The Canadian Investor - 20 stocks ranked on their pricing power

Episode Date: January 31, 2022

In this episode of the Canadian Investor Podcast, we rank about 20 businesses on a scale of 1 to 5 based on their pricing power. https://thecanadianinvestorpodcast.com/ Canadian Investor Podcast Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Stratosphere 🚀 https://www.stratosphereinvesting.com/ Tickers of stock discussed: COST, LULU, CTC.TO, SBUX, ETSY, AC.TO, AMZN, TDG, L.TO, DOL.TO, TD.TO, MSFT, INTU, TTD, CRWD, U, OKTA, MDB, HUBS, SU.TO, CNQ.TO, SPOT, NFLX, AAPLSee omnystudio.com/listener for privacy information.

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My name is Brayden Dennis, as always joined by the man, Simon Belanger. Today we have a sweet episode because we're going to go through around 20 companies one by one and rank them on their pricing power. The reason that we find this so important is because we talk about it time and time again, is the companies that are able to increase prices are the best performing companies over time. All else being equal, pricing power is such an important metric. Simon, why do you think it's so important right now as well more than ever? Yeah, it's really important.

I mean, we've been talking about it. People have been seeing it in their everyday lives. Inflation is real. Prices are going up. We're seeing it every day. But as an investor, inflation can be actually quite a bit different. Yes, it'll put pressure on things like margins, higher costs from labor, materials, service providers, and more. And that can create problems for a lot of businesses. But if they do have pricing power, they can usually limit that impact or even

negate it in some cases where they can simply raise prices today we're gonna have a fun one like you just mentioned we'll go over about 20 companies or so and rank them from 1 to 5 1 being the lowest and 5 the highest based on their pricing power and maybe even you know we'll have a zero in there I don't know we'll see yeah we'll go off the scale for zero all right well it's. There's no rules in this podcast, so we can do whatever we want. Speaking of this podcast, if you have not given it a ranking, a rating in your podcast player, if you're on Apple Podcasts, if you're on Spotify,

that's a new option. It really helps the podcast grow., we are top 20 in all podcast categories in this country now. Top 20, number 18 to be exact, which is sweet. So we really appreciate y'all tuning in. It really means a lot. And this has gone way beyond what we possibly thought would be possible. So thanks so much for the support. Simon, do you want to kick us off here with your first company? Yeah, yeah, definitely. So the first one, a name everyone has heard of, a company we've talked about before, Costco. So Costco, actually, they increase their

membership fees about every five years or so. And the last time they did that was on June 1st, 2017. The reason why I'm mentioning membership fees is because that's the main like really where Costco gets like the bulk of their profits. They do get small margins on the actual items, but memberships are the biggest driver for Costco. And at the time, so in June 1st, 2017, the membership prices were increased by $5 for the gold membership and $10 for the executive membership. So that brought them to $60 and $120 respectively. These prices are still in effect today. So Costco, obviously, if they're true to their schedule, they're probably going to be doing a price hike on their membership fees this

year I guess it remains to be seen but they've if you look at their history that's pretty much on the ball every five years or so so in 2021 for context Costco's renewal rate of membership was 91% in the US and Canada and 89% worldwide so that's amazing when you think that they also get a bunch of new memberships right every year. And I also went to look at their 2018 10K. So the reason I wanted to look at the 2018 and the 10K is just their annual report because they file in the States. It's because their fiscal year ended on September 2nd, 2018. So almost like a year after that membership rate hike that I just talked about before. So I think looking at the membership renewal in that 2018 annual report will be a good indicator. And the numbers I found were that they were almost identical to the ones

from 2021, which was 90% for the US and Canada and 88% worldwide. So I think for me, it's safe to say that Costco has some pretty good pricing power. I don't think it's unlimited. Like I don't think they could go and raise their prices for membership by $5, $10 every year. But given that they seem to have a pretty good recipe here, I would give them a four out of five. It's funny because Costco, on the huge rev base of what they sell as a retail play, they're optimized for the lowest margins possible, the lowest gross margins possible. You're looking at around 10% to 12%. By the way, looking at Walmart, for instance, as a comparable is about double that of Costco. So you might be thinking like, oh, why do they have such bad margins? Like, why is that?

And you realize it's because that's their whole model. That's their whole value proposition. And that's why it's such a good business. It took me a while to figure out the Costco story. And then it hits you like a bag of bricks. Phenomenal company. We talk about them all the time. I'm on board with four out of five. Although I think they could get away with more hikes. Probably.

And I think that they should, but it kind of goes against what they do. That's where I'm kind of thinking like almost three and a half because they're so loyal to their members that they won't increase it. Yeah. I mean, for a lot of these businesses, I think that's always going to be the case, right? It's always a fine line between pricing power and getting it just right and then increasing too much. So that's why I think they have a good recipe right now. I wouldn't mess with success. So that's why I kind of, I gave it that four out of five, but we're just arguing on, on semantics there. So you did your notes earlier on this.

Oh, by the way, we had to start a new Google doc for the podcast notes because we had so many graphs, so many figures, so many stats on the history of this podcast that the Google document just wouldn't open. It was freezing. And then I know I sent you a text and then you started a new document because you noticed the same thing. It just wasn't working. So anyway, Simon did his notes beforehand and I was shocked that I had Lululemon available. I thought you were going to pick it right away. So this goes without saying, I mean, look, they sell expensive athletic athleisure apparel. And people line up to pay well above comp prices.

