Yet Another Value Podcast - Devin LaSarre shares thesis on Haypp Group, Online Distributor of Snus and Nicotine Pouches

Episode Date: April 8, 2024

Devin LaSarre, Founder and Editor of the Invariant Newsletter on Substack, joins the podcast to discuss his write-up and thesis on Haypp Group (HAYPP.ST). Quick description on Haypp Group (according to their website): The Haypp Group is spearheading the global transformation from smoking to healthier product alternatives. With origins in Scandinavia our extensive experience from pioneering markets in smoke free alternatives, as well as being a leader in the e-commerce sector, we now fully take our vision to a global scale. With eleven e-commerce brands, the Haypp group is present in seven countries where we served more than 950 000 active customers in 2023. Haypp Group write-up: https://invariant.substack.com/p/haypp-group-nicotine-pouch-trend For more information and to subscribe to Devin LaSarre's newsletter, Invariant, please visit: https://invariant.substack.com/ You can Follow Devin LaSarre on Twitter/X @DevinLaSarre: https://twitter.com/DevinLaSarre Chapters: [0:00] Introduction + Episode sponsor: Santangel's Review [1:36] What is the Haypp Group and why it's interesting to Devin and overview of the smoking alternatives industry [6:52] Demand for nicotine and oral products (pouches, snus, dips) [13:44] Haypp Group - investing thesis, why attractive idea to Devin [17:44] What is differentiated about Haypp Group; why is this not the most competitive, lowest margin business [23:21] What's a "Zyn-fluencer" and marketing challenges [26:24] Customer acquisition costs / focus on SEO [33:06] Haypp Group's pricing and cost structure [41:01] Alternative smoking product consumer trends, switching up brands [48:30] Addressing risk factors / Haypp's moat [57:07] Insights business [59:47] Regulation risk with selling alternative smoking products online [1:07:23] Valuation [1:12:32] Where alpha potentially comes from since Haypp stock's double in last 6 months [1:18:06] Low capex [1:21:30] Switching costs from cigarettes to alternative smoking products Today's episode is sponsored by: Santangel's Review Finding the right hedge fund cap intro event isn't just about the size; it’s about the value it brings to your time. This month's sponsor, Santangel's Review, offers something unique for fund managers and allocators. Founded in 2010, Santangel’s hosts three Cap Intro Roundtables each year - two in New York City and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide. The secret sauce: Santangel’s spotlights undiscovered talent. Managers you don't necessarily see at other industry conferences. Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry built on relationships, Santangel's fosters some of the most valuable connections. Just go to Santangels.com— S-A-N-T-A-N-G-E-L-S dot com to learn more and request an invitation. If you’re a manager or allocator who is serious about maximizing your time, you'll want to be a part of the Santangel's Roundtable. Click here: https://santangelsreview.com/

Today's episode is sponsored by Santangil's Review. Finding the right hedge fund cap intro event isn't just about the size. It's about the value it brings to your time. Santon Joel's review offers something unique for fund managers and allocators. Founded in 2010, it hosts three cap intro roundtables each year,

two in New York City and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide. The secret sauce, Santon Jules, Spotlights, Undiscovered's talent. managers you don't necessarily see at other industry conferences.

Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry-built-on relationships, Santangels foster some of the most valuable connections. If you're a manager or allocator who is serious about maximizing your time, you want to be a part of Santangil's Roundtable. All right, hello, and welcome to the yet another value podcast. I'm your host, Andrew Walker. If you like this podcast, I mean a lot, if you could rate, subscribe, review wherever you're watching or listening to it. With me today, I'm happy to have Devin Lassaire. Devin is the author of the Invariant Substat. Devin, how's it going?

I'm good. Thanks for having me. Well, thanks for coming on. I'm super excited to have you on. But before we get there, I'll just do a disclaimer. Same thing I do for every podcast. Nothing on this podcast is investing in advice. Please consult a financial advisor. Keep that in mind. Do your own diligence. Always true, but maybe particularly true today because we're going to be talking about something that's very anti-ESG, tobacco-related companies. the trades on an international exchange, which carries all sorts of extra risks. So, please do your own research, consults financial advisor. Devin, that out the way, look, I'm so excited to have you on.

I was telling you before, you published this incredible piece on the HAP group. I'll include a link to it in the show notes for people who want to go through it. It's a very lengthy piece, but it's really interesting. Just awesome work on it. And as soon as I read it, I sent you an email within like five seconds that I'd love to have you on the podcast. So let's hop into it. What is the HAP group and why are they so interesting? Right. So I think it's pronounced hype, technically. I've, I've trained myself so hard because I, from, you know, the Midwest, I pronounce everything with a hard A. So I say HAPE. And I've been training myself to try to say hi. I'm glad you correct me because every time I read it, I actually read happy and obviously the Y is the third letter.

But I think of it in my head as the happy group and it does make a certain, but okay, hate group. I did the same thing when I first read it, too. I kept flipping the peas and the Y. It's funny how the human mind works like that sometimes. Yeah. So, I mean, the company is certainly not known by many. It's very small. It's listed on a very small exchange.

But even before digging into the company or kind of walking through that, I think it's maybe important to give a little content. context around the evolution of the industry and just getting to exactly where this company kind of falls into place. Just do one sentence on what they do so people know and then let's go to the industry. Okay, perfect. So it is the world's largest online distributor of snooze and nicotine pouches. They're still quite small but fast-growing lists.

on the NASDAQ First North in Sweden. Perfect. So let's do all the industry stuff. Sure. So, I mean, looking back, I think a lot of people have some idea of the tobacco industry. It's kind of inescapable. You've seen it one way or another, maybe researched it a little bit. Most people understand that prevalence has been declining for something like cigarettes,

volumes are down, offset by pricing power. manufacturers historically have done pretty darn well. If you look at the last decade, though, something has occurred, which is the rise of next-gen products, also often referred to as RRP, has reduced risk products. And that's heated tobacco, vaping, and these modern oral nicotine pouches. And a few different scientific innovations have allowed these to really become popular. You have the heating element of heated tobacco. You have the nicotine salt technology allowing vaping to best mimic the hit that a cigarette gives.

Then you have a few different innovations leading to extracting tobacco, nicotine from tobacco for the modern oil nicotine pouches. All of them. When you look at studies looking at a continuum of risk, if you look at, say, cigarettes having a harm factor, risk factor of 100, you kind of go from 100 down to cigars, pipes, hookah, and then way, way down at the other side are these next-gen products. Because largely, and what is lost or unknown to most, is that most of the harm comes from combusting tobacco. And when you remove the combustion, you reduce the harm substantially. And then again, when you go from tobacco to simply nicotine, you reduce those risks even further.

And I think what's so interesting about that, and I've touched us on this a bit in my writing, is when you look at affordability of these products, a lot of the time it's strictly focused on the monetary cost. Of course, manufacturers, they take price, offset volume declines, and then it kind of look at the any elasticity coefficient to look at, well, how does that affect, you know, either people quitting or looking for alternative products? But a second cost is the health cost of using the product. When you look at the very, very high risk profile that's something like a cigarette has, and all of the regulation occurring in the last 70-some years looking to reduce usage because of the health harms, You get to ask the question, well, if you reduce that harm, do alternative products not become inherently significantly cheaper from that perspective?

And if they're significantly cheaper, are you potentially unlocking a huge amount of suppressed demand to use nicotine? And that's a big overarching idea that I explore in a lot of my writing. And then, you know, with that said, I think we can maybe start talking about high-group. So obviously that is, like, that is great background and have benefits from a lot of those trends right there, the largest provider. Let me just ask one thing there. So I think one of the reasons, because I was telling you before, I guess he's at Robody and he published so I can say it, Spencer Sabelli had this great research report on HAP. And I kind of flipped through it and was like, oh, not for me. And I think it's because I've never used tobacco.

