This week’s podcast is about assessing specialty ecommerce companies (i.e,. the anteaters) vs. the ecommerce giants (i.e,. the lions). Which will survive? Which will thrive?

You can listen to this podcast here or at iTunes and Google Podcasts.

Here is the link to the Q&A on Sept 7:

• Live Chat with Prof Jeff on Asia Tech Strategy

Here are my 5 questions (thus far) for assessing the viability of a specialty ecommerce company.

1. Is the company sufficiently differentiated in the user experience?
2. Can the company compete and/or differentiate in logistics or infrastructure without ongoing spending?
3. Does the company have a strong competitive advantage in a circumscribed market?
4. Is there a clear path to significant operational cash flow?
5. Has the company avoided markets and situations that are attractive or strategic for the major ecommerce companies?
6. Addendum: Don’t overestimate first mover, virality or growth hacks.

Here’s how I think about this as a strategy question.

Here’s my assessment of various specialty ecommerce companies:

• Thriving:
  • Etsy – huge suite of unique products for mass market by capturing unique merchants.
  • Oriental Trading Company – unique product for niche market by unique logistics.
  • Pinduoduo – engagement driven ecommerce.
• Survive, but questionable:
  • Global-e – cross border logistics
• I’m not optimistic:
  • Dingdong
  • Farfetch
• Situations that may be overestimating first mover, virality or growth hacks.
  • Delivery Hero:
  • Shein

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

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This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

——Transcription Below

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Welcome, welcome everybody. My name is Jeff Towson and this is Asia Tech Strategy. And the topic for today, Pinduoduo, Etsy, OTC, and the other e-commerce anteaters. How to tell if a specialty company is going to thrive against the giants, the lions. Now that’s a wordy topic and it’s gonna make a terrible headline for this, but. I think it’s an important question and I’ve been kind of taking this apart for a couple months now and I’m going to sort of lay out where I am in my thinking but basically the question is look we know the e-commerce giants Amazon, Alibaba, Taobao, all of this but what about the specialty players Etsy, OTC, Delivery Hero, Ding Dong, Farfetch’d. How to tell which of these are going to thrive and which of them are going to struggle and which are kind of going to they’re going to get crushed. So I’m sort of calling those the anteaters, the ones that I think are gonna survive and thrive long term despite the fact that there are lions on the savanna. That’s the topic for today, and I’ll lay out my six to seven questions that I kind of use to make the call. Now let me do a little bit of housekeeping because one, I’m coming up to 100 podcasts in a couple weeks, which is crazy. I mean, that’s one a week for two years. It’s a lot of content, and probably about yeah let’s say 600 articles. So all of this, all the podcasts, all the articles, they all basically get cataloged in the library, the company catalog, the company library on the website and the concept library. Now in the last week or two we’ve had quite a decent number of sign-ups, quite a few subscribers. Things are taking off again, kind of happens from time to time, so I thought it would And the basic idea is, you know, I’m 50% of the time, I’m wearing the investor hat and 50% of the time, I’m wearing the teacher hat, which is, look, I want you to get better at this. I want you to sort of take this apart over time and become the expert. And I actually get quite pleased when I see students, listeners surpass me, that, you know, they’re in a niche, they’re in an area. And I look up a couple of years later and it’s like, they’re way beyond me on the subject now. They’ve kind of taken in what I’m doing and then adapted it and gone beyond me. I kind of get a lot of satisfaction out of that. That’s the teacher hat. But the way this process works is every week, I put out a podcast and then for subscribers, I send you two articles per week minimum. In each of these, it’s always, I’m sort of talking about two things. I’m gonna lay out companies. All of those go in the company library and I’m gonna lay out two to three concepts that I think are important for understanding digital behavior, digital economics, competition, things like that. And it’s just a long walk. It’s every week you do this, every week you do this, you get a little smarter. Companies that you weren’t familiar with, you start to get familiar with. Concepts that you weren’t familiar with, network effects, platform business models, virality, digital economics, all of this stuff. you know, go from being strange to quite comfortable. And then you look back over six months and you realize you’ve really built up a lot of expertise. It’s, you know, taking apart digital companies is not unlike learning a language. You just study every week, you learn a couple of new words, and then after six months, you’re like, wow, I kind of speak Japanese now. How did, you know, when did that happen? It’s the same thing. It’s a step-by-step process. So that’s why every one of these articles I send out every podcast, you’ll always see at the bottom. Here’s the two companies you need to think about, and here’s the two concepts. And we just keep hitting them and taking them deeper and getting into more and more subtleties over time. But that’s it. It’s a long, that’s in my experience teaching, which is how I spend about 30% of my time. That’s how you master something that’s complicated and valuable. It’s like learning a language. It just takes time. It’s gradual, it’s step by step. You keep at it every week and then you look up and you know six months later, it is amazing how far you’ve come. So that’s the process for those of you who are new, that’s what we’re doing. And anyways, those of you who are new subscribers, welcome. Glad to have you. For the last week or so, I’ve sent you out some stuff on Etsy. In the last couple of weeks, I’ve sent you Oriental Trading Company. Going forward. What’s coming next for subscribers is I’m gonna send you some stuff about probably Global E, which some of us talked about