Their customers, you know, including the two dudes who host this podcast at the moment, are willing to pay $150 for a pair of pants because they feel amazing for, you know, chilling at home, working out at the office. These things are fresh. All right. So Lulu, by the way, come sponsor the podcast. Look at all this promo we do for your company. You're welcome. Every business has what is called the willingness to pay scale. Every business has it. And most businesses should at least know roughly their willingness to pay scale. The Lululemon customer willingness to pay scale is just ridiculous. They sport a 56% gross margin on clothing. And I'm going to be talking about gross margin so much today, just given the nature of the conversation. Nike's around usually like 10% on GMs, a company that already has some nice

pricing power and brand awareness. Under Armour is in that similar ballpark. Aritzia, you're looking at like sub 40% gross margins. I don't really need to name further comps here. It's Lulu. They have wonderful pricing power. This is like full marks, five out of five for me personally. Yeah. Yeah. I agree with what you you said i mean i i'm willing to pay a decent penny for for their clothes because they're like you said they're so comfortable they last for a long time and i know my wife is i mean she buys so much lulu i sometimes i even wonder like i'm glad i'm a shareholder now but uh sometimes i'm like don't you already have this

about five times like it's uh that's a reaction i have but i would say yeah for me it's probably a four out of five or five out of five it doesn't get much it doesn't get better than that i think in the clothing uh line in terms of pricing power in the category yeah exactly so the next one uh so i made sure to add at least a couple canadian names in there and the next one one is definitely a Canadian name just with its name, Canadian Tire. This is an interesting one because you don't have a membership base like you do for Costco. So it's a bit harder to gauge how often people are returning. But my view is that they probably have some pricing power, but they have some pretty large competitors.

So I think it does limit it and their competitors are very massive so I'm thinking here companies like Home Depot, Lowe's, Loblaws for certain categories and Genuine Parts Company also known as Napa Auto Parts in Canada that's one of their subsidiaries so they're competing against some big players who have a lot of purchasing power and you know i'll be the first one to admit canadian tires are much better than i thought when the pandemic started because their online experience was a complete debacle but they really really kind of picked up some steam since then so they seem to have invested quite a bit but because they they're really there's a lot of competition there's no

differentiator in my view compared to their competitors to me it's it's a two out of five i just can't see it much more than that i don't know about you brayden i i think the you know we bash on canadian tire quite a bit especially when they just they do some things just backwards especially when they didn't have do some things just backwards, especially when they didn't have, they were just not ready to do business when the pandemic started that we were pretty vocal about that, but they do have a bunch of other interesting assets in the brand. Like pro hockey life has definitely has pricing power as a retailer. That's a, that's a great, that's a cool store. I don't know if you play hockey and you go to pro hockey life, it's a fun time. Definitely you can spend a ton of money there. So I mean, I don't think I've given them enough credit. And I do think they actually do have an interesting house of brands

at this point. They just lack the ability to scale outside of this country. And that's why it's just not that interesting for me. Yeah. So how much would you give them? Maybe like a 2.5, 3? Yeah. It's a retailer. We're talking so much about retailers here. So if we're doing like comps on retailers, yeah, somewhere around 2. That sounds about right. Yeah. That's kind of where I was coming from. And just the fact that they just have some big competitors in this space. That was my other thing. But no, I think you have some good arguments. For sure.

Yeah. Starbucks, I'm going back to another highly priced, positioned product in the industry that they compete in. You know, in the world of coffee, Starbucks' worldwide brand is one of the best in the world. It just is. And you know what you're going to get. You know the experience you're going to get. You know what it's going to feel like when you walk in one of their locations and you roll up knowing full well that you're going

to pay significantly more than if you buy a Timmy's Double Double. There's a reason that Starbucks has very consistent earnings per share growth of 16% competitive growth rate. They have a relatively easy playbook to follow, and it includes pricing power. Open more stores, get more lucrative margins on a cup of coffee, the odd banana bread, and increase that average ticket size year over year. So ticket size is one of the most important metrics to track for Starbucks. They consistently grow at around 3% to 5% per year. Now, this number that they point out, and by the way, they're very vocal in their 10 cues about their ticket spend, how much an average customer is

spending. They're quite easily able to increase prices over time to drive that metric among some of the other growth levers they can pull, but pricing power absolutely helps for sure. I'm giving them a four out of five. If there's a limit to the increases due to the basket size, due to that ticket size for an average purchase, they're kind of constrained from that perspective. But when it comes to increasing prices well in excess of inflation, Starbucks is one of the golden childs of that. Yeah, I'm going to say a three And I'll tell you why I think it's a bit lower. And this is probably when you were quite young. So I'm not sure when if you would have remembered, but I'm actually not playing with you. I'm actually being saying that for real. No, no, I'm all.

Like I mentioned a few episodes ago, I was in in Taiwan in 2007. And back then, actually, Starbucks, their prices were, I think if I remember correctly, higher than they are right now. So they were so high at some point that they had to trim them back because they were seeing that they were losing business and it was hurting the brand. And I think that's probably around the time, and I'm just going on memory here, but that's probably around the time Howard Schultz took over. Maybe it was a bit after that. But they had to do, I think, a big overall of their whole pricing strategy. But I agree with you that now it seems like they do have a good amount of pricing power.