I've never been into it. I was like, oh, I'm on your backup. I guess at the end you said, hey, there's this suppressed demand for tobacco, right? where for nicotine for nicotine where cigarettes have been vilified they're very expensive and you know if you're growing up it's a very old person thing right like if you got hooked on it 20 years ago yeah you're probably still smoking but if you're 18 you're most people aren't exactly like hey you know i want to go spend 500 dollars every month to get smoke to smoke tobacco and then get cancer in 15 years most likely but is the you said that's gone but there's the suppress demand for

nicotine. And I just want to ask, is there, like, I know a lot of my friends dip, a lot of my friends do the sort of stuff, but again, I've never done it, but just as someone who hasn't. What's the demand for nicotine, right? Outside of the smoking, like, how much is their demand for this? Absolutely massive. I mean, so when you think about worldwide, there's over a billion people that smoke, right? And that number is potentially still growing and we'll hit like 1.1 billion soon before it may be peaks. But if you look at the rest of all of the different tobacco products and then next-gen products, the aggregate industry volumes right now on a global level are actually growing. They aren't declining like when you just break out and strictly look at cigarettes.

And likewise, historically, when you look at the industry, even with those volume declines, the industry has always grown the profit pool. It's never really shrunk historically. Even today, when you look at some of these next-gen products and smaller players taking share from larger manufacturers, the total global profit pool is still growing. And I think what's interesting is when you break out next-gen products separately, you have a couple different interesting factors.

One is the substantially reduced risk profile, which has a longer tail effect that's really beneficial for everybody, which is, you know, you think of governments and the history of regulation around tobacco because of the health harms. If products are far less harmful, in theory, they're going to embrace those qualities and embrace tobacco harm reduction policies in their frameworks. how they regulate these. And if they do it properly, they will see a reduced total harm to their society, even if total nicotine usage increases. And you can look at a country like Sweden, right, where they have a very high prevalence of oral usage. And they were really the kind of birthplace for modern oral nicotine pouches, very high prevalence. But there's smoking rate is substantially lower than the rest of the Western world. And when you look at tobacco-related harm, significantly lower than everywhere else.

And so I think a country like that is a great kind of example of what can occur if countries take the, what I think is a sensible approach to regulation. But then what happens is you have also the consumer, they get to. enjoy nicotine, but they're harming them, you know, themselves less. So they get to live a lot longer. That's a pretty good deal for them. Can I ask one more question? Yeah. So I think I was kind of leading the witness there, but I probably do believe like there is the man for there is I 100% believe there's the man for, like people were willing to do it with cigarettes which are stinky. My other question would be so happen, this can start getting this into there,

but they are mainly selling pouches, right? oral pouches. A lot of the demands, to me, seems to be the vapes, right? And whether that's the illegal vapes, I'm domestic, whether that's the illegal vapes, the cotton candy flavors that you're not supposed to sell. But as Evan Sandell came on and pitched that group, and as he would tell you, you know, you can go get them from pretty much any bodega, or whether that's the legal stuff that, the jewels and that type of stuff that people are doing. A lot of it seems to be the vapes. And the oral stuff generally seems to me to be people like older people who are kind of, oh, was hooked on tobacco, I was hooked on cigarettes, and I'm switching here so I can keep getting

my nicotine fix while trying to kind of wean off cigarettes. So I guess my secondary question, again, this is getting us probably too far into the half group, but is there, is that demand for oral really there? Or is it more like, you know, the people who are just getting off cigarettes, but five years, 10 years for now, like it's always a shrinking pool because the apes actually kind of dominate the demand. Does that make sense? Yeah, that makes sense. And I would say that if you look back historically, and we can separate the modern oral nicotine pouches versus traditional oral tobacco. Is that dip?

Am I kind of thinking like my friends? Sure. Yeah. Yeah. Yeah. So all of that together, all of the oral products, has always been a growth industry in the world. Basically, volumes have just continued to grow.

And when you look at nicotine pouches, it's really been. in only in the last half decade that the growth is really accelerated and now it's kind of inflected and is growing radically. And we can get into detail down the line. But I think even if you say, and you can look at different sources, different studies saying, well, what percentage of nicotine pouch users are coming from other products versus have never used nicotine or tobacco, right? And the vast majority do come from having used legacy tobacco products. And I think you can look at the numbers. And again, if there's a billion people worldwide that smoke and, you know, you can shave off the large number of people in China because it's an inaccessible market.

But you look at that and then you look at people shifting from not just cigarettes, but legacy oral tobacco. You look at people maybe even shifting from vaping, which is occurring. right now. And nicotine pouches are actually the fastest growing next gen product category. It's outpacing, heated tobacco, and vaping. So that should be a really good background for people just understanding like what they're selling in the backdrop of the kind of the backdrop of the industry overview. Why don't we go specifically into HAPE and talk about what's so interesting and attractive about them? Right. So, you know, the original company was found in 2009. And it was focused on selling snooos online, which are

pouch, you know, tobacco pouches, oral use, and very prevalent in Sweden. And the two founders, their rationale for starting the business was, you know, they'd go to the local convenience store. There'd only be a handful of skews to look at. Some of them might be old, outdated. The person behind the counter doesn't know anything. They can't really help guide them into what they might want to buy or try out.

And the price was high. And so they looked at all this. So like, there has to be a better way to do this. And they realized, hey, if we do an online site, we can, we can give the adult consumer all the information, you know, under the sun about the exact product qualities. We can have a huge assortment. If we get to scale, we can offer it at a far lower price. And they ended up, you know, it was slow going at first, but it ended up scaling up. And then the company, in 2017, got new management, made my name of Gavin O'Dowd, current CEO, joined the company.

He had previously worked at British American Team. And he actually was a general manager for Sweden, Norway. While he was at bat, he was responsible. He acquired the company that would eventually become the best-selling nicotine things. Pouch brand of the Scandinavian version of Velo. I don't know if you're aware of any of the brands, but best selling, you know, product in Scandinavia, which is the most competitive market. So, so, you know, he, he established that.

He looked at where the market was going. He saw the fast growth of this category. He saw it not just taking share from traditional oral, but he saw smokers switching. He saw the opportunity. And, you know, so he, he just. jumped from Bat to Hype Group. Several other people from Bat actually followed him over. And then I believe they also have somebody from Swedish Match as well that was high up

at Swedish Match, which produces Zinn that's now owned by Philip Morris International. So I, oh, go ahead. Please continue. As I say, so, you know, 2017 he joins. They decide they're going to focus on going from snooze to nicotine pouches and then eyeing international expansion. And over the following four years, they did a handful

of acquisitions. In 2019, they merged with Northerner to create pipe group. And from that point forward, they were the largest online distributor of snusa and nicotine pouches. Today's episode is sponsored by

Santangil's review. Finding the right hedge fund cap intro event isn't just about the size. It's about the value it brings to your time. Santon Joel's review offers something unique for fund managers and allocators. Founded in 2010, it hosts three cap intro roundtables each year, two in New York City, and one at Fenway Park in Boston. These events stand out for their focus on quality over quantity, attracting some of the most prestigious endowments, foundations, and family offices worldwide.

The secret sauce, Santon Jules, spotlights undiscovered's talent. Managers you don't necessarily see at other industry conferences. Attendees take part in eight one-on-one meetings, intermixed with ample networking opportunities. In an industry built-on relationships, Santangels foster some of the most valuable connections. If you're a manager or allocator who is serious about maximizing your time, you want to be a part of Santangelo's roundtable.

You had a question? Yeah, I was going to say, so we've got the background of they're the largest online distributor, and I did not realize that he's the one who launched Velo. The only way I know it is I, as you and I were talking, I was looking at, I've looked at all the HAPE websites and everything, Velo is like right up there as one of the top brands. So that's the only way I knew it.

So I guess when I first heard about this, right, online distribution of snooze and nicotine pouches, my first thought was like, okay, cool, that's about the most commoditized, most commoditized lowest margin business I can think of, right? Like, yes, I guess you could argue like you've got a diaper.com situation where, hey, these are things that people are getting frequently so you can get them on auto subscribe and save. then I was kind of like, oh, you know, cigarettes. Like, I could go to the convenience store down the street and walk and go pick up the thing.

