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Tesla Will Burn Through Cash By First Half Of 2019: Levington · Bloomberg Intelligence

• 0:05
  Speaker 1: Welcome to the Bloomberg p m L Podcast. I'm pim
• 0:08
  Speaker 1: Fox along with my co host Lisa Bramowitz. Each day
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  Speaker 1: we bring you the most important, noteworthy, and useful interviews
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  Speaker 1: L Podcast on Apple Podcasts, SoundCloud, and Bloomberg dot com. Ouch.
• 0:32
  Speaker 1: I am looking right now at Tesla bonds. They are plummeting.
• 0:36
  Speaker 1: I want to bring in our own Joel Lovington, senior
• 0:39
  Speaker 1: credit analyst for Bloomberg Intelligence, who's been tracking this. Wow,
• 0:44
  Speaker 1: this has been a big swoon, not entirely unexpected considering
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  Speaker 1: that these bonds were among the short most shorted they
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  Speaker 1: could possibly be. What's going on today? Well, last night
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  Speaker 1: Moody's downgraded then very much into the conversation that we
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  Speaker 1: had last week. So very props to you, yeah for
• 1:01
  Speaker 1: for doing this for Bloomberg. UM and uh and the
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  Speaker 1: bonds have lost about three three and a half points
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  Speaker 1: UM or about sixty six five basis points at least
• 1:09
  Speaker 1: that's the last quote that I saw, So it looks
• 1:12
  Speaker 1: like we're in the about the eighties six dollar range. YEP, YEP,
• 1:15
  Speaker 1: we're still there's that means a yields maturity of about
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  Speaker 1: UH seven point six six percent, give or take um.
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  Speaker 1: Let's talk the broader picture here. Let's just sort of
• 1:24
  Speaker 1: paint a scene for this company. They have the controversy
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  Speaker 1: going on that has certainly plummeted or sort of punctured
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  Speaker 1: their stocks with a car crash that ended up with
• 1:35
  Speaker 1: the death of the driver of the car. Meanwhile, this
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  Speaker 1: is a business model that really hinges on the company's
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  Speaker 1: ability to access credit markets. How much does the downgrade
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  Speaker 1: and subsequent plunge in bond prices affect Testla's ability to
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  Speaker 1: finance it's penchant for burning through cash. That's a great question, Lisa,
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  Speaker 1: and it really it's two ways. At one, there are
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  Speaker 1: certain funds that can't buy ariple see paper uh and
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  Speaker 1: so now you have a triple C B minus issue,
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  Speaker 1: which makes it tougher in terms of financing. The second
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  Speaker 1: thing is with a bond at eight six and UH
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  Speaker 1: and yields in the upper sevens, issuing unsecured debt straight
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  Speaker 1: unsecured debt, like what they did with the issue is
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  Speaker 1: really not an option. It's too it's too costly. So
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  Speaker 1: then they have to start thinking about what is the
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  Speaker 1: right approach because everybody knows that they do have a
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  Speaker 1: liquidity event in front of them. Will it be through
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  Speaker 1: a structured issue or will it be through UH issuing
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  Speaker 1: straight equity or some sort of convertible. Okay, so when
• 2:35
  Speaker 1: we spoke last time, you said that the leveraged loan
• 2:38
  Speaker 1: market might be most attractive for Tesla, and we did
• 2:42
  Speaker 1: see Uber managed to successfully upsize their loan offering. I'm
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  Speaker 1: wondering at this point is even the loan market off
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  Speaker 1: limits or is there enough of a bid coming from
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  Speaker 1: the collateralized loan obligations these funds that have to buy
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  Speaker 1: loans that it raised a lot of money that that
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  Speaker 1: anyone can tell anything. Well, you know, I think that
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  Speaker 1: I think the Uber deal is actually a pretty interesting
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  Speaker 1: one because I think it went in live war plus
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  Speaker 1: four hundred. So you're looking at a little over six
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  Speaker 1: percent coupon on that UH and that is without a
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  Speaker 1: credit rating on it. And so if you have a
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  Speaker 1: public company that still has a forty plus billion dollar
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  Speaker 1: market cap on it, one might say that they should
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  Speaker 1: be able to do as well, if not better than
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  Speaker 1: what Uber god And and maybe that kind of puts
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  Speaker 1: into a framework what a unsecured deal versus a secure
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  Speaker 1: deal might look like. Um, so, I guess maybe that
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  Speaker 1: kind of paints the picture as is, if they went
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  Speaker 1: down the road of issuing dead the unsecured market and
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  Speaker 1: not being able to handle it, a secure deal maybe
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  Speaker 1: in the six percent range might be a better option
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  Speaker 1: if you're the treasurer. Right, let's sum out a little bit,
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  Speaker 1: because there are sort of this existential question with Tesla
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  Speaker 1: right now, which is, you know, as money gets increasingly
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  Speaker 1: expensive for them, as they fail to prove that they
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  Speaker 1: can come through on their promises, when do they run
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  Speaker 1: out of leeway? So when do they run out of
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  Speaker 1: liquidity and face some serious issue if financing markets close
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  Speaker 1: up or at least become really onerously expensive. Sure, I
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  Speaker 1: mean without doing any new issuance, I would say sometime
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  Speaker 1: in the first half of they're gonna burn out of cash.
