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Speaker 3: Harveryone. Welcome to the Bloomberg Business Week Weekend Podcast. Tim
Speaker 3: is on assignment. Now we've officially entered the final month
Speaker 3: of twenty twenty five, you know that, and all eyes
Speaker 3: are on this Wednesday's FOMC interest rate decision. That meeting
Speaker 3: with market participants. It is expected to bring another rate
Speaker 3: cut by the Fed, largely priced in, some say, despite
Speaker 3: the FOMC committee working with less economic data than usual
Speaker 3: after that government shutdown for more than a month. Now
Speaker 3: for the latest on what to expect from the Fed meeting,
Speaker 3: head on over to Bloomberg dot com or check it
Speaker 3: out on the Bloomberg terminal. Even without that data, We've
Speaker 3: got some really great reads this week into US economic health.
Speaker 3: We have the CEO of Lending Club with an outlook
Speaker 3: on consumer credit he joins us in just a moment
Speaker 3: plus a deep dive into private credit with Christina Lee
Speaker 3: of oak Tree Capital Management, who also has a take
Speaker 3: on the health of the consumer that's actually impacting the
Speaker 3: firm's investment strategy. Also why a recent downgrade in the
Speaker 3: cloud security company zscaler is not phasing its CEO, Jay Chawdry.
Speaker 3: We speak with him a little bit later on all
Speaker 3: of that to come, but first, the online lending marketplace
Speaker 3: and platform for loans, credit cards, deposit accounts, insurance, and
Speaker 3: a lot more. We're talking about lending Club. They announced
Speaker 3: recently a one hundred million dollars share buy back. It
Speaker 3: was just about one month ago, which was nearly five
Speaker 3: percent of the company's market value on the day of
Speaker 3: that announcement. Analysts have been raising their price targets on
Speaker 3: the stock this year, and even most recently since the
Speaker 3: company reported earnings late October and posted third quarter results
Speaker 3: that beat estimates and provided a guidance range for new
Speaker 3: fourth quarter originations with a midpoint above estimates. We caught
Speaker 3: up with Scott Sanborn, chief executive officer of lending Club.
Speaker 3: He's been CEO for almost a decade and he's been
Speaker 3: at lending Club for fifteen years now. Also joining our
Speaker 3: chat Herman shan He is Bloomberg Intelligence Senior analyst for
Speaker 3: US regional Banks who help bring this conversation, this roundtable altogether.
Speaker 1: Scott, I want to start with you and just give
Speaker 1: us some size and scope of the business, the consumers
Speaker 1: that you're working with, who's interacting with the platform.
Speaker 4: Yeah, so we serve a customer base we call the
Speaker 4: middle majority. They are if you think about credit, which
Speaker 4: we are a credit centric bank.
Speaker 5: If you've got a lot of money, you don't need
Speaker 5: a lot of access to credit.
Speaker 4: You pay cash for car, you save up to send
Speaker 4: your kids to college. If you're on the other end
Speaker 4: of the spectrum, you can't really access credits. So there's
Speaker 4: this middle group that are high income, heavy users of credit.
Speaker 4: So they can afford a car, they can afford to
Speaker 4: send their kids to school, but they need to use
Speaker 4: credit to do it.
Speaker 5: That's who we serve.
Speaker 4: It's a really big customer base that represents about a
Speaker 4: third of the US population, but.
Speaker 5: It's close to half of the credit wallet.
Speaker 4: So they are more likely than average to have every
Speaker 4: form of credit, and that credit is with the exception
Speaker 4: mortgages also larger than average.
Speaker 5: That's what we serve.
Speaker 3: How much do these people usually make our average?
Speaker 4: And you know, obviously misleading averages can be misleading, but
Speaker 4: average is about one hundred and twenty five thousand dollars,
Speaker 4: but you can think of it of ranging between call
Speaker 4: it eighty thousand dollars in individual income to about two
Speaker 4: hundred thousand is where we really over index.
Speaker 6: Great.
Speaker 7: One of the real highlights of your recent investor day
Speaker 7: was the panel discussion with Marketplace Investors, and we talked
Speaker 7: about this earlier before your appearance here on radio. One
Speaker 7: of the panel THATTS talked about being aligning performance expectations
Speaker 7: partnering with better operators. Are you seeing that with the
Speaker 7: private credit space.
Speaker 1: Yeah, we do so.
Speaker 4: You know, we were born as a marketplace. Initially, everything
Speaker 4: we originated we sold. When we acquired the bank in
Speaker 4: twenty one, we started to hold a portion of our
Speaker 4: loans on our balance sheet.
Speaker 5: That both gives us.
Speaker 4: A stronger and more resilient earnings profile also allows us
Speaker 4: to do other things innovate using our balance sheet. And
Speaker 4: what we found is just by aligning our interest with
Speaker 4: our loan buyers, we're the largest eater of our own cooking.
Speaker 4: We're the largest holder of lending club loans. We care
Speaker 4: very deeply about the performance of the credit and you know,
Speaker 4: credit is always evolving, it's very dynamic. Because we have
Speaker 4: a balance sheet, what we can do is when we
Speaker 4: want to test something new, we test it on our
Speaker 4: balance sheet.
Speaker 5: Let's try longer duration, let's try a larger loan size,
Speaker 5: let's try.
Speaker 4: A new marketing channel.
Speaker 5: We hold that first, we own it, we own it, we.
Speaker 4: Make sure it performs the way we expect, and then
Speaker 4: we release that to the marketplace. If you don't have
Speaker 4: a balance you can't really do that. And so that's
Speaker 4: visible in our results across every aspect of underwriting. So
Speaker 4: lower delinquencies than the rest of the industry thirty or
Speaker 4: forty percent.
Speaker 5: Below, lower roll rates, higher recovery rates, lower.
Speaker 4: Prepayments, lower fraud, literally every aspect that you can measure
Speaker 4: of credit, we're out performing on.
Speaker 1: Has that remained consistent this year, in recent months, in
Speaker 1: recent weeks, like you have a great real time view
Speaker 1: of the consumer in the form of how well they
Speaker 1: are doing in terms of paying back their loans. That's right,
Speaker 1: still looking good.
Speaker 4: Yeah, So that's been consistent for you know, we release
Speaker 4: four years of data we put out there, and so
Speaker 4: it's remained consistent. But you know it's not it's kind
Speaker 4: of like a duck on a pond. It's remained consistent
Speaker 4: because we're doing.
Speaker 5: A lot of work underneath the cover.
Speaker 4: So you know, something that we shared an investor Day
Speaker 4: is at any given time, we have more than two
Speaker 4: hundred tests in the market where we're evaluating price points,
Speaker 4: changes to the credit. So we're constantstantly adjusting to reflect
Speaker 4: what's happening with the consumer, and that's what's giving us
Speaker 4: the consistent results.
Speaker 3: Well, so that to me says you're very picky about
Speaker 3: who you lend to. That's true, we are so in
Speaker 3: terms of your test, So tell me what it is
Speaker 3: I mean, and how many of people who apply or
Speaker 3: want to access your platform. You're like, I'm out.
Speaker 4: Yeah, So we're pretty good at selecting who we want
Speaker 4: to have in our portfolio and reaching out to those
Speaker 4: people and then both delivering the price and product experience,
Speaker 4: but also let's call it the user experience that gets
Speaker 4: them all the way through. So we look for areas where,
Speaker 4: for example, we can control the use of the fund proceeds.
Speaker 4: If you come to me and say i want twenty
Speaker 4: thousand dollars because I'm going to do whatever my kid
Speaker 4: needs braces or I'm moving cross country. Great, but unless
Speaker 4: I'm paying the orthodontist, I don't actually know that that's
Speaker 4: what you're using it for. Yeah, So we try to,
Speaker 4: you know, set ourselves up so that we are in
Speaker 4: some ways controlling the use of proceeds and then making
Speaker 4: the experience such that it makes it really easy. So
Speaker 4: or largest use cases for people who already have debt,
Speaker 4: credit card debt, most notably, which at this point more
Speaker 4: than half of all Americans are carrying. They're carrying it
Speaker 4: at really high rates twenty three percent interest rate. It's
Speaker 4: highest they've ever been in history. And we say, great,
Speaker 4: you should do this instead. It takes less than five minutes.
Speaker 4: We're going to save you seven hundred basis points. And
Speaker 4: by the way, check all the credit cards that you
Speaker 4: have that you want us to pay off, like we
Speaker 4: see you have Chase or a cap One. Great, check
Speaker 4: those and we're going to pay them directly, so we
Speaker 4: know you are paying off your credit card debt. You're
Speaker 4: not just saying you're going to pay off your credit
Speaker 4: card debt and taking out more money we are paying
Speaker 4: it off for you. Benefit for you is you know
Speaker 4: you've consolidated everything into one bill.
Speaker 5: Other benefit is.
Speaker 4: Your FICO score usually goes up by thirty thirty five
Speaker 4: points because you've lowered, you know, your utilization.
Speaker 3: How much can you low? Like I'm going to tell you,
Speaker 3: credit card rates just blow my mind about how high
Speaker 3: they are. And I'm just curious, why are they so high?
Speaker 3: Are people so bad? Is it to cover? No, I'm curious.
Speaker 8: Yeah.
Speaker 5: No, it's a great question, and it just.
Speaker 3: Seems like it's out of control, and I think it
Speaker 3: prevents people from becoming financially solvent or creating, you know,
Speaker 3: kind of getting ahead of the game if you will.
Speaker 5: Yeah, there's a lot to unpack in that.
Speaker 8: It is.
Speaker 4: No, No, it's a great question, and you know there's
Speaker 4: a number of questions underneath. But I'd say the biggest
Speaker 4: thing is if you think about how people choose credit cards,
Speaker 4: it is not based on the interest rate. Yeah right,
Speaker 4: it's my Skymiles card or whatever, my retail store card.
Speaker 4: I'm going to get rewards for this. I don't even
Speaker 4: know what the interest rate is, or it's a promotional
Speaker 4: rate that resets, So that's one, they don't choose based
Speaker 4: on that. Half of the people don't revolve on the card.
Speaker 4: They're collecting these rewards. Yeah, but they're not carrying a balance. Well,
Speaker 4: guess who's paying for that. All the people that are
Speaker 4: carrying a balance. Those people don't know what their rates are.
Speaker 4: The research we've done is half of all customers don't
Speaker 4: say they don't know the interest rate on their credit cards,
Speaker 4: and the half that say they do, more than half
Speaker 4: of them are wrong. They think they know their rate,
Speaker 4: but they don't, right. And so cards have been able
Speaker 4: and one of the big resets with the cards was
Speaker 4: was driven by the Card Act, which limited how much
Speaker 4: cards could increase rates, so they factored in higher rates.
