Ted Audio Collective.
HBR presents. Hi everyone, you're listening to After Hours.
I'm Yang Mi. I'm Mi here.
And I'm Felix. How are you guys doing?
Doing alright. Still at home?
Actually, I will say that for the first time, I almost had a feeling of, I don't know if I'm ready for this to end, in the sense that, like, there's pieces of this that I kind of like.
Well, the extra time with your family is...
The good news is, you can just decide not to leave your house for a week.
That's right. So, the other thing is, right before we turn down the record button, Mi here and I learned that Felix has been going to the grocery store at four in the morning.
Yes, it's an amazing experience.
No one is there. But you have to then wake up in order to go.
There's a reason no one's there.
Oh yeah, and then there's this little institution called Napping, which has been very empty.
So this is our second to last episode of the season.
So we have one more episode after this, and then our season will come to a close.
Yeah, and in fact, you know, hopefully we'll be able to cook up something for our listeners during that time that will surprise them a little bit.
We'll use the newsletter to keep people informed as to what we plan to do over the summer.
And so if you haven't signed up, there's a link in the description of the podcast where you can just click on it and sign up for the newsletter.
And so we'll use that over the summer to keep everybody informed as to some of the projects.
Right. We've got a few projects cooking, so it'll be fun.
Yeah. As for this week, our penultimate episode of the season.
Mihir, you brought in a topic.
Yeah, so it was a big week of earnings.
A lot of the big tech companies reported, and it's our first real look into the effects of COVID -19 on the economy and on businesses.
So I thought we could just take a little step back and think about what we've learned during this week of like big news from big companies.
Great, and then Felix.
I brought a topic that is looking out a little further.
So we now have some sense of what the pandemic will look like and how it might end.
But I think there's a much bigger question now how it's going to go economically.
And so I thought just for us to talk about what do we know about recessions, what are the companies that are typically doing well during difficult times?
I think that should be a really interesting topic to think about.
Yeah, that looks great.
Okay, Mihir. So for the first time, we've started to actually hear about the effects of COVID -19 on the economy and on businesses through earnings releases.
So first quarter ended for a bunch of folks on March 31st, and we're getting a window into what effect it's had.
And in particular, this week we had a whole bunch of tech companies, Apple, Facebook, Google, Amazon, all come in with pretty big earnings announcements.
So I'm curious, young me, what were the big stories that kind of really struck you about this first look into what is happening to business and to the economy in a post COVID world?
Well, let's start with big tech, because you alluded to that.
So we are in the middle of a global economic shutdown.
Most companies around the world are understandably shrinking.
Meanwhile, big tech is growing.
Apple shut down hundreds of stores around the world and it grew sales.
Microsoft grew sales.
Amazon grew sales. Google.
Facebook now has a user base of three billion people.
All of these companies are taking hits to profitability for sure, but there doesn't seem to be any fundamental fragility in their business model.
And in fact, user dependence on these services has only grown.
And what that tells me is that any slowdown you see from them is what I would refer to as a speed bump.
This is not a detour.
This is just a speed bump from them.
And in fact, there is that saying, when the tide goes out, that's when you see who's been swimming naked.
Well, to me the takeaway is that these guys have not been swimming naked.
They are completely suited up, full scuba gear, ready for whatever is next.
On the other hand, my related takeaway is about who has been swimming naked.
And here I want to talk about Uber and Lyft.
Now, at the time we're taping this, neither of these companies have reported earnings yet, although they probably will have by the time you're listening to this.
But I want to talk about them anyway, because if you remember the entire premise behind these ride -sharing companies, the whole reason they were valued so highly to begin with was the idea that ride -sharing was not a fixed -cost business.
And therefore, the Uber platform, the Lyft platform, was just going to be this massive profit -generating machine.
Platform businesses are beautiful, because if you're Uber or Lyft, you're just a matchmaker.
You don't have to hire drivers.
You don't have to own any cars, which means that if your business contracts, your expenses automatically contract as well.
Compare this to say Hertz rental car.
For Hertz, this crisis should be, and is, by the way, a complete disaster.