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  Speaker 1: Our model last week we were talking about about a
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  Speaker 1: two point three billion dollar cash usage this year. They
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  Speaker 1: have a billion two of debt maturities into the first
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  Speaker 1: quarter of so that's about equal to what the cash
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  Speaker 1: was at at the end of the year. So they
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  Speaker 1: need to raise more money by the first part of
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  Speaker 1: next year or else they're out of business, right And
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  Speaker 1: I would say for all stakeholders, they're probably better off
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  Speaker 1: doing it sooner than later, and probably more than what
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  Speaker 1: they need today to get the liquidity issue away from
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  Speaker 1: you know, both the equity and the dead So let's
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  Speaker 1: talk financing price. So if we end up with a
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  Speaker 1: yield of say seven point seven and that is the
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  Speaker 1: going yield for Tesla to borrow money, is that sustainable
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  Speaker 1: for them? No? So okay, But this is this is
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  Speaker 1: a really important point in other words, because if you're
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  Speaker 1: seeing a seven point seven percent yield, which is effectively
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  Speaker 1: what is being implied this is the bond that comes
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  Speaker 1: due in less than ten years, that's not a viable
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  Speaker 1: financing costs for them. No. I mean, when you're burning
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  Speaker 1: through cash to create more liabilities that are have a
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  Speaker 1: high coup a cash coupon on, it does only makes
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  Speaker 1: the issue worse, which means that a best case scenario
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  Speaker 1: would be that you issue a block of equity or
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  Speaker 1: maybe equity with a secured debt package behind it to
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  Speaker 1: reduce the cash costs as opposed to the coupon. Would
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  Speaker 1: you say the time's running out here? I would say
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  Speaker 1: that they need to do something. Uh, and again I
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  Speaker 1: would if I was in the Treasury seed at TESLA,
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  Speaker 1: I would be doing it sooner than later to get
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  Speaker 1: this issue off the table, at least for as kicking
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  Speaker 1: the can down the road, or as long as I could.
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  Speaker 1: You would also be investing in some kind of anti
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  Speaker 1: sweat measure because it seems like a pretty hot seat
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  Speaker 1: to be on right now. Joel Levington, thank you so
• 6:08
  Speaker 1: much for being with us. And you did nail it.
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  Speaker 1: Last time we spoke. You said that this is going
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  Speaker 1: to likely be a company that is downgraded. It was downgraded,
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  Speaker 1: and now the bonds are plunging. Joel Levington, Senior credit
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  Speaker 1: analyst for Bloomberg Intelligence. Always insightful, always interesting. Thank you
• 6:24
  Speaker 1: for being with us. People on both sides of the
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  Speaker 1: aisle agree that the US has some unfair trade relationships,
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  Speaker 1: certainly with China, but also with the rest of the
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  Speaker 1: world joining us now. Robert Lawrence Professor of International Trade
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  Speaker 1: and Investment at the John F. Kennedy School of Government
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  Speaker 1: at Harvard University. He's also a Senior Fellow at the
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  Speaker 1: Peterson Institute for International Economics. Also former economic advisor to
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  Speaker 1: President Bill Clinton. Robert Lawrence, Thank you so much for
• 7:06
  Speaker 1: being with us, A really important time to hear from you. So,
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  Speaker 1: you know, since there is this sort of widely accepted
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  Speaker 1: unfair trade relationship that the US has certainly with China,
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  Speaker 1: what measure should we be looking at as a gauge
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  Speaker 1: of whether things are becoming more fair? Well, ultimately, UM,
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  Speaker 1: I think, by the way, it's a pleasure to be
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  Speaker 1: with you this morning. UM. Ultimately, I think we just
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  Speaker 1: we have to look at what kind of access our
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  Speaker 1: firms have to their market, um, and what kind of
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  Speaker 1: access their firms have two hours, and we have to
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  Speaker 1: compare that. And I think there's no question that the
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  Speaker 1: Chinese have been using their market as a way to
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  Speaker 1: enforce a U S firms and other foreign firms to
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  Speaker 1: transfer technology. They've also not been respecting intellectual property rights,
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  Speaker 1: which are part of the rules of the World Trade Organization. So,
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  Speaker 1: Professor Lawrence, since you advised former President Bill Clinton, I
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  Speaker 1: assume you line up more on that side of the aisle,
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  Speaker 1: although I could be wrong, and I'm wondering whether coming
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  Speaker 1: from that vantage point, you can view anything that President
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  Speaker 1: Trump has done as being positive on this on this count. Well,
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  Speaker 1: I think, UM. Focusing on the question of our trade
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  Speaker 1: relationship with China and trying to improve some of the
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  Speaker 1: violations or deal with some of the violations, I think
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  Speaker 1: is well worth well worth doing. I think at times
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  Speaker 1: what the measures that they've actually taken are are pretty
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  Speaker 1: high handed, and um, some of them actually contravene rules
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  Speaker 1: that we've agreed to. So I think that's the part
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  Speaker 1: of it where I would take take difference with him.
