How much would you pay for untapped pricing power?

[jfan]

I appreciate that untapped pricing power could be used strategically as a means of delivering more value to customers than its costs in order to maintain customer loyalty. 

As an outside passive minority shareholder, would you pay a premium for this untapped pricing power and if so, how much? (in light that you won't have control on the pricing itself) 

Would this be different if you could acquire the entire company and influence pricing?

 

[giulio]

Quick answer is = a lot. The multiple you pay goes down quickly even with small pricing/volume increments, potentially cutting the entry multiple in half over 4 years (just done a quick calculation on excel so I might be wrong).

As a reference point TransDigm routinely pays about 15x EBITDA for acquisitions.

The real question is if this pricing power is real. Is there any evidence of this company consistently raising prices without losing volumes/customers? Why can they do it? Why have they not done it so far? Can they defend their position? 

A high ROCE is a good starting point for quality. What's the reinvestment opportunity? 

I would thoroughly examine these questions first.

If you are satisfied with the answers you can pay a very high multiple and still do very well. being value focused I would capped it at 20x. But it really depends on the opportunity.

 

G

[jfan]

On 7/17/2024 at 7:42 AM, giulio said:

Quick answer is = a lot. The multiple you pay goes down quickly even with small pricing/volume increments, potentially cutting the entry multiple in half over 4 years (just done a quick calculation on excel so I might be wrong).

As a reference point TransDigm routinely pays about 15x EBITDA for acquisitions.

The real question is if this pricing power is real. Is there any evidence of this company consistently raising prices without losing volumes/customers? Why can they do it? Why have they not done it so far? Can they defend their position? 

A high ROCE is a good starting point for quality. What's the reinvestment opportunity? 

I would thoroughly examine these questions first.

If you are satisfied with the answers you can pay a very high multiple and still do very well. being value focused I would capped it at 20x. But it really depends on the opportunity.

 

G

thanks...that means a lot of sense. I've been looking at some luxury companies out there, and it seems that for those with secondary re-sell markets (or at least a demand for such) have a significant 2-4x consumer surplus that is left uncaptured. Certainly, this might suggest that their financials are under-earning to a degree with the caveat that full capture of this surplus would be long-term detrimental to its brand value over time (ie the barrier to a purchase commitment is raised if the expensive Birkin, Patek-Phillipe, Chanel, Ferrari item can't hold "value" into the future). 

 

With the valuation of these luxury companies routinely trading at lofty numbers, is it just the fact that the market recognizes this untapped pricing optionality or is it massively over-estimating the growth potential/re-investment runway for these companies (ie ubiquity being the enemy of luxury, # of HNWI out there and the growth of their net worth, barriers to exit for failing legacy brands, and fickleness of end customers)? 

 

I guess these particular companies and their securities should be viewed as alternatives to inflation-protected long-term treasuries coupled with the share scarcity in the float as part Rembrandt if the brand can survive multi-decades into the future. 

 

 

 

[gfp]

A company like Costco has untapped pricing power for something like their membership fee.  They retain a large percentage of their membership base when they raise the fee and the fee represents most of their income.

 

Hermes and Ferrari already monetize the rarity and re-sale premiums for something like a Birkin bag or a limited edition highly desirable Ferrari by requiring many purchases of less rare and desirable (but extremely high margin) products to even be considered for invitation to buy the products we see the re-sale premiums on.  

[Spekulatius]

What is scary about these luxury companies is that the product can become irrelevant due to change on consumer preferences the brand running out of fashion for something else. What would happen if women do f care about handbags in favor of different accessories?

 

I think this happens with watches to some extent where people just prefer smart watches or a different crowd of people does not wear watches at all as they grow up without them. I never collected watches, but had a few nicer worn that I rotated and wore a watch my entire life until I didn’t. After all I had a watch (smartphone) in my pocket. If you grow up without watches or rely on your Apple Watch for many things, you may just have no desire to buy an expensive watch as an accessory.
Same thing that happens with booze potentially.

I guess you just have to follow these slow changes over time when investing and hope that management is good enough to recognize them.

