No Mercy / No Malice: Scarcity

0:28Support for this show comes from Aura Frames. Steel is exclusive to listeners and frames sell out fast, so orders you now to get it in time for the holidays and support the show by mentioning us at checkout. Terms and conditions apply.

0:47Kids. They grow up so fast. One day they're taking their first steps, and the next they don't fit into the tiny sneakers they took them in. You blink your eyes and their princess dress is two sizes too small, And their dinosaur backpack isn't cool anymore. But don't cry because they're growing up. Smile, because you can profit off of it. For real, there are a bunch of parents on Depop looking for the stuff your kid just grew out of. Download Depop to start selling. This is No Mercy, No Malice by Scott Galloway. Scarcity, as read by George Hahn.

1:32Stabbings, state secrets, horrors masquerading as Supreme Court justices. It's been an especially depressing week in the news. So I'd rather focus on scarves. Specifically, Hermes, the iconic luxury brand. With$12 billion in annual revenue, Hermes now has a larger market capitalization than Nike, which boasts$47 billion in annual revenue. I see this as a slow yet tectonic shift in customer values. Cue dramatic music. As awareness seeds ground to artisanship. Awareness via social platforms has created a generation of empty calorie brands. Kylie Cosmetics, Dollar Shave Club, Andrew Tate, built on sand.

2:35Over the past five years, the three biggest consumer packaged goods companies, P &G, Nestle, and Unilever, whose competence is building awareness, have averaged annual stock gains of 9 % versus 15 % for the three largest luxury firms, LVMH, Kering, and Estee Lauder. The decline of linear TV is a function of cable TV losing its oligopoly on awareness, and awareness beginning to lose value as brands famous for being famous are less enduring. This trend highlights what has got to be a first-ballot Hall of Fame strategic head-up-your-ass decision. Do away with one of the great artisanal brands of the 20th century, HBO.

3:30But that's not what this post is about. Key to artisanship is there being few artisans. Specifically, the existence of scarcity. or, as is often the case, the illusion of scarcity. The strongest brands in the world, MIT, Apple, Hermes, the U.S., are built on the artificial choking of supply via rejectionist admissions, pricing strategies, production, and visas. Thirteen years ago, I started a business intelligence firm that advised luxury, then CPG, brands. It was a successful company predicated on a simple premise. Luxury brands would trade at higher multiples of revenue due to increasing income inequality and their ability to manufacture scarcity.

4:26This was the sermon I preached to every executive we met. We sold the company in 2017 for eight times revenue. Mirroring our client base, we were disciplined about pricing and said no to a lot of potential clients' procurement departments. By the way, awful job. My first consulting firm, Profit, had said yes to every client with a checkbook, and it sold for 2.8 times revenue. It was the right decision at the time, as I didn't have the capital to utter the sexiest word in the English language. No. The richest man in the world doesn't make cars, rockets, or enterprise software. He makes handbags.

5:16Bernard Arnault, the CEO of LVMH, is now worth more than Warren Buffett and Mark Zuckerberg combined. He's made his fortune not selling things people need, but things they want. LVMH controls the most prestigious luxury brands in the world From Tiffany & Company to Loro Piana to Louis Vuitton When you assemble artisans and create scarcity That results in a supply-demand imbalance You generate a cash volcano That you can cap the same way you do an oil well And turn on or off as needed Businesses are either supply-constrained like rare earth minerals, 1945 Chateau Mouton wine, etc., or demand-constrained, pretty much everything else.

6:11The companies that trade at the greatest multiples are those that are artificially supply-constrained, where the supply-demand imbalance puts a dial on the spigot that managers control. Imagine the decision to have more revenue Is just a function of when you'd like more revenue See above, Hermes I wrote about scarcity six years ago How to create it, how to sell it Why it's so important Today, scarcity is more important and scarce than ever In sum, this post still resonates The following was originally published on March 3rd 2017. Scarcity is key to irrational prices. Beachfront property is scarce and, regardless of the economic cycle, always in demand.

7:07You can also manufacture scarcity with similar results. Crazy town prices. Spoiler alert, Hermes could produce more Birkin bags and yet decides not to. The choking of supply adds heft to the narrative that this is a special bag, and it adds credibility to the urgency. You may be shit out of luck next week if you don't plunk down$14 ,000 now. Snap Inc. stock began trading yesterday, and bankers did a masterful job of manufacturing scarcity. The triple threat of social video millennial is uber fashionable, and the underwriters ensured that after placing the bulk of shares with institutions which implicitly commit to holding for a long-ish time, the bankers let only 14 % of the shares float or be available for trade.

