Ask Us Anything: Why do some aggregators beat direct prices? + Is the budget punishing risky investors?

0:00I'm Adam Schwab. I'm Adir Shifflin. And this is The Contrarians with Adam and Adir.

0:08And we are back, episode 212. We are here for our Ask Us Anything episode, of course. Over to the main chief question, ask himself. Great to be back for another Ask Us Anything, guys. First question this week comes in from Josh Zentl, who asks, I recently booked a hotel through Luxury Escapes for about 25 % less than the hotel's own website. Buying wine at a cellar door or beer at a brewery is almost always more expensive than Dan Murphy's, but Uber Eats charges a premium over ordering direct, as do insurance comparison sites. Why can some aggregators undercut the original cellar while others charge a premium?

0:53Can a business switch from one to the other? And which model makes a better aggregator business? Over to you. I love this question. Josh, what a legend. You should answer first. I have a thought about this question, but you might know very slightly more about luxury escapes in that world than I do. It's marginal, I have to say. Lion ball. but why do you think you're cheaper than direct but Uber Eats is more expensive than direct? So I can go through a bit of a diatribe on luxury escapes specifically but essentially there's two types of businesses in two types of successful businesses businesses that reduce the cost for customers and that could be a Costco could be Kmart could be a luxury escapes or businesses that try and charge more for customers that could be a Ferrari Hermes Porsche so you got a luxury brand versus a call it a mass brand so we clearly fit we obviously despite being named luxury escapes we would classify ourselves as a more mastige brand so we're trying to lower the cost for customers uh and bring the give them the lowest price uber is an interesting case again so i'll get onto the sort of the uber issues in a second we talk about uber a lot but essentially what we're able to do is use scale so we we can sell a significant amount of product much like costco and we probably We compare ourselves to Costco for travel in many ways.

2:12So because we have such great scale, and there's a few other things we do for hotels, but really scale is the big one. And we can bring a huge amount of revenue for our partners, a bit like Costco does for its partners or Kmart does for its partners. And we can then effectively pass that bulk discount on to customers who are buying individually. So we essentially take a kind of almost a buy in bulk strategy, but sell it one by one to customers. So that's where we're able to get a significantly better rate. and Josh has pretty astutely pointed out, most travel businesses sell at the same price or at parity.

2:41So we tend to, in our very limited circumstances, break that parity. So we're able to do that through scale, really. Costco does it. There's lots of very significant businesses, much bigger than us, that do it in sort of the mass market. And McDonald's does it in many ways, although McDonald's is becoming a more expensive offering in recent years. So that's the mass option. Or you can have the premium option where you try and charge a significant markup, the Ferrari style, where they get a huge gross margin because they're a luxury item. Hermes is the same though in 70 % gross margins because they're a really luxury item.

3:11So I kind of think about it in two different ways, either the great businesses are making it cheaper for customers or charging a significant premium. Adir, what are your thoughts? So I agree obviously with what you just said there. That's very sensible. I like the buy in bulk. I'll come back to that. Buy, buy, sell, sell, retail at a discount. This is how I feel about business more broadly. I think about the world as jobs to be done. Very smart person taught me to look at the world as jobs to be done. Jobs to be done. And the famous example is like the McDonald's thick shake is not about like quenching your thirst.

3:48It's about giving you something that feels filling for a long drive, but doesn't make you feel bad about what you're consuming. And so that's the jobs to be done. And the way I feel about business is you get to charge for doing a job. That's how business works. You get to charge for doing a job. And so Mike, the way Mike became a millionaire is he does his podcast producing and he charges us, we've got a job to be done. The job we need done from Mike is that we've got an idea for a podcast, but like I'm incompetent and you're busy. And so we need someone to do that job. And so Mike does that job.

4:23That's the jobs to be done. And we had to find someone to do that. And so he gets paid for that. And so then we look at what are the jobs to be done for luxury escapes versus Uber Eats. There's two good examples. So Uber Eats, it's pretty obvious what the job to be done is. I'm lazy or I can't go out of the house. Probably I'm lazy would be the main one. But I want to eat food and I want a big range of food. So go and solve that problem for me. And I want it so that it's not too cold and the delivery guy doesn't eat too many of my chips. We could call jobs to be done. And so that's the job they do for you and they charge for the job.