Speaker 1: I just want to jump in real quick. We are
Speaker 1: speaking with Scott Sanborn, CEO of a lending club. He's
Speaker 1: been CEO for close to a decade. We also have
Speaker 1: here with us Hermann Chan. He's Bloomberg Intelligence senior analyst
Speaker 1: for US regional banks.
Speaker 6: Thanks.
Speaker 7: I wanted to follow up with you, Scott on some
Speaker 7: of the medium term expectations you laid out an Investor Day.
Speaker 7: You talked about doubling loan originations. We're talking about eighteen
Speaker 7: to twenty billion dollars a year. What are some of
Speaker 7: the levers to get you to that level? You mentioned
Speaker 7: use cases? Maybe talk about home improvement as a use case,
Speaker 7: and how do you maintain solid credit quality as you
Speaker 7: ramp up?
Speaker 3: And an improvement is something you're getting into, right.
Speaker 5: That's right, yep.
Speaker 4: So first and foremost is as I mentioned, you know,
Speaker 4: credit card refining people out of their credit card debt
Speaker 4: into a fixed rate, lower rate.
Speaker 5: Loan is number one use case.
Speaker 4: It's it's about eighty eighty percent of what we do.
Speaker 4: That market is the largest it's ever been. There's one
Speaker 4: point three.
Speaker 3: Trillion eighty percent of what you do.
Speaker 6: Is that?
Speaker 9: Wow?
Speaker 3: Go ahead?
Speaker 4: Sorry, So that is you know, one point three trillion
Speaker 4: in balance is priced at really really high rates. We
Speaker 4: you know, when the rate environment shifted and the inflationary
Speaker 4: pressure shifted, we pulled back on a lot of our marketing.
Speaker 4: So we're currently running today at sort of below our
Speaker 4: historical volumes. So we're just going back into that market,
Speaker 4: turning back on marketing channels that we had turned off.
Speaker 4: And then the other areas. You know, personals can be
Speaker 4: used literally for anything, right, and before credit cards came
Speaker 4: around and came to be, they were the dominant way
Speaker 4: consumers at access you know.
Speaker 5: Credit for everyday need.
Speaker 4: So we have a major purchase finance business that's growing today,
Speaker 4: call it fifty plus percent year on year. That's allowing
Speaker 4: things like elective medical procedures, you know, lay six races
Speaker 4: for your kid, you know, all kinds of procedure of
Speaker 4: fertility treatments, teeth implants, so things that insurance doesn't pay
Speaker 4: for but you want.
Speaker 5: To do and you want to do right away.
Speaker 4: Private school education it's another one. So home improvement is
Speaker 4: sort of a next adjacency. People right now are staying
Speaker 4: in their homes longer. You know, seventy five percent of Americans,
Speaker 4: their mortgage rate is under five percent. They're not going anywhere,
Speaker 4: and the homes are getting older. So the homes need
Speaker 4: to be invested in, they need to be improved. So
Speaker 4: effectively enabling home improvement through an unsecured loan, where again
Speaker 4: we are controlling the use of proceeds. We can pay
Speaker 4: the supplier, we can pay the contractor. We've got the
Speaker 4: capability through an acquisition we announced to you know, disperse
Speaker 4: this in phases to multiple parties.
Speaker 5: So we're really excited to kick that off.
Speaker 4: Consumer doing okay, I'd say the consumer we serve is
Speaker 4: demonstrating themselves to be remarkably resilient.
Speaker 2: That a lot.
Speaker 4: It's a drinking game, but we'll acknowledge the sentiment isn't great.
Speaker 3: Are thanks to Scott Sanborn, chief executive officer of Lending Club,
Speaker 3: alongside our own Herman Chan. He is Bloomberg Intelligence Senior
Speaker 3: Analyst for US regional banks. Coming up the split mood
Speaker 3: around private credit soaring, inflows rising risks, lots of questions.
Speaker 10: One of the things to look out for is one
Speaker 10: of the questions. I think that we all talk about
Speaker 10: our valuation marks.
Speaker 11: Right.
Speaker 10: Is there transparency? Is there not transparency? I always tell
Speaker 10: people to ask them what is your valuation methodology?
Speaker 3: Christina Lee of oak Tree Capital Management joins us. Next,
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Speaker 3: In a recent opinion piece for Bloomberg, Apollo Global Management
Speaker 3: CEO Mark Rowan argued that much of the fear around
Speaker 3: private credit is based on myths that the core of
Speaker 3: this market remains high quality and relatively safe. Even so,
Speaker 3: not everyone is so confident. Bloomberg Opinion columnist Paul Davies
Speaker 3: argues that the lack of transparency in private credit is
Speaker 3: one reason that investors could be more fearful. He goes
Speaker 3: on to say that the outlook for repayment problems in
Speaker 3: bankruptcies isn't great and that in fact, it's getting worse.
Speaker 3: Needless to say, a lot of questions have emerged in
Speaker 3: recent weeks about private credit. It all really goes back
Speaker 3: to that JP Morgan earnings call back in October, when
Speaker 3: the head of JP Morgan, Jamie Diamond, made that comment
Speaker 3: about more cockroaches being out there, kind of tapping into
Speaker 3: some of the concerns about the private lending world, the
Speaker 3: private credit world, the financial landscape, that there could be
Speaker 3: more problems.
Speaker 12: Out there, like you should assume that every something has
Speaker 12: we scour all process, all procedures, all underrunning all everything,
Speaker 12: and you know, we think we're okay and other stuff.
Speaker 12: My antenna goes up with leaves like that happened, and
Speaker 12: I should I shouldn't say this, but when you see
Speaker 12: one cockroach, they're probably more, you know, and so we
Speaker 12: we should everyone should be four more than this one.
Speaker 3: This past week, we leaned on Christina Lee, managing director
Speaker 3: and co portfolio manager for oak Tree Capital Management's US
Speaker 3: private debt strategy, for some insight.
Speaker 10: I think it's been called the Great cockroa chores, you
Speaker 10: name it. I think one of the issues that I
Speaker 10: think people are having is there's been some high profile
Speaker 10: bankruptcies that I've happed recently, and people are saying, is
Speaker 10: this systemic? Is this a pattern of what's next? I
Speaker 10: think sometimes you do have to take a step back
Speaker 10: and remember we're doing sub investment grade credit. You are
Speaker 10: taking risk. There will be defaults, there will be restructurings.
Speaker 10: You don't get eight to nine percent all in yields
Speaker 10: by not taking risk.
Speaker 3: Okay. So having said that, when you guys, especially you know,
Speaker 3: in terms of private credit, I think what really tripped
Speaker 3: a lot of investors or investments up in the private world,
Speaker 3: private credit, private equity for that matter, is that there
Speaker 3: weren't the exits that were normally there. Right, We've seen
Speaker 3: them pushed off, and I think it's starting to come back,
Speaker 3: but then you had terms renegotiated. You just like all
Speaker 3: these things started to happen, and you just wonder whether
Speaker 3: it gets a little bit fuzzier and that there is
Speaker 3: more opportunities or more touch points for things to come
Speaker 3: undone roll that in and how we should be thinking
Speaker 3: about that part of it.
Speaker 10: I think defaults have been very, very low in private credit,
Speaker 10: and if you were to look at various managers, their
Speaker 10: loss ratios, et ceter, default rates would probably all be
Speaker 10: relatively similar. And that's because private credit hasn't really been
Speaker 10: through a downturn yet.
Speaker 11: Right.
Speaker 10: The advent of the class when it really started booming
Speaker 10: was maybe ten years ago. I think COVID was too short.
Speaker 10: I think what you're seeing right now also is defaults
Speaker 10: will likely rise because a lot of these bars put
Speaker 10: in capital structures when it was a zero interest rate environment,
Speaker 10: which is you know, now it's higher for longer, and
Speaker 10: I think that's why you're seeing defaults and some cracks emerge.
Speaker 3: Does it get worse though, because you're right, an investment
Speaker 3: in a zero rate where money costs nothing is very
Speaker 3: different from where we are today, right. It's just the
Speaker 3: business dynamics and the financial dynamics of a deal looks
Speaker 3: very different. So do we see more cracks going forward?
Speaker 3: Is Jamie diamond Wright that there's never just one cockroach.
Speaker 10: I think you likely will see some cracks, but what
Speaker 10: will be dependent is the cracks have been massed, the
Speaker 10: cracks have been around for a year or two. Is
Speaker 10: there's a lot of liquidity in private credit and even
Speaker 10: in private equity. They weren't necessarily deploying in new investments,
Speaker 10: but they were helping the resisting investments.
Speaker 3: Forgive me for about when does too much liquidity, though,
Speaker 3: become a problem where you're chasing after there's so much
Speaker 3: more folks involved in the private market world, private credit,
Speaker 3: private equity, and when there's a lot of money around,
Speaker 3: it's like people are chasing deals and maybe more likely
Speaker 3: to take on even more risks. So when does it
Speaker 3: get messy or does it not? In this world, maybe
Speaker 3: it's something different.
Speaker 10: I think right now, what you're seeing is there's still
Speaker 10: a supply demand imbalance. As you had mentioned, there's less exits,
Speaker 10: there's less M and A, and so private credit dry
Speaker 10: powder has increased. But if we were to look at
Speaker 10: kind of the exit piece that private equity needs to
Speaker 10: do M and A should increase starting in twenty twenty six,
Speaker 10: and that supply demand imbalance should lessen. But right now,
Speaker 10: what you're seeing is there's really an imbalance right now,
Speaker 10: and so you are seeing that competitive nature of private credit.
Speaker 10: And does that mean looser underwriting standards a lot of time? Yes,
Speaker 10: would you do it?
Speaker 1: Howard Marx, the co chairman principal co found under of
Speaker 1: oak Tree Capital Management, out just last month, that was
Speaker 1: in the beginning of November, with a traditionally long memo
Speaker 1: about private credit, but in bold on the second page
Speaker 1: he writes, so, no, I don't think this is necessarily
Speaker 1: the beginning of a trend. And by the way, it's
Speaker 1: called cockroaches in the coal mine. It's not an indictment
Speaker 1: of the whole sub investment grade debt market or the
Speaker 1: whole private credit market. Rather, it's just a reminder that
Speaker 1: the yield spreads people care about so much are there
Speaker 1: for a reason, because sub investment grade debt entails credit risk.
Speaker 1: You agree, this is essentially just part of investing in
Speaker 1: this type of debt.
Speaker 10: Exactly if you don't take on risk, that usually means
Speaker 10: that you're yielding something lower. Right, it goes hand in hand,
Speaker 10: and I think because we've been in such a benign
Speaker 10: market where that you haven't seen a lot of defaults,
Speaker 10: et cetera. That's why people, I think are surprised.