But I think there's also a limit to what price people will pay for expensive coffee. So I think that's why I'll give it a three out of five, just because I remember that specifically. It used to be it was ridiculous. It was like $8, $9 US in 2007 in Taiwan for Grande. Right. Yeah. Yeah, and I totally understand your perspective there,

and I agree fully with the sentiment because where they're positioned in the market right now, there are still other coffee shops that you can go if you're a true coffee snob and want to pay $10 for a cup. Those places do exist and they would be far in excess what you would pay at Starbucks. So yeah, no, I agree with that. I don't think they're a perfect five due to all of those things mentioned however they do have pricing power i think we can agree on that yeah yeah definitely so now the next one etsy so everyone knows i've said it before i own etsy uh it's been definitely one of my better investments uh for those who aren't aware etsy makes money primarily in three ways. So they charge a fee on the final sale of an item of 5%.

A listing fee that's 20 cents per item. And have fees for other services like promoted listing and payment processing. So this is a bit of a weird one when it comes to pricing power. Because I think their merchants for the most part will probably probably have some pricing power because these are craft goods. And they might not be available locally in some places. So people have to resort to this platform to get those craft goods. So I think if their merchants are able to increase those prices, it indirectly gives them pricing power, right? Because they have that 5% fee. But I don't think they have much leeway in increasing that 5%.

They did a few years ago when new management came in, they did a little bit, but I don't think, I mean, 5% is fairly high. I just don't think merchant would take an increase very well. The one place where I think there could be some increases is that listing fee that's currently at $0.20. Maybe there's a bit of flexibility there in increasing it to say $0.25 or something like that. But for me, I think it would be probably a 3.5 out of 5, but it's kind of an indirect pricing power. These platforms or payment providers that basically have a take rate on the GMV that's coming out of the business, they're very resistant in the fact that the sellers on the platform have pricing power. Yeah, exactly.

That's where they're able to take the take rate on that. But yeah, I know what you mean. It's kind of like Visa, MasterCard, they only take between 12 and 14 basis points take rate on a transaction. But it would be ridiculous for me to say in my bull thesis that I think they can expand that if anything, take rates are going to be attacked over the next decade. So it's an interesting one where it's like, yes, they do. But take rates, I think across the board for almost every company will be under attack, not only from a competitive landscape, but also from a regulatory landscape for the next however many years, I think personally.

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details. That is questrade.com. Calling all DIY do-it-yourself investors. Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building and people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I

encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. All right, let's talk about Air Canada. We got some Canadian names for you guys here. I've been talking about airlines for a long time in the fact that it's a pretty poor business model that they live in. Customers are extremely price sensitive. There's so much competition. There are sites like assets owned under like booking.com, ticker BKNG or Expedia, ticker EXPE that give you the lowest prices across all these airlines. You type in where you want to

go, where you're going from, and then it'll scan across like 50 different airlines, different times you can take off and it'll give you the best prices. The airlines do do their best to get loyalty on frequent flyers. But in the grand scheme of things, customers don't care. And I know I don't. Give me the lowest prices. Do you really have much brand loyalty when it comes to airlines? No, no. I mean, I have like an Aeroplan membership, but honestly, to me, I use it almost as a tiebreaker. So if they're pretty similar prices, then I will go with Air Canada.

But if I'm getting a much better price from WestJet or another competitor, I'll go with the competitor. Right. Because they're performing the exact same service. So what are they competing on? They're competing on price and customers are very sensitive to it. So AC, Air Canada Sports, historical median gross margin of about 25%. Not great. Now, I'm not saying Air Canada is a bad airline. I'm saying I just don't like investing in airlines. If I had to invest in an airline like gun to my head, I would consider it Canada. I think it's pretty well run and it's fairly backed as Canada's airline. Now, here's the best part of managing your portfolio. You get to make your own decisions. And I believe that airlines have next to zero pricing power.

This is like a one out of five for me. Yeah, yeah. I think I would put one out of five. And it's also their costs are so volatile, right? With jet fuel. Yes. That's, you know, it can be a great effect on margins if it goes down in price. But the other way around is true as well.

And, you know, I think Warren Buffett learned the hard way of not down in price, but the other way around is true as well. And, you know, I think Warren Buffett learned the hard way of not investing in airlines, right? He sold it all when the pandemic started. And I think it was his second time investing in airlines. And I don't think we'll see him invest in that anytime soon. Yeah, it was a bit of a fool me once, shame on you, fool me twice kind of thing with airlines. They can look so alluring when times are good. When you're in the airline cycle, they're so alluring. I owned Air Canada many, many years ago. I don't think I've owned it for over five years, but I owned Air Canada many, many years ago. And I made good money on it, but I looked at it as like a trade. The airlines are just not a place I want to be,

given the style that you and I have adapted into, like buying great companies, holding them for a really long time. I don't see where it fits into the strategy. Yeah. Now moving on to another name that everyone has heard of of Amazon. So this one is a bit similar to Costco when it comes at least to Amazon prime. I am well aware they have AWS. Their renewal rate was 93% after the first year of membership and 98% after two years. The last time they, yeah, it's pretty crazy. But it's, I'm just going on memory because I didn't put it in my notes, but it's around 60% for 30 day free membership. So people who get the free trial will renew at a 60% rate or so.