here in Bangkok, and then also Billy Billy. So that’s kind of on the horizon. For those of you who aren’t subscribers, feel free to go over to jefftausen.com, 30 day free trial, sign up there, you get access to the full concept library and the full company library. Most of that now, probably 70% of that content is subscriber only. And that’s that, okay, last standard disclaimer, nothing in this podcast or in my writing on the website is investment advice. The numbers and information from me and any guests may be incorrect. The views and opinions expressed may be incorrect, no longer relevant or accurate. Overall, investing is risky. This is not investment advice. Do your own research. And with that, let’s get into the topic. Whoops, one more thing I forgot. Upcoming next week, I’m gonna do a… online live Q&A for anyone who wants to sort of participate. There is a link in the show notes to that, but I’m gonna start doing these more because I mean, this is a lot of me talking, right? Which is probably tiresome at a point and there was no opportunity to ask questions or talk through this stuff. So next week, which will be around September 7th-ish, we’re gonna do sort of a live Q&A online and you know, show on up, sign up and any questions you have, we’ll just sort of talk about whatever you want. Any questions on the table? Totally good. Anyways, the link is in the show notes. So first off, as always, the key concepts for today, marketplace platforms, I’m not gonna go into that much, but that’s always important. Specialty e-commerce, which is a concept that’s been added to the concept library. That’s kind of the point today. I’m gonna lay out six to seven questions for sort of identifying specialty commerce companies that I think are gonna do well versus those that are gonna get crushed. And then interactive and engagement focused e-commerce. That’s also in the concept library. That’s a lot about what Pinduo Duo is really doing. So those are the two important ones, specialty e-commerce and interactive and engagement focused e-commerce. And then the companies obviously Etsy, Pinduo Duo and Oriental Trading Company are the big ones. Okay, so what are we talking about? The scenario we often see is we see a… smaller e-commerce company emerge. And it looks kind of interesting. Often they can be, you know, we’re not talking about tens of billions of dollars of revenue, we’re not talking about, you know, 500 million monthly active users. So those are the giants. We’re talking about company that might have a couple million active users, maybe one to $2 billion of GMV. So these are smaller animals by definition. And the question is, okay, they seem to have a clever product, they seem to have a clever niche in the market. They’re not going to be big. These are not on their way to becoming giants like a company say like Shopee. But we do see these on a regular basis. Farfetch, Etsy, OTC, Ding Dong, Global E, all of these companies. Okay, and maybe they’re operating profit positive or maybe they’re still negative, which is always an important question. Is it gonna turn positive soon? But then you have to, okay, even if you like the company, you’re struggling with one question, which is, look, these things are small compared to the giants. Is Amazon gonna crush this thing or not? I mean, they could. If Jeff Bezos wants your business, you’re pretty much dead, mostly. Not always, but, you know, Alibaba. 10 cent mini programs, companies like this. The giants pose a looming existential threat to these small companies. So it’s hard to make the call of, I feel comfortable this company’s gonna do well. Is it gonna get crushed? Is it gonna struggle along? So that’s kind of the goal of today’s these six questions. And that’s kind of why I’m saying, look, we’re talking about anteaters versus lions. The lion’s on the savanna. If the lion wants to kill you as a company, it can’t. If the lion wants to go after whatever you’re feeding on, it can. But yet we see anteaters walking around the savanna and they put their long snout down into these, you know, these sort of ant holes or whatever you call those and they survive and they do quite well for a long time. So that’s kind of how, you know, I put these in my brain because I like to use animal analogies. Lions and tigers that’s Alibaba versus Tencent mini programs, but then there’s also these companies like ant eaters and hedgehogs You know ant eaters look they’re they’re living off ants and they’re specialized to get the ants and the lions Don’t really have a good way to do that and it’s not that much food anyway, so who cares Or they’re sort of hedgehogs. Okay, even if the the animal wants to kill it, the thing’s got all the spines, it’s just not worth it, and they just kind of walk away, and these companies do quite well. So that’s kind of your animal analogy for today. Now, against this question, and I mean, for those of you who are subs, I wrote about this in the last day. Look, you can’t ignore the fact that the political terrain of China has changed, and the large players, the Alibabas, the Tencent’s, are on the regulatory radar. by virtue of their size. Now, that is a concern. However, that sort of regulatory check on them is going to limit their ability to crush the smaller players like they have in the past. So that’s actually good news for the smaller players. So it’s kind of a twofer here. Look, the regulatory issue is gonna limit the size of the big players. It’s gonna give more space to grow for the smaller players. Also, these smaller players are never going to be on the political radar. They’re just too small You know e-commerce is not a political market in China It’s not these companies like Alibaba are not on the political radar because of their industry We’re selling socks and shoes. They’re on the radar because they got to a certain level of dominance But if you’re not a dominant e-commerce player, you’re in pretty good, you know terrain politically So that’s kind of why I’ve been looking at these second tier companies over the last couple of months. I also looked at the second tier gaming company like NetEase. I wrote a bit about them, but that’s why I’ve been kind of going through these. And I went through quite a few. Ding Dong, Delivery Hero, which is a German player, Farfetch, Shien, Pinduo Duo, Global