Morning Brew Daily - FTC Sues to Block Major Grocery Merger & BYD Taking Over the Car Market?

Episode Date: February 27, 2024

Episode 267: Neal and Toby explain why the FTC is suing to block another major merger, this time between two grocery giants. Plus BYD enters the luxury car game while also rolling our a $15,000 model that is putting auto makers on notice. Next up, Samsung is putting big money into the Galaxy Ring and Toby shares his favorite trends. Finally, why are there so many car washes? And Amazon finally joins the Dow. Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow Options are not suitable for all investors and carry significant risk. Certain complex options strategies carry additional risk. Options can be risky and are not suitable for all investors. See the Characteristics and Risks of Standardized Options to learn more. For each options transaction, Public Investing shares 50% of their order flow revenue as a rebate to help reduce your trading costs. This rebate will be displayed as a negative number in the “Additional Fees” column of your Trade Confirmation Statement and will be immediately reflected in the total dollars paid or received for the transaction. Order flow rebates are only issued for options trades and not for transactions involving other assets, including equities. For more information, refer to the Fee Schedule. All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Open to the Public Investing, Inc., member FINRA & SIPC. See public.com/#disclosures-main for more information. Learn more about your ad choices. Visit megaphone.fm/adchoices

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Good morning, Brew Daily Show. I'm Neil Fryman. And I'm Toby Howell. Today, the FTC wants to put the largest ever supermarket merger in the freezer section. Then beware Baconator lovers. Windy's is getting creative with a new burger pricing strategy. It's Tuesday, February 27th. Let's ride.

There might be a world in the not too distant future where humans are able to talk to whales. Seriously, a new Atlantic article highlighted a well-funded project that's bringing together leading AI researchers to decode sperm whales language. These whales communicate through clicking sequences known as codas. And if scientists spent enough time decoding these clicks paired with key tech breakthroughs, it's possible that eventually humans would be able to initiate a conversation with them, marking the first time two species living side by side for tens of millions of years would make contact with one another.

First of all, this is huge because hopefully we can tell the sperm whales to talk to their pals, the orcas, and tell them to stop seeing our ships, because if killer whales turn us, we are doomed as a species. But also, I feel like the scientists pick the wrong species to do this with. You got to go after the dog market first, right? That's how the first trillionaire is going to be born. If someone can invent a way to talk to dogs. But, Neil, I got to ask you, if you could talk to any animal, which animal would you choose? Well, I'm trying to get in better shape.

So I'd love to consult the best fitness influencer on Earth, the dung beetle. because the dung beetle is the strongest insect on earth, they're able to push balls of fresh animal poop that weigh more than 200 times their body weight. So I'd love just to know the regiment. That sentence never went in the direction that I was expecting it too. I thought when you said fitness, it was going to be like cardio fitness, so I thought maybe an antelope or something.

You're a muscle guy. That makes sense. Before we jump into the show today, we have a quick word from our sponsor, VIM. We're coming close to the end of February, which means we are close to the end of our VEM ads. Neil, what are some of your best VIM memories? So many, so many.

I liked when we discovered that VIM was founded by Ohio State grads, but still sponsored Morning Brew, even though we were founded by Michigan grads. Show you that cybersecurity and data recovery is a grand unifier. I, for one, am not looking into the past, but into the future. We've got a few more days left with VIM, and I intend to make each one of them count. But I also liked the ad where I said, VIM me up, Scotty.

