Expert Excerpts: Ad Tech & Marketing

                                                      
 
 
 
 
 
 

Scott Galloway — Staying Motivated Now

                                                      
 
 
 
 
 
 

Terry Kawaja — What Happens Next in AdTech and Marketing

Terry Kawaja Transcript

Larry Bernstein:
We’re going to go to, Terry Kawaja next. Terry worked with me at Salomon, but since then, has founded and become CEO of Luma Partners, an investment bank focused on digital media and marketing.

Terry Kawaja:
Advertising technology or ad tech as it’s known, occupies an esoteric corner of the B2B world that usually doesn’t get much attention. Companies like The Trade Desk, Magnite, PubMatic, Roku, Unity, Digital Turbine Viant and AppLovin, that’s right, I said AppLovin, are hardly household names. And yet these eight stocks sport a combined market cap of $150 billion, over twice the value of the top five ad agency holding companies. It turns out these companies are foundational to the operation and monetization of the internet. Subscription models are not an option for the vast majority of publishers, which rely instead on advertising revenue to support their content businesses, including journalism.

The numbers at stake are substantial. Research firm, eMarketer, projects digital advertising revenue in 2021, will reach almost $200 billion in the US alone and is growing at a breakneck 25% pace, as it has been for the last 15 years. That excludes the opportunity in television, as that channel becomes digitally addressable as viewing shifts from traditional linear to streaming another, $70 billion of market opportunity. This is all part of the sectors migration from art to science, as data and software improves both the efficacy and efficiency of media and marketing. But despite this growth and opportunity, the sector was out of favor with investors for many years, a phenomenon I attribute to three factors. One, the over fragmentation of the sector, there are over 5,000 independent companies and the ecosystem, two, the dominance of big techs ad triopoly, Google, Facebook, and Amazon, enjoy a two third market share of the entire digital ad revenue and three, the threat to user data sources under the guise of privacy.

The user data I refer to is the fuel that drives audience targeted advertising, an approach that yield substantially higher revenue than contextual targeting, which targets audiences based on website content. Audience targeting uses JavaScript, known as a cookie that anonymously identifies the user and associates their viewing behavior for purposes of content and ad relevance. With audience targeting, men don’t get feminine hygiene ads and people with auto leases nearing expiration, will likely see more Chevy or Mercedes commercials. Chevy, if you’re low income, Mercedes, if you’re high income. At a time when journalism and content publishers are suffering economically and are outgunned by the big tech platforms, they need this form of revenue realization. Now there are two sources that threaten the use of this audience data, one is privacy regulation, and the second is data deprecation by the large tech platforms. Let’s peel the onion on these two, with a perspective on how they impact privacy and antitrust.

Governmental bodies from Europe to the US States, have implemented legislation to protect user privacy and limit data collection, except for instances where the user explicitly opts in. While the aim of this regulation is laudatory, I would submit that there’s both an overcorrection and unintended consequences. The overcorrection comes in the form of conflation of the privacy concern. No one would argue against the need to ensure protection of users’ personally identifiable information, or PII, but regulators have lumped that in with the cookie, an anonymous 10 digit number matched with the user’s proclivities, to personalized content and advertising. It’s not dissimilar to when politicians conflate illegal border crossings with the H1B visas available for highly trained engineers, both are “immigration” yet are very different. By doing this privacy zealots have created a boogeyman out of the cookie and third-party data.

In essence, there was always an implicit value exchange between publisher and user. The user provides their attention and data in return for free content. The new regulations make this explicit by requiring users to opt-in on every web visit where they are not registered. How do I know this is an overreach and that users are generally fine with the exchange? Well, the opt-in rate is over 90% on daily interactions by over 500 million people living in the EU. That’s one hell of a sample. Anecdotally, if you ask young people, they are even more than happy to trade anonymous tracking, to avoid paying for content. This restriction on third-party cookies means that publishers can only use first party data collected from logged in users who have given permission in their terms of service. This will have the effect of substantially advantaging the triopoly, an unintended consequence, since these are the companies often cited as the reason for privacy regulation in the first place.

So let’s recap. These privacy laws instituted to protect users from something they don’t really care much about, are making the web worse for users, reducing yield for publishers and strengthening tech monopolies as well. The other threat to audience data is deprecation by the large tech platforms, primarily Google and Apple, who control much of the digital tech infrastructure in the form of workflow intermediaries like DoubleClick, browsers like Chrome and Safari and devices like iPhones and Android phones. Google has announced that it is eliminating the cookie and not supporting any third party identifiers. Again, a move that will not harm their mostly first party ad business, making the web less democratic. And they’re doing this in the name of privacy.

This coming week, in fact, Tuesday, Apple is expected to implement a restriction to tracking in apps on the iPhone, which will have a similar effect of substantially hurting publishers and driving people to pay for apps, which lo and behold, benefits Apple’s app store that gets a 30% cut of such revenue, also in the name of privacy. So the net effect of these “privacy initiatives” is to preserve and strengthen monopoly power, currently both Google and Facebook are facing antitrust scrutiny, but the odds are long on whether they will be any substantive recourse. I believe we do need antitrust regulation on big tech, to oxygenate the market and democratize the web. It’s unfortunate that misguided privacy policies will have the opposite effect.

Terry Kawaja QA Transcript

Larry Bernstein:
Let me start out with a question about these cookies and this privacy angle. You highlighted the fact that the EU has been aggressive as a first mover, but we’re seeing states in the US also, I think it was California, maybe Virginia, have also been active in privacy policies. Who’s driving the American story? How is it that we’re getting involved in this perverse way?

Terry Kawaja:
Well, sadly, it’s a really a small cohort of people. I label them privacy zealots. And the reason I do that is because you’ve got these advocates who believe in that again, conflating the notion of what constitutes a privacy infraction from all ends of the spectrum, whether it’s overt privacy infractions surveillance, I think that we could all agree is bad and these general, anonymous, tracking capabilities. And so you get a lot of people out of universities, they tend to be out of the left wing of these universities. They’re the ones guiding policy which have been introduced. And the net effect of this I think is dire because it particularly hurts smaller publishers.

Todd Benson:
Interesting. I’m curious basically Rishad Tobaccowala, if you’re still on this call, does Terry have it right? Or is he missing something?

Rishad Tobaccowala:
Terry has it more right than most people do. And he’s done the research and I believe it is right. And to a great extent, what will eventually, I think happen is marketers, whenever you make it difficult for them, they go to places where they think it’s all well lit, but in fact, it puts them at further and further risks. So while this is also not good for consumers at a particular stage, a marketer has no access to make what I call have strategic optionality. We saw that in after Black Lives Matter. One of the reasons why every marketer had to go back to Facebook, regardless of what Facebook did or did not do, is they couldn’t afford not to be with Facebook. And this is the first time I’ve seen marketing companies have no strategic optionality, and this is not going to help them.

Terry Kawaja:
I concur with that other conclusion, which is if you’re going to drive everyone towards Facebook and let’s be clear. The reason Facebook has one of the most phenomenally, historically unprecedented, fastest growing media business in the world. Why is that? Because demonstrated efficacy, right? They do this data-centrism targeted advertising. And whilst I would agree that some of it is creepy and Facebook in particular has got elements of surveillance and they’re everywhere. And the company itself can be criticized for a variety of things. One cannot take away the fact that they’ve built a trillion dollar business on a rapidly growing advertising business. That the reason why people continue to spend money on it is because it works. It’s a closed loop Petri dish of perfect information.

Todd Benson:
So if you’ve suggested Apple comes out on Tuesday and says, “We’re going to introduce additional privacy”, which presumably makes it tougher for Facebook, does Facebook stocks sell off or does this hurt Facebook’s business or does Facebook basically have such size and scale that they can get around it? And it basically just hurts everybody else and only makes Facebook stronger?

Terry Kawaja:
I think it hurts everyone. So I would expect that should this proceed as planned it will have an impact on Facebook stock, but I got to imagine that’s already factored into the stock. I think in the long run, and this is the sad part of it, is it unnaturally or disproportionately affects, helps, these big companies because it may hurt everyone, but it hurts the bigger guys less or said another way, it hurts the smaller guys more. The other factor here is this whole notion of shifting from advertising, which is “bad,” right, to paid media, is that it’s extraordinarily regressive, right? Scott Galloway, I think had a great quote. He said, “Increasingly advertising is becoming a tax on the poor,” because people with enough means will simply pay to consume media in an environment without ads.

Terry Kawaja:
So the notion that we shift more and more media towards paid channels, first of all, simply won’t happen because there’s not the economic wallet there to capture that. But it’s also as a policy matter again, from these people largely on the left, extremely regressive.

Larry Bernstein:
Terry, can I go back to your comments about Europe for a second as being a 500 million person Petri dish? If I was going to go on the internet in the EU, what would I see that’s different than here? How has life changed in this EU privacy, non-cookie world?

Terry Kawaja:
So the cookie was made to have sustained knowledge of who you are so that when you revisit sites, you don’t have to log in again and all that stuff. So the cookie was actually created as an accident, but the net effect of it was to improve utility for consumers. And so when you go back to a website that you’ve been to, you don’t actually have to… It remembers your password. So that’s the net effect. The other consumer benefit effect of the cookie. In the EU, you get a prompt every time you come to a publisher webpage where you’re not a logged in or registered user that doesn’t have first party data on you, where you’ve already offered up your, let’s say your email address or your PII information. And it requires you to authorize them to use cookies or not. And again, it’s making explicit the implicit value trade-off.

Terry Kawaja:
Now I would say that the industry has done a horrific job of explaining the value proposition in the very first instance, because it was largely just taken for granted given the way the web works. My solution to this by the way, is to have, by the way, absolutely respect consumers or users preferences with an opt-out. So there is a veryclear capability on the part of consumers who don’t want any of their information tracked. “No, thank you. I want to see general ads that don’t pertain to me. I don’t care about personalized ads.” There’s a lot of people that say, “I just hate ads and don’t show me anything. And by all means don’t track anything.” Great. Let’s have a button that says opt me out. And all of those people will simply no longer have their data tracked. An opt-out coupled with, I think, some additional teeth around antitrust will I think go a long way to level the playing field and maintain this economic advantage for publishers, which I believe is needed for a vibrant, free and open internet.

Larry Bernstein:
We got a question emailed in from Mitch Feinman. And he wants to know if we get rid of the cookie, could we use artificial intelligence and context-based content to track the type of person you are, what you want?

Terry Kawaja:
Yeah. I’m not going to defend the cookie per se. I don’t care what the technology is. And I believe with the rapid pace of agile software development that occurs in this sector, that there’s going to be a wide variety of capabilities to provide relevant and efficacy of targeted advertising to support the open web. And yes, that will be a mixture of context, as well as audience-based solutions. Google has proposed something called cohorts, a flux where you essentially double down and don’t target to the exact individual, but you target to a group that share the same proclivities. So I believe there’s going to be a spectrum of opportunities. And yes, technology I believe, will help lead the way.