Speaker 1: So then what's the what are the products or what
Speaker 1: are what's the credit that investors should avoid right now?
Speaker 10: Like?
Speaker 1: How do you separate because of another? A criticism I
Speaker 1: guess you could say is that there's not a lot
Speaker 1: of transparency necessarily with this type of investment, So then
Speaker 1: how do investors know what they should invest in what
Speaker 1: they should stay away from?
Speaker 10: Yeah, I think one of the things to look out
Speaker 10: for is one of the questions. I think that we
Speaker 10: all talk about our valuation works, right, Is there transparency?
Speaker 10: Is there not transparency? I always as tell people to
Speaker 10: ask them what is your valuation methodology? How often are
Speaker 10: you looking at your valuation? Because in the end, we
Speaker 10: are in a private liquid market, there's no mark to market,
Speaker 10: there is no market, and so there is a subjectiveness
Speaker 10: and a judgment on the manager. And I think a
Speaker 10: lot of it is do they mark their investments aggressively
Speaker 10: or are they conservative?
Speaker 8: Right? How do you know?
Speaker 10: I think you have to ask your questions of how
Speaker 10: what methodology. Do do you do you discounted cash flow?
Speaker 10: How much does current field matter?
Speaker 3: But this is where I think about Christina, that a firm,
Speaker 3: whether it's Oak Tree or somebody out, Yes, right, if
Speaker 3: you're you're playing games in terms of evaluations or not
Speaker 3: being so transparent or whatever for your investors, the deals
Speaker 3: aren't going to pay off, right and investors are not
Speaker 3: going to give you any more money. So is that
Speaker 3: kind of a checks and balance in some way in
Speaker 3: terms of ensuring you guys are doing the work like
Speaker 3: they trust a manager. Yeah, and that you guys are
Speaker 3: making sure you have the transparency before you go into a.
Speaker 10: Deal exactly, because if you are way too aggressive and
Speaker 10: all your marks are overinflated, you will have a really
Speaker 10: hard time with your investors, right, right. That is reputation risk.
Speaker 10: And also just inherently, as a creditor, you are always
Speaker 10: worried about kind of what's next, what's the next risk,
Speaker 10: because your upside is getting what's contractually due to you, right,
Speaker 10: So a lot of just inherently as a credit investor,
Speaker 10: you tend to be conservative because.
Speaker 3: That's why it's some you know, and some of the
Speaker 3: conversations we've had in trying to figure out, like there
Speaker 3: are there more cockroaches out there that maybe some of
Speaker 3: what some have said is smaller players that maybe maybe
Speaker 3: don't do as much homework or something that's where we
Speaker 3: might see some problems. Talk to us about the market overall,
Speaker 3: where you guys are finding opportunities right now and what
Speaker 3: kind of kind of opportunities. And I'm curious if it
Speaker 3: tells you kind of what this investment environment. Is it
Speaker 3: a healthy one? Is it a stressed one? Like I'm
Speaker 3: just curious.
Speaker 10: I would say right now it is there's a supply demand,
Speaker 10: a balance, So what does that mean. It's very competitive.
Speaker 10: If you think about the first nine months of the
Speaker 10: year with the tariffs, right with all of the uncertainty,
Speaker 10: M and A went to a screeching halt for the
Speaker 10: most part. Now M and A has kind of come
Speaker 10: back after Labor Day, and so now you're seeing what
Speaker 10: I call a little bit of fomo where you're seeing
Speaker 10: a lot of lenders rush to get deals done. And
Speaker 10: I think this is the time that you want to
Speaker 10: be very selective, you want to be a credit picker,
Speaker 10: because the terms are getting more aggressive. Leverage is going up,
Speaker 10: pricing is going down. And so from like oak Tree's
Speaker 10: philosophy standpoint is, you really need to be elective. It's
Speaker 10: a yellow light. Proceed with caution. You're not going to
Speaker 10: stop investing, but you've got to pick and choose your spots.
Speaker 1: Do you think this type of asset class will end
Speaker 1: up in the four oh one k's of many Americans?
Speaker 10: I think that is I call it the next frontier.
Speaker 10: I think from a technology standpoint, if you think about
Speaker 10: private credit, it's a relative. I'm talking about more sponsored
Speaker 10: direct lending. It's a pretty mature asset class at this point, right, right,
Speaker 10: And I think where you're going to see innovation is
Speaker 10: what I call technologies on reaching new investors or fund construction.
Speaker 10: And so I do think four oh one case will
Speaker 10: be the next horizon. But that's also where private equity
Speaker 10: is also going into, right, And so will that help
Speaker 10: a little bit with the supply demand?
Speaker 3: Yes, rightly right?
Speaker 1: Whether whether people want it or not in their four
Speaker 1: o one k's, I don't know.
Speaker 3: Well, it does though, it creates another demand right for
Speaker 3: what's going on there? Just kind about a minute left?
Speaker 3: Can you can you share with us, I don't know,
Speaker 3: an interesting deal that you recently did I don't know
Speaker 3: how specific you can get, but just give us an
Speaker 3: idea in terms of maybe the type of deal, terms
Speaker 3: or whatever you can share.
Speaker 10: Can't just not about a specific deal, but just what
Speaker 10: we're seeing in the market right now is it's it's
Speaker 10: kinter intuitive, but as the interest rates go lower, you're
Speaker 10: seeing leverage creep up because bars can actually make their
Speaker 10: interest charges now. And so before when interest rates were
Speaker 10: say four percent on sofa, you didn't really see deals
Speaker 10: go over six times, yeah, because otherwise a barro couldn't
Speaker 10: pay their interest. Now it's actually going the other way,
Speaker 10: where you're getting lower yields but higher leverage. And that
Speaker 10: just notes the level of competition. So we're hoping that
Speaker 10: twenty twenty six there will be a little bit more
Speaker 10: balance than deals. Yeah, but that's what we're seeing in
Speaker 10: the moment.
Speaker 1: So does this assume.
Speaker 3: Too, that you think the Fed will continue to rate
Speaker 3: to cut rates even into twenty twenty six.
Speaker 10: I think it all depends on who gets appointed, you.
Speaker 3: Really, So yeah, do you think is it is it
Speaker 3: a done thing that if if it's Kevin has it
Speaker 3: that you can assume that there'll be lower rates. Just
Speaker 3: got about thirty.
Speaker 10: Seconds I'm not going to make an assumption around it,
Speaker 10: but we all have an understanding wort the administration wants
Speaker 10: is lower rates.
Speaker 3: Right, interesting time.
Speaker 10: And we'll see where the underlying economy also says. We'll
Speaker 10: hopefully well also dictate where the race of neflee land right.
Speaker 3: That the FED sticks to the band aid and what
Speaker 3: needs to be done. Thank you so much, really appreciate it.
Speaker 3: Christina Lee, Managing director and co portfolio manager for US
Speaker 3: Private debt Strategy over at oak Tree Capital Management. Joining
Speaker 3: us right here in our Bloomberg Interactive Broker studio.
Speaker 2: This is the Bloomberg Business Week Daily Podcast. Listen live
Speaker 2: each weekday starting at two pm Eastern on Apple car
Speaker 2: Play and the Android Auto with the Bloomberg Business app.
Speaker 2: You can also listen live on Amazon Alexa from our
Speaker 2: flagship New York station, Just Say Alexa played Bloomberg eleven thirty.
Speaker 3: This past week, we got an update about the Trump
Speaker 3: administration ending a pay incentive program intended to hire and
Speaker 3: retain experts in the federal government's primary civilian cybersecurity agency,
Speaker 3: which has already been depleted by firings, resignations, and reassignments.
Speaker 3: The program, known as the Cybersecurity Retention Incentive program will
Speaker 3: be eliminated in twenty twenty six and replaced with a
Speaker 3: different incentive program called the Cybersecurity Talent Management System. Cybersecurity
Speaker 3: experts warned that ending the extra pay will lead to
Speaker 3: more departures at the agency, further weakening the federal government's
Speaker 3: defenses against cyber attacks, with some employees facing a significant
Speaker 3: pay cut of as much as twenty five percent. That
Speaker 3: story on the Bloomberg. We know that cybersecurity experts have
Speaker 3: worn for years now that the rise of artificial intelligence
Speaker 3: and large language models will radically transform the way hackers
Speaker 3: operate and make devastating breaches easier to pull off, whether
Speaker 3: it's in the private or public sectors. Just last month,
Speaker 3: AI developer Anthropics said that it disrupted what it described
Speaker 3: as a highly sophisticated AI led espionage campaign from China
Speaker 3: that use the company's clawed chatbot. Thwarting cyber risks of
Speaker 3: all kinds is the world of cloud security companies. Zscaler.
Speaker 3: The company released its operating results for its fiscal twenty
Speaker 3: two twenty six first quarter, which revealed accelerating revenue growth
Speaker 3: on the back of staring demand for its products. However,
Speaker 3: the stock is still down roughly thirty percent from its
Speaker 3: twenty twenty one record high, when it reached what some
Speaker 3: analysts call an unsustainable valuation during a frenzy in the
Speaker 3: tech market. For more on the company the outlook in
Speaker 3: the world of cybersecurity, we caught up with zscalerx cooj Chottery.
Speaker 3: Also joining our conversation, Bloomberg Intelligence Global head of Technology
Speaker 3: Research man Deep Sing.
Speaker 8: We had an outstanding quarter.
Speaker 13: Our arr growth twenty six percent, revenue growth twenty six percent,
Speaker 13: free cash flow margin fifty two percent, operating margin twenty
Speaker 13: two percent. We beat all the metrics that Wall Street
Speaker 13: was looking for. In fact, if you take our free
Speaker 13: casual margin and add it to our revenue growth, that's
Speaker 13: seventy eight percent. That beats the rule of forty that
Speaker 13: many investors look for very very well. And this is
Speaker 13: at scale of three billion dogs or higher. There are
Speaker 13: only about five pure play enterprise SaaS companies that are
Speaker 13: in that unique class, so we're done extremely well. We
Speaker 13: are very proud of what we delivered and be passed
Speaker 13: a meaningful beat. We did and raised our annual target,
Speaker 13: so I think we're very pleased with it. I think
Speaker 13: investors get it wrong from time to time.
Speaker 8: This is one of those times.
Speaker 3: That's what I's going to ask you know what, you
Speaker 3: think investors just got it wrong, because I mean, thirteen
Speaker 3: percent is a pretty big hit. So you think, I mean,
Speaker 3: that's not like them wavering at all. They really wanted
Speaker 3: more from you guys. I mean the expectations were certainly high.
