A Tale of Two Cities – October 2018

A Tale of Two Cities

Contrary to what might be a readers’ first reaction, the last month has given us increasing confidence in our portfolio. Most of our long investments have reported and have beat market expectations with few exceptions. A significant portion of our short investments have missed their earnings with some reducing the guidance for the rest of the year. The fundamentals reported are supportive of our theses.

And yet, as you can see from the first paragraph, we had to mark our portfolio down more than 5%. What do we make of this divergence between what the fundamentals are telling us and what the market is pricing? Is the market anticipating a material reduction in the cash flow generating abilities of our companies or has fear severely reduced the market’s appetite for long term winners like the ones we pursue at Somar?

We believe that fear and market sentiment are the major drivers of the moves:
– During this period, we have observed large price swings in the stocks, even in the course of a few hours with limited connection to fundamentals. For example, Takeaway.com reported an acceleration in order growth in Germany strengthening our thesis and the stock opened up 10%. A few hours later, the stock closed down for the day with no additional company or industry related news reported.

– We observed strong rotation away from companies with strong growth prospects into perceived defensive names like utilities and consumer staples. This is a sign of rising fear in the market and not of company by company assessment of opportunities ahead. The market is putting a higher premium on certainty of cash flows over uncertainty of growth potential.

– During this period, the VIX, which measures the S&P 500’s expected volatility, has stayed extremely elevated with some periods above 20% (versus low teens for most of the year). VIX consistently spikes in periods of heightened fear as investor rush to buy market protection, for example in the form of S&P500 put options.

At Somar, we are long-term investors, focused on companies’ execution to capture the abundant
opportunities ahead. Our due diligence process and investment thesis is similar to that of an investor in
private (unlisted) enterprises. However, private equity investors don’t face a daily mark to market. This
provides an opportunity but also a risk:

– The big risk is that you let the daily swings of the stock price inform and influence your views of
the risk/reward of each investment. This can lead you to sell on the lows or cover short positions on
the high. This is a costly mistake that will hurt returns over the long run.

– The opportunity comes from taking advantage of inefficient prices to boost returns. You can buy
more of your long investments at lower prices or short more at higher prices. When you have the
fundamentals supporting your thesis, you can use the market’s volatility to capture a bargain.
Somar’s process positions us very well to take advantage of dislocations like this:

– We value our investments by discounting our views of companies’ cash flows at a normalized
discount rate. This prevents us from overvaluing companies just because the current interest rates
may be lower than the long-term average. It also insulates us from using multiple1 comparisons,
which are moving targets, especially in market volatile times.

– To support our projections, we rely on our own primary and secondary research. We also model the
value under different scenarios to quantify and inform the loss we are assuming if we are proven to
be wrong on our thesis. This research is ongoing and our risk-reward is updated as new information
comes in.

– We invest in companies that create economic value at high rates by gaining market share and
expanding the value offered to the consumer. This means time is on our side on our long investments:
temporary dislocations don’t hamper our eventual rate of return on our investments for the long
positions we hold (Fig. 1). We can even increase the return by buying more when market dislocations
offer that opportunity.

Note: Conceptual graph
Source: Somar Analysis
Fig. 1

Our attitude when the market sells off is humility. We start by assuming the market is right. We go back to
the basics, redo channel checks and talk with the companies and players in the industry to make sure the
incoming data is reflected in our scenarios and risk-reward analysis. We let the incoming data dictate our
actions and decide to add to positions where we are confident our thesis is on-track and the price dislocation
presents an opportunity.

Your opportunity

What is true for Somar and our management of our individual positions, is also true for you and your
management of your investments in Somar and possibly other vehicles. We can use fluctuation in the markto-
market value to add to your positions at attractive valuations and enhance your long-term returns.
This is extremely difficult to do and most people let market concerns detract from their long-term returns
by selling and buying at unattractive times

– Research from Dalbar2 showed that the average fund investor, substantially underperformed the
return of his fund. For example, for the 1994-2013 period the average fund studied returned 8.7%
while the average return for each investor was only 5.0% as investors consistently sold after bad
performance and bought after good performance.

– Follow the crowd behavior is useful and comfortable in most walks of life but is quite costly in
investing where the crowd behavior changes the risk/reward: when the crowd sells and lowers the
prices available, the potential return is higher, and the risk of permanent capital loss reduced.

Our mission at Somar is to help you achieve the highest possible return over the long term. Therefore, we
offer high transparency and write to you monthly to give you as much information as possible to allow you
to make the best decision for yourself. Our phone is always available to answer any questions you may
have. The fundamentals of the companies in our portfolio are supportive of our theses. The market short
term dislocation, while painful, is opening an opportunity to enhance our long-term returns. You have a
similar opportunity as well.



1 For example, as a multiple of sales or a multiple of earnings – benchmarked against the trading multiples of similar companies

2 Quantitative Analysis of Investor Behavior


Alignment of Interests – September 2018

Alignment of Interests

Show me the incentive and I will show you the outcome” – Charlie Munger

Alignment of interests is one of the keys for successful investing. At Somar we evaluate the degree of interest alignment to identify long and short opportunities. We pay extra attention to changes in interest alignment to evaluate the risk reward of existing and potential positions. If interest alignment changes, Somar’s opinion of the risk reward changes.

Conventional wisdom evaluates alignment in a binary way: either interests are aligned, or they are not. Somar looks at alignment in a continuum with different degrees of alignment ranging from perfect alignment to conflict of interests.

* * *

On its long investments, Somar looks for the best possible alignment between consumer value, company profitability, management incentives, stock market performance and Somar investor wealth. (Fig. 1) Every single step of this alignment counts, and there can be losses of alignment at each level.

Source: Somar Analysis

Fig. 1


Customer alignment is key for any sustainable business value creation. Somar looks for businesses that offer a material upgrade to existing consumer value proposition either through lower prices, wider choice or superior services[1].

Long investments benefit when we partner with management teams that focus on constantly innovating to expand the value they deliver to customers year after year. This could be in the form of product / service enhancements, price decreases or new adjacent businesses.

Some businesses have this alignment built-in. For example, businesses that benefit from network economies offer expanding value to their consumers as they grow. The value of a telecom network, or social network increases, as more people participate in it. Similarly, the value of a food ordering platform like Takeaway.com increases the more restaurants are available there.

