How instant noodles reflect where you’re from?

When I say “Instant Noodles”, what’s the first image that comes to your mind?

Do you think of the cake of instant noodles that you cook in boiling water and add the packet of MSG? Or do you think of something more along the lines of “Cup noodles?”

Your choice of instant noodle says a lot about you

Before we go into how the type of instant noodle reflect who you are, let’s start by firstly reviewing the instant noodle market in Hong Kong and China.

Instant Noodle Market Growth is Anaemic in both HK & China

According to an industry report from Frost & Sullivan, Hong Kong’s instant noodle market was worth around HK$1.8bn. Over the past four years, growth has been anaemic with sales value only rising 0.5% p.a. while sales volumes have actually contracted by 1.3% p.a.

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Although China’s instant noodle market is much bigger, it is also not growing much. The Rmb81bn of instant noodle sales in 2016 only represent a p.a. growth rate of 0.4% over the 2012-2016 period. Volume wise, the number of instant noodle serving has actually fallen by 3.9% p.a.

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Who eats more instant noodles?

In absolute terms, China’s 37.2bn serving of instant noodles is 90x larger than Hong Kong’s 415mn servings. However, if you consider that China’s 1.3bn population is actually 186x larger than Hong Kong’s 7 mn population, the data actually shows that Hong Kong people actually eat more instant noodle than their mainland cousins.

HK 59.2 servings Vs. China 28.6 servings

In 2016, Hong Kong people ate 59.2 servings of instant noodles, almost twice as much as the average 28.6 servings consumed by those in China.

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What do you eat? Cups, Bowls or Bags

When we examine the data further, we see another interesting distinction between Hong Kong and China’s instant noodle connoisseurs. In Hong Kong, bag-type instant noodles make up nearly two-thirds of the overall sales volume. In China, the mix is almost 50/50 with bags taking up 53% of sales.

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In this respect, if you associate instant noodle with those that come in a little plastic bag that you cook yourself, then you’re most likely from Hong Kong. Conversely, if you think about pouring water into a little cup/bowl then you’re most likely from China.

What brand do you prefer? 出前一丁 or 康師傅

If you go to a Cha Chan Teng in Hong Kong and order instant noodle for breakfast, you are usually given a choice of upgrading to 丁麵 (Demae Iccho) for a few extra bucks. But what you may not realise is that in Hong Kong, 出前一丁, 公仔麵, 福麵 and Cup Noodles are all carried by Nissin Foods.

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The multiple brand strategy has helped Nissin Group become a clear leader in the Hong Kong market with a market share of 65.3%. Nong Shim (maker of Shim Ramyun) and Sau Tao, are a very distant second and third and only have a 5.5% and 5.4% market share respectively.

In China, the names are very different. Taiwanese noodle makers like Tingyi (康師傅) and Uni-President dominate the instant noodle market and hold market shares of 46.5% and 17.8% respectively. Nissin Foods is much smaller and only holds a market share of 2.8%.

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So if you associate instant noodle with Cup Noodle and 出前一丁, you’re most likely from Hong Kong. On the other hand, if you think of 康師傅 or 來一客, then you are most likely from China.

These two distinction is even more stark when you consider the revenue breakdown of Nissin Foods in the two areas. In Hong Kong, the revenue split between Bag type instant noodles, cup/bowl type and frozen foods are almost even at 39/28/33. Whereas, in China, the revenue split for Nissin Foods is 85/13/2 .

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The Premium-isation of Instant Noodles

In a way, China’s instant noodle market is very unique. Unlike the other industries that we have looked at in our Mass Consumption series (travel, beer, coffee and fried chicken, online games), the instant noodle market is NOT growing. In fact, Frost and Sullivan forecast that the number of instant noodle servings will decline from 2016’s 37.2bn to 34.5bn in 2021E.

With volume in decline, the only way to make more money is to try to raise ASP through the premium-isation of instant noodles.