5:06And so the restaurant is charging for its job. Its job is making good food for you when you want it and sending it your way, having it ready to go your way. and then Uber charges on top of that and they can charge that because that's the nature of the job that they're doing. But the job that Luxury Escapes is doing is it's a different kind of job. You're doing a job which is I want to go on a holiday and I want to go somewhere beautiful and I'm happy to trade off a wide selection of options for trusting you to curate a narrow selection and give me a cheaper price. That's actually your job to be done.

5:46And so you're still charging for that job to be done because there's another job you're doing as well. And the other job you're doing is I'm a hotel and I've got lots of inventory and I want certainty on selling my inventory and I'm happy to pay for that job to be done. And actually you get paid for doing the hotel's job and you also solve my job and other people, other customers' jobs and that's how that's, kind of the way you solve the hotel's job and get paid for it and so i think the way to think about it is how much is uber eats really solving the restaurant's job this is the beauty of it like there is a job that a restaurant needs which is get me distribution get me because i've got fixed costs and i need lots of orders getting marketing it's getting customers getting customers and And what's interesting is that Uber Eats gets to charge everyone for their job.

6:45So you only get to charge one side of the marketplace, but Uber Eats gets to charge both. They say, hey, restaurant, I'm doing a job for you. I'm getting marketing, I'm getting customers, so you're going to pay me. That's the clip they take from the restaurant. Big clip, right? 30%, 25%, whatever. And then they say to the customer, I'm doing a job for you. You don't have to leave the house. You get a whole big wide range of food. I'm going to charge you as well. And so what is actually going on, though, is a bit – And they charge fees to the customer. But what's going on a bit is this. The restaurant feels like I am paying for too much of my job to be done and the customer is not paying for enough of their job to be done.

7:21And the way that markets work is they equalize themselves through value creation, value capture. And so what the restaurant does is they jack their prices. And what jacking prices does is says to the customer, oh, you need to be paying for more of your job to be done. So we are going to pass along that cost to you because Uber Eats is not. And I think that there's actually a very complicated dynamic that goes on in business. And I think that it's really around jobs to be done and paying for jobs to be done. Uber's a really complex example. And Josh has chosen a super complex. Much of his games is a bit simpler because we really, we negotiate with the hotel and, yes, we sell to a customer.

7:59So we're both three-sided, but Uber, we're way two-sided. Uber's three or even four-sided because there's a driver in the middle or a rider in the middle. So Uber has to also pay the guy on the bike to deliver the food. So technically, a lot of that amount that Uber charges both the restaurant and the customer is actually going to pay the driver slash rider. So Uber's margin isn't actually that big. It just feels big because it's got to pay this other guy or girl to drop off your food. So Uber's got such great – and DoorDash both have such amazing scale. They've been able to build this$70,$80 billion business.

8:30notwithstanding that sort of dig that goes to a driver and obviously the drivers and riders aren't paid a lot relatively speaking but there still is a relatively high amount that goes to them so that's a super complex example because there's all these jobs to be done by in the middle and also like um what what the uber example what the increase in price is saying in the restaurant is if we charged you if you as a customer an uber car uber eats customer if you just paid the regular the restaurant price, actually your job to be done wouldn't be being priced fairly. You would be prepared to pay more and Uber's not going to charge you more.