8:08So, even if a Birkin bag or snap shares are not intrinsically worth$14 ,000 or$25 a share, if scarcity supports the price, then God bless them, no? No. Hermes can maintain scarcity. However, over the next 24 months, seven times the number of Snap shares could hit the market. The network's artisanship or specialness is also about to become less scarce as Instagram Stories continues counterfeiting the Snap bag. I believe in 2018, Snap shareholders will discover they don't own a Birkin. Not even a Coors or a Kate Spade, but an Esprit black-brown round barrel bag, purse-shoulder small hipster. Shares of a snap plunging after hours on an earnings missed on more than 26%.

9:07Currently on pace for the second biggest drop since going public. We've been reading words for several hundred years, listening to words for thousands, and learning from images for millions. We, as a species, are great with images. We can interpret and absorb an image 50 times faster than words, as we've had a lot more practice with visuals. Just as music is cemented into our being in our late teens, the images of our early childhood become fixed into our gray matter. When I was seven, we lived in a house near the beach in Laguna Nguel. My dad would come home early, he was a salesman, and we'd go body surfing and see seals and porpoises just offshore.

9:54When there was a storm, we'd go to Newport Beach. From the end of the pier, we'd look several hundred feet out and alert each other when millions of gallons, barreling toward shore, morphed into a blue-gray hemi-cylinder eight, maybe ten feet high, and wait for the pier to vibrate, even shake, as the rising seafloor thrust the cylinder up and the wave crashed down on the water.

10:23On one of four consecutive nights, beginning on the full and new moons in spring, my mom would wake me at midnight, and armed with flashlights, we'd go down to the beach and watch what looked like hot slices of metal dancing in the shallow surf. The grunion were running. They weren't all images from the title sequence of the OC. I remember, on TV, a skinny guy wearing a ski mask on a hotel balcony interrupting awe-inspiring performances from Mark Spitz and Olga Korbut. The only reason it stuck is every time this guy came on screen, my parents stood in front of the TV, visibly uncomfortable. When my father was going on a business trip, my mom and I would go with him to Orange County Airport.

11:12More than an airport, it felt like a restaurant where people pulled up in the back in commercial aircraft. There was a bar with a wraparound balcony on the second floor that you could access via stairs from the street. No security. My dad would take me out on the balcony and cover my ears as aircraft engines screamed in anticipation of the pilot releasing the brakes and beginning the 5 ,700-foot transformation from beached seal to soaring eagle. He taught me the difference between a 727 and a DC-9, three jets versus two, and between the DC-10 and the L-1011, third jet as part of the fuselage versus finding residents halfway up the tail.

11:59The backyard of this restaurant was dominated by two brands, Air California and Pacific Southwest Airlines. Pacific planes had a smile painted on the nose, grinning at us through the big windows. My parents were living the American dream. Two immigrants with an eighth-grade education, they applied hard work and talent to the greatest force of good in history, the U.S. economy. We lived close to the beach, but they, mostly my dad, fucked up, and soon we were living in two houses, neither near the beach. After the divorce, my dad would pick me up after work every other Friday in his Gran Torino from our 800-square-foot apartment in Encino.

12:47I had to wait outside, sometimes for an hour, far from our apartment, because my mom didn't want to risk seeing my dad or even his car as she hated him. I became skilled at identifying cars from a distance by the shape and luminosity of their headlights. AMC pacers were easiest.

13:14Anytime I hear sound in the air, I still look up. And most of the time, I can identify the plane and airline. Last weekend in South Beach, my friends pretended to be impressed with my ability to distinguish the A380 headed to Munich, Lufthansa, from the double-decker Airbus flying to Paris, Air France. Gazing upward and cataloging air traffic is an instinct for me. Look up, identify an object, and think of when we were a family and lived near the beach.

13:54Life is so rich.

14:31Thank you. Best part? Odoo replaces multiple expensive platforms for a fraction of the cost. That's why over thousands of businesses have made the switch. So why not you? Try Odoo for free at odoo.com. That's O-D-O-O dot com.

14:54This next one's for all you CarMax shoppers who just want to buy a car your way. Want to check some cars out in person? Uh-huh. Wanna look some more from your house? Okay. Wanna pretend you know about engines? Nah, I'll just chat with CarMax online instead. Wanna get pre-qualified from your couch? Woo! Wanna get that car? Hey, that's a beat! You wanna do it your way? Wanna drive? CarMax.