That was classic. Veem might be departing the pod soon, but they will never leave your business out to do. dry, head to veme.com today. That's VEEAM.com today. Study and play. Come together on a Windows 11 PC. And for a limited time, college students get the best of both worlds. Get the Unreal College deal, everything you need, to study and play with select Windows 11 PCs. Eligible students get a year of Microsoft 365 premium and a year of Xbox GamePass Ultimate with a custom color Xbox wireless controller. Learn more at Windows.com

slash student offer. While supplies last, ends June 30th, terms at AKA.m.m.m.S. slash college PC. Stop me if you've heard this before, but the FTC is suing to block a major merger again. This time, the unlucky duo is Kroger and Albertsons. The two had agreed to a deal that would see Kroger snap up its grocery rival for $25 billion, which would have been the largest supermarket deals in history. Now everything is up in the air after the FTC filed a lawsuit in federal court, saying the deal would lead to higher food prices and less bargaining power for unions. There are a lot of subplots going on in this case.

The FDC is looking to string together some wins after a bumpy start to chair Lina Khan's career. President Biden is also looking on intently after explicitly calling out grocery stores for price gouging despite falling inflation. While Kroger and Albertsons say they need this merger in order to compete with the Walmarts, the Amazon's, and the Costco's of the world. Neil, where do you want to start here? Let's do maybe some Kroger Albertsons 101. Maybe just to set the stage here. Kroger's based in Cincinnati as about 2,700 stores. They own brands like Ralph Smith, Harris-Teter, and then you have Albertsons. They're based in Boise. They have 2,200 stores, Safeway, Shaw's,

those brands. Together, they would combine, they would account for 13% of the market, and their argument is that Walmart is the big guy here. They control 25% of the grocery market, followed by Amazon and Costco. So similar to what we saw with JetBlue and Spirit, linking up together or wanting to link up together in the airline market to take on the big four. That is Albertson and Kroger's play as well, saying we need to band together to take on these big guys because they're becoming a huge share of the grocery market, and we can't let that happen. Yeah, I think if you look ahead to how this thing might play out, the FDC is going to argue that Kroger and Albertsons are not competing with those people. They're competing with traditional supermarkets. And, again, on paper, it would make sense to block this because Kroger and Albertsons are the number one and number two largest supermarkets.

market chains. But you are correct in saying that Kroger and Albertsons are saying, that's not who we're competing against. We're competing against the much bigger players, the big box warehouse clubs, Costco's and Walmarts of the world. So I think the case will kind of come down to how a judge ends up interpreting the market and who Kroger and Albersons that are actually competing again. Right. So the FTC is saying that this merger will drive up food prices and grocery prices are absolutely in the spotlight over the past few years with inflation. They did do some research in the past, the FDC itself, on how grocery mergers did affect consumer prices. It wasn't clear cut that they would lead to higher prices. A paper from

2018 found that mergers in some markets resulted in price increases, but mergers in other markets, but in other markets, it led to actually price decreases. And that's Kroger and Albertson's argument that together, we would have much greater buying power and be able to reduce costs across the board. That's one half of kind of why the FTC is scrutinizing this, but the other half is kind of the labor portion of it. And this is kind of a major win for labor advocates, because it's only been recently that the FDC has been seriously taking into account whether mergers will lead to employers having excessive leverage over their employees, over their union. So I think this is a win, a checkmark in the book for labor advocates, which is not something you necessarily

always see considered in these mega mergers. Right. And the largest grocery store you has come out and oppose the deal. Meanwhile, there's this other bank deal going on, Capital One and Discover want to merge in a $35 billion deal. That has also attracted a lot of scrutiny. 13 top Democrats in Congress this week urge the Biden administration to reject that merger. So if you're trying to make a deal right now, it's tough going. If you are wondering what's keeping Elon Musk and other auto CEOs up at night, it's B.YD. The Chinese EV maker is going full beast mode, releasing a high-performance electric supercar priced at $233,000 and a budget, $15,000 sedan in the same week, showing that it aims to compete on both ends of the auto market

in its quest for world domination. There is little precedent for an automaker going up against both Lamborghini and the Toyota Corolla at the same time, but BYD is more confident than a dad manning the grill after dethroning Tesla as the world's top-selling EV maker in the fourth quarter of 23, and U.S.-based automakers are kind of freaking out about B.YD. Last week, the CEO of Chrysler-Panagan Stalantis said that BID's potential entrance to the U.S. market would be as disruptive as when Japanese cars arrived in the 1970s and South Korean vehicles in the 90s. Elon Musk, who previously laughed off BYD, recently said, and I quote, if there are not trade barriers established, BYD will pretty much demolish most other car