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  Speaker 1: What do you mean that they contravene with rules that
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  Speaker 1: we've agreed Well, Uh, you know, as a member of
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  Speaker 1: the World Trade Organization, you're not allowed to simply raise
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  Speaker 1: your tariffs against the products coming from other countries. Uh.
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  Speaker 1: What you have to do is to go to that
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  Speaker 1: body to prove that the other country is violating the
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  Speaker 1: agreement and then get permission to take retaliatory measures. But
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  Speaker 1: what President Trump did the other day was to simply
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  Speaker 1: unilaterally announce that the United States is going to put
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  Speaker 1: tariffs on up to sixty billion dollars worth of Chinese exports.
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  Speaker 1: That clearly violates the rules of the World Trade Organization.
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  Speaker 1: So if we want to have the moral high ground
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  Speaker 1: and be persuasive in a sense that we're being wronged,
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  Speaker 1: it seems to me we ought to be adhering to
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  Speaker 1: the rules. Who who stands to lose more, the US
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  Speaker 1: or China if the trade tensions do escalate, Well, I
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  Speaker 1: I think we both lose a lot um and and
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  Speaker 1: it's hard to say who loses more, but but the
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  Speaker 1: point is it's damaging to both of us. You've seen
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  Speaker 1: what the markets have done in the last two weeks,
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  Speaker 1: and clearly that's in response partly to these aggressive trade actions.
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  Speaker 1: A huge number of American firms are now integrated with
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  Speaker 1: with Chinese firms. A lot of the parts we buy
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  Speaker 1: come from China, and those supply chains are now being threatened,
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  Speaker 1: and we're seeing the reflection of these threats uh in
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  Speaker 1: in the stock evaluations of a lot of our firms. So, yes,
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  Speaker 1: the Chinese will also lose by if we put tariffs
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  Speaker 1: against their products, but our firms are also going to lose,
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  Speaker 1: and I think it goes a threatened jobs of people
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  Speaker 1: who work for those firms in the United States. So
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  Speaker 1: to learn's you've been on the inside of these negotiations.
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  Speaker 1: I'm sure you've dealt with China in particular, and I'm
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  Speaker 1: sure that this issue was apparent to you back when
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  Speaker 1: you are advising former President Bill Clinton. I'm wondering, is
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  Speaker 1: there something about China's approach, what they would like, what
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  Speaker 1: their priorities are with respect to trade, that is getting
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  Speaker 1: lost in some of the some of the big talk. Well,
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  Speaker 1: I think it's you know, China is has two features. First,
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  Speaker 1: it's a very large and important economy, and that means
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  Speaker 1: we have to take it seriously. But the Chinese a
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  Speaker 1: s poor economy and they're only at about twenty five
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  Speaker 1: level of American living standards, and poor countries typically use
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  Speaker 1: their government to a much greater degree to enhance their
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  Speaker 1: economic development. So uh so, there's basically attention in China.
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  Speaker 1: It needs the risk of the world. It wants to
• 12:01
  Speaker 1: sell to the rest of the world and to export,
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  Speaker 1: but at the same time it also wants to nurture
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  Speaker 1: its own domestic economy and sometimes in a way that
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  Speaker 1: discriminates against foreign firms. So China has a very complicated problem.
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  Speaker 1: How does it engage with the world. On the one hand,
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  Speaker 1: that means it ought to be more open, and on
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  Speaker 1: the other hand, how does it develop its own economy?
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  Speaker 1: And that leads it to want to encourage domestic development
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  Speaker 1: of technology and foreign firms to bring their latest technology
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  Speaker 1: to China. Professor Lawrence, there's a lot of focus on
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  Speaker 1: which American companies stand to lose the most in a
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  Speaker 1: possible trade war. People focus in on Boeing, for example,
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  Speaker 1: or Caterpillar. Perhaps we ought to be asking the flip question,
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  Speaker 1: which is which American companies stand to gain the most?
