Welcome back. In the weeks I wrote this newsletter, I rarely spent time on the finances of individual companies. But the question of how much Soho House (aka Membership Collective Group Inc) might be worth is particularly interesting. But before that, Unhedged first set foot on a tricky topic: China’s influence on world prices.

There will be no newsletter on Thursday. I have other duties to deal with. See you on Friday.

Is China now an inflationary force?

Why is inflation in so many places so long and so low? The standard explanation is three words: “technology and globalization”. The technical aspect has a lot to do with Moore’s Law. Over time, more goods and services we buy are digital, and computing power has been getting cheaper. Globalization has a lot to do with China. Its export machinery provides us with all the cheap things and depresses wages in the global manufacturing industry.

Is the story of China as an exporter of deflation over? Diana Choyleva of Enodo Economics thinks so. She plotted the U.S. import price index to China based on the RMB/U.S. dollar exchange rate:

As shown in the figure, the exchange rate has a lot to do with whether China exports higher prices to the United States. Beijing allows the yuan to appreciate. But the vast majority of China’s trade with the United States is still denominated in U.S. dollars. Therefore, changes in the exchange rate force Chinese exporters to decide whether they are willing to bear the cost of RMB appreciation.

Choyleva pointed out that the profit growth of these exporters has declined in recent years, due to the dual impact of strong exchange rates and rising labor costs. Covid-19 only had a short-term impact on revenue, which has driven global demand for electronics and medical equipment:

Now the pressure is really great, which is reflected in 9% increase Chinese producer prices in May. Choyleva believes that in China, it is difficult to pass on higher costs to domestic customers, as evidenced by weak consumer price inflation. The government is also unlikely to provide relief by weakening the renminbi. It pays more attention to issues such as food price inflation and encouraging capital inflows. Therefore, if Chinese producers want to protect their profits, they have no choice but to increase export prices in dollars.

Not everyone agrees with Choyleva, naturally (this is economics). For example, Macquarie’s Larry Hu pointed out that China’s producer price index is closely related to oil prices—in other words, it is imported. Oil prices will soon be out of the trough of the pandemic. In addition, Hu pointed out that China’s high PPI has not historically led to higher export prices (he specifically pointed to the 2015-17 PPI increase).

However, the inflation question that plagues us all is whether this time it is different. The answer will depend in part on whether Chinese manufacturers are willing and able to pass on higher costs to international customers.

Soho House and exclusive mass production

Soho House is an international hotel chain with 28 high-end hotels (“Houses”), operating on a membership basis. Members (111,000 of them) pay the initial registration fee and annual fee (approximately US$3,400 in the US) to gain access, and then pay for accommodation and accommodation fees on this basis.

The company is planning an initial public offering, and its owners are reportedly seeking a valuation of $3 billion.registered Documentation It is an interesting reading. I think it can be summarized as follows:

1. Yes, we have about $2 billion in debt and lease obligations, and we are currently losing money, however. ..

2. The unit economy of our business is very good, and moreover. ..

3. The loss is because the number of our units is growing very fast, and…

4. At some point, we will not grow units at such a fast rate, we will make a lot of money

You will realize that this is the standard spacing of any retail chain. Sometimes it is really effective (for example, look at the stock charts of Chipotle or Home Depot).

The following is the content of unit economics, from the file:

Our unique business model provides a convincing House-level economy. This is because we are able to increase the membership base of each House over a long period of time with the improvement of operations and the normalization of the frequency of use of existing members. The ability to add members to our house over time. .. It sets us apart from traditional hotel companies, which have a more fixed occupancy rate.

In other words, our members have to pay no matter how often they come. Over time, they will become less and less (“frequency of use…normalized”). Then we add more members.

This is the way to redeem:

For large-scale, well-equipped houses that position our brand in cities, our goal is to stabilize the average income between US$20 million and US$30 million in the fifth year of operation.As [of] In fiscal year 2019, we achieved or exceeded this goal in 8 of the 9 large residences that have been in operation for at least five years. Our goal is to increase the contribution rate of the housing level to 20% to 30% by the fifth year. .. Once members reach a level that we believe to be normalized, our goal is to return more than 50% cash to cash.

sounds good! 50% cash back! How much do they invest in each house? This is a “light of capital” model:

Our landlord[s] agree[] Funding most or all of the development cost of the house in accordance with our design specifications, let us only fund pre-opening expenses (and art and other unique interior design elements). Almost all the houses we plan to open in the next three years reflect this light asset model. .. Under our asset-light model, we expect our contribution to opening a new home (mainly including pre-opening expenses and artwork) will be between US$3 million and US$6 million.

Therefore, about 5 million US dollars have been invested, and about half of it will be returned in cash every year after about five years. that’s good. There are 28 houses now. The plan is to have 46 by the end of 2023. Then who knows what it is.

The special thing about Soho House is that it is different from Chipotle or Home Depot, which supports the economics of those great units-exclusivity:

As members established for the creative industry, we are proud to support these members, who have shaped our cultural landscape as world-class writers, artists, performers, directors, founders, designers and producers-all of them All reflect our spirit and vitality. Soho House. .. Each member of the House of Representatives consists of a special committee composed of influential ideas and innovators.

The success of Soho House as an investment depends on a problem. How much expansion is consistent with the whole thing still cool and insider? For the company’s credit, it clearly marked this risk:

If we expand too fast, we are vulnerable to the erosion of brand appeal. In any such incident, the churn among existing members may increase significantly, and we may encounter difficulties in attracting new members.

Mass production exclusivity may seem contradictory, but isn’t this the dream of the entire luxury goods industry?

A good book

I missed This An article published by Stephen Roach about a month ago. In the 1970s, Roach worked at the Federal Reserve under the leadership of Arthur Burns. Burns tends to view the price increase in the early 1970s as a one-off, driven by exogenous factors that will soon fade. they do not.