And in this case, there's what, like, there are a lot of brands, but there are probably three brands that are going to make up about two-thirds of sales. So, like, you're getting squeezed on one end by your supplier. You're getting squeezed on the other end by just pure competition. It's online. So everybody knows Google probably makes the most money of everything online. So I guess I'd just love to start by diving into like, obviously you've shown it, the result shown it, but why is this not just like the most competitive, lower?

margin business. Like, what is so differentiated and different about them? Right, right. Because I mean, when you first hear about it, you go, okay, a super popular, cheap, addictive product. It's a fast-growing category. It's going to attract a world of competition. And that competition is going to compete away all profits. And if I can just add one thing. As a domestic person, I would add all that and I'd be like, oh yeah, and this company with a really weird name, of course there's just some, like, fly-by-night cheap website, like, put them to the side. Who cares? Right?

Yeah. That's exactly, you know, the thought process of how it goes. Except, you know, you think about it. And, like, nicotine pouches are a super simple, really, like, ideal product for, for e-commerce because they're high value to their, you know, mass and volume. And they're all uniformly sized. And so it makes kind of fulfilling orders and shipping, like, like really, really simple and straightforward, which again, if it's so simple, then that kind of invites competition.

Along with it, like, it's even better, more attracted because it's like non-cyclical. There's basically no product returns for this category. And so just, just everything you would want for an e-commerce product, it basically checks all the boxes, right? And then we come to regulation, right? there's complex regulation covering this product category along with that the complexities of navigating different tax dynamics whether you know your country by country state by state jurisdiction not very easy to do and along with that when you think of the online space you you have to think about well how do we get eyeballs on our side and traditional

when you think of scaling into a fast growing category, you go, oh, well, you know, we'll have a paid ad budget and we'll, you know, we'll locate some to Google, we'll locate maybe some on Facebook, Instagram, whatever, and, you know, figure out what the highest return on that spend is and we'll kind of balance it accordingly. And as a category grows, well, we'll scale our budget up and and adjust whatever. The issue with anything regarding tobacco and nicotine is platforms like Meta and Google. Their terms of service restrict paid advertising on addictive product. And so you can't just go out and even if you have all the money in the world,

you can't just dump it into ads to try to get eyeballs on your sites. So I cannot Facebook, Instagram, TikTok, any of these guys. cannot go dump. Even if I'm not advertising for Zen, I mean, Zen also, or one of these, I can't advertise for Zen. And even if I wasn't, I can't go on and say, hey, come by your generic brand nicotine pouch from Devin and Andrews nicotine emporium. Yeah. So it's not 100% restricted. There are some small, oh, I'd call them loopholes, but greatly prohibited, where it's not, It's not large and it's not scalable. And the same goes for trying to sell on a site like Amazon.

They have a similar terms of service where... Have you looked on Amazon? I'm sure you have. Have you looked on Amazon? So when you look, it's so funny because you find all these things that look just like the real thing, right? They're coming in the little circle aluminum containers. But when you read the fine print, like you don't know any of the brands. You're like, oh, I guess just the big brand.

And all of them say nicotine-free, tobacco-free. They're clearly just trying to get, here's an uneducated Amazon consumer who's just going to buy this thing and not realize. So I've been trying to explore and rent my head around like the alternative oral usage space. And a lot of those are like caffeine pouches or they have other like supplements in them that are supposed to give you like a boost of energy. So it's like, all right, you pop something in your mouth where it gives you that, you know,

lasting flavor and it gives you a boost of energy. It's like, okay, I guess I can understand the appeal. But yeah, like radically different category, right? So just sticking with the lack of advertising. So there's two things I want to ask. So one, you know, I am not on TikTok, but I have read articles about there's things called Zinfluencers, right? So I think I want to ask you, one, to describe what his influencer is.

And two, could you and I loophole around for Andrew and Devon's nicotine imporium? Could we go to influencers and pay them and say, look, we can't put an advertisement on Facebook, but we will pay you $1,000 to be like, hmm, I just got this nicotine pouch from Andrew and Devin's Simporium. Use this discount code to get 40% off your first order. Right. So, I mean, I suppose you could do that, right? I mean, hard for me, I guess, to define a Zinfluencer. Outside of Twitter, I'm really not on social media. I don't know the whole influencer space. But I suppose if I try to take a stab at it, I mean, it's somebody that loves a product and is kind of, you know, speaking out in great favor of the product, right? And

they love it so much. They talk about it, but they're not getting paid to my understanding. They're just brand ambassadors and they love it and they're just sharing their enthusiasm. Yeah. I mean, I wouldn't necessarily say ambassador because I mean, I think that has a certain connotation with being affiliated, right, with the company. But, I mean, the company doesn't hire these people. And so I think, you know, there have been a number of headlines. popping up recently talking about lawsuits, especially in the U.S., talking about, in the U.S., the most popular pouch brand Zinn, right? That's kind of what you're getting at here. And if you look at it, most of the meat of the complaints, you know, I've read all these lawsuits

over. There's not a lot of substance in there, in my opinion. And it's allegations that are kind of really unfounded. And if you want to say, hey, underage people are seeing all of this content, it's like, well, is it the manufacturer's responsibility or is it the platform's responsibility? You know, they're not associated with these people at all. These people can kind of say and do as they want, right? They're just expressing their personal opinions. You know, where do you draw the line? And at that same time, you know, you can look at things like underage usage of these products in the U.S. And it's abysmally low.

And so I think there's not a lot of substance in some of the very public alarm that's been sounded recently. You know, I'm trying to think of it. If on TikTok, if I was on TikTok and I was a 19 year old drinking, like you wouldn't go after Bud Light for the 19 year old drinking their product. Like you'd go after who sold it to them. You might go after the platform for allowing like videos of underage drinking, but you certainly would.

And it's kind of crazy if Zinn is like, hey, people love our product. They're going on and saying, I love Zinn. There has been no money changed hands. All the money has come from them to us. Like when they buy our product, it's kind of crazy to go after them and tell them they need to crack down. So let's see, keep focusing. So we've got Hapkirk. We've talked about some of the modes they built up, right?

They're online. This is a difficult space to jump in because if you and I were going to form any other retail thing, we'd go in and be, look, customer LTV tap, right? we're going to go acquire a customer by doing a lot of advertising. We'll get the customer, we'll get their contact info, and we'll try and form a relationship with them. Perhaps it's, hey, if you want to steal our customers, good luck. Like, we were kind of the first mover.

We've got all their information. How are you going to advertise to get the customer to try? Like, we're doing a great job. So that's the first stage in the boat. I want to talk about some other stages, but just anything on that stage you want to dive into? Yeah, yeah. So, I mean, there's a lot to say, and this will tie into what I think their biggest part of their mode is, you know, to tie into what you just mentioned, you know,

customer acquisition costs a lifetime value. It's like, again, in a fast growing market, a lot of competition, especially if there's, you know, a limited ad pool. It's like, well, those potentially are going to become really expensive as people are competing on the same phrases, you know, long tail intent-based phrases where there's, you know, high purchase intent, right? And you better hope that you can afford your acquisition costs and you really better hope you've reasonably calculated your LTV, because if you're really off base and you're,

you know, paying an arm and leg trying to compete in that space, especially as a category is growing, it's like if you're off, all of a sudden, maybe you're not really making such a return on that spend and you're burning money, right? Let me give you an anecdote, because I think this is both an interesting anecdote, and I'd love to hear how you think about it relating to the hate group. So prep for the podcast, again, I am not a smoker. I don't use any of these, but I looked up a bunch of terms around Zen and on. which are the two biggest domestic brand, is my understanding.

So I looked up a bunch of terms to try to see, like, hey, who's popping up at the top? And the top organic result was Nicokic, which is Hap's U.S. brand, right? That was the one of their two U.S. sites, yeah. There were three sponsored results above it. There was Zinn, the website itself, had a sponsored result above it. GoPuff and Prilla were all above it. And I don't believe Prilla's hate group, right?

It is not. It is one of, it's, much smaller than them, but it is one of the relatively larger competitors. And the reason I thought that was so interesting was, A, confirmation, the organic term, their brand was at the top of the organic term for all of these. And I probably did 10 to 12 of them. Sure. But on all of them, there were sponsored numbers that were above them.