As the bowls get bigger…

Noodles - 1

…and fancier…


…so does the ASP. In China, over the past four years, the average selling price of instant noodles have risen by 4.4% p.a. since 2012 (faster than Hong Kong’s 1.75% ASP growth). chart (16)

However, with the “Big Cup” noodle now weighing in 80 grams, 450 calories and 1,600mg of sodium, I suspect this premium-isation trend could be hard to sustain. Furthermore, while the past few years’ increase in ASP appear to have helped with gross profit margins, the benefits do not appear to have flowed to the bottom line.

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I am Satay Flavour出前一丁

As for me, I’ve been told that I make the best instant noodles with the exact right balance of soup to noodle. If I had to choose one type of noodle to eat, it would be the satay flavour 出前一丁.

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Now what does that say about me?


P.S. In the first collage, there is one picture that does not belong, can you spot it.


Alibaba – The Internet Giant Vs. the Tale from Arabian Nights

What do you think of when you hear the word “Alibaba”?

The US$488bn Internet Giant

I reckon that most of you would be thinking of Jack Ma and the massive e-commerce giant behind TaoBao, T-Mall and the recent Singles Day which generated US$25.3bn online sales within 24 hours.

But Alibaba is really much more than just TaoBao and TMALL, the overall group (including the non-listed side) also includes a logistics network (Cainiao) and a financial services group (via Ant Financial and AliPay).

Alibaba’s vision statement is: “We aim to build the future infrastructure of commerce. We envision that our customers will meet, work and live at Alibaba, and that we will be a company that lasts at least 102 years.

But how you ever thought of “Why Alibaba?”. Is there any special meaning behind the name?

The Tale from Arabian Nights


This thought occurred to me when my daughter recently asked me to read her “The Tale of Ali Baba and the Forty Thieves”. Although I can recall some parts of the story like “Open Sesame”, I had forgotten much of the details and often confuse Ali Baba with Aladdin.

I’m not sure if the version I read is accurate to the original tale but some parts of the story struck me.

  • Ali Baba was the younger of two brothers. His elder brother Qasim was the one that had great skill in buying and selling and was one of the richest men in Baghdad. Ali Baba on the other hand was a humble woodcutter.
  • Ali Baba came upon his wealth when he stumbled upon the magical cave where the Forty Thieves stored their loot. This is where the phrase “Open Sesame” came from. He took three sacks of gold dinars out of the cavern and took it home on his donkey.
  • When Ali Baba’s wife and son asked him “where did you find such wealth?”, he said, “I may not tell you except to say that I broke no law, nor did I rob any honest man.”
  • When Qasim found out, he gave Ali Baba no peace until he revealed the secret of the cave.
  • But Qasim was greedy. He brought 12 mules to carry the loot away but unfortunately once he was inside the cave, he forgot the last word of the charm and was locked inside. The thieves came back, found him and killed him.
  • Ali Baba went to look for his brother and found him dead in the cave. He brought home Qasim’s body as well as the the coins and jewels that  his brother had tried to steal from the cave.
  • In order to evade the attention and deal with the forty thieves, Alibaba had a trusted helper, Marghana.
  • Since Qasim had no children, Ali Baba inherited his household and all his wealth, making him the richest man in Baghdad.
  • When the leader of the forty thieves came posing as a fine oil merchant, Ali Baba actually invited him into his household. The rest of the forty thieves hid in oil jars.
  • Once again, it fell on Marghana to discover and foil the evil plot of the forty thieves. She poured hot oil into the jars where the forty thieves hid and then she killed the leader of the forty thieves.

“Ali Baba’s wealth knew no bounds”

When I sat back and thought about this story, I wondered if these might be some interesting parallels.

  • Ali Baba came upon his wealth by accident. His older brother was actually more talented but Qasim had bad intentions.
  • When Ali Baba took the three sacks for gold dinar from the cave, he said “I broke no law, nor did I rob any honest man.” This made me think of a statement from Amazon’s founder who said “Your margin is my opportunity”. In a very similar way, Alibaba’s business is to reduce the friction of commerce, thereby reducing the high margins of the entrenched businesses (i.e. the Forty Thieves).
  • Marghana, his trusted helper, was essential to Ali Baba in helping him evade the Forty Thieves. I think in this case, Marghana is the Internet. Without the proliferation of the internet, it would not be possible to combat/disrupt the entrenched businesses.

