Brandon Donnelly

Daily insights for city builders, delivered every morning at 6 AM ET. I’m Brandon Donnelly — a Toronto-based real estate developer and founder of Globizen. I’ve been writing here since 2013.

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Category: Business

  • Essential food logistics

    Blair Welch, co-founding partner of Slate Asset Management, was recently interviewed by Don Wilcox of RENX about the company’s recent acquisition of the Commercial Real Estate Business of New York-based Annaly Capital Management. As part of the deal, we also acquired $0.4 billion of grocery-anchored real estate assets across the US. These were purchased by Slate Grocery REIT (TSX: SGR.UN). What some of you maybe don’t know, though, is how we as a company view these kinds of assets as being essential food infrastructure, more so than as being retail assets. So here are a few excerpts from the article and quotes from Blair that explain why, in our view, this distinction matters.

    “We started buying grocery-anchored real estate in a big way in the financial crisis and I think we always looked at grocery-anchored real estate as food logistics, rather than a retail play,” Welch explained. “In the pandemic it’s really proven the local food store, or the spoke in the hub, is just as valuable as the hub itself.”

    Despite an increase in online grocery shopping (to about 10 per cent in the U.S.), people are still going to the stores. Or, at least, (are) getting their products from the local stores. Again, think “food logistics.”

    “That (10 per cent bought online) means 90 per cent is done in store,” Welch observed. “Now, here’s the interesting thing. Over 90 per cent – probably closer to 95 per cent – of the online sales are done at the local store.

    “So what we are saying is over 99 per cent of all the sales are done at the local stores, whether it is click and collect, or someone delivers. You are not changing the distribution pattern.”

    Here are a few more words and a comparison to what Amazon is and has been doing when it comes to food logistics:

    “If I’m Kroger or Walmart if I have to pay $10 (per square foot) for my warehouse what’s the difference if I’m paying $10 for my store? It’s the same cost, they just look at it as a distribution cost,” he said.

    However, those stores are in the middle of most neighbourhoods. Exactly where Amazon wants to be.

    “I think Amazon is an amazing company. I think their acquisition of Whole Foods and others is actually to get closer to the consumer. And the Whole Foods (acquisition) was just under 400 grocery stores in a market of 35,000 stores.

    “If I am Walmart with 5,000 stores or Kroger with about the same under different banners, that infrastructure is extremely valuable.”

    Slate will soon own more of it.

    For the full article, click here.

  • London super prime and the City Trifecta Index

    The latest (15th) edition of Knight Frank’s annual The Wealth Report was published last month. I find these interesting because they give you a global view of how and where capital is flowing into real estate (specifically prime real estate). London, for example, did rather well last year despite the pandemic. Buyers from the around the world spent nearly $4 billion on what is commonly referred to as “super-prime properties.” This is real estate with a sale price of US$10 million or more. London saw 201 super-prime properties trade hands last year, with an average price of $18.6 million and with 31 of these transactions being at or above $25 million. This is an increase compared to the year prior (2019), which I suppose is something given that the UK’s housing market was more or less frozen between March and May of last year. These figures put London at the top, ahead of New York and Hong Kong, when it comes to super-prime real estate sales in 2020. (London figures via the Financial Times.)

    Another interesting thing that you’ll find in the report is a city ranking that Knight Frank calls their City Trifecta. What this index does is take Knight Frank’s City Wealth Index (which considers where wealth is currently concentrated) and then adds in two other dimensions: innovation and wellbeing. The idea here is that innovation should drive future economic growth and wealth, and that wellbeing (quality of life) is pretty important when it comes to the future competitiveness of our global cities. When you look at the world’s top cities through this lens, the ranking starts to differ from what you may be used to seeing with cities like London, New York, and Hong Kong at the top (see above chart). Now you have Munich taking the number one spot; Boston and Toronto in 5th and 6th position, respectively; and cities like Zurich jumping up ahead of cities like Hong Kong. These kind of rankings always need to be looked at with a critical eye, but they can be interesting nonetheless.

    Image: Knight Frank

  • Are Amazon’s private labels any different?