E, Oriental trading company Etsy. I mean that’s kind of what I’ve been hunting in this space for the last couple months for that reason Okay, so let’s sort of just jump to the so what? Here are my Six to seven questions. I asked to determine whether look is this smaller e-commerce company this Specialty player gonna survive and thrive or is it gonna be just sort of hoping it doesn’t get crushed one day And I’m putting these in the show notes Number one, is the company sufficiently differentiated in the user experience? And by user, we can be talking about consumers, or we can be talking about merchants, suppliers, service companies. I mean, it could be both sides of the platform, if this is a platform business model, which Etsy is, but which Oriental Trading Company is not. I mean, that’s just a classic retailer, so there’s only really one user group that we’d be concerned about, which is consumers. Shi-in which people are talking about, one user group. Ding-dong, one user group. But others like Etsy, two user groups. That’s really the biggest lever here. That’s the anteater model. That look anteaters are sufficiently differentiated. They’re going after a small market of ants underground and they’re very differentiated in how they get them. That’s kind of the most important one. Question number two, can the company compete and or differentiate in logistics or infrastructure without ongoing spending? Now you can be a cool e-commerce company building logistics, let’s say Farfetch, which is a luxury focused player, but you are, or let’s say Ding Dong, which is focused on grocery and last mile on demand delivery of fresh groceries. The problem with that is it gets you into an arms race with the giants. Every year Alibaba, these companies, they are gonna outspend their rivals on logistics infrastructure delivery because they view that as a core capability. You can’t play that game as a small player. You don’t want to. You don’t wanna have to write big, huge checks every year because every year JD and Alibaba. keep increasing the sophistication of their on-demand delivery and warehouses and retail spaces. You don’t wanna play that game. There is a certain level of infrastructure you wanna build that’s differentiated that protects you, but you don’t wanna play this ongoing spending game. That’s always been my biggest concern with companies like Farfetch in that regard. Okay, question number three, does the company have a strong competitive advantage within a circumscribed market? And that circumscribed bit is important. Look, you gotta have a competitive barrier, or eventually the giants are gonna look at you and decide, eh, should I take that space or not? That’s where you wanna kinda appear to be a hedgehog. Well, we don’t wanna mess with that company. The market’s not that big, it’s circumscribed, it’s small. And also the… the company’s pretty well fortified, they’ve got some good competitive advantages there, and then they just kinda walk away. Number four, is there a clear path to significant operational cash flow? Eventually, if you’re gonna survive and thrive in a niche market as a specialty e-commerce player, this thing has to throw off cash flow, because that’s the money you’re gonna reinvest in the user experience, you’re gonna reinvest in your capabilities. such that you are the world’s greatest anteater anyone’s ever seen because you keep investing in your long snout year after year. Right, and also you need cash flow so you can fight off smaller competitors. If you’re cash flow negative, you can’t survive as a niche player. Number five, has the company avoided markets and situations that are attractive or strategic for the major players? If you are after a strategically important capability like groceries, Alibaba is totally open about new retail and grocery and physical retail are core strategic initiatives for the entire enterprise. You don’t wanna be in that space because they will spend money there till the end of time, even if they’re losing money. Now the other one would be, look, okay, maybe it’s not strategic, but it’s very, very attractive. That’s luxury. The major players are all looking at luxury and apparel as an attractive long-term space because it’s big money. You don’t wanna be sitting in either of those, either super attractive or very strategic, such that the giants are gonna decide, yeah, we’re going after that no matter what. You gotta be kind of below the radar in both of those. So that’s number five. Number six, which is more of an addendum. Don’t overestimate a first mover or a growth hack Which a lot of these specialty players when they emerge it’s like oh that looks like a really good company It’s like now you were just the first mover or you just had a nice growth hack like virality Which pin duo duo did and she and have done Don’t overestimate how important that is because that will fade over time and that’s not where you want to live It’s it’s helpful, but don’t overestimate it Also, don’t overestimate the power of platform business models, because when we’re operating at a smaller level, the platform is not going to be as powerful as the giants. And if you’re facing a giant, let’s say an Alibaba or a JD, they have so many users that it’s easy for them to jump in as a platform and take your business. Because you know, the trick with the platform business model. you get a network effect often, you get a chicken and the egg problem often, but these big players, the chicken and the egg thing is not a deal for them because they already have one user group. It’s very easy for them to add a second group and jump in. So it’s not gonna defend you as much as you think. So those are kinda my two addendums to that. Anyways, I’m gonna list them in the notes. But based on these questions, I think you can get a reasonable assessment of the viability of a specialty player. Look, is it gonna be viable financially? Is it sufficiently defendable? Is it gonna be in a space that doesn’t attract the major competitors? And can it sort of grow fast enough to compete and survive against those if they come at them to some degree? I mean, you kind of wanna get a read on all of those. If you get a yes to all of those, then you’ve got an anteater. Looks pretty good. If not, well, you might get attacked and you might have to think about