Perfect management alignment with shareholders is difficult to achieve. Conventional wisdom has it, that stock option plans are a good solution. While a step in the right direction, it has a big shortcoming: management has none of its capital at risk. As investors, our first priority is to not lose capital. Stock options are granted with no financial commitment from managers who are left with no incentive to protect capital. They share in the upside but not in the downside. (Fig. 2)

Fig. 2

The best way to align management to investors, is to have managers be shareholders in the business and for those shares be a large portion of their net worth. Somar finds these management teams are extremely entrepreneurial and create significant customer and shareholder value. This happens frequently (but not always) when you partner with the founders of the business. 8 of Somar’s current top 10 long positions still have the founders and their team in place. On average this group averages 15.7% ownership of their respective companies. Ownership in this group ranges from 4.2% to 36.8% of total shares. We are happy to have our entrepreneur managers with skin in the game alongside us.

Conversely, none of our top 10 shorts has an entrepreneur leading it. Management teams consistently have less than 1% ownership of the company. If we add the trusts controlled by the descendants of the founding families (with no management involvement on the day to day operations), the average inside ownership rises to only 4.25%.

As your conduit to these opportunities, we are careful to make sure Somar is as aligned with its limited partners as possible:

  • We have our own capital at risk alongside yours. The Ramos family is the second largest investor in Somar. One other member of our team has also the vast majority of his net worth invested in Somar.
  • Our financial success hinges on us delivering substantial returns to you. Our management fee only covers our basic expenses and we are committed to returning to our founders any economies of scale in the form of reduced fees as our assets scale.

* * *

Alignment changes overtime and needs to be monitored continuously. A prolific source of both long and short ideas for Somar are changes in alignment. We have sold long positions fully when alignment has materially decreased.

Substantial management purchases of stock in the open market are strong sources of new ideas for Somar. Not only do they carry the signal that management believes that their company is undervalued, but they also want to align themselves with shareholders in the value creation opportunity ahead. We follow these movements closely and investigate them immediately.

Conversely, when management sells substantial portions of their shareholdings, we ask ourselves whether we should sell too: either get out of a long position and/or build a short position. This year we had a top 3 position had a major shareholder sell down and we significantly decreased our exposure to it materially: it is now outside of our top 10 positions.

Often alignment shifts for reasons other than management buying and selling:

  • Strategy shift away from consumer value creation. E.g. slow innovation and start price increases
  • Competitor introduction of a superior product / service
  • Management turnover
  • Change in management incentives
  • Spin-offs
  • Regulatory changes
  • Growth in fund manager AUM
  • Change in fund manager compensation structure

This happened recently to a company we were long. Scout 24 had a star manager in online classifieds: Greg Ellis. Greg is a pioneer in the industry, having built REA into one of the most profitable and faster growing real estate online classified platforms in the world back in his home Australia.  During his tenure he created significant shareholder value with the stock price growing at 62% CAGR for more than 5 years (Fig. 3)


Source: Bloomberg

Fig. 3


Earlier this year, Scout 24 made a large acquisition in an adjacent market (consumer lending). A few months later, Greg Ellis asked the board to leave the company at the end of 2018 for “personal reasons”. The CFO also asked to leave by September 2019. This loss of alignment with company strategy and management incentives was a sign to us of potential problems with the core business. Given valuation remained close to our upside scenario, we fully sold our position.

* * *

It is an honor to be entrusted with your wealth. We don’t take it for granted any single day. My family and I fully align ourselves with you and work daily to make sure your money is entrusted to aligned management teams that tirelessly work to create and expand the value they offer to their customer.


[1] For further detail on our thinking here please read our letter from January 2018


Takeaway.com – August 2018


This month we will take a deeper look at our investment in Takeaway.com (“Takeaway”). Our thesis provides a good illustration of what Somar looks for in a long investment:

  • Order of magnitude growth opportunity driven by material improvements to the available customer value proposition
  • Highly attractive and defensible business model
  • Capable and strongly aligned management team

Takeaway is a leading food delivery marketplace in Central Europe, with core operations in the Netherlands, Germany, Austria, Belgium and Poland. In these markets, it offers consumers access to large number of local restaurants covering a wide range of cuisine types. Consumers search from each restaurant’s menu and place an order. This order is processed by Takeaway and, if a valid address and payment are behind it, is transmitted to the restaurant that cooks and delivers the meal. For some restaurants that don’t offer delivery, and are important for customers, the company handles the delivery itself for an additional fee[1].

Takeaway has a simple business model, taking a low double digit to mid-teen percentage commission of all the orders through its marketplace.


Growth opportunity

We see an opportunity for Takeaway to grow to more than 5x its current size due to its superior value proposition to both consumers and restaurants coupled with its still low penetration of its target markets.

In its markets, Takeaway provides a step-change improvement to the consumer and restaurant value proposition vs. the status quo:

  • Consumers have significantly higher number of restaurant choices and added convenience vs. the alternative of phoning the order in. Prior to the launch of online ordering, most delivery orders came from Pizza chains. Through updated online menus and ratings, Takeaway expanded this into a wide range of cuisine types and restaurants. The marketplace intermediation also saves consumers from repeatedly typing their address and payment credentials, a process both time consuming and prone to errors. Consumers are voting with their wallets and are increasing their order frequency (Fig. 1)
  • Delivery orders are highly accretive for restaurants from a financial point of view. With limited additional investment needed, restaurants benefit from additional revenues with contribution margins ranging from 30% to 60%. Despite the continual addition of new restaurants to the platform, each individual restaurant is seeing increased demand from Takeaway every year (Fig. 2)

Source: Takeaway.com

Fig. 1


Source: Takeaway.com

Fig. 2


Despite these advantages, and the strong 30%+ annual growth in orders of recent years, only about 12.5% of the food delivery market is intermediated by Takeaway or one of its online competitors providing a vast opportunity for growth for the years ahead.

  • On Takeaway’s core markets[2] we estimate about Eur 12 Bn of restaurant orders are delivered per year. Currently Takeaway delivers only Eur 1.5 Bn of these
  • The delivery market is growing above GDP as more consumers look for the convenience and time savings of not having to cook and do dishes at home
  • Somar’s interview with customers shows that the more cuisine and restaurant options are available and the more convenient (no repeat input of address and payment details) it is to order the more often they tend to order further expanding the overall market potential.
  • These numbers also exclude the corporate catering market, a significant additional opportunity that Takeaway is also pursuing by leveraging its recent acquisition of 10Bis.