    Amazon is sometimes criticized for its private labels. The way this generally works is that Amazon uses the data that it collects from its platform to see what customers are buying. It then goes out and makes its own version of these products and sells them in competition with the other products in its marketplace. The reason why Amazon (and others) do this is because the margins are generally better on private labels, even though they are often positioned to the end customer as being a value-oriented alternative. That is, they’re cheaper.

    Some people think that Amazon shouldn’t be doing this, particularly as its third party marketplace continues to grow. This side of its marketplace deals with inventory that Amazon doesn’t own. It is the stuff of third party sellers who come to the platform to access Amazon’s customer base and reach, and to possibly use its fulfillment services. This marketplace now makes up about 60% of Amazon’s sales volume and so it has become a dominant part of its business. It’s a way to grow without having to spend money on additional inventory.

    Is it, then, acceptable for Amazon to mine this data, replicate products, and compete with its own customers? The truth is that this isn’t all that new. As Benedict Evans points out in this recent post, retailers have been doing this for more than a century. The above table taken from a 1932 report on “chain store private brands” shows that about 80% of stores in the US at this time were selling private label brands. Furthermore, it represented about a quarter of their overall sales. Is this time any different?

    Table via Benedict Evans

  • Need vs. want and what that means for pricing

    Seth Godin recently posted this four quadrant chart on his blog. It is for plotting different products based on price and based on want vs. need. In his post, he asks his audience to think about what they’re offering and which quadrant it fits within. It can only be in one.

    I am fascinated by questions of pricing. At at some point on this blog, I wrote about a pricing class that I took at Rotman while I was doing my MBA about a decade ago. It stands out to me as one of my favorite university classes.

    So let’s consider these four quadrants.

    In the top left, you have inexpensive products that are wants and not needs. This quadrant is where you’d place those novelty sunglasses you picked up for your friend’s theme party. Fun for that moment, but if they break or you lose them, that’s probably okay.

    In the top right are expensive wants. Seth uses the example of a Hermès purse. The need is a place to put your belongings, but that’s not how these sorts of items are priced. The real value, arguably, comes from their “signaling” and how they make the owner feel.

    This is the luxury goods category. Demand will likely be cyclical and sporadic, and so you’ll need to make sure that you have fat margins.

    In the bottom right are expensive needs — like a pacemaker. Seth’s point is that these products need to work exceptionally well, all of the time. In the case of a pacemaker, it is truly a matter of life or death. At the same time, there’s going to be less price sensitivity.

    In the bottom left are the inexpensive wants. Low cost products that people really want and are infinitely useful. Seth’s example is Amazon Web Services.

    This quadrant of products is attractive because demand will naturally be extremely high. Cheap and invaluable will do that. However, Seth’s caution is that you still need to sustainably deliver the goods. These aren’t novelty sunglasses.

    I find it helpful to think of products as existing in only one quadrant. But most offerings aren’t going to exist all they way in one corner. It’s perhaps important to consider the “job to be done.” (To borrow from the late Clayton Christensen.)

    Take, for example, housing. On a fundamental level, it’s a need. We all need shelter. But it can also be a want, or have aspects of want. I need a place to live. But I want a place in the mountains. This subtle difference means something very different when plotted precisely.

    Image: Seth Godin

  • The 10x Class

    I just discovered the work and writing of Dror Poleg. Initially trained as an economic historian and media theorist, Dror went on to work in advertising, tech, and real estate private equity, among probably a bunch of other things. Today he mostly writes. He’s the author of Rethinking Real Estate: A Roadmap To Technology’s Impact on the World’s Largest Asset Class. I haven’t read it (yet), but I did just subscribe to his weekly newsletter. Here are a couple of excerpts from a recent post called, “Rise of the 10X Class.”

    In 2020, things are very different. Charli D’Amelio, a TikTok star that 99% of you have likely never heard of, makes $48,000 per post. By uploading one short video every day, the 16-year-old D’Amelio can earn 20 times more than the world’s most successful singer earned in 1801. Charli is scalable in a way that was possible only for a tiny group of TV, film, and pop stars 20 years ago, and was not possible at all in Elizabeth Billington’s time.

    The internet makes it possible for many knowledge employees to work from anywhere. The earning potential of (many of) the most productive employees is no longer capped by geography. As a result, we will see the emergence of a new class of people earning salaries that are an order of magnitude higher than what we saw in previous decades.

