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.
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.
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.
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