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With The Finance Ghost having just returned from a trip to the UK, France and Dubai, the opportunity was clear to talk through some of the brands and business models that have been researched in Magic Markets Premium. It’s one thing doing desktop research. It’s another thing walking through a Sephora store or swinging a club at Topgolf. Mohammed Nalla lives in Canada so he’s already had this experience for some time now, leading to an insightful discussion.

And let’s not forget EVs, which are always a bone of contention on Magic Markets. Having seen the level of adoption in Europe first-hand and experienced such cars, have the in-house views on EVs changed?

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

Full transcript:

The Finance Ghost: Welcome to episode 181 of Magic Markets and Moe, this is going to be a fun one, although it’s always a fun one, I think. I’ve recently traveled, as anyone who follows me knows and is probably sick of hearing by now – hopefully not – and this, of course, gave me a good opportunity to experience some of the brands that we’ve talked about and covered and researched extensively in Magic Markets first-hand. There’s a lot that we don’t get in South Africa. For example, I don’t think there’s a Lululemon (see our Premium report here) store here. I haven’t seen a Sephora, just to give a clue of some of the things that we’ll be talking about. And it’s really lovely to be able to go overseas and actually experience these things in the flesh versus looking at the numbers as a desktop research exercise, which of course comes with the benefit of objectivity, because if you haven’t really experienced the brand yourself, you kind of look at it cold. But there really is no replacement for getting out there and actually seeing the stuff in the flesh, right?

Mohammed Nalla: Yeah, indeed, Ghost. And I mean, that’s really part of the value proposition at Magic Markets, is that on-the-ground experience as well. Because I live up here in North America, so I get to kick the tires, I get to see some of these brands live in action. And I think that’s what I want to get out of this particular discussion, is how can we contrast what my experience is up here in North America with what you’ve experienced in Europe and in the Middle East? I’m keen to just maybe hear what some of the brands were that stuck out for you. What were you most surprised by? Let’s unpack some of that. I mean, for me, quite frankly, I’m still surprised. I know South Africa is a small market, but a brand like Lululemon has just become so ubiquitous up here in North America that it’s surprising that they haven’t gone and tapped a market where I think there’s fair amount of potential with a Lululemon down in South Africa. Also surprised by the fact that you don’t have Sephora. I know you’ve got MAC for those that like their makeup, but Sephora is really a powerful brand, a powerful business. We’ll get into that. What I do know South Africa loves is luxury, because you just go and do that walk of shame, as I call it, it’s the diamond walk in Sandton and you can see all of those luxury brands. You’ve got LVMH, Louis Vuitton there. I don’t know if you have an Hermes down there, that would be an interesting one for me. But you’ve got all the others. You’ve got, I think you’ve got a Gucci, you’ve got a Dolce Gabbana. We’re going to touch on some of these brands. And then you like Topgolf. I saw pictures of you playing some golf out there in Dubai. Let’s jump straight in Ghost.

The Finance Ghost: Yeah, there’s a lot to talk about. I mean look, on the Lululemon side, it’s not like premium athleisure wear hasn’t come to South Africa. There are some other brands, but it’s a difficult, it’s a niche market. It’s expensive stuff. I mean, we just aren’t a market that has the kind of scale that the likes of a Lululemon would be looking to hit. I’ll tell you where I do want to start. You talked about kicking the tires. Well, I kicked the tires of an electric vehicle, which I got to drive around in, in the UK. So that’s the first time I’ve really spent time with an EV. It was a BMW i3, so the funny looking little one. And I have to say, much as I wanted to desperately despise it, it was actually quite a lot of fun. I was quite impressed. It makes sense when you’ve got the infrastructure that they have in the UK, obviously. First part is when you plug the car into your house, it actually charges, although these days load shedding seems to be part of South Africa’s history, so who knows? But more than that, you’ve also got charging stations that you can go to and lots of them. So it’s not like I saw at one of the malls in Dubai where there was a whole floor of just Tesla chargers, and that’s for Teslas only, obviously, you can’t go and charge anything else there. I’m talking about bigger infrastructure than that, where you actually have places you can stop and charge the car. But if you speak to people who own the EV, it is still a pain. The charging network remains an issue. So for a lot of them, their electric vehicle is kind of their runaround car, and then they just charge it at home because the range is not bad. I mean, for general driving, it’s more than fine, you only need to charge it every few days and you’re good to go. But a lot of the households will also have a petrol-powered vehicle in them, obviously, for those longer drives or where they have what gets called “range anxiety”.