That's a good conversion, man. That's a, that's a really solid conversion. Yeah. Yeah. But what we're seeing is it increases the longer the members are there essentially. Then guess once you're there for at least two years you're you're locked in for good yeah so the last time they increased their membership price was four years ago in the u.s it went from 20 to 119 a year it did not affect the canadian membership price i would not be surprised if we see a 20 increase increase in Canada in the near future.

I mean, it's been the same price for ever since I joined, I think, years and years ago. I think we've been with them at least for six or seven years. But with the pandemic, which has clearly been a big boost for Amazon, I think they'll be able to increase it without impacting their renewal rates. What do you think there? Yeah, this leads me, I was just in the background here, googling some quotes from Jeff Bezos, because he had some thoughts on this. I'm going to read this. Quote, we want Prime to be such good value, you'd be irresponsible not to be a member. Prime has become an all-you-can-eat physical digital hybrid that members love there's a good

chance you're already one of them but if you're not please be responsible and join prime you know it speaks to like that that top of the quote sorry i just smoked my mic with something but uh the the top of the quote is important we want prime to be such good value you'd be irresponsible not to be a member i think that what you're talking about makes sense. And that's why I'm kind of hesitant. They seem hesitant to increase prices is what I'll say. Yeah. But I mean, with Amazon Prime Video now that you get included, I mean, even at $20 extra, I personally think it provides us with tons of value. You'd still be irresponsible. Yeah. No, I agree. They are due, and I'm not the

only one that thinks this, they are due for a hike and it could be quite sizable. For the AWS side though, I did a bit of research and that's a bit different. So it seems like they very rarely if ever increase prices. I'm not sure how much pricing power they would have with AWS if they do decide to raise prices. But it seems like their overall customers, I was reading kind of browse through Reddit, some people that use it. And once they start using it, apparently people really love the AWS platform. But overall, I mean, I think I'll kind of stick more for the retail business. I would give them a four out of five in terms of pricing power. They haven't shown that they've used it and a desire to use it all that much, at least not like a Costco like we talked about earlier.

But I think they could if they wanted to. And I'll leave it at that. With Amazon, I mean, there's so many different segments, right? So just quickly here, breaking it down. The third-party sellers is a huge part of the retail business. It is a gigantic part of the retail business. It is a gigantic part of the retail business and they have been flexing take rates there. So that's an interesting thing to think about with some bushback though, but they have been flexing some take rates on third-party.

Prime, we already discussed it. They're definitely due for a hike and they can do it, I believe, without any concern at all. And AWS, So since it's a usage-based model, like all these infrastructure cloud plays are, right now they're in total land grab expand mode because your cloud provider is so sticky. There's just way too much upside for them to be in land grab strategy than be focusing on uh short-term take like price increase even rev growth yeah like customer acquisition is top of mind so i wanted to provide another one here with trans dime so what what would you give them oh amazon yeah yeah they're like a four to five at least for me yeah but it's weird right it's because like each

segment's different. They can. And yeah, exactly. They can. And I think probably all their segments, maybe not AWS because of the land grab like you talked about. But I mean, obviously for the membership and I know like the take rate for their third party seller has definitely been something as well that they've increased.

So I think, yeah, overall, I think it's there, the potential. So that's why for me, four out of five too. Yeah. So I did want to do a thing on Transdime, ticker TDG, as a counter to Air Canada. And the reason for that is because Transdime's an aerospace business. And this is an example of a great place to be in aerospace. There are suppliers with tons of pricing power. It's the actual operators, the commercial airline operators

that have pretty bad unit economics and have been historical dogs to own. Transdime, on the other hand, has been a very consistent compounder. They supply aircraft components commercially and for defense contracts, the US military being a very large customer, for example. They have a 10-year company annual growth rate on free cash flow of 13%, gross margins well above 50%. Not saying this is a good thing, but they were very recently under fire from Congress for charging the military and other commercial customers over $8,000 for a part that cost them just a little over $100 to make. Now, that's some pretty juicy margins and some nice pricing power.

It's not a name I know super well yet, but it is a counter example somewhere else in the value chain of aircrafts and defense that there are some great businesses and Transdime being one of them. It's like a high performing conglomerate, HPC, Mark Leonard coined that term as far as I know. This is about a three or four on pricing power. I want to be more confident and tell you, but I'm new to trans dime. So I'm not going to say for sure. Yeah, I definitely don't know much about them. So I think I'm just going to go with what you said and say a three or four because I would just be guessing at this point. I'll be honest.

So, yeah. Yeah. They make airplane parts. at this point i'll be honest so yeah yeah they make airplane parts so you know they'll make the seat belt that goes on your boeing 747 okay fair enough uh now moving on to a name that i know much better loblaws everyone in canada and he knows that name they're everywhere um so this is another one where i don't i don't know it's hard say, but I don't think they have much pricing power. It doesn't mean that it's not a good business, but they do make money because of the scale that they have. So it's a low margin business.