companies in the world because of their cost advantage. Toby, are we going to be driving our kids to soccer practice and BYDs? I don't know. I was peering through some of these pictures, and they do, especially the supercar. It looks pretty freaking cool. I will say it is interesting to see them try to run every single playbook at the same time. As you said, we've never seen someone debut a super luxury car to go after the luxury market and also the $16,000 dollar Toyota or Corolla killer.

And it's doing all that in the face of sagging demand for EV. So again, I do. think that is interesting that they are running this all-out push. Their stock is down 12% this year because investors are still saying, like, we're not sure if the demand for EVs is quite there yet. So I do love that they're throwing everything in the kitchen sink at it. It could go really well. They could take over the world. Or it could just fall flat because maybe the consumer demand isn't quite there yet. It's not. But over the past year, look, this company has grown so much, especially in the export business. They do make cars for the domestic Chinese market.

But they have grown so much in international markets as well, and that's what's kind of freaking out. These other automaker CEOs from Europe and in America, in 2022, they shipped 55,000 cars. The next year, that surged to 240,000 vehicles. So, BYD, because there isn't enough shipping capacity, actually, to send all these vehicles to these overseas markets, they're building their own shipping business. They've made their own ship to be able to send cars abroad. It's this very specific type of ship, too. To ship cars, you have this thing called the roll-on, roll-off ship, which allows you to, as you might expect, drive the cars on and off the ship.

Makes it much easier for loading. And there's just simply not enough of these type of ships out there. So the cost became exorbitant. So B-YD is like, listen, we're going to go vertically integrate essentially, and we're going to build our own ship. So it is a scary, it's not even a sleeping giant anymore. It's just a giant out there. So B-YD, definitely a name to keep your eye on. Samsung is getting into the ring game, Saran style, unveiling its newest wearable product in Barcelona at the Mobile World Congress yesterday.

The Galaxy Ring is a health tracking device that gives you heart rate readings, monitors your sleep, and provides you with a readiness score each morning. Samsung's team also hinted that stuff like non-invasive glucose monitoring and blood pressure sensing could be around the corner, as well as a feature that would allow the ring to carry out contactless payments. AI is also involved because, of course, it is. The vision is for an AI assistant to comb through all your health data and make sense of what you're seeing, ideally through and easy to interact with chat. With the aura ring already around in an Apple ring reportedly imminent, the wearable health wars are starting to heat up. Right. So this is in the same way that the Vision Pro from Apple is validating or legitimizing the headset market.

The same thing might be happening with rings. It's a small segment in the wearables market, but perhaps it could be growing. The company that pioneered, or it's generally considered to have pioneered, the smart ring is ORA finish company that's now worth over $2 billion, and it could be IPOing soon. And so Samsung coming into this space actually has ORA executive saying, look, we told you that this is going to become a thing. It's not just smart watches. It's not just AirPods that people are going to wear.

It's going to be these rings. This is the new playbook, too. Health tracking is kind of already a key. selling point of a lot of these smartphone manufacturers, a lot of these watch manufacturers, Samsung, Apple, Google, all are kind of adding these features to attract and then retain customers. Because remember, the smartphone market and the Wehrbolds market is decently saturated, especially smartphones. So how do you keep milking kind of revenue out of these additional users? And a lot of it is through their services business, their subscription business. And I think

health subscription business is going to be a major, major part of how these companies are going to grow revenue going forward. Right. Samsung is billing this as part of this connected care. And that's definitely in quotes around your home where your health tracking is not just going to be attached to one device because it won't just be your smart watch that you have to wear all the time. It won't just be this ring that you have to wear all the time. It's as you go about your home, there will be so many Samsung connected devices that will give you a holistic portrait of your health as you open up the refrigerator, as you put on your ring, as you put in your earphones, all of that kind of stuff will lead to this particular health score that you

