Morning Brew Daily - Why Car Buying is About to Get Harder & Delta Loyalty is for the Rich

Episode Date: September 15, 2023

Episode 148: Neal and Toby discuss the UAW strike and its effects across the auto industry and US economy. It looks like Hot Labor Summer goes into the Fall. Next, another big splash in the IPO market that has Wall Street buzzin'. Then, a look into why decades of maintenance deferments to Libya's dam could've prevented one of the most devastating floods in history. Plus, big corporations giveth and taketh: Delta raises the bar for its Sky Lounge and McDonalds says goodbye to soda fountains. Lastly, want to help out your favorite actors & writers? Make a bid. Listen Here: https://link.chtbl.com/MBD Watch Here: https://www.youtube.com/@MorningBrewDailyShow Excited about entrepreneurship? Check out our other podcast, Founder’s Journal: https://link.chtbl.com/founders Learn more about your ad choices. Visit megaphone.fm/adchoices

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at pwc.com slash US slash brew AI. That's pwc.com slash us slash brewAI. Good morning brew daily show. I'm Neil Freyman. And I'm Toby Howell. On today's pod, auto workers have officially gone on strike against the big three Detroit automakers.

Plus, McDonald's is in its New Jersey gas station era by removing the ability to pump your own soda. Then the chip designer arm got a leg up on the market after its IPO yesterday. Plus, if you're listening to this in a Delta airport lounge, chug that mimosa because you might not be back anytime soon. It's Friday, September 15th. Let's ride.

Just want to begin by wishing a Shanatova to all our Jewish listeners. That's because Rocha Shana begins tonight and it celebrates the arrival of the Jewish New Year. Shanatova means happy new year. Some traditions include listening to the shofar, which is that ramshorn, dipping apples into honey and eating circular kala. Yeah, if you've ever seen that standard kala loaf, the tradition on Roshua, Rosh Hashanah is to make it into a circle to represent the cycle of the seasons. I'm not going to lie, my ears did perk up at apples and honey, because that's an underrated

combo right there. I do love Jewish holidays seem to have the best food. Is this an accurate statement? The best food. I mean, that's certainly debatable. I think the thing most often associated with Jewish holidays is that they commemorate something horrible that happened, but not Rosh Hashanah. This one's actually fun.

But, no, I mean, if you like matzabal soup and gefilte fish in these, like, classic Jewish, Eastern European foods, at least in my family, then yeah. All right. Am I getting the invite tonight to this? We're having a potluck. Just let me know what you're going to bring. All righty. All right, let's go to our first story. What may be the climax of Hot Strike Summer, the United Auto Workers Union began an unprecedented strike this morning against Detroit's Big Three automakers, GM, Ford, and Stalantis

after they failed to agree to a new contract before the 1159 p.m. deadline. We were fast asleep before then. This is a historic moment in the American labor movement. It's the first simultaneous strike at all three automakers, and it could become the second largest work stoppage in 25 years after the ongoing writer's strike. I keep saying could for now, because this is a targeted strike that's limited to 13,000 employees at specific factories, and the point of this strategy is to inflict maximum chaos without depleting the union strike fund.

If all 145,000 UAW employees went on strike immediately, then the union would need to spend $70 million a week from its $825 million strike fund to support workers, depleting its reserves rapidly. The idea is that since the U.S. Auto Factory is so interconnected, strikes at single plants could eventually bring down the whole system. Toby, we've been talking about this potential strike for months, and now it's here. We are really in our uncharted territory because the union typically goes after just one auto maker, but for the first time it's walking out on all three at the same time.