And you can view that two ways, right? We can say, to your point, hey, maybe these guys are burning insane amounts of money on CAQ and they don't realize it. And eventually these things will be dropped and I'll be, but, you know, I was also kind of like, oh, but you can cac your way in it. It's not like, like most of the results are probably some person who's got a hankering wanting to get it subscribed. Like they probably go through Google, not a Facebook or something. So I wanted to throw that anecdote over to you because I thought it was kind of interesting. Yeah, it's interesting. And I mean, so I also also does

spend some on paid advertising as well. And, you know, in talking with them, they've kind of explained it is they don't spend a lot on it. And they abide by the terms of service. and they largely do it to kind of poke and prod and see where their holes are and kind of reverse engineer to see how their competition is operating. But they spend less than 1% of, you know, net sales as paid advertising. Like it's very, very low. Something like 97% of hype's traffic comes from organic sources.

And the vast majority of that comes from organic. search. And this ties into exactly what their true mo is, or one of the key pieces, rather, which is their focus on search engine optimization. I have some experience more than a decade ago. I did quite a bit of SEO work. And I've kind of seen how Google's algorithm has evolved. And this company has been laser focused on everything related to search engine optimization. which back in the day used to just be stuffing keywords into, you know, as frequently as possible on your pages to rank for those certain terms. Nowadays, Google has become very sophisticated in lining up search results that are best calculated to deliver on the intent of the search, you know, the desire of that user using Google. And it factors in every variable under the sun.

And it's going to look at your product variety, your pricing, the ease of using your website, reviews, your overall reputation, authority. You know, the list goes on and on that all gets factored into how you're going to show up in these results. And as the largest, I owns the best majority of the organic search results. Like really, I think it's something the last stat they shared was they get something like two thirds of all clicks for spaces one through three in the search results for anything related to nicotine pouches, which is kind of obscene, right? And when you think about retail at a physical level versus the online level, like you go into a convenience store. Maybe they have 20, 30, even 40 skews, and that's it. and the person be behind the counter, you know, if you ask them, oh, you know, tell me about these. They just like, pick one.

I don't know. Like, I have a line of people behind you, just make your purchase and whatever, right? I'm glad you started going into the retail because this is the next question, right? When I first started hearing about them, my second thought was I instantly switched over from, okay, cigarettes. How do I personally think most people buy cigarettes? And that's they go to the gas station or I see them in front of me at the bodega and, you know, they get a pack or they get a carton and then they do it. So I wanted to, it seems like one of the reasons that online is better than in store is same as Amazon, right? There's a really long tail.

Like I thought in my head, hey, I'm just tossing some nicotine into my mouth. But, you know, if you go to the store, yes, you can get that. But if you go online, you can get cotton candy flavor, experiment, like you can get all the flavors. And that long tail flavors is really attractive. That's one. I'll concede that. But I wanted to ask more about it because, you know, these snoo cans, they cost, what, $350 to $5 per can? And they're small.

You can fit them in your pocket. You know, they're the, what is it? The ice breakers, whatever, they're the size of that thing. Very similar, yeah. And I want to ask a little bit on cost because, you know, the other thing with cigarettes is there's all sorts of regulatory shipping and nightmares and we can talk about the regulatory in a second. But, you know, shipping is in, like, if I'm going to get three of them, that's a $10 order,

I'm a little surprised that he can do this so profitably because sending, you know, three of them, it's going to get stuck in a mail carrier. a lot of the margins going to the manufacturer, the cost of having one person go grab three, stuff it into an envelope and then ship it, there's a reason a lot of these knickknacks, I kind of think of like the dollar store, right? Like, yeah, these little knickknacks,

they cost absolutely nothing, but the reason the dollar store does it profitably and it's not all on Amazon, it's because Amazon's realized, hey, having a worker go and pick out these things, like the worker's time would eat all the margin and then some to say nothing of the shipping costs. So I just wanted to ask,

I keep selling these things for $3.50, there's the convenience store down the street money is obviously the thing they're often selling a lot cheaper than the convenience store how does that price and everything and their cost structure work out I realize it just threw so much at you that is a lot and that's great those are all good things to think about and and yeah so when you when you think about the advantage because you're right there are certain costs that are being incurred that wouldn't be incurred maybe at physical retail But also, you know, the reverse is also true. So when you think about it, there's several big drivers of why on earth would anyone go and buy this product online rather than just, you know, going to your local convenience store.

Convenient stores are, as their name suggests, very convenient, right? Well, instead of that, you know, assortment of 20, 30, 40 skews on a global level, hype group has over 800. And along with that, you read details of every different quality of the product. You have reviews, you have comparisons, all kinds of stuff that really gives the consumer, the information that they're looking for to navigate the category. Along with that, the prices are substantially cheaper, where when you look at Hypes prices to the average convenience store or average supermarket, it's anywhere from 20 to 50% cheaper, which is just staggering.

And you say, well, how can it be so much cheaper that seems absolutely nuts? And there's several big components. You know, you touched on the, you know, having a picker grab a couple cans. And, you know, how can it make sense to just grab a couple, put them in a bag, you know, slap shipping on it and go, it's like, well, again, it's all very uniform. It's all very standardized. So if you think of one of their warehouses, you have a bunch of modular units you have a belt running down uh essentially these these bins you have lights

lighting up for for each it's almost like little dispensers for all the skews right so it lights up and say oh two here three here four here ding ding ding ding ding ding and it all kind of moves down all of those get thrown into shipping bags taped up automatic shipping label printed up slapped on and then bulked and prepped for their shipping partners. It's all very straightforward. If I can add, I think this is in one place where focus matters, right? Like if Amazon through, let's say there's a thousand skews. If Amazon threw this into one of their warehouses, their picker would go from, you know,

today I'm getting this in, and then I'm go over here to go get the plates, and then I'm over here to go get whatever else you're getting on Amazon. Whereas here, there's 800 skews, and you know exactly where each one is, and the person's going, and all they're doing is fulfilling these orders. So I do think there is something to the scale of just focused on only these 800 skews and not being in this giant warehouse where people like, my understanding with Amazon, one of the many issues they had was, hey, I go to get like, you know, a dollar kid's toy. I have to walk all the way across the warehouse.

By the time I get there, like I've racked up more than dollar employees cost, whereas if you're only focused on the Zinn, you could see how the employee, like maybe he's just sitting next to it and he's grabbing it. So it actually, it's a way of focus. actually matters here. Super streamlined. Exactly. And along with that, when you look at the difference in the cost incurred from these two models, the online versus physical retail, for the manufacturer, it's very easy to bulk send product to a single warehouse rather than distributing it, you know, think of the cost incurred when you're having your product distributed

to a million different, you know, convenience stores, right? A little bit different in terms of the profit pool and the cost incurred along with that the physical retail you're competing for shelf space you're competing for different promotions incentive plans you're maybe having some level of you know performance pay based on you know monthly volumes or whatever's moved so there there's all these things that come into the mix where you look at the higher convenience store price, but a lot of that is kind of taken off along the way from different parts of the value chain, right? No, you're right. And the proof isn't the numbers and what they're selling for and the profits that they generate. Though, again, it is surprising to me because like I also think

of the old cigarettes. It's like, hey, you're a C-store. Maybe you do cigarettes kind of at costish because it's just a traffic driver, right? Like somebody who smokes cigarettes, they're going to buy a pack a week. So you know every week they're going to walk in there. And once a month, they're going to buy a bag of chips with it. A lot of tickets. Yeah, exactly. And Hate doesn't really have that. So it's almost surprising you're selling against a lot of people who might price it kind of at their cost of goods sold. A lot of the end range margin where, you know, for Hap, they're going to send it in the mail to you. They have to pay for that. Whereas if I was buying from a C store, I kind of like, it's a, I don't see the cost of my time of going.

to it, but they managed to dodge all that and they still undersell it. So I think that's a good overview of why they're unable to undercut on price. Anything else on kind of like the seesore or hate selling cheaper you want to talk about? Yeah. So, I mean, really, and I touch on this a bit in my piece, but really it's kind of a virtuous cycle that shares the idea of scale economy shared, right? Which is you get to a point where you have the widest assortment at the cheapest price. And when you when you think about people shifting from physical to online to make their purchases, those are two major drivers. They're people that have already become very knowledgeable about the category. They like the category. So now they're consuming more.