selling. And I would put companies like Farfetch in that category. And Farfetch has been doing deals with the China players. They did a deal with JD a couple of years ago. They kind of fell apart. No one talks about it. And then they recently did a deal with Alibaba. You can kind of tell they know they need to partner up with the big ones. Anyways, let me give you my read on where all these companies fall out against those five questions. So here’s my short list. Who’s doing well? Who looks like a surviving and thriving e-commerce specialty e-commerce company, the Anteaters? Etsy, which I’ll talk about. They have a huge suite of very unique products. They do things like vintage things and solopreneurs who are creating custom. They’re basically craft stores. people who make jewelry in their apartment and sell it online or take it to the local fair or sell you vintage coins from 1920. Lots of unique products, that’s their strength. They offer a huge suite, 81 million plus unique products to the mass market and they do that by capturing a very unique group of merchants. Who are people who make stuff? I think that’s an anteater. Pinduoduo. Pinduoduo does engagement-driven. Commerce, and I’ll talk about that one in detail. That’s a different strategy. Oriental Trading Company, which nobody talks about, it’s Warren Buffett’s e-commerce company based in Omaha. I’ll talk about them a little bit. So there’s at least three where I would call those anteaters, but Oriental Trading Company, unique products for a very unique market with unique logistics capabilities. That one looks the most like an anteater to me. Okay, who’s gonna survive, but I question whether they’re gonna thrive. Global E. Global E is sort of the Shopify for cross border. If you’re a merchant and you put your business up on Shopify, it gives you all the back office capabilities you need to sell in your market. This is the version that lets you capture customers in other countries. So you’re an e-commerce player, you’re getting a lot of traffic, maybe on your content. So you sign up for Shopify to sell to your customers in the UK, you’re based in the UK, but then you’re also seeing you’re getting a lot of customers in Brazil. You don’t really know how to make money off them. You sign up for Global E, you monetize. It’s Shopify for cross-border. Companies that strike me as in trouble, Dingdong, which is a Chinese company which is doing on-demand fresh groceries. They’re going head to head with the space that Alibaba cares a lot about. Farfetch, I think they’re sitting, both of those companies are sitting in the strategic path of the giants. And then companies where I think the first mover aspect has been overestimated, I would say Delivery Hero and Shein. So those are all sort of specialty players. That’s how they sort of fall out in my assessment based on my five to six questions. Okay, that’s the theory for today. Let me just go into two companies and sort of take it apart, well, three companies, and take it apart in detail. So first company would be PinDuoDuo. which is really becoming a giant now, but they didn’t have to be. They could have stayed a specialty e-commerce company for a long time. And I think they’re kind of misunderstood, but I mean, look at the scenario they jumped into. JD, Alibaba were dominant. Everyone thought e-commerce was all locked up, and yet this company jumps in and does very well and grows quite well. How did they do that? I think they did three things in the early days. Now since then they have changed and they’ve evolved to a larger company themselves. But in the early days, they did interactive and engagement focused e-commerce. Now that’s sort of one of the two concepts for today. Specialty e-commerce, interactive and engagement focused e-commerce. You can see it in the concept library. What did they do? I mean, Alibaba, JD. Amazon, so many of the e-commerce players, they kind of offer you the Walmart experience. Their pitch is, if you come to our store, we have everything. We have a massive product selection that’s bigger than anyone else, and we have the lowest prices. Therefore, there is no reason to go anywhere else, and that’s largely true in life. If you go to Walmart, there’s really no reason to go to any other store for, let’s say, 80% of the things you need in life. Shampoo, socks. underwear, basic stuff, right? And their competitive strength is we have a bigger selection and we have lower prices. That’s kinda how most of these companies were built. And the number everyone looks at is GMV. Okay. Against those two strategies, and there’s, you know, JD is obviously a little bit different, they’re higher quality goods, but nobody goes to the Walmart to have fun. It’s not like, hey, let’s go to the Walmart and hang out. Nobody does that. Right? PinDuo Duo comes and they say, we’re gonna do something, we’re gonna focus not on GMV and sales, we’re gonna focus on engagement and interaction first. We’re not looking at GMV as our primary metric, we’re looking at daily active users. We want you to open our app seven times a day, 10 times a day. Why? Because it’s fun. This is closer to going to Disneyland. or it’s closer to going to a theme park or something. Let’s say there’s a free theme park. They just want you to show up and hang out and have fun and play games and spend a lot of time. And if you do that, they know that you’ll probably buy stuff while you’re there. So they’re getting you to show up all day long. And that’s what Pinduoduo really did. It’s gamification. It’s a lot of fun. and you look around and you play games and you do points and things, and then along the way you buy stuff as well. But the primary metric is engagement and interaction. And that by and large worked out. So you can make a lot of analogies. Matthew Brennan, hey Matthew if you’re listening, good dude out of Chengdu, wrote some great stuff about Pinduoduo, and really came up with some good analogies for how this company is working. And… He’s used a couple analogies. He said, look, it’s more like going to a theme park or it’s more like going to sitting in a restaurant that’s a sushi bar. Like you go and you sit in the restaurant and if you’re in China, they give you this massive menu with all types of items. And you search the menu for what you want. That’s very similar