have this dashboard. And I know you're big on this. You think ultimately everyone will have this health dashboard one day because of all of the things we're wearing that are connected to the internet and our bodies. Yeah, I think that Amazon's, or not Amazon's, Samsung's term for it, is ambient sensing. So, yeah, your refrigerator kind of pair up with your watts to let you know that you haven't eaten vegetables in 10 days, and maybe that's why you're not feeling so good. And yeah, I am very bullish on this. People are more invested in their health. We've talked a lot about longevity and how that is a growing market. So I think this is all part of the same system.

I do think that Apple's imminent debut, as a lot of analysts are saying, is also going to reshake up the market because Apple has probably the most robust suite of health features right now. I spend my time frequently going through, like, how's my cardio fitness looking? So I think that suddenly we're about to see this new arms race aided by AI as well, because health data is a little bit, sometimes you get caught in the weeds, and it would be nice to have an AI chat bot that can tell you like, hey, this is why your heart rate variability matters. This is why your cardio fitness matters. So very bullish on this space in general, and it was cool to see Samsung kind of unveil its latest gadget. Okay, we're going to hear a quick word

from our sponsors, but stick around because we got a hefty helping of Toby's trends coming up right after this. If you are craving a Wendy's Burger, I suggest suppressing those hunger pains until after lunchtime. And I'll tell you why in this edition of Toby's trends, where I, a rapidly aging Gen Zier, educate my ageless millennial co-host, Neil, about a recent trend I've had my eye on. So Wendy's new CEO is looking to test out a dynamic pricing strategy for their burgers starting in 2025. Under the new model, their 599 Dave's single quarter pounder burger might cost you as much as a dollar more if ordered during lunchtime. During mid-morning and late afternoon lulls, though, the price might fall by as much as a dollar. This surge pricing or

whatever you want to call it, has long been a staple of other industries. Ride sharing being the most common where Uber and Lyft jack up those prices if demand for their services is high. Now, Wendy's wants to utilize new electronic menu boards to dynamically change their prices as well. Neil, I'm on the fence about this trend, to be honest. Wendy's is already the most expensive fast food chain in the U.S., according to data from Price Leastow, and its prices rose 35% due to inflation between 2020 and 2022. This, just seems like a pathway to even more expensive burgers. It absolutely does.

And I have a theory about this in the restaurant industry. I think this is all enabled by the advent of digital menus, putting prices on a digital board instead of a paper one. Because in industries where dynamic pricing exists, airlines, ride sharing, we've only ever bought services through digital platforms. Like, you have no idea what the typical airfare from JFK to Phoenix is or what an Uber cost from your house to work. Restaurant prices historically have been on paper.

menus or physically printed. But now that digital menus exist, and Wendy's is investing $20 million in these digital billboards, these chains can basically disorient you into thinking you have no idea what the standard price of a cheeseburger is. So when you walk in, you'll just be like, all right, I guess I have to accept what this price is. And ultimately, I think most fast food chains are going to do dynamic pricing. And here I thought that those digital menu boards were just as though HD images of the Baconator I was about to order. But yes, we have actually seen this in the restaurant industry before. Stonegrate Group, which owns a bunch of pubs over in the UK, recently announced the adoption of surge pricing at 800 of its locations. Tons of people got really

mad about that. Consumer advocacy groups were calling it an unhappy hour surge. But StoneGate Group was like, this is a reality of the restaurant business these days. We have to kind of charge more during these peak hours in order to support our businesses. So it is certainly not just Wendy's. It is a risky pricing model, though, because we saw that backlash there. There's a survey from a software company called Captera that found that 52% of customers believe dynamic pricing in restaurants is the same as price gouging. And again, we've talked about it. AdNozum on this show that consumers are very, very sensitive to price gouging in the current

moment, in the current inflationary environment. So I think this is a fine line that Wendy's is walking here. Consumers absolutely hate dynamic pricing, but I just don't think there's anything they can do about it. Liveseeo last year said, I hate dynamic pricing. I hate surge pricing. We're going to get rid of it. Lyft still has it because a few months later, he's like, yeah, like, we're going to keep it.