They're spending more. And they have two thoughts. One, can I get this product for a lot cheaper? Yes, they can. And two, what else is out there? Because I only have access to these, you know, maybe if I go to all these different convenience stores, maybe I only have access to 50 skews. So what else can I try out? Other flavors, other strengths, other brands. I mean, you've described a virtuous moat, right? Where you have the most customers, you have the best pricing, you have the best selection. Like, that's a virtuous moat that's almost unable to be overcome.

So I want to talk about the next risk. And I think there is something in there you said that's interesting. Haif's got 800 skews, right? They've got the best flavors, the best selection of everything. I really like Diet Dr. Pepper. I try not to drink as much of it as I used to, but I really like Diet Dr. Pepper. I do not switch. I do not say, hey, you know, I've been drinking Diet Dr. Pepper for a month.

This month, let me go try Coke Zero or something. Diet Detective Pepper is my game. So I just want to ask, and you'll see why this matters a second. Like, if you and I are into nicotine pouches, how often is the average user kind of switching? Because I could see both. If you like chips, one day you might want barbecue. One day you might want ranch. drinks, you kind of stick with the same thing for the most part.

How often is the same musician? Because I could see you saying, hey, if you like the cinnamon-flavored nicotine, like that is what you get every day of the week, or are they switching up? That's an awesome question. I love it. And it's great because hype has actually provided a fair amount of data in the past in terms of consumer trends. And the interesting thing is you have a couple of

different kind of major cohorts of consumers. You have some people who like you, you know, it's the equivalent of, you know, I drink my diet, Dr. Pepper, I drink my classic Coke, whatever. It's like, oh, it's like I only do Zen wintergreen. Six milligram strength. It's all I want. I don't care about anything else. That's it. Right. And is switching up strengths this thing? Like, will people go six to 12? Yeah, I think some people do. And I mean, so, and there's also a, correlation to kind of what their previous usage, you know, rate was, whether it was a legacy product or something else. So if they were smoking, you know, two packs a day and they're trying to use this as a replacement, it's like, well, three milligrams probably isn't going to be,

they're going to want something stronger, right, to satiate that craving. I pop four packs in my mouth of maximum strength. And yeah. No jokes. I think, you know, you know, total tangent, but that's why Also, like, strength caps don't really work because no joke. It's like, well, you say, well, the max you can have is six milligrams. It's like, all right, well, if people want 12, they're going to pop two in, right? Like, there's no stopping that. So, but that's, you know, total tangent. Type back into the cohorts.

So you have a large group of people where they find the specific brand flavor strength. We're like, oh, this is my jam. I love it. You know, maybe there's some other great stuff out there, but I'm really happy with this. and I'm not really interested in exploring. Just like, you know, there's all kinds of new drinks coming out every year. You're good with Diet Dr. Pepper. You probably don't think much beyond that, right?

And so they have a subscription model where people can just sign up and say, hey, I consume about this much every, you know, week, every two weeks. I want this brand strength, flavor. This is much to my door every two weeks, you know, my happy camper. And, you know, it's really straightforward. I don't have to think about it. I don't have to make extra stores, trips at a store, whatever. What's super interesting is, from my understanding, I doesn't really prioritize the subscription model,

which sounds really weird because, like, you know, I think most people, they have it burnt into their brain that, oh, yeah, subscriptions, recurring revenue, it's nice and stable. When you said that I was shocked, because I thought like the whole thing here, online store, I thought the whole thing was get people on the subscription and the sounds like it doesn't make sense. It's like, well, why the hell would that be the case? And along with the large cohort of people that are like you, there's all of these people where

along with becoming more interested in saving on money as they're consuming more. They go, well, I can shave off a dollar per can. I'm consuming seven cans a week, you know, or whatever the math ends up being. It's like, they're looking to save money. They're also looking to see what else is out there? And because of that, and you see this a lot more in pipes core markets, which are Sweden and Norway, which are really much more established, more competitive, and also much more open to having much easier to get new products into the market, as opposed to the U.S., which is very kind of stagnant and stale. We can touch on that in a little bit. But in the core markets in Sweden and Norway,

You have all of these new brands coming to market. And along with that, because hype has a large install base and they can get your product in front of the eyeballs of all of these people, they're actually kind of the go-to partner to do product trials and tests and raise awareness of new brands. And so because of that, they've kind of become the de facto partner for any company looking to get into this space. And along with that, it's wonderful for consumers because you have a large cohort that's looking to continually try new, whatever new is. And it's not just strengths, it's not just new flavors.

It's all kinds of qualities regarding the packaging, the feel, the size, the form factor of the pouch. it's moisture level and moisture level it will affect the feel how comfortable it is to have tucked into your lip the rate of nicotine delivery the duration the consistency of the flavor like all these things tie in so incremental improvements like if you look at what's on the market in sweden now compared to six years ago radical upgrade and there's a lot of consumers who want to continually go out and try new stuff. And I think it was late last year. I provided a statistic where a large chunk of consumers fall into the cohort of wanting to try new skews.

And I think it's something like an average, they try on average in numbers, I want to say 8.2 new skews per year or something. Do you know if the people are trying new skews? are they do they have any brand loyalty so for instance back to my diet doctor pepper thing i will like diet dr pepper i'm looking over my shoulder because i see it they introduced a diet dr pepper strawberries and cream and i will try from diet dr pepper to diet dr pepper strawberries and clean but coke strawberries and cream comes out that's not for me like in this does if i am a zin person am i willing to hop over and try a velo i'm looking at it's like velo freeze x strong because that flavor sounds good or is it kind of like my old diet doctor's pepper model's like well look

if it was in the Zen flavor, I would try that, but I'm not a VLO person. Does that make sense? Yeah, that makes total sense. And so I think that that is the ultimate kind of lingering question, especially for the major manufacturers, in that they have this scaled production, they have currently the dominant distribution, and they leverage that to build that kind of brand affinity and doesn't mirror anything like their legacy products, right? And I'll say, like, it is occurring to an extent.

They are building a degree of brand affinity that loyalty you spoke of. I don't think it will ever be as strong as something like affinity for Marba or, or, you know, one of the premium brands like that when you, when you just think of its legacy, lack of obvious new competition, et cetera. It's just like, you have this entrenched leader and it's, it's, it's, it's, it's, been that case for decades and will likely remain so, right? Because here's the biggest, there are two big risks that's there at me. And the biggest risk, and this gets into it, is these guys can deliver the cheapest, right? But they have, again, I think it's Zinn on and

one other make up about two-thirds of the market. And if Zin says to themselves, hey, why are we giving hate all of this margin? Why are we letting them, like, why are we letting them grow? Why are we letting them have power over us, we're just going to have people go direct through us, right? Very similar is how Nike is much bigger than Foot Locker. This isn't quite fair, but Nike looked at Foot Locker and said, hey, we're giving them all of our new high heat products. Let's cut them off. Let's have people go direct. So the risk I was asking is, and you can build on it is like how much is there a risk that Zing starts going direct to consumers, on starts going direct to consumers and consumers say, look, I am a Zin person. I just go get

my Zin. I don't care if I don't have access to on. Now there's cost on. there's all sorts of thoughts, but that is the largest risk that strikes me. And everything hate can do to prove out like, hey, you know, for a while there was the thought of, in some brands you still have this like with Nike, hey, Nike needs us just as much as we need them. If Nike loses Foot Locker, well, we're 20% of their sales. And yeah, we're going to lose some sales. But a lot of the people are just going to go buy Adidas instead, right?

Because if Zim lost hate, maybe hate says, okay, cool. Like, yes, you're going to take some consumers with you. But 90% of your sales are just going to go to on or be low. So I've rambled there. I'd love to hear how you kind of think about that. The brand's going to wreck to consumer risk because that's the largest risk it seems to me. So, I mean, I can cut right through some of that very simply in that, you know, I know some people have been highlighting recently that Zinn does have a standalone website. They recently started pushing subscriptions more heavily.

They were the top, they were the top Google result paid. But when I searched Zun, it was Zinn was the top, and then the top organic was promote. And one of the things, you mentioned subscriptions. I was shocked when I looked at HAP and I kind of didn't notice it. I thought there'd be like a subscribe and save button. I don't see any subscribe and save button. So they really are pushing people for the one-time thing. Sorry, continue on Zinn.