 

Now here is another company that understand untapped pricing power - AVGO. These guys are masters at charging more for products or features that were free before once they buy a business..

[DooDiligence]

I sold all my watches years ago and replaced them with a phone. There's a lot of somebodies who'll pony up for one of these though. Breguet produces some nice pieces too. Art, history and precision engineering for the well heeled gent who prefers quiet money. But yeah, my phone works fine too.

 

 

https://www.alange-soehne.com/us-en/timepieces/saxonia/lange-31

Edited July 20 by DooDiligence

[Morgan]

A few days ago I bought some 12 packs of Pepsi. I used to buy them all the time before Covid.

 

Pre-Covid 2020: four 12 packs were $12 when on sale, or $0.25 per can.

 

2024: three 12 packs for $20 when on sale, or $0.55 per can.

 

CAGR of 21% per year.

 

I guess Pepsi has tapped their pricing power and will continue to do so. 

[Spekulatius]

@DooDiligence I am certainly biased but I like the boutique German watches more so than the Swiss ones. I used to wear a watch since I was like 5 and went to school. Got used to have something on my wrist and it felt like something was missing when ai didn’t. Then almost 50 years later I lost my one of my watch on a trip and go used to not wearing one. By the time ai got home, I didn’t not really like to wear a clunker on my wrist any more that relay went needed since my phone gives me the time. Any wife also used to wear watches but as a nurse, the Apple Watch is very practical so she wears those and all her watches including an expensive Rolex she got as a gift from her Mom went into the drawer and barely see the daylight again.

 

We bought our son a watch too and Inhave almost never seen him wearing it, because obviously the smartphone replaced it.

 

So over time, I think the population will change to one that is not used to watches any more and my hunch is that they won’t care about luxury watches as much either.

 

Sort of like collecting stamps was really popular 40 years ago, but who uses stamps any more or writes  letter, so the number of stamp collectors has a gone down and so have the prices for all but the highest valued ones and  those have seen less appreciation.

 

Cars could have similar problem if everyone just rides Uber in 50 years and cars are not part of the daily culture any more and transportation becomes a mere utility. Than would shrink the number of buyers , simply because less people are interested in those products, I think.

Edited July 20 by Spekulatius

[DooDiligence]

2 hours ago, Spekulatius said:

@DooDiligence I am certainly biased but I like the boutique German watches more so than the Swiss ones. I used to wear a watch since I was like 5 and went to school. Got used to have something on my wrist and it felt like something was missing when ai didn’t. Then almost 50 years later I lost my one of my watch on a trip and go used to not wearing one. By the time ai got home, I didn’t not really like to wear a clunker on my wrist any more that relay went needed since my phone gives me the time. Any wife also used to wear watches but as a ruse, the Apple Watch is very practical so she wears those and all her watches including an expensive Rolex she got as a gift from her Mom went into the drawer and barely see the daylight again.

 

We bought our son a watch too and Inhave almost never seen him wearing it, because obviously the smartphone replaced it.

 

So over time, I think the population will change to one that is not used to watches any more and my hunch is that they won’t care about luxury watches as much either.

 

Sort of like collecting stamps was really popular 40 years ago, but who uses stamps any more or writes  letter, so the number of stamp collectors has a gone down and so have the prices for all but the highest valued ones and  those have seen less appreciation.

 

Cars could have similar problem if everyone just rides Uber in 50 years and cars are not part of the daily culture any more and transportation becomes a mere utility. Than would shrink the number of buyers , simply because less people are interested in those products, I think.

 

Glashütte is a nice German watchmaker (owned by Swatch as you undoubtedly know).

 

https://www.glashuette-original.com/en/

 

Swatches fortunes seem to rise and fall in China.

 

https://fortune.com/europe/2024/07/15/luxury-watch-omega-owner-swatch-groups-moment-has-passed-profits-drop-70-in-6-months-big-impact-is-china-blancpain-harry-winston/

[Spekulatius]

31 minutes ago, DooDiligence said:

 

Glashütte is a nice German watchmaker (owned by Swatch as you undoubtedly know).