Highly attractive and defensible business model

The food delivery marketplace is a winner-take-most industry making it a very attractive business for leaders

  • Like most marketplace businesses, food delivery benefits from strong network economies (Fig. 3)
  • Competitive behavior is also benevolent: once a clear leader is established in a market, non-leading players prefer to sell their operations and focus on other markets where they can achieve leading positions rather than continue to invest in that market (Table 1)

Fig. 3



Table 1


The business is also very defensible with extremely low churn rates, even for non-leading players. Once a customer has ordered from a food delivery marketplace for at least 3 times, they tend to stick with that marketplace. This means that orders from each cohort of customers tend to accumulate year after year (Fig. 4). Therefore, competition tends to focus on acquiring new customers that previously were using phone for delivery rather than stealing customers from other online competitors.

Orders per cohort

Source: Takeaway.com

Fig. 4


These cumulative orders come at extremely high 50%+ (pre-marketing[3]) operating margins yielding a 100%+ return on invested capital for the business. This is a very low capital-intensive business.

  • Negative working capital: the marketplace collects from customers daily while paying to restaurants 1 to 2 times per month
  • Low capex: the business fixed costs are mostly limited to building and maintaining the marketplace website and app



Capable and aligned management team

Takeaway is owned[4] and managed by two entrepreneurs and industry pioneers:

  • Jitse Groen founded Takeaway in 2000 and has been its CEO ever since. He is one of the industry pioneers and still owns more than 34% of the company. In its home market of the Netherlands, Jitse built Takeaway into one of the most dominant players in the world with a virtual monopoly and EBITDA margins well over 50% in its home market.
  • Joerg Gerbig founded Lieferando.de in 2009 and built it into a leading player in both Germany and Poland. Upon the sale of the business to Takeaway, Joerg chose to stay as COO and to roll part of the sales proceeds into stock of Takeaway
  • Both Jitse and Joerg are best-in-class operators having developed the “one company” approach for increased efficiency in operations and customer acquisition
    • Dingle global technology platform to be used in all operations around the world
    • Unified brand in each market to maximize efficiency of brand campaigns
    • Centralized back-office functions
    • Simultaneous roll-out of innovation initiatives


Attractive Risk-Reward

Upon underwriting this position, Somar assessed the investment to have minimal downside under an adverse scenario while offering at least a 5x potential under our base scenario.

  • Our base scenario represents our best assessment of what the company can deliver. In our judgement there is a 50% probability the company will beat our base scenario and an equal 50% probability it will fall short of it. In general terms we assumed Takeaway keeps its dominance in the Netherlands and achieves half of the penetration and success in both Germany and Poland.
  • Our adverse scenario assumes that Takeaway continues its lead (but not dominance) in the Netherlands and fails to achieve leadership and significant probability in Germany and Poland.
  • The most common path for food marketplaces that don’t achieve leadership is their sale to the local leader (please see Table 1 above). The extremely low customer churn makes these businesses an attractive stream of cash-flows with strong accretive value for the leader[5]. In our adverse scenario we didn’t assume any potential sale of subscale operations in Germany and Poland.


There are a lot of risks that we track continuously to make sure our thesis is on track: increase in competitive intensity, change in consumer preferences, change in restaurant preferences, increasing customer acquisition costs, reduced marketplace relevance for consumers (number of orders per consumer) and restaurants (number of orders per restaurant). We use our primary research to confirm our thesis and, so far, have seen increased support for our thesis from the incoming data.





[1] Through their subsidiary Scoober. Takeaway believes this part of the business will be breakeven and responsible for up to 5% of total orders.

[2] Netherlands, Germany, Poland, Austria and Belgium

[3] Marketing expense is discretionary and almost entirely to acquire new cohort of customers

[4] Collectively Jitse Groen and Joerg Gerbig own more than 36% of Takeaway.com

[5] A strong data point in support of this is Hungryhouse whose sale to Just Eat took about 1 year to be approved by the UK’s competition authority, and during this time, despite low marketing investment, they barely lost any customers during the period.


Keys to Successfully implementing a short idea – July 2018

Keys to Successfully implementing a short idea

On its surface, successful shorting may seem like a simple mirror image from buying a stock: you find a company whose moat and financials are being impaired[1], short it at an unsustainably high valuation, wait and then cover your position at lower price to lock-in your profit.

However, while necessary, the conditions above are not sufficient for success in shorting. Timing and position sizing are also crucial for short profitability. This, together with the fact that over time economies grow and businesses accumulate profits, makes successful shorting much harder than buying stocks.

                                                                      Fig. 1


In this letter we will dive deeper into Somar’s shorting method: which we call “The Short Triangle”. (Fig.1) At Somar we believe you need to get these three aspects right at the same time to have a successful short.[2]  Let’s take each of these conditions one by one.


For a successful short idea, we need to find a company whose futures prospects are being impaired. At Somar we focus mostly on companies being disrupted (see June 2018 letter). When holders of the stock are not pricing in those threats to future profitability and cash generation in the stock we have a potentially good short idea. The question now is how much do we short?


Sizing of a short position is particularly difficult. On the one hand, the larger the initial position, the higher the profits we get when the idea comes to fruition. On the other hand, if the short position moves against you, the size of the short in your portfolio increases automatically, potentially precluding you from increasing your short position at even more attractive prices. In more extreme conditions, you may even be forced to cover your shorts at a loss because you are now violating your own risk controls.

Let’s illustrate this with an example. We want to short stock A. Our risk management rules dictate that no individual short should be larger than 3.00% of AUM. Let’s also assume we initially size stock A into a 3.00% short. Table 1 describes two potential scenarios.[3]

Table 1

Now let’s also assume we initially size stock A into a 2.00% short. Table 2 describes the same two potential scenarios.


Table 2


By comparing Tables 1 and 2 we can highlight the inherent tension between profit and risk management inherent in sizing up a short trade:

  • A larger initial size for the short provides a higher potential profit (+0.60% vs. +0.40%)
  • But that comes with additional potential costs: not only the potential loss is higher (-0.60% vs. – 0.40%) and more importantly the option to short at higher prices is lost and we may even be forced to cover at an unattractive price, realizing the losses in the portfolio

It is important to note that the risk management limits are important to prevent escalating losses on shorts whose investment thesis proves out to be wrong. For example, on Scenario 2 in Table 1, if the PM would keep the short at 3.60% (thereby ignoring the risk management rule of reducing it to 3.00%) and the stock went up a further 20%, the losses would now be an additional -0.72% (20.00% x 3.60%) rather than –0.60%.

When you buy a stock, this sizing dilemma doesn’t occur. Let’s say you buy stock S up to 3.00%[4] of the fund’s AUM. If the stock initially declines 20%, you now lost -0.60% of AUM and are sitting on an investment that is now only 2.40% of AUM. We now have the option of buying more stock at a more attractive price. If the stock is kept at the same level and then declines another 20% we will lose -0.48% (20% x 2.40%). So, the loss on the second adverse event (0.48%) is smaller than on the first (0.60%).