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  Speaker 1: Should trade practices between the U S and China benefit
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  Speaker 1: the most? Wait? Which companies will benefit the most from
• 13:05
  Speaker 1: fairer trade? Well, well, clearly our companies that produce intellectual property.
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  Speaker 1: So if we took our I T firms, if you
• 13:14
  Speaker 1: took Microsoft as an example, Uh, their products are being
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  Speaker 1: copied without the royalties being paid. So I would say
• 13:25
  Speaker 1: heavily U I T companies and and companies that that
• 13:30
  Speaker 1: have done a lot of research and development and basically
• 13:34
  Speaker 1: are being copied or ripped off by the Chinese. So
• 13:38
  Speaker 1: if we can level the playing field, if we can
• 13:40
  Speaker 1: ensure that they enforce intellectual property protection, it's those kinds
• 13:45
  Speaker 1: of companies that are going to benefit, not necessarily industrial companies. No.
• 13:50
  Speaker 1: In fact, that's what's interesting because the whole focus here
• 13:55
  Speaker 1: is of the policy has been very, very focused on
• 13:59
  Speaker 1: um or a heavy element of it has been on
• 14:02
  Speaker 1: intellectual property, but there could be some industrial companies, say
• 14:06
  Speaker 1: in the steel industry, for an aluminum, who are going
• 14:10
  Speaker 1: to get more protection and so uh those companies will gain.
• 14:16
  Speaker 1: There are solar panel uh producing companies who are now
• 14:21
  Speaker 1: getting more protection. So so so it's it's a complicated mix. Yes,
• 14:27
  Speaker 1: the steel industries are going to gain, but all of
• 14:30
  Speaker 1: the users of steel companies like Caterpillar and others could
• 14:34
  Speaker 1: well lose from those tariffs. Robert Lawrence, thank you so
• 14:38
  Speaker 1: much for being with us. Robert Lawrence, Professor of International
• 14:41
  Speaker 1: Trade and Investment at the John F. Kennedy School of
• 14:44
  Speaker 1: Government at Harvard University, also former economic advisor to the
• 14:48
  Speaker 1: former President Bill Clinton, and Senior Fellow at the Peterson
• 14:52
  Speaker 1: Institute for International Economics. Yesterday, as news emerged that Facebook
• 15:11
  Speaker 1: chief executive Mark Zuckerberg plan to head to Washington, d C.
• 15:15
  Speaker 1: To testify in front of Congress on April twelve, people
• 15:18
  Speaker 1: started talking about how he tends to sweat when he's nervous.
• 15:22
  Speaker 1: So with that image in mind, I want to bring
• 15:24
  Speaker 1: a Max Chafkin technology reporter from Bloomberg Business Week. Clearly
• 15:28
  Speaker 1: he's been sweating a lot over the past few weeks
• 15:31
  Speaker 1: and today they announced some measures that boosted their stock
• 15:35
  Speaker 1: a quarter of a percent. What are these measures? Yeah,
• 15:38
  Speaker 1: I I wouldn't get too excited about any of this, um,
• 15:41
  Speaker 1: but they said that they were redesigning the sort of
• 15:45
  Speaker 1: screen inside of the app where users can, um, you know,
• 15:48
  Speaker 1: update their privacy setting. So the idea is to make
• 15:51
  Speaker 1: it easier for people to say, you know, cut off
• 15:54
  Speaker 1: some of face weeks data access. Now, this is something
• 15:57
  Speaker 1: that Facebook. This is kind of Facebook's go to move
• 16:00
  Speaker 1: of sorry, I didn't I want to interrupt you, just
• 16:03
  Speaker 1: there for one second before you get on to sort
• 16:05
  Speaker 1: of the larger issue specifically, is this cutting off Facebook's
• 16:09
  Speaker 1: ability to sort of see what you do on other platforms,
• 16:13
  Speaker 1: in other words like Google or your you know, your
• 16:15
  Speaker 1: Google searches or your all the cookies that you incur.
• 16:18
  Speaker 1: Is this what we're talking about here? No, no, no, no,
• 16:20
  Speaker 1: This is just making it easier for you to sort
• 16:23
  Speaker 1: of toggle like whether or not you know you're sharing
• 16:25
  Speaker 1: your phone number with your Facebook friends or or things
• 16:28
  Speaker 1: like that. This is a very much an incremental step, UM,
• 16:32
  Speaker 1: and it kind of kind of continues what the position
• 16:35
  Speaker 1: that Facebook has historically taken, which is if you're upset
• 16:38
  Speaker 1: about the amount of data that's out there about you
• 16:41
  Speaker 1: on the internet, you know it's your job to sort
• 16:44
  Speaker 1: of fix it. And I think that is the sort
• 16:46
  Speaker 1: of philosophical debate that's been happening for a while in Europe,
• 16:49
  Speaker 1: and that is starting to move here. The question is
• 16:52
  Speaker 1: should Facebook proactively be doing more to keep users data safe?