 

https://www.glashuette-original.com/en/

 

Swatches fortunes seem to rise and fall in China.

 

https://fortune.com/europe/2024/07/15/luxury-watch-omega-owner-swatch-groups-moment-has-passed-profits-drop-70-in-6-months-big-impact-is-china-blancpain-harry-winston/

I have no idea how Swatch can do as badly then they did during the last 15 years, They owned so many brands at so many price points and they generate 80% gross margins but someone how their operating margins have more than halved to ~10%. They seem to care less about profits than the post office.

Edited July 20 by Spekulatius

[ValueArb]

19 minutes ago, Spekulatius said:

I have no idea how Swatch can do as badly then they did during the last 15 years, They owned so many brands at so many price points and they generate 80% gross margins but someone how their operating margins have more than halved to ~10%. They seem to care less about profits than the post office.

 

The watch business has lost a lot of revenues to Apple over the last decade, last time it was analyzed Apple Watch makes more profits than the rest of the market combined, and IIRC something close to half the revenues.

[jfan]

On 7/20/2024 at 7:28 AM, Spekulatius said:

What is scary about these luxury companies is that the product can become irrelevant due to change on consumer preferences the brand running out of fashion for something else. What would happen if women do f care about handbags in favor of different accessories?

It seems to me that the persistence of some of these luxury brands is their ability to say NO to their very wealthy customers who are not accustomed to being denied anything they want in life. It is less about the actual product but the mindshare/relationship between the heritage of the brand with customer themselves. All these products (bags, watches, collector cars) are essentially commodities, and will have competing products that deliver more utility at a lower cost, but the truly successful brands are selling the ability to belong to an exclusive club more than they are selling these items. It seems that companies that rely on their brand, are especially maniacal about maintaining this relationship. 

 

Costco's membership, as @gfp, pointed out is similar. Their promise to deliver high-quality low cost products that we use daily is carefully nurtured and cutting out that membership would be inconceivable in our household (and I suspect many other households). Perhaps the acid test is the number of people that would utter the statement (as my wife does often), "I love Costco". 

 

I'm no brand/marketing expert, but after studying a few of these brand-dependent businesses, it seems the successful ones understand their relationship and take certain elements to the extreme and maintain that over time. They then calibrate their funnel to find the next generation of customers at the same time optimizing their most avid supporters (ie super-fans) life-time customer value (ie minimize retention costs, increase share-of-wallet, reduce churn). 

 

It is very interesting that many of these luxury brands have existed decades owned by families or non-profit foundations. I think it requires the caretakers of these brands to be particularly long-term focused and have significant abilities to defer gratification to ensure brand mindshare and survival.   

[jfan]

15 hours ago, ValueArb said:

 

The watch business has lost a lot of revenues to Apple over the last decade, last time it was analyzed Apple Watch makes more profits than the rest of the market combined, and IIRC something close to half the revenues.

 

Rolex revenues (USD)

 

10 billion swiss francs = $11.25 billion USD

 

 

I think the same was said about the luxury watch marker when the quartz watch came out. Business breakdowns had a nice podcast on the history of Rolex. Can you own both? I think you can. Will you use them differently? Probably. Will you pass on your Apple watch to your heirs? Low probability. 

 

Just speculating, perhaps, the luxury watch brands, will become even more coveted because they are becoming more scarce and Apple has paradoxically increased their brand value by taking over the middle-tier markets.

[Luke]

20 hours ago, jfan said:

 

Rolex revenues (USD)

 

10 billion swiss francs = $11.25 billion USD

 

 

I think the same was said about the luxury watch marker when the quartz watch came out. Business breakdowns had a nice podcast on the history of Rolex. Can you own both? I think you can. Will you use them differently? Probably. Will you pass on your Apple watch to your heirs? Low probability. 

 

Just speculating, perhaps, the luxury watch brands, will become even more coveted because they are becoming more scarce and Apple has paradoxically increased their brand value by taking over the middle-tier markets.

 

Good video about problems in the luxury market and rolex/watches