Now, it works in a place like the UK, but I’ve heard some horror stories recently from Italy. In fact, my brother was one of them, because he had an electric rental while he was there on holiday recently. And what happened was he got to a charger, he now had no choice, he had to charge the thing, and there was a long queue, and the queue was so long that he actually missed his flight or his train, I can’t recall, doesn’t matter, because he couldn’t get the car back in time because he was stuck at the charger. So electric vehicles, are they more fun than I expected? Yes, they are, honestly. But are they practical? Still not. And they are depreciating like crazy, which is interesting, because a lot of the leasing companies, I think, are going to get stuck with fleets of electric vehicles and they’re going to take a bath on them because they’ve priced them for normal depreciation curves and lease payments. And that’s not what’s happening out there, because the incentives for buying an EV, I think a lot of them actually fall away when the car is used. And in general, used EV prices are horrible at the moment. So the total cost of ownership for people is actually quite high because of the used prices dropping away. But will that change over time? We’ll see. We covered Stellantis recently in Magic Markets Premium, and of course, the big theme there was the rise of Chinese EVs and what that might mean for the broader European market. So I’ll start there and I’ll stop there now. It was fun to finally experience electric vehicles.

Mohammed Nalla: I don’t want to spend too much time on EVs. Like you say, we’ve covered Stellantis (see our Premium report here), we’ve covered Tesla, the stock you love to hate, and some pretty good reasons, right? I mean, my takeaway from this, from an investment thesis perspective, is up here in North America, they are becoming a lot more prevalent. If you have a look at Audi, for example, they’ve got their e-tron range. If you go and have a look at VW,  they’ve got a range, I think it’s called the ID range, effectively. You’ve got the i ranges that you’ve driven with BMW – the i4, very attractive car. I’ve got a friend who bought one for his son out in the US. And again, largely a product of those massive incentives, there was a dealer incentive, there was a state incentive, so that really contributes. The point is that it’s more than Tesla. You’ve got Hyundai with its IONIQ range. You’ve got Ford with a Mach-E. I have a friend who recently bought a Genesis, that’s Hyundai’s Lexus, if you want to call it that. And they bought this big SUV, which, guess what, it’s an EV. Really quite attractive. To your horror story point, reports of Tesla’s Cybertrucks with the chargers getting stuck in the truck. And then a friend of mine, when he was visiting me, also decided he wants to experience EVs, rented a Tesla. We went to the closest mall, had some dinner. He wanted to charge the car there, and the one EV charging station that was available was available for a very, very strong reason: it wasn’t working. And so this caused him to have to drive a couple of miles out to go and find the next closest charger.

So again, on EVs the investment thesis for me, watch out. It’s more than Tesla. The other auto manufacturers are hard at work and it’s starting to show.

The Finance Ghost: Yeah. And what people don’t think about is if you don’t have a parking that is close to where you can charge your car, you’ve got a problem. So if you are street parking in Europe, life is not so easy for you. If you have a house with a driveway at the very least where you can run a cable, or ideally a garage, then it’s different. So I still maintain my view that ICE cars are not about to disappear. I can see a world in which households have got one EV, one petrol vehicle. But the Teslas are extremely underwhelming compared to everything else on the road. They look like they are now from a previous era, because they actually are. They spent a lot of time and effort on the tech, but they spend very little around the design and it’s starting to show.

Mohammed Nalla: Yeah Ghost, enough Tesla bashing, right, let’s move on to some of the more interesting stuff I want to hear about.  I want to hear about the luxury or the quasi-luxury brands that you experienced. I mean, you went via Dubai, and Dubai really does exude that luxury. I know the last time I was there was over ten years ago, and again, it was really one of those premium markets that you just see the Lamborghinis and the Ferraris. But you mentioned something interesting to me off-air, and you said the rise of the middle class in Dubai is what stuck out for you. So let’s maybe jump into what that means for some of the brands that you experienced with regards to that mass affluent coming through.