But if you're Uber or Lyft, you should be able to weather this crisis because of your ability to variableize expenses.
But guess what? Just last week, Lyft announced it was laying off 17 % of its workforce, about 1 ,000 employees, and Uber indicated it was considering even larger cuts, 5 ,400 employees, including as many as 3 ,000 very precious engineers.
So I find this fascinating, and when I heard about these layoffs, my immediate thought was that this is a classic example of a couple of companies in trouble using this crisis as cover to dramatically restructure their business.
If this were a speed bump, they would be trying to hang on to as many of their most valuable employees as possible, trim a little bit here and there, and just ride the crisis out.
Uber ended the month of February with $10 billion in cash.
But the truth is, these guys have always been swimming naked.
They have never been profitable.
Even before the crisis hit, they were losing money.
Their business model in its current form is not sustainable, coronavirus or no coronavirus.
So this is not a speed bump.
This is a recognition that some fundamental restructuring is required.
In a way, it shines a very interesting light on some of the effects that you can expect from this downturn more generally.
Of course, every downturn is associated with so much pain, so much economic suffering.
But what happens in the labor market at the same time, of course, is that some people get reallocated to better jobs, to better companies.
So what you see when we come out of recessions, you sometimes have almost these miracle economies where you think, oh my God, how can it be that we're growing so fast?
And part of that effect is, I think, exactly what you're talking about, that we're spending time thinking about businesses whose business model didn't make that much sense to begin with.
And that's a very painful process.
But in the end, what you're looking at is actually a healthier economy.
This, I expect to be a big difference between, say, European economies with less flexible labor markets and the U .S.
where you have a more flexible labor market where more of that reallocation happens.
So it's more painful to begin with.
But then in the longer run, it also contributes to a healthier economy.
So, Jungmi, I'm totally with you on the UberLift piece of this puzzle.
And I think one way to say it is, it turns out they had more operating leverage than you would have thought.
Right? You know, which is they just, they grew and they grew in a way that was a little sloppy.
So that nirvana of a platform company turns out to be a lot more elusive than you think.
But, you know, I had kind of the same reaction to you, Jungmi, about big tech, but I want to flip it a little bit, which is, I too was stunned by their resilience.
And I think it's just amazing.
And if you dig a little deeper into it, it's really striking.
So all of these tech companies are so resilient because they're flexible.
So look at Apple. Now they have services revenue that are really a big deal.
You look at Facebook, it turns out travel and auto disappears from advertising, but then gaming and e -commerce shoots up.
So there is a lot of flexibility in their business models that I guess I didn't fully appreciate.
Having said all that, I came away thinking, yeah, they look resilient, but do we know really what long -term effects are?
Like, are they like at the beginning of a recession you might, or at the beginning of this COVID thing, you get a little shot.
But are they actually sustainable ways to kind of keep going?
So I take your point about the resilience and the flexibility, but I thought to myself, are we going to overread this?
And are we going to see the shoe drop?
Not now, but later.
You know, because their businesses are so different, it's hard to talk about them as a group, but I have to say each one was impressive in a different way.
So take Facebook, for example, Facebook, you could argue is among the more vulnerable of big tech because of the reliance on advertising.
On the other hand, as advertising comes back, the first kind that's going to come back is direct response advertising.
Brand advertising will be last.
And so Facebook and Google, they stand to benefit from that.
The second thing I would say about Facebook is if you were to try to identify, you know, in 2019, what would be the biggest vulnerability or warning signs that Facebook has to be really on top of, you would say, well, they've sort of hit a ceiling in terms of engagement and usage among young people,
and can they continue to add new users?
And they have completely busted through to another level.
They have proven themselves, but every one of these things is different.
Each one is different.
That's absolutely right.
They're going to invest $4 billion this next quarter they've announced.
The metrics don't always reveal everything because Amazon is going to take a big hit to profitability, but that's because they're in a position to invest heavily for this new post -COVID era.
So I just see them as getting bigger and bigger.
So I'm a little less optimistic than the two of you are, because I think a big part of what we see is just additional time available.