Larry Bernstein:
Terry, thank you.

                                                      
 
 
 
 
 
 

Rishad Tobaccowala — the Future Not Fitting in the Containers of the Past

Rishad Tobaccowala Transcript

Larry Bernstein:
Our next speaker is Rishad Tobaccowala. He is the former chief growth officer and chief strategist at Publicist Group. He’s going to talk about why the future doesn’t fit in the containers or the past.

Rishad Tobaccowala:
The future doesn’t fit in the containers of the past, can also be stated as how we all need to reinvent, reimagine and rethink. Why do I say that the future doesn’t fit in the containers of the past? I’m just going to pick three arenas, all of these start with the letter M. One of them is media, the other one is markets and money, and the third one is mindsets. So let’s look at media and the containers of the past. There was a time when most of the media we consumed, fit in containers called compact discs or DVDs or newspapers or magazines. And as we know, increasingly they’ve all been unbundled down to individual themes, songs and articles, all digitized, streamlined, and available for remixing, reposting, and sharing. Media will cease to fit in containers of times, whether it was the internet, television, network programming grid, the moment when the newspaper or the magazine went to press. And movies were marched along from theaters, to pay TV, to video, to cable, to TV.

Now windows are shortened, collapsed, everything is increasingly in real time. And in addition, all the movies and television shows can be viewed with a VPN app and all schedules are malleable. And one of the reasons we see the challenges, whether in communication, in social, in politics, is because media is so different in every single way that it doesn’t fit in the containers of the past. Let’s move to markets and money. The Miami Heat arena will soon be renamed for a company that most of us don’t know, called FTX, which allows for 24 hour trading globally of many instruments and is creating new markets and new instruments as we speak. We’re obviously living in an age where cryptocurrencies and blockchains, is reconfiguring the future of transactions, store of value and exchange.

While Bloomberg is important, so is WallStreetBets and StockTwits, and maybe the revolution will be on Robinhood. Insurance is no longer priced the old way, it’s priced by the mile. Ownership of everything is fractionalized and tokenized. Coinbase is more valuable than Goldman Sachs. Among young people, debit is a new credit and it’s the next generation of Stripe, Squares as firms and after pays basically show. So that’s the second big thing, which is markets, which is how we do business with money and how we communicate with markets, is also changing and doesn’t fit anywhere close to what we all grew up with. And then the third container is really us. And by us, I mean, many of us are on the older side of 45 or 50 or even older, and most of us and most managers are baby boomers, and our mindsets may also be containers of the past.

If you think about millennials who are a generation or two removed from the average age of most leaders in non-tech companies, the tech companies are the only place where this doesn’t work, but at non-tech companies, they’ve grown up in a completely different environment then we may have and one that is more aligned with the future, then what our roots were. So for instance, they grew up multiethnic, with the US next year will turn Caucasian minority for under 18 years old. We don’t have to wait till 2045, it’s happening next year for under 18. They grew up digital and digital isn’t even Facebook and Google, you’ve got to hang out at Discord and Twitch and TikTok and try to even figure out what’s going on. Unlike many of us, they expect to do worse than their parents and they saw 9/11, the great recession, COVID and the rise of Uber and Task Rabbit.

And many of them will tell you that they believe that the future of work is a gig economy. And as a result, in addition to skill building, they have to build social standing, brand and speed. And they will tell you that the operators companies are one in real time. And surprisingly, they are the ones forcing companies to become more purpose and meaning driven, much more than BlackRock and Larry Fink and everybody else. But it’s just not the mindsets of millennials that need to be revisited, we may also need to view this at our own mindsets as we see ourselves in older people. So someone who’s healthy at 50, is expected to enjoy other 30 years of good health and people over 50 now contro 70% of the wealth in the United States. So 70% of the wealth being controlled by people who are going to live 30 years or more, and COVID has shown that all of us that we can have massively new behaviors. And so a lot of businesses are giving short shrift to older people, where the money and re-invention might actually be.

So you take all of these trends and they’ve been accelerated, accentuated and amplified by this little thing called COVID-19. And when I hear words like, the new normal, or I hear words like, restarting, I want to tell people something, I don’t know what world you’re living in. If you take the entire world and shake it with a health, financial and social crisis, for at least a year and a half in the Western world, and maybe three to four years in emerging economies, you do not get back to a new normal, you do not restart, you prepare for a new strange world. And as a result, I would end by saying that we should be thinking of ourselves in the midst of a great reinvention and a great rewiring, which has already begun because of globalization, demographic shifts and technology and now we have the multi trauma of COVID-19.

And a suggestion that I share with folks is like a five-step plan. And the first one is to understand how ourselves and people we serve or sell or work with or teach, have changed and what they will start, stop or continue to do. The second really is to commit to continuous learning in a world where the half-life of knowledge and behaviors is increasingly shortening, deliberate practice and continuous improvement are probably key. The third is to imagine the exact opposite of what we believe. And this is a little difficult because as we get more senior, we surround ourselves with either people who are like us, or we have algorithmic social media, or we have people unwilling to tell us the truth and so we begin to believe that our flatulence smells like Chanel # 5, which it doesn’t. And also the fourth is to remember that the future comes from the slime and comes from the outside. It comes from beneath us and next to us, but not within us, which is why IBM didn’t see Microsoft, Gillette did not see Dollar Shave Club, GM and Ford completely missed Uber and Tesla.

So in end, the future doesn’t fit in the container of the past and we just got to make sure that our mindsets are not such a container. Thanks.

Rishad Tobaccoawal QA Transcript

Larry Bernstein:
Thanks Rishad that was terrific. Let me start out by talking about your mindset argument. It’s interesting that in your book, you talk about that we have data and the data consumes us, and it leads managers down one route, but there’s also the soul of the business, the organic nature of relationships, which are also very important. And you encourage more direct relationship between management and its customers. And you gave the example of a United Airlines advertisement when the manager gives out plane tickets to encourage his team to go visit their clients. We’ve just been in a year where we haven’t been in physical contact with clients, we haven’t seen our customers, we’ve seen them virtually, but we haven’t had drinks with them and we haven’t really listened to them as well as we should have. How do you think about, when we do reopen, whether or not we will go out and touch our clients and understand their needs, or do you think the virtual experience has been real and that we have been successful in understanding customers?

Rishad Tobaccowala:
The answer is it obviously will depend on the customer, the country, and the industry we’re in. But what I believe will happen is we’re going to spend our times as managers across allocating our time, including our physical presence, across four different venues, not two, which is what people used to think, office and home. And the future of hybrid is not office and home, that’s only for people who have no imagination. It’s actually going to be four places. One will be the home, the office will increasingly be a museum, it will be an artifact where the headquarters will be, where people go to get indoctrinated and see old memorabilia and where some old senior people roost. The other two places, which is going to be where you’re going to interact a lot with clients, is neither the office nor home, and it may not even be their office.

It will be at events, including, there are companies like Automatic where all their employees work from home 12 weeks a year or 12 weeks a quarter. And one week they all gather in an exotic location and get together, where they also meet clients and they learn stuff. And then another place, which is not necessarily a Starbucks, but a WeWork, or a Regis or other places. So every industry will allocate across the board, but my sense is business travel will return. But if you look at the airlines, most of them are anticipating for the next three to five years, returning at about 60 to 70 to 75% of what it was. So I do know that having recently been completely vaccinated and taken my first trip after a year and a week, I was wondering why I was spending so much time moving around.

Larry Bernstein:
In your book, you talked about that you used to be on the road, doing hundreds of business trips a year. Do you regret that now? Do you think it was a mistake?

Rishad Tobaccowala:
Absolutely. Absolutely. And the other thing is I’ve at least found that, obviously I’m fortunate in that my job doesn’t require me to be physically at a place of work. Not everybody has that opportunity, and I’m senior, so I don’t necessarily have to be indoctrinated and trained, which is hard to do. But with that, I have found, for instance, I’m not only far more productive, but the people I help find it much easier and I can basically serve the world from my room in Chicago, literally. And I wonder, when people ask me now to come and speak at a place, I say, “Why do you want me to spend six hours coming to speak for an hour and coming back? What is the point?” So I think what’ll happen is experience and relationship building will go in-person, content will become virtual.

Todd Benson:
I’m curious, what have been the things that have surprised you? I know you’re a big thinker and thinks about a lot of things, possibilities. But as we’ve come through this past year, what are the things that surprise even you?

Rishad Tobaccowala:
There’s a lot of things that have surprised me, but I think the biggest surprise to me of almost anything, , there’s a big divide between what we say at work, or we say as management and what actually is happening in companies, which is most people are using this opportunity to rethink their entire lives, literally. If you just look at, for instance, in many companies, let’s look at Starbucks management, you will see amazing turnover in the senior roles at Starbucks management. And it’s just not, the COO went on to become the CEO of Boots, Walgreens, there’s massive turnover across companies because a lot of people have basically began to understand that life is fragile and it ends. And a lot of people, young, medium and old, are redefining how they’re going to spend their next 10, 20, 30 years. And we are talking about it, but work doesn’t actually address that as much.

Todd Benson:. And what are some of the second order things or things that people should think about and probably aren’t giving enough attention to right now?

Rishad Tobaccowala:
So the ones I basically think about is this way. The exercise I suggest to everyone, and again, it depends on who you are, where you are and what you’re doing, so there’s not one answer, but the exercise that I suggest to people, which then leads to radical thinking, is the following. Number one, is just think about one or two industries that you indulge with and how they have most dramatically changed. So for most of us, it might be restaurants, or it might be travel, whatever it is around you, just think about that. Then think about your own, whatever you do, whether you’re a teacher, how all of that has changed.

And just keep that to the side and then ask yourself this, if I were to start all over again today, and I only had three rules, whatever I had to do had to be legal, whatever I had to do has to be technologically possible in 2021 or 2022, and whatever I do has to eventually make money or be cash flow positive in three years or less, what would you do? And there’s nobody who I sit within businesses who create anything that looks like their current business.

Larry Bernstein:
I want to ask you a question about the gig economy. We had David Weil from Brandeis’s Heller School of Public Policy, a couple of weeks ago. And he was a upset about the gig economy, mostly because it undermines our ability to regulate industries and individuals. When no one works for a corporation, it’s much more challenging for government policy. On the other hand, when I think about your career Rishad, I’m actually flabbergasted how long you stayed with one particular organization, given the breadth of your interest and the breadth of your ability to start entrepreneurial activities, even within Leo Burnett. Why do you think we’ve gone gig? What is it about transaction costs in corporations that have declined and allowed for people to move around much more efficiently? And should we celebrate the gig economy or should we frown upon it?