But I can't see them rising prices without a good reason. Obviously, if their costs increase and the cost of goods that they're getting, the reselling and the cost of transportation, their labor and so on. You know, yes, they'll be able to increase prices. People have to eat and there's just so many grocers in Canada. amount of scrutiny that they would get if politicians would start hearing from their constituents that Loblaws is taking advantage of people and jacking prices when they shouldn't be. So that's why for me, it's a retail place. I probably would just give it a two out of five. Yeah, grocers have very limited ability on pricing power. What I will say is they're very good. They're not a zero or a one because they're very good at pushing on increased cost of goods sold onto the customer. I mean,

they're maybe the best ever at that, but in terms of increasing in excess, which is a big part, in excess, which is a big part. To be over a two in our little made up scale here, in my mind, you have to be able to increase in excess and all the way up to five, well further in excess of inflation. They're not a one, but they're definitely not a three. I'm good with that. Another Canadian retailer. Wow, we're really getting the Canadian investor podcast theme going here. Dollarama, ticker DOL on the TSX. I wanted to throw this one in because I have a counter opinion to what you might be thinking. Dollar stores have pricing power? Hell yeah, dollar stores have pricing power. Dollarama sure does have pricing power. They increase prices and they do it way better than their US peers in this model. All the US dollar store investors

all look at Dollarama in the North as a prime example of, oh wow, you really can increase prices in this business model. They have compounded earnings over 20% for 10 years now. You can't do that without pricing power. That is a beautiful number. They can move an item from like $2 to $2.25 with very little pushback from customers. Yet the net margin expansion is huge. If you think about it, because the dollar sizes are so small.

So while their customers are price sensitive by nature, going to the dollar store, I recognize that they still manage to provide an excellent value proposition while increasing the prices of these goods. So this is like a three and a half, even a four for me because their customers are price sensitive like a one, but their execution is like a five. So it's a very interesting example, especially when their items are supposed to be very low priced. Yeah. I mean, I made a good argument. Definitely. I was probably leaning more towards a two, still probably more of a three than a 3.5 i would say just because i do get your argument that yeah it looks small to the eyes of the customer the increase between you know 225 and two dollars but in real percentage terms it's

actually a pretty hefty increase which people don't necessarily connect i mean i still think there's probably going to be a limit to them being able to do that. So that's why I'm kind of, I'll be a bit more generous and give it a three. But I mean, they have a good track record. So I guess I can't take that away from them. But in a high inflationary environment, I'll be interested in seeing if they can really keep that up to keep up with inflation. Yeah. I thought like what your sentiment is exactly how I would have responded to me saying this segment like a year ago. I would have said the exact same thing as you. I've just really realized and changed my mind about this because the facts are the facts and they have flexed pricing power and

proven every bear wrong. And so I'm not willing to bet against them being able to continue to do that. Although I do agree. Is there a ceiling, right? That's the question. Is there a ceiling? I would say yes, probably. And you're saying yes, probably. That's why it's not a five. I'm just not going to continue to doubt their pricing power anymore. Okay, now we're going to move on to the fun world of banking. So I chose TD Bank, but I think here you can place any retail bank. So I just chose TD because that's the first one that probably comes to mind for me when I think of Canadian banks. We're talking here primarily retail banks, because obviously there's all different of Canadian banks. We're talking here primarily retail banks because

obviously there's all different kinds of banks. There's investment bank, there's commercial bank, so banks that are more specific in certain operations. But in Canada, we have very large retail banks. Yes, they can probably raise their prices a bit, but if they raise it too much, in my opinion, consumers will go to competitor. I mean, I've done it myself. I used to be with TD and I switched an online bank a few years ago. And granted, it was a bit of a pain, but it was worth it because I used to pay $15 a month and now they probably charge like $19 for the same account. I haven't checked recently.

But you know what I did? I actually called them. I said, remove my fees or I'm leaving basically for the same account. account i haven't checked recently but you know what i did i actually called them i said remove my fees or i'm leaving basically for the same account and they said well you know the only way to remove your fees is if you have to leave five grand in your account so they can take that money and lend it to someone give me zero interest on it right so i said okay no problem and i just changed everything it was a little bit of a pain but like i said i did it and now i'm not looking back but don't you keep like sorry if we're getting into your personal finances but don't you keep like five grand liquid cash and not in a that your main

bank account anyways though so i actually keep my my money so the five thousand dollars or a bit more because it's part of our emergency fund. So I keep that in a savings account just because. Like a high interest savings and not like you're just you're checking. Exactly. Where TD was requiring me to keep that $5,000 in a checking, giving me like literally like a couple basis points at most in terms of interest. Yeah, it's terrible. Yeah.