So, of course, if I'm sitting at home six, seven hours, like in particular young people now, you know, you can't be outside, you can't meet your friends, and as a result, you see demand for social media in particular go through the roof.
The larger trend before the crisis is some sort of Facebook fatigue.
You know, people check in a little less often.
Once they check in, they stay on site.
It's not quite as long as they used to.
And I think the big question in my mind is whether the current crisis doesn't accelerate this trend.
Well, yes, right now it's unusual because you have all this time on your hands.
You're going to spend a lot of time on Facebook, but a little bit like the way we talk about Zoom fatigue now that, oh my God, yet another video conference, you got to be kidding me.
That to me is the biggest concern.
I think there's a reading of the data that says, oh my God, people have sort of forgotten just how much fun it is to be on social media.
And I think the contrarian reading is to say, in the long run, this is just going to accelerate Facebook fatigue, just like Zoom fatigue.
This is an important contrarian view because it really underscores how hard it is to predict what a consumer trend is going to look like.
For example, you could argue that there are people who really hadn't fully embraced online shopping.
And now that they have to, this is online grocery shopping, buying stuff.
Or you could make the argument that the minute a store is open, they will be, thank God, I can actually go to a store and I can physically walk into a store.
So these things are very, very tough to predict.
So Felix, what did you take away from this?
So like the two of you, I like to look at these changes in consumer behavior and I like to think about which of these are long term, which of these are short term, and then how they affect the companies.
So my first example is a negative one where I think it's probably going to be short term.
You've seen in McDonald's earnings release, they suffer tremendously.
And the reason why is super simple, breakfast.
People don't go out for breakfast.
You just see like breakfast is so important for McDonald's.
And now that people, including me, can be in their pajamas until 11am, you're just not going out getting breakfast.
That I think is a trend.
My prediction would be that people will go back to their more traditional breakfast behavior once the pandemic is over.
The second company, which I think has a very different story is Mastercard.
We probably see Mastercard, not surprisingly, also not fantastic results.
But if you take a closer look, I think it's actually super, super interesting what happens.
The first thing to note is this is about as healthy a business as you can imagine going into the crisis.
Just so you know, I'm smiling.
So full disclosure, I am affiliated with this company, so I'm not weighing in, but I'm smiling.
Good. Yes, I can rarely miss an opportunity to make you smile.
So that is an added bonus.
So return on assets close to 30%, net profit margins, 40%, just an amazing business.
And then of course, they get hit the way you'd expect them to get hit.
So overall transactions, volume is about down 20 % right now.
And much more important is cross -border transactions.
That really hurts Mastercard in the short run.
But there are two things that are really amazing that actually bode so well for the business in the long run.
The first one is that transactions where the card is not present, essentially online transactions grew 40 % this quarter.
Why is this important?
This makes a big difference because now Mastercard can add services.
You might have seen when you shop online, there's this little window that pops up that says, oh, Mastercard is making sure you're safe.
They're checking against fraud and all of these.
And that's a completely different part of the business.
And I have a very hard time imagining that this is short run.
If I had to predict, I think that's a part of the business that is going to stay like this.
The second aspect of the business that is just doing amazingly well right now is B2B payments.
I looked up two numbers and both of them just really astounded me.
The first one is just the size of this market.
B2B payments, $125 trillion.
This is huge. And then even more astounding, 30 % of that transactions volume is cash or checks, like in the middle ages.
And what you see in the B2B payments market, as a result of the pandemic, it's going digital much more quickly than before.
And so again, Mastercard is one of these companies.
They're suffering right now for all the obvious reasons and they're very well positioned going forward.
I'll just make two comments.
One is, I think it's really important to realize that whenever you see migration in a particular direction, for example, in the direction of services, what you're seeing is the result of a lot of foresight on the part of management, because laying down the rails and building the infrastructure to enable
that, it's years in the making.
And so I don't think anyone at Mastercard had the foresight to think that a global pandemic would be upon us, but this migration to being a more full service company has been a long, long time in the making.
And then the second point I'll say is that the primary competitor for companies like Mastercard is cash.
Is cash, checks. Most of the world continues to transact that way.