Yeah, it looks like the union is kind of zagging where people thought maybe they would zig because at one point, it was looking like maybe everyone would go on strike. And then we saw that it was going to be more targeted. But then some industry experts thought that they would be more strategic in the plants that they targeted because you're right, they're so interconnected that if you really, really went down and said, all right, we're going to strike at this plant, this plant, it could bring the entire system to its knees. although they didn't really do that

and they kind of picked some a little bit more at random which some industry experts were confused about but then also if you want Max chaos doing it at random kind of puts the automations on the back foot

so this was very strategic and very chaotic which is exactly what you want this guy president the president of the UAW Sean Fain has just been doing things completely differently than his predecessors

just making the demands very vocal whereas before it was kind of you kind of keep it close to the chest But they want a 40% pay bump over multiple years. And Fane is characterizing that as, you know, we want to be in line with inflation because auto workers pay has not kept up with inflation. And interestingly, he's making this class warfare argument by tying the pay increases to

the major pay bumps seen by the CEOs. So he's going full Bernie Sanders with this. I also think that what people are kind of coming to terms with is that they're negotiating this union contract under a much different economic reality than the last one. The last time they negotiated contract was 2007, 2008, when the automakers were really struggling, they were really strapped for cash. So they made a lot of concessions back then that right now they're trying to claw back. And yeah, some of the claims are a little outlandish. Like they want to reduce their work week to four days and 32 hours. And get paid for 40. And get paid for 40s, which, listen, isn't that the dream of

every single worker ever? I know. We need this guy negotiating for us. Yeah, exactly. So what does this mean for you? What will happen to the price of vehicles? And it seems like at least for most of the auto market, we won't see dramatic price increases because of a lack of supply or anything. There are a lot of non-UAW produced vehicles on the market. Think Hondas, Toyotas, and Teslas, they are not unionized under the UAW.

So those will be fine. Those will be in production. But certain models that are produced by these three automakers, like, the GM Tahoe or the Yukon SUV, those could eventually, depending on how long these strikes lasts, they could eventually dry up and off of auto dealers lots. And, you know, you might see some prices from certain in-demand models. Yeah. All right, Neil, let's move on. Usually we do stock the week, dog the week on Friday, but today we had a stock that was so important. We felt it deserved its own story. And that stock is the UK-based chip designer arm. Arm,

Arm went public yesterday, and it went well to say the least. Shares rose almost 25% as Arm went on to have the largest IPO in nearly two years with a closing market cap of $68 billion. Now, Arm is an interesting company. It's in the same space as Nvidia, which we know has been the best performing stock this year. But instead of manufacturing its chips like Nvidia, Arm's business centers on designing and licensing its intellectual property to customers. Mr. Wonderful would love this model. It's also got this crazy history where it was a public company from 1998 until 2016. Then SoftBank acquired the business and took it private for $32 billion.

Now, seven years later, after a failed acquisition attempt by NVIDIA, Arm has gone public again, which has been a nice win for SoftBank, which still owns 90% of the company. Neil, what stood out to you about Arms pretty dang successful debut? This business model, which I didn't know about, so they make chip, they don't make any chips. They make the blueprints. They're kind of the chip architects. And whenever you're in the chip business, I mean, nowadays, it's pretty good business. So they offer their designs for chips going pretty much every smartphone.

And then they earn royalties. And half of their total revenue comes from products they released between 1990 and 2012. So the CFO there, he's like, yeah, I'm sitting pretty here because, you know, all of these things are just making passive income for me as far back as the 90s. So we compared it to the Beatles. catalog. Yeah, it's our passive income king right there. Also, I do think, though, that the market may be a little bit over-exuberant because even though Arm has a lot of things going for it, it's got a nice business model operating in the hottest space that you can operate in right now. Right now, it's price to earnings multiple is about 170. Just to put that in perspective, that Nvidia, which

has had the best year we've seen in a while, has a price earnings multiple of 109. And it has that without NVIDIA's 170% growth forecast. So again, I think people might be getting a little head of their skis here. I know. This is not financial advice. But if you just compare the two, like they're in the same space, Nvidia clearly is on this massive growth trajectory. And yet Arm is valued out of a multiple that's way higher than VINC. And Arm is is pretty exposed to China, which we know can turn in an instant on you. But to zoom out, I mean, this is really big for the IPO market that's hit the skids this year. So far this year, there's only been 73 IPOs in the U.S. that's raised nearly $15 billion. In 2021, during the heyday of the IPO and SPAC boom,