Rishad Tobaccowala:
I believe we should celebrate the gig economy, as long as we provide the following two things, portable healthcare that you can take with you wherever you go, because that’s one of the big reasons why people are stuck to jobs they hate. So if you have that, which is one key thing, and then the second one is some form of learning credits as you basically move. But outside of those, all of us are in the gig economy and we just are fooling ourselves that we’re not. So I believe while I stayed in the same company and a lot of people would tell you, I stayed in the same company for 38 years because I was pretty bad and nobody employed me anywhere else, but let’s assume that’s not true possibly. The reason I stayed was because every three or four years I could do something new. Literally I was changing my job every three or four years because it allowed me to continue to learn.

But this is a no brainer for two simple reasons. If you go to most boardrooms, they are beginning to realize that what they have to manage is variable costs and their biggest variable cost is employees. And post COVID-19, they figured out how to basically extract or get or connect with employees anywhere in the world in real time, even within their own organization. So the question they ask is why do I need 100% of you? What I basically believe is if I can get you 25% of the time for 50% of the employee’s wage, which saves companies half, but I can then merchandise the other somewhere else, it’s great for the employee because his run rate doubles. But the other reason why this gig economy is going to take off, besides technology, besides COVID-19, it’s also because of the half-life of skillsets, things are moving so fast that even within a technology company, they replace so many of their engineers every six, seven years. And therefore, unless you have the continuous education and healthcare, which are the two things you need, it won’t basically happen.

I think actually gig economy is actually very good because it gives you a lot of flexibility and plug and play. But right now we are limited, A, because obviously current rules and regulations. The biggest problem we have and even I heard the earlier talks, et cetera, is all of us, including our leadership and everybody else, and are fixated on a world that doesn’t exist. This is a global world, this is a fast moving world, this is a technological gig world and all our rules and everything else are changing.

Todd Benson:. Rishad, how do you think about the work from home is an existential threat to the white collared middle-class. And at the end state is work from Mumbai, work from Delhi, work from Cebu City, basically like the off shore, basically what I call the extenturization of the world. Do you see it that way or do you have a different take on it?

Rishad Tobaccowala:
So I see it as a double-edged sword, that clearly happens to be one of those things. What it basically does, which is why my whole emphasis on education and working with machines, the nature of my book also, is that there are two parts of what we do, there’s parts of what we do in our work, which is spreadsheet based, it’s about data, decision-making, numerical driven logic. The other part of it is story-based, it’s storytelling, culture, environment, human contact, et cetera. I believe that any job that is very spreadsheet based or very repetitive, will basically go offshore, outsourced or near sourced.

So what’s very important is to A, learn skill sets that allow you to connect in different ways that cannot be done there, but also to learn new skill sets. Because when you begin to see some of the caliber of people all over the world and the emphasis that they have on education, it is pretty scary, even in that space. So it is a double-edged sword. And this was a piece that I wrote, which was very popular, which just simply called, the future of work, where I explain this, which has now been read by a lot of folks and people can see at rishad.substack.com.

Larry Bernstein:
Thank you very much, Rishad.

                                                      
 
 
 
 
 
 

Michael Duda — Why We Will Witness a Golden Era for New Consumer Brands

Michael Duda Transcript

Larry Bernstein:
We’re going to move on now to consumer behavior, my co-host will be Todd Benson. Our first speaker is Michael Duda. Michael is a managing partner at Bullish, and he will discuss the upcoming golden era for new consumer brands. Mike, please go ahead.

Michael Duda:
Consumer brands: My view of it comes from this weird platypus background of investing in early-stage consumer companies for 11 years, and also being a marketer for 20 years too. And the reason why I have a chip on this shoulder is that consumer is a big part of our economy. It’s 70% of our GDP, which is up from the year of the Netscape IPO, I think in the mid-nineties was 66%, yet in my world, only 2.7% of early-stage dollars goes to funding, which is this weird area. And we, as a nation, as investors, laud technology. I think the 20% of the S&P 500 is made up by companies named Microsoft and Facebook and Amazon and Alphabet and Apple on there, and when we talked to LPs, for people it’s like, “Well, haven’t we thought of everything in consumer, what’s out there? Consumers can be boring.” And I just want to go into why we think we’re in a golden age of consumer brands.

So first, let me give you our viewpoint, how we look at this stuff. We study the demand side of the equation, what consumers are really doing and acting. We spend about 8,000 to 10,000 hours in the field each year. 2020 was a little bit different, field-wise, than past years, but we really looked at stuff. And from an investment perspective, we’re looking to fund crazy new things that have product culture fit. Not social product market fit, where things that get into TAM, total addressable market, and all these three-letter acronyms, but so we study things that are going on in culture, which is softer, and maybe the reason why a lot of investors are not as keen on it early.

So I’m going to go over today about three things going on in culture that we think are going to be tailwinds behind some the other things, but first, before I get to culture, let’s take a look at three concentric circles, technological, industrial, and culture, which I’ll spend most time on. First Technological, the most obvious statement I can make is the iPhone is only 12 or 13 years old. Until the iPhone, we didn’t really have the internet in our pocket. It was all about emails and texts and that stuff. And we are still just using these things, in the way that we’re probably meant to be, just now, for transactions, for commerce. But with it has also come a new set of expectations, which I’ll get into in a little bit.

On the industrial side, quite blankly, if something’s been around for 12 or 13 years, it’s a new shiny toy, and you’re a business that’s been around for 50 or 60 or 100, good luck trying to build, trying to recalibrate your ability to take in that technological innovation, in terms of helping better serve the customer. Ever try turning around an aircraft carrier versus a jet ski? Aircraft carriers are tough.
And then culture. So, this is the main point of what we’ll get into, with some stories that are hopefully somewhat informative. There are three directions going on right now that, while that’s a negative thing, we think is going to aid and abet the future consumer brands that we’re loving over the next couple years. The first is authority. There’s been just the destruction of authority, and the alternative is that people are finding new forms of authority in activities. We’ve gone from a country that’s respected, maybe even worshiped authority, to one that’s growing mistrust. The mass mentality has become more trusted and traditional voices, and we see this in so many different ways, and we just had Julie on movies.

I think a good member of this audience, and Larry, you’re from Chicago, Siskel and Ebert used to decide, for a lot of people, like, “Should I go see this movie or not?” Now, “Let’s go see what Rotten Tomatoes says,” and that’s if you just didn’t click what Netflix recommends for you. I grew up in an area where the advertising was, “Four out of five doctors agree,” or “Nine out of 10 dentists agree.” That’s no longer the case, and for so many different reasons, besides HMOs and that side of it. Now we want things faster, and if we can’t get into a doctor’s office or a specialist in a week, all of a sudden WebMD and Google is determining if my kid has a fever or the flu, or something else. And that’s formed the rise of things like Zocdoc, which doesn’t reward people if I can find the best doctors, but find those you can go see ASAP.

And then there is religion. I grew up in the seventies, as an Irish Catholic up in Syracuse, New York. In the seventies, 68 to 70% of people had a great deal of confidence in organized religion and went to church every Sunday, or synagogue on Saturdays, and that side. By 2015, that number is in the low forties, and for various reasons in there, be it the Catholic church had it issues, or otherwise. But one of the reasons that we found that people go to church or synagogue was there’s a sense of ritual, there’s a sense of a community, there’s a sense of spiritualness.

Guess what was taking that place? Soul Cycle, CrossFit, and Peloton. In fact, Peloton, which we were the first investor in, has mentioned, “We started noticing an uptick in Sunday morning, like 7:00 AM to noon, was the fastest growing segment of users on that side of it, and did a programming to that effect.” So, to this day, like Sundays With Love, which is almost a… I won’t say religious experience, but very community and spiritual, the groups of people that were coming to those classes, and this is in 2016, 2017, wound up being great cohorts that over-indexed on the brand’s evangelism, and really helped grow that company. But the main point is that authority has kind of gone by the wayside for the masses.

Number two, brand destruction. This is near and dear to my heart, and I wince as I say it, but brands and consumer loyalty has gone down, because you want accessibility, a little bit what I mentioned on the doctor’s side of the equation. We’re time pressed, there’s more people working in dual income families than ever before, whose kids do more activities. We want to get things done easier, if possible.

And the best example I’ll use of that is personal experience in GNC, General Nutrition Center, which has been around since 1935, and for years had been the number one vitamin company in the world. As times are changing, and this is in 2017, 2018, GNC said, “You know what? We have to supplement our 8,800 stores, and let’s go on the internet, let’s do a test on Amazon.” And we helped them do a test on Amazon, set up a GNC store, and this was extremely telling.

If you go into a GNC location across the country, the gross margin on that sale for GNC is 50, 5-0 percent. If you bought something on gnc.com at the time, it was 55%. in the first three or four months of selling on Amazon, the gross margin for a GNC product was 62%, which is scary. Because basically, as much as vitamins and supplements are so healthy, people are like, “What’s the easiest way I can get them?” And the fact that GNC made more money by selling on Amazon than it could on a profitability basis, because the leases they had to pay on the stores or they didn’t have the advanced operational and logistics ability, was stunning. We wound up not working with them anymore and investing in a startup, and the rest is kind of history on that side.

Scale destruction, that’s the third. And scale destruction, what does that mean? It’s like empathy. And again, that’s one of these warm, squishy things that, as a marketer, that we see that is tough for investors, and this really defined the period of 2010 to 2014. Scale used to be a natural moat in helping the market share leaders, and the things that can help achieve that scale can also blind a company to not change with the times.

Let’s take Gillette, for instance. Gillette, in 2010, was literally a Harvard Business School case study. It was 9% of P&Gs revenue, and something like 34% of their profit. They had 81% market share. And if you look at their historical marketing, very 1980s, very, “A best a man can get,” featuring beautiful 6’2”, 220-pound models just achieving their all. Well, in an era of metro-sexualism and guys not shaving every day, they stayed tone deaf, and plus with the pricing ramifications.

When companies like Dollar Shave Club and Harry’s came along, that ate into their market share quite a bit. And with the launch of Harry’s, which actually became a giftable proposition, the fact that Larry’s father-in-law gifted him a Harry’s set just spoke to it. And when we launched the incubated investment of Harry’s… First of all, the name is Harry’s. Talk about empathy, it’s just like, “You don’t have to shave every day, we get it.” Literally, our logo was a wooly mammoth on that side.

So, a lot of these companies that have market share, that have been in the business for a long time, their scale prevents them from seeing what’s new. So, from a brand level, if you don’t have a great brand that has a different experience, you can get Amazon. From an authority level, there’s different things going on that are just causing different behaviors. So, I’ve said some things and given us some personal examples, so what categories do we think could be in charge of leading this golden era in consumer, with new brands going up? It’s a variety, and some will sound simple, and some will sound maybe hilarious, but here goes.