9:03So the restaurant effectively charges you for part of that service. I think the interesting thing with luxury escapes, and this is true for like the places you compete with, hotels.com, booking.com, what's their job to be done? I just want to see all of the hotels in one place and be able to book it conveniently. but the thing is that you if you really think about this carefully you and them you are charging the customer in a way in the same way as uber eats is doing which is this you're making a margin from the hotel and you're and so you're providing a cheaper price and making a margin from the hotel and if you were not um charging at all then you would have to pass on more and more and more of that margin down to the hotel down to the customer now i don't well the interesting thing about your business and we won't ask you to give away your whole business model here but the interesting thing is the price costs x when the hotel sells it directly you sell it for y so there's a gap there and then you keep but you bought it for zed so you bought it for below y you sell it for y and i don't have to pay x and it's an interesting dynamic which is could you sell it for more to the customer and keep more like how much is the job worth that you're doing i think or does the hotel not let you does the hotel decide what price you need to sell for no the hotel doesn't mind if we charge more hotels don't the harder part for hotels so i think booking is actually a better example we've still got the three examples you've got uber uber uber eats like doordash where you pay a premium as you said because there's not enough money to compensate the restaurant for doing that one job for you well the job is too expensive the restaurant is being charged too much for the job and the customer is being charged not enough for the job and the reason the restaurant has to be charged too much is because you got to pay this driver right or drop it off and that's expensive relatively speaking and because if you said to the customer the restaurant's actually charging you 10 more so instead of that we're going to get you the restaurant to charge you the same and we're going to drop a 10 fee on top the customer won't pay that it's too much of an obstacle you know what i mean and so they have to kind of the system has found out a way to charge everyone what they should be getting charged.

11:13Exactly. Exactly. So you've got DoorDash or Uber, we charge a premium, as we said, for the reason why. You've got Booking.com, Hotels.com that charge the exact same price as the hotel, so there's no premium. And essentially the job that's been done there is distributing the room. So I know Booking.com. I love Booking.com. I've got the Booking.com app. If I'm the Marriott in Bangkok, I'll just distribute my room via Booking.com. It's kind of severus paribus in a way. Yeah, the hotel is paying Booking.com a 10 % or 15 % or 20 % commission, whatever it is. but they're getting a good price for that hotel the same price they're going direct without having to do loyalty points and all this kind of stuff so booking and hotels caught a parity and we're the other extreme we're actually a discount so we're the opposite to uber so uber's a premium bookings apart and we're a discount and we're a discount because we're a marketing channel for the hotel so why do hotels pay us what they pay us as in pay us through a better a discount is because we give them lots of marketing and we can move lots of production for them that nobody else in the world can do and we do smart deals that make them actually more money because we sell all-inclusive and full board and they're making lots of money from the food and the bev and some other stuff so we we structure it differently and we structure it to make sure the hotel makes money and we're also an early bird channel so there's a few things that we do really uniquely that no other channel does which allows us to so a job that's to be done for us to hotels is we make the money we actually generate profitability for them and that's why we can get such a great rate and pass that to the customer versus an Uber Eats, which prima facie actually probably costs the restaurant money, but they're kind of getting their throughput up, they're getting revenue to the door, they're paying their overhead so they can sort of get away with it, especially if they can charge a premium.

12:46I completely agree with that take. I think what's the most interesting out of the booking.com example is that effectively the hotel having their job done and paying for that is completely subsidizing the customer having their job done. The customer pays no more than they would pay to go direct. And so what I think what has happened is that booking.com has become so powerful that they say to a hotel, if you don't subsidize the customer's jobs to be done so that we can get the customer easily, we're just not going to put you on booking.com we are so powerful that that job is worth so much to you that we're going to force you to cross subsidize the other side of the marketplace to build our business i think that's what's going on well i think yeah you're right and that's called a desegregation in the marketplace but what that actually is every travel because generally hotels pay are used to paying a commission whether it's to a wholesaler whether it's to an ota an online travel agent they're kind of used to it so maybe booking can charge a bit more for that as you said because they're so powerful but it's not standard deviation is more maybe booking might get a 23 commission and your standard wholesale might get 17 so like it's yes they have some power but it's not as they're not sort of omnipotent super powerful in that sense like a monopoly provider i feel like i'm gonna talk about this all day because like the other thing you could argue is well when they when the hotel gets the direct booking they haven't really got the direct booking someone else did the job and they probably went to performance marketing or to any other form of promotion like someone is getting paid for that job and if they're doing it with repeat purchases then the people inside the hotel are getting paid to do that job so like yeah even if you and if you look at booking as well the big who's number one customer of google booking.com so really half of what you paid at booking is going to google so it's actually there's kind of multiple people doing that job google's doing the job or facebook's doing the job or instagram or instagram are in the job and booking sort of pays them but hence the hotel is kind of subcontracting their marketing to booking who then subcontracts to google because booking's the smartest digital market in the world so that's why they kind of do it because booking are better i'll go to my question number two all right the next question today comes in from ari berman hiya dear i'm interested to hear adam and your thoughts on the unintended consequences the budget will have on investors.