The risk on the long (buy stock) positions declines when they move against us, opening up the option to reinforce the position at more attractive prices. In short positions, the risk increases when the stock moves against us, reducing the opportunity to reinforce the position and potentially forcing the closing of the position at a loss. Sizing is a critical skill on the short positions.


The previous section made it clear that a short investment doesn’t tolerate dramatic adverse movements in the stock price until the thesis fruition. Therefore, timing the entry and exit points are very important to minimize the potential for forced transactions at unattractive prices for risk management.

There is a strong propensity to be “too early” in a short trade. Long investors tend to be sanguine to early indications of trouble and discount it as normal bumps in the road while bidding the share price higher. For a successful short, exercise of good judgement on the potential impact to the company fundamentals of incoming news. Then we need to decide where the tipping point lies, which will start to sow the worry among the company investors that its future profitability may not be as high as they had anticipated.

Being too early in shorts is costly and may lead to losing money on a short, even though the original thesis is proven correct in the fullness of time.

To illustrate this let’s analyze Trivago. The company went public in December of 2016. It is a travel price comparison engine mostly focused on hotels. It is a challenger, following TripAdvisor which through its rich content and unmatched review content is the market leader. To compensate for this, Trivago embarked on a massive TV advertising campaign to acquire traffic. It would then sell this traffic onto online travel agencies and hotels. Their financials showed that overall the company’s customers were paying as much for the traffic provided by Trivago as it cost Trivago to acquire. To put it simply: Trivago’s revenue matched its spend on TV Advertising. Given its lack of additional differentiated features (reviews, social engagement, unique content) we didn’t see this as a sustainable business model. In fact, the market was saying that it didn’t see any value added by Trivago but just merely a low (or zero) margin reseller of traffic.

Fig. 2

Soon after its IPO Somar took a short position on Trivago. As can be seen from Fig. 2 we proceeded to experience steep losses on the trade as the stock doubled in the first 6 months of the trade. Investors were attracted to the company’s high growth rates and were convinced the company could continue to grow fast by adding a growing number of new users at lower average prices to eventual turn profitable. The first two quarters of 2017 showed progress on growth but not on margin. In the third quarter of 2017 the first cracks started to appear when growth faltered, and margins failed to improve.

While we recovered some of our losses in the second half of 2017 we ended up losing money on the trade overall by being too early. We were forced to reduce risk prior to our thesis being proven right.

* * *

Somar’s culture stresses the value of being honest, humble and hungry. No part of our business keeps us humbler than the short book. This is a massive opportunity ahead for us. It adds tremendous value to our investors and to our return profile. It requires flawless execution, emotional balance and strong judgement. We are heads down focused on capturing it and improving every week. We are excited by the roadmap ahead and look forward to reporting that back to you.


[1] We wrote about this in last month’s letter

[2] By contrast, the same is not necessarily true in long investments. If you buy a large position and it initially declines, its new lower size, provides you additional space to add on weakness. Also, if your initial investment is small, and the stock goes up, the new size in your portfolio is larger at the higher valuation.

[3] In all the described scenarios in this section we are assuming constant overall fund AUM throughout the period.

[4] To be clear we are able, and have, bought single long positions that are larger than 3.00% of AUM in our fund


Incumbents, Disruption, and Short Opportunities – June 2018

Incumbents, Disruption and Short Opportunities

“We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten. Don’t let yourself be lulled into inaction”
Bill Gates

“You can resist an invading army; you cannot resist an idea whose time has come”
Victor Hugo

“Your margin is my opportunity”
Jeff Bezos

This past month, General Electric (GE) was dropped from the Dow Jones Industrial Average after more than 110 years in the Index. GE was the last founding member of the index in its current format. This watershed moment calls our attention to the fragility of business success, constantly under attack by competitors, technological innovation and regulation.

Somar is relentlessly searching for short opportunities created by the abundant innovation we see in the world right now. We look for incumbents with high market shares and inferior consumer offers. The current strong and accelerating pace of innovation creates a fertile environment to find such opportunities. We are excited and believe that the Somar investment method positions us well to take advantage of them.
We have seen a larger number of former leaders go through hard financial times in the past few years. The accelerating disruption of large incumbents can be seen for example by analyzing the number of companies dropped from the Dow Jones Industrial Average index (composed of 30 companies). As Fig. 1 illustrates there has been a growing trend over the past few decades.

Fig. 1

Technological innovation and entrepreneurial prowess are allowing new innovative challengers to offer a
vastly superior value proposition to consumers: in the form of significantly lower prices, wider assortment
or better service. This leaves incumbent companies with the difficult task of sustaining their high market
share with an inferior consumer offering. If they can match the challenger’s offering this normally entails
lower margins. Frequently, challengers possess advantages that incumbents can’t even match (e.g. network
economies, superior customer information / customization, embedded in business processes).

To appreciate the impact that innovation has on the value of companies and their contribution to the overall
economy at any point in time it is instructive to look at the Dow Industrials components for different periods
of time. In 1884, Dow’s predecessor index was mostly composed of Railway companies1. By 1905 it was
composed mostly of Basic Materials and Utility companies2 After the Great Depression, in 1939 the
components were more diversified (see Fig. 2).

However, a lot of these companies no longer exist, others have gone through bankruptcy proceedings (e.g.
Bethlehem Steel, Chrysler, GM, National Steel) and others are under significant pressure to survive today
like Sears Holdings Corp. for example. This analysis is a clear reminder that size and leadership alone are
not guarantees of future financial success in the face of innovative competitors.