companies raised $142 billion. So we're still far behind. But the fact that Arm did well is a signal that a bunch of these other companies that have been waiting in the wings, can say like, okay, investors are ready to spend and buy our stock if we go public. So you have Burke and stock, you have Instacart, and you have Clavio that are just waiting. waiting in the wing. Right. They were priced at the high end of their IPO range and it's still jumped from there. So yeah, it does look like people... IPO markets moving. We're back, baby. We're back. We are so back. All right, something we have not talked about on this podcast yet, but do need to touch on is this tragedy in Libya. More than 11,300 people have been killed in the city of

Durnah over 10,000 and over 10,000 remain missing after massive flooding from Storm Daniel, wiped out a quarter of the city on Monday. They sent entire neighborhoods out into the Miranda Terranian Sea. And some of the firsthand accounts you read are just unimaginably horrific. One eyewitness called this situation worse than death. What makes this all the more infuriating, though, is that it seems like human neglect and incompetence played a big role. The flooding was caused when two dams upstream of Durnah burst, unleashing 30 million cubic meters of water on a city, equivalent to 12,000 Olympic-sized swimming pools. These dams were in horrible shape. They were built by a Yugoslav construction,

company back in the 70s and had not undergone maintenance in two in over 20 years. And it wasn't exactly a secret these dams needed repair. A paper from SEBA University researchers last year warned that the dams had high potential for flood risk and the result of a flood would be catastrophic for the residents of the valley and the city. And that's exactly what happened. Yeah. I mean, you touched on it.

That's what's so infuriating about this is that the fact that everyone knew these dams were compromised and everyone knew they hadn't been having maintenance. also money for maintenance just evaporated according to $1.3 billion. Yeah, $1.3 million was allocated for the upkeep. And then according to a Wall Street Journal investigation, that money just went nowhere. There's also, there was $335 million allocated to rebuild the war-torn cities of Durna and Benghazi. That also ended up kind of in the midst of a political dispute.

So you're seeing something where money was potentially earmarked for these cities and for these dams, but they just clearly took. didn't go to it and this is what happened. This is like government corruption. I mean, there's this, Libya is, has been unstable since for a long time and especially since Moa Mara Gha Duffy was toppled in 2011. There's been so much infighting.

Right now in Libya, there's two different governments governing the East and the West. And so whenever money is, is sent for infrastructure, you know, it's gobbled up. And not sent to where it needs to be. A perfect example of kind of this infighting is that Dernas mayor issued an order on his official Facebook account.

to evacuate parts of the city. And then later, the military rule overruled that ruling and said that stay put and stay in your homes just had instituted a curfew. So that right there kind of shows exactly the type of infighting that ends up resulting in a tragedy like this. And there's also this oil angle because Libya is a major oil producer and oil prices jumped to over $90 a barrel for the first time this week in a while since November 17th, 2022, because a lot of these ports in Libya are not able to export oil now. And Libya is, I mean, its entire economy is based on oil. 98% of its revenues are from the production of crude. So, you know, we're just, it's just a terrible thing. Yeah, definitely thinking about Libya. All right, Neil, before we jump into our next story,

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One size, absolutely, does not fit all. Get a quote or find an agent today at thehartford.com slash small business. Neil, I have a confession to make. I've never been in an airport lounge before. So this next story was all a little bit foreign to me. But yesterday, Delta announced a slew of major changes to its loyalty program, and boy, are people upset. First things first, it's limiting how many times people can visit Sky Clubs

at airports. If you're an Amex, Platinum, or Sky Miles Reserve credit card holder, you will now be limited to six and ten Sky Club visits a year, respectively. And if that's not enough, your medallion status now doesn't take into account how many times you fly Delta a year. All that matters is how much money you spend on the card. Delta says that this simplifies things. And while that may be true, they also raise the spending bar. So even though the system is simpler, customers still need to spend more money to achieve the same status. And that's the big. thing that has Delta loyalist mad. You're asking me to spend more money to get less out of my status. All this to say, it was a tough PR day for Delta yesterday, Neil. It was, but I think this is probably