And so in some ways, because the world is so uneven in its migration to using more digitalized forms of payment, it enables companies that have a little bit of foresight to leapfrog a little bit and bring them into a much more modern way of transacting that actually ends up being more secure and more
convenient as well.
Okay, so the future of breakfast, the future of spending, the future of big tech, we covered it all.
And we'll find out more about this when we can revisit these in the fall.
Okay, Felix. I am curious about the recession that we're going to have and how you think about success and failure during these recessions.
Thinking about what we know from previous recessions, thinking about what we know, who does typically well, who does not so well.
How do you think about the current landscape?
So Felix, are you referring to the winners and losers from a recession?
So part of it is winners and losers, but also if you had to do things in your company right now, what are good things to think about?
Of course, in aggregate, you see that some companies do much better than others coming out of these recessions.
And I'm curious how you think about what we know from past recessions, what applies, what doesn't apply, because this recession, remember, we shut down the economy.
This is very different from any sort of recession that we had in the recent past.
I think this is such an interesting topic, Felix, and unsurprisingly, I guess my first take on it is a little bit more financial, which is we've already seen the effects in this recession of companies that came in with too much debt.
So we know that companies like J.
Crew and Neiman Marcus are probably filing for bankruptcy very imminently, and that's going to be a legacy not just of the demand shortfall, but of a historic set of financing decisions.
Moreover, we know that from past recessions, that the access to credit that gets cut off and just literally running out of cash is a huge piece of what winnows out firms.
And so I've been particularly intrigued to see companies now doing huge debt offerings and huge financial transactions.
So Boeing raised $20 billion.
Snap raised a billion dollars of a convertible debt offering.
And of course, the legendary example of this is Amazon in 2000 doing a big convertible debt offering at the beginning of 2000 before the bubble bursts, which, you know, folklore is really allowed them to tie themselves through that very difficult period.
So why do you think that is?
I have that same intuition that during recessions, super hard to raise capital.
What's different this time?
Well, right. It may become like that, just to be clear, which is we may end up in a world like that.
But what's happening right now, I think is people are getting super opportunistic and they're saying we're going to get in there and we're going to raise a lot of money.
And I think that's really smart because we're going to see a winnowing out.
And then for the lower and middle tier firms, they're the ones who are going to struggle.
And for the entrants who couldn't get access to financing, they're the ones who are going to struggle.
That to me is one of the lessons because I think what's going to end up happening is companies with financial resources, when the shakeout happens, can do the big bets.
But the only ones who can do the big bets are the ones who have the financial resources.
That's the second piece, right?
Part of the culling, and I think we referred to this before, is that there are going to be a lot of cheap assets that begin to hit the market because a lot of these companies are going to end up failing.
And then the question is who's going to have the financial capability to go in and gobble those assets up.
And then to do the big bets, young me, which I think is the second important piece, it's not just financial, it's got to be a mindset, right?
So I think what happens during a recession is people hunker down and they get risk averse.
So you need financial resources and then you need the mindset, which is no, no, no, no, no, no.
Now is the time to double down.
And that will be really interesting.
Super interesting. I brought a little puzzle through this conversation.
So let me ask you. Uh -oh.
Here's the one that's good at puzzles.
I love puzzles. So what's common across these companies?
General Electric, General Motors, IBM, Disney, HP, Trader Joe's, FedEx, and Microsoft.
I think I do know this one.
Yeah. Trader Joe's is a giveaway.
They were all founded during major recessions.
That's exactly right.
Isn't that amazing?
Yeah. It is amazing.
And then so many of the companies that, you know, stay around have real staying power over long periods of time.
It's so counterintuitive to me.
Why do you think this is?
I think it's fascinating.
And I think there are a couple of stories that you can tell about this.
One is I think individuals inside companies and in general have the opportunity costs go way down.
And so they become a little bit more willing to take big risks.
So one story is I'm actually willing to kind of go out and do my own thing.
Why? Because my current situation is pretty poor and it got worse.
And so my opportunity cost goes way down.
I think the second thing is there is an attitude amongst some people at these times, which is they become a little bit more risk -loving and they want to control their destiny.