The Finance Ghost: So very different in Dubai to what I saw ten years ago, where practically every car was either, as you say, a Lamborghini or a taxi. Now there’s this big middle class in Dubai, which is pretty interesting. That expat lifestyle is working well. And yes, you do get exposed to the luxury brands in Dubai. I mean, you go to one of the malls and there’ll be an entire Hermes store. You just don’t see that in South Africa. There will be a massive Rolex store. There will be a massive IWC store. Try find an IWC watch in South Africa. There’s only a few that will carry them, and it’s not going to be an entire store. Definitely not. Although no different in London, really. When I went to Harrods, which was quite mindblowing for me, they had couches there that cost more than a Porsche 911, which feels to me like a waste of time because you can’t drive your couch. But people will spend money on crazy things and really just levels of luxury that are hard to comprehend from South Africa. So, those brands, you kind of really see their power when you go into those shopping hotspots. So when you read the results of, like, Richemont, for example, and they talk about why travel is so important. Go and spend time in a duty free, or go and spend time in one of these cities that are hotspots, like London, like Dubai, or like Singapore, which I wasn’t in this time, or Hong Kong, whatever it is, and you will see why that is just so important, because people are trying these things on and they are buying them. I saw it happen. Someone will walk in at duty free and go and drop R200,000 on a watch because, why not? It’s very hard to contemplate when you are sitting in South Africa worrying about, do you have enough potable water at your mall like I saw Hyprop writing about this week, but the stuff is out there and these luxury brands are very, very strong. But I think they are particularly strong in developed markets and also pockets of wealth outside of that in emerging markets.

Mohammed Nalla: Yeah, Ghost, I mean, I’m going to take a completely left field take on this and say to you that the thing that sticks out for me is if someone’s dropping 250k on a watch at duty free, you also want to go and have a look at Mastercard (full premium report here) and Visa (recap here) – stocks that we’ve covered here at Magic Markets Premium – maybe even American Express (full premium report here), because that’s telling you that cross-border payments travels come through and that might be another way to get a clip on that mass affluent and the consumer coming through. Another interesting point: Rolex. We have these full Rolex boutiques up here in Canada. I’ve certainly seen it in the US. And Rolex is interesting because it’s privately owned. We’ve covered Swatch group here, they own Omega, for example. Let’s call it a Rolex competitor. We’ve also covered other luxury brands. I mean, Richemont owns a couple of good watch Maisons in their stable. And so there’s so many different ways to actually get exposure to that luxury part of the market.

Watches, those have actually declined in popularity certainly over the course of the last several years. And you actually saw that notable slowdown come through from China, when there was a big crackdown in terms of corruption. And I guess people were just paying officials with Rolexes. But interesting to see some of those themes going through to the mass affluent as well as the luxury theme in Dubai, where you experienced it, again, also in London, because, like you say, Harrods got quite a few strong brands. A very impressive store up there in London. If you get the chance to visit, it’s certainly one to go and see. But Ghost, what about the more mass affluent stuff? Because quite a lot of the time we look at just the luxury market, you’ve got players like Richemont, but then we’ve also got the likes of LVMH (recap here) that owns what we have called a mass affluent brand within their stable, and that’s Sephora. And why I’m asking you specifically around Sephora is, yes, I have two daughters. My younger daughter, in fact, even knows about Sephora. She knows the branding. And every time I walk past a Sephora store, it almost looks like an Apple store if you go into it, because it’s always busy. Sometimes there are queues, which blows my mind as someone who clearly doesn’t use any makeup on themselves. Sephora is an interesting story. So tell me a little bit about what your experience was with regards to some of those mass affluent brands.

The Finance Ghost: So the obvious one we kind of mentioned earlier, actually, which was Lululemon. I mean, that is actually mass affluent, but maybe the more interesting one, because I knew what to expect at Lululemon, we’ve done the research. It’s athleisure. And I must say, lots of focus on the men’s range. I mean, that’s something that we’ve picked up in all of their strategic communications is expanding beyond the women’s wear range. That’s very clear when you see a Lululemon store. But the one that was way more interesting than that for me was Sephora. So obviously you get greeted at the door by loads of promotions around Rihanna and her stuff. But Sephora was interesting and it was absolutely pumping when I was there, when you could barely move. So it’s basically all the way around the store – I don’t know what it’s like in North America, I’m sure it’s much the same. This was in Dubai, and actually there was one in London as well that I also made a point of going into. And Sephora, of course, is owned by LVMH. So it’s luxury, but it’s not that real luxury. It’s very much mass affluent because there are cosmetics in there that are actually quite affordable. And then, yes, there’s stuff in there that is expensive. But what is interesting for me, it’s all about the brands. So the store is not sorted by, oh, here’s all of the mascara. All the way around the edges of the store, there’s basically a different section for each brand. From what I could see, it was almost alphabetically ordered at that particular one, I don’t know if all the Sephoras are like that, but it’s all about pushing the brands, which then makes sense why it’s part of LVMH at the end of the day. But just a good store. I mean, I could look at it, I could see,  people were really enjoying being there. I can see that they’re spending lots and lots of money, and that has been a serious growth engine inside Louis Vuitton and LVMH group, rather.