to going on Taobao, lots of items and then you have a search function. That’s different than going to Pinduoduo which is more like going to the sushi bar. where you sit down at the table and the little sushi tray, you know, the conveyor belt just goes along next to you. And you just look as things come in front of you and then you reach and choose the one you want. There’s no search function, you just wait for stuff to go past you. That’s kind of what Pinduo Duo does. You log in and they just, in the feed, they show you, oh, there’s a sale on Kleenex. Oh, there’s a sale in shampoo. Buy now and you get a discount. And… The benefit of that model is it’s a different user experience. So that’s what gets me to question one on my list of is the company sufficiently differentiated in the user experience such that it’s compelling? And in that case it is. You’re just waiting for your newsfeed to see what they’re offering you today and then you basically buy because it’s fun. And also you get a really cheap price because… They don’t offer everything on the planet. It’s not a massive list of SKUs. They offer a select number of items and because it’s a select number, they can negotiate deals with those manufacturers and offer them cheaper. So by this sort of gamification, sushi bar, one, it’s more fun, it’s engaging. Two, it’s cheaper because they’re only offering a select number of SKUs and they negotiate deals based on purchasing economies. That’s a different model than going to Walmart. So that’s kind of where I’d say that one is different. And if you look at my five questions, number one, is the company sufficiently differentiated in the user experience? Yes, they are engagement and fun first. Can the company differentiate and compete in logistics or infrastructure without ongoing spending? In that earliest model, yes, because they are not trying to offer everything you need in life. with all these warehouses, and they’re not doing an on-demand delivery, I’ll get it to you in an hour. They’re not playing that game. A select number of items that you get for a good price as it goes in the newsfeed in front of you, and then they’ll ship it to you in a week or so. So they’re not really playing that game. They are now, but they weren’t in the early stage. Do they have a strong competitive advantage in a circumstriped market? Not so good here. Their market is not circumscribed. They are going for the daily essentials of life for the whole market. So they’re a bit weak there. Do they have a significant, they have path to significant operational cashflow? Yes. Have they avoided the markets and situations that are attractive or strategic to the major companies? Nope. I mean, they did real well in fifth and fourth tier cities with this model, but the major players are coming at them. Okay, so it’s a mixed picture, but I think they are quite good. Now question number six and seven, the addendums. Don’t overestimate the first mover advantage and the growth hacks. And this is really what Pinduoduo did. They went after the fifth tier markets, the poorer cities, the villages, and they got there before Alibaba and JD with a very good solution. That was very good, but that’s gonna go away, because these companies are after them now. They also had some early growth hacks, like being social commerce. Again, that’s gonna be copied. So I think, overall to me, I think they were a specialty e-commerce company that did very well as a smaller player. I think they realized they had to become a bigger player probably, and that’s what they’ve been trying to do. So phase two has been, we’ve gotta become a major player. but phase one was pretty good specialty strategy. Anyways, that’s my take on that one. Next company, and if you wanna know more about them, go to the company library, clip on Pinduoduo, there’s a lot there, lots of podcasts and all that stuff. Okay, player number two, Etsy. Now Etsy is an American company. It’s a classic simple marketplace. We’ve got two user groups, consumers and merchants. Most of that has been the US. most of their GMV is the US, but they’ve expanded to the UK, France, Germany, Canada, Australia, India. So they’re growing. They’re getting a lot of attention because they kind of doubled their revenue during COVID. But they’re a funny company. You know, if you want to buy something weird in life, like you want to buy Japanese currency from 1920, you want to buy handmade jewelry, you want to buy a special curtain. special porcelain doll, a special toy, vintage clothing, vintage tables. If you want a coffee table from 1920 France, it doesn’t have to be a real one, it can just look like one that was remade. That’s what they do. Think of all the stuff you find at a local craft market or a vintage or an antique store. That’s what they offer and that’s their big unique differentiator is The vast majority of their users say, the stuff I find on Etsy, I can’t find anywhere else. It’s 81 million listed items that are unique, that they’ve either been created by their merchants or they’ve been curated because these are people that hunt the dumpsters and the antique stores. So it’s either unique by virtue of it’s created by the merchant themselves because they’re a solopreneur making jewelry in their apartment they’ve hunted around and found weird stuff. So personalized, vintage, unique, handmade, hard to find anywhere else. These are all the sort of key words for this company. But most of their stuff is done by sort of creative entrepreneurs, creative artisans, a lot of jewelry, home and living items, some clothing, stuff for wedding parties, toys. You know, I bought… the other day. I like SpaceX. I’m obsessed with SpaceX. I watch all the videos of all the engineering. It’s kind of my thing. I wanted a model of his lightest starship. Like, you know, let’s say half a meter model. Big thing. You can’t buy that anywhere. If you search for, I want a replica of starship, you’re going to get referred to Etsy where they have local artisans in the UK making these models in their apartments. And that’s where I bought one and it’s on the way to Thailand. If I log in there, what it’ll show me from my account is Japanese currency from the 1920s and 30s, because I like old currency, bills, coins. I don’t know why I do. It’ll show me t-shirts and mugs with quotes from James