Fig. 2

Successful disrupters succeed by changing the source of competitive advantage. For example, for many
years, leaders in mass fashion leveraged large scale, good designers and strong marketing capabilities
through both media campaigns and capilar store fronts to offer affordable fashion to the masses.
With the advent of fast communication networks and large data processing capacity, large scale was no
longer critical to lower production costs: fast fashion players lowered costs by significantly reducing costly
mark-downs through virtually eliminating fashion risk. This new model shifted the basis of competition
from scale to responsiveness of supply chain. Challengers like Boohoo and Missguided succeeded by
offering consumers a significant upgrade to the value offered:
– More adequate and appealing designs in touch with current trends
– Lower prices (funded by lower markdown and marketing costs)
– Wider assortment
– Convenient home delivery
– Stronger community engagement through social media interaction with like-minded customers
This was possible by designing a different supply chain and distribution strategy
– Reducing lead times from 3 months to 2 weeks
– Making small initial runs, testing them online (for only a few hours) and producing larger batches
of the products the consumers liked
– Using customer and celebrity endorsement on social media to generate buzz and demand
– Home delivery from central warehouse with larger inventory and deeper size offer

DJIA Components on March 4, 1939
Allied Chemical and Dye Corporation General Electric Company The Procter & Gamble Company
American Can Company General Foods Corporation Sears Roebuck & Company
American Smelting & Refining Company General Motors Corporation Standard Oil Co. of California
American Telephone and Telegraph Goodyear Tire and Rubber Company Standard Oil Co. of New Jersey
American Tobacco Company (B shares) International Harvester Company The Texas Company
Bethlehem Steel Corporation International Nickel Company, Ltd. Union Carbide Corporation
Chrysler Corporation Johns-Manville Corporation United Aircraft Corporation
Corn Products Refining Company Loew’s Theatres Incorporated United States Steel Corporation
E.I. du Pont de Nemours & Company National Distillers Products Corporation Westinghouse Electric Corporation
Eastman Kodak Company National Steel Corporation F. W. Woolworth Company

For years, incumbents like The Gap Inc or H&M relied on their large scale and numerous store network as
a competitive weapon to keep expanding and taking market share against smaller mom and pop chains.
Today, however, these stores and large scale are a hindrance to their ability to move online faster and
efficiently and to move to a fast-fashion production schedule. This change of the source of competitive
advantage in the fashion industry has opened several short opportunities for Somar.
Somar believes that the process of disruption today is evolving faster for two reasons:
– Customers have instant and convenient access to information through the internet and their
smartphones. Therefore, they are quicker to find superior offers when available
– Easier access to capital through both venture capital and public markets, allows disrupters to scale
faster and mount a more robust challenge to incumbents3
With many disruption processes in place and faster scalability of challengers, Somar believes there are
plenty of attractive short opportunities in the markets today. Your team at Somar is heads down focused in
finding them and making them work for you. We will continue to report to you on our progress.


Source: Wikipedia; Somar Analysis

1 Chicago & North Western Railway Company; Delaware, Lackawanna & Western Railroad Company; Lake Shore Railway Company; Louisville & Nashville Railroad Company; Missouri Pacific Railroad Company; New York Central Railroad Company; Northern Pacific Railroad Company; Pacific Mail Steamship Company; Chicago, Milwaukee & St. Paul Rail Road Company; Union Pacific Railroad Company; The Western Union Telegraph Company.
2 Amalgamated Copper Mining Company; American Car and Foundry Company; American Smelting & Refining Company; The American Sugar Refining Company; Colorado Fuel and Iron Company; National Lead Company; The Peoples Gas Light and Coke Company; Tenessee Coal, Iron and Railroad Company; United States Rubber Company; United States Steel Corporation.


Somar Turns 2 Years Old – May 2018

Somar turns 2 years old!

The first two years have been an exciting journey for Somar. As we start our 3rd year we are very excited to continue to improve the quality of our portfolio, taking advantage of the large opportunities in front of us.

This month, we thought it would be good to hear from the team directly through a video. You can find it at: https://youtu.be/SyWZsbcJ6iU

Our Process to Evaluate Investment Opportunities – April 2018

Our Process to Evaluate Investment Opportunities

“You should never take more than you give
In the circle of life”

Elton John – Circle of Life, Lion King Soundtrack


The focus on creating more value than that which you capture is core to Somar. We believe we can deliver our investors a level of excess return vs. the risk they are taking that far exceeds the amount they pay us in fees. As an organization, we are focused on elevating and growing our employees to accelerate and upgrade their careers. As an investor, we partner with businesses that are creating more value for their customers than their competitors.

In this letter, I want to show you why I believe this is a very powerful approach to building a sustainable long-term investment portfolio. In addition, it is also a great framework for identifying great short opportunities. As an investor, Somar believes that we will thrive and achieve great returns, when the customers of the businesses we own thrive. And when the customers of the businesses we short are not receiving the best value for their money. We believe in full alignment with the fate and satisfaction of the end customers.

What does Somar mean by consumer value? We mean the difference between the maximum price the consumer would be willing to pay for a product or service and the price he pays for it. Let’s use an example: as a family man, I always look forward to spending Christmas with my family back in Portugal. It is something I dream about throughout the year and one of the highlights of my vacation. Therefore, I would be willing to pay quite a large amount for a plane ticket that would deliver me home. Let’s say I was willing to pay $10,000 for the trip (please don’t tell the airlines). If you book in advance, you can get a coach seat for no more than $1,000. Therefore, the difference between what I’m willing to pay ($10,000) and what I actually pay ($1,000), is my consumer value. In this case, $9,000.

Now, as an investor I don’t need to precisely quantify the consumer value. I just need to know whether a new product or service is going to increase it significantly or not. Continuing with our example: if an airline starts a low-cost service to Porto and charges $500 per ticket, as an investor I know that the consumer value for most, if not all of the consumers is superior. Incidentally, this is what companies like Ryanair and Wizz Air are doing in Europe. Therefore, as an investor I would be curious to learn more about this company.

Price is probably the easiest to understand improvement to consumer value but far from the only one. Others include choice, service and quality of product. In the airline industry:
– an airline could significantly increase choice by adding the number of destinations to which it flies directly (anyone likes to make connections?);
– an airline could improve service by offering more leg space, priority boarding, and better onboard food and entertainment options;
– an airline could improve the quality of the product by flying faster and getting you to your destination sooner. I know some of the readers of this letter have flown the Concord in the past.

Once a company offering a step function improvement in the consumer value is identified, Somar needs to answer two additional questions:
– Can the company provide the product while earning an attractive return?
– Can these returns be sustained over the long run? That is, can competitors copy the company’s offer?

If the company can sustainably offer the superior product, we need to understand how much of the market they could ultimately serve. To answer this, Somar tests the product, interviews existing and prospective customers and makes an estimation of how many additional customers would benefit from adopting the superior product. Based on our own scenarios for market share capture we will estimate the value of the company. We are attracted to situations where what we pay is significantly less than our estimation of the value. The risk-reward is attractive when the amount we can win if we are right is much larger than the amount we could lose if we are wrong.

This process is very effective in identifying attractive short opportunities as well. The thought process here is inverted. We are looking for companies whose consumer value proposition is inferior to that offered by another competitor. In addition, the company is either unable to offer the superior product offered by its competitor or can only offer it assuming a strong negative impact to its margins and returns. We will take a position when the valuation of the company doesn’t account for the negative scenario of ongoing market share erosion. The risk-reward is attractive when what we can lose if we are wrong is a fraction of what we can win if the market share loss materializes.

