The World's Unsexiest Business
adding a little sizzle to the convenience store industry
Softening things up a bit -- would you consider adding FOMO to that list? And in case you weren't familiar with the millennial coined acronym, that's the Fear Of Missing Out. Unlike its more existential rooted relative YOLO (You Only Live Once), FOMO's focus is usually directed more to an event rather than the entire spectrum of life.
That's not to say that they haven't been used interchangeably.
Las Vegas. 2006.
The flurry of activity surrounding this scorching real estate market had managed to keep pace and then ultimately fall short of the hype. There really was no way to downplay the deal clamoring and the excitement being perpetuated by mainstream business media and brokers alike. And no one really wanted to. Because, in this historically sleepy housing market, millionaires were being churned out faster than the nearby casinos could wipe out retirement pensions. The city of sin had become the center of attention for all of the above: astute investors, speculators, and simply the fool hardy. For those who had jumped on the bandwagon (or simply had developed an investing acumen in navigating the developed terra firma) two to three years prior, navigating such deals became second nature. Financing pitfalls, contingencies, lofty valuations, bogus appraisals, and construction defects were all easily spotted for this 'trained' group of buyers. And for the rest, either their 'gut' instinct had served them well having progressed onto their double digit deal or they just wanted 'in' even if it meant winning it all at the cost of financial ruin.
During this time, if you wanted to make a quick buck, you simply chose your speculative poison pill of choice -- the stock market or the real estate one. With the former, transparency in the form of highly regulated exchanges and television networks such as CNBC and Bloomberg (not to mention the internet portals) made finding high ROI deals substantially more difficult. Sure you could just follow the trend, but the position could move against you in the blink of an eye. But with the latter, it was easier to spot or even just manufacture an artificial bubble in a locale that hadn't seen much activity. The more crowded the market became, the more difficult the deal, and therefore the higher the alpha or return. But no matter how hot the market for in any particular locale became, every successive deal raised the ante and therefore the FOMO value.
Some 22 percent of Southern Nevada homeowners with mortgages were underwater — meaning their debt outweighed their home’s value — in the third quarter last year. That’s down from 28 percent a year earlier and far below its peak of 71 percent in early 2012, according to home-listing service Zillow.
By the time a locale or segment of the market had reached its peak there was too much money chasing too few properties/deals/ideas. Seems like a headline you've seen recently flashing across your Twitter feed? Now it's rearing its speculative head in the form of technology startups. While the investors are usually high profile and mid to high net worth, it's not too hard for the rest of us to find ways to get in. And that's not to mention Kickstarter and the myriad of angel investing sites.
So who was actually killing it? While many of the real estate deal participants seemed to be making out like bandits, on a risk adjusted basis, it was the army of facilitators and fee collectors that made out the best -- middle men, brokers, appraisers, and even the 'fly by night' second rate 'experts' dispensing advice under the guise of experienced consultants. Exhibiting even the slightest tendency for salesmanship and follow through capabilities, this contingent could see that the potential for limitless profits (with little to no downside) was rather immense -- all realized with minimal barriers to entry into the respective profession.
What was the winning formula? For direct market participants, it would be the ability to purchase value on an absolute basis while selling it on a relative one. Alternatively on the periphery, one could be selling services or advice on a selling price relative basis while easily absorbing low absolute (or fixed) costs. Either way, the gross margin would be ridiculously high. And to ensure that rainmaking never stopped? The incredibly savvy and data driven were perpetuating their successful livelihood by engaging in the real estate equivalent of Liar's Poker.
Enter the Data Renaissance
It was only about a decade ago that Nate Silver (among other lesser known data science practitioners) known for his popular statistical analysis blog FiveThirtyEight had been able to successfully predict Barack Obama's electorate victory. While his efforts and media attention didn't exclusively herald the beginning of the data revolution, even the least data inclined layman reconsidered his stance on merits of statistics and data based analysis. For the better. But prior to this 'renaissance', data had been downplayed in favor of evangelical style sales pitches. Today with easy access to free (incomplete) and subscription (more complete) data sets and research, many can realize alpha in information arbitrage:
Purchase data (or its esoteric insights) on a low absolute basis and repackage / integrate it into a medium (i.e. social media / digital presence) for which a service can be augmented and then sold for a relatively high value.
In case you were wondering, I promise not to mention anything about social media guru Gary Vaynerchuk!
Tying it All Together
When was the last time you read the headline Stupid Money Chases Smart Investments? Most likely never. But I'm not going to rule out anomalies for which the above may actually hold true.
Smart Money doesn't always represent outperforming hedge funds managers just as much as Stupid Money represents day-traders who lose their shirt a month after opening their brokerage account.
According to Internet marketing firm BloomReach Inc., "more than 50% of shoppers turn first to Amazon in [a] product search." Therefore, it should come as no surprise that the average consumer of today is much more informed than ever before about the vast product landscape and cognizant of the relative value of staple items. Given the easier access to data and internet competition, this Smart Money consumer is also then very price conscious (among other product and brand attributes).
Whether online or brick and mortar in the non-luxury good space, if consumers can easily spot a minimum number of discounts/promotions their brain registers that value is at play and therefore a relative level of savings can be reasonably expected. Whether or not absolute value exists, it's a bait and hook model for which we are subconsciously drawn towards. So that means expensive items in the store tend to be perceived as being cheaper even though on an absolute basis you might be better off going elsewhere to score a deal on that equivalent item.
But on the other hand, saturation of deals and marketing works can potentially decimate a retailer by eroding value, the brand, and ultimately bottom line.
Consumers are driven by perceptions more than reality. In fact, consumers’ conscious and subconscious perceptions about price can drive purchasing behavior that doesn’t always seem to make sense. For example, a study found that a US$10 discount on a $500 camera would fail to persuade many camera shoppers to visit a store across town. Shoppers would, however, cross town for a $10 discount on a $20 DVD. In both cases, the savings was $10, but consumers felt they were a getting a better value on the DVD, so they were more motivated to make the purchase at the store with the lower price.
And for the different age segments, there are competing value driven assessments at play:
We’re on this 40 percent off drug that we pulse every weekend. When you take away your promotions, your shopper melts away because you’ve trained them to come back on that 40 percent off day.
It has been alleged, for example, that advertised reference prices are “artificial, arbitrary and did not represent a bona fide price at which [the defendant] formerly sold,” which effectively “misrepresented the existence, nature and amount of price discounts” for consumers.