Malt Liquidity 51
Rates Day draws nearer
Kick em while they’re down
It’s no secret that restaurants in particular suffered pretty badly over the course of 2020. Who would have thought that a low margin business losing a large percentage of their optimal stream of revenue would have disastrous consequences?
You know what these restaurants need to recover? Well, to buy ads, of course:
Food-delivery platforms have long expected merchants to pay a hefty tab for their services. Lately, they are asking merchants to bid for extra love…
DoorDash isn’t alone. In addition to its own commission tiers, which include services such as delivery and marketing… Uber Eats announced sponsored ad listings in the U.S. last August. The company says that ads are now also available in the U.K., Australia, Brazil, Mexico, Canada, France, Germany, Portugal, Spain, Taiwan and Japan. Meanwhile, Grubhub says sponsored listings are baked into its commissions, with more money buying more visibility.
A while ago, I wrote about the phenomenon of companies worth dozens of billions of dollars that can’t actually turn a profit in their core business “attempting to diversify” their revenue streams in an effort to become profitable, and apparently we have iterated from hailing cars to delivering food to delivering booze to selling ads as a company that has existed for 12 years and been public for 2 still continues to not be profitable:
…the flood of cheap VC funding into “gig economy” companies transfers the risk of making ends meet from the business itself to the services it inserts itself into delivering and the people who facilitate the deliveries themselves. As Levy correctly notes, there aren’t sufficient margins in delivery - while food delivery startups such as Grubhub or Doordash command 10-11 figure valuations, they don’t actually make any reliable profit; rather, they are enabled by artificially subsidized cost of capital allowing them to show explosive revenue growth. Thus we arrive at a situation where a 50 billion dollar company ($DASH) has to diversify its business operations to even turn profitable.
While they claim to purportedly help restaurants, the trend now is not to enable restaurants to complete more orders, but rather enable ghost kitchens to purely fulfill app-based orders without having a visible storefront or any hallmarks of the traditional restaurant at all. Obviously, this prices the restaurants with the storefronts out solely due to pricing power of the ghost kitchen, but with ad sales, these ghost kitchens can further entrench themselves by placing themselves at the top of search queues. I wouldn’t be surprised to find out that a bunch of Uber-backed ghost kitchens are the primary “top-tier” ad-spend as they find even more ways to wash their capital raised through other operations to pump up their revenue further and continue the game of “we’ll be profitable by the end of the year, I swear!”. For the love of god, call your restaurants and pick up your food - don’t funnel 30% of the order into an app that does nothing other than chip off some of the rock to make it a harder place.
Xi don’t hurt me, no more
What is debt? I like to think about commercial debt simply as scalable trust, a liquid I-owe-you that can be passed along well removed from the original issuer and borrower. Debt contains an underwriter as well, a function of what the debt is denominated in - dollar-backed debt, for example, is enshrined in the fact that if you are paid what you are owed in dollars, the US government upholds your ability to use said dollars. The more uncertainty about the underwriter or the ability of one to pay their debts leads to a lending freeze - the I-owe-you becomes less liquid and people stop wanting to deal with either the borrower or the method of payment proffered.
As such, I’m closely following the CCP’s adventure in regulating gaming, cryptocurrencies, gambling, celebrities, and more as they turn their sights to central banking itself:
Mr. Xi, who started his campaign late last year with a regulatory assault on private technology giants, is launching a sweeping round of inspections of financial institutions. According to people with knowledge of the plan, the inspections, announced in September with few details, focus on whether state-owned banks, investment funds and financial regulators have become too chummy with private firms
Starting this month, graft-busters from the Central Commission for Discipline Inspection are fanning out through the offices of the 25 state institutions, reviewing files of their lending, investment and regulatory records and demanding answers to how certain deals or decisions related to the private firms were made, according to the people familiar with the plan.
Earlier in this very post, I quoted how cheap VC funding enabled companies like Uber to grow and scale (and make a small group of people very rich - a distinction worth making when talking about China). With the entire Evergrande fiasco, it would logically follow that the cheap-cash policies that enabled the growth of China’s tech sector (especially Didi, the worst IPO I’ve ever seen in terms of regulatory failure) fall under scrutiny. VC’s and tech investors are not in the business of underwriting bonds, after all. However, it appears a lot of these debt issuances were tranched and sold to the public as stable investments:
One of Evergrande’s main lenders is financial conglomerate Citic Group, which is now being scrutinized. Over the years, the lenders at Citic, founded in the late 1970s by Rong Yiren, China’s most famous “red capitalist,” to experiment with capitalism, have created the closest thing China has to a Wall Street culture.
They take risks that some traditional lenders have shunned, going as far as creating investment funds for firms such as Evergrande. For instance, when the developer needed money for projects in 2015, according to people with knowledge of the matter, it received a pledge of about $3 billion from Citic. Citic then folded the funds into investment products sold to individual investors, promising a high rate of return funded by the loan payments from Evergrande.
Considering that regular people are getting hit by these products issued by state-backed banks, what was once an aligned set of goals between the state bank and the CCP is now diverging. On one hand, you want foreign liquidity in your own debt markets - it’s an endorsement, of sorts, that you’re a trusted party and you will ensure that debts are paid (to some extent, at least) and “you’re all in this together”, so to speak. On the other hand, bad state bank behavior when they are directly representing the state fouls your own reputation, and it’s hard to punish your own arm for acting badly without looking like you’re chopping off your own thumb. If Xi truly wants to crack down on cheap debt and flimsy issuances in what could amount to the first notable assault on low rates, it’s hard to tell how quickly debt liquidity could dry up. By all means, debt holders will be paid out how the CCP dictates (traditional junior/senior/mezz debt seniority won’t apply, of course), but if the CCP tells the foreign bond holders to shove off - in effect saying “so what?” when people show up with their I-owe-you’s - their borrowing capacity may be greatly diminished. It’s a situation to monitor going forward, for sure.
On that note…