It is important to note that these market share dynamics are independent of the macroeconomic environment. What matters is whether a company has a sustainable superior consumer offer to its competitors. This doesn’t change whether the macro is favorable or we are entering a recession.

Now macro fluctuations, or even macro news will lead to sharp swings in share prices and create opportunities for long term investors. While any recession would certainly not be beneficial for our long investments, it would also likely hurt our shorts too which would offset some of the potential losses from our long book. Therefore, volatility normally tends to bring very attractive opportunities for Somar. We have been taking advantage of this since inception, more so in the last few months and will continue to do so in the future.

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There are several ways to be a successful investor. Other investors have had success with more leveraged strategies, financial engineering, macro analysis or even technical analysis. At Somar, we see ourselves as businessmen. We believe the best way to build wealth is to take care of your customers, add a lot of them every year by offering a superior product and let the operations drive our financial value. My background including several years working with leading companies as a consultant both at McKinsey and BCG has proven very helpful in our endeavor.

Drawdown: Part II – March 2018

Drawdown – Part II

In March we didn’t protect the downside as well as we did in February. Most of our losses in the month came from our European long book. A lot of our high conviction names declined significantly amidst the volatility and the absence of news post earnings season. Our work during the month indicates the thesis is very much on track with substantially all our high conviction positions. Therefore, we remain very confident for the performance of our portfolio going forward.

Our short book also didn’t perform up to our standards. That said we found new compelling ideas and added them to our book towards the end of the month.

Somar Contest – Name the Company

We like to keep the companies in our portfolio secret until we exit the positions so that we maintain mental flexibility and openness to incoming information and to change our minds. We are protecting against the commitment and consistency bias and the flawed decision-making it entails. At Somar we let the facts dictate what we should do with our portfolio. We strive to keep our ego and any public statements away from rational decision making on behalf of our investors.

The downside of this, is that you get less information on the portfolio than you probably would like. Also, most investors and prospective investors don’t have a way of discerning the diversity and attractiveness of our opportunity set.

To mitigate this, we launched a contest: “Name the Company”. Basically, we will provide you a description of companies in our portfolio (either long or short) and allow you the opportunity to guess their names and confirm it with us. What’s in it for you? Hopefully some fun and a $50 Amazon gift card. We are rooting for you and look forward to sending a lot of cards.

While fun, we hope this game will illustrate to you how “under-the-radar” these are. We work hard to deliver the highest returns and to earn your trust. Good luck!

Company A

This company is an emerging global leader in the fashion retail industry. It uses a “fast-fashion” supply chainfor fulfillment. This means on average they can get a run produced and on sale 2 to 3 weeks after it was first designed. They sell only online, using three different brands. For marketing they rely both on traditional performance marketing channels (search), word of mouth, and celebrity endorsement on Social Media. Their revenue growth has ranged between high double digits and low triple digits since inception and they are solidly profitable. Currently most of their sales come from their own clothing design but they are looking to add other brands to the offer. We estimate company only has a low single digit share of their market.

Company B

This company is a pioneer in the gaming production support services marketing. They partner with gaming studios to help them build international versions of their game. They also test games for bugs before they get released to the public. Recently they have developed art work, engineering and co-development capabilities. These offers are more and more important for game studios as games become more social and business models evolve towards “game as a service”. Company B has also been asked to build augmented reality apps for other companies. Currently more than 90% of the world top 25 gaming studios work with company B.

Company C

This company is a leading platform for self-directed investors. They offer consumers low prices, a best-in-class service and wider range of investment options. Their superior offer means they can grow revenues in the high teens to low twenties range on a consistent basis benefiting from the shift from defined benefit to defined contribution pension plans. They are developing an app that will allow consumers to move their cash between financial institutions to take advantage of the best interest rates at the click of a button. This will be a pioneering product in the developed world. If successful, this cash product will almost double their addressable market.

Company D

This company is a payments disrupter addressing an underserved market: individuals and small businesses that are mostly unbanked or underbanked. They use direct distribution supported by media, unlike their competitors that mostly use bank branch distribution. Company D serves the full needs of their customers with an offer ranging from wallets, to acquiring services and POS / dongle sale. They have been growing revenues in the high double digits / triple digits and are solidly profitable with expanding margins due to operating leverage. We estimate their current market share is still in the mid-single digits.

Company E

This company is a global pioneer in the funding and investment in legal claims. Litigation costs are escalating due to higher costs of discovery. For example, lots of data is now available in electronic media: e-mails, voice-mails, text messages, phone call logs, etc. The additional hours it takes to compile and analyze all the relevant facts make it riskier for parties to pursue litigation. Law firm clients are asking them
to take risk and contingent payments on outcomes. Law firms prefer to bill by the hour and not be at risk but are being forced to adjust to the market pressures. Company E offers an alternative by financing these costs in exchange for preferred returns and contingent payments. Their return on invested capital has been
stellar and we estimate only a single digit percentage of the overall opportunity has been tapped.

Company F

Company F is an emerging educational k-12 provider in a major global economy. They are the leader in premium tutoring and support services. Led by the founder who is also its largest shareholder, they are still early in the capture of their overall opportunity. We estimate their market share is only low-single digits but company F is growing more than 30% per year. Their product is outstanding: their rate of acceptance of placement of students into top Universities in the country is more than 5x that of the national average.

Company G

A leading fashion and clothing retailer in the USA. Company G built its success on strong branding and attractive locations for its stores. Most of its sales still come from brick and mortar stores but it is developing an active online presence. Its supply chain is efficient and organized around cost minimization. This leads
to most of its production being made in Asia and long cycles (3 months or longer) between clothing design and the time a piece is available in store. This has created challenges to sell items at full cost as more competition emerges using fast supply chains and electronic distribution channels. Company G has hired a new CEO in the last 18 months.

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We hope this glimpse provides you with more information about why we are excited about the future performance of our portfolio. We can’t wait to see your answers and hopefully to send a lot of $50 Amazon cards to the winners. Also, if you have suggestions for us on how to do this more informative and fun for you please let us know.

Drawdown – February 2018


The past few weeks have brought with them volatility that has not been seen for 2 years. With that, you may be wondering how your portfolio fared during this period. While the S&P 500 saw a drawdown of -10.44% between January 29th through February 8th and the Eurostoxx50 went down 7.43%, Somar’s performance was -3.07%. At no point was Somar’s performance negative for the year, unlike the S&P 500 which reverted back to November levels (please see the table below for more information.)