So they can take that money and lend it out. So that's why I just flushed them and went for an internet bank. But banks, they get most of their revenues with fees and the interest spread. And for those that are pretty new and don't know banks quite well, interest spread is pretty simple. The example that I just gave, essentially the bank is the interest they'll give you for the money that you deposit. And then they turn around, they take is the interest they'll give you for the money that you deposit. And then they turn around, they take that money and they lend it to someone else at a higher interest rate and they pocket the difference. And that's why for me, I mean, there's just there's a lot of different banks and there's just not much pricing power. Because I think aside from the switching costs for people and the pain that it can be for some to switch, there's not much incentive, in my opinion, to stay with a bank. So that's why I would give it

probably a two, maybe even a 1.5 out of five. Yeah, it's difficult for banks, retail banks, to really say for sure. And in Canada, I do agree with the sentiment, especially when you have these digital banks coming out shout out to eq bank you guys sponsor this podcast we we love you guys yeah so i i i agree with that and i know like the bank that i've always had you know there's like that minimum amount you need to have in there you're also you pay the fees right or whatever and it's so yeah it's just not ideal when you want to have that at least doing something you know like so you pay the fees, right, or whatever. And it's, yeah, it's just not ideal when you want to have that at least doing something, you know, like I don't want cash is doing absolutely

nothing, especially in this retail, like in this inflationary environment. So yeah, I agree with you. I'm not really sure, to be honest, I don't have a clear opinion on the bank's pricing power anymore. I just don't have any good opinions on banks anymore at all because they keep dominating and I don't know what to say anymore. Canadian banks are such good investments, man. Like it's actually crazy. As do it yourself investors,

we want to keep our fees low. That's why Simone and I have been using Questrade as our online broker for so many years now. Questrade is Canada's number one rated online broker by MoneySense. And with them, you can buy all North American ETFs, not just a few select ones, all commission free so that you can choose the ETFs that you want. And they charge no annual RRSP or TFSA account fees. They have an award-winning customer service team with real people that are ready to help if you have questions along the way. As a customer myself, I've been impressed with Questrade's customer service. Whenever I call

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account, you can get in-depth portfolio insights, track your dividends, and there's other stuff like learning Duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me, search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. Okay. So I have another one here, traditional B2B SaaS as a business model. I'm going to give you some examples of companies

in there, but this section is just called traditional B2B SaaS. So B2B being business to business, software as a service, B2B SaaS. So SaaS that works in this space, companies like Salesforce, Intuit, Microsoft, Atlassian, Autodesk, Zoom, CrowdStrike, The Trade Desk, Unity, Okta, HubSpot, MongoDB. He's just a few off top of my head for this list when I'm making this document here. They all have tremendously great pricing power because their product is so valuable. pricing power because their product is so valuable and they have like tiered pricing too for different customer sets versus like SMBs versus enterprise typically. Oftentimes you pay per seat. They're easily able to flex pricing power most of the time on almost

all those names I mentioned whenever they want pretty much. And their product is so damn sticky to existing customers, especially when it's business to business. Business to business software service is like the golden age of business model when you think about it. Their pricing power is amazing. The customers are extremely sticky. They oftentimes integrate with the core product, which becomes essential for them being able to do business. Think about your cloud provider or database provider. If you are using MongoDB to host all of your customer database, if Mongo increases your subscription by 10%, you're soaking that. You're soaking that cost. There's no, like, I mean, maybe you can send them an email

and be like, Hey, can you do some better? And maybe they, if you're a large enterprise, they can do something better. But for the most part, you're soaking that cost. Not to mention many of these models are, you know, extra revenue per user on that ARPU number every year, because net retention, these customers are spending more and more on the product without even actually increasing the price of the product. Like the AWS example we were talking about with Amazon. This is a perfect five for me. So much of these business models are incredible, maybe the best businesses ever, but they have traded at ridiculous, crazy multiples over the past two years. 50 plus times sales hasn't been the norm for the last two years. Now that tide is turning.

And many of them, I'd be looking to get long. I know 25 times sales. It traded at 50 times sales. It took a 50% haircut. Now it's 25 times sales, but these aren't companies growing revenue at 10% a year. There are companies growing revenue at 50% plus per annum, sometimes per quarter on a sequential basis for huge publicly traded companies is insane. So I think many of them right now in this downturn of SaaS, it could be a good time to get long some of these quality names, quality being a very important thing to say here. Yeah, I think you put it well, especially business to business. They're very sticky. It's very hard to switch when you're a large enterprise from one provider to another. So I agree with you. I think for me, probably 4.5 or 5, but pretty much as high as it gets. So

definitely on board with that. Next one, one that I don't think has much pricing power, but one that I know being in Canada, a lot of people like these businesses. So Suncor and Canadian Natural Resources, but it could be any other oil or natural gas producer. I don't think I just took those two names because they're pretty well known by everyone. But we've seen it before. For them, it's really the price of oil and natural gas that they're dependent on. So if it goes down sharply, their margins take a hit and vice versa. So if it goes down sharply, their margins take a hit and vice versa. Suncor is probably a little less susceptible for this because they have the production segment, they have the refinery, they have the distribution. So they can actually, when prices go down in oil, they can actually use that to buy additional oil on the markets and then have higher margins on their refineries, for example. But still, they're still very dependent.