Here’s the most interest part.

  • From that day on, Ali Baba’s wealth knew no bounds, for now that the forty thieves were dead, all the treasures of their cavern belonged to him.”

I guess that’s why he chose the name Alibaba.


How well do you know luxury goods? Hermes Edition

How well do you know your luxury goods? After looking at LVMH’s 3Q results, in part 2, we turn to the highly sought after Hermes. Do you know which region generates the most sales, which one is growing the fastest and what are the key similarities and differences between Hermes and LVMH? Find out.

LVMH is one of the largest luxury brands in the world with a market cap around €129bn but it is not the most sought after. I think the honour goes to Hermes (market cap €47bn).

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Its iconic Birkin and Kelly handbags are so sought after that strategy books have been written on how to obtain one. Similar to our earlier post “How well do you know luxury goods?”, today, we test your knowledge on “How well do you know Hermes?”

The answers are posted after the various photos. Don’t peak.

1. Which region contributes the most to Hermes revenues through the first nine months of 2017?

  • A) Asia,
  • B) Europe,
  • C) US,
  • D) Others

2. Which region had the strongest revenue growth rate in 3Q 2017?

  • A) Asia ex Japan,
  • B) Japan,
  • C) Europe,
  • D) US

3. Rank the revenue contribution by product segment from largest to smallest?

  • A) Leather goods,
  • B) Fashion and accessories,
  • C) Silk and textiles,
  • D) Other Hermes sector (i.e. Jewellery and home products)
  • E) Perfumes
  • F) Watches
  • G) Other products (i.e. production activities for non-group brands)

4. Among the various product segments, which one recorded the strongest revenue growth in 9M 2017?

  • A) Leather goods
  • B) Fashion and accessories,
  • C) Silk and textiles,
  • D) Jewellery and home products
  • E) Perfumes
  • F) Watches
  • G) Other products
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Which region contributes the most to Hermes revenues through the first nine months of 2017?

  • The answer is Asia. Combining Asia ex-Japan (36%) and Japan (13%), Asia contributed 49% to Hermes’ overall revenues in 9M 2017. (Recall that for LVMH, Asia was 36%). Europe was the second largest region with 32% of sales (LVMH was 27% exposed to Europe). the Americas was third at 17.5%

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Which region had the strongest revenue growth rate in 3Q 2017?

  • Not counting the “Others” region, the strongest growth came out of Europe ex-France which rose 14% YoY in 3Q 2017. Notably, while Japan showed very strong growth for LVMH in 3Q 2017, for Hermes, 3Q growth in Japan was only 7%. For the full 9M 2017, Asia Pacific was the fastest growing region with sales rising 14% YoY in local currency terms.

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Rank the revenue contribution by product segment from largest to smallest?

  • This was another obvious one. Leather goods was the clear leader and accounted for 50.8% of overall sales. Fashion and accessories contributed around 21.8% in 9M 2017. In the third to fifth place, the gap is quite small with Silk & Textiles at 8.9%, Jewellery and home at 6.3% and Perfumes at 5.4%.

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Among the various product segments, which one recorded the strongest revenue growth in 9M 2017?

This is another area where we saw some departure from LVMH’s results. For LVMH, its largest segment were also its fastest growing segment (Fashion and Leather Goods at 35.5% of sales and rising 14% YoY). But for Hermes, it was the smaller categories. Perfumes (5.4% of sales) grew the fastest at 13% YoY. This was then followed by steady growth of 11% across Leather goods, Fashion and accessories and jewellery and homes. Notably, for 3Q 2017, Silk and Textiles sales surged by 17% YoY.

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Key Takeaways – Very strong Asia performance, watch Japan in 4Q and affordable luxury

When we compare and contrast the 3Q results from LVMH and Hermes, there are two key takeaway messages.