15:15This has largely been ignored in the media. For example, previously, an investor was rewarded for investing in more risky stocks, like biotech, miners and tech stocks, no dividends, but got a tax break on capital gains, i.e. more reward for risk. Am I now better off investing in boring companies that generate yield? Well, this might shock you to know this, but the government are liars. Now, I'm sure you've probably figured that out by now when it comes to this tax. Maybe they will never, ever, ever, ever, ever, ever, ever charge this tax and then they do the tax might be the giveaway. But there's something else they lie about, which goes to the heart of Ari's question.

15:58Ari's a great guy. Ari's got a business called Tall Bob, which does like a whole lot of SMS marketing and stuff. We use it with some of the businesses, et cetera. And so very good. And so I tell you why I think the government has lied on top of the lie. They say they're doing inflation indexing, but they're not doing inflation indexing. They're indexing the cost base. That's the amount you pay. They're not indexing the sale price. If they were doing inflation indexing, it's the second number that rises with inflation. You don't adjust the first number. You adjust the second number down. And so what Ari is alluding to correctly is that because only the cost base is being indexed, a faster growing investment will have a gain, makes the cost base irrelevant, essentially.

16:46If you invest a dollar and you make$2, the$1 you invested going to$1.30 is a lot more meaningful. And if the$1 went to$10, who cares if it went to$1.30? It makes no difference. and so what ends up happening is the tax rate grows on, there's a higher rate on better performing investments, which I thought was a bug. I thought these idiots, they haven't thought this through. It turns out this is exactly Treasury's dream. For whatever reason, I assume the people in Treasury are bad at investing and they just want to get lower tax on their bad investments, right? The people in Treasury can play morons on that.

17:19It's been well established. And so I think that this is, I don't know what to say about that. I kind of just like put my toe in the water and all of a sudden a huge – my toe in the water of like criticizing treasury. Tidal wave. And then a huge hand just came behind me and pushed me into the pool. So there you go. It was very enjoyable. And so it is very problematic. And so I've thought a lot about this, obviously. We've spoken a lot about this. Do you try and buy worse investments so they don't go up as much and you pay less tax? Or do you keep trying to buy good investments and they got more?

17:50It's like founding a business. My cost base is zero. Do I stop doing that? And I think the answer is this. Unless you move overseas, which is genuinely an increasingly good option for people approaching me and saying to me, what do I think? Like, this is not a hypothetical. Like, definitely I think it's going to happen. I mean, I don't want to say definitely. I think it is definitely going to happen. There will be people that move overseas. But I think that… People are already moving overseas. People are moving. Yeah, for sure. And, like, I think there's no doubt about it. But if you're not moving and you say, well, what should I invest in?

18:25I think you get smashed by the tax and it does result in less investment into other people's startups outside particular vehicles that are not applicable to most things. but I think as an individual investor you just got to say if my investment horizon is more than 10 years I probably still need to invest in strong investments that I think are going to perform strongly and get a lot of equity growth over the next 10 years and vote against the government at the next election and pray they get voted out and things get fixed because whilst it's very damaging to the economy especially intellectual property creation patterns and venture capital investment as an investor, I don't think you've, if you've got a time horizon 10 years plus, I don't think you've got much choice.

19:13I would just say my one, and it's not financial advice, just me thinking through the logic of it, not giving advice. The one caveat would be the only logical, from a purely dispassionate view, if you want to build wealth for your retirement, the only logical place to be doing that with high growth assets is inside your superannuation fund. That's the caveat. And super is completely untouched. It's now, always was a massive tax reward. Now it's a tax reward times 100. So you're paying, in your example, probably high 40%, mid to high 40 % tax on a high growth. Yeah, you get an investment that grows 5x over any period of time.