• 16:57
  Speaker 1: And and right now, even with this um sort of
• 17:00
  Speaker 1: modest tweak that they've made, that's that sent the stock
• 17:02
  Speaker 1: price up just a tiny bit. Uh, It's like I said,
• 17:05
  Speaker 1: it's it's still saying you know, you still have to
• 17:08
  Speaker 1: do this. There's a difference between a lot of people
• 17:12
  Speaker 1: seeing information that you voluntarily put out there for a
• 17:16
  Speaker 1: pretty big network of people, right. I mean, on one hand,
• 17:19
  Speaker 1: you could say buy or beware. You agreed to let
• 17:22
  Speaker 1: people see it when you posted it there for everybody
• 17:24
  Speaker 1: to see. I mean, it's sort of tautology. There's a
• 17:26
  Speaker 1: difference with selling the data of all of your clicks
• 17:30
  Speaker 1: on that platform, of what links you click on, of
• 17:33
  Speaker 1: you know, who you follow, of you know the cookies
• 17:36
  Speaker 1: that you incur from other websites that allow advertisers to
• 17:39
  Speaker 1: target messages to you. Have they addressed that aspect they're
• 17:45
  Speaker 1: starting to UM. Last week, uh, sort of amid this
• 17:48
  Speaker 1: fear of the around Cambridge Analytica, this um, you know,
• 17:52
  Speaker 1: British consultancy that had basically improperly acquired some user user data,
• 17:57
  Speaker 1: Facebook sort of said they're gonna they're gonna do try
• 18:00
  Speaker 1: to do a better job cutting these third party apps
• 18:03
  Speaker 1: off if they're not using your data, and making it
• 18:06
  Speaker 1: easier for you to tell which apps have access to
• 18:09
  Speaker 1: your data. They've also sort of said they're going to
• 18:11
  Speaker 1: do audits of basically anyone who had access to this
• 18:15
  Speaker 1: kind of data to make sure that a sort of
• 18:18
  Speaker 1: Cambridge Analytica situation didn't happen someplace else. But the problem
• 18:24
  Speaker 1: is there's just so much of this sort of washing
• 18:26
  Speaker 1: around out there. It's it's also not clear like how
• 18:29
  Speaker 1: the audits would work or how they would um be
• 18:32
  Speaker 1: able to really know um from what we know of
• 18:35
  Speaker 1: this Cambridge Analytical situation. Facebook was aware of this for
• 18:38
  Speaker 1: a long time. Cambridge Analytica had said they had deleted
• 18:41
  Speaker 1: the data UM, and then it came out through the
• 18:44
  Speaker 1: New York Times is reporting that through whistleblower that they
• 18:48
  Speaker 1: in fact hadn't. So, so it's this kind of thing
• 18:50
  Speaker 1: where it's it's it's pretty hard to see how Facebook
• 18:52
  Speaker 1: addresses this in an easy way, and that's why, you
• 18:55
  Speaker 1: know the stock price is so depressed, uh over the
• 18:58
  Speaker 1: past two weeks. I'm just wondering, you know, how many
• 19:01
  Speaker 1: band aids could Facebook really throw on this or does
• 19:03
  Speaker 1: this problem really puncture something fundamentally about Facebook's business model.
• 19:11
  Speaker 1: We don't know yet, and but I do think there's
• 19:14
  Speaker 1: a chance and a non zero chance that this could
• 19:17
  Speaker 1: seriously impact Facebook's business model. The there is this sort,
• 19:21
  Speaker 1: like I said, there's this sort of philosophical question, do
• 19:24
  Speaker 1: you do you have to opt out or do you
• 19:26
  Speaker 1: have to opt in? You could imagine, uh, the FTC
• 19:29
  Speaker 1: is looking into Facebook once again. European regulators have been
• 19:32
  Speaker 1: pushing in this direction. Uh. You could imagine a rule
• 19:35
  Speaker 1: that sort of says that users have to check a box,
• 19:38
  Speaker 1: or check a bunch of boxes, or go through a
• 19:40
  Speaker 1: bunch of different screens to allow Facebook to use the
• 19:44
  Speaker 1: kind of data that they're using now in advertising. And
• 19:47
  Speaker 1: if users have to go through a bunch of steps,
• 19:49
  Speaker 1: that could cause many many of them to stop doing that,
• 19:52
  Speaker 1: which could in essence break Facebook's amazing business model right
• 19:56
  Speaker 1: now now I think, on the other hand, I think
• 19:59
  Speaker 1: that is probably not the most likely outcome. I think
• 20:02
  Speaker 1: the most likely outcome is Facebook makes some small fixes
• 20:05
  Speaker 1: and and we all get outraged for a while, and
• 20:08
  Speaker 1: people probably go back to to using this exceedingly popular app.