Skincare and lawn products. Go back to the 2000’s, when this weird, some said hippie company, called Whole Foods started emerging out of Austin, Texas. They championed organic, non-GMO foods, and informed consumers, because consumers were becoming more woke to what they put on their bodies. They did such a good job that by 2014, 2015, Costco was the number one selling leader, in terms of organic food. Now let’s apply that to skin care. The fact of the matter is, the things that we put on our skin get absorbed into our bloodstream quicker than what we eat. And women, who are much better consumers than someone like myself who’s got an XY chromosome, women put on average 12 different products, and about 168 chemicals, on their body each day. And so, what we’re seeing now is a lot of new products in skincare, not just about sustainability and not saying for look your best, but also be your best. Because, literally, we could be putting poisons on our body each day.

Look at the lawn care industry, Scott’s had to pay off 10 and a half billion dollars with new lawsuits. Sunday Lawn, which is one of our companies, is two and half years young, said no to two acquisitions and now we’re just being featured in 800 Walmart’s across the country.



Michael Duda and Leslie Ghiza QA Transcript

Todd Benson:
This is Todd Benson. So, my first question for the two of you, and you’ve been terrific, turf divorce at 78 RPM, it’s what do you think the impact of the new stimulus checks is going to be? And where do you think that is going to get spent and how much of it is going to be spent on products and things, versus experiences, versus saved? And how’s that all thinking to your thinking?

Leslie Ghize:
Being connected to the retail industry directly, we definitely see a spike in sales when the checks come out. So, we know that people are waiting for the checks to do some shopping that they want to do or have to do. So, in terms of shopping, it definitely indicates a spike. A younger generation, in my opinion, is doing more saving than older generations used to do. I think that’ll be interesting. And I think we’ve seen recently the younger generation also getting the investing bug and maybe start trying to turn their money into money. So those would be my quick takeaways on that.

Todd Benson:
Like GameStop, a prior topic of Larry’s show.

so, one area that neither of you sort of touched on, but is a big area in terms of value and in terms of products and things like that, has been all around financial services. And if you’ve thought about things like PayPal having a bigger market cap than not only Goldman or Citi, but Goldman and Citi put together. I’m curious about all the innovation there and Robinhood being one example, you just sort of touched on it, but if there are other things in that space that are interesting to watch?

Michael Duda:
We’re not a nation of savers, jumping off where people are spending their stimulus checks—Bob’s Discount Furniture sells more couches right after people get their refunds back from the IRS. So that’s going to continue. And when we’re so flush with capital, because more money in the private markets than ever, the stock market is going up, it’s just people aren’t saving on that side of it. Now, when we’ve looked at it from an investment perspective, I mean, Robinhood just filed their IPO, whereas we’re going to see more use cases that, because of Reddit and GameStop, it could become more like the official bar bet, is the way people are going to save the future. Sports betting, if that becomes actually more prevalent on a state-by-state basis, that’s going to be more.

So I’d love to say it’s something like this, could be a new credit card that comes out or people learn to save, but consumers are going to keep being the irrational beasts they are, from what we see.

Todd Benson:
What’s your guys’ sense of basically when people are going back to work? Meaning, when’s people going back in the office, no more hide and seek?

Leslie Ghize:
I have a very contrary opinion to most people on that.

I don’t understand the, “we’re never going to go back to work full time.” I don’t understand the, “we’re going to go only a couple of days a week.” I think that maybe that’s how it starts, but it’s like an AB weekend in a share house. Like what if there’s a friend on the other weekend? Do you never get to see them? What if there’s someone you have to work with on the other day? I think what will happen is that people will eventually, like what used to be a 40-hour work week, or supposed to be a 40-hour work week before this, was always a 60-hour work week. I think that it’ll just creep. There’ll be creeps and it’ll creep back. It’ll be all herky jerky when it starts, but then I think it just creeps back to regular. I mean, there might be flexibility and options of the platforms and the ways that people work. But I think we got to get back to work. And my big question is, if we don’t, what is everybody doing?

Todd Benson:
Mike, would you agree with that?

Michael Duda:
I’m a fellow contrarian, along with Leslie. I think the tech firms got out ahead of it saying like, “Oh, we’re going to be working from home until like 2022 or permanent.” And those are places that you have a lot of engineers who put on headphones and who don’t talk to people on a daily basis. Humans are a very social species; we want to be together. We want to go to a Kansas City Chiefs game and hug somebody next to us after Mahomes throws a touchdown. And then work, that’s going to be the same thing. There’s a lot of businesses that require some human capital. Now will it be five out of five days a week? Will business travel go the same way? No, but we’re looking at 90 million vaccinations distributed so far, we’re looking for an opening up. People have returned to the office, absolutely. It doesn’t have to be the way it was before, but it’s just people look for absolute. So, the whole work from home, I sense we’re going to have a narrative shift come actually in the next 60 days.

Leslie Ghize:
I also think that people are going to go old school with entertaining and traveling and trade events. I have this weird hunch that people are going to be like, “You know what? I’d love to take a client out to dinner again. I’d love to go to a trade show and go on a boondoggle.” I think people are going to want to do that again and I think it’s going to make business boom.

Todd Benson:
So if you look at the stock market, you’d see you’ve got a Home Depot, stock price up and Wayfair and Restoration Hardware and all those because we’ve invested in homes. And even things like Lululemon because of athleisure, and living in my sweats. Your view, basically, you’d be buying men’s dress shoes.

Leslie Ghize:
I would not be buying men’s dress shoes. Once you get comfortable, you’re not going to get uncomfortable. I mean, I do not think that people are going to be getting formally dressed. I think people are going to have style and personal style and they’re going to express themselves and they’re going to look great and they’re going to want to buy clothes again. But I think it’s like you have to put the brownie in the broccoli, like no waistband that doesn’t have a little stretch in, it is going to be useful to anybody. No shoe that doesn’t have some comfort built into it, is going to be useful to anybody.

Michael Duda:
But I do, I think it’s splitting hairs here, but anything that you wouldn’t Instagram about in 2020, will become they’re prolific coming up. So, denim sales were way down last year, whereas the Mack Weldon, the Lululemon weren’t. If you don’t go out, people aren’t showcasing them on some in some way, shape or form should perform. So as social bees, we think there’s going to be an uptick in nicer men’s apparel in that side of it. Guess what we’re learning, is the destruction of used to be is well underway on that side of it. So, what luxury looks like is going
to change, and that could be by experiences more than apparel, but I think apparel will go up in the non-sweatpants category overall, but it’s just looking good, but with compromise. So, I think Leslie’s point is way under the gun.

Leslie Ghize:
I agree totally. It’s going to be style, but it’s going to be a lot of technology built in to make it comfortable and make all sorts of products do double duty. I think it’s going to be all about ingenuity in terms of how you construct things and how you make them look amazing, but feel great.

Larry Bernstein:
I’ve got a question for Michael. Michael, you mentioned the benefit of immediacy as part of the consumer experience. The example you gave was, I can’t wait for my doctor for the answer, I’ll go grab the WebMD or go to Zocdoc. I want my answer now. And when I look at the success of Amazon and the two-day delivery and the amazing improvements in logistics of e-commerce, what’s the best way to profit from this consumer desire for immediacy?

Michael Duda:
The best way to do it, is just to know whatever corner of the universe you’re attacking to fill that consumer need, it’s just like what’s being done now, how can I do it better than everybody else and go towards it. Listen, we love Amazon, I think it is 40 to 45% of all e-commerce, but we are going to see a new era of customization and personalization. Function of Beauty is one of our companies, 54 trillion combinations of shampoo and conditioner. Guess what? Delivered to your door in four or five days. You know what’s going to help that business? They’re going into Target.

So, e-commerce is not going to kill retail altogether. E-commerce has killed bad retail. So, you’re going to see companies like Walmart and CVS are doing interesting things to embrace startup DTC brands that we hadn’t seen in the past five or six years, that Target got a lot of credit for. So, part of it is this old school game. If I run out of something, I want to be able to go to the store and get it, but it’s got to be customized to give me options. And so many times we looked at such absolute, DTC, direct to consumer as one channel in economics. Successful brands will have multiple areas that serve that customer, where they need to be served.

Larry Bernstein:
Can you expand on the direct-to-consumer movement? Amazon now offers certain companies to effectively advertise on the Amazon platform about themselves. And I think in the long run, firms had only an indirect relationship with their consumer. As you mentioned, like Gillette before Michael, Gillette really doesn’t, I’ve been a Gillette user now for 30 or 40 years, though
I’ve never had a direct relationship with Procter and Gamble. How can Gillette benefit by finding a method of having a direct relationship? How can they boost sales, learn more quickly and make that product cycle so much faster?

Michael Duda:
Do something with a product cycle. It’s interesting about Gillette, Gillette, I’ll say that it is the best shave you can get from the technological basis. They spend tons of money in research. Like Harry’s is a great shave at a fair price. But you have to understand what role do you play in life? I run out of razors, I want them right away. So direct to consumer on one hand, be fulfillment versus acquisition, or it could offer up something like new. And take page from Supreme or Fashion World, do a special drop, do a new eight blade, “the ocho from Gillette to a thousand people that most embody how a man can get to be their best on that side of it.” Make it something newsworthy, remarkable on that side of it. But not everything was meant to be just purely DTC.

But it’s tough for P & G who served their customers, who’ve been the Albertsons, the Walmarts and the Amazons for years, now to do direct to consumer is a different kind of muscle. To be honest with you, there’s a lot of under marketing groups, like African-Americans, who haven’t been directly advertised to, and they bought a company Walker and Co, so they could be doing something to very targeted audience as well too.

                                                      
 
 
 
 
 
 

SSunil Gupta — Reinventing Business

Sunil Gupta Transcript

Larry Bernstein:
Let’s begin with Sunil Gupta who will discuss Reinventing Business.

Sunil Gupta:
Technology has changed every aspect of our life, and businesses are trying to adapt in this new world. Companies improve efficiency, automate processes, enhance user experience, launch e-commerce sites, and create hackathons and scrum teams. All these are good, but have business leaders paused to think if the rules of business have fundamentally changed? Let me highlight one such fundamental change in how we need to rethink strategy. For decades, we’ve been told that strategy is about focus and competitive advantage comes from making your product better or cheaper. Now take a look at a company like Amazon and ask yourself, “What business is Amazon in?” Is it an online retailer, a cloud service provider, a hardware producer, an advertising giant, automobile producer? It certainly doesn’t look like focused strategy to me. Perhaps Jeff Bezos missed his strategy class at Harvard Business School, but somehow he has been able to build a $1.7 trillion company. What connects all these disparate businesses of Amazon, and is there a general lesson for all of us?