And for them, as a general rule, the higher the price of oil, the better. So because of that, because they're dependent on a commodity and on the commodity market, I think I just have to give them a one out of five. Yeah, the reality here is that commodity-based businesses are the definition of having very little pricing power, if any. And that's because the market external factors outside of their control dictate their bottom line. That is the complete polarizing contrary to pricing power by definition, the way I think about it anyways. So I agree with you. It's a one-off pricing power. It doesn't mean that these aren't extremely well run providers. Oh, they're good. They're good companies. CNQ and Suncor are incredibly well run. They are very good at managing their cost structures

and they're very good operators the whole investment thesis for me falls apart immediately when we talk about their bottom line is dictated by an external factor that is outside of their control very difficult environment to operate oh yeah exactly and i'm sure we always get tweets when we talk about these i find about oil companies but you know we i would not be surprised if you know suncor or canadian natural resources you know triple in the next few years if prices of the commodities go way up that's that's entirely possible like that's not out of the realm of possibility i I think it's just for us where we want to invest in very long-term in businesses that actually can control a lot of these things. It's just Suncor and

Canadian Natural Resources. It's not one of those. Exactly. Yeah, that's well put. My Albertans who at me in my DMs about oil, I still love you guys. Don't worry. I was born in Calgary. So I still love you guys. Don't worry. I've been to Calgary. Oh, you just, I was born there. So, you know, we got some representation on the podcast, but we're here to level set,

set you straight with the oil business. And you're right. It could freaking triple in the next three months. And then we'd look like idiots. But the reality is don't care. Don't care. Completely irrelevant. All right. Spotify and Netflix. I'm grouping these up because I just talked about business to business subscriptions in software. Let's talk about business or sorry, direct to consumer or not to business. We're talking about to see customers. D2C subscriptions in their nature have been looked at as having limited pricing power.

And I'm here, I'm bringing these two names up because I have a contrarian view to their pricing power, especially these two names in particular, because they are the leaders. I subscribe to the idea or I used to subscribe to the idea that they have limited pricing power. I truly believe that good investing and good investors is the ability to change your mind when presented with new facts. It's hard to do. It's very hard to do to change your mind. But if you can do it when you present it with new information, it'll make you a better investor and probably a better person overall. So these are two of the most sticky direct consumer subscriptions in history. Extremely low churn, consistent price increases, and category leading usage metrics. Now, usage metrics is important here because Spotify, for example, sports an average 140

minutes per day per user of usage on the platform. Customers love the platform and use it heavily to get their money's worth. Now, this is important because that stickiness reduces friction for them to be able to increase prices. Spotify has recently increased prices last year and still hit that monthly active user growth. All right, let's talk about Netflix because we've been talking about their pricing power a fair bit on the show recently, Simone. They started at $8 a month. Then they raised it to $12. Then they raised it to $14. Then they raised it to $16. And then they raised it to $20. $19.99. Now that is an 150% increase in the monthly sub. This is for the premium price, by the way. They have a couple of different subscriptions, but this is for the premium one, which is their bread and butter.

That is an 150% increase in the subscription price from 2014, representing a 20% per annum increase on their pricing if you average it out. During that stretch, they went from 54 million paid subs to 222 million paid subs. I think that for both of these companies, we will continue to underestimate their pricing power. Not even just to match inflation, but well, well in excess. I think that you and I have a somewhat countered opinion on this. And I think that that's totally cool. I think that they have some of the best pricing power of any business, like four range, maybe even a five range. And I know that's contrarian because the narrative has always been against that. The reality is that netflix 150 increased their monthly subscription price

since 2014 that is serious pricing power yeah so what would you give them out of five like a four or five maybe like a four and a half yeah and i mean i think so i think netflix has more pricing power than i thought uh but I think there's a limit. And where I'll give you a counter argument is in 2014, there was almost no alternative for online streaming. I mean, there was YouTube and Netflix. I mean, I'm trying to remember back. So I think that's where and in the States, I guess Hulu was there at the time. But that's my counter argument is I think they have pricing power,

but I think with increased competition, we could see that pricing power go down. And I think they have a tricky game with that increased competition to not get to a number. And I'm just saying number, not a percentage increase, just a number for people that's too psychologically high. And I think, you know, when you start noticing it on your bill a lot more, it's a bit like, you know, a lot of people like penny stocks, right? It's a small number because, you know, they don't look at the metrics. They like penny stocks because it's $2 a share, even though the company, by all metric, is highly overvalued. But that's kind of where I'm sitting. I mean, I agree with you. They've had good pricing power. But I'll be interested in seeing the next few years as we see a lot more services, how those users stay on board with Netflix and how much they can increase during that time span.

Yeah, it's a good point. And it is kind of silly for me to group Spotify and Netflix because the operating model is completely different. Netflix's operating leverage is way, way better because Spotify actually has gross margins built into the actual stream. So even though they increase the price, the more their users actually stream music, the lower the ARPU is. So it's kind of like this catch 22 in their business model and why that's like the bear case on Spotify, to be honest, is like the unit economics are not great. However, their ability to increase that top line subscription for the monthly active users on the premium content.