    Note that I am not talking about the emergence of a handful of highly-paid superstars in the vein of Hollywood’s Brad Pitt or Tom Hanks. I am talking about micro-stars in the vein of TikTok’s Charli D’Amelio: a whole new layer of professionals than earn incomes that are a level below the biggest earners on in their field, but still much higher than what the average employee (or singer, or dancer) could earn in the pre-internet era.

    I call this new layer of professionals the 10X Class.

  • How to model a wealth tax

    I just came across this post by Paul Graham called, “modeling a wealth tax.” It’s from last year, but it recently resurfaced. In it, he paints a scenario. Let’s say you’re a successful entrepreneur in your twenties (i.e. you make some money) and then you live for another 60 years. How much of your stock would the government take with various wealth taxes?

    With a 1% wealth tax, it means that you would get to keep 99% of your stock each year. But assuming the wealth tax gets applied every year, you would be left with 0.99^60, which equals 0.547. Put more simply, a 1% wealth tax would mean that over the course of the 60 years after you built your company, you would be giving the government 45% of your stock.

    How did this number get so big?

    The reason wealth taxes have such dramatic effects is that they’re applied over and over to the same money. Income tax happens every year, but only to that year’s income. Whereas if you live for 60 years after acquiring some asset, a wealth tax will tax that same asset 60 times. A wealth tax compounds.

    Of course, Paul also points out that giving away a portion of your assets each year doesn’t necessarily mean that you’re becoming net poorer, so long as your assets are increasing in value by more than the wealth tax rate.

    Still, these are massive numbers. A 2% wealth tax would translate, over this same 60 year time period, into the government taking 70% of your stock. A 5% wealth tax works out to 95%. For more on this, check out Paul Graham’s post.

  • What are you serving at your restaurant?

    Warren Buffet’s annual letter to Berkshire Hathaway shareholders was just published for 2020. It can be downloaded here. I have made a habit out of reading his letter every year and his overall approach has been instrumental in shaping the way I think about investing.

    What is clear to me when I look at the first page of each letter — which contains a comparison of Berkshire’s performance to that of the S&P 500 — is that he and Charlie Munger have got to be the most successful stock market investors of the last century.

    They have consistently outperformed the market. And they have done that by focusing on fundamentals, doing what others are not (i.e. being contrarians), and being incredibly patient, among other things. All of this isn’t rocket science. It’s simple, understandable, and repeatable.

    The other thing we can learn from his widely read letters is that clear and concise writing is a powerful tool. I have said this many times before, but to explain something clearly it means you need to really understand it. Things tend to get complicated when you don’t know what you’re taking about.

    And with that, here’s an excerpt from this year’s annual letter:

    In 1958, Phil Fisher wrote a superb book on investing. In it, he analogized running a public company to managing a restaurant. If you are seeking diners, he said, you can attract a clientele and prosper featuring either hamburgers served with a Coke or a French cuisine accompanied by exotic wines. But you must not, Fisher warned, capriciously switch from one to the other: Your message to potential customers must be consistent with what they will find upon entering your premises.

    At Berkshire, we have been serving hamburgers and Coke for 56 years. We cherish the clientele this fare has attracted.

    The tens of millions of other investors and speculators in the United States and elsewhere have a wide variety of equity choices to fit their tastes. They will find CEOs and market gurus with enticing ideas. If they want price targets, managed earnings and “stories,” they will not lack suitors. “Technicians” will confidently instruct them as to what some wiggles on a chart portend for a stock’s next move. The calls for action will never stop.

    Many of those investors, I should add, will do quite well. After all, ownership of stocks is very much a “positive-sum” game. Indeed, a patient and level-headed monkey, who constructs a portfolio by throwing 50 darts at a board listing all of the S&P 500, will – over time – enjoy dividends and capital gains, just as long as it never gets tempted to make changes in its original “selections.”

    Productive assets such as farms, real estate and, yes, business ownership produce wealth – lots of it. Most owners of such properties will be rewarded. All that’s required is the passage of time, an inner calm, ample diversification and a minimization of transactions and fees. Still, investors must never forget that their expenses are Wall Street’s income. And, unlike my monkey, Wall Streeters do not work for peanuts.