Maxwell, who’s sort of famous physicist who did electromagnetism. I read a lot about old physicists. A little picture frame that goes on the back of the door that’s identical to the ones from that TV show Friends. You know where you look through the peephole but it’s got this little picture frame around it. Like because people make these in their apartments and they sell them. And the latest one which was kind of funny. It showed me a handmade samurai sword which is identical to the ones used in the video game Ghost of Tsushima. I love Ghost of Tsushima. For those of you who play this game, the director’s cut just came out a week ago and they have a new island you can play. Anyways, I was playing that all yesterday. Totally awesome. Anyways, that’s the kind of stuff you’re gonna see. And it’s a marketplace model. Okay, so back to my questions. Is the company sufficiently differentiated in the user experience? And the answer is a big yes. But who are we talking about for users? In this case, it’s a marketplace model, so we’ve got two types of users. Consumers. and merchants, these creative artisans who sell. Okay, for the consumer, it’s the unique collection of items. This is where you get stuff you can’t get anywhere else. That’s their biggest lever and it’s totally true. There is no way Alibaba, Amazon online, I’m sorry, Walmart online, they are not gonna carry. thousands of different types of homemade jewelry as SKUs where every item is pretty much unique. They’re not going to do that. This is a very sort of unique, you know, this is like going to lots of little antique stores in Napa Valley and hunting for weird stuff that that’s one-of-a-kind. Now why is that important? Because when it’s one-of-a-kind it’s not just about owning it, it’s about the experience. It’s about sort of the fun of shopping for these things. It’s the feeling, why do I like old currency? I don’t know. But there’s something about holding like bills from the 1850s in the United States. It’s like a connection to history. I mean, it’s kind of an emotional feeling more than anything else. I find, you know, why do I look at old letters from James Maxwell that he wrote in the 1850s? I mean, it’s a feeling of connection. There’s a lot that goes on there in these unique items as opposed to I’m just buying socks at Walmart. That’s a good price. So there’s a lot there in the experience. Now against that experience, they also have the human connection with the person who makes this stuff. This guy who makes these Starship models, I mean, he lives in Kent in the UK, and he makes them in his garage with 3D printing. And every time Elon Musk announces a new starship, he makes a new model. And a lot of kids buy these things or fathers buy them for their children. And then of course dudes like me buy them. Who the person is matters as well. There’s a human connection between me and the merchant. And you can chat with them online. And it’s interesting and it’s compelling. And then search and discovery. But there’s a lot of differentiating factors on the consumer side. that are interesting. So that’s interesting I think. And then is it differentiating on the merchant side? Again you get a strong yes. These are not people selling t-shirts or speakers or cables or shampoo. You know small merchants, big merchants on Taobao or Shopee. You know these curators, these creators have very few places to sell their stuff. They can go to flea markets. They can go to sort of local consignment and vintage stores. They can go to wholesale, very few places. They have certain aspects that are important to them, like their biggest issue is time, because they have to make these things themselves. So what Etsy does is it provides them tools on the business side so they can spend more and more of their time creating and manufacturing and not filling out bills and posting ads and doing shipping. of these users, of these creators, 81% are women, 69% that this shop is a business, 97% are run from their homes, 30% say this is their sole occupation. So there’s a lot of unique needs there. So answer to question one, yes. Question number two, I’ll go a little faster here. Can the company compete and differentiate in logistics or infrastructure without ongoing spending? You don’t want to get in the arms race of infrastructure and logistics spending with the giants. There are basically no issues here. These people aren’t building warehouses. They aren’t hiring fleets of delivery people that can get you your coffee in one hour. The whole company Etsy has about 1,400 employees. You don’t see a ton of people in logistics and you don’t see big capex spending in logistics and infrastructure. Does it have a competitive advantage in a circumscribed market? Number three. Absolutely. This is a network effect. It’s a good one. It’s a classic marketplace. It started at the national level and it’s going international. I bought my Starship from a merchant in the UK. You can get some switching costs, but yep, good. Is there a significant path to operational cash flow? Yep, Etsy already has 20 to 20%. They’re taking 20 plus percent take rate. of the GMV, they’re already cashflow positive. Have they avoided markets and situations that are attractive and or strategic to the major companies? Yep, I don’t think Amazon and these companies care about this market, I don’t. It’s not strategic, it’s not big money. The revenue of this company is one to $2 billion. That’s not gonna get Amazon or any of these companies attention and it’s not a massive growth market. So on that one. Boom, boom, boom, I think that’s an anteater. Cool company. And last company for today is Oriental Trading Company, which I’ve written about a bit. Interesting company. I think it’s another anteater. It’s Warren Buffett Company based in Omaha. I’ve toured the company a couple times when I took students out to have lunch with Mr. Buffett. I don’t know why I call him Mr. Buffett, that’s kind of weird. I mean, but saying Warren, that also feels weird. But I’ve got emails from him like he says, hey, thanks, blah, blah, blah, you know, nice to meet you, Warren. So, yeah, it’s kind of weird. I know, it feels uncomfortable either way. Okay, so Oriental Trading Company, this is a weirdo company. It’s basically Omaha-based specialty e-commerce company that specializes in