Yeah. So it's really interesting. And, you know, I've kind of tried to deconstruct how the online market looks exactly and trying to think about, well, you know, where are all these different companies? is where are their true interests and how can they align? Is there a reason to go one way or another? And you look at the Zinn standalone site. Not only, you know, they do pay to advertising,

but they also rank very highly for all kinds of brand specific terms, mostly for Zinn, unsurprisingly, right? It's, you know, they sell exclusively Zinn. They're going to focus on capturing that market. Now, what's interesting is for people going online for just Zinn, they're probably already using Zin, they are familiar with it. Now they're just looking to maybe lock in at a slightly cheaper price or get a subscription for convenience. Those aren't the people looking to explore. Those aren't, and they maybe probably aren't the people using other brands, right?

If somebody's only ever used on, the odds of them. going to the Zen online store than set up the subscription are pretty low, right? But what's interesting is there are a couple points. One is that Swedish match now owned by

Philip Morris International, they don't actually fulfill and distribute the orders on the Zin site. That's actually handled by Scandinavian Tobacco Group. Really? Yeah. Yeah. And it's like a negligible part of their business, but they use their U.S. infrastructure.

to handle that. And they haven't talked out, I think, for like the last two quarterly calls. Not sure what's going on there, but like it's, I think they may be mentioned it for one sentence saying, yeah, it's growing like Zinn's growing like wildfire in the U.S., which is good for us, but it's small part of their business. So it's like, you know, for Swedish match or for Philip Morris International, it's like, well, you're giving up part of your margin, whether it's to skin, in tobacco group or it's to hype or whoever.

But the advantage of working with hype and the reason why I think that they're going to stay the leader by far is because how do you get eyeballs of users of other brands to try your product, right? Again, like all these standalone sites, they're really for people that are already kind of stuck on the one particular brand. They're not looking to branch out.

And also it's like, well, are you going to give up and only have your product on your standalone site? If you don't have it on the largest portfolio of sites in the world, anyone else that is willing to stay listed on there is going to inherently get more eyeballs and get more sales. You're conceding that entire space. So everybody kind of needs to stay on there. Along with that, there's two key points. which is there's this additional virtuous cycle of when you look at the core market, Sweden and Norway, you have constant new introduction of new products, new iterations.

Something like one third of all the products haven't even existed for more than a year on those sites. You're talking a lot of just iteration, whether it's new variants of existing manufacturers or new manufacturers trying to break in, like how. How do you get eyeballs? How do you reach the consumer? How do you get people to try a product? How do you get data to understand how it's being received? By far the most economic resource is to partner with HAPE group to make that done. I can't remember if it was your write-up or Spencer's write-up or a different write-up I read in prep.

But I think it was yours. But somebody pulled a slide from one of Philip Morris's investor relations tax. And it was something talking about ZAN. And if you looked at the source, the source was actually the hate group. right so it so i i had that and it was uh altria ultria they they talk about so they have on in the u.s and they're piloting on plus which is a moist pouch variant piloting it in in uh scandinavia partnering with with hype to make that happen again so um something we haven't talked about and is really another reinforcing pillar of hype's moat is their insights business

Now, they're by far the largest in this space. And they have over a decade worth of consumer data on snooos and then more recently nicotine pouches. Along with that, all of the new brands, they partner with the company to try to launch these things. They have every single data point. I think they said to something like 4,000 data points for every consumer that uses their website along with all this data of every single brand, all these trends.

And so what happens is they take all of this data, they clean it up, they package these insights products to sell to manufacturers, to help them navigate the space. And it can be anything from understanding the category on a global level, on a country level, looking at data for a specific brand to try to identify M&A targets. it will also, you know, be used for trying to identify, you know, maybe gaps in terms of strengths, flavors, you know, searching just trends in consumer behavior. That all gets packaged and, again, is exceedingly valuable to any manufacturer. It seems like the long run, I'm not sure because you would probably piss your partners off, but it seems like in the long run, they need a private label brand or maybe multiple private label brands because you could imagine A, that takes them off the risk of Zinn wants to go off because

if Zin wants to go off, they say, great, we're going to push more traffic towards our private label brands. And B, if they're getting the most insights, like instead of just giving it to the brands, be like brands, go figure it out yourself, we're going to take it and we see like mango is popular, watermelon's popular. There's not a mango watermelon flavor. We're going to launch that first. Yeah, eureka moment right there. Yeah. So what's interesting is they've explicitly said they're not going to get into manufacturing their own. Makes sense. Yeah.

And they've laid it out in that, you know, it's not in the interest of the consumer and it's not in the interest of the manufacturers, which they aim to serve both, right? And I think also, you know, you get into some complexities of, yeah, how do you authentically best service, you know, the interests of all these other manufacturers if you're pushing your private label, you know, you look into a situation like Amazon basics, right? and how kind of how that's gone on the criticism that's received. But looking at this more fully, the insights is so interesting because, like, as the category grows globally, insights will become more and more valuable. Now, they don't specifically break out the financial contribution of this in the site's business, but you can think about it really straightforward. Like, you collect all this data.

Then there's a development cost to, like, it up and basically package it as a data product, right? And they also offer some like custom insights solutions, which are more bespoke, more costly, and less common. Normally they package everything and like they set a price at the start of the year and then each year that renews and because there's more data, they take a step up in price and then, well, people want to buy that year's data or they don't and a lot of manufacturers opt to.

But what's interesting is in the core markets, while they don't break out the exact contribution, you know, you have the upfront development cost, but you have this constant growing competition from all these manufacturers. Everybody kind of needs this data to figure out, you know, what's going on in the market and how are we going to get to market? Also, along with that, like you can pay for a premier placement on type site. You can pay for product trials at the checkout. There's opportunities for upsell to trial your product. There's all these additional forms of monetization through these offerings, which is really interesting. If you think about it, like Instacart stumbled on to, there's questions, but it's a pretty good business where, hey, look, we sell everything and we can direct traffic to different grocery stores by saying, hey, like, groceries are a commodity, whichever gives us the best cut, we'll direct. And B, you know, milk is a commodity.

whichever milk brand pays for the top advertisement will put it to the top of the bucket like if you can run the business of picking groceries which is tough but if you can get that to work like there's a lot of really high margin profits here you've got all of that you've got all of that and then some as the category leader

I want to ask two more questions before we wrap it up because you've been generous with your time towards then the other big regulatory thing that jumped out to me right this is online selling of nicotine pouches I live in New York City you cannot get tobacco delivered You cannot get cigarettes sold to you online.

And I think I'm a believer in the, hey, look, people, free markets, people should be able to do what they want. And this is way, whether you believe it's riskless or there's some, this is 100,000 times better than smoking cigarettes, right? So I believe in a lot of, I'm not going to say this is public health benefits, but, you know, risk reward public health, all that. Still, I can't get cigarettes delivered to me. And this is a very small fraction of the market.

And I do think there is a vaping crackdown coming just because of all the teen smoking cotton candy. I could imagine a world where either a, you know, cities, states, federal government start saying, hey, just no tobacco or nicotine getting sold online, period, because, you know, we don't know if people are, if little kids are buying it or we just don't want to because vaping's out of control. Or, B, I could imagine a world where even if it's not done federally state by state city, there's only three carriers. for carers that matter, right? UPS, FedEx, USPS, maybe D.HL. I can imagine all the carriers looking and saying, hey, the risk or reward of none of them do alcohol, right? And the reason none of them do alcohol is in part because it's expensive, it's heavy. But if they deliver an alcohol bottle to my doorstep and my six-month-old daughter somehow gets it and a side step a party, they're going to be in trouble because they didn't confirm someone who's 21 got it.

I could imagine a world where the four distributors just say, hey, not making a lot of money. you know why are even working so i just wanted to put over that like the online model risk of you could just ban it and have people go to the sea stores yet it's a little less convenient but they can still get their nicotine fill how do you think about that so i don't know specifically who who the i think there are alcohol like or wine subscriptions people people so there are partners like i could watch us uber bought drisley for over a billion dollars and i know they have some shipping partners to get it to the households of people.