I mean, it makes sense. If there's a Taylor Swift concert in town, we'd be very, very dumb not to jack up prices because there's way surging demand. So I just don't think this is going in a way. It's going to seep into more industries. My favorite instance of dynamic pricing, though, is something called the beer exchange. And that's kind of a beer stock market. It just closed down in Detroit, but there is still one in Kalamazoo. Michigan, where the prices fluctuate based on demand like a stock market.

And then every few instances during the day, there's a crash where all the prices plummet to their lowest prices ever for five minutes. And I think that is a funny little thing. Moving on, have you noticed that there are randomly a ton of car washes popping up in your neighborhood? You are not hallucinating. According to a report by Bloomberg, the number of car washes across America is surging, leading to pushback from some communities who consider them an invasive species. First, let's establish one thing. Car washes are one of the fastest growing categories in retail right now.

More car washes were built in the last decade than all the preceding years combined. There were 60,000 car washes across the U.S. right now, and the market is expected to double by 2030. Investors are foaming at the mouth about this high-margin business, scooping up mom-and-pop shops and consolidating their holdings. As Bloomberg described it, private equity has turned toward car washes with his zeses. zeal of a mid-century cartoon wolf sizing up a femme fatale. Sure. We were reading this Bloomberg article this morning and the first example that they led with was there's this town, Streetsboro in Ohio. It's got 17,500 people and four full-service car washes in town with a fifth being built. It is crazy. These are just fantastic businesses. Unlike, they're great for the people operating and

owning them, but not so great for the actual towns themselves. Unlike restaurants or businesses, They don't really pay taxes to their host communities. They also don't bring much of else to the table in terms of jobs. They're increasingly automated. They increasingly lead to traffic congestion. So you see why these cities and these states are kind of pushing back across this car wash explosion that we're seeing. It is funny. The reason that there's such good businesses, the automation, all that kind of things makes them terrible residents for cities.

and that Streetsboro town that you mentioned, actually put a moratorium on car washes, and an increasing number of places across the U.S. are doing that because they consider them a scourge in their... Scourge on their towns. I like scourge. That's what happens when you try to go do a big word. Yeah, absolutely.

I do think the car wash boom does reflect a broader change in society as well. You're not seeing like kind of the family on the weekends soaping down their car, studsing up their car, detailing it in their driveways. You are seeing much... People, much like oil changes, they're not doing themselves. They're going to these self-service places. The number of car washes done at professional facilities jump from 50% in 96 to 79% in 2021.

So, again, it is meeting a consumer demand. This is where the industry is kind of heading. And all these car washes are popping up saying, listen, we know you want it. So we're building now. And what particularly juicy characteristic of the car wash business that I did not realize maybe it's because I've been living in a city for so long. but this membership plan, basically you can sell memberships for $20 a month for unlimited car washes, the movie pass of car washes, and that is an incredible business. Some car washes are getting 80% of their revenue from subscriptions.

