One of the key strategies for success with investing is the simple task of diversification. I have written many times in this blog that diversification is the easiest way to reduce risk and improve returns. Diversification over various asset classes is one way to implement diversification in a portfolio. The following chart shows the importance of diversification using returns from the UK market as published by Vanguard:
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Source: Vanguard UK
The Subway fast food chain is to be sold to Roark Capital for $9.6 billion according to a recent article in The Wall Street Journal. Subway is the eighth largest chain the US based on revenue in the US market in 2022.
The top restaurant chain in terms of US revenue is McDonald’s (MCD). While Starbucks (SBUX) at number two is not surprising, Chick-fil-A taking the third spot is indeed surprising.
All the top 10 companies listed above are established players with billions in revenue. It remains to be seen if any of the smaller startup chains such as Sweetgreen (SG) and others can join this elite group.
Source: Subway Sandwich Chain Nears Sale, WSJ
Disclosure: No positions
In an earlier post we looked at the homicide rate in the US and Europe. In this post, let’s take a quick look at the homicide rate in South America. Globally countries in the continent are not known for low homicides. Homicides rates in South America are very high relative to the rates in Europe and the USA.
The highest rates are in Venezuela, Colombia and Brazil. The lowest homicide rate is in Chile followed by Argentina.
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Source: Landgeist
The homicide rate in the US is high compared to European countries. In this post, let’s take review the how they compare. Though both are part of the developed world the homicide rate vary significantly between them. It is beyond the scope of this post to discuss why they vary so much.
The following charts show age-standardized homicide rate per 100,000 people.
Homicide Rate in the USA:
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Homicide Rate in Europe:
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Source: Homicide Rate in Europe and Homicide in the US, Landgeist
A few observations:
Entrenched industries are extremely difficult to disrupt let alone crush in the US. This is because established players have plenty of advantages over newcomers. For instance, these firms have financial strength, years or decades of data, strong networks and in some cases legal, political and regulatory protections. A classic example of where high tech startups failed to revolutionize is the auto dealership industry. During the height of the dot com mania of the late 1990s it was predicted that auto dealers would go the way of the dodo birds as many startups would make online auto buying easier and simpler for customers. However it did not turn out that way. Auto dealers not only beat their silicon startups but more recently thrived when auto prices soared. Trying to eliminate these middlemen is like someone trying to write a new constitution for the country and replace the current one.
Another industry where startups failed miserably to uproot traditional companies is the insurance industry. This includes auto, home and health. A few years ago many startups went public in this space with the hype and hope to redo this industry and be profitable as well. A recent journal article discussed the failure of insuretechs. From the piece:
In theory, few industries should be easier to shake up than insurance, which scores very low on customer satisfaction and is run by big, boring corporations set in their own ways. Data and statistics have been at its very core ever since British mathematician James Dodson created the Equitable Life Assurance Society in the 18th century.
As a result, venture capitalists love it: According to reinsurer Gallagher Re, they poured $49 billion into insurtech between 2014 and 2022. Funding fell back last year, but mostly because 2021 was wild.
Unlike moonshots that promise air taxis or space tourism, these startups have sensible pitches. Root, which is backed by online used-car retailer Carvana, saw that the riskiness of drivers tends to be assessed through broad-brush variables such as age and occupation, leaving a gap for using telematics to assess individualized behavior, including factors such as gentle turning or not answering texts while driving.
Similarly, Hippo employs “smart home” kits to constantly monitor risks of fire, water and other damages. Lemonade uses AI and techniques from behavioral economics to fast-track all types of insurance.
Yet the revolters have failed to storm the gates.
Root’s business has slowed lately, a red flag for investors looking for fast-growing companies with potential economies of scale. Even more concerning is that new technologies haven’t yet proven that they are better at pricing risks: Old-school insurers still have lower claims relative to premiums than insurtech firms, though the record of the latter group is improving.
The digital age has never shown much sign of threatening insurance giants. They haven’t seen their market share eroded or even had to adapt their businesses much. Price-comparison websites may have injected some extra competition, but people haven’t fundamentally changed how they buy insurance, even as they embraced online apps to hail rides, get food delivered or go on vacation. That suggests even the takeover value of insurtech stocks may be low.
As it turns out, incumbents had good reasons to be conservative. “20 years ago we thought distribution costs would be lower using the internet, but this is absolutely not the case: Paying Google is more expensive than paying an agent,” said Frédéric de Courtois, group deputy chief executive of French insurer Axa.
Source: Curb Your AI Enthusiasm: Just Look at the Insurtech Carnage, WSJ, June 28, 2023
The key takeaway is that investors need to be aware of the risks involved with the startups that promise to modernize an industry. It is easy to fall for the hype of silicon valley.
Of course insurance is not the only industry that needs to be redone. Other industries such as airlines, auto, rail, tax preparation, medical devices, dental, telecom, media, retail, etc. and many more needs serious competition as well. Instead of true disruptions of these industries silicon valley is more likely to promote yet another Twitter or Facebook and the like.
Referenced companies:
Disclosure: No positions