And I think at these moments you're like, I don't want to rely on that company.
I want to do things my way.
And so entrepreneurship can really kind of in some ways benefit from this.
Well, you said it sounds exactly right to me.
I had two more ideas.
One is spare capacity is sometimes a good thing if you're starting out.
So if you wanted to open a restaurant in a major American city before the pandemic, good luck finding any sort of real estate or space.
I'd imagine that now with the difficulties in the sector, that that is something that will become easier.
And Felix, that's not just spare capacity in real estate, it's equipment and it's talent and it's all kinds of things, right?
Exactly. Yeah. It has a little bit to do with this reallocation of talent and capital in the economy that we talked about before.
And then I think a second example, and this is probably, I don't know, the most valuable business ever started in a difficult time.
Alibaba's Taobao, the consumer platform, was founded during the SARS epidemic in China in 2003.
It was literally a team in Jack Ma's old apartment and they couldn't leave.
They had to work on this thing 24 seven, basically, because you couldn't go out.
And so there I think you see something else.
You see a shift in consumer behavior.
At that point in time, obviously online and the internet is like super new for China.
Not many people feel compelled to shop online.
And what you see in the Taobao business model is it's built for people who are hesitant.
So many of its features have to do with, oh my God, now I have to shop online because all the stores are closed.
I can't leave my house.
But I have so many concerns.
The whole business is basically built to alleviate those concerns.
And I think that's another big reason why you see successful entrepreneurship.
Its consumer behavior is forced in new directions.
And then some companies are just very good at picking up on what that means, how these business opportunities present themselves and what they mean for the longer term.
The telling thing to me about your story, Felix, is not just there's this shift in consumer sentiment, but I also love the team building aspect of that story, you know, which is you have a bunch of people hunkered down together and they're forced to think through things.
And I think that is an element of what is happening today, hopefully in enclaves around the world, which is you got a bunch of young people hunkered down together being like, we got to think a new way about the world.
And that is exciting.
And it's obviously great for building an incredible team as well.
Sometimes we forget, I think both for business as usual, but also life as usual, but just so many things that are routines where we never question how they're done, how we do things.
And then these big changes that are forced on us as a result of recessions.
They're both terrible, but they're also opportunities because we think so many of the things that normally we wouldn't really consider.
I remember many years ago, I did a little experiment with a grad student where we took a novel, a floor drain.
The plumbing business is not exactly known for innovation.
This is a PVC story, Young...
I was going to say PVC.
The season is down full circle.
Oh, my God. When you think about your toilet, it has...
Did you just say, when you think about your toilet?
Yes. So, how do you prevent sewer gases from entering your bathroom?
Think about that. Let's not.
I don't want to. So, someone had a really fantastic idea how to build a floor drain, how to build toilets that are much better than what we have today.
And so, these disruptions sort of in this complicated way can have long -term benefits.
OK, Pics, Felix, what do you have this week?
So, we're all cooking much more, I think, than usual.
And so, I thought I would recommend the cookbook.
The cookbook that I would like to talk about is by a French chef.
His name is Joélle Robichon.
And he's one of these French celebrity chefs best known for really delicious but really complicated food, super expensive restaurants.
But he has written a book that is called, not so modestly, The Complete Robichon.
And what I love about this book is that it has everything you can possibly think of.
You're not quite sure how to boil eggs.
There is a recipe for how to boil eggs.
You're not quite sure how to make a potato salad.
He gives you guidance which potatoes you should look for.
Is that simple? It's really, it's home cooking.
And I emphasize this because I find that many famous chefs, when they offer their home version, it's still completely inaccessible.
Here is really true.
This sounds almost like a book, Felix.
Like, could you actually read this book?
Because it seems like it would be fun to actually go through the recipes in a way.
So, part of it is all these little tricks.
So, you suffer through peeling fava beans.
He's going to tell you if you blanch them first, so much easier.
But part of it is also that each chapter starts with what you should pay attention to when you go to the store.
How do you pick fish?
How do you choose vegetables?
That's really nice.