    When seats open up at Berkshire – and we hope they are few – we want them to be occupied by newcomers who understand and desire what we offer. After decades of management, Charlie and I remain unable to promise results. We can and do, however, pledge to treat you as partners.

    And so, too, will our successors.

  • Shopify’s mission is to be an entrepreneurship company

    Howard Lindzon has a podcast called Panic with Friends. It was started last March (hence the name) and he uses it to interview entrepreneurs, investors, venture capitalists, and other business people about what they’re up to. In today’s episode he speaks with Harley Finkelstein, President of Shopify, about the future of ecommerce and about how they’re positioning the company. What was interesting but not surprising to hear was that in the early years people didn’t believe that Shopify had a large enough total addressable market. Supposedly, there weren’t enough people out there who might be interested in starting their own online store. That, of course, has proven to be false and there are new and successful ideas emerging all the time. We’re also now talking about how ecommerce is reshaping the landscape of our cities. Given all of this, the company has grown to think of itself as an entrepreneurship company. If you’re at all ambitious, then you’re an entrepreneur in their eyes and Shopify wants to be the platform for you. As a Canadian, it’s great to see them doing so well. If you can’t see the embedded Spotify player above, click here.

  • Income-to-expense ratio

    Professor Scott Galloway’s recent post called “The Algebra of Wealth” makes the argument that there are four key factors in the creation of wealth: focus, stoicism, time, and diversification. Some of you may argue with his points around diversification. I’ve heard Warren Buffet and Charlie Munger say before that diversification is really just admitting that you have no idea what the hell you’re doing. Because if you did, you wouldn’t need diversification to protect you.

    That said, I like a lot of the points that Galloway makes on his blog. For one, he calls bullshit on the age-old advice that you should just “follow your passion.” Finding something you love to do is important and ideal. I feel incredibly fortunate that I found something (there were pivots) that I want to be my life’s work. But that doesn’t mean that I didn’t and that I don’t think about money. As I’ve said before, I never understood why money is often a taboo topic in architecture schools.

    Galloway also takes a stab at defining, what is rich?

    “I know a lot of people who make an extraordinary amount of money, but few people who are rich. Rich is having passive income greater than your burn. People on a path to money focus on their earnings; people on a path to wealth also focus on their burn. Joseph Heller said, “It takes brains not to make money.” (Note: I think he was casting a favorable light on his starving artist friends). This may be true, but it definitely takes brains to hold onto it (i.e., money).“

    “My father receives $48,000 per year from Social Security and his Royal Navy pension (he was a frogman). He spends $40,000, and it’s enough to make him happy. He swims every day, watches a shit-ton of hockey (Leafs fan), and on Fridays goes to The Taco Stand (an actual restaurant in La Jolla) where he orders something called a michelada. (Apparently it’s medicine delivered in a chilled salt-rimmed glass — he claims his hair is regrowing and that he’s sleeping better. I believe half of that so … I believe it.) Anyway, it’s not your income, but your income-to-expense ratio, that determines if you’re rich.“

    When I was growing up, my dad used to always tell me that it doesn’t matter how much money you make, it matters what you do with the money that you make. That is another way of saying, focus on your income-to-expense ratio. Spend less than you make and be strategic with what’s leftover. This is a good principle to follow for real estate as well. As a rule, it’s generally a good thing when your revenue is greater than your operating expenses and your NOI is positive.

    But there’s another important message in Galloway’s excerpt: you don’t necessarily need a lot to be happy. (Sign me up for The Taco Stand on Fridays!) And if you’re in position where your passive income is greater than your burn, then you also have something called freedom.

    For Scott Galloway’s full post about The Algebra of Wealth, click here.

  • The great unbundling

    Every year, Benedict Evans publishes a presentation about the “big macro tech trends” impacting the global economy. They are always excellent and I usually share them here on the blog. It’s also becoming harder and harder to differentiate tech trends from the rest of the economy, and so in many ways this is just a presentation about important macro trends.

    In this year’s presentation, he focuses on the “unbundling” of retail, ecommerce, advertising and TV; China and the end of the American internet; and a few other timely topics. To view the presentation, click here. Benedict also delivered this same presentation at a recent event by Protocol and Nasdaq (video link) in case you’d prefer to consume the content that way.