Author Topic: Businesses That Act Like Leeches  (Read 3388 times)

BG2008

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Businesses That Act Like Leeches
« on: May 13, 2020, 08:42:48 PM »
I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers.  If we invert this, there are companies that act like leeches.  One example is Seamless.  Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring.  I feel that Seamless is particularly a leech.  What are others? 


Gregmal

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Re: Businesses That Act Like Leeches
« Reply #1 on: May 13, 2020, 11:00:44 PM »
Been thinking about these for a while, and think they fit in here, but in our realm of the universe, JLL, MMI and CBRE do a fine job of collecting their pound of flesh regardless.

KJP

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Re: Businesses That Act Like Leeches
« Reply #2 on: May 14, 2020, 06:38:32 AM »
I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers.  If we invert this, there are companies that act like leeches.  One example is Seamless.  Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring.  I feel that Seamless is particularly a leech.  What are others?

By "leech" I assume you mean a business that provides far less value to its customers than it charges.  Unless there is some regulatory capture or market failure, how does a business like that last?  In other words, why would customers keep using it.  For example, if Seamless is truly a leech, why are restaurants doing business with it?

My contribution:  ESPN, AMC Networks, Viacom, MSGN, etc.  They were exploiting a legacy distribution system and are now losing customers hand over fist and the barriers to distribution fall. 

spartansaver

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Re: Businesses That Act Like Leeches
« Reply #3 on: May 14, 2020, 07:03:53 AM »
95% of asset managers

PBMs

writser

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Re: Businesses That Act Like Leeches
« Reply #4 on: May 14, 2020, 07:06:08 AM »
Value to customers is somewhat subjective, right? Some people might think ESPN is the best value for money they can get. I think the true leeches are companies exploiting loopholes in capitalism: rent-seekers and monopolists. Cable monopolists. Uber. Patent troll firms. But in the US I'd say private health care companies in particular.
« Last Edit: May 14, 2020, 07:10:18 AM by writser »
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KJP

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Re: Businesses That Act Like Leeches
« Reply #5 on: May 14, 2020, 07:23:42 AM »
Value to customers is somewhat subjective, right? Some people might think ESPN is the best value for money they can get.

Absolutely.  So, if you were buying ESPN a la carte there's no issue.  If it wasn't worth it to you, then presumably you wouldn't buy it.  That whay it's the now-unraveling bundle that I was referring to. 

Jurgis

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Re: Businesses That Act Like Leeches
« Reply #6 on: May 14, 2020, 07:25:10 AM »
Uber.

???

Uber is a great value for customers. You might argue it's a bad value for drivers, but this would be pretty contentious argument. And if not Uber, then you have taxi monopolists which are the real leeches.
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BG2008

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Re: Businesses That Act Like Leeches
« Reply #7 on: May 14, 2020, 07:26:47 AM »
I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers.  If we invert this, there are companies that act like leeches.  One example is Seamless.  Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring.  I feel that Seamless is particularly a leech.  What are others?

By "leech" I assume you mean a business that provides far less value to its customers than it charges.  Unless there is some regulatory capture or market failure, how does a business like that last?  In other words, why would customers keep using it.  For example, if Seamless is truly a leech, why are restaurants doing business with it?

My contribution:  ESPN, AMC Networks, Viacom, MSGN, etc.  They were exploiting a legacy distribution system and are now losing customers hand over fist and the barriers to distribution fall.

I think industry structure acts as the enabler of Seamless' leech status.  At one point, Seamless was a niche provider of a "seamless" way to order meals for I Banking analysts working really late hours in the office.  Since time is money, the few restaurants that are on Seamless' platform that got the orders truly got access to a new source of revenue versus those that are not on the platform.  As time goes on and Seamless went more main stream, they held onto the 20-30%.  Now every John and Jane orders from Seamless.  That's why if you go to restaurants, they will ask you to call direct or order direct from their websites.  This is probably the best sign that a company is acting like a leech.