What I like about this is it sounds for someone who is still learning.
It sounds like the on -ramp is pretty easy.
Does it have nice pictures, though?
It has no pictures.
Sorry. Seriously, yes, there's no pictures.
But drawings. Because it's not about the vast majority of these recipes.
You have eaten 25 times in your life.
There's no point in adding a picture.
Wow, okay. This sounds great.
So, I'll go next because it's the food theme.
Oh, okay. We're all thinking about food.
I'm going to food, too.
Yummy. Oh, my God. You can see where our heads are.
You're so coordinated.
So, this was a little different.
So, there is this New York City chef, Gabriel Hamilton, who ran a restaurant called Prune in the East Village, a small restaurant, just 14 tables.
And she wrote an article last week in the New York Times about the closing of her restaurant.
And every once in a while there's a story that just captures one sliver of this moment in time.
And she captures so well what it means to close a single restaurant.
It had so much detail about the hours, the work involved in running a restaurant.
It had so much financial detail.
It had so much unglamorous detail, blunt detail, but it was also so sensory, so colorful.
It had so much heart and soul.
It's an existential moment in her life, right?
Because this restaurant may not survive.
Or she doesn't know what her future is.
And I think it touched so many people.
I must have gotten like two dozen people who sent the article to me after I had read it, because I think many had exactly that same.
It was interesting to read, but then it was also so personal, so emotional at the same time.
Yeah, that's fantastic.
Yeah, it was beautiful.
This is why, that article really captures why there's so much emotionality around restaurants going under.
From a rational big picture perspective, when a single restaurant goes under, actually, it shouldn't be that big a deal, because another one will come along and replace it.
But from a more cultural, emotional, from a neighborhood perspective, it really is a big deal.
She was also on PBS's The Mind of a Chef.
There was an episode that featured her.
I'll include that link as well.
It's very good. It's from a few years ago about her restaurant.
Really gives you a sense of who she is.
Because when you read this article, you're going to want to just know more about her in a restaurant.
That's fantastic. So anyway, that's my pick.
And I'm here to close out the food recommendation section.
Well, yeah, so you guys went Gabriel Hamilton and Joel Robichon.
I'm going to go lowbrow, which is, I've recommended the Bon Appetit TV channel, and I've recommended, of course, our stand mixers, and they come together in this beautiful way, which is Claire Saffitz of the Bon Appetit TV channel had an episode about making pasta at home.
Oh, okay. And I decided to go for it, and I went for it.
And of course, it involves the stand mixer because the way you make pasta at home is you have these attachments to the stand mixer that help you roll out the pasta.
And we did it at home, and it was the best cooking experience I've ever had.
And it's because it is so much fun to do, so easy, and it's so magical.
Was it a mess? No, no, no, it was fine.
And you make this little well of flour, and then you put the eggs in, and, you know, it's just amazing.
And it comes out wonderfully, and you cook it in three minutes, and it's amazing.
And it's easy. And so I thought it brought together everything in my life, the stand mixer, Bon Appetit TV, and my developing domestic sauce.
You know what's my favorite moment when you make pasta?
It's like you have the flour, and then you push it to the side, you have the egg in the middle, and then you move the egg and you pick up the flour.
You're incorporating the flour.
Yes, exactly. I've never done that before.
I've never done that before.
Oh, it's the best thing.
I wish our listeners could see your faces right now.
It was such a magical moment.
They're glowing. Yes, it is so wonderful.
And Felix, everybody thinks it's really hard, but it's not.
Actually, it's not hard to do at all, and such a huge payoff.
I have not had the guts to try that.
I've seen that action that you're talking about, when you build the well and you put the egg in it.
I've seen that, but no, I can't...
So tactile and it's such a...
You've done it once, you cannot go back, I promise.
Really? It was fantastic.
So my pick is making pasta at home with the KitchenAid additions to your stand mixer.
This is like a season of lost, where all the interlocking pieces of different episodes, PVC piping and stand mixers all come together in the penultimate episodes.
Yeah, exactly. So we are out of time.
Thanks everyone for listening.
This is After Hours on the HBR Podcast Network.
