Author Topic: Businesses That Act Like Leeches  (Read 3498 times)

KJP

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Re: Businesses That Act Like Leeches
« Reply #10 on: May 14, 2020, 07:38:33 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.

What is it about the platform that causes you to continue to use it? 


Jurgis

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Re: Businesses That Act Like Leeches
« Reply #11 on: May 14, 2020, 07:44:25 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.

What is it about the platform that causes you to continue to use it?

Convenience. I have past orders that I can reuse - which I do. I have my account, CCs, etc. I know the UI, I know the UI works. I know that ordering works.

And TBH restaurants mostly don't leave, so I know what I can order and from which restaurants. If restaurants left en-masse, I'd be forced to switch. But if just one-two restaurants leave, then I choose platform.
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BG2008

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Re: Businesses That Act Like Leeches
« Reply #12 on: May 14, 2020, 07:46:03 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.

What is it about the platform that causes you to continue to use it?

Convenience. I have past orders that I can reuse - which I do. I have my account, CCs, etc. I know the UI, I know the UI works. I know that ordering works.

And TBH restaurants mostly don't leave, so I know what I can order and from which restaurants. If restaurants left en-masse, I'd be forced to switch. But if just one-two restaurants leave, then I choose platform.

Seamless is very convenient for customers hence the Seamless name.  But it chooses to "over monetize" the restaurants IMHO

writser

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Re: Businesses That Act Like Leeches
« Reply #13 on: May 14, 2020, 07:46:12 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.

Let me clarify: it's a great deal for users. So perhaps it isn't a good example in that sense. But I think you can argue that the 'gig economy' offloads the costs of social security to the tax-payer.
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cherzeca

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Re: Businesses That Act Like Leeches
« Reply #14 on: May 14, 2020, 07:46:18 AM »
I just had a convo with someone who labelled investors like Elliot as "vultures"...on notion that they "exploit" for own gain (buying a sovereign bond lawsuit against Argentina), to which I agreed, but preferred to call them simply "smart" investors who are capturing value (which as investors is sort of the objective).

so I think any company can be characterized a "leech" if there is a market opportunity that the company is profiting from, and will continue to profit from until the profits are competed away.  seamless provides value until some competitor can provide more cost effective value. economic rents are not good for the "system" but are good for the rentier.  just capitalism.

BG2008

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Re: Businesses That Act Like Leeches
« Reply #15 on: May 14, 2020, 08:01:04 AM »
I just had a convo with someone who labelled investors like Elliot as "vultures"...on notion that they "exploit" for own gain (buying a sovereign bond lawsuit against Argentina), to which I agreed, but preferred to call them simply "smart" investors who are capturing value (which as investors is sort of the objective).

so I think any company can be characterized a "leech" if there is a market opportunity that the company is profiting from, and will continue to profit from until the profits are competed away.  seamless provides value until some competitor can provide more cost effective value. economic rents are not good for the "system" but are good for the rentier.  just capitalism.

Okay, I think perhaps I should have titled this as "Businesses That Choose To Completely Monetize" 

Perhaps this is me getting older and increasingly appreciate Costco and Visa/Mastercard.  It's appreciating that you don't have to extract every last cent.  Recently, my wife and I have had a lot of restaurant and construction employees who can't pay rent.  We choose to work with them and decided that life is too short to be a-holes.  The point of the thread is to identify companies that have monetized every last cent.  My theory is that the companies that somehow manage to charge a 10% gross margin and pay their employees a livable wage, i.e. Costco, can thrive for a very long time.  Invert this and the companies that makes one of their constituent, customer, supplier, etc unsustainable in the long run will likely face structural issues.  I think QSR franchisors are great restaurants.  But the franchisees are really suffering.  At some point, this will come to bite the franchisors in the butt. 

bizaro86

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Re: Businesses That Act Like Leeches
« Reply #16 on: May 14, 2020, 08:51:32 AM »
I just had a convo with someone who labelled investors like Elliot as "vultures"...on notion that they "exploit" for own gain (buying a sovereign bond lawsuit against Argentina), to which I agreed, but preferred to call them simply "smart" investors who are capturing value (which as investors is sort of the objective).

so I think any company can be characterized a "leech" if there is a market opportunity that the company is profiting from, and will continue to profit from until the profits are competed away.  seamless provides value until some competitor can provide more cost effective value. economic rents are not good for the "system" but are good for the rentier.  just capitalism.

Okay, I think perhaps I should have titled this as "Businesses That Choose To Completely Monetize" 

Perhaps this is me getting older and increasingly appreciate Costco and Visa/Mastercard.  It's appreciating that you don't have to extract every last cent.  Recently, my wife and I have had a lot of restaurant and construction employees who can't pay rent.  We choose to work with them and decided that life is too short to be a-holes.  The point of the thread is to identify companies that have monetized every last cent.  My theory is that the companies that somehow manage to charge a 10% gross margin and pay their employees a livable wage, i.e. Costco, can thrive for a very long time.  Invert this and the companies that makes one of their constituent, customer, supplier, etc unsustainable in the long run will likely face structural issues.  I think QSR franchisors are great restaurants.  But the franchisees are really suffering.  At some point, this will come to bite the franchisors in the butt.

I think this is a great insight. Any business that isn't completely monetizing its pricing power has a huge moat. It makes it very difficult to compete with them, because a new entrant would need to either offer more or charge less, and the lower-than-possible margins make that hard.

A few other things I think fit this model:
-Interactive Brokers - their margin rates are way lower than the competition. They could raise them and still be by far the lowest. But their margins are still good.

-Disney Parks - they have discovered pricing power, and raise ticket prices every year. The parks are still always packed, so they are under-doing this. This is weaker than the other cases mentioned, imo.

-High speed internet - I would pay more than I do right now for this. A lot more. Maybe competition keeps this down. There are two sets of fibre to my neighbourhood (one telco, one cableco) so there are two choices for true high speed.

Liberty

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Re: Businesses That Act Like Leeches
« Reply #17 on: May 14, 2020, 09:09:16 AM »
Herbalife seems like one that doesn't contribute anything but takes from (mostly) poor people.
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cherzeca

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Re: Businesses That Act Like Leeches
« Reply #18 on: May 14, 2020, 09:30:03 AM »
I still dont get your point re monetizing the last cent.  I dont belong to Costco for many reasons (usually hang my hat in NYC) but I dont like having to pay an annual membership fee just to walk in the door.  interesting business model, but if I dont use Costco that much, they are sure monetizing my money...

keerthiprasad

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Re: Businesses That Act Like Leeches
« Reply #19 on: May 14, 2020, 09:30:33 AM »
Herbalife seems like one that doesn't contribute anything but takes from (mostly) poor people.

I am dumbfounded every time I hear about another one of these new social media pyramid schemes and then I remember that herbalife is still around...