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Carvana, Ally, and Prime vs Non-Prime Auto Loan Gross Profit

We estimate Carvana finances ~75% of vehicles it sells. According to old Carvana ABS docs, out of the ~75% of cars financed, there is a 60/40 split in prime and subprime loans. 

The profit per loan is driven by the excess spread of the interest rate paid by the customer minus the annualised losses and other servicing, credit enhancement and cost of funds. The table below from our H1 2022 research on CVNA finance GPU highlights the difference in prime and subprime loan profitability. The 2021-N1 column represents one of CVNAs 2021 non-prime ABS pools, P-1 is a prime pool. Back in the days when rates were rock bottom...

Prime customers are safer, but less profitable. Subprime loans are more profitable. Carvana is the only large auto retailer that originates subprime and prime loans. Carmax, or CAF, underwrites prime paper. This highlights why comparing KMX and CVNA finance gpu is not apples-to-apples. 

Subprime is important not only because it’s more profitable, but it’s more difficult. It’s riskier. It requires an underwriting edge. This is where CVNA claims it can drive lower losses and better performance for lower FICO scores. 

This interview with a Former Ally Director, with years of experience working with Carvana and the Garcias, explores the differences underwriting prime and subprime customers. Prime customers with FICO of 700 or above all behave similarly. Underwriting becomes a real edge below 620:

When you're talking about a FICO score of 700 and above, anyone can approve those. When you start looking at the middle of the credit curve to subprime, below 680 and especially below 620, that's where you need a person to look more closely at the transaction and the customer to make the right decision. You're dealing with a customer with spotty credit performance, like paying slowly on almost everything. You want to look at their previous auto performance. Being late is one thing, but do they have a bankruptcy or prior repossession? You'll see more of these issues with customers below 620, leading to lumpy credits. You have to determine what happened three, four, or five years ago; was it a job issue, medical problem, divorce, or something else? - Former Executive at Ally Financial

We also explore the impact of the lengthening of loan terms, vehicle quality, and accident frequency on subprime loan profitability. 

That's one of the biggest changes that happened during my career at Ally Financial. I mean, 48 months was kind of the standard, and then suddenly 60 months became the new 48, and now it's 72, and even 84 months. Some banks are going up to 96 months. Because the terms have been elongated, the problem is the depreciation rate on a vehicle, especially a new one, drops off a cliff as soon as the customer drives it. So it takes much longer for the customer to build equity in that vehicle. - Former Executive at Ally Financial

We plan on publishing more work on Carvana’s subprime loan business over the coming weeks. 

Broadcom: Operating Philosophy & Culture

This interview with a Former Broadcom Senior Executive explores management and company culture:

Hock loves to use the $1 million per employee metric. When I was there, it was $1.3 million per employee, and it even reached $1.6 million at one point. He often talked about it. Broadcom's management approach is more centralized and resembles a private equity model. It's essentially a private equity-like strategy of acquiring businesses, improving margins, paying off debt, and repeating the process. This is why it's like a playbook of acquisitions that increase margins. He's famous for this approach. He doesn't like to focus on technical aspects. Instead, he wants to see metrics like EBITDA, financial revenue, percentage changes, and revenue growth. If you look at Broadcom's history, from LSI to Avago to Brocade to CA to Symantec, the model is to acquire a business, improve margins, pay off debt, and repeat. They won't hesitate to spin off a company. For example, they spun off a company from VMware's Security Division and sold some assets. - Former Senior Executive at Broadcom

Hermès: Pricing & Quota Bag System

Hermès follows a notoriously disciplined quota system to determine which customers get the opportunity to buy a Kelly or Birkin bag. Even customers spending over 40,000 EUR in one trip may not get the offer:

I would say 60% of clients purchase the quota bags as their first bag, and 40% as a second or third bag. I say this because we have a historic clientele with access, and then we have exceptional clients who also have access. So, yes, I would say 60/40. They manage to maintain the durability of the bag because it's so difficult to get one. They are willing to wait a year or a year and a half to get the second one. It takes time. Yes, sure. I have a good example from the Paris store. The boutique on Sèvres, not the flagship on Faubourg. A very wealthy client spent more than €45,000 on various items, but was not offered a Kelly or Birkin bag. They really choose the clients they want to offer bags to. - Former Merchandising Executive at Hermes

Just Eat Takeaway vs Wolt Germany & Employed Courier Models

In 2021, DoorDash acquired Wolt, a European food delivery company, for $8.1bn in stock. The equity issued as part of the deal was valued at $207 per share, ~20% from ATH and a level the stock has yet to reach since. Similar to DoorDash, Wolt deployed a delivery-focused strategy with premium restaurants across Europe. Over the last few years, the company has won share in Berlin from Just Eat Takeaway’s Liefrando brand, the German market leader. 