The strategy paradigm of make it better or cheaper is a very product-focused view and assumes that you’re selling one product to one customer at a time. But what if you offer multiple products as complements using a razor blade strategy? So you can sell candles cheap in order to make money on e-books. You might say, “What’s new? Razor blades have been around for a long time.” Yes, but today razor can be in one industry and blades can be in a completely different industry. Take Amazon Studio as an example. Why does it make sense for Amazon to spend billions of dollars to create its own movies and give it away for free? Well, Prime Video is a razor that creates stickiness among Prime customers, who end up buying much more products on Amazon e-commerce site. In other words, Amazon Studio is a razor for its e-commerce business. In fact, Jeff Bezos has publicly said that, “Every time we win a Golden Globe award for our content, we sell more shoes.”

This idea of cross-industry complements can be extremely powerful. If Amazon wants to compete with banks by offering loans to small and medium enterprises, it can choose to offer loans at such a low rate that banks just won’t be able to compete. How can Amazon do this?
Well, it doesn’t have to make money on loans if these loans help its merchants grow on its platform, which provides additional commission to Amazon in the long run. The moment you make a competitor’s core business your razor, they will have a very hard time to compete.

So the first dimension of the new strategy is about connecting products as complements. The second dimension is about connecting customers. Take the example of Facebook or Clubhouse. What’s the value of Facebook if you are the only person in the world using it? Not much. As more people join Facebook, its value increases for you without any change in the product. So it’s not about product. It’s about connecting customers, and this is the classic network effect. So the digital economy is about connections, connecting products and connecting customers, and this is true not only for tech companies like Amazon or Facebook, but also for traditional product or service companies.

Take the example of Peloton. Peloton could have used the traditional strategy paradigm to claim that its bikes are more expensive, but they are the highest quality. But over time, competition catches up, and soon it becomes a race of product features with very little differentiation. As we all know well, Peloton chose a very different path. It built complements in the form of on-demand videos, and perhaps more importantly, it created a network of Peloton riders who can ride at the same time to get a virtual gym experience at home. It won’t matter to Pelton customers if tomorrow a new competitor comes with a better bike, because the new player won’t have the community of riders that Peloton has.

This strategy of connecting products and customers also cuts across traditional industry boundaries and changes the nature of competition. At some level, Prime Video is competing with Netflix and Disney Plus. However, while Netflix has to make money from its content, Prime Video is the razor for Amazon to drive its e-commerce business. When you have players in an industry with very different objective functions, the nature of the competition games changes.

Now, back to the issue of focus, traditionally, we have defined focus based on the industry we compete in. So if you’re a bank, you should focus on banking. But today, focus is defined by capabilities, and this focus on capabilities opens up completely new opportunities for growth. Alibaba faced the challenge that buyers do not trust sellers. To solve this problem, [Alibaba created an escrow account where buyers’ money is kept safe until its customers are satisfied with the product they received. But once Alibaba developed this capability or muscle to manage money, it went on to develop one of the largest wealth management companies in the world.

MasterCard used the same strategy. It developed the analytical and data analytic and cybersecurity skills to manage its own business and then went on to leverage that muscle to generate almost 25% of the revenue from these new services. Perhaps the best example of this is Amazon. Amazon uses computer vision technology to improve its warehouse operations and later used this capability to launch its own Go stores. Recently Amazon just last week announced the launch of a hair salon in London. This might seem strange for an online retailer until you recognize that this is the way for Amazon to test and leverage its technology muscle that could revolutionize offline retail the way AWS did in the online world. So let me conclude by saying that business leaders should be not simply thinking about technology to digitize existing operations, but reexamine the fundamentals of their business.

Sunil Gupta QA Transcript

Larry Bernstein:
I want to start out with a competitor of Amazon and try to think about what they did right and what they did wrong. I think the precursor to Amazon was Sears, a broad-based retailer that was able to touch lots of customers. It innovated from a catalog to retail stores, and it started offering all sorts of interesting products. They offered the Discovery credit card. They created Allstate Insurance. They created an auto repair shop. They were revolutionary with Allstate for auto insurance, and they came up with the Sears credit card. Yet Sears is bust or close to bust. When you compare Amazon and Sears as they sort of develop products, why was Sears a failure, why is Amazon a relative success, and is it a matter of time before Amazon falls into the Sears death spiral?

Sunil Gupta:
So I think that’s an excellent question, and I would say that Sears leveraged its existing customer base to offer new products. So once I have a large customer base, and by the way, Walmart is doing the same thing. “Once I have this large customer base, I can offer healthcare. I can offer banking. I can offer lots of other services.” That’s perfectly fine, but they’re still using existing technology, existing capabilities to do that. All you’re doing is leveraging the large customer base, and you’re hoping that this becomes a one-stop shop for all the products that you’re offering. What Amazon is also doing in addition to that is sort of understanding customers where the customers are moving.

So, for example, it’s saying that, look, one of the biggest challenges for customers in the offline world is the pain that they face when they are standing in line to pay. That’s why it leveraged its existing technology to develop completely new stores, the Go stores. So I think part of the difference is Amazon is not standing still, using the same model that has served it well in the last 25 years, which I believe Sears did the same thing, the same store, the same catalog, the same system, and it didn’t change that in the 25 years. But having said that, I think that fear still exists for Amazon, but it becomes so big in the existing technology base that tomorrow a completely different world comes, and it might be very hard for Amazon to cope.

Larry Bernstein:
I like the metaphor of razor versus blades and how you applied it across the board. I remember that Warren Buffett used to say he only likes to buy businesses that have a moat, but yours is not moat-like at all. It’s sort of like an interesting way, a way of not having to show a profit in one business to capture another. How do you can compare and contrast the razor and blade framework versus the moat model?

Sunil Gupta:
So I think the moat model is the traditional model of differentiation that you’re so good at something, either you have a cost advantage, the standard cost leadership, because I have economies of scale, and therefore my costs are so low that nobody else can compete and that’s my moat or I have innovation R&D, so I will innovate at a faster speed or I have such fantastic technology or proprietary technology that nobody else can do it. That’s fine and nice, and that’s still important. A good product is still important. But the reality is that even if you’re Apple and you have the best phone in the world, well, Samsung will catch up at some point in time. It becomes a competition of phone features. So Samsung will have three cameras, and the iPhone will to come up with three cameras. Samsung will put four cameras on the back, and iPhone will have to put four cameras in the back. That is sort of a strategy that doesn’t go very far. So I think having good product differentiation is a necessity, but not sufficient condition to compete in this world.

Larry Bernstein:
We’re going to be talking about Apple later in the show as it relates to Xerox PARC. But when you think about Apple’s razor versus blades;I can see now that they’re caught in an arms race, but how do they break through to crush music, phone or computer competitors? What was their product offering that made it more razor-like?

Sunil Gupta:
So for the longest time, Apple has been focused on devices, right? I mean, a majority of their revenue and profit has been coming from iPhone or MacBooks, et cetera. But now they realize that this has a limit. The number of iPhone shipments over time is not going to be the same that it was 10 years ago. So more recently, in the last five to seven years, they have gone heavily into services, so whether it’s Apple Music or Apple TV or other things, it’s almost like 20 – 25% of their revenue is now coming from services and that is likely to increase. Many of these services, they will offer at a much lower price, because that helps them lock in the customer on the devices as well. The beauty of the razor blade is that you can always change the way you make money. You can make the razor the blade or the blade the razor as the competition changes.

Larry Bernstein:
I want to ask a question about banking. The regulators have been very fearful of allowing industrial firms or call it non-bank regulated firms to engage in banking activity. They’ve banned Walmart from having its own bank, but you mentioned that Amazon is considering having a banking-like relationship. Can you expand on the threats from the regulatory state to permit Amazon to expand into that sector?

Sunil Gupta:
No, I wasn’t suggesting that Amazon will go into banking. I’m saying that hypothetically, if Amazon were to go into banking, that’s what they could do. If I were Amazon, I will never go into banking, because I will be more regulated. What I will do is I’ll partner with an existing bank, but think about it. If I partner with an existing bank, who owns the customer relationship? It’ll be Amazon. So the bank will become the backend. Therefore, the bank becomes a commodity. So the relationship that Amazon will build with its customers that they can provide other services will make it difficult for the other players to compete in the marketplace, and that was the point. I don’t think Amazon will … or at least as far as I know has any reason to go into banking right now.

Larry Bernstein:
We had a panel on antitrust, and they focused on several of the names that you listed today, Amazon, Facebook, and Google. There’s a fear of big tech. As big tech applies the razor and the blades and building and strengthening social networks, there behavior seems both to anger and frustrate the regulators. Is that just inherent in the business model, and is that going to be problematic for big tech if it accelerates?

Sunil Gupta:
No. I think that the challenge is if you look at the typical antitrust policies that have been designed for the last century, they’re based on two fundamental principles. One is do the companies do harm to consumers if they become too dominant in terms of raising prices, for example, and the other is do they have a large share of a particular industry? A large share, maybe it could be 30% or 40%. So that’s the definition of dominance in the industry, and that may be true, for example, for Google, because Google has a dominant share in the digital advertising business or Facebook in the social network.

But I think it becomes fuzzier in the case of a company like Amazon, because Amazon is in so many industries, it’s very hard to define what business it is in and share of what industry are you talking about? Share of retailing? It has a very small percentage. Share of online retailing, yes, it has large share, but they can define, “We are in the retailing business,” not just online retailing, because of the omni-channel story. Are they in advertising? Are they in movie production?

So I think the first question is the definition of the industry becomes fuzzy, and therefore the traditional antitrust regulators have trouble defining does Amazon have a dominant share in their industry? Because the definition of industry itself is different. The second basic dimension of antitrust is will it harm consumers? Most consumers love Amazon, because they can get anything they want conveniently, usually in a day or so, at a much lower price. So what’s not to like? So I think it feels like Amazon is becoming dominant and it’s actually hurting some businesses, but on the other hand, the traditional two dimensions that antitrust looks at, Amazon seems slipping through that criteria.

Larry Bernstein:
So you don’t think that the regulators will simply change the rules of the antitrust by changing the You’re right. They’re not harming customers. They’re making it better. Amazon’s retail market share is not that large, and Amazon’s growth is not fueled by acquisitions, but Amazon’s market power seems to anger and frustrate the progressive antitrust movement who want to go after Facebook, Google and Amazon.

Sunil Gupta:. I think Facebook and Google are in worse shape, because they have a dominant share of their respective industry. Amazon, because the industry is less well-defined, it becomes a little bit more difficult for the regulators. Some of the small sellers are complaining about Amazon and fear future competition. That marketplace behavior might be considered anti-competitive, because it’s basically hurting the small merchants. Amazon many times offers its own private label brands after doing market research to see which products will do well and then Amazon ends up selling its own product. Now, it might get into this trouble if it’s using merchants’ data to launch its own businesses and compete with them, and I think that has been in the discussion to some extent.

