proposition of “10 minute delivery” is unique, whimsical and more attention grabbing than the typical loss-leading rotisserie chicken. And remember, the question isn’t if it makes money - but that it doesn’t lose too much. What if you could sell mostly high margin SKUs, have a lower real estate cost structure than the average corner store, and beat legacy retailers at the ads game with a purely digital storefront?

What’s the future?

If you look at the numbers (as we did in 2020-2021 looking at Gorillas and others) - well, it almost just possibly makes sense. Almost. When Walmart acquires one of these companies, this will be the reason: like the rotisserie chicken, 15 minute delivery may never need to make money. It just needs to be a shiny toy that keeps you a loyal subscriber to Walmart+ or Amazon Prime.

Meanwhile, the problem with layoffs for startups is they signal the end of growth. Startups can discount salaries through stock-options and get discounted capital on the promise that the future will be way better than the present. But that dream can only be sold when things are going up and to the right. When that stops, even the best advertising can’t help.

⚠️ Battery prices going the wrong way

The massive growth in EV sales has been powered by a steady decline in battery prices. But those declines are coming to an end: A recent report from the International Energy Agency warns that battery packs will become 15% more expensive this year compared to 2021 (link).

What is driving this increase? EV batteries rely on a complex supply chain: raw materials, mainly metals such as lithium, cobalt and nickel, which are then formed into cells. These cells are assembled into modules, and modules into packs. It is the first step in this supply chain that is causing the problem, especially lithium. Lithium prices have increased by a staggering 500% in the last 12 months (link)!

Why is lithium surging? It takes up to 10 years to establish a new lithium brine extraction project. Even once this is done, it can take another two years from the time the brine is extracted to when it congeals into a slurry that can be efficiently processed. This lag makes it very difficult for lithium supply to keep pace with growing EV demand.

What is the forecast? Macquarie warned of a “a perpetual deficit,” Citi thinks prices could still double, but Goldman is sanguine and thinks we’ve peaked (link). So basically no one knows. We think the whole battery supply chain has underappreciated risks: beyond the raw materials challenge, China is makes 80% of the world’s lithium batteries. It might not be so crazy to do more to support hydrogen vehicle technologies as a hedge (as discussed in MDF).

💀 Death and regulation in America

In the wake of a wave of shocking mass murders in America, the following diagram was shared widely showing that firearms have now become the leading cause of death amongst children:

https://www.scientificamerican.com/article/guns-now-kill-more-children-and-young-adults-than-car-crashes/

Although it is politically expedient to make it seem like guns are worse than cars, the reality is that total number of gun homicides in the US in 2021 (20,992) was less than half the number of car crash deaths in 2021 (42,915) (link, link).

In recent years, road accidents have been declining, but 2021 saw the single highest jump upwards ever (>10% year-over-year) and brought us back to 2005 levels. Global roadways appear to be trending in the same direction - and remember we’re talking about one million people per year around the world who die in car accidents.

But wait, weren’t we driving less last year? It’s counterintuitive, but less traffic meant people drove faster (link). Speed is the key factor determining the likelihood and severity of any accident.

Can’t technology like ADAS save us? Like gun violence and obesity-related health issues, we may seek to invent amazing new technologies to dig us out of this uniquely American hellhole - heck, our job at RedBlue is to invest in them. But safety technologies are coming up short for three reasons:

  1. Slow deployment: According to our friend Chris McNally, an analyst at Evercore ISI, effective L2 systems such as auto emergency braking (AEB) can cut fatalities between 30-50%. Almost 50% of new cars can be equipped with these systems, but in fact only just 10% are. And it will take a decade or more before these systems are widely prevalent given the slow rates at which cars are replaced.
  2. Hostile road design: American roads are almost universally designed to encourage fast and unsafe driving by default (link), and pedestrians are expected to basically assume they will die by default unless they take exceedingly careful action to use crosswalks.
  3. Cars are getting phatter: SUVs and pickups are the most popular vehicles on these American roads. And as the size of vehicles has grown, so has the extent of their deadliness. Better technology struggles to fight physics.

We need to address the root causes. Just as changing rules arounds guns are difficult, so too is finding ways to regulate cars. Which is why an initiative from Washington DC city counsel to add a $500 annual fee to oversized vehicles is interesting (link). Beyond this, having infrastructure that separates cars from people and keeps traffic slow by design would be effective towards making the US a less deadly place to ride a bike or walk (link).

Will these things change? Slowly, perhaps. Which is all the more reason to fight hard for them.

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