1) The divergent performance between LVMH and Hermes out of Japan. In 3Q, Japan sales rose by 21% for LVMH and only up 7% for Hermes. In comparison, Asia Pacific ex Japan sales were strong for both LVMH and Hermes (up 21% and 14%). This would seem to validate that luxury consumption growth is more broad-based in Asia ex-Japan and points to a bullish story for China. For Japan, given the higher price points of its products, it would be interesting to see if the continued rally of the Nikkei will help Hermes sales growth to surge in 4Q 17.

2) On the other hand, a key similarity is the strong performance out of the smaller ticket item of perfume. For Hermes, Perfume and Silk and Textiles showed the strongest growth in 3Q (up by 23% and 17%). At LVMH, perfume and cosmetics was also the strongest growth category in 3Q, up 17%. This reinforces our belief that consumers love the luxury brands. In the case of Hermes, where supply cannot rise to meet demand, consumers will go after the affordable luxury items like perfumes, scarfs and pashmina.

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Mass Consumption Part 7: Who’s got game?

Computer games is big business. Gaming has been the key driver behind some of the best performing stocks like Tencent and Nvidia. As an entertainment industry, games is the third largest and brought in US$101.1bn. We take a snapshot to see (i) Who’s playing, (ii) What are they playing, and (iii) What are they spending money on?

Plants Vs. Zombies 2 – Screenshot from my phone

If you ask me what is my favourite computer game, I would probably say Plants Vs. Zombies or MarioKart 8. Although I’m not a serious gamer, gaming is big business.

Gaming is big business

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According to the prospectus that I came across today, the global gaming industry brought in US$101.1bn of revenues in 2016, making it the third biggest segment of the global entertainment industry behind TV & Video (US$314.3bn) and, surprisingly, Publishing (US$329.3bn). Going forward, the Publishing industry is expected to contract by 0.5% p.a. between 2017-2021 but the Gaming industry is expected to grow 5.1% p.a.

Who’s playing?

Among the geographies, Asia Pacific (including China) is the biggest market, contributing 46.4% of the US$101.1bn of gaming revenue in 2016. The Americas and Europe contribute 29.6% and 20.9% respectively.

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While the Rest of the World only contribute 3.2% of games revenue, they make up 14.8% of active gamers in 2016. On a standalone country basis, China make up 25.4% of active gamers and 24.3% of games revenues.

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What are they playing?

As expected, mobile games are the most popular. In 2016, there were 1.973bn active mobile gamers, which is like 95% of all active gamers. PC gamers (1.162bn) make up 56% of all gamers while console gamers make up around 30%. Among the three categories, mobile games is expected to remain the fastest growing segment with a CAGR of 6.2% between 2017-2021, followed by PC games at 3.6% CAGR and console games at only 1.5%.

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Who’s watching?

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While the number of gamers is expected to grow 5.4% p.a., there is one aspect of gaming that is expected to grow at almost 3x the speed. The global eSports audience (those watching televised computer games) is expected to increase from 322.2mn in 2016 to 665.3mn in 2021, a CAGR of 14.6%. In 2016, China had the largest eSports audience at 106.2mn people and is expected to remain the leader with 217.6mn eSports audience in 2021.

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In terms of prize money, the richest tournament appears to be Dota 2 with a purse of  US$88.33mn, followed by League of Legends at US$36.61mn.

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Source: HKEJ

Serious machines for serious gamers

Just like how professional cyclist need serious bikes, serious gamers also need serious machines. In 2016, the global gaming systems market was worth US19.3bn with revenues evenly split between Asia, the Americas and Europe.

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In addition to getting machines with the fastest processors, the best graphics card and memory, peripherals are also an important component. If you’re trying to navigate through Doom, you need the best mouse and the best keyboards. But one thing that I did not appreciate was the importance of sound quality.