19:53It can be 10 years. You're going to be paying 43 % to 45 % tax if you're in the top tax bracket. Yeah. So assume close to half of it versus super, potentially 10%. So it's just extraordinary. Plus, you get tax breaks on the way into super. Obviously, it's up to 3 million cap. That's a pretty decent cap. It doesn't include your family home. So what the government's done here is completely dissuade people to invest in fast growth companies. And where are most jobs being created? In fast growth companies, it's going to be the most jobs. So this is a job-killing, horrendous policy that is just an absolute nightmare for anyone wanting to create value and create jobs and create a business.

20:31And it's been created by Anthony Albanese, Jim Chalmers, Jenny Wilkinson, three people who have never worked in Honest Day's job in their life. They've only been employed by the government. So these people have no idea how people invest in risky assets. So that's the problem. You've got the lunatics clearly running the asylum. I think one point I would make, and you sort of made a really interesting point, eventually you'd hope that this government gets overthrown and a more sensible government comes in. This could be the next section, could be the election after. But purely these asset prices will drop.

21:00So there could be a really interesting investment case where you invest in a fast growth asset. And if this government does get voted out and you do get a more rational government coming in and reverting the policy back, you might see a significant boost in the value of that investment. because suddenly everybody wants to invest in growth assets again. So there is an interesting little investment play there at some point that you're sort of betting on and you can potentially hedge that bet in other ways with sort of Calci or Polymark or who knows. But there is a really interesting arbitrage to be had there.

21:32Well, it's not so much an arbitrage, but certainly a risk-adjusted policy play at some point. Two comments would be, one, the thing you absolutely don't want to do in super is invest in hyper risky assets in super it's the most perverse incentive possible encouraging people to put their riskiest assets inside their super fund and you can argue and say well it doesn't fail a what's that single purpose test or whatever it's called that it can only be used for retirement savings i mean what are you gonna are you gonna police that and so like i think number one that's perverse and number two you know this idea that the government says well oh, it's for young people and most young people, they're not investing in any way and they're not paying capital gains tax so they don't care.

22:18That is like the, I don't often say gaslighting, but that is gaslighting. Like that is saying we are going to tax the living hell out of you so you literally have no money available after we charge you income tax to invest in anything and then we're going to say, you see, most people are not invested in anything like young people. I don't care about capital gains tax. It's just horrible. It's a horrible line of argument. Everything about this labour policy is a lie. Like every time someone, they get questioned as to why are you doing this, why are you taxing businesses? They go, oh, because it's unfair because young people can't buy property.

22:53Their actual response to a question about something different is reverting back to property. Nobody has an issue with the property. Everybody said, yeah, okay, there's maybe some people don't want to tax on property. Everybody understands why property taxes need to change and how CGT discount should be removed for property. Even negative gearing, people understand that. What people have the issue with is something completely different. yet they keep answering the question with going back to property because they're such liars. Like here's this, the Albanese and Chalmers have lied from the election and they've lied from before the budget and they've lied constantly since the budget.

23:20These people, these people weren't politicians. They've been in jail for fraud. They are just complete liars and they can't be trusted and they need to be voted out as soon as possible. But Ari is right, by the way. Like Ari's observation is spot on and it hasn't gotten a little bit of attention. I mean the question is probably a couple of weeks old to be honest and like there's a backlog of questions but it has got a bit of attention. But he's right. Like there has not been a lot of focus on this and he's absolutely spot on with his remarks. Great, great. Two great questions. We've got to a super quick break.

23:47Back with our last question just in a moment.

23:58And we're back. Final question. Over to you, Mike. Final question this week. Something topical in the news. It comes in from Tim. With barbecues galore entering administration and hundreds of jobs affected, are Australian consumers pulling back spending more aggressively than the data suggests? Why don't you handle this one? Well, barbecues galore, I mean, I don't know a hell of a lot about that business, but it's a complicated situation because I think that business traded at some point in the past, I think, unless I'm wrong. This is background quadrant, who's one of Australia's actually best private equity firms in the last 30 years.