So to have that recurring revenue with margins of 50% or more, you can see why there are dozens and dozens of PE firms that are scooping up the last vestiges of the mom-and-pop car wash boom that existed during the 60s and 70s. And, I mean, if you're just a P.E. firm, I know it's not a mid-century cartoon wolf, but they are looking at car washes and saying this is possibly the best business I could ever imagine. Right. It's great margins. And they also are saying that Amazon can't ship a car wash. So there's not going to be this some big player coming in and massively innovating, cutting them out. So, again, a great, if you're a P.E. firm listening to this. They know. They know. They know. They know. Okay. Our final story, a club more exclusive than Augusta National just welcomed its. newest member. Yesterday, Amazon officially became part of the Dow Jones Industrial

Average, the iconic stock index that was created all the way back in 1896. Some consider inclusion in the Dow, like being inducted into the Hall of Fame of Corporate America since the index contains only 30 stocks. But since there are only 30 stocks in the Dow, Amazon had to bump one out, and the castaway would be Walgreens, which is getting the boot after its share price dropped 60% since it was added in 2018. The addition of Amherst, Amazon shows how the Dow is trying to stay relevant at a time when tech giants are dominating the stock market. The index is very old school. It's got industrial companies like Caterpillar, manufacturing giants like 3M and Honeywell, and consumer stalwarts like McDonald's and Coca-Cola.

But it's been slow to acknowledge the tech boom. And the addition of Amazon is its attempt to keep pace with a much broader S&P 500, which has been lapping the Dow in recent years. The Dow is so weird, man. So the Dow is a price-weighted index, which means stocks that have higher share prices are giving more weight. And the reason why the kind of the ripple effects of how Amazon got added is that Walmart did this three for one stock split, which essentially watered down Walmart's contribution to the Dow. And so to maintain kind of a normal level of exposure to consumer retail, which is obviously a huge part of the stock market, they needed to bring in another stock alongside Walmart. Amazon makes a ton of sense. They actually did their own

stock split back in 2022, which allowed their share price to come down to a level. in which they could get added to the Dow. But it just goes to show what an idiosyncratic exchange. I'll go further. I'll say it's useless. The first thing, when you walk into business school, I didn't go to business school, but I've heard the first thing they tell you when you walk into business school is the Dow does not tell you anything.

It is, don't pay attention to the Dow because it is weighted by share price, which makes no sense. The S&P 500 is weighted by market cap. So the bigger companies have bigger sway. That would make sense, right? But now you're saying Walmart did this three for one stock split. So its stock price is a third of what it was, and it contributes much less to the Dow. But nothing changed about the company.

It's still the same size. It just split its shares into thirds, but its size did not change. And now it has a much less weight in the Dow. It just makes absolutely no sense. We just use the Dow because it's there. It's such status quo bias. Yeah, it is hilarious how non-reflective the Dow truly is. I mean, you mentioned in kind of your intro of how saying that they wanted to get more exposures to these large-cap stocks,

but I'm going to list off some names that aren't in the Dow. Invita, Alphabet, Meta, Berkshire Hathaway, if they added that to the Dow would chain, would send the Dow skyrocketing because the share price is so high. So at least with the Amazon's inclusion, it gets a little bit more representative of kind of the reality that we live in. But, dang, this was just a Dow. It was a Dowbassing. I knew it was going to happen going in. But investors in Amazon are probably wondering, is this going to have a material effect on Amazon's share price?

And it is not likely to because there really aren't that many funds that are benchmarked to the Dow relative to the S&P 500. So there's really not an expectation that there will be a huge impact on Amazon stock price now that it's in the Dow. But it is a fun trivia fact that Amazon's in the Dow now. I think that is the ultimate conclusion here. That is our show for the day. Have a wonderful Tuesday. It's going to be 55 degrees here. Maybe Groundhog Day was right about early spring.

I'm going for a run outside for the first time in month, so I'm very excited. I'll miss you at the gym. Either way, make sure to send us any feedback you have on MBD to Morning Brew Daily at Morningbrew.com. Let's roll the credits. Emily Milliron is our editor and producer. Raymond Lou is our associate producer. Yuchinawa Ogu is our technical director. Billy Menino is on audio, the FTC sued to block hair and makeup smerger.

Devin Emery is our chief content officer and our show is a production of Morning Brew. Great show today, Neil. Let's run it back tomorrow.