Larry Bernstein:
I want to ask about vertical versus horizontal integration. When I went to business school, we were told that the benefits from vertical integration are illusory that it sounds good on paper, but very rarely has the sort of benefits you predict. But horizontal integration is spectacular. It gets rid of a competitor. We’re able to generate more market power, and that’s where we run into friction with the anti-trust division. In the examples you were giving with Amazon, you were giving extremely broad examples of vertical integration. We weren’t looking at movie theaters making movies. We are looking at a retail store making movies. Why do you think that the vertical integration in this bizarre fashion is actually a good idea relative to the historic vertical integrations attempted by others?

Sunil Gupta:
I think the traditional vertical integration is about control, control of the entire supply chain. So if I’m making computers, I start also vertically backward-integrating into making chips or forward-integrating into having stores, and that’s for the traditional model. But that’s still the same industry, and the hope was by having more control, I will actually have better economies of scale, better experience. To some extent, Apple is doing that, right? It’s making his own chip. It has his own stores. It makes its own products, et cetera. But by and large, that gives you more control, but that means that if tomorrow the industry shifts and you are still caught in the same innovation, you will have difficulty moving along with the industry.

Amazon’s vertical integration, is very different. It’s not in the same industry. It’s basically connecting dots across industries. But ultimately, if you ask me as to what are the key capabilities of Amazon that defines what business it will get into or not, I will say it has three core capabilities. One is logistics. It’s very, very good at logistics, as good or better than Federal Express and UPS. It’s very good in technology. Clearly, AWS is an example, but it knows lots of other components of the computer vision of AI or others. The third is it’s very good and obsessed with customer focus, both in terms of culture as well as in terms of leveraging data to understand customer preferences. So anything that touches these three things, it will actually get into. Now, you call it vertical integration, but I don’t see this the same way as we thought of vertical integration back in the eighties and nineties.

Larry Bernstein:
Then let’s go back to the 1910s to 1920s, 1930s for Sears. So Sears goes from a catalog. It goes to a retail store, and not only the retail store. It says, “My God, they’re getting here by car. We should really create an auto center.” Then when they had an auto center, they said, “Oh, we should probably create our own batteries, Diehard. We should probably offer our tool sets in Craftsman, and then they should sell their own dishwashers called Kenmore. Then they started offering auto insurance and were able to mass market auto insurance. Is that the sort of vertical integration that reminds you of Amazon and when Sears was being successful, and when Sears stopped doing that, it was a big problem?

Sunil Gupta:
I think your analogy of Sears is very apt. In some ways, you can say Amazon is the new Sears, in some ways. It may face the same fate as Sears did. But I think Sears could have been the new Amazon, because it had all the underpinnings of a great, successful business model for a very long time. But the Internet changed the fundamentals of the business for Sears, and it still remained a retail business. If it had changed the way Amazon changed, it could have been the Amazon. So, again, I mean, in all fairness, we are drawing an analogy from one data point in both the cases of Amazon as well as Sears. But I think what I’m trying to understand is are the principles Amazon applied beyond just Amazon?

So take the example of razor and blade. So I’m on the board of this company called US Food, which is a large food distributor, and we started thinking about, “How do we apply the razor blade analogy to a food distributor like US Foods?” This company distributes food to small, independent restaurants, like mom and pop restaurant owners. Traditionally, the way the company has been and still sells its product is I go to a restaurant and say, “My fish is better” or “My fish is cheaper.” Make it better or cheaper, the traditional strategy and paradigm. Guess what the competition does? The competition does the same thing. They come and say, “Hey, my fish is better” or “My fish is cheaper.” Very soon, the quality of fish is the same, and over time, it becomes a price competition and becomes a commodity. That happens to every industry.

So we started saying, “Hey, what might be the razor for our industry?” Now, it sounds strange. What do you mean, razor for a fish? But then the best way to think about this is put yourself in the shoes of a customer. Forget about your product for a while. So if you were to put yourself in the shoes of an independent restaurant owner and ask yourself, “What keeps this restaurant owner up at night?”70% of restaurants go out of business every year. This is pre-COVID, and that’s because these restaurant owners, they love food, they love to cook, but they don’t know how to run a business. They don’t know how to manage their finances. They don’t know how to manage labor. They don’t know how to generate traffic. They don’t know how to manage inventory, and that’s the real problem, not the price of fish.

The moment we realized that, we started offering software services to these restaurants, many produced by the company and some others licensed from third-party. Third-party providers provided a subsidized discount. Now, that’s the razor which US Food can offer these restaurants, solving a fundamental problem, and the moment I do that, the conversation shifts on the price of fish, because I’m solving a real problem. So that’s a very different way of doing business. Again, I’m using the same analogy of Amazon, but in a very different context.

Larry Bernstein:
Another thing about Amazon which is really unbelievable to me is their willingness to cannibalize one of their own businesses. So, for example, the Amazon Marketplace offers the exact same products that they offer on Amazon, potentially at a cheaper price, by one of their competitors. We didn’t see Kodak make the transition between analog and digital, and there was probably resistance internally to doing such. But Amazon seems to be willing to attack themselves in order to expand the pie. Somehow the entrenched bureaucracy that undermined Kodak or AT&T or whoever doesn’t exist at Amazon. What makes them special, and why is there no inherency to the existing way of doing business?

Sunil Gupta:
I think it’s Jeff Bezos’s philosophy of customer first, and he somehow has been able to instill that in the company, even if it means it hurts their other business. So the Prime service is a great example, and there were internal debates when they offered the Prime service, which is two-day free shipping. There was a huge concern that this would eat hugely into the profit of the company. It was very likely that most people who will use the Prime service initially, these were the heavy buyers to begin with who would order tons of products at basically free shipping and would cost the company a ton. But they tested it, because they say, “Hey, this is actually worth testing, because it’ll be good for the customers.”

So they have done these things again and again which have cut into their business, and I think you have to truly believe that if you serve the customers well, in the long run, it’ll pay off. In the short run, it might hurt. Now, I realize it’s very hard to do, because in the short run, it will cannibalize your existing business, which is what happened to Kodak and many other places.

                                                      
 
 
 
 
 
 

Wine & Spirits Panel: Mike Novy (Celebrity Tequila)

Mike Novy Transcript

Larry Bernstein:
Our last speaker in this panel, is Mike Novy. Mike is the president and chief operating officer of 818 Spirits, which is Kendall Jenner’s new tequila brand.

Mike Novy:
So if you haven’t seen 818 tequila in your local liquor store or restaurant yet, you’re not alone. We’re actually launching our brand on May 17th in California, and then it should be in most of the states where you are residing in July, or just after. So 818 Tequila was the brainchild of Kendall Jenner, who grew up in a reality TV family, but she’s also carved out a really strong career as one of the top-earning fashion models in the world today.

I’m going to tell you that I think that reality TV star is an ideal face for consumer products for several different reasons. First, by the very nature of how we know them, which is watching them in their homes from the comfort of ours, we feel more intimately connected to them, and second, because they hustle. Reality TV stars are part actors, part entrepreneurs. They know how to work hard. Case in point, Kendall Jenner, the founder of my company, 818 Tequila, grew up in reality TV, but has transcended not just into modeling, but into a series of other businesses.

So, celebrities get connected to brands fundamentally in two ways. One is a company who owns a brand goes looking for something to energize it. But they go looking for a celebrity spokesperson, and then they create a backstory about how that celebrity has a passion for this category, or for the brand. The second way is that the celebrity has an idea and searches out a business partner to bring the idea to life. That’s the way that my company came into the world.

I was actually working on another business when this one came along. I had a checklist for the things that needed to be there for this to make sense. I think this is the blueprint for how a celebrity or, in this instance, a TV reality celebrity and model can be successful in the spirits business. So first I asked, “Is Kendall committed to the business and willing to put in the hours on the type of activities required to build a business in this industry?” So first and foremost, it was clear to me that she comes from one of the hardest working families that I’ve encountered. It’s just fundamentally in her DNA. Two, Kendall is in tune with styles and brands, and she felt like there were many good tequilas on the market, but none that spoke to her as a consumer. She was willing to put in a lot of time and effort to try to formulate and create, and then bring to the world something that actually did just that.

So her vision was a next generation tequila brand that was more casual, more approachable, more youthful, more social in terms of that social interaction, as Carol spoke to, that consumers are looking for, and also more socially conscious. As an aside, 818 is the area code that Kendall grew up in, and she wanted something in this name that symbolized inclusiveness, so a consumer being figuratively invited to make a connection with Kendall through a drink that she, Kendall, loves, at a place that is the most personal to her.

For the past four years, she has been working on this idea, going from finding someone who could help her locate distilleries to someone who could guide on all the regulatory hurdles that are required. Then there’s just your fundamental business management, brand marketing, and supply chain that all had to be put together. Her work ethic and commitment to me wasvery clear when, on the first call that I did with her, she first was willing to make the whole group shift their schedule to a Saturday trip to go down to Guadalajara to go over to Tequila so that I could be a part of that trip and then, secondly, tell the group that was flying privately out of LA that they would be wheels-up at three in the morning so that by the time they hit the ground in Guadalajara and got over to Tequila about 45 minutes away, they would have a very full day of work. Again, that was a full day of work on a Saturday. She won me over with that one.

But then I wanted to know, “Is the celebrity, in this case, Kendall, accessible for whatever’s needed, not just for the fun stuff?” So even this past week, Kendall has been involved in every facet of the business. She’s done Zoom calls with me with national account buyers; we went up and down the street in New York to see some key retailers and on-premise operators. She is deeply plugged into what we do with our marketing agency, with our distilling partner, working on our production plan, and, in fact, the last text that I had of the night on Friday was at 10:30pm from Kendall, who was following up on something that she and I had talked about earlier.

But then, is she relevant to the target audience, and can she be the voice of a tequila brand? I looked into this, and clearly, I’ll tell you, if you don’t have the answer to that question, ask your 21 to 35-year-old children, friends, or coworkers, and the answer is a resounding yes. Tequila is, as a category, of growing popularity across all consumer demographics in the US. It’s really been amazing. It’s really been explosive over the past three years or so.

One reason for that is, I think we’re just more accepting and more interested in things like Mexican beer and Mexican food, which has improved in quality. The tequilas that people are adopting now are better crafted. They’re better styled. They’re really so much different than what they once were, when we needed salt and lime and a strong grimace to endure drinking tequila. It’s also become very popular with young women, so it’s broadly accepted across all demographics, but it’s really strong with young women, and women who like drinking it on the rocks to have a seat at the table with their male counterparts.
By the way, Dora Wedner, an intern for What Happens Next, thank you for that insight when we talked earlier this week.