24:36They actually bought the business, I think in 2012, they bought it, I think possibly for another private equity firm, possibly like Ironbridge or something. They sold it to Gordon Brothers for basically nothing. So that last private equity firm, Gordon Brothers, wherever they are, yes, they lost money, but probably a relatively small sum, Quadrant, who have generally had a great record. Obviously, this wasn't their finest transaction. They lost a bit of money on this one. But yeah, so it's a really interesting question. Obviously, never great to see a big Australian name collapsing like it has in the last couple of weeks.

25:05Well, without doing a deep dive on this, my take on it is Gordon Brothers didn't buy it very long ago. I suspect that it was in big trouble and Gordon Brothers basically, I think they took over some debt as well. I'm not sure, but they didn't, they weren't blindsided by the fact that this thing is now going into liquidation. Like I think they were basically trying to do some deals to save it and they didn't work. and from what I read, the deals that they were, so they owed a lot of money to a lot of different people and in order to go and restructure the company as part of a receivership, which is when the people that are owed money, the creditors of the business, they send in their own people to say, protect our interests and then an administrator probably comes in to administer the business.

25:50I think they were pretty close to sorting out survival for this business and renegotiating. And there were a couple of parties that said no, one of whom were the Chinese home brand, like own brand manufacturers. And the reason they said no from what I read in the Fin Review is they couldn't get insurance from the Chinese government insurer to be able to extend credit to barbecues galore anymore after this. And so they couldn't agree to a rework of the package. And when you're, I think everyone was expecting that this would be worked out and continue trading. And when a couple of them blocked it, it means that they can't do a deal and so the receivers have to say, we need to go and get the money for the people that are owed cash.

26:38We're going to go and sell off the bits of this company and get whatever we can and pay it back to the people that have lent debt. And so that's called liquidation. I think, so what's happened here? So the question is, is this consumer confidence slash a tough economy in Australia and the answer is I don't know and the reason I don't know is barbecues galore is an old business it's been around for a long time it was a business that made its name as a third-party retailer selling other people's stuff aggregated into one location so this business was founded in 1976 now let's think about what was going on in 1976 there was certainly no internet there was no fax machine in 1976 so like you went to meyer or david jones i mean i don't know if there was harvey norman in 1976 probably but wasn't selling barbecues no there was there was norman ross in the early late 70s early 80s that got sold to alan bond but it was no harvey norman started about 10 years later yeah and so if you wanted to go and buy barbecues i reckon you probably went to the local hardware store like mckeon's i don't even know where you'd go and buy a barbecue well i I think you're missing – you're bearing the lead a bit here.

27:52I think probably the biggest reason is the Goliath of Australia, Bunnings, really sells a lot of barbecues. I think that's probably the biggest reason for barbecues galore demise. It's very hard to compete against Bunnings, which is just unbelievable. And so, yeah, I mean, that's kind of where I was going, right? Like in 1976, if you wanted to buy a barbecue and someone popped up and said, I'm going to put all of the barbecues in one place and you can come and buy it here, that was like the internet in 1976, right? Like you could get everything in one place and look around. And that is how these department stores were so big.

28:24And there were so many department stores that don't exist today. And then you had this combination of the internet on the one hand and other much bigger big box retailers like you said, Bunnings on the other hand. I just think they were trying to pivot to making their own stuff. Obviously, it was just too slow. They couldn't get there fast enough. By the way. They've been doing their own stuff for decades. Oh, has they? All right. It just wasn't good. People want to buy Weber or whatever they want to buy, right? Yeah. I want Sporta Weber from there. You want to wear it? Yeah. I mean, I think brand makes a big difference in this category.

28:56People want to buy known brands. And so this to me feels less like the economy is bad and more like the business model, they were left behind on the business model essentially. I don't think the economy's helped them. I think they may have seen a drop-off in profitability or whatnot, but the actual death of the – well, I think the death of the business, two things. One is I think they've been, to your point, smashed by Bunnings and probably a little bit internet and some other stuff. And I think probably the other one is private equity companies tend to load a lot of debt on the balance sheets of their businesses and they do it to juice their returns.