• 20:12
  Speaker 1: What about April twelve, what are you expecting to hear Zuckerberg?
• 20:17
  Speaker 1: Has you mentioned the sweating he has, Well, that's such
• 20:21
  Speaker 1: a visceral image. I mean, he's gotten better. Um. I
• 20:24
  Speaker 1: think people who sweat with with Yeah, sure, with his
• 20:27
  Speaker 1: temperature control and also with his with his poise. I
• 20:31
  Speaker 1: think if if you watch the CNN UM interview that
• 20:35
  Speaker 1: that that happened last week, I would say it was
• 20:38
  Speaker 1: maybe above average for him, probably below average for you know,
• 20:42
  Speaker 1: your average chief executive, but definitely definitely an improvement. I
• 20:47
  Speaker 1: think that where Facebook has struggled is that this is
• 20:51
  Speaker 1: a company that is super cerebral, and Zuckerberg has sort
• 20:56
  Speaker 1: of not been willing to engage on a kind of
• 21:00
  Speaker 1: normal emotional level. He hasn't really apologized, um, and I
• 21:04
  Speaker 1: think you know, he would do well to to just
• 21:08
  Speaker 1: to stop with the pretense of of trying to sort of,
• 21:12
  Speaker 1: you know, come up with like a zillion technical reasons
• 21:14
  Speaker 1: why Facebook did nothing wrong. Uh, and just say hey,
• 21:17
  Speaker 1: you know, we're sorry, We're trying to fix this. UM.
• 21:20
  Speaker 1: I think I think if we get something like that
• 21:22
  Speaker 1: that that will probably move things in a positive direction
• 21:24
  Speaker 1: for the company. So he has about two weeks to
• 21:27
  Speaker 1: learn how to eat crow. Max Chaffin, thank you so
• 21:29
  Speaker 1: much for joining me. Always love speaking with you. Max Chaffin,
• 21:33
  Speaker 1: Technology reporter for Bloomberg Business Week. It has been a
• 21:37
  Speaker 1: really difficult week for Max between Facebook, Uber and the like.
• 21:42
  Speaker 1: We'll be talking more with him, I'm sure in the
• 21:44
  Speaker 1: upcoming weeks. We talk about alternative assets. Sometimes, I want
• 22:02
  Speaker 1: to talk about an asset that has a happens to
• 22:05
  Speaker 1: have an additional benefit of being able to make you
• 22:07
  Speaker 1: feel pretty good and actually tastes good too. I'm talking
• 22:11
  Speaker 1: about wine, and we're talking with Steven Ronically, if he
• 22:14
  Speaker 1: has global beverage strategist at Robbo Bank International, he did
• 22:17
  Speaker 1: not bring a bottle of wine with him. Apologies, well,
• 22:20
  Speaker 1: but we'll let that slide. Steven, I want to talk
• 22:23
  Speaker 1: with you about wine in the context of what we've
• 22:27
  Speaker 1: seen in high end art markets over the past few years.
• 22:30
  Speaker 1: We've seen huge auctions, record prices being paid as a
• 22:35
  Speaker 1: lot of very wealthy families and individuals seek some kind
• 22:39
  Speaker 1: of uncorrelated asset. To what degree are you seeing the
• 22:43
  Speaker 1: same type of activity in high end wine markets? Yeah,
• 22:47
  Speaker 1: it's certainly become a very interesting asset class. People looking
• 22:50
  Speaker 1: at wine as an alternative investment, and and it does
• 22:53
  Speaker 1: perform well overall. I think the returns it's not something
• 22:56
  Speaker 1: that I that I kind of track on a day
• 22:58
  Speaker 1: to day basis, but the returns that I've seen have
• 23:00
  Speaker 1: been have been very, very attractive. It's it's it's been
• 23:03
  Speaker 1: something that people have looked at as an alternative investment,
• 23:06
  Speaker 1: and as you say, worst case scenario, you can drown
• 23:09
  Speaker 1: your sorrows if things go bad. I guess the reason
• 23:13
  Speaker 1: why I start there is I'm trying to understand to
• 23:16
  Speaker 1: what degree the wine market I'm talking to high end
• 23:19
  Speaker 1: wine market is uh composed of connoisseurs, and to what
• 23:24
  Speaker 1: degree is it does it include a lot of speculators? Uh,
• 23:28
  Speaker 1: there's certainly a mix. I think investors are certainly getting
• 23:32
  Speaker 1: into it looking at it as you know, kind of
• 23:34
  Speaker 1: looking and seeing the the uh, the improvement of value
• 23:39
  Speaker 1: that you've seen in wine as an asset class. It's
• 23:42
  Speaker 1: performed very well. But then there's also a whole different
• 23:46