Wolt focused on cities and signed local heroes like Burgermeister to build a brand and order density:  

The medium to premium local heroes, like Burgermeister, are well-known in Berlin but not outside of it. Risa Chicken, for example, are similar to KFC here, quite famous locally. They have a very localized approach, not trying to onboard everyone, but being selective to create density. Strategically, they look at city centers, identify good restaurants from Google reviews, and then aim to create density by attracting important brands and expanding. - Former Senior Executive at Wolt

But Germany is an "employed courier” market. The order density and take rate from top restaurants like Burgermeister required to cover the 17 EUR per hour driver salary is difficult. 

I don't know the exact profitability numbers, but Germany was definitely one of the markets lagging in profitability. They never showed us the numbers, but I know it's one of the least profitable countries because of that. Wherever they have a platform business, or rather a marketplace business, they were much more profitable. - Former Senior Executive at Wolt

This also highlights why ~50% of orders are fulfilled by employed drivers from third-parties, not direct employees of Wolt or Liefrando. 

One reason is it's a legal gray zone. We never really started with this because we didn't know if the government would crack down on it. It was a strategic or legal question. The second reason is the premium delivery you get from your own operated couriers. Lieferando also uses 3PLs, but they are not as good quality-wise. For example, if you have a 3PL with 10 couriers and they engage in account sharing, they might have another 20 couriers in their pockets. Today, Bob might be delivering, but tomorrow it's Bob's account again, and David is delivering instead. This kind of practice is always shady. You cannot quickly remove them from the system. That's the issue. You cannot perform any performance management because you're not allowed to do so in this 3PL relationship. - Former Senior Executive at Wolt

This interview with a Senior Executive at Wolt explores the German food delivery market and potential risks to Liefrando’s profitability.

Vitrolife Group & the IVF Treatment Process

According to the WHO, 1 in 6 people are affected by infertility. The global birth rate has dropped from 5 births per woman to 2.3 over the past 50 years. The primary reasons seem cultural; women are choosing to have children later in life. There are also other lifestyle factors like smoking, alcohol use and obesity that affect the fertility of men and women. This IP Company Learning journey curates our recent work on Vitrolife, a leading equipment for IVF treatment. We cover the following:

CellaVision: 25 Year of Hematology Market History

This interview with a 40 year industry veteran explores the evolution of hematology analyzers over the past 25 years. We focus on how Sysmex, which accounts for >70% of CellaVision's revenue in 2023, grew to market leadership and the relationship with CellaVision.

the turning point was in the mid-2000s, around 2008, when Sysmex secured LabCorp, one of the two largest reference laboratories, the other being Quest. Sysmex's strategy focused on process improvement and operational efficiency. Hematology analyzers use a lot of a particular reagent, a diluent, which comes in 20-liter containers, weighing 22 to 23 kilograms each time you move one. - Former Commercial Executive at Sysmex

Within a decade, Sysmex went from ~50% the size of Beckman Coulter in the US to dominating the large labs with ~80% market share. By partnering with Sysmex and co-developing the DI-60 analyzer + digital morphology platform, CellaVision bet on the eventual market leader.

That was a key component in the rise of the importance of CellaVision within the Sysmex portfolio. Due to our collaborative relationship and growth, people began to think, "We have automation on the Sysmex platform and automated slide review. Wouldn't it be great to connect the two?" Discussions evidently took place, although I wasn't involved. One day, the development team in Japan asked for a forecast of what this could look like. I thought, "Nice, we can do that." I was delighted when the Di-60 didn't stop sales of either the DM96 or the DM1200 because there were other opportunities for those, as not every laboratory had XN technology at that time. - Former Commercial Executive at Sysmex

DI-60 sales eventually overtook CellaVision's standalone products, highlighting the reliance on Sysmex' distribution and product integration. We are planning on sharing our learnings about digital hematology leader CellaVision during Q1.