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Among the US$2.2bn gaming peripherals sales in 2016, headsets accounted for nearly half, more than the sales of  mice (US$526.8mn) and keyboards (US$458.6mn) combined. Look closely at the picture below, everyone has a headset on and if you’ve seen the prices of some of the latest Bose headsets, it is probably an ASP thing.

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China is very much mobile games driven

One thing that is interesting is that while China accounts for around 25% of active gamers and also 25% of global gaming revenues, their spending seems to be concentrated on the actual games. Among gaming peripheral sales, China only make up 14.3%. For Asia Pacific ex China, the stat is even lower. Asia Pacific ex China gaming peripherals sales is only 7.8% compared to its 22% market share in global gaming revenues.

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This suggest that gaming in China and Asia Pacific likely takes place on mobile devices rather than PC or consoles. I guess that’s why this company in question is now planning to launch its own mobile phone, adding it to its stable of mice, keyboard, headphones and laptop computers.

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How well do you know luxury goods?

LVMH is one of the biggest luxury brand in the world. Under its stable, you’ll find the likes of Louis Vuitton, Rimowa, Loro Piana, DFS and Sephora. In 2016, it had annual sales of €37.6bn and as I write this its market cap stood at €122bn.

Today, I came across its 3Q results and it was interesting.

To see if you know luxury as well as you thought, take the following quiz. The answers are posted after the various photos. Don’t peak.

1. Which region contributes the most to LVMH’s revenues through the first nine months of 2017?

  • A) Asia,
  • B) Europe,
  • C) US,
  • D) Others

2. Which region had the strongest revenue growth rate in 3Q 2017?

  • A) Asia ex Japan,
  • B) Japan,
  • C) Europe and
  • D) US

3. Rank the revenue contribution by product segment from largest to smallest?

  • A) Wine and Spirits,
  • B) Fashion and Leather Goods,
  • C) Perfume and Cosmetics,
  • D) Watches and Jewellery and
  • E) Selective Retailing (i.e. DFS and Sephora)

4. Among the various product segments, which one recorded the strongest revenue growth in 9M 2017?

  • A) Wine and Spirits,
  • B) Fashion and Leather Goods,
  • C) Perfume and Cosmetics,
  • D) Watches and Jewellery and
  • E) Selective Retailing (i.e. DFS and Sephora)
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Which region contributes the most to LVMH’s revenues through the first nine months of 2017?

  • The answer is Asia. Combining Asia ex-Japan (29%) and Japan (7%), Asia contributed 36% to LVMH’s overall revenues in 9M 2017. Europe was the second largest region with 27% of sales (9% France and 18% Europe ex-France). The US was the third largest region at 25%.

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Which region had the strongest revenue growth rate in 3Q 2017?

  • The surprising answer was Japan and Asia ex-Japan. Both regions saw top line sales growth of 21% in 3Q 2017. For the year-to-date, Asia ex-Japan was still stronger at 19% while Japan is only at 11%. However, given all the talk about Japan still struggling with its lost decades, a 21% YoY growth was most unexpected.

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Rank the revenue contribution by product segment from largest to smallest?

  • This question should be the easiest one. I’m pretty sure that 90% of you knew that Fashion and Leather Goods would be the biggest category (at 35.5%) but how many knew that Selective Retailing (i.e. DFS and Sephora, etc) would be the second largest category at 30.6%. Perfume and Cosmetics was third at 13.3% while the Moet-Hennessy part of LVMH was only fourth largest at 11.5% of revenues. Watches and Jewellery was the smallest segment at 9.1%.

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Among the various product segments, which one recorded the strongest revenue growth in 9M 2017?

For the first nine months of 2017, LVMH’s largest segment was also its fastest growing. The Fashion and Leather Goods segment (35.5% of sales) grew 14% YoY in 9M 2017. AS Perfume and Cosmetics also grew 14% (with 17% YoY growth in 3Q 2017), this suggest that luxury branding is very strong. On the flip side, although wine and spirits grew 8% YoY, 3Q growth of 4% YoY made it the slowest growing segment in the group.