Kendall is a relevant style setter across a variety of different attributes, and that is incredibly relevant to us.. I’ll give you some quantitative validation of her relevance: if you go to her Instagram account and then you go and you check out her Twitter and TikTok, she has over 200 million people following her on social media. Her family all combined has over a billion, with a B. Our Instagram account, which is @drink818, I’d encourage everybody to check that out at some point, already at last count when I checked earlier today had 423,000 followers. When I looked this morning, when I first woke up, it was 422,000.

So people are interested in what Kendall has to say, and what Kendall’s going to do with the brand. That’s obviously very compelling in a lot of different ways. It’s also economically very attractive, because that’s worth hundreds of millions dollars of global media, if you had to go and buy it. She also speaks very naturally and honestly about coming into the category as a consumer. She doesn’t position herself as something that she’s not. She doesn’t claim to have grown up in a tequila-producing family. She doesn’t say that she’s a master distiller. That’s also one of the keys to any celebrity being a part of the spirits or wine or beer industry. I actually think that her personality is one of our secret weapons. Most of the buyers that we’ve talked to have called her warm. They’ve said her enthusiasm is infectious, and maybe the highest compliment, if you think about the world that she’s grown up in, they say she seems really normal.

The last thing that was on my checklist, and this will be one that I imagine will be in follow-up questions, is, “Is the celebrity controversial or might they be?” Some of you may have seen a couple of months ago, if you’re familiar with our brand or Kendall being in the tequila business, it’s probably because we got a lot of press about cultural appropriation, and whether she should have right to be bringing a tequila to the US. We’re all very aware of that risk, but I will tell you and maybe ironically, that it has probably become one of our greatest opportunities, as every gatekeeper who saw that actually came to me with a list, and I have it right here in front of me.

The running list is at least 12 to 15 male names of US or European celebrities who had been involved in tequila, and there are many more in rum and other categories, none of whom were criticized for cultural appropriation. So, we try to balance the question and the issue of cultural appreciation versus cultural appropriation, and we look at our investment and our partnership in the community as collaboration versus colonization. But that is going to be probably one of our most dynamic issues that we’re going to be dealing with as a business.

Mike Novy:
I know why you might initially perceive 818 Tequila as a reality TV star brand. Clearly, not all celebrity partnerships are good business decisions, but I see this one as a very strong proposition, and it’s a beautiful product founded by a very smart woman who happened to start her career in reality TV. So far, my point of view has been validated by Kroger, Safeway, BevMo, Total Wine, and more, Target, ABC Stores, all of whom are going to be bringing in our product as well as some of the best hotels, bars, and restaurants in the country that are waiting for us to launch.

Wine & Spirits Panel: Carol Reber (Wine)

Carol Reber Transcript

Larry Bernstein:
We’re going to go onto our beverage panel next. This topic is the future for wine and spirits. We’ll have four speakers who will go in order, and then we’ll open up to a question and answer period afterwards. Our first speaker in this panel is Carol Reber. She is executive vice president, chief marketing officer, and direct-to-consumer officer at Duckhorn Winery.

Carol Reber:
I’m going to talk a little bit about the reasons that we drink. I do want to point out I will leave it to others to talk about drinking in excess. I’m going to focus on the reasons we drink, hopefully, in moderation. I think those reasons are complex but hardwired. So, I think in reverse order of impact, lots of us drink to unwind, compliment a meal, particularly with wine. All of you who have homeschooled children during COVID absolutely know this feeling. For many of us, in the heat or peak of the pandemic, and adult libation was the only difference between sanity and insanity, and between one’s work day and the portion of one’s non-work day, to the extent that there was much of that.

Lots of us drink for reasons of social branding and identification. Just like the cars we drive, the clothes we wear, it’s part of our identity. I’m a tequila guy, I’m a Chardonnay gal. Ain’t no laws when you’re drinking Claws people, if you’ve seen those bumper stickers around, probably not around New York City much, I would gather. But some of the more rural parts of the country, you’ll see those.

And I think one of the most innate reasons that we drink alcohol, I think, has to do with the Harvard Grant longitudinal study. Very famous study many people are aware of. It was a 75-year longitudinal study, one of the longest ever conducted, which ultimately, probably inadvertently, found the secret to a fulfilling life. The study tracked the physical and emotional wellbeing of 700 people since they were teenagers in ’38. The group was really varied, all men, from various economic and social backgrounds, from Boston. JFK was even part of the group. These people were evaluated every two years.

The goal of this study was to identify predictors of healthy aging, and the finding, when all of the data was collected after many decades, is that the secret to a fulfilling life is our connection with others and, in particular, belonging. We are absolutely hardwired to our core to connect with others. It’s vital to our survival and our mental and emotional wellbeing. Our authentic relationships matter.

Clearly, there are many paths to that, and enjoying connections with loved ones over a drink, a glass of something, is one of many paths. Not required, but a very common, well-worn path. Our entire business is set up around this premise of connection, authentic connections to each other. When you come to our tasting rooms, you don’t come alone. Obviously, being a member is an important part of our offerings, but we believe that a stellar glass, in our cases, of pinot noir or cabernet is absolutely part of the good life.

Talking a little bit about how beverage consumption changed during COVID, many of you did some excellent imbibing your way through. National Wine Day seemed to last from March 16th to December 31st, so terrific work there. But there were a few notable trends that had already taken root, they just accelerated at a faster rate. Certainly E everything. We’ve talked about education today, e-grocery, e-delivery, the e-tail explosion. Wine.com sales were up double. Platforms like Drizly and Instacart grew more than 300%.

Lots of channel shifting. When 80% of restaurants went offline, restaurants scrambled to master delivery. They managed to figure out how to sell wine and cocktails to go, really masterfully, after some trial and error. Consumers bought directly from makers. There are millions of direct new relationships small-craft suppliers now have. And people did a lot of cross drinking. Beer people drank wine, wine people consumed spirits, all across the board, so that kind of category curiosity bodes well.

In-home consumption, clearly an important trend. Mixology blossomed. People planted gardens, cooked from home. You couldn’t find flour or yeast anywhere, for those of you who were looking for that. Social and Instagram exploded, 7X. Some of you may have found great amusement following the author, Susan Orlean, and her wine exploits during the pandemic. Virtual happy hours abounded. The candemic, as we call it, a huge shortage of aluminum. Won’t be a permanent trend, but is a relevant trend that’s still shaping can shortages for a lot of us. And in social, the Pelowinos, the Peloton Wine Group, is 15,000 people strong. So we’re seeing this merging of social, community, exercise, wine, and affinity groups.

Lastly, Americans started pantry loading, and then largely reversed course. A lot of us were not sure of the financial situation. Obviously, when the stock market crashed, there was a lot of pantry loading of boxed wine. People ultimately settled, and those who realized their financial security was not at risk had a lot of pent up spending that they would’ve normally spent on eating out, traveling, buying cars, et cetera. Those dollars clearly went into eating and drinking well.

For any of you looking for online fine meat or seafood during the peak of the pandemic, most of that was pretty well picked over. And then shoptimism really took over as people looked for affordable luxuries, handbags, shoes, cosmetics, fine wine and spirits. That was a great trend that I think will continue in the next year, and really has carried us into 2021, and will set the stage for some of our other conversations from panelists. Lots of new drinkers entering the category. We are in a golden age of beverage innovation in the United States, both alcoholic and non-alcoholic. Low alcohol trends are real, consumers don’t need scores or validation the way they used to, and a thirst for experiences is definitely taking center stage.

Larry Bernstein:
Thank you, Carol

Wine & Spirits Panel: Carlton Fowler



Carlton Fowler Transcript

Larry Bernstein:
All right, we’re going to move on to our second speaker in this panel. That’s Carlton Fowler. Carlton is the managing partner at Goat Rodeo Capital Management, and he is also the former spirits innovation and brand developer at Gallo Winery. Go ahead, Carlton.

Carlton Fowler:
Very briefly, for the benefit of the listeners, Larry has granted me a little extra time to describe to everyone what the three-tiered system that governs regulation on beverage alcohol is. Essentially, think of it as a vestigial tail of the end of Prohibition. The 21st Amendment ascribed to the states the power and responsibility to separate and regulate the tiers of beverage alcohol, namely suppliers, and those can be as large as the $100 billion market cap Diageo or as small as a micro distillery. They sell to distributors. Distributors warehouse the product, they comply with the various state laws. Very importantly, they collect federal excise taxes, and they also get the product to the retailers. And then the retailers, they can be on premise, that is places where the alcohol is actually consumed on the premise, like a bar, or they could be off premise, meaning liquor stores, grocery stores, et cetera, depending on individual state laws.

So I think it’s going to be useful for a lot of these talks to have that basic understanding. Then, as far as mine, I find these quick talks are actually always best if I try and convey a simple pattern of facts, one set that is pretty obvious, one set is a little bit more interesting, and hopefully one that is a little bit more heretical, but all of which are hopefully actionable.

So, for the obvious set, it is impossible to ignore, and Carol highlighted this a little bit, just how much the consumer is continuing to adopt digital or e-commerce, and beverage alcohol is no exception there. What is a little less obvious is how much that has changing our industry. Before the pandemic, beverage alcohol actually had an e-com penetration rate of less than 2%. While that penetration rate quickly doubled during the pandemic, if you contrast that with the average rates in other fast-moving consumer goods, those are about 20%. So we have a long way to go, and we will catch up very quickly.

I would argue that the low e-com penetration rates in our industry are a result of some of this archaic regulatory structure. But again, they’re moving to catch up quite quickly. Additionally, when you factor in the additional costs of delivery in last mile and e-com, basket size or dollars per cart is really everything in a world where Amazon has trained consumers to expect that delivery should be free. Delivering a head of lettuce through an entire supply chain fresh to
someone’s door is very hard and it’s very low margin. Delivering a $50 bottle of wine or whiskey is comparatively much easier.

Said pretty bluntly, this is a quarter of a trillion dollar category in the US alone that has a very high incentive structure to reorient 50 billion or more of its total value to a digital supply chain and go-to-market in the next 12 to 24 months, and that’s really just to catch up. To paraphrase the late Senator Dirksen, “A couple billion here and a couple billion there, and pretty soon, you’re talking about real money.”

For the interesting fact set, in keeping with the digitalization of beverage alcohol and how that affects consumer behavior, I’d like to explore what has happened around the last-mile providers. What I mean by last mile is that the well-capitalized logistics and delivery companies. You all may have heard of one: it’s called Amazon. The others are less known, but growing just as fast: Gopuff, DoorDash, and Uber. All of these companies have their sights set on beverage alcohol. It’s a massive market, yet a product that isn’t particularly complexi to deliver. You don’t really need to take my word for it. Uber paid over a billion dollars from Drizly, and Gopuff just paid over $350 million for the entire liquor chain BevMo rather than build their network from the ground up.