a strong business move. This is the way the industry is going. There are more rich people flying than ever that want to make the experience as comfortable as possible. And by getting Delta status, you can, you know, cut the line on various things, get, you know, access to lounges. And there's never been more people traveling, like in history, and especially at the upper income levels. So Delta and all these other airlines are saying, okay, how do we ring a little bit more money out of this huge demand that we're seeing? And this is one way. Yeah. And also, one of the big complaints over the past few years is how crowded these airport lounges have become. So then suddenly Delta says, okay, we're going to limit how many people it can come into them. And people are

really mad at that. So it is. Well, but that raises the allure of them for people who can afford it. See, again, it is this thing where, I mean, it is a savvy business move from Delta, but it is, you tow the line of how much can we push the envelope here to maximize our profits, maximize the alert of our lounges without kind of alienating these really loyal people who have been Amex holders, Delta card holders for a long, long time. Just to zoom out here, I mean, this business is remarkable. This business is remarkable. I mean, there is a common refrain that it's like airlines are actually credit card providers that fly planes. And they, I mean, I think Delta made $5.5 billion on this business last year. And the CEO

6.5. 6.5 billion. Thank you. And the CEO said that the amount of money consumers charged to Delta's co-branded line of Amex cards approaches 1% of US GDP. That's more than $268 billion. When you are measuring some of your business in terms of US GDP, that's how you know it's a massive business. That is crazy that it's flowing through these Delta cards. But I mean, big business spenders, as we said. Big business. Also, if we want to talk about the demand for airport lounges, United Airlines just opened a 35,000 square foot club at the Denver airport. I've been to the Denver airport a few times and it's seen it under construction. It's making me think United, honestly, because it looked really nice. That means you have to fly out of Newark here, though.

Oh, oh. I'll allow it. Okay. All right, we got to move on from lounge and credit card talk. It's always hard. Everyone has that friend, so I'll just talk credit cards for years. All right, the days of making the Shrek a combo of high sea blue power aid and Sprite are coming to an end at McDonald's. The fast food chain is getting rid of its self-served soda machines by 2032 at its U.S. restaurants,

and some locations in Illinois have already started removing the machines. McDonald's may not necessarily have anything against your grotesque soda concoctions. Instead, the move reflects changing consumer habits, specifically the shift away from in-store ordering toward apps and drive-thrus following the pandemic. This stat truly boggles the mind, but online sales now account for 40% of McDonald's total revenue, so it considers these soda machines redundant. For customers who've gotten used to remixing soft drinks and snagging free refills, it might come as a bit of a shock to the system, but this is the way the entire fast food

industry is going. Digital drive-through and delivery. The 3Ds. Yeah. I just made that up. That was good. I mean, McDonald's also, not only is it getting a ton of digital orders, its drive-thru business is still like the main cash cow. 70% of the change U.S. business comes via drive-thrus. Also, I was digging into McDonald's drive-thru innovation it's done over the years. There's been some wild stuff going on behind the scenes that we don't know about. In 2018, it acquired a decision engine for $300 million. And that tech, can adjust digital drive-through menus based on factors like time of day, weather, wait times, and even regional menu item popularity. Very cool. I remember that. I wrote about that morning

brew at 2018. You know. And then in 2019, some U.S. locations started testing recognition technology, and this is a little dystopian to me. It will recognize your license plate and predict your orders and make AI-based recommendations. That one's a little much for me, but I mean, it shows McDonald's has been innovating and on the AI wave before we even do. We were, yeah, we were like, what is AI in 2018? But let's get back to soda. What is your, what is your soda concoction? Because I know you just went ham.

Okay. You were the person who would do this. I mean, my biggest thing was always after soccer tournaments was Sprite and Powerade. It's not the Shrek, so it wouldn't have the high C in it. So it's just like a little sparkling powerade. And I still to this day think that is one of the best drinks. And if I don't know why someone hasn't made something like, I guess it's a fruity soda. Like, what is it?