To get back, there are lots of restaurants and they are afraid to lose sales to another restaurant. So they bid up prices to get the order flow.  This is usually 20-30% of the actual order.  Being from the food industry, this is likely fine if this was an "one time" CAC to acquire a new recurring customer.  But restaurant diners are generally promiscuous and tend to try different restaurants.  Hence, they don't stay loyal customers. So the restaurants have to constantly pay up to get that order flow.  Most customers probably aren't aware of the take of Seamless and feels that the transaction is Seamless.  The TAM could be so much larger if Seamless decided to take 3-5% of a transaction which is much more sustainable for a restaurant.  Unlike e-commerce such as Amazon where Amazon is providing the warehousing, i.e. rent and logistics, restaurants still have to pay rent which is 10% or higher, the 20-30% take rate on a gross margin that is 40-60% really cuts into the profits before adding cooks and other overhead.  It is simply unsustainable.  But the leeches keep leeching because restaurants are low barrier to entry but high barrier to exit business much like small hedge funds.  There are lots of passionate hedge funds managers (one man shops), but the barrier to exit is very high.

KJP

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Re: Businesses That Act Like Leeches
« Reply #8 on: May 14, 2020, 07:29:46 AM »
rent-seekers and monopolists. Cable monopolists. Uber.

It's interesting that both Seamless and Uber are mentioned here.  I assume the view of them as "leeches" arises from viewing them from the perspective of suppliers (restaurants, drivers) rather than the perspective of users.  But those companies provide a lot of value to users.  Of course, they're also squeezing another part of the value chain by getting scale on the demand side.   

Jurgis

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Re: Businesses That Act Like Leeches
« Reply #9 on: May 14, 2020, 07:36:26 AM »
I generally view Visa and Mastercard and Costco as companies that generate a tremendous amount of value add for their customers.  If we invert this, there are companies that act like leeches.  One example is Seamless.  Trust me, restaurants can't afford to give away 20-30% of their revenue to Seamless for something that is supposed to be recurring.  I feel that Seamless is particularly a leech.  What are others?

By "leech" I assume you mean a business that provides far less value to its customers than it charges.  Unless there is some regulatory capture or market failure, how does a business like that last?  In other words, why would customers keep using it.  For example, if Seamless is truly a leech, why are restaurants doing business with it?

My contribution:  ESPN, AMC Networks, Viacom, MSGN, etc.  They were exploiting a legacy distribution system and are now losing customers hand over fist and the barriers to distribution fall.

I think industry structure acts as the enabler of Seamless' leech status.  At one point, Seamless was a niche provider of a "seamless" way to order meals for I Banking analysts working really late hours in the office.  Since time is money, the few restaurants that are on Seamless' platform that got the orders truly got access to a new source of revenue versus those that are not on the platform.  As time goes on and Seamless went more main stream, they held onto the 20-30%.  Now every John and Jane orders from Seamless.  That's why if you go to restaurants, they will ask you to call direct or order direct from their websites.  This is probably the best sign that a company is acting like a leech.

To get back, there are lots of restaurants and they are afraid to lose sales to another restaurant. So they bid up prices to get the order flow.  This is usually 20-30% of the actual order.  Being from the food industry, this is likely fine if this was an "one time" CAC to acquire a new recurring customer.  But restaurant diners are generally promiscuous and tend to try different restaurants.  Hence, they don't stay loyal customers. So the restaurants have to constantly pay up to get that order flow.  Most customers probably aren't aware of the take of Seamless and feels that the transaction is Seamless.  The TAM could be so much larger if Seamless decided to take 3-5% of a transaction which is much more sustainable for a restaurant.  Unlike e-commerce such as Amazon where Amazon is providing the warehousing, i.e. rent and logistics, restaurants still have to pay rent which is 10% or higher, the 20-30% take rate on a gross margin that is 40-60% really cuts into the profits before adding cooks and other overhead.  It is simply unsustainable.  But the leeches keep leeching because restaurants are low barrier to entry but high barrier to exit business much like small hedge funds.  There are lots of passionate hedge funds managers (one man shops), but the barrier to exit is very high.

I don't use Seamless (not in my area?), I use Grubhub. I can see that restaurants would think them as a leech. IMO the restaurants are mostly forced into this no-win situation that they do lose orders if they are not on a platform. Yeah, some outstanding restaurants can leave the platform and get the same orders through their phones or websites. But for most restaurants I will just order from their competitor that is on the platform. So I'd stay with platform rather than staying with the restaurant. (And I would pretty much never call a restaurant if they are not on a platform and they don't have website - calling just sucks.) Yeah, it sucks for the restaurant, but that's how it is.
"Human civilization? It might be a good idea." - Not Gandhi
"Before you can be rich, you must be poor." - Nef Anyo
"Money is an illusion" - Not Karl Marx
--------------------------------------------------------------------
"American History X", "Milk", "The Insider", "Dirty Money", "LBJ"