Day Somar S&P500  



1/29/2018 -0.15% -0.67% -0.12%
1/30/2018 -0.46% -1.08% -0.96%
1/31/2018 0.27% 0.05% 0.07%
2/1/2018 0.20% -0.05% -0.76%
2/2/2018 -0.68% -2.11% -1.51%
2/5/2018 -1.38% -4.10% -1.26%
2/6/2018 -0.41% 1.75% -2.41%
2/7/2018 0.49% -0.50% 1.76%
2/8/2018 -0.95% -3.74%  



Total: -3.07% -10.44% -7.43%

Table 1

Note: Returns above represent gross performance for each of the calendar days mentioned


While we do not intend to report our daily performance in the future, we chose to do so on this occasion as it marked the first correction your portfolio was exposed to since inception. During downturns our performance is helped by our ~50% net portfolio exposure. This means that we would expect to have losses in drawdowns that are half of the market decline. Of course, that also means that our returns should be half those of the market during rallies. At least that is the theory if we had a 1-to-1 correlation with the S&P 500.


However, Somar does not have an exact correlation with the S&P 500, which comes down to our ability to select and invest in transformative companies that have defensible competitive positions, a large addressable market, and trade at a sensible price, and to short names that are losing market share, are not delighting their existing customers and which trade at unreasonably high valuations. This philosophy served us well during this correction, and we believe it will continue to serve us well through future market swings.


From Table 1 you can see that based on the S&P 500 movement a reasonable investor would expect Somar to be down slightly over 5% during the period (based on the Eurostoxx 50 we would predict a loss of about 3.72%). Our loss of 3% during that period showed that we outperformed this expectation by about 2 percentage points (or roughly 65 basis points against the Eurostoxx 50).


We believe there are two reasons behind the outperformance:

  • the drawdown occurred in the peak of earnings season when most of our long names reported strong earnings while a lot of our shorts disappointed; and
  • much of our exposure on the long side is not included in the S&P500 indexes and therefore didn’t face the selling pressure from investors reducing their passive investment/ETF exposure.


Our risk management and high conviction in our positions supported by our fundamental analysis allowed us to avoid being forced sellers during the downturn. Instead, we could play offense and look for opportunities created by the market’s volatility.


A 10% correction materially alters the risk-reward profile of most stocks. Somar updates our assessment of the risk-reward of the companies we track daily and is ready, willing and able to act accordingly.


  • Our first step is to determine what fundamental changes caused the market correction and what impact that change has in each of the companies we track.
  • Our second step is to assess the fundamental impact the market correction itself may have on the companies’ fundamentals.
  • Our third step is to update our view of the up and down potential of each company which combined with the market price yields our assessment of the investment case risk-reward for each stock.


This work uncovered new attractive opportunities created by the market volatility. During the drawdown, Somar added to some of our highest conviction longs at attractive prices and covered some shorts that hit our price targets.



Your portfolio has recovered well since the drawdown to February 8th. While the S&P500 increased 5.32% since then and the Eurostoxx50 increased 1.85%, Somar’s portfolio increased 4.69%.


We want to make it clear that we are not calling February 8th the bottom of the market. We have no idea what the market will do in the future. What we intend is to highlight how your portfolio reacts to moments of market volatility and how your team at Somar handles the risks and opportunities created.


We are pleased with the way the portfolio performed in February amidst the volatility. The asymmetry of protecting the downside while capturing the upside is what we strive for at Somar.  We would caution you to not extrapolate this type of outperformance for every volatile period. During February we also benefitted from the earnings season that mostly provided encouraging data points for our investment thesis. That said, we would be disappointed in the future if volatility doesn’t prove to be an opportunity for Somar’s performance and portfolio construction.


Short Illustration

“Your margin is my opportunity”, Jeff Bezos – Amazon Founder and CEO


Key to the asymmetry we experienced in February is a thoughtful and asymmetric short book. This means a short portfolio that provides a large downside potential while offering limited upside.

Some mature packaged good companies present such an opportunity.  The past few decades, these companies built leading positions supported by strong competitive advantages:

  • Scale – provides lower production, distribution and marketing costs
  • Brand – over the years these leading brands built strong brands on the consumers’ minds, that in some cases came to represent the product category (e.g. Kleenex – synonymous of soft personal paper tissues)
  • Distribution – companies leveraged their strong brands and large scale to establish and crystalize an advantageous distribution position. In a typical supermarket the top brands occupy the largest and most attractive (eye level) shelf space.

These companies did a wonderful job using the above advantages to expand their market share and lower their costs. As a result, they achieved extremely attractive economics for its owners: Operating margins of 20% to 30% and ROIC of more than 20%.

This steady performance coupled with these businesses’ relative resilience to the economic cycle allow these companies to trade at high multiples of earnings. They came to be known as consumer staples and perceived as low risk, dividend paying investments.


Fig. 1

Source: Somar

The emergence of digital commerce and social media is eroding some of the advantages that brick and mortar retail has provided these companies. Our work suggests that these companies have entered a period of decline in their life cycle and are in a process of inexorable loss of market share.

  • Scale is less important
    • Small businesses can now get nationwide or even international distribution online either directly or by partnering with platforms like Amazon or Alibaba
    • Social Marketing allows innovative companies to reach millions of customers in a very cost-effective way[1]
  • Traditional brands are being challenged
    • Traditional leading brands have poor connection with customers while successful innovative brands emerge with a strong social media fan base that is highly engaged
    • Distributors both online and offline are putting additional emphasis on developing and promoting their private label offers
  • Distribution is exploding
    • Online commerce offers an infinite shelf space
    • Online platforms / marketplaces like Amazon and Alibaba are in control of which brands get displayed on top and some are demanding higher advertising fees for the better positioning
    • Online native competitors are taking a larger share of online commerce. According to One Click Retail, which measures sales on Amazon, “No Name” brands are significantly outselling traditional brands on Amazon (Fig. 3)

Fig. 2

Source: Amazon, Somar Analysis

Fig. 3

Source Ascential


With very high (20%+) operating margins, full market penetration, lowered barriers to entry, consolidating distribution channels with higher bargaining power and well-funded new innovative players, the future of these traditional brands appears to be a gradual decline. Given their optimized cost structures and pricing, and the inherent operating leverage of their operations, the slowing of sales growth or even decline will put pressure on their operating margin and operating profit.

A large portion of these companies trade at a premium to the overall market in terms of price / earnings multiple. Our DCF models show those prices can only be justified if we assume continued market share growth and margin expansion. Our research suggests this is highly unlikely. We see limited upside potential for these stocks and a material downside. Somar has built a short position in some of these companies.