Speaker 13: Look, markets do what they do. I have one focus,
Speaker 13: keep on innovating and serving our customers. And those innovations
Speaker 13: started with zero trust architecture, which has changed the world
Speaker 13: of old school firewalls and VPNs and now as a
Speaker 13: security is coming a securities become a big concern and
Speaker 13: zero trust that we pioneered is the foundation of it.
Speaker 13: So we have amazing interest from our customers. That's why
Speaker 13: we're able to deliver.
Speaker 8: These strong numbers.
Speaker 13: Over forty five percent Fortune five hundred companies trust us,
Speaker 13: depend upon us.
Speaker 6: So I'm very polish about our future.
Speaker 11: So talking about AI security, I mean, you have a
Speaker 11: business model that's reliant on companies hiring more people and
Speaker 11: you have a c based model. How does that change
Speaker 11: with AI security? Because AI, you know, what we are
Speaker 11: seeing out there is more consumption based so how does
Speaker 11: that impact you and your business?
Speaker 13: It's a good question. So we started out with bringing
Speaker 13: zero trust for users, so users can access applications without
Speaker 13: being on the company network, and natural pricing for that
Speaker 13: is user based. Let me move the model to the
Speaker 13: our architecture. The next thing, how about zero trust communication
Speaker 13: for workloads cloud workloads. That's actually based on number of
Speaker 13: workloads and actually amount of traffic, so it's not just
Speaker 13: user based. If you think about a security, there are
Speaker 13: many facets of a security. What one of the biggest
Speaker 13: things our customers look for is as every company starts
Speaker 13: using a lot of agents. These agents are some like people.
Speaker 13: They need to access their applications, they need to talk
Speaker 13: to other agents. So we are extending our zero trust
Speaker 13: exchange that are designed for users and workloads and branches
Speaker 13: now to agentic exchange so that right agent can talk
Speaker 13: to right agent and right application. So obviously there's an
Speaker 13: opportunity for us to secure that communication. Yes, the number
Speaker 13: of users may not grow significantly, but I believe every
Speaker 13: company will have scores of agents for every single employee
Speaker 13: and they need to be secured and we are extremely
Speaker 13: well positioned to handle that.
Speaker 11: And talking about agents, it sounds like one of your
Speaker 11: biggest competitors is doubling down on observability and identity, especially
Speaker 11: on the browser side, as an area of focus for
Speaker 11: agent take AI is that something you feel is very
Speaker 11: important to roll out the agents.
Speaker 13: So some companies try to go and buy many companies
Speaker 13: to create a collection of things. We are very focused
Speaker 13: on what we want. We will focused on zero trust
Speaker 13: and then we focused on AI. Regarding observability, we actually
Speaker 13: do observability for the areas that matter to our customers.
Speaker 13: We sit between the user and the application. So today
Speaker 13: we have a sizable business, hundreds of millions of dollar
Speaker 13: business with the product we call Zeskin Digital Experience, where
Speaker 13: we can tell our customers if any user is having
Speaker 13: any performance issues as they try to access those applications.
Speaker 13: It's integrated with a platform. While many companies have many
Speaker 13: point products and they are separate, we like to have
Speaker 13: integrated platform that serves our customers. So we not only
Speaker 13: provide secure and reliable experience, we make sure that it
Speaker 13: is fast and you can trouble shoot those things. But
Speaker 13: I'm not going into broad observability, which has become a
Speaker 13: broad area. We are focused on the areas that are
Speaker 13: relevant to our customers.
Speaker 11: And identity is that something you care about. The identity
Speaker 11: on the browser.
Speaker 13: Identity is important. Think about identity for users. We have
Speaker 13: been working from day one with all leading ID provider
Speaker 13: for users or whether it's Microsoft and oct and others.
Speaker 13: Now when it comes to identity of agents, I believe
Speaker 13: they'll be any contenders Microsoft, Google, Aws octors of the world.
Speaker 13: Our philosophy is to federate those identity providers use that
Speaker 13: identity and we are the zero trust exchange, the switchboard
Speaker 13: to make sure the right AI agent talks to right agent.
Speaker 8: In this world.
Speaker 13: I do not need to own everything. I need to
Speaker 13: do some of the things I do the best and
Speaker 13: integrate with partners with proper API integration so our customers
Speaker 13: get the biggest benefit. We believe in doing a few things,
Speaker 13: but do them extremely well and partner with others.
Speaker 3: So I do feel like we're all learning as we go.
Speaker 3: And of course man Deep and Jay, you guys are
Speaker 3: ahead of us in a big way. But when they
Speaker 3: talk Man Deep about zero trust, this never trust, always verify.
Speaker 3: I think about digital touch points thinking that there are
Speaker 3: threats within an organization and outside, and you've got to
Speaker 3: make sure there's security everywhere.
Speaker 11: Yeah, no matter where you are, and that's where you
Speaker 11: know sase is a term that gets thrown a lot,
Speaker 11: and z scaler is in the leading position in that
Speaker 11: magic quadrant. So I have one other question J for you. So,
Speaker 11: given the amount of data in the world of security,
Speaker 11: and you know you guys generate trillions of data points,
Speaker 11: will the security world have its own LELLM.
Speaker 8: Yes, the answer is yes.
Speaker 13: We are actually working on building our security focused LM
Speaker 13: and I do not need to have the large large
Speaker 13: language model. Security is very focused set of high equality data.
Speaker 13: With over eight thousand customers and forty five percent of
Speaker 13: Fortune fire and companies, we generate over half for trillion
Speaker 13: transaction logs a day. Those logs are anonymized, but they
Speaker 13: can give us an idea of where the threats are
Speaker 13: coming from. We can find a needle huistag and help
Speaker 13: all of for customers.
Speaker 8: So AI is only.
Speaker 13: As good as the data that powers it, and we
Speaker 13: have the best data and we believe we can help
Speaker 13: identify some of these threats in almost near real time
Speaker 13: and provide a closed loop system so that the threats
Speaker 13: can't really exploit our customers and provide them benefit at
Speaker 13: a much faster wayte That's why we have focused on
Speaker 13: AI powered security operations, and our acquisition of Redcarty is
Speaker 13: part of the strategy because they build some very very good,
Speaker 13: egentic AI technology that we're integrating with our platform.
Speaker 1: The use of AI to make the system more robust
Speaker 1: certainly makes sense, but the concern about how AI has
Speaker 1: made the attackers just more robust and the attacks more robust.
Speaker 1: Can you point to specific instances where hackers have actually
Speaker 1: used AI to enhance their attacks and did it work?
Speaker 13: Yes, there are many, many examples. Let me give you
Speaker 13: a few simple ones. Every attack starts by finding your
Speaker 13: attack surface, who where you are and public IP address
Speaker 13: is the starting point. Every firewall, every VPN, every application
Speaker 13: portal is an attack surface. In the past, a hacker
Speaker 13: may have taken weeks to identify it. Now you can
Speaker 13: go to chat GPT and say tell me all the
Speaker 13: firewalls and VPNs that have one abilities and give it
Speaker 13: to me in a nice tablar format. Under sixty seconds,
Speaker 13: you can get that.
Speaker 8: Now.
Speaker 13: The second part hackers would do is these phishing emails.
Speaker 13: Now they can ask AI to say, write an email
Speaker 13: that looks like a cfo's writing style, no typos, make
Speaker 13: it very targeted.
Speaker 1: That's number two.
Speaker 13: Third, hackers are using automation that AI provides.
Speaker 8: Once they are on the network.
Speaker 13: Automation can find the key applications and try to encrypt
Speaker 13: that data. A lot of that is happening. What does
Speaker 13: the skuttter do in this case? Number one, we hide
Speaker 13: your attack surface. Your applications are hidden behind our cloud.
Speaker 13: Bad guys can't even find you. They can find you,
Speaker 13: they can attack you. And the second is owned the network.
Speaker 13: The biggest problem with firewalls and VPNs is right, they're
Speaker 13: trying to protect the castle, and we actually make it
Speaker 13: zero trust.
Speaker 3: Jay, We've got to run. This was so informative and
Speaker 3: so enlightening in terms of AI security. We so appreciate it,
Speaker 3: Jay Todrey, he's founder chairman' CEFZ Scaler and of course
Speaker 3: our own Mandi Singh a bi.
Speaker 2: You're listening to the Bloomberg Business Weekdaily podcast. Catch us
Speaker 2: live weekday afternoons from two to five pm Eastern Listen
Speaker 2: on Apple CarPlay and Android Auto with the Bloomberg Business app,
Speaker 2: or watch us live on.
Speaker 3: YouTube plentyhea our second hour of the weekend edition of
Speaker 3: Bloomberg Business Week. We have a great glimpse of the
Speaker 3: world around us, from real estate to retail, including Yeah,
Speaker 3: it's shopping's biggest season. So what does Target need to
Speaker 3: do to turn its business around? Plus break out the
Speaker 3: hot chocolate, We catch up with the founder and global
Speaker 3: CEO of the UK based chocolateer Hotel Chuck a Lot,
Speaker 3: this company taking on the US. First up this hour
Speaker 3: a lot happening with New York real estate. This past week,
Speaker 3: New York Mets owner Steve Cohen won approval to operate
Speaker 3: a casino next to Cityfield and Queens as one of
Speaker 3: three projects selected for gambling licenses right here in New
Speaker 3: York City. Two other projects were also selected genting groups
Speaker 3: Resorts World Whidge proposes to expand a casino next to
Speaker 3: the Aqueduct racetrack in Queens and Bally's Corp. Whige plans
Speaker 3: to operate a gaming facility at the site of a
Speaker 3: Bronx golf course. We spoke with ron Eliasaff. He is
Speaker 3: founder and managing director of north Wind Group. It's a
Speaker 3: real estate private equity firm in Manhattan that has transacted
Speaker 3: over five point six billion dollars of debt inequity investments
Speaker 3: in residential, commercial, senior, life and healthcare properties.
Speaker 1: It was a long wait, I think for a lot
Speaker 1: of the observers and the companies who put in bids
Speaker 1: for these licenses. I'm just wondering how you view this
Speaker 1: in terms of changing the real estate landscape. This one
Speaker 1: is not in Midtown where one of the other licenses
Speaker 1: could have gone, But how do you view it?
Speaker 14: I think in general it's a positive thing for New
Speaker 14: York City. I think it was given it's not going
Speaker 14: to be in Manhattan, and I think to support growth
Speaker 14: in communities and queens and Broncs. It's overall a positive thing.
Speaker 14: It will create jobs, opportunities, increase tourism and attraction. I
Speaker 14: think the hard rock bit together with Stevie Coin, is
Speaker 14: going to make great things for city field there.