I believe it's quite strong, but I hear what you're saying. I do hear what you're saying, and that's why it's not a perfect five. Yeah, I'll probably give it a three. But I give myself the leeway to change my mind in a year or two if I need to. Upwards or downwards, you know, all depends how they perform. The one counter argument I'll say is you said like look at all this increased competition it was eight dollars when they started back in 2014 it was eight dollars this latest price increase to 20 is is in this like saturated market of of competition and they still have net ads so i mean it's slowing net ads though i will i will

say that net ads are slowing but i don't know if that's a dynamic of pricing or market saturation i i don't know that answer i'll be i wanna we should revisit this one in like two years from now it'll be interesting um so now i'll move on to a name that I guess you can't talk about pricing power without talking about this business. And that's Apple. Apple, I think, just has amazing pricing power on their products. I did a quick comparison and that's not very, you know, just high level. I wanted to compare as a whole Samsung's overall gross margins versus Apple margin on its products not their services and Samsung sits at 40% and Apple at 44.3% granted Samsung sells like other things like appliances

and and those are just their overall margins but it still gives you a pretty good idea because in my mind Samsung is probably the top electronic company in terms of like how i perceive them in terms of their products outside of apple i don't know about you i think that's a perception i get from samsung yeah i would never buy any of their appliances but i tend to agree they do make some good stuff they make good tvs yeah i mean i have some of their appliances they they work pretty well so they work well yeah i mean i've had bad experiences like those things also okay what's what's your opinion we're getting away from apple here but do you have a touch screen on your refrigerator no i don't no i i do on my what the hell is the point of that yeah the last thing we need is more screens in our homes and they're wrapping on

a ipad on my refrigerator what is the point of this anyways i digress so i i also found getting back to apple so i also found an article comparing margins on various smartphone models between samsung and Apple's over the past 10 years with their price at launch. And we've known that in the past 10 years, obviously Apple, you know, they did not have any trouble selling their, you know, their iPhones. Apple had actually nine of the top 10 profit margins on that list. And their more recent models are god i know their more recent models are a bit lower in terms of margins but still in front of what samsung's margins are and we've seen it before i mean we've talked about it people have seen it on the news and when apple releases a new product

you'll see like lines of people you know sleeping overnight to get their hands on the brand new iphone or the new apple watch or the new headphones whatever it is and i mean aside from a concert ticket with limited availability i can't think of any other product that or even service that people would line up like that can you i know there's a bunch and i know i know that there are many brands that have tapped into this like hype launch event type thing and apple is like the pioneer and the the example that every other brand looks up to in more ways than one and like in product design and marketing and like sleek and elegance and pricing like they just do do everything right. And that's why I agree with everything

that's been said so far. Yeah, yeah, exactly. And so for me, it's a five out of five. I think there's definitely a limit to what people will pay. I don't think people will pay five grand for a new iPhone, like obviously. But I think, you know,

what we have learned over the years and you can, Apple has been really good at doing a very high end model and then not diminishing their brand with the lower-end model. And oftentimes, the lower-end models will just be the older models, right? So right now, you can get the iPhone, I think, 13 Pro, but you can also get the 11, which was, you know, really close to their top of the line when it came out. And it doesn't really devalue the brand, I think, in my perception. I think in a perception of a lot of people. So I think they found a very good balance of maximizing pricing on the very kind of across the board

and without devaluing the prestige of the brand. So, yeah, that's kind of my take. That's why I give it a five out of five. I have the 16-inch MacBook Pro recording right now on it. It was $4,000 Canadian dollars. And I obviously could have got a computer to fit my needs for much, much less. to fit my needs for much, much less. But I like the ecosystem of Apple and I like the iOS of Apple computers, of MacBooks. I like the iOS by the operating system. And so people who are willing to live in that ecosystem that all their products connect to, or for me, just the actual operating system of Mac,

I prefer it much more. I find it much more reliable. I found it more intuitive. I'm a MacBook Pro user for life now. I don't see how I get out of that. I mean, never say never, but it's the definition of pricing power they're the they're the gold star yeah yeah and i mean you said you paid four grand for the laptop i mean you could have got a pc equivalent and maybe even like higher specs uh for less but again you wanted oh for yeah half the price the apple product and i mean i'm probably my laptop. There's a good chance I'll switch to a MacBook Pro as well. So yeah, I think consumer electronics or a tech company, whatever you want to call Apple. I mean, pricing power, they have it.

There is a very famous boardroom meeting that Apple had where they decided, they sat down and they decided if they were going to open up group chats to outside of iPhone users. They came out and there's a transcript from the meeting and they said, at this time, we're going to continue with the decision. I believe it was in 2017, continue with the decision for only blue messages on the Apple ecosystem to be allowed on Apple group chats. How many billions and bajillions of market cap did that decision add over time to Apple? It's something that you would never think that would be so small and i would contribute to it hundreds of billions of market cap on apple because it forces people to to get one yeah yeah pretty much so uh yeah it's it's the gold standard i hope you guys like this i feel

like we've been recording for a year now i I hope you guys really like this. We just did about 20 companies one by one talking about their pricing power. I talked to a stratosphere member earlier today and he was asking me about some different ideas. Pricing power kept coming up and it's just so important, man. We talk about it so much, but it really is important. And when inflation is running hot, if it's running hot like it is, you know it's running hot. I know it's running hot. You know it's running hot. You need good pricing power. Thanks so much for listening. Let's get to the top 10 in Canada, shall we? So share the show. We're going to do a giveaway in the future too. Me and Simone are planning a giveaway for our listeners. We're trying to pull all the growth levers, baby. We're going to crack

the top 10. Thanks so much for listening. Take care. We'll see you in a few days. The Canadian Investor Podcast should not be taken as investment or financial advice. Brayden and Simone may own securities or assets mentioned on this podcast. Always make sure to do your own research and due diligence before making investment or financial decisions.