  Speaker 1: set of folks that that kind of get into collecting
• 23:48
  Speaker 1: one because they're passionate about it and and try to
• 23:51
  Speaker 1: find unique vintages and you know, building up their wine
• 23:55
  Speaker 1: cellar and having something to entertain and so forth. How
• 23:58
  Speaker 1: much have some end prices increased? You know, it's really
• 24:02
  Speaker 1: interesting when when you look at wine prices, it's it's
• 24:06
  Speaker 1: it's been um at the retail level. It's been the
• 24:10
  Speaker 1: high end and the very low end that have been
• 24:12
  Speaker 1: able to take price increases. The middle kind of that
• 24:14
  Speaker 1: kind of ten to twenty dollars or seven to twenty
• 24:17
  Speaker 1: dollars that there's a lot of there's a lot of competition,
• 24:21
  Speaker 1: a lot of new players coming in, new brands being introduced,
• 24:24
  Speaker 1: a lot of there's some pricing pressure in that segment
• 24:27
  Speaker 1: at retail. But the low end, because uh, they've been
• 24:31
  Speaker 1: able to take price increases, supply is kind of dried
• 24:34
  Speaker 1: up globally. And then at the high end there there
• 24:37
  Speaker 1: seems to be appetite from uh, from from fine wine
• 24:42
  Speaker 1: buyers to to accept price increases. And part of it
• 24:45
  Speaker 1: is because you have limited limited growth in places like Napa,
• 24:50
  Speaker 1: you can't plant any more grapes. People understand that that
• 24:53
  Speaker 1: there's more and more demand for some of these wines. Uh,
• 24:56
  Speaker 1: and you can't and supply is constrained. Can you give
• 24:58
  Speaker 1: us a sense of just how much some things have
• 25:01
  Speaker 1: have increased on the high end in cost? Well, you know,
• 25:03
  Speaker 1: we one of the things that we look at a
• 25:05
  Speaker 1: lot is great pricing in Napa uh. And that's just
• 25:09
  Speaker 1: been growing astronomically lately. I think, you know, just a
• 25:13
  Speaker 1: few years ago, it was i would say around four
• 25:16
  Speaker 1: or five thousand dollars. Now we're up to you know,
• 25:19
  Speaker 1: we're hitting closer to eight thousand dollars a ton. And
• 25:22
  Speaker 1: when you look at how it's spread out, there used
• 25:24
  Speaker 1: to be a very good chunk of wine grapes the
• 25:26
  Speaker 1: Napa Valley Cabernet sauvignon that would sell for about ten
• 25:30
  Speaker 1: percent of the crop would sell for under Now there's
• 25:35
  Speaker 1: almost none of that left. All of that is getting
• 25:37
  Speaker 1: bit up into higher things. And when you look out,
• 25:39
  Speaker 1: you see, you know, lots and lots of a good
• 25:42
  Speaker 1: chunk maybe five or ten percent, selling for fifteen thousand
• 25:45
  Speaker 1: dollars a ton, and that's that's just an astronomical price.
• 25:48
  Speaker 1: And by global standards. When somebody who spends a couple
• 25:51
  Speaker 1: of thousand dollars on a bottle of wine be worried
• 25:54
  Speaker 1: about opening it and finding out it's a vinegar, I
• 25:57
  Speaker 1: think if you're spending yeah, I mean really used, got
• 26:00
  Speaker 1: a serious concern and maybe they're not planning to ever
• 26:02
  Speaker 1: open it. I don't know. I think if you're I
• 26:05
  Speaker 1: think it is a concern. But I think if if
• 26:08
  Speaker 1: you're spending thousands of dollars on a bottle of wine,
• 26:11
  Speaker 1: you can you can absorb that cost. Let's talk about
• 26:14
  Speaker 1: the method of sales. I know, certainly the way that
• 26:18
  Speaker 1: people are buying clothes and food has changed and moved
• 26:21
  Speaker 1: more online. What about wine, Yeah, that's that's been the
• 26:24
  Speaker 1: subject of a study that we've just put out looking
• 26:26
  Speaker 1: at the growth and online in in e commerce and
• 26:29
  Speaker 1: online wine sales, and and it's been it's been exploding
• 26:32
  Speaker 1: through a number of different channels. You know, you have
• 26:35
  Speaker 1: kind of the the drizzlies of the world, people buying
• 26:37
  Speaker 1: for for immediate delivery. You have specialty wine retailers like
• 26:42
  Speaker 1: wine dot Com and others, and you have kind of
• 26:45
  Speaker 1: e commerce, and then there's online grocery, and you know,
• 26:48
  Speaker 1: the grocers have been kind of lagging behind the rest
• 26:52