And it’s something that they are expanding offshore at pace. I’m sure it won’t be too long. I don’t think there’s a Sephora in South Africa, but that cannot be far away.

Mohammed Nalla: Yeah, every time I go to the Sephora that’s close by to me, there’s this very fancy car that’s parked outside and their number plate actually says LVMH. So again, a strong reminder in terms of where this group sits. I never noticed the alphabetical layout of the store. I’m going to actually go into my local Sephora and just go and see if that’s actually a thing or if that was just coincidental down there. The point you’ve raised, however, around the brands is so key, because I think that’s central to Sephora’s success. They experiment not just with the core brands. I know a big group tie-up between, for example, Dior, I think, features quite prominently in terms of the overall Arnault family’s holdings. So you see that come through in a Sephora as well. But they then experiment with some of the lesser-known brands and then those brands find their way into prominence. So, effectively, a very strong strategy there. And again, if you’re interested in this industry, we’ve not just covered LVMH, we’ve also covered Ulta Beauty (full report and recap) on the show before. Because if I go into an Ulta beauty store, for example, some strong learnings between the groups, it’s very competitive. And beauty as a segment has been absolutely red hot.

So some interesting context there. I don’t know if there were any queues outside the Sephora where you were, but like I say, every time I go past a Sephora, and it almost doesn’t matter where the store is, whether it’s a standalone store, whether it’s in a big mall, those stores are busy. And so I think that tells you there’s definitely a mega trend at play there. Ghost, just in terms of time, I want to also touch on another one, just because I saw the picture of you taking a swing at a golf ball, and I’m not a golfer – certainly not a good golfer – but Topgolf, that’s a stock we covered a long, long time ago here at Magic Markets (here). I’m keen to know what’s actually happened in that space, because Topgolf, as a business, if I look at the share price, hasn’t done fantastically. And so what does the actual experience look like on Topgolf there? I can quickly tell you up here, I’m not a golfer. There are lots of driving ranges around that are not Topgolf obviously, there are lots of golf courses, but I have seen some of these standalone, let’s call it virtual driving ranges and so forth. That was central to Topgolf’s value proposition. What did it look like in London and in Dubai where you recently went through?

The Finance Ghost: It was super interesting to go to Topgolf in Dubai. I was very excited about that and it was a cool experience, which is actually kind of weird because Topgolf has been a real drag on Topgolf Callaway’s share price, I mean, it’s all part of the same group, basically. And the other big player in that space is a group called Acushnet, they’ve got Titleist mainly, and I just had to look now, that share price has done really, really well because golf has actually grown in popularity in the last few years. It benefited tremendously from the pandemic because you’re standing with your mates there when you tee off and to be honest, that’s the last time you see them until the green, unless you’re very good. One goes to one side of the fairway and the other guy goes into the bushes and whatever the case may be. So it’s great, actually. And jokes aside for social distancing, it worked out well. And then, like anything in life, when there’s a pickup in activity in something, a percentage of that will stick. Then you get Netflix coming on board with Full Swing and getting people really excited about golf again. And there’s some interesting personalities in it.

So golf is doing well at the moment. Topgolf Callaway, not really seeing much of that because I think those Topgolfs are just so frighteningly expensive to actually build and roll out. The one I went to in Dubai was a multi-level structure, I can’t even remember how many floors it had, but it had a number of floors. It’s quite disconcerting hitting a golf ball from so high up. You basically feel like a pro, then you remember you’re starting like 20 meters in the air, which is sometimes 20 meters higher than the ball occasionally goes. But it really is fun. And it’s basically like golf meets ten pin bowling. So it’s very gamified. It’s very much about hiring a particular booth. And then you can have as many people there as you want practically, within reason, but you can have like six or eight people there. They bring you drinks, they bring you food, you play different games on the screen. So just a really cool experience. But not cheap either. And obviously that’s in comparison to other things because nothing is cheap in the developed world. But even if I take that into account, it’s still not a cheap experience. This is not something that you’re going to go and do lightly every week. And the problem is they need to claw back just the costs of running a place like that and the technology and everything else.