[1] For an example of a very successful viral marketing campaign please check the Dollar Shave Club add at https://www.youtube.com/watch?time_continue=4&v=ZUG9qYTJMsI which has more than 25 mn views.



Value Creation – January 2018

Value Creation

At Somar we believe the next few years will come to be known as the Golden Age of Investing (see June 2017 letter). Around the world, the current breadth of innovation compounded by accelerated consumer adoption is creating abundant opportunities for entrepreneurs to offer their customers a step-change improvement in value proposition. Entrepreneurs can then capture part of this value created. Somar investors will share in this too when we partner with the winning entrepreneurs at a sensible valuation.

Our financial return comes from real economic value creation rather than from trading acumen. For us, the most sustainable, enduring and powerful source of economic value is customer value creation. This includes offering consumers lower prices, more choice and better service. In this letter, we will provide illustrations of how we position our portfolio to take advantage of them.

Lower Prices
E-commerce – By now, I believe most, if not all, of the readers have saved money buying something online. Before e-commerce, price information was opaque and retailers used that to their advantage. Their mantra was “location, location, location” – if you had the right location you could afford not to compete on price. The advent of e-commerce and the penetration of smartphones changed the power balance and are saving significant money for consumers. Even when in store, consumers may use their phones to compare the price of the same item on different retailers and order it if they find a cheaper option. Some entrepreneurs are building retail operations that eliminate costs that price-sensitive customers don’t value (such as brick and mortar stores) and reinvesting those savings into lower prices. This allows them to take market share and grow their own profits. The customer wins and the entrepreneur wins.

Online Travel – Before I came to America 15 years ago, I used a travel agent for all my travels. It was a very opaque process. I asked for prices for a few dates for my travel and got some quotes. It was a mystery to me why they fluctuated so much and what I could do to minimize expenses. With the advent of the internet, new tools were given to consumers to manage their travel cost:
• You can skip the middleman and book flights directly with airlines.
• You can compare prices across airlines, itineraries and different dates.
• You can also browse many more flight and lodging options.

Marketplaces that allowed consumers to get full transparency and contract directly with flight and lodging providers share in the savings offered to consumers. As more and more consumers save money by using these travel marketplaces, this increases the revenues and profits of the marketplaces and the returns for their investors.

More Choice
Online Marketplaces – Marketplaces have expanded dramatically the options for consumers. In general merchandise, a Wal-Mart Supercenter has between 120k to 160k1 SKUs2. Internet changes the game in terms of assortment. Amazon on its marketplace offers more than 350 mn SKUs3. This large long tail assortment makes it easier and faster for consumers to find what they need and not settle for inferior substitutes. It leads to happier customers and higher sales.

Online classifieds – Years ago. if you were looking for a house or a car you would probably buy a few newspapers, browse the classified sections and circle a few for viewing. This was time consuming, hit and miss and sometimes when the call was answered, the house or car were no longer available. Online classified platforms today offer a superior experience: a wider range of options, ability to filter results by geography, price range and other attributes. They also display photos and reviews. The online platforms are generally free to the consumer. The consumer can quickly find the car or house that meets her needs and book appointments to view the car/property. Online classifieds allow advertisers to reach a wider audience at a lower price. For example, Rightmove PLC in an investor meeting claimed a few months ago that the amount spent on online property classifieds in the UK is still about half of the total offline spend in 2007. By providing a superior product to both advertisers and consumers, online classified platforms create significant value in their markets. As a shareholder we get to share on this.

Food ordering and delivery – When I was a teenager the only food they would deliver to your home was pizza. With every call you would need to provide your order details, address and payment information, which was time consuming and prone to errors. The advent of the internet, mobile phones and food aggregator apps present a more compelling consumer value proposition. Each app has your payment and delivery information stored, so you can now order food from hundreds of restaurants and from a variety of food choices. You can even get ice-cream delivered! (I wish I had that as a kid). Restaurant owners also benefit as they get extra orders that come at high incremental margins without having to expand their serving facilities. Customers are delighted to have more options and restaurateurs profit from the extra demand. The aggregators that facilitate this match share in this value creation and so do its shareholders.

Better Service
Payments – While still not my favorite activity, it has never been easier, safer and more rewarding to pay for my purchases than today. When I was limited to cash and checks it was not unusual for me to be unable to complete a transaction for lack of access to my funds. The development of electronic payment networks allowed consumers to easily access their funds in a convenient manner. In addition, it provided rewards (miles, cash back) on a percentage of their spending and protection against unauthorized charges. With the growing penetration of smartphones, new services have been added that allow you to store your card information in wallets and even transfer funds to your friends and family with just a few clicks. Electronic payments enable you to transact with businesses at a distance (e-commerce) and setup recurring payments (e.g. subscription, utilities). Finally, consumers can analyze their past spending automatically by doing analysis of the transaction records. Electronic payments are also a boon to merchants allowing them to sell and charge consumers without them being present (including recurring payments), speed-up check-out lines, reduce costs of handling cash and even launch loyalty programs. Payment entrepreneurs provide this value, charging only a small percentage of each transaction. Consumers end up not paying the fees (they are mostly borne by merchants).

Online TV – Growing up in Portugal my TV options were limited to two channels, both owned by the state. RTP 1 was a generalist channel that started transmitting at 5PM on weekdays and gave 30 mins of cartoons per day. RTP 2 was focused on culture and would start at 7PM. Cable was a big step forward in that it dramatically expanded options. However, you still needed to put up with advertising and either record a show or be sitting in front of the TV when the show aired. Internet TV is changing the game once again and creating happier customers. You don’t have to wait for the allotted time and can stream your favorite show when you are ready. You also don’t have commercial interruptions. In addition, applying Artificial Intelligence to your viewing patterns, services like Netflix, Hulu or Amazon Prime can suggest shows that you may be interested in watching. When I compare the value I get from my TV now vs. 30 years ago it is a night and day difference. A lot of value has been created for viewers. And some of that is being captured by the service providers.

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Somar succeeds by partnering with entrepreneurs that offer their customers a sustainable step-change improvement in value proposition. Around the world, we see an abundance of these opportunities. Many have scored early traction but are only 5% or less penetrated in the overall opportunity. It is still early days. We are excited by the road ahead and are grateful you chose to participate in this opportunity with Somar.


1 Source: www.walmart.com
2 SKUs – Stock Keeping Units: measuring the number of products included in a retailers’ assortment
3 Source: ExportX; 360 pi