Speaker 8: It's great transportation.
Speaker 14: I don't think anybody wants a casino in Times Square
Speaker 14: or anywhere in the city. Agreed, and overall it's going
Speaker 14: to be If you look at the three projects that
Speaker 14: are almost there right there's still final stage together to
Speaker 14: get done. It's going to be total over twenty billion
Speaker 14: dollars invested in developing the real estate around it. Hotels,
Speaker 14: tourist attractions, concert venues, music.
Speaker 1: It's a good thing on the casino side. The thing
Speaker 1: that's puzzling to me is that we all have casinos
Speaker 1: in our pockets with our phones nowadays. It seems like
Speaker 1: and the rise of prediction markets, the rise of online
Speaker 1: sports betting and doing it through apps, it means like.
Speaker 3: It's not the same experience.
Speaker 1: You don't have to go to Vegas or Atlantic City.
Speaker 14: I don't gamble personally, but I think casinos are not
Speaker 14: what you do on your phone. It's exactly what Carol
Speaker 14: is saying. It's a touristic attraction. You go there for
Speaker 14: the experience. It's coupled with great dining, with shows, circussola
Speaker 14: or whatever it is. And I think it will overall
Speaker 14: increase tourism to New York.
Speaker 3: Interesting. Interesting, take a big picture right now? How do
Speaker 3: you see a real estate in New York right now?
Speaker 14: I think right now everybody's bracing for the mum Dani
Speaker 14: taking office in January and what will come next. I
Speaker 14: think there's been positive signs. Staying on as a commissioner
Speaker 14: seems something that, at least for the realistic community, is
Speaker 14: perceived as a positive thing. I think public safety is
Speaker 14: on top of every everybody's mind. But with that said,
Speaker 14: there are some pretty aggressive legislation looming. Recently, city council
Speaker 14: is pushing a COPAK community offer to purchase.
Speaker 8: It's not sponsored by Mondney.
Speaker 14: Per se, but it's definitely something that you see as
Speaker 14: a left wing agenda. It's basically means that anybody that
Speaker 14: owns a multifamily building will have to first give a
Speaker 14: writer first offer to nonprofits and community transitions to purchase it.
Speaker 14: Basically could potentially stall selling real estate multifamily.
Speaker 1: Those multi family buildings aren't moving anyway though.
Speaker 14: Right they are. They are, they're moving. I'm not rent
Speaker 14: stabilized buildings. This will this will if it passes, which
Speaker 14: they got a pretty overwhelming initial vote.
Speaker 1: So this goes for rent stabilized and non rent stabilized too.
Speaker 14: So any multi any multifamily above certain unit count, which
Speaker 14: is pretty overwhelming and it hasn't passed yet, But this
Speaker 14: sort of agenda will scare investors potentially and will make
Speaker 14: people pause the city. You asked about the city in general,
Speaker 14: the city is facing a supply shortage that's unbelievable.
Speaker 1: But what what does do for a supply shortage?
Speaker 14: Though, this will hurt it because people you will think
Speaker 14: twice before buying.
Speaker 1: I think that's what's so puzzling to us. And I'm
Speaker 1: going to speak for Carol a little bit, because we
Speaker 1: talk about the supply demand challenge with with multi family
Speaker 1: real estate, and with real estate in New York City anyway,
Speaker 1: the prices won't come down unless you build more house.
Speaker 14: This sort of legislation will do the exact opposite of.
Speaker 1: Taking a political position here.
Speaker 14: I mean this is this is not a political position.
Speaker 14: This is this supply the supply demand. In economics, if
Speaker 14: the city council or the mayor wants to reduce pricing,
Speaker 14: what they have to do is push more supply in
Speaker 14: You push more supply by providing subsidies, by endorsing legislation
Speaker 14: that makes it easier to build, change zoning less effective,
Speaker 14: increase up zone, not limiting someone's ability to sell their
Speaker 14: own property, rent their own property. So this will have
Speaker 14: a negative effect. Not aupon to the fact, I mean, what.
Speaker 3: Are the rules? I mean, I don't understand why when
Speaker 3: a developer is building a building that there isn't either
Speaker 3: a certain percentage that's always put aside for people who
Speaker 3: maybe don't make as much money.
Speaker 8: Well, there have been certain programs, right.
Speaker 3: Certain programs. But why I mean, well.
Speaker 14: The full affordable kind of subsidies have been tapped out
Speaker 14: of maximized in the budget. So then there was four
Speaker 14: twenty one A that papered off and die. Then forty
Speaker 14: eight forty five X those have built in twenty twenty
Speaker 14: five percent affordable components in it.
Speaker 3: Every new construction.
Speaker 8: Yes, if you qualify, right, and then now with.
Speaker 14: Food, I mean, if you qualify there are certain ground
Speaker 14: well four twenty one A is expired, but forty five
Speaker 14: X you have to qualify with pricing and how much
Speaker 14: you do. But then if you build round up and
Speaker 14: you've done it in the timeframe that the relegislation existed,
Speaker 14: you would have to build twenty five percent or provide
Speaker 14: twenty five percent affordable.
Speaker 3: So why do you think is it just zoning that
Speaker 3: we don't have enough affordable housing here in New York City,
Speaker 3: I mean, or any major city.
Speaker 14: The issue in the city is it is the land
Speaker 14: is limited. Yeah, right, Manhattan is an island. Cost of
Speaker 14: land is very high, cost of construction is very high.
Speaker 14: It's not like building somewhere in middle of Texas you
Speaker 14: can just bring your trucks in.
Speaker 8: You have to stop traffic. You have to build.
Speaker 14: The cost of labor is more expensive, so everything costs
Speaker 14: more to build, so the end product costs more. So
Speaker 14: for you as a developer, it has to be more
Speaker 14: profitable to justify it. But the city has done a
Speaker 14: few things right. If you look at City of Yes,
Speaker 14: it was a great program. It is still a great program.
Speaker 14: The four sixty seven m tax abatement. We basically said
Speaker 14: if you convert an office building to resilient and set
Speaker 14: aside affordable, you get a tax incentive, property tax incentive.
Speaker 14: Those have been positive, I think examples of how the
Speaker 14: city has done it right. Yeah, this specific bill on
Speaker 14: the table is a very bad example, and I hope
Speaker 14: it doesn't pass.
Speaker 1: I think people could also point to something closer to
Speaker 1: my neighborhood, like Gowanis rezoning. I mean, if you go
Speaker 1: to a long fourth Avenue in Brooklyn and you know
Speaker 1: the Gowanis area that has been that was rezone owned,
Speaker 1: there's just multi like huge buildings and thousands of units
Speaker 1: that are going up there as a results.
Speaker 14: And I agree with you, up zoning is the right
Speaker 14: way to go because in the long term, the city
Speaker 14: will benefit from more property tax eventually on more units
Speaker 14: being built. I would personally up zone the entire Midtown
Speaker 14: district that connects to Hudson Yards. Right now we have
Speaker 14: these mid block garment district building giving more property rights.
Speaker 8: Right, you have a building.
Speaker 14: Right now, you can build twelve times more than what
Speaker 14: your land lot sizes.
Speaker 6: Double it.
Speaker 14: I mean, it's not like we're building go higher. I
Speaker 14: mean the city we have plenty of sky rises here, right.
Speaker 3: Yeah, right.
Speaker 1: I think one of the challenges would be transportation to
Speaker 1: move all the additional people, and I think about that
Speaker 1: a lot dense. It does get dense, and it's not
Speaker 1: like you can add more You can't add more cars
Speaker 1: to the subway. You can't always increase frequency of subway
Speaker 1: trains coming because some of these trains share tracks.
Speaker 14: It has to come with with investment infrastructure. So this
Speaker 14: is up zoning is not something you pressed the button.
Speaker 14: You have to plan ten years ahead and it has
Speaker 14: to come with additional infrastructure for public public transportation for sure.
Speaker 14: So in places in Queens and Midtown you have to
Speaker 14: plan and building more public transportation. I think eventually you're
Speaker 14: going to see also eventually these driverless cars coming in
Speaker 14: that will have a huge impact on traffic.
Speaker 1: Over time in a positive way.
Speaker 8: I think in a positive way, definitely.
Speaker 1: When you think they'll arrive.
Speaker 14: We've I've seen when driving around the city. I've tried
Speaker 14: it in the West Coast in LA. It was one
Speaker 14: of the best experiences.
Speaker 1: I've never met anyone who tried it and didn't like it.
Speaker 3: It's like unbelievable. The rate environment. If and do we
Speaker 3: get it's expected that the Fed's going to cut rates
Speaker 3: next week meets, how is that impacting kind of deals, valuations,
Speaker 3: opportunities right now?
Speaker 14: It's pretty I think it's pretty priced in right now.
Speaker 14: I think if you look at the ford, if you
Speaker 14: look at the forward curve, it's pricing in this reduction
Speaker 14: it expects it. I think we're very close to being
Speaker 14: a kind of neutral state. I don't think we're going
Speaker 14: to see another significant decrease in rate. Maybe another fifty
Speaker 14: bits over the next year, but not more than that.
Speaker 14: That's what the price of the market is pricing. And
Speaker 14: you're seeing more liquidit tique flow into the real estate
Speaker 14: market in general, both from the lending side, from the
Speaker 14: credit We've seen spreads come in and more loans available
Speaker 14: and equities back, and people are making investments that feel
Speaker 14: more comfortable now that there's more predictability.
Speaker 3: Our thanks to Ronnie Eliasaff. He is founder and managing
Speaker 3: director of Northwind Group. You're listening to Bloomberg BusinessWeek. Coming
Speaker 3: up off of the back of retail earnings and Black Friday,
Speaker 3: we take a deep dive into Target and the uphill
Speaker 3: climb for its incoming CEO. And speaking of earnings, Macy's
Speaker 3: reported this past week posting better than expected results, but
Speaker 3: the retailer warned that it may be seeing softer demand
Speaker 3: to come in the future. For details are remain Bostic
Speaker 3: caught up with the CEO of Macy's, Tony Spring for
Speaker 3: a pen and pad interview enjoyed Bloomberg's Danny Berger and
Speaker 3: Matt Miller to talk about it.
Speaker 15: I mean, I did ask him a lot about what
Speaker 15: foot traffic was.
Speaker 1: Was there an actual increase.