What is quite interesting is a few months ago I was on the plane between Joburg and Cape Town and I was sitting next to someone and I started chatting to her about what she does for a living. You know how it is, you strike up small talk because she had quite an interesting lanyard or something, as I recall. And she works for a company in Stellenbosch that does a lot of the technology that powers these ranges, like Topgolf. So the tech that actually tracks the ball and everything else, from what I understood from her, is actually very much homegrown South African, which is really cool. And the end product on the other side is also really cool.

But I think it’s a really good example of how you need to be careful when you go somewhere and you think, oh, I had a great experience, this might be a great investment. No, not necessarily.

It has not necessarily been a great investment at all. You’ve got to look at the finance metrics and that’s where – its probably a nice place to end it, actually, because I think that’s sometimes where just taking an objective view on a business is so valuable, where you haven’t been tainted by falling in love with it. You’re actually just looking at it on paper and saying, this is cool, but do I want my money in this? Probably not.

Mohammed Nalla: Yeah Ghost, it wouldn’t be a Magic Markets podcast if I didn’t look at the share price performance. So let’s do that before we actually wrap up, because your point is absolutely spot on. You can go and have a great experience. Topgolf has actually done a bad job of converting people who might be tangentially interested in golf into actually coming into the facilities. I would be the classic target market here. I haven’t actually gone to a Topgolf facility and I think the pricing point is definitely one of those driving factors. You’ve got to make it compelling, you’ve got to incentivise people to come in and then once it sticks, you get the recurring revenue. So a quick recap on this. I mean, I’ve just gone and charted a whole bunch of stocks. I’m going to run these through you. LVMH, Lululemon we’ve mentioned that. We’ve mentioned Topgolf, Hermes. I’m going to throw one in the mix there, you haven’t mentioned it: Ralph Lauren, because it’s kind of luxury and it was interesting when I looked at the chart. Then Christian Dior. Kering, which is kind of the luxury group that everyone loves to forget because they just have a mishmash of brands. And again, that will come through. And then Richemont, that’s a stock that’s well-known to our South African investors. And if you chart this over the last five years, Ghost, take a flyer. Give me your podium. Who are the top three?

The Finance Ghost: So Moe, I think LVMH would have done really well talking about luxury and Sephora and everything else. That would surely have to be, I think, right up there over the past few years. Tesla, obviously, with a long enough timeframe, will be a little bit bonkers. Lululemon, they had a bit of a sell off, actually. In fact, we covered Lululemon recently on Magic Markets Premium. And again, it depends on your starting point. I mean, that’s how all these businesses work, right? Pre-pandemic versus post-pandemic starting point. Of all of them, it probably irritates me to say that Tesla is probably the best performer over enough years, but I’m keen to see how they stack up. Not that any of these are directly comparable, of course, other than just stuff you’ll spot while traveling, which would certainly be an unusual ETF.

Mohammed Nalla: Okay, so, Ghost, if we include Tesla on that, you’re right. It’s why I purposely left it off the list, is that Tesla is absolutely bonkers. Over a five year timeframe, it’s up, like, over a thousand percent. So I’m going to actually exclude that one, because I want to rob you of having had a successful guess at what our podium looks like. And I’m going to jump right in and tell you that Hermes actually comes through as the strongest player. And not surprisingly, but I would have actually expected LVMH to do a lot better. LVMH coming through on the podium in the number three spot, which was surprising for me. They came through, they were quite strong at some point in time, then actually sold off quite aggressively. Lululemon coming through in the number four spot, the number three spot, interestingly enough, coming through to Richemont, if we have a look at this in constant currency. And then in terms of the disappointments, like we say, be very careful in terms of just thinking your good experience is going to translate into a good investment thesis. Yes, Kering. That’s not one you mentioned directly, that’s the loser. But Topgolf coming through with a -11% return over the last five years. And so that’s showing you, I guess, maybe some of that divergence between ultra luxury, obviously the EVs, Tesla’s been completely bananas, and then that mass affluent market that really has been struggling.

That’s where we’re going to leave it this week, though, so let us know what you think of the show, of Ghost’s experiences and of actually considering experiences you’ve had in terms of your investment decisions. Hit us up on social media. It’s @magicmarketspod, one word, @financeghost, @mohammednalla all on X, or go and find us on LinkedIn and pop us a note on there. Until next week, same time, same place. Thanks and cheers.

The Finance Ghost: Ciao.

This podcast is for informational purposes only and is not financial or investment advice. Please speak to your personal financial advisor.

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