party supplies. It’s now owned by Berkshire. They bought it several years ago. Nobody knows about it. I mean, party supplies. It’s a B2B. company that sells to hospitals, schools, education companies, regular business, and they sell them party supplies, which is really weird. Like let’s say we’re a hospital, management of the hospital, you know, running a hospital, which I used to do, it’s like running a little city. It’s like a community. You have, you know, hundreds and hundreds of people. And on a regular basis, every week or two, you have a party, you have a birthday, you You have community events, all this sorts of stuff. So let’s say we’re gonna have 500 people come down to the cafeteria on Friday and we’re gonna have a party because who knows why. What do I need? Well, okay, not food, that’ll be handled by someone else, but we mean balloons. Okay, we need balloons, we need some signs. We should give everyone gift bags. Let’s give everyone gift bags. So we need hundreds of these little handbags. We’ll put tissue paper in them, colored tissue paper, and we should put toys in there too. We’ll put little pencils and pens and we want the company’s name to be on those. And maybe we’ll put little rubber ducks or something in there and then we’ll put streamers up and you realize like where am I going to get all of that? And not only do I need kind of a a lot of them, I need them in a couple days. Nobody buys this stuff months in advance. And I want them personalized if possible. Maybe corporate logo can be on all of them. So that’s a weird sort of need. Well, who do you call? You call Oriental Trading Company, OTC. And historically this company has been in the catalog business, where they would send out catalogs with lots and lots of SKUs of the strangest little stuff you’ve ever seen. Right now if you go to their website, they’ve pretty much moved from catalog to online now. They have 40,000 SKUs of fun, little, cheap stuff. And you go on the website and you fill up your shopping cart with I need 200 little rubber ducks. That’s their biggest number seller actually, is little rubber ducks that have the company name. And we need lots of little balloons, and we need lots of little, and all of these things are like a dollar. right, and you fill up this shopping cart with the weirdest assortment of stuff. And then, I mean, it goes to the fulfillment center. And what does their, so one, their catalog of products is weird. None of this stuff is at Walmart. Walmart does not have 10,000 types of little pencils that all cost 20 cents, that you want to buy 500 of them. So their assortment of products is weird. then it has to go to the logistics facility. And I’ve toured the logistics facility. They’ve got four fulfillment facilities, biggest ones in Omaha. And what are these people doing? It’s not like an Amazon facility at all. Because in one side of the facility you have all these trucks coming, mostly from Chinese companies, that are giving you all these funny little products. The products all go into the bins. They go down the conveyor belts and then you have people who are assembling these packages of weird stuff. Okay, I’ve got an order from So and So Company in Minnesota. I need to get 26 different items all in one box. I need some pencils, some pens, some streamers, some balloons, some ducks, some stuffed animals, some whatever. You’re creating… So what’s interesting about their logistics facility is they spend all their time doing these weird assembly. processes that no other warehouse facilities do. So on the the front end the user product selection, it’s weird, but then the logistics facility it’s really weird. This is why it looks to me like an ant eater. An ant eater is going after that weird thing nobody cares about the ants and it’s specialized with this unique capability of the long snout to get it. That’s this unique selling scenario and these weird logistics facilities. Anyways OTC founded in 1932 by a Japanese immigrant to Omaha named Harry Watanabe. He started out selling novelties and gifts that are value priced. He became originally a major supplier to U.S. carnivals. Like think about that as a weird customer base. They later expanded into catalogs and then you know the Sun took over in the 1980s they started moving online. They started selling more to schools, hospitals, businesses, and now they’re mostly online. It’s a strange business. Their biggest selling categories party supplies, toys, novelties, crafts, school supplies, and weddings. The average price per item they sell is eight dollars but their average order size is about seventy five dollars. Anyways, Buffett bought them and that sounds better, right? Mr. Buffett sounds weird, Warren sounds weird. I’ll say Buffett. Buffett got involved in 2012. They basically, PE firms played with this company, loaded them up with debt. They went into receivership. But they have $300 million in revenue. I mean, it’s significant. They come out of receivership 2011. One random day, the CEO emails Buffett and says, we’d like to sell, he basically says yes within three days because that’s how he operates. He can make an offer within a couple days. They buy it in 2012. The whole deal was done, I don’t know. He said within a month. Here’s the story from the CEO. He said he sent an email to Buffett on Friday at around 10 a.m. asking if he was interested in buying the company. He got a call from Buffett directly two hours later. The basic deal was done within a couple days. The whole thing was closed within 45 days. Now everyone says, oh my God, Buffett’s really smart. Yeah, I don’t think that’s it. Well, one he is. I think if you’re an Omaha based business, I think he knows about this company for a long time. Anyways, kind of a funny company, but we get to my questions and sort of, okay, does this meet the five questions? Yeah. I mean, I think it does. I think this is a clear anteater. Is the company sufficiently differentiated in the user experience? Yes, this is a weird user experience. There’s no merchant side on this. This is purely a retailer. Can the company compete and or differentiate in logistics and infrastructure without ongoing spending? Yeah, I think they are very differentiated on the logistics side. Their facility is very different than a typical e-commerce warehouse. And they don’t