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Key Takeaways – Japan and Asia might be getting its Mojo back

As a generalist data point gatherer, the most interesting takeaways were:

1) The very strong performance out of Japan and Asia ex-Japan. Japan was supposed to be struggling to show inflation while Asia was supposed to be still dealing with the anti-corruption curbs. For both regions to show 21% YoY growth in 3Q and 11% and 19% YoY growth in 9M 2017 suggest that Asian consumers seems to have found their mojo and are back to their happy spending ways.

2) Branding remains effective. Usually with the law of the large numbers, as sales reach a certain critical mass, growth would inevitably slow. However, in the case of LVMH, although Fashion and Leather Goods is its largest segment at 35.5%, it growth has remained the strongest among the categories. Further, as many perfumes and cosmetics are branded along the same lines, the strong growth in those two categories suggest that consumers still love the luxury brands.

On point 1), if Japanese and Asian consumers have indeed gotten their mojo back, then the recent catch up of Japanese equities might have more room to go.

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Source: Yahoo Finance



Happy Anniversary – Make time to celebrate your success

Over the weekend, I was at my son’s basketball lesson. It’s just something to help the kids learn about the game, work on some drills and have some fun. At the end of each class, the coaches give out a medal for the game’s MVP. Sometimes, this recognises the most skilful player but more often than not, it recognises the child that has worked the hardest and demonstrated the best attitude.

Well, this past weekend, my son got the MVP. I was super excited for him and I couldn’t wait to give him a high five but I noticed that he looked a bit odd. I think he wasn’t used to the attention. We talked afterwards and discussed that it is important to celebrate our success. When you or your teammate score a basket, give each other a high five or a pat on the back, you guys deserve it.

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As I thought about this scene over the weekend, it occurred to me that in our daily lives, we don’t celebrate our successes often enough.

While we frequently conduct post-mortem reviews of things that have gone wrong in order to guard against future mistakes, we don’t celebrate enough. We worry that complacency may set in and we move on too quickly from our successes.

With that in mind, I am giving myself a quite pat on the back.

Happy Six Month Anniversary

Six months ago, I wrote my first blog here. It was a short piece entitled “For better or for worse“. Here are some key stats since that first post.

  • Published 33 articles in total
  • By category, I have written the most on the “Postcard” and “Mass consumption” topics, both with five notes each
  • The most popular post so far has been our “Postcard from London” followed by “Going once, going twice, SOLD“.
  • Our readership is mostly from Hong Kong but I also appreciate the one page view from Madagascar.

Thank you to all those who have Like’d the various articles. Looking ahead, I will try to schedule posts at more regular times, say every Thursday or Friday.

Until the next random idea. Here are two quotes that I like on celebrating successes

Celebrate your success, find some humour in your failures – Sam Walton

The more you praise and celebrate your life, the more there is in life to celebrate – Oprah Winfrey

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Postcards from the car dealer – how the middleman makes money in the internet age

We are selling our seven-seater. With the internet and the various online marketplace, selling your used car should be a cinch, right? While the internet has greatly boosted transparency in the used car market, is there still a role for the middleman? The answer is Yes. From talking with the middleman, I reckon the internet has reduced his margin from 22% to only 4%-10%.

I’m selling my car. We have been debating for some time whether we still needed our seven-seater. That’s the back story but what I really wanted to share about was the selling process. Specifically, how the economics for the middle man has changed as everything now goes online.

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Everything’s online, is there still a role for the middle man?

I am not an expert on cars but even I know that trading in your car to the dealer gets you worst price when you are trying to sell your car.

With the proliferation of online marketplaces, there are now many car trading sites. Positively, these have really increased the transparency of the used car market. Once you key in the make and model year, the search results will give you a pretty good idea how much your car should go for.

In my case, my 7-seater should go for something between HK$198,000 to HK$258,000. Armed with that information, I posted my ad near the top of the range. Our car was well maintained, the mileage was a bit on the high side but I also expected a bit of bargaining.

And so I waited. A few days passed. There were no bites except for one joker who wanted to barter and exchange his RAV4 for my car. Nope.