Like Uber Eats is a person physically goes to the store, buys it, and then it brings it to your doorstep. Whereas HAPE is, hey, you buy it. It's from a warehouse. It's put in a box. And correct me wrong. It's shipped over USPS or UPS or something. Yeah, you have a couple different options.

For each country, they partner kind of with the optimal providers. Yeah. But this is where. HAP is warehouse online versus the Uber Eats model, I believe, is just a man goes to the grocery store and buys your alcohol and then it hands it to you, you know, like those are two different things. Yeah. So, you know, specifically for nicotine pouches, there are a couple of things that consider

here, you know, comparing to alcohol. It's like one, with alcohol, it's like it's larger, it's bulkier, it's heavier, prone to breaking, right? So shipping can be a little more difficult if you break a couple bottles. There's all of that. Nicotine pouches, again, small, super lightweight. You can't break them. You can chuck them in a wall.

you know against the wall they're going to be just fine um along with that i you know they take this ultra seriously so they they partner with a number of companies or for both uh at the point where you plug in your credit card you plug in your online details you use uh you verify your age online uh they use all these different forms to verify you are who you say you are and you're over 21 And then along with that, if it's required in the state, they require a signature at the point of delivery, you know, once it's actually delivered. Right. And so because of that, they use all these different layers. And, you know, they've had confirmed 100% of their transactions are age verified. So, you know, they don't have any teens figure out how to, you know,

skirt the system and get this stuff delivered. I'm obviously domestic focus. So I understand regulations and there have been so are there any states in the u.s where online delivery of nicotine pouches in Tibet is outlawed yeah so um fuzzy don't have it in front of me i want to say maryland maybe it's maryland could be wrong think i think maryland has banned it um i know so right right now there is a slew of state level they're called like pm t a registry bills going on specifically focused on vaping, right? I'm sure you've seen some of the chatter about that. And the idea is that, you know, if a product doesn't have a marketing granted order

or doesn't have a PMTA, a pre-market tobacco authorization application pending mouthful with the FDA, then they're going to basically be off this registry, not allowed to be sold in a certain state. then the state will enforce against any products that are infringing on. And so some states, I know, again, can't remember off the top of my head exactly, some are now starting to look at, well, maybe along, you know, with this register, registry, we sneak in the idea that, oh, maybe we'll ban online sales or maybe we'll restrict flavors.

And there's other states doing similar actions. You know, late last year, we saw California ban flavors, right? right for all these products. And so certainly, generally how I'm thinking about it is on a federal level, I don't think it's likely that we'll see something like an online sales ban for Nikki Pouches. And I don't think it's likely that we'll see a sweeping flavor ban. I think it's also unlikely we'll see a cap on strengths. So again, you know, people can pop multiple pouches in if there is a cap. So that's kind of irrelevant. into any place. On a state level, we're going to see all kinds of things changing. But I don't think

it's all going to be inherently bad for hype. And the reason is, is when you look at other geographies, other countries, there have been measures taken, which have ended up being a tailwind. Like, if you look at Germany and you look at kind of restrictions prohibiting, like, physical retail, but you allow online sales. It's like, well, what do you think happened for hype? in that situation, right? Why Germany outlawed physical retail? I don't know the rationale. That escapes me.

I just know that they did. And then also, like, it's so bizarre because, like, you're not allowed to have, if you ship them online, like, you can't sell them from Germany, but within the EU, they're allowed to sell and ship. So I believe that hype uses their distribution warehouse from Sweden and then ships them into Germany. But that's legal. I'm obviously thinking domestic when I asked the question. And I do think a risk is, hey, everything gets swept up into, there obviously needs to be some reform around vaping and everything gets swept up. And it's just like a crackdown on all of it. Right. I think that

would be some type of risk. But the other side is regulations and everything tend to actually, and online tend to actually be better for the larger player because it just increases that cost. right? What happens with IDFA or all the European things? Yeah, the costs to run a Facebook or Google goes up, but guess what? Now you can never start a Facebook or Google competitor. Exactly. So I could see that. I want to end by, so end with the question of valuation. First, I talk domestic when I ask regulation, because again, I'm domestic. But the interesting thing here is like, I think the valuation is, can you give the valuation with and without the U.S. because the U.S. is actually a growth market for them. It's not their mature market. So maybe we should talk about that. Yeah. So, so, interesting because, and, you know, when I think about this company, it's, it's interesting because on paper, like, if you look at current net earnings, they're trading a very lofty like earnings multiple, right? Because you have the very profitable poor markets, which is Sweden and Norway, but you have losses being incurred in the growth market sector, which is the UK, Austria, Switzerland, Germany, and the U.S. But what's so interesting is that

the growth markets are growing at a rather ridiculous pace, and the U.S. is by far of the largest market for nicotine pouches in the world. It's something like five times larger core market than the core markets for this company. And there was something said, I think, at the end of last year by Gavin, which was like the growth in the, last six months in the U.S. in the U.S. market, that total volume is greater than the whole Sweden and Norway market combined. It gives the idea of like just how big the U.S. is and how fast it's growing. And so we can strip out the losses of growth markets entirely. We can look at core markets. So like, you know, last year, they did something like 190 million second

EBITDA and their current EV is, call it, 2.7 billion sec. So, something like 14 times for the core business on enterprise earnings, right? And again, that core business excludes the super growth, huge U.S. market. So if you think the U.S. market can hit scale and probability, like that's a free call option we're talking about from there. Right. And so what's interesting, The core markets are still growing by double digits. You know, you're talking growing by 10, 11% a year total. Now, what's happening is nicotine pouches are growing even, are growing faster than that in those countries,

but it's also cannibalizing legacy volumes like snooze volumes, right? And so there's some push and pull on that dynamic. But again, like across the board, hype basically owns around 80% of the, online share in all of these countries that operates in. And something that's super interesting is when you look at all of tobacco and nicotine, like nicotine pouches are like a tiny little fraction of that. Globally growing, you know, let's call it 30% plus year over year for the whole, you know,

world. Some countries growing much faster than that. But what happens is as countries mature and as more consumers again become acquainted with the product category, they're looking to save money, looking to explore new flavors, more people gravitate online over time naturally. And so online penetration is very, very low in some place like the U.S. where it's just a couple percentage points of the total market. And so you go, well, you know, if the U.S. is growing, call it 60, 70% year over year,

what happens if you take that, you know, low single digit penetration and you double it? Or to get to the, you know, the equivalent penetration in Scandinavia, you multiply it by like, times six, right? The growth rate for a company like this, like it can be rather astronomical. It's kind of hard to wrap, you know, head around the numbers. But again, so you're, you know, to go back to the valuation, 14 times poor enterprise earnings that are growing double digits, capital light, don't need much reinvestment at all. And I believe there is a definitive moat here. They've retained a large market share, and they're continuing to grow and reinforce that moment. Today's episode is sponsored by Santangelo's Review.

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I didn't miss it or it's a and buy into a stock that's doubled, right? So I guess I just want to end by asking, look, you laid out a case for the core business at 14 times earnings. But if a listener's listened to it and they can tell I'm pretty, they can probably tell I'm pretty interested in it. Again, link in the show notes to the write-up, it's incredible. But when you look at this 80, having doubled, I hear you when you say, oh, 14 times core business, but you're getting all the growth, the core business is growing 10%. capital light and you get all these domestic markets free. I guess my thing would just be like, hey, why was it at 40 six months ago? And why have I, why have I not missed it? Right. Like what was the market missing at 40 that it's gotten a little more right today, but it's still getting

dramatically wrong? It's like, and you know, you can back up further. And like, you know, before it was trading at 40, not too long ago, it was trading at, you know, 30, you know. Absolute depths of the absolute depth of the trade. Yeah, those are pretty good. In hindsight, good prices to buy i suppose um but yeah looking at it now it what's interesting is you can look at this business and the core markets again growing healthy double digits the growth markets i mean they grew sales in the in the growth markets at 67% last year right like just um and the year before that 57 so it's actually accelerated um which which is rather remarkable but if you look at their guidance. It's like, so let's think about it. It's all like 80 a share right now, whatever.