As to why this is interesting, the US market has been historically fractured in its third or retail tier. There are well over 100,000 outlets in the US selling beverage alcohol, a retail penetration rate second really only to water. What this has been historically is that because of this highly fragmented retail base, just about any idea under the sun can get to be tried by an entrepreneur in this space. Because most buyers represent only one or two locations, every product has a chance to get on a shelf somewhere, but it also necessitates a robust distribution tier to serve all these locations, and that distribution tier has a lot of fixed costs locked in. While a giant distributor like Southern Wine and Spirits might be great at logistics benchmarked in their industry, does anyone on this call really think that they will beat Amazon at logistics 10 years from now?

We as consumers are increasingly viewing our consumption experience through the screen on the phone in our pockets, and these last-mile providers are making that screen the new retail tier. It will have huge echo effects throughout the industry. Brands and suppliers that understand that and prepare for that world will thrive when the supply chain and go-to-market is increasingly digitized, and brands that don’t will be left behind.

So finally something first that e-commerce is coming quickly and second that the last-mile providers will be investing very heavily in facilitating that world, but how fast might these changes come to pass? Surely these large distributors will push back. After all, Southern Wine
and Spirits had 2019 sales of $20 billion, and who wouldn’t want to protect that? As much as the large distributors would resist any legislative change through lobbying, that is not the only way. There’s also a judicial path.

Without turning this into a law seminar, there was a landmark Supreme Court case in 2005 called Granholm v. Heald that essentially allowed wine commerce in some circumstances to transact without the distribution and retail tiers to over 95% of the population. I’d be happy to explain those circumstances in the Q & A more, but what is important is those exact same circumstances are starting to build in the spirits category. My heretical statement is I think we are actually three years or less away from a similar judicial decision in spirits and/or beer, which could revolutionize that industry from a business model standpoint. That amount of margin could drop to the bottom line similar to the way it’s happened in wine.

David Epstein (Craft Bourbon, Gin, and Vodka)

David Epstein Transcript

Larry Bernstein:
Up next, David Epstein, co-founder of Tom’s Town Distilling Company, a manufacturer of craft bourbons, gins, and tobaccos. All right, David. Take it away.

David Epstein:
In 1896, the son of a furniture salesman is born in St. Cloud, Minnesota. That boy’s name is F. Scott Fitzgerald. In 1917, after a stint at Princeton University, Fitzgerald heads to Fort Leavenworth, Kansas, just outside of Kansas City, drafted as a soldier in the European theater of World War I. The head of Fort Leavenworth at the time, by the way, was the future president of the United States, Dwight D. Eisenhower, whom Fitzgerald despised.

He wasn’t at Fort Leavenworth long, but F. Scott Fitzgerald would no doubt have heard of and most likely been in awe of, a young swashbuckling bootlegger named Tom Pendergast, the future emperor of the Midwest, the boss of the Paris of the Plains: Kansas City. Tom’s reign was so complete and so powerful, that the Las Vegas of its day, Kansas City, was known simply as Tom’s Town. As Scott Fitzgerald leaves Fort Leavenworth with a head full of ideas on fabulous wealth, booze, power, and raw politics, and he writes The Great Gatsby about five years later in 1923. The Great Gatsby is, in short, the fictitious novel based on a very real person named Tom Pendergast, the city boss of Kansas City, Missouri.

For me, being the grandson of a rival bootlegger to Tom Pendergast, I, too, have been enthralled with this part of my family’s lore for decades. When I began Tom’s Town Distilling Company five years ago, I knew very well that authentic characters like Mr. Pendergast were rare, and complicated, and extraordinary. January 19th, 1920 was the first day of Prohibition. I call that, “the greatest day of Tom Pendergast’s life”. For the next 13 years, Boss Tom ruled Kansas City and most parts of the Midwest like a personal piggybank and fiefdom. The alcohol flowed, the cradle of jazz was born, and the Roaring Twenties become synonymous with cocktails, jazz clubs, speakeasies, and little if any acknowledgement of the rule of law.

This period in American history ended not in one year, not in five years, but thirteen years later on December 5th, 1933. By the mid-1930s, Mr. Pendergast had finally played his last card at the poker table of American politics, and he was finally put in prison for failing to report a bribe on his taxes. A Kansas City star goes to visit him in prison and asks him, “How did you do this? 250 speakeasies, the birth of jazz, and not one alcohol-related arrest in the entire city’s history.” His answer was, “The people are thirsty.” That is our tagline.

Almost 80 years later, I founded Tom’s Town with my business partner with a desire to build an authentic craft distillery that paid homage to the era of Mr. Pendergast, my grandfather, and with an eye towards creating game-changing spirits that reflect the spirit of the Jazz Age, but for the modern eyes or the palate of current tastes. In the heart of downtown Kansas City, we built an Art Deco tasting room, urban distillery, and event space. In 2019, over 90,000 customers walked through our doors, and many became the evangelists for our libations and spirits and spread the word. In 2021, we announced our partnership as the official gin of the Kansas City Chiefs.

No doubt, the pandemic has not been kind to many facets of the world’s economy, and the craft spirit industry is no exception. You may be saying, “No way. I hear that everyone is drinking more and more, and all spirits are getting sales records all over the country.” The pandemic has been good for drinking, but devastating for brands that rely on in-person discovery. There is no doubt much will be said about the overall volume increase in alcohol sales during the pandemic, but those statistics are results from the established corporate brands and not craft distillers. According to Nielsen, off-premise sales, which means liquor stores and grocery stores, are up about 30%. Despite this massive growth, sales revenue for craft distilleries is expected to decline by $700 million in 2020, about 40% of this sector.

Now, the pandemic has in some ways changed how consumers buy liquor and, of course, where they’re consuming liquor. A quote I saw from a board member of the Oregon Distillers Guild said people are drinking, but they are not shopping. A really stunning illustration of this is that large-volume bottles, one liter or larger, saw an absolutely massive spike in sales, rising about 80% over the period in 2019. Most, if not all, of these craft distillers sell their spirits in the traditional 750 millimeter bottles, and those in fact remained stagnant during the pandemic. The key for craft distilleries remains three things: distillery visits, bartender menu recommendations, and in-store tastings, none of which could have occurred in 2020.

But we’re now four months into 2021. The pandemic has eased in the United States, and the Roaring Twenties are inching their way back. In fact, in Ken Burns’ PBS series Prohibition, there are several scholars that said they “woefully underestimated” the impact on the 1918 pandemic on the Roaring Twenties. As Fitzgerald himself said, “We never wanted to look in the rearview mirror again.” With the massive shift in cultural attitudes at the time, the country, indeed the world, ushered in a decade of partying, an explosion of societal changes that hadn’t been seen since the Civil War.

I believe we were on the doorstep of a similar revolution, hopefully without the bookend of a Great Depression, that will rival the Roaring 1920s, where social media, consumer online shopping, and a general feeling of community and craving for social interaction away from the screens and back into the physical world is inevitable. As anyone knows after reading Sapiens, we are not just social animals, but wired to be part of something greater for our own survival. So let’s all go belly up to the bars and toast the Roaring Twenties with a Tom’s Town martini, gimlet, or Manhattan, or, as Jay Gatsby himself said, “And so with the sunshine and the great bursts of leaves growing on the trees, just as things grow in fast movies, I had that familiar conviction that life was beginning all over again with the summer.”

Larry Bernstein:
Our last speaker in this panel, is Mike Novy. Mike is the president and chief operating officer of 818 Spirits, which is Kendall Jenner’s new tequila brand.

Mike Novy:
So if you haven’t seen 818 tequila in your local liquor store or restaurant yet, you’re not alone. We’re actually launching our brand on May 17th in California, and then it should be in most of the states where you are residing in July, or just after. So 818 Tequila was the brainchild of Kendall Jenner, who grew up in a reality TV family, but she’s also carved out a really strong career as one of the top-earning fashion models in the world today.

I’m going to tell you that I think that reality TV star is an ideal face for consumer products for several different reasons. First, by the very nature of how we know them, which is watching them in their homes from the comfort of ours, we feel more intimately connected to them, and second, because they hustle. Reality TV stars are part actors, part entrepreneurs. They know how to work hard. Case in point, Kendall Jenner, the founder of my company, 818 Tequila, grew up in reality TV, but has transcended not just into modeling, but into a series of other businesses.

So, celebrities get connected to brands fundamentally in two ways. One is a company who owns a brand goes looking for something to energize it. But they go looking for a celebrity spokesperson, and then they create a backstory about how that celebrity has a passion for this category, or for the brand. The second way is that the celebrity has an idea and searches out a business partner to bring the idea to life. That’s the way that my company came into the world.

I was actually working on another business when this one came along. I had a checklist for the things that needed to be there for this to make sense. I think this is the blueprint for how a celebrity or, in this instance, a TV reality celebrity and model can be successful in the spirits business. So first I asked, “Is Kendall committed to the business and willing to put in the hours on the type of activities required to build a business in this industry?” So first and foremost, it was clear to me that she comes from one of the hardest working families that I’ve encountered. It’s just fundamentally in her DNA. Two, Kendall is in tune with styles and brands, and she felt like there were many good tequilas on the market, but none that spoke to her as a consumer. She was willing to put in a lot of time and effort to try to formulate and create, and then bring to the world something that actually did just that.

So her vision was a next generation tequila brand that was more casual, more approachable, more youthful, more social in terms of that social interaction, as Carol spoke to, that consumers are looking for, and also more socially conscious. As an aside, 818 is the area code that Kendall grew up in, and she wanted something in this name that symbolized inclusiveness, so a consumer being figuratively invited to make a connection with Kendall through a drink that she, Kendall, loves, at a place that is the most personal to her.

For the past four years, she has been working on this idea, going from finding someone who could help her locate distilleries to someone who could guide on all the regulatory hurdles that are required. Then there’s just your fundamental business management, brand marketing, and supply chain that all had to be put together. Her work ethic and commitment to me wasvery clear when, on the first call that I did with her, she first was willing to make the whole group shift their schedule to a Saturday trip to go down to Guadalajara to go over to Tequila so that I could be a part of that trip and then, secondly, tell the group that was flying privately out of LA that they would be wheels-up at three in the morning so that by the time they hit the ground in Guadalajara and got over to Tequila about 45 minutes away, they would have a very full day of work. Again, that was a full day of work on a Saturday. She won me over with that one.

But then I wanted to know, “Is the celebrity, in this case, Kendall, accessible for whatever’s needed, not just for the fun stuff?” So even this past week, Kendall has been involved in every facet of the business. She’s done Zoom calls with me with national account buyers; we went up