Speaker 15: He did say he was happy with foot traffic, but
Speaker 15: he also seemed to implog here that a lot of
Speaker 15: the revenue gains that they've seen in this most recent
Speaker 15: quarter was people buying more so basically bigger tickets, bigger receipts,
Speaker 15: if you will, rather than actual actually more people going
Speaker 15: in there. But this is also a company that is
Speaker 15: you know, he's done that. He's doing the conference call now,
Speaker 15: and he's been asked a lot about how strong this
Speaker 15: holiday season is going to be. And one of the
Speaker 15: reasons why you see the shares down a little bit
Speaker 15: here is the comp sales growth, while certainly an improvement
Speaker 15: over previous years, is still kind of lagging what you
Speaker 15: would have seen at a company like Macy's in holiday
Speaker 15: seasons of past. Remember, this is going to be or
Speaker 15: supposed to be their best quarter of the year, their
Speaker 15: physical fourth quarter.
Speaker 4: You know, going to a physical store seems like a
Speaker 4: quaint idea, but a strange thing to do, right, I mean,
Speaker 4: most of us buy all of our stuff online.
Speaker 5: What are they doing with that? Well?
Speaker 15: I mean, first of all, the average age of a
Speaker 15: macy shopper is over forty. It's like, you know, late forties.
Speaker 1: I think is the average age that gives you.
Speaker 15: A sense of wanting a challenge that they're going I know,
Speaker 15: madd and you're still in your thirties. But we get
Speaker 15: to this idea here that there is still a cohort
Speaker 15: of boomers out there that do want that physical experience.
Speaker 15: Macy's obviously is now trying to make sure that the
Speaker 15: younger generation of gen Z and beyond that they are
Speaker 15: actually engaged in the physical stories and trying to make
Speaker 15: them more experiential. That's the long term story, you know,
Speaker 15: and that's what he's doing. He's basically taking three hundred
Speaker 15: and fifty Macy's stores, basically going to revamp all of
Speaker 15: these stores to make them more experiential. He's only done
Speaker 15: about a one hundred and twenty five hundred and fifty
Speaker 15: so far. They're going to get to the rest over
Speaker 15: the next year and a half two years.
Speaker 7: It feels like we're in this bizarre world where the
Speaker 7: retailers who do well it's because you've got like Sidney
Speaker 7: Sweeney to do your campaign or Casa are some.
Speaker 3: Sort of celebrity. I mean, Macy's isn't doing that.
Speaker 12: But it feels like we're in this weird era of
Speaker 12: collapse and influence.
Speaker 15: Well, it's interesting and you bring up, you know, obviously,
Speaker 15: what we're seeing with the American ego. Their shares on fire.
Speaker 15: I think when they open they're going to be having
Speaker 15: their best day in a couple of months. But it
Speaker 15: gets to this idea. That's a singular brand, right, and
Speaker 15: Macy's is a multi brand retailer in an era where
Speaker 15: a lot of us go directly to the brands themselves.
Speaker 15: We connect with those brands either because you know, Matt
Speaker 15: salivates over Sydney Sweeney in that ad or something else.
Speaker 15: And the question is how does macy sort of get
Speaker 15: that fired. They've had a lot of collabs with Wicked
Speaker 15: and other things like that that do get people into
Speaker 15: the stores, but it's a much bigger challenge.
Speaker 5: Danny.
Speaker 3: That's Bloomberg's remain bostic. Danny Berger and Matt Miller just
Speaker 3: ahead on Bloomberg Business Week. More in the retail space,
Speaker 3: and I'll look inside the inner workings of Target. I'm
Speaker 3: Carol Masser, and this is Bloomberg.
Speaker 2: This is the Bloomberg Business Week Daily Podcast. Listen live
Speaker 2: each weekday starting at two pm Eastern on Apple car
Speaker 2: Play and the Android Auto with the Bloomberg Business App.
Speaker 2: You can also listen live on Amazon Alexa from our
Speaker 2: flagship New York station, Just Say Alexa played Bloomberg eleven thirty.
Speaker 1: Target has had a tough couple of years. Well it's
Speaker 1: almost two thousand stores still sell a ton of stuff,
Speaker 1: and the company remains profitable. Some observers say it has
Speaker 1: long had a culture of high self regard, which can
Speaker 1: be dangerous in an industry as rapidly evolving as retail.
Speaker 3: Yeah, sometimes you got to be humble. The ailing retailer
Speaker 3: has lots of lost.
Speaker 1: Yeah, I'm sorry, that was my fault.
Speaker 3: Has lost. It's a cheap, chic appeal. Can a new
Speaker 3: CEO get it back on feet with his old boss
Speaker 3: next next door? I always think about that when there's
Speaker 3: a new CEO and yet the old CEO is kind of,
Speaker 3: you know, somewhere as executive chair or something. That's the question, though,
Speaker 3: at the heart of jaywon King and Devin Leonard's profile
Speaker 3: for Bloomberg Business Week. You can check out the story.
Speaker 3: It's on the URMO and also at Bloomberg dot com.
Speaker 3: Devin joining us right here in our Bloomberg studio. Got Devin,
Speaker 3: by the way, senior Global business writer. Just want to
Speaker 3: get your title out there. Hey, Target is a retailer
Speaker 3: we all know, and I've probably loved at different times.
Speaker 3: I have been one of those people when they did
Speaker 3: those fashion combinations, and I wanted to be to say,
Speaker 3: the tea kettle no, not the teakettle, but.
Speaker 1: That's that's a big star of the profile.
Speaker 3: But I've lined up, you know, because I wanted to,
Speaker 3: you know, get a piece of some fashion folk, you know,
Speaker 3: and their combination or their their collaboration with with Target.
Speaker 3: Talk to us about how you wanted to approach this
Speaker 3: one because they've been going through a tough time for
Speaker 3: a while.
Speaker 16: While here, I don't know, I mean, it's just this
Speaker 16: company that's that that at it's you know, and it's
Speaker 16: good times. People have just really loved it, been really
Speaker 16: passionate about it, and and uh, I my wife, my
Speaker 16: daughter were really into it. My daughter, as a teenager,
Speaker 16: spent just hanging out there and and and that was
Speaker 16: her whole thing.
Speaker 6: You know.
Speaker 16: It was was you know, they they'd be selling you know,
Speaker 16: and to sue handbags, but at the price that you know,
Speaker 16: my daughter, who's like you know, sixteen could afford. And
Speaker 16: so this whole thing of kind of like bringing design,
Speaker 16: bringing fashion to the masses, you know, to to to
Speaker 16: to teenagers. You know, it's this huge, huge achievement. And
Speaker 16: yet uh, you know, things have been for things have
Speaker 16: been really really tough in sales have been declining. They peaked,
Speaker 16: you know, during the pandemic, and they just haven't been
Speaker 16: able to get get the group back and there's been
Speaker 16: a lot of a lot of missteps. But you know,
Speaker 16: we you know, we wanted to sort of delve into
Speaker 16: that and look at that and go talk to them
Speaker 16: about that, and so we did in in uh in
Speaker 16: early September, and uh, you know, spend a lot of
Speaker 16: time researching going back to them. But uh, I mean,
Speaker 16: I know, it's it's it's kind of a it's kind
Speaker 16: of a tragic story at this point. I mean maybe
Speaker 16: they maybe they can turn around, but turn it around,
Speaker 16: but you know, they're in rough they're in rough shape.
Speaker 1: Well, you got to attend this PEP rally, uh for
Speaker 1: that that was kind of the culmination of the most
Speaker 1: recent CEOs time at Target Brian Cornell, and you spent
Speaker 1: some time with him and his uh.
Speaker 16: Success soon to be successful in gamecoming right pending.
Speaker 1: Yeah, it's like looking for the word yah.
Speaker 6: Yeah, And it's confusing.
Speaker 1: Does he how does he look at his time and
Speaker 1: and sort of the arc of this narrative. Well, because
Speaker 1: there's a little bit of a disconnect.
Speaker 16: Yeah, no, no, totally, tim because because uh, I mean
Speaker 16: that that was the thing. You know, it was this
Speaker 16: huge you know event fourteen thousand, sorry, you know, upper level,
Speaker 16: you know, targeting in this you know, eight o'clock in
Speaker 16: the morning in the target set of the music's booming,
Speaker 16: red lights everywhere, and then you know, the Brian Cornell,
Speaker 16: you know, you know, the current CEO has been CEO
Speaker 16: since twenty fourteen, comes out and you know, basically it's
Speaker 16: going to be his his last time as you know,
Speaker 16: at target together as CEO, and you know, it's a
Speaker 16: big look back, you know, you know, at the highlights
Speaker 16: and basically emphasized him that when he came in, he
Speaker 16: did a really good job, and you know, the company
Speaker 16: did turning around. Then he did that, he pulled it
Speaker 16: out of Canada where they were they were losing money.
Speaker 16: He rebooted a bunch of stores and rebooted a lot
Speaker 16: of the store brands. You know, the company peaked though,
Speaker 16: you know, you know, in twenty twenty two, and he
Speaker 16: doesn't really he didn't really talk about what happened after that,
Speaker 16: except we didn't really grow and there's all kinds of
Speaker 16: things that happened in the last couple of years that
Speaker 16: it contributed to, you know, the decline of their stock
Speaker 16: and the client of their sales. You know, you know,
Speaker 16: they've had some big political controversies. You know, the they
Speaker 16: ticked off conservatives, they ticked off you know, liberals with
Speaker 16: their abandment of dei, so you know, you know, you know,
Speaker 16: so they're kind of like, you know, all purposes of
Speaker 16: the offender. And and then and then the stores have
Speaker 16: been operated, the story have been kind of a mess. Anyway,
Speaker 16: he sort of ignores all that, and then he cut
Speaker 16: bursts into tears on the stage, and it's kind of like, well,
Speaker 16: wait a minute. You know, he's announced that he's stepping down.
Speaker 16: He's not leaving though, until January, and then replacement in
Speaker 16: his right hand man, who's an insider. That's not to
Speaker 16: say that you know, maybe he won't that's not to
Speaker 16: say he won't work out, but but but it's not
Speaker 16: what investors wanted to snock drop. And it was this
Speaker 16: moment kind of like you know, he was you know,
Speaker 16: he was kind of milking this moment in station in
Speaker 16: front of all these folks when his last couple of
Speaker 16: years have been kind of a disaster. If if he'd left,
Speaker 16: you know, in twenty twenty two, he could have gone
Speaker 16: out in history as a great retail CEO. But he
Speaker 16: but he stuck around.
Speaker 3: And well they wave the manag for a retirement age
Speaker 3: for him a couple of times.
Speaker 16: Right well, just well once once was enough, Carol, I think,
Speaker 16: but yeah, that was still But I.
Speaker 3: Think, what's crazy? What's fascinating? And you see this over
Speaker 3: and over again with companies and they are, you know,
Speaker 3: in a hard place, trying to figure out their way forward,
Speaker 3: and then they just top somebody who's been at the
Speaker 3: company for another twenty you know, who's been there for
Speaker 3: twenty years. And I know sometimes folks are like, well,
Speaker 3: it's good you have an insider who knows it, but
Speaker 3: a lot of times what you need is an outside.