Yeah, Sprite is too much sugar. I mean, how much sugar? There must be a lot of sugar in there. Usually you do just like a salsa or a soda with powder or something to make it sparkly. But Sprite and Powerade, I mean, it's candy. It's delicious. Sprite and X. Sprite and lemonade was my second one.

And then if I was feeling really, my mom used to always put a lemon in her diet Pepsi. So I would go in to do Pepsi and lemonade and feel like really, really fancy about that. So, yeah, basically any combination of Sprite, lemonade, Powerade, I'm on board with that. Although I'd never heard of the Shrek before. but it's got that green color so I can see why Macy was talking to us about the show. I think she made it up. It's a beautiful thing.

I love that. All right, Neil, I have a very fun story to end this week of shows. So as we all know, the writer and actor's strike is still going on in Hollywood and a deal doesn't appear to be materializing anytime soon.

That's left thousands of production workers at risk of losing important health insurance and other benefits. So a newly formed organization called the Union Solidarity Coalition is taking matters into its own hands to help raise money for its members, and it's doing so in a very creative way.

Celebrities are auctioning off unique experiences on eBay, ranging from 20 minutes and 20 questions with Maggie Jillon Hall for $910, to a dinner with Bob Odenkirk and David Cross that has a current bid of $9,100. There's other experiences like the cast of Bob's Burger singing you happy birthday or just hopping on a Zoom call with the cast of New Girl, But, Neil, they were all going super viral on social media yesterday. Were there any of the ones you saw and you were like, ah, I would totally buy that one?

Definitely Bob Odenkirk and David Cross because many people may not know this, but Bob Odenkirk from who plays Saul Goodman and David Cross, who plays, what's his name on Arrested Development? Tobias, yeah. They were on a sketch show back in the day on HBO, like a really rudimentary sketch show called Mr. Show. And it was very funny. And so I think, like, super fans of that will want to get in on Bob and David. I think that was the top item, the top, the highest bid last time. Yeah, those guys are legendary. Also, I did like this one.

I don't have a dog, but Adam Scott from Parks and Rec and Step Brothers and Severance, I think he's a great actor. He's super funny. He will walk your dog for one hour, but it's only for dog owners based in L.A., so I won't be able to do that. That one stood out to me. And you also don't have a dog. Also, in terms of dogs,

You can get a watercolor portrait of your dog from John Lithgrove, who I didn't know this, but he's actually the voice of Lord Farquod in direct. Yes, I didn't know that. So I was looking into his voice acting, but people, a lot of dog theme ones were popular. But in terms of virality, I think they absolutely nailed this. If you're going to launch a fundraiser in the year 2023, having it go viral is probably one of the biggest things you can do. It reminded me, honestly, of remember the Barbie marketing stunt where you could put your face on the Barbie marketing material? It was similar in that where people started making their own versions of crazy things that celebrities might offer. And like there was a staring contest with Cillian Murphy for like a million dollars or something like that.

You can sit, this is my favorite one. You can sit in absolute silence with Nathan Fielder for an hour. Yeah. See, those are the made up ones. But it made me wish that they would take a cue from social media and actually offer those. Because people would pay a lot of money for those. Okay, that is all the time we have for today's show. hope everyone gets through Friday without too much stress and has a wonderful weekend. As always,

you can hit us up with your thoughts on the show at our email Morning Brew Daily at MorningBrew.com. Let's roll the credits. Samantha Velas is our editor and producer. The Shrek creator, Macy Gilliam and Raymond Lou are associate producers. Yuchenoa Ogu is back as our technical director. Billy Menino is on audio. We're selling a one-hour styling session with hair and makeup and the bidding starts at $2,000. Devin Emery is our chief content officer and our show is a production of Good show today, Neil. I wish you all well. Yamava Resort and Casino at San Manuel is California's number one entertainment destination for today's superstars. Catch the Jonas Brothers return to the Yamava Theater stage on April 30th,

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