“Are you a private seller or a car dealer?”

I guessed that my price was too high and lowered the price to the middle of the advertised range. This seems to do the trick. My phone started ringing and people called to get more details. One question that always came up was whether I was a private seller or a car dealer. Most people seemed to be wary of car dealers, fearing that they would mess around with rolling back the mileage or other funny business.

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After much back and forth, a serious buyer emerged. As it turned out, the caller works for a garage and is reaching out on behalf of a prospective buyer. In other words, he was a middle-man. To make a long story short, I brought my car to his garage, he checked it out, done deal.

The Economics of the Middleman

But during the process, he was kind enough to share with me his economics.

Here are the headline numbers.

  • I sold my car to the middleman for HK$218,000 ($10,000 lower than my list price).
  • The prospective buyer is going to pay him HK$250,000.
  • At the headline level, the middleman’s take is HK$32,000 or 12.8%.

However, as they need to redo the leather seats and put on some new tires, this costs of HK$13,200 is part of the HK$250,000 that the prospective buyer is paying for. Taking a 50% haircut on this number, I reckon the middleman’s margin is actually closer to HK$25,400 (HK$32,000 less HK$6,600) or 10.2%.

There’s more. Since the prospective buyer is trading in his 2007 sedan, the middleman is offering him a trade-in value of HK$40,000. According to the middleman, if the prospective buyer did not agree to buy my 7-seater, the price would have been HK$20,000. The middleman expects to sell the 2007 sedan for HK$25,000-35,000.

So, if you factor in middle man’s effective HK$5,000-15,000 loss on the 2007 sedan, the middleman’s real margin would have been reduced from HK$25,400 to something around HK$10,400 to HK$19,400 (a margin of only 4.2% or 7.8%).

At this point, we want to ask a couple of questions:

  • Did I sell my car for too cheap?
  • Why didn’t the prospective buyer approach me directly?

Did I sell my car for too cheap?

On the surface, it would seem that way since the prospective buyer was willing to pay HK$243,400 (HK$250,000 price less HK$6,600 for leather seats/tires). However, in the old days before the internet, the dealers would probably have lifted my car for HK$190,000.

Takeaway #1 – The internet has reduced the middleman’s margin reduced from 22% to 10.4%

So the first takeaway here is that the increased transparency of the internet has reduced the bid-ask spread. Whereas, before the middleman’s margin would have been HK$53,400 (HK$243,400 – HK$190,000), this has now been reduced to HK$25,400 (HK$243,400 – HK$218,000). In margin terms, the online market place has brought down the middleman’s margin from 22% to 10.4%.

Why didn’t the prospective buyer approach me directly?

But why does the middleman still exist? Shouldn’t the online marketplace had connected buyers and sellers directly? If the prospective buyer had approached me directly, we could have split the bid-ask spread and we would both be better off.

I think it has to do with information asymmetry. As the seller, I know that my 7-seater is in perfectly good condition. But from the buyer’s perspective, he cannot tell whether my car is pristine or has suffered serious water damage.

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To guard against being cheated, the buyer needs professional help from someone who he can trust. This is where the middle man comes in. Not only does the middle man help to vet the car’s condition, he also provides the prospective buyer with some recourse. If things go badly, there is a least a store front (in this case a garage) that he can go to protest.

Takeaway #2 – Information asymmetry and recourse sustains the middleman – for now

But what about me, the seller? I suppose if I have more time and more patience to deal with the various callers, I could have waited until the right price came along. However, for the service of matching me up against the buyer, the middleman’s fair wages is now 4-10%.

I suppose it is possible for someone to AirBnB or Uber this type of service but given that most people only change cars every five to seven years, there probably isn’t the volume to scale this business.

As a side note, the middleman also explained why a professional dealer would low ball at HK$190,000. The answer is rent. At the used car exhibition centres, dealers are required to rent at least six spaces and each space costs several thousand dollars.  Given the significant rental costs, it takes the used car dealer three cars to breakeven and he only makes money on the fourth car.