Speaker 16: Well actually, and we're neglecting something here because it's one
Speaker 16: thing to basically ignore investors and a point and the point,
Speaker 16: you know, consum an insider. Some guys's been there for
Speaker 16: twenty two years, but we're for neglecting to mention that.
Speaker 16: On top of that, Brian Cornell, the guy a lot
Speaker 16: of people think is responsible for, you know, who presided
Speaker 16: over you know, over the you know, the sort of
Speaker 16: catastrophe over the last couple of years. He's not going anywhere.
Speaker 16: He's sticking around as executive chairman. And I think there
Speaker 16: are there are instances where like Jeff Bezos, you know,
Speaker 16: you know, when it's time that you know, you know,
Speaker 16: you know then you know, you know, you know his replacement,
Speaker 16: Edrew jac I mean, he sticks around his executive chairman.
Speaker 16: It's kind of well, you know, he's the founder, he's
Speaker 16: responsible for a lot of company's success. If he wants
Speaker 16: to stick around and kind of kind of keep an
Speaker 16: eye on things and you know, leave the strategy find
Speaker 16: But when you're somebody who's had a really terrible record
Speaker 16: in the last couple of years, why are you sticking around?
Speaker 16: And why is the board why? Yeah, yeah, he of
Speaker 16: course he's the chairman of the board. But but but
Speaker 16: but it just seems to speak to speak to kind
Speaker 16: of a larger problem at Target that you know, the
Speaker 16: thing you mentioned the beginning about a lack of urgency
Speaker 16: and addressing problems and sometimes even acknowledging they have problems.
Speaker 6: Right.
Speaker 1: So yeah, So when Cornell came in more a little
Speaker 1: more than a decade ago, he pulled the plug on
Speaker 1: the Canada stores, which was seen as a pretty big move.
Speaker 6: They were all losing money. They's, yeah, one hundred and thirty.
Speaker 1: Three, but they hadn't been in Canada for that long, right, right,
Speaker 1: And there were just a lot of as you point
Speaker 1: out in the piece, a lot of execution issues.
Speaker 6: It's actually right, some chain issues.
Speaker 1: Yeah, at what point like the Target that you scribe
Speaker 1: and that Carol describes, and you know, the taking out
Speaker 1: all the ads like to take over the New York.
Speaker 6: No, it's all that stuff is. And I remember also about, yeah,
Speaker 6: what was the.
Speaker 1: Sort of the end of that, like why did that
Speaker 1: era decline?
Speaker 16: Well, that all of that stuff happened, you know, for
Speaker 16: certainly for the most part, happened under the I guess
Speaker 16: this CEO of Bob Ulrich who became CEO of Target
Speaker 16: in nineteen eighty seven and they just had about, you know,
Speaker 16: three hundred plus stores. It was part of Dayton Hudson
Speaker 16: sort of a department store company. But he basically, you know,
Speaker 16: you know, decided that to compete with Walmart, we have
Speaker 16: to have like kind of cooler style or products. We
Speaker 16: have to have cleaner, you know, more more well lit stores.
Speaker 16: The execution has to be better. But he kicked off
Speaker 16: this whole thing that sort of I would say culminated,
Speaker 16: but it really really started, you know, with the Michael
Speaker 16: Graves partnership, and that was in nineteen ninety nine. That
Speaker 16: resulted in the famous Teakettle, which course we can't stop
Speaker 16: talking about it.
Speaker 6: You can mention enough times in the.
Speaker 16: Story because because it's just sort of like it was incredible.
Speaker 16: It was it was a piece of art that people
Speaker 16: could buy for thirty four ninety nine. But in any case,
Speaker 16: he steps down because of you know, the retirement age limit.
Speaker 16: In two thousand and eight, he's replaced by Greg Steinhoffel,
Speaker 16: who was his number two, his right hand man, and
Speaker 16: that's just that just didn't really work out. Even you know,
Speaker 16: Bob Allwork says in the story, he thinks that's, you know,
Speaker 16: the you know, the biggest mistake he ever made.
Speaker 6: But they never.
Speaker 1: Really probably the worst decision in my yes, God bank life, Yeah,
Speaker 1: filling them. But Steinhoffel did not respond to request.
Speaker 16: For no, but right, but but so Brian Cronell comes
Speaker 16: in twenty fourteen and after steinhoff has asked it, and
Speaker 16: by the way that follows follows the you know, the
Speaker 16: hack you know, you know, a target you know, in
Speaker 16: the twenty thirteen that was and The funny thing is
Speaker 16: like that's something that's happened in a lot of companies since,
Speaker 16: but at the time it was kind of a first
Speaker 16: and it blew everybody's minds. And yeah, and he took
Speaker 16: responsibility for it, kind of lost his job. But but
Speaker 16: but so Brian Cornell came in and fixed a lot
Speaker 16: of that stuff. But I think in terms of like
Speaker 16: maintaining that, you know, that stylistic edge, the edge on design,
Speaker 16: I think that that kind of started.
Speaker 6: To wane and and uh and.
Speaker 16: Then and then in the pandemic, they themselves admit that
Speaker 16: they weren't really staying in touch with the consumer people.
Speaker 16: You know, people were working from home and they weren't
Speaker 16: doing all the things they do. It was going out
Speaker 16: to consumers homes and like looking through their their you know,
Speaker 16: you know, their you know, their.
Speaker 6: Makeup bags and all that stuff.
Speaker 16: You know, they're kind of trying to do that now
Speaker 16: and and trying to trying to.
Speaker 6: Make up for that.
Speaker 16: But but they really, you know, they really lost the edge.
Speaker 16: But so to the aswer your question, though it's been
Speaker 16: it's happened slowly, and then you know, the pandemic, post pendemic,
Speaker 16: it's accelerated you know, really rapidly this sort of decline.
Speaker 3: I mean, I've to say, when my daughter was younger,
Speaker 3: I mean I livedn't Target, like I was there all
Speaker 3: the time, and sometimes I've gone back for her even today,
Speaker 3: and she's not a little one anymore. But so what
Speaker 3: do folks say needs to be done at Target? Because
Speaker 3: I got to say, when it was in its groove,
Speaker 3: it was a pretty cool retail.
Speaker 6: I know, and they're really successful, yeah.
Speaker 3: Super successful, and everybody talked of a Tar, right it
Speaker 3: was kind of cool. So what do what do outsiders
Speaker 3: or folks say needs to be done?
Speaker 6: Well, there's I mean, they need to get their edge
Speaker 6: back in style design. They say that, they say they're
Speaker 6: doing that. I mean, of course, the question is.
Speaker 16: They really they really got there in the first place
Speaker 16: in a very different kind of you know media, you know,
Speaker 16: retail retail environment. So yeah, so it's a bit of
Speaker 16: a challenge to you know, to to recreate the success
Speaker 16: that they had. I mean, you can't just like take O.
Speaker 16: I guess you could take over the New Yorker. Now,
Speaker 16: I don't think it would be quite quite the same thing.
Speaker 16: But they have that. They still have operational problems at
Speaker 16: their stores. I mean, you know, you can got a
Speaker 16: really nice story in the suburbs. We went to very nice,
Speaker 16: nice one of the inn Adina, uh you know, Minnesota,
Speaker 16: right outside of Target, where it turns out quite a
Speaker 16: few of the you know, top Target executives, including one
Speaker 16: Michael Fidelki shop. So of course that place was fantastic.
Speaker 16: But or you can go to the target down the
Speaker 16: street from where I live in Washington Heights one.
Speaker 3: Hundred and eighty Firstets is actually locked up.
Speaker 6: Yeah, and it's just it's it's it's a mess.
Speaker 16: So so how do you really And I think there's
Speaker 16: kind of in between sort of sort of you know,
Speaker 16: my target and the target target we went to. But
Speaker 16: they have to fix fix all that stuff. They have
Speaker 16: a bunch of unhappy employees. They have to they have
Speaker 16: to do something there. But a lot of it is
Speaker 16: just executing at the level you know that they used
Speaker 16: to they used to used to execute and then that
Speaker 16: they've kind they've kind of let that slid, and uh,
Speaker 16: you know, can they do it in uh in uh,
Speaker 16: you know, twenty twenty five, twenty twenty six. You know,
Speaker 16: it's a different world than it was in the odds,
Speaker 16: So we'll see.
Speaker 3: Well, it's a cool deep dive another one. You always
Speaker 3: do these stories where you just kind of like into
Speaker 3: so much detail. Hell, you learn a lot, Devin. Thank
Speaker 3: you really appreciate. Devin Leonard be Senior Global Business writer
Speaker 3: at Bloomberg Business Week. Check out his story Jwon King
Speaker 3: and Devin Leonard doing it for Bloomberg miss this week.
Speaker 3: Yeah no, no, no, what a reporter.
Speaker 1: Yeah, very very always awesome Devin. When you join us.
Speaker 2: Thanks you're listening to the Bloomberg Business Weekdaily Podcast. Catch
Speaker 2: us live weekday afternoons from two to five pm Eastern.
Speaker 2: Listen on Apple CarPlay and Android Auto with the Bloomberg
Speaker 2: Business app, or watch us live on YouTube.
Speaker 3: You wouldn't love about the holidays?
Speaker 1: This is a chocolate Yeah, I knew you were going
Speaker 1: to say it.
Speaker 3: Cut to the chase.
Speaker 1: Well, you know it's funny that you say that. It's
Speaker 1: funny to say because our Bloomberg News team is out
Speaker 1: with the ultimate footy gifts for anyone who likes to
Speaker 1: cook an eat. Did you see this at the dream roll?
Speaker 3: Nice job?
Speaker 1: The word chocolate. It's mentioned ten times in the gift guide.
Speaker 3: Say no more.
Speaker 1: Okay, it's also for good reason. Because it's the time
Speaker 1: of year where we like to indulge in that often include,
Speaker 1: at least for me and I know for Carol Masser,
Speaker 1: eating our share of chocolate.
Speaker 3: Let's be really good chocolate with us.
Speaker 1: Here in the Bloomberg Interactive Broker studio is Angus Thurwell,
Speaker 1: he's hot her In Global CEO of Hotel Chakolat. It's
Speaker 1: the UK based chocolate tier that has more than one
Speaker 1: hundred and fifty cafes in the UK. You'll remember this
Speaker 1: was bought by Mars for more than six hundred and
Speaker 1: sixty million dollars. That deal closed at the beginning of
Speaker 1: twenty twenty four, so it's been almost two years since
Speaker 1: you've been under the Mars umbrella. Almost two years.
