Episode 70: The Iconic Struggles, Pro Medicus Triumphs, Porsche v Ferrari v Hermes, AFR Business Person of the Year, and Computer Games
The guys discuss the fall and fall of ecommerce giant, The Iconic; Pro Medicus incredible run, why margin is everything in luxury retail, did the AFR get it wrong, and the guys chat computer games.
The Contrarians catchup
Adam and Adir both appreciate that their relationship has reached a point where they don’t have to waste time with pleasantries.
Adir read ‘Shareware Heroes: The Renegades Who Redefined Gaming at the Dawn of the Internet’ by Richard Moss. Shareware is a type of proprietary software initially shared by the owner for trial use at little or no cost, which is the origin of freemium.
The top three types of video/computer games for gen X are puzzles, shooting games, and adventure/strategy. Gen Alpha prefers adventure games.
Adir asks whether it’s a good or bad strategy to have a KFC next door to a gym, leading to a chat about the drop in cleanliness inside McDonald’s and the slowdown of fast food.
Adam discusses the excitement behind 16-year-old Queensland sprinting sensation, Guot Guot (pronounced "gwot gwot"), and a new Maldives resort built on a man-made island. Insanely, 60% of Australians book the Maldives through Luxury Escapes, and the company is responsible for 35K tourists per year, which is higher than almost every country.
AFR Business Person of the Year
The top prize went to the founders of Chemist Warehouse - Jack Gance, Sam Gance and Mario Verrocchi - and AirTrunk Founder & CEO, Robin Khuda, who took “an unfunded idea” to the “biggest data centre deal in human history”.
From the AFR:
While the two businesses come from very different sectors, their billionaire founders have been at the centre of the two big deals that will shape Australian capital markets for years to come.
In September, Khuda sealed the spectacular sale of AirTrunk to US private capital giant Blackstone for $24 billion – then immediately set the target of turning the business into a $100 billion behemoth.
A few months later, Chemist Warehouse won long-awaited approval from the competition regulator to proceed with its reverse takeover of ASX-listed Sigma Healthcare. When the deal completes next year, it is likely to create a company worth $30 billion.
The Iconic Struggles
Carrie LaFrenz from the AFR dove into the downward trajectory of The Iconic and how they’re plotting their “recovery, one Samba at a time”.
A decade ago, The Iconic was riding high on the surge in popularity of online fashion. Its executives touted growth of 30 per cent every month and big investors such as JPMorgan Asset Management piled in. “We’ll definitely be profitable in 2017,” said its then-chief executive, Patrick Schmidt.
It was not. And it’s a very different story now. Sales have been declining, and losses show no sign of ceasing. Many of the retailers The Iconic took sales from are catching up, and there are plenty of new competitors.
Jere Calmes has been The Iconic’s chief executive for about 18 months. He wants to reverse the sales decline and finally post a profit without sacrificing services such as free delivery and limitless returns loved by shoppers.
Adir: “What kind of retail business do I hate? Selling other people's stuff. E-commerce 2.0, or the next generation of e-commerce, has a lot in common with DTC 1.0, which is spend heavily on brand. The unit economics are quite dreadful, because they argue their customer acquisition cost is not really a CAC. A chunk of it is brand spend. Like, that's the myth they tell themselves. And what ends up happening is you actually can't build a brand that drives a low enough CAC as a consequence of all of this money that you're spending.”
Adir: “The way that you need to think about free delivery, and returns, is CAC. Nobody thinks about it as CAC. If you get returns of a few percent, then you can say that's just part of the operations of the business. They would not be running a few percent returns. They'd be running double digits, maybe a 20 plus. That's CAC.”
Pro Medicus Triumphs
Pro Medicus is a leading imaging IT provider, delivering services and solutions to hospitals, imaging centres and healthcare groups worldwide.
If you invested $100K in Pro Medicus in 2013, that investment would now be worth $67M. The business is now the 20th largest in Australia based on market value ($27B) and is one of the most extreme share price growth stories on the ASX.
Adir: “I only talk in US dollars now.”
Adam: “They paid $3.5M for Visage Imaging and the company is now worth $27B, which is basically the entire value of the whole business. That’s an 8000 bagger of that acquisition”.
Adir: “If I didn't know this business so well I would have thought I just misheard you.”
Porsche v Ferrari v Hermes
Porsche has been driving around with the ‘check engine’ light, their share price dropping 50% this year. Alongside Audi, Bugatti, and Lamborghini, Porsche sits under the Volkswagen AG umbrella.
How is the Porsche share price less than a third of Ferrari’s?
Adir: “This is just a retail business, and a retail business that has to sell through the weirdest kind of third party distribution that has ever existed. car companies want the dealers to have a footprint for their brand and to sell, they just don't like the idea of having to pay the dealers for that privilege. In retail, one of the most important things, is gross margin. And Ferrari, the fundamental differentiation is gross margin.”
Which brand is better, Ferrari or Hermes?
Adir: “Ferrari. There are lots of parts of the Hermes business that are now accessible to regular human beings. They have the Apple Watch band, which costs $1600. I think exclusivity is central to being a luxury brand over time and I think Ferrari maintains exclusivity and Hermes is actually quite an accessible broad.”
Adam: “My point is that the strength of a great luxury brand is that you can sell stuff that isn't always crazy luxury because you can price to that strength. You’re expanding the TAM.”
Five other stories worth following:
After nearly two years and 152 shows across five continents, Taylor Swift’s Eras Tour took its final bow in Vancouver. When the first leg ended in 2023, it was already the highest-grossing tour of all time. After an additional 86 shows this year, the final haul is estimated to be ~$2.2B.
POTUS-elect Trump nominated Paul Atkins — a pro-crypto lawyer on the advisory board of the Digital Chamber of Commerce — to serve as the next SEC boss. Hours after Atkins’ nom, bitcoin passed a milestone of $100K for the first time.
Los Angeles Times owner Patrick Soon-Shiong thinks AI can interpret bias. He announced plans to add an AI-powered “bias meter” to news articles in January. It would involve a button a reader could hit to get “both sides” of a story.
Notre Dame reopened in Paris this weekend more than five years after a fire ripped through its roof. Around 340K donors contributed ~$900M to the restoration, and the cathedral expects to greet up to 15M visitors a year.
A federal appeals court upheld a law banning TikTok nationwide unless parent company ByteDance sells it. The court claimed that China-based ByteDance represents a national security threat and gives TikTok until January 19 to be sold off or face a US-wide ban.