have to keep spending against it. One, I don’t think Amazon wants to build this. And two, it’s not like it’s an ongoing spending war to keep upgrading and adding logistics and robotics and all of that. So that’s cool. Does it have a strong competitive advantage in a circumscribed market? Yeah, they basically have economies of scale in assembly. That’s what they have. And then in marketing, this is a classic retailer. You’re going, yeah, they’ve got some consumer presence and branding that’s helpful, but this is a classic retailer play where you’re going for economies of scale, in this case in assembly, in marketing spend, and then probably purchasing economies. All of those concepts are in the concept library if you’re curious, but just look up retailers. It’s a standard playbook. Do they have a clear path to significant operational cashflow? Yes, they are profitable, have been for a long, long time, which is why PE firms started to play with them the same way a cat plays with a ball of string, loaded them up with debt pre-financial crisis, that busted the company. Have they avoided markets and situations that are strategic and or attractive to the major e-commerce companies? Yes, I don’t think Amazon has any interest in the cheap. party supply, B2B, e-commerce space at all. So I think that’s a solid anteater surviving, thriving as a specialty e-commerce player against the giants. Okay, and I think that’s it. Wow, that was a lot of content. Sorry. You can tell when I start speaking faster and faster, I know that I’ve been talking for a long time, which is probably not helpful. If anything, I should speak slower. Anyways, that’s it. Three companies to think about today. Pinduo Duo, Oriental Trading Company, and Etsy. I mentioned some other companies but I didn’t go through them. Concepts for today. Specialty e-commerce. I mean that’s kind of the whole point, the anteater question. What are the six to seven questions? I’ve gone through those three times now. And I’ve put them in the show notes, so just copy them. See if they’re useful to you. The other concept for today, interactive and engagement focused e-commerce, that’s really Pinduoduo, but a lot of the companies are shifting that direction. They started with the sort of sales-based e-commerce strategy, the Walmart, the Taobao, and they’ve been shifting more and more towards engagement. But you could say that Pinduoduo started on the other extreme. They started purely focused on engagement and then have started to shift the other way. And we’re sort of meeting in the middle, depending what product category you’re in. And third concept, which I didn’t talk about was marketplace platforms. But anyways, that is it for the content for today. I think that is more than sufficient. All right, as for me, it has been a good week in Bangkok. Really any week out of quarantine is a good week to tell you the truth. I’m still in this post quarantine high of thank God I’m not stuck in that room anymore. That was not fun. Anyways, I’m back in my place here doing well. It’s great here in Bangkok. The city is opening up again in a couple days, which is great because I haven’t been too much to do, which has been fine because I’ve just been hanging out. But it’d be nice when the shopping malls and all of that open. I mean, that’s kind of what life here is like. Like what do you do for fun? You go to cafes and restaurants and you go to the shopping mall. That’s pretty much life in Bangkok, right? I mean it’s one, it’s hot out so that’s kind of normal. That’s kind of the main thing to do. So that’s been shut down because of the recent wave. But anyways, a couple more days for that. I finally given up on the war with the pigeons on my balcony. I put up some netting yesterday. I didn’t want to put up the netting because it kind of obscures the view. I don’t like it. But when I was away for three months, the pigeons basically took over my balcony. I mean, they moved in. There were four or five of them living there full time. That thing was disgusting. I got it cleaned, fine. And well, I hired someone to clean it. But I think they, you know, they just had, I mean, there were eggs, there was a nest. I mean, I think they just got it ingrained that this is their place because they just kept coming back. You know, I was like, They were living above the air conditioner units. I blocked that off so you couldn’t get above those. So then they started landing on the railing. I put up like cardboard on the railing so you couldn’t land there. But then, pigeons are pretty smart. Like everything worked for a day and a half. And then they would figure out how to get around it. Like after two days, they landed on the cardboard. So I put spikes in the cardboard, which worked for a day and a half. And then sure enough, they learned to land between them. They started landing out the ground under the chair. I literally put a webcam with a motion detector pointed at the balcony. So as soon as a pigeon landed, I would run out there and shoot off to try and break the habit. Yeah, it didn’t work. It was actually pretty cool though. I’d get little notifications on my phone whenever pigeons would land on my balcony. Anyways, I gave up. I put up the netting. So that worked, but yeah, I don’t really like it. So I seed that round, but that’s alright. I’m probably gonna, I’m moving into a new condo probably, so I’ll sell this one anyway, so not my problem. Anyways, that was how I spent my week, which was interesting. Other news, no other news. Oh, as I mentioned, Ghosts of Tsushima, for those of you who play that game, man, I love that game. I absolutely love that game. It’s the whole open world of Japan, it’s just stunningly beautiful game. Anyways, they had the new director’s cut came out about seven days ago so you can get new islands and I Downloaded thing that just destroyed my Saturday, but it was awesome Anyways, I guess that’s it for me. I hope everyone is doing well Again, there’s a Q&A sort of live chat. We’re gonna do next week online You can find the link in the show notes if you want come on any questions you want to talk about We’ll try and get away from me. Just sort of you know talking all the time Anyways, that’s it, sign up there. But otherwise, I will talk to you next week. I hope everyone is doing well. Take care. Bye bye.