Speaker 6: Yeah, we've been.
Speaker 9: We've been really busy since then, thank you. I mean,
Speaker 9: the whole rationale of combining with Mars was to strap
Speaker 9: Rocket Launches onto the Hot Chocola brand. We already knew
Speaker 9: from previous entrees into the American market that the brand
Speaker 9: resonated with people. The playfulness and the contemporary design coupled
Speaker 9: with a really you know, strong approach or more cocoa
Speaker 9: less sugar. Yeah, so even with milk chocolate and white
Speaker 9: chocolate diving up the cocoas so it's not overloaded with
Speaker 9: two much sugar.
Speaker 1: So we care you're speaking like you're speaking my language now,
Speaker 1: like more coco, less sugar, totally. Yeah, Like I'm talking
Speaker 1: like ninety dark is like you know.
Speaker 9: Well, yeah, that's well, you're almost at my level. Yeah,
Speaker 9: that's one hundred percent. I love that, Okay, Yeah, I
Speaker 9: take it as a drink every morning. In our we
Speaker 9: have a drinking chocolate machine called Velvetizer, which enables families
Speaker 9: at home to make Burister grade drinking chocolate really effortlessly.
Speaker 3: Velveteer, Velvetizer, Velvetize.
Speaker 1: What is what is drinking chocolate like comprised of.
Speaker 9: Well, I mean, if you if we step back and
Speaker 9: consider the history of humans and cocoa together, the history
Speaker 9: in the drinkable version is five thousand years according to
Speaker 9: the latest archaeological digs where they found ceramic fragments of
Speaker 9: drinking goblets with little traces of cocoa on, and the
Speaker 9: edible version is only just over two hundred years of history.
Speaker 9: So the drinkable version has way more heritage. And basically
Speaker 9: what you do is you take up take the cocoa
Speaker 9: bean and grind it up and then dissolve it into
Speaker 9: either a water base, which is the early civilization's way,
Speaker 9: or the way we prefer the velvetizer. Put it onto
Speaker 9: your preferred milk, either dairy or plant, and it makes
Speaker 9: the most amazing, rich, deep wholesome chocolate drink.
Speaker 1: And this is sugar free.
Speaker 9: You can go sugar free, so there's no you don't
Speaker 9: need to add any sugar. It's either already in there
Speaker 9: to a very restrained level, or as I'm hoping to
Speaker 9: get you on, we can take you all the way
Speaker 9: to one hundred percent not a single scintilla.
Speaker 1: Of sugar there. I guess let's do it.
Speaker 3: But it's fascinating that you say that, because I think
Speaker 3: the views around chocolate, certainly maybe globally, but I know
Speaker 3: certainly in the United States has changed in terms of
Speaker 3: looking at the amount of coco or chocolate that's in something,
Speaker 3: and that I think Americans are changing their preference. Tell
Speaker 3: us about the American market and what your experience has
Speaker 3: been since you guys have been moving into it.
Speaker 6: Yeah.
Speaker 9: So, we we're based in Chicago now and we've spent
Speaker 9: pretty much all of twenty twenty five trying to win
Speaker 9: over the city of Chicago by opening five you know,
Speaker 9: amazing locations and taking you know, like really careful note
Speaker 9: of the way people are interacting with our chocolate. And
Speaker 9: what we're seeing is that our Neon sign that's in
Speaker 9: every store that says more Coca less sugar. People are
Speaker 9: doing Instagram picks against it, and they're really loving that.
Speaker 9: The drinking chocolate which we serve over indexes as a
Speaker 9: mix compared to our UK model. So that's telling us
Speaker 9: that the American consumer is very open to experimenting with
Speaker 9: I feel like composed and original drinks. And you don't
Speaker 9: have to go far love our drinks. I know, if
Speaker 9: you if you look at the New York culture, the
Speaker 9: LA culture, you know that drink drinks are an art form.
Speaker 3: Is it hot cold?
Speaker 1: Both?
Speaker 8: Like both those plus ice ice?
Speaker 3: Okay?
Speaker 9: Yeah, And we also have a version where we combine
Speaker 9: it with a with our own soft serve as well
Speaker 9: if you want to go you know, like really, you know,
Speaker 9: all the way. So so we really notice those dimensions,
Speaker 9: and we we've also noticed that the preference for amongst
Speaker 9: affluent Americans is dark and they start off saying I'm
Speaker 9: a dark person. Don't even show me any milk. But
Speaker 9: there's a way to do milk chocolate well, which is,
Speaker 9: you know, it can be very creamy and still loaded
Speaker 9: up with loads of cocoa. And so that's been a
Speaker 9: bit of an eye opener, we think for the chicagoans
Speaker 9: to you know, to taste really high end milk.
Speaker 1: You mentioned the idea with the Mars partnership and Mars
Speaker 1: acquiring you a couple of years ago, was to strap
Speaker 1: this rocket ship on expansion. Certainly the idea of distribution
Speaker 1: is incredibly helpful with the global companies such as Mars,
Speaker 1: but also about sourcing and getting the actual ingredients. Are
Speaker 1: you able to get ingredients the same ingredients you were
Speaker 1: getting as an independent company now for cheaper as a
Speaker 1: result of being part of Mars.
Speaker 9: In some cases yeah, I mean if we put cocoa
Speaker 9: to one side, where we willingly spend more than the
Speaker 9: market price. And I'll come on to that if you
Speaker 9: will permit me a bit later. But when we're looking
Speaker 9: at other things like hazel nuts, were able to use
Speaker 9: the buying power of the of the group and the
Speaker 9: financial strength of Mars as well. I mean, you know,
Speaker 9: as an independent business we could offer a certain security
Speaker 9: over our trading relationship with our favorite hazel nuts supplier.
Speaker 9: But when we're part of Mars, suddenly our credit rating
Speaker 9: is much higher and that can get reflected in better terms.
Speaker 9: It's how the world goes around. So, yes, they're some
Speaker 9: of the synergies, but the combination was more about growth,
Speaker 9: not really about a cost based play. Yes, we'll collect
Speaker 9: those along the way to try and be a more
Speaker 9: efficient business and reinvest the proceeds into more development and
Speaker 9: more growth.
Speaker 3: I'm still obsessed with the velvetizer. I'm just going to
Speaker 3: say for Christmas, oh exactly. So talk to us about
Speaker 3: the US market, the growth that you've seen and tell
Speaker 3: us what it's like. So you mentioned Chicago. Tell us
Speaker 3: about expansion and what you've seen since you've been here.
Speaker 1: Yeah.
Speaker 9: Well, I mean if we look at our domestic market first,
Speaker 9: which is the UK market, there's loads of headroom left
Speaker 9: there and we've opened about twenty twenty five locations in
Speaker 9: the UK over the last twelve months. Yeah, and here
Speaker 9: in the US we I'm very much a standing start,
Speaker 9: but already five open and they're spread across different neighborhoods
Speaker 9: in Chicago and also on a magnificent mile as well.
Speaker 9: So we're going into the holiday season all guns blazing,
Speaker 9: you know, with an amazing offer.
Speaker 3: What is the growth market for you guys, is it?
Speaker 3: Do you see the United States as being like a
Speaker 3: bigger and bigger part of the of the business.
Speaker 9: Yes, very much. I mean, you know, the US is
Speaker 9: the world's biggest consumer market. As we know, it's the
Speaker 9: leading media and culture center for the world.
Speaker 3: I mean social media plays a role in right, like
Speaker 3: expanding the brand usually, yeah.
Speaker 9: I mean it's it's you know, the way we built
Speaker 9: it in the UK was word of mouth. We didn't
Speaker 9: spend any money on above the line advertising.
Speaker 3: It's amazing.
Speaker 9: It was all pr and word of mouth and reviews.
Speaker 9: And we very much want to focus on similar tactics
Speaker 9: in America. We know we've got a story to tell,
Speaker 9: we know we're differentiated and yeah, and America is our
Speaker 9: total focus.
Speaker 6: We for growth.
Speaker 9: We know that if we win in America, we can
Speaker 9: then you know, win everywhere. As Frank Sinatra said, almost.
Speaker 1: Yeah, So what's the expansion plan in New York and
Speaker 1: Los Angeles and other parts of the country.
Speaker 9: Yes, we're you know, you won't be surprised that we've
Speaker 9: scoped out already. You know, the next three to five years,
Speaker 9: and we're clearly looking at New York and California and
Speaker 9: you know the other kind of interesting states. So I
Speaker 9: mean there's a wealth of headroom available for us to
Speaker 9: grow into. But the key, the key thing I bring
Speaker 9: is an insistence on quality growth. Right, We're not just
Speaker 9: trying to wrack up, you know, like numbers of stores.
Speaker 9: The most important thing is to hold on to that quality.
Speaker 9: The way our team interacts. They need they need training,
Speaker 9: they need to know everything about cocoa and chocolate, and
Speaker 9: that gives the confidence to be able to engage and
Speaker 9: have a proper conversation. And our supply chain, which MARS
Speaker 9: will help on hugely. The logistics, the things like finding patents,
Speaker 9: you know, getting getting permits, which a different state by state,
Speaker 9: so all those things are pretty you know, difficult for
Speaker 9: Brits to understand where it's one homogeneous country, it's like
Speaker 9: one set of planning laws. But in America, you know,
Speaker 9: it's such a vast market that you've got to you've
Speaker 9: got to crack the code for you know, California when
Speaker 9: you've just learned it for Illinois.
Speaker 1: Some people live in New Jersey and work in New
Speaker 1: York and have to pay taxes in both places. It's
Speaker 1: not fun.
Speaker 3: You do get some of it back a little bit
Speaker 3: later on. Just final thoughts in terms of where you
Speaker 3: hope this business is. I don't know, two years. What's
Speaker 3: a fair timeline that you're thinking about? And just get
Speaker 3: about a minute left.
Speaker 9: Here, I think I mean in the UK, it took
Speaker 9: us ten years to become a household name brand. In America,
Speaker 9: we're hoping to do it in half the time.
Speaker 3: That's no pressure, we'll come back. Please, just gonna say,
Speaker 3: I'm a person who leaves my office and I'm going
Speaker 3: to just tell you there's another chocolate place that's down below,
Speaker 3: but I will actually buy chocolate on my way home.
Speaker 3: So hopefully you guys will be in the neighborhoods soon
Speaker 3: so I can do that hopeful intention. Angus, thank you
Speaker 3: so much, Happy holidays, and thanks for coming in. Angus Thirlwell,
Speaker 3: he's founder and global CEO at Hotel Chuck a Lot,
Speaker 3: joining us right here in studio.
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Speaker 9: Yeah