  Speaker 1: of of retailers. The obviously, the the acquisition of of
• 26:56
  Speaker 1: Whole Foods by Amazon is kind of lit a fire
• 26:59
  Speaker 1: under every And you know, that's where we see enormous
• 27:03
  Speaker 1: potential for growth, particularly for one So who is the
• 27:05
  Speaker 1: biggest beneficiary from that try and accelerating and who is
• 27:09
  Speaker 1: potentially the biggest loser. Well, you know, this is something
• 27:11
  Speaker 1: that we talk about a lot. I think there there's
• 27:13
  Speaker 1: opportunities for everyone. I think there's great opportunities for retailers
• 27:17
  Speaker 1: to build this up. They still have some pieces to
• 27:20
  Speaker 1: figure out. Some of them are a bit behind in
• 27:23
  Speaker 1: the development of their website. They have to figure out
• 27:25
  Speaker 1: last mild deliveries, etcetera. But I think the you know,
• 27:28
  Speaker 1: in terms of brand owners, we see big opportunities for
• 27:31
  Speaker 1: large brand owners to continue shifting sales online. Uh. Small
• 27:35
  Speaker 1: brand owners can look at this and say, hey, you know,
• 27:38
  Speaker 1: there's virtually limitless shelf space online. We have a chance
• 27:41
  Speaker 1: to gain share. But then the other one that we
• 27:44
  Speaker 1: kind of look at, and if you pull up some
• 27:46
  Speaker 1: of these websites from retailers is private label. Private label
• 27:50
  Speaker 1: has a great chance to grow share because the retailer
• 27:53
  Speaker 1: can position them on that first page. So it's it's
• 27:55
  Speaker 1: it's gonna be for brand owners. It's going to be
• 27:58
  Speaker 1: who figures out how to how to really build brands
• 28:00
  Speaker 1: online and who invests in search engine optimization and all
• 28:05
  Speaker 1: of those things to be successful. You want to make
• 28:07
  Speaker 1: sure that you get that first sale because then you
• 28:10
  Speaker 1: pop up. So who's the biggest brick and mortar wine seller.
• 28:15
  Speaker 1: Believe it's still Costco Total Wine and more has been
• 28:18
  Speaker 1: has been growing very aggressively. Both both do a great
• 28:22
  Speaker 1: job and and then you have your your traditional retailers
• 28:26
  Speaker 1: like Krogers and safe Ways that that sell a fair
• 28:29
  Speaker 1: amount of wine as well. Do you order one online?
• 28:32
  Speaker 1: I have? It's it's challenging, and this is something that
• 28:35
  Speaker 1: we talk about a lot. You know, if you want
• 28:37
  Speaker 1: to get uh kind of a media delivery, if you
• 28:39
  Speaker 1: want to shop online, like when you're buying groceries where
• 28:43
  Speaker 1: I live in in Westchester, it's it's harder to get
• 28:46
  Speaker 1: it delivered. And that's the problem. That's the challenge that
• 28:49
  Speaker 1: that online has because you have to have somebody there
• 28:51
  Speaker 1: to sign for it, and then it creates a logistical
• 28:54
  Speaker 1: problem for delivery of the entire package. If you have
• 28:57
  Speaker 1: wine in that right. And also if you're going to
• 29:00
  Speaker 1: somebody's dinner party and you realize that the last minute
• 29:02
  Speaker 1: you need a bottle of wine, it doesn't work to
• 29:04
  Speaker 1: suddenly just go and press a button and then wait
• 29:06
  Speaker 1: for a couple of days. No, but that's what the
• 29:08
  Speaker 1: Drizzly and many bars do really well. Right. They can
• 29:11
  Speaker 1: do that because they're they're local if you have access
• 29:14
  Speaker 1: to them. Steven Ronic Cleve, thank you so much for
• 29:16
  Speaker 1: being with us. Steven Roni Cleve is global beverages strategist.
• 29:20
  Speaker 1: Fabulous job. By the way, I can only begin to
• 29:22
  Speaker 1: imagine what your tours include. Oh no, no, life is hard.
• 29:27
  Speaker 1: Oh life seems brutal for you. Steven Ronic, Global Beverages
• 29:30
  Speaker 1: Strategists at Rabobank International. Thanks for listening to the Bloomberg
• 29:36
  Speaker 1: P and L podcast. You can subscribe and listen to
• 29:39
  Speaker 1: interviews at Apple Podcasts, SoundCloud or whatever podcast platform you prefer.
• 29:44
  Speaker 1: I'm pim Fox. I'm on Twitter at pim Fox. I'm
• 29:47
  Speaker 1: on Twitter at Lisa Abramo. It's one before the podcast.
• 29:51
  Speaker 1: You can always catch us worldwide on Bloomberg Radio.