I think, I think, yeah, when I published it, it was maybe 60 or something. So a pretty quick run-up since then. What they're guiding to in 2025 is top line of five billion in sales. They're at about trailing three billion right now. So that's a pretty substantial jump-up. going from three to five. Along with that, they basically said that their growth markets are going to inflect to profitability, and they're going to reach mid-single-digit

adjusted operating margins with that. Now, you can look at how they break out their adjustments. They subtract out some consulting legal costs, and then I think amortization of the acquired intangibles related to the sites they acquire to get that adjusted figure but if you if you do some rough math on okay five five billion in sales five to seven adjusted operating like you're looking at enterprise right now of 2.7 they basically said that capex is always going to stay capital light like one and a half two percent uh of sales

per year, marketing is less than 1% of sales each year and decreases each year because that isn't getting scaled up. And then the company, starting in Q1 of this year, is going to break out a third segment, a new segment, which will be emerging markets, which will be trying to establish into even more countries. And then new categories in existing countries, including kind of branching out into vaping, doing some light testing with that right now. But all in all, you look at the total reinvestment needs. And they basically said previously that, hey, we're going to just sink every dollar we generate into growth. And we don't care about showing profits on paper.

We're going to keep growing this company because we think the opportunity is immense. But they've kind of adjusted that and said, hey, after 2025, even maintaining this level of reinvestment, you know, the growth markets will have scaled inflected to profitability. continue to reinvesting the emerging markets, we're going to be generating substantial cash in excess of what we need to manage this business. So we're going to evaluate, you know, starting to return capital share of, which likely means maybe in 2026 in stating a dividend while continuing to grow. And it's kind of odd, again, because you look at the numbers of, you know, growth markets growing 50, 60, 70% year over year and be like, yeah, we can achieve that by reinvesting almost

nothing, right? It kind of implies, again, you look at their footprint. They use a mix of third party and self-owned warehouses, but like well under maximum capacity, lots of room to increase capacity, relatively capital light to add in more, you know, 3PL, third-party logistics warehouses, continuing to scale this and investing in core business, it just isn't capital intensive. And there's a pretty straightforward path on how a whole lot of operating income converts to free cash flow down the line. Actual last thing in the knowledge go, I am a little surprised by the not capital intensive.

And I'm not calling for this to be like a steel manufacturer. But if I just think, if this is the Amazon of online tobacco sales, right, like Amazon does buy and build huge warehouses. And I understand you can rent a little bit and they can use 3PL and stuff. But I'm surprised there's not more capex into buying and building warehouses here, especially because I would kind of think you would want to have your own warehouses just on the off risk that, you know, if you're using a third party and they say either A, hey, you know, there's somebody who will pay more so we're kicking you out or B, hey, you guys are

the best, you've got a lease. But as soon as this lease expires, we need you out because, you know, tobacco. We were either rightly or wrongly, going to ESG, worried about how it's the rest, whatever. I'm surprised that KAPX is so low. So I just want to ask quickly on that. Yeah. I mean, so it's interesting. I think if we circle all the way back to the beginning of our conversation, you talk

about just the focus on this, like the simplicity of the product, how everything is uniform. Like you think about what they need to increase the footprint of this very modular setup to fulfill and handle. distribution. It's really straightforward. And again, like, you know, most of their warehouses, they have them on these long-term leases. You have pretty straightforward equipment to, to handle this kind of stuff. And then, you know, you have your personnel expenses. And when you, when you look at the fixed cost, it's not hard to extrapolate growing volumes. And you look at where the operating leverage can can really, you know, start to shine, especially,

in the US, when things are growing in the UK, where things are growing this fast, you go, well, if they're not at capacity, it's not terribly difficult to add a bit more capacity. You have X-Fix costs, ridiculous inventory turnover. I think it's something like times 15 times a year. So, the working capital requirements really isn't, you know, all that ridiculous. The beautiful thing about this on inventory, like when you have an addictive, non-discretionary product, you can probably plan out your inventory almost to the day, right? Like, it's got to be just insane in terms of what you can do. Yeah, I can't really think of any company all the top of my head that has this kind of velocity.

It's kind of obscene. And along with that, you know, they use, it's been kind of, it's been interesting how they've managed their working cattle. You know, they have this overdraft facility. And then at the end of every year, it looks like at the end of like every year, they basically drastically increase their, inventory at the end of the year when they're anticipating like inbound price hikes from certain manufacturers at the start of the next calendar year right so it's like all right we're going to max this build up inventory but then again like you said like there's so much visibility into into like future sales especially with their insights they can manage their

working capital rather you know precisely hey let actual last question and then I do have comment and then I'll let you go we can we can keep going no I I I I I appreciate it. And look, a long time listeners will know when I go, I tried to make the podcast run hour. I generally go over a podcast because I'm just having fun and learning so much. So, you know, we're approaching 90 minutes. So that is the reason. If I was smoking a pack a week and I switched to a snoo or a snoo, whatever, am I right that I would save money?

Generally, yes. I mean, it depends on the exact country. depends on the state, right? Not only does affordability vary from country by country, but state by state in the U.S. It depends if you live in New York or Virginia. You're paying two very different prices for a pack of cigarettes, right? I was just wondering in terms of pricing power, because when you said the manufacturers increased pricing, like the great thing is everybody who touches tobacco understands these

guys raise prices like crazy. The consumers understand it, the distributors. I was just kind of thinking, you know, if I'm switching. off tobacco, ignoring, hey, I'm probably not going to get, hopefully reduce my risk for cancer. Hey, I won't smell, less social stigma. I was also thinking, hey, you know, if I used to spend 50 bucks a week on cigarettes and I switched to 20 bucks a week on snoot, maybe like I've got more, more price less, city if that makes sense at all. Yeah. And again, I think there's also that trade up going back to like the health cost. Maybe you're willing to pay even more long term

if it's far better for you. If you don't have those, the health risk, maybe go, oh, well, I'll I'll pay much more because it's much safer for it. But generally, when you look at it, like, there isn't this federal level excise, like there is on cigarettes. There isn't the master settlement, I must say, payment per pack, like there is a cigarettes that's baked into the retail price. Yeah. Right? State level, some states have basically, you know, no excise tax on pouches.

Other states have implemented something. I'm sure down the line, when they realize this is growing, we're leaving money on the table, not taxing this. they'll apply, more states will apply excess Texas, but I think they'll leave a pretty remarkable differential between that and cigarettes to, again, incentivize people to switching to reduce the health costs. And because of that,

I think when you look at the contribution margin of these products for manufacturers, I think they can have rather remarkable margin profiles. For a company like type historically, you can look at core markets, snooos is being cannibalized by nicotine pouches. So manufacturers of snooos are taking price to offset those volume declines. Hype has been able to manage their price and basically protect their own margins.

And likewise, you look at the nicotine pouch space where it's very innovative over there, lots of new products. Some of them are not exercising pricing power, right? Because they want to be attracted from the right price point. Nonetheless, hype hasn't had an issue really kind of protecting its margins. And along with that, as it grows, in the grand scheme of things, while it's the largest in the online space, it's a very small company overall. And as its volumes grow, most of its supplier agreements with the manufacturers are based

on calendar years, which are based on the previous year's volumes. So you think as they keep growing, growing each year. they kind of get a step up in potentially their margins because they're able to get better pricing, better agreements with the manufacturers. Along with that, they have the step up in the pricing on their insights data. So you can kind of extrapolate that as volumes grow. And think about what the margins might evolve. Well, Devin, again, this has been absolutely fantastic.

We're going to have to have you back on for another one. But I will just remember everyone, the piece, which should be. I'll include a link in the show notes was probably the best investment research I've read so far this year. I say probably because I've read some good ones and I don't want to hate on anyone, but it is really worth reading. And I think you can tell from this podcast, it's a fascinating idea that's worked well, but probably hopefully has a lot longer to go. So, Devin, I'm looking forward to having you back on, but thanks so much for coming on. Thanks for this. And we'll chat soon. I appreciate it so much. Man, we only got through like a third of my notes, but, man,

and it felt like we only talked for 20 minutes. So it was a blast. Thank you so much. Appreciate I get it. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.