Argentina’s Century Bond: A Cool or Catastrophic Investment?

By: Andrea Ferrell

Before facing an impending recession this year, Argentina had issued century bonds maturing 2117. But it seems the bill may be due sooner rather than later

A Brief Overview of the Argentine Economy

Argentina is one of the largest economies in South America, but with such great size comes great volatility. The main industry drivers of the Argentine economy are food processing/ agriculture and motor vehicles. Since independence in the 1860s, Argentina has defaulted eight times on government debt, with the most notable occasion in 2001 when the country was unable to repay $132B in dollar-denominated debt. In 2015, a market friendly president, Mauricio Macri, was elected to office. He promised to “fix” fluctuations of the Argentine peso and eliminate a variety of taxes on income and exports. 2017 brought an emerging market boom where risk-hungry investors flocked to high yield emerging market assets such as bonds and flowed fresh money into the Argentinian economy. As a result, Argentina’s inflation had dropped from 40% to 24% by the end of 2017, as the country curbed their economic woes.

In 2018 the U.S. began to raise interest rates, causing investors to panic as dollar-denominated debt, which includes a majority of Argentine debt, became more expensive for Argentina to pay back. While other parts of the world, like Europe and Japan, have not begun to raise interest rates, investors are looking to the future when deciding whether or not to buy a century bond. This “run” on emerging markets is evident in the Peso/USD spot rate, as the Argentine Peso has lost almost 50% of its value since the beginning of 2018. Likewise, to combat rising inflation, Argentina has raised interest rates to 60%, more than doubling borrowing rates from the beginning of the year. Analysts have predicted that by the end of 2018 Argentina will enter into a recession as their GDP is forecasted to be -1.9%.

The Emerging Market Boom of 2017

During the Emerging Market boom of 2017, Argentina released a century bond, maturing in 2117. In the fixed income market, century bonds are an anomaly, with few countries and corporations issuing them. Countries release century bonds as a way to let investors place long-term bets on the issuer, and some institutional investors buy century bonds as a long-term diversification asset in their portfolio. In 2017, Argentina issued $2.75B in bonds, with a coupon of 7.125% and a yield of 7.9%. Bond yields show investors their current rate of return and fluctuate as the bond matures. The Argentine century bond reached above 10% in August of 2017 as investors began to lose faith in emerging markets and a sell-off ensued. Bond yields rise as prices fall because the demand for the bond drops and investors look for lower prices/higher yields. With the recent release of the IMF’s Economic Outlook and their credit line extension of $70B from $50B, the yield dropped below 9% as investors had a positive outlook on the future of Argentina’s economy.

What’s the Deal With Century Bonds Issued in Other Countries:

Argentina is not the only country to issue century bonds. In 2010, Mexico released $1B in century bonds. The low interest rate environment of 2010 attracted investors, and the bond’s yield was 6.1%. On October 22, 2018 the yield was 6.03%, showing little change since its issuance. Mexico’s century bond reached high of 6.7% in 2011, and a low of 4.5% in 2012. Comparing the three percent spread between the yields of these two century bonds, one can see the risk that comes with investing in an economy as volatile as Argentina’s. While Mexico has a variety of risks associated with its economy such as large drug cartels and political corruption, it continues to benefit from trade agreements like the updated NAFTA deal and the booming U.S. economy. Likewise, in September 2017 Austria became the first developed eurozone economy to issue €3.5B in century bonds, expiring in 2117. The bond was issued with a yield of 2.1% and as of October 30, 2018 the yield has dropped to 1.79% as investors move into safer assets. Analyzing the yields of these three sovereign century bonds, one can see how the differences in the stability of each economy affects the yield of each respective bond. An emerging market with a past of defaults, like Argentina, has a much higher yield than a stable, developed country, like Austria.

Investing in the Future

Looking to the future in the year 2117, when Argentina’s century bond matures, is tough because there is no guarantee where Argentina’s, as well as the world’s, economy will be. However, if looking at Argentina’s default ridden past, one can only speculate when Argentina will default on its debt payments again. In its current economic state, Argentina is not a safe bet for investors as the country continues to battle high inflation with extremely high borrowing rates. Likewise the rising interest rates in the U.S. make debt in countries like Argentina more expensive and less attractive for investors. The short-term outlook for the global economy makes Argentina’s century bond unappealing; however, the world in 2117 is full of unknowns, making the century bond a gamble that risk-hungry investors are willing to take, even if they do not live to see the bond mature 99 years from now.

Works Cited

Allen, K. (2017, September 12). Austria joins century bond club, raises €3.5bn at 2.112% yield. Retrieved from https://www.ft.com/content/1a0862fe-5647-3563-b8be-d1fc10b13524

Cohen, L. (2018, August 28). Argentina’s economic crisis explained in five charts. Retrieved from https://www.reuters.com/article/us-argentina-economy/argentinas-economic-crisis-explained-in-five-charts-idUSKCN1LD1S7

Devin, F. (2018, January 19). Government Says Argentina’s Economy Grew 2.9% in 2017. Retrieved from https://www.thebubble.com/government-says-argentinas-economy-grew-2-9-in-2017/

Gillespie, P. (2018, September 4). Argentina to Go Deeper Into Recession, Central Bank Survey Says. Retrieved from https://www.bloomberg.com/news/articles/2018-09-04/argentina-to-go-deeper-into-recession-central-bank-survey-says

Mander, B. (2017, June 20). How did Argentina pull off a 100-year bond sale? Retrieved from https://www.ft.com/content/5ac33abc-551b-11e7-9fed-c19e2700005f

Millan, C., & Gonzalez, P. R. (2018, September 21). Argentina 100-Year Bond Rally Advances on IMF Optimism. Retrieved October 23, 2018, from https://www.bloomberg.com/markets/fixed-income

Phung, A. (2018, July 02). Why Do Companies Issue 100-Year Bonds? Retrieved from https://www.investopedia.com/ask/answers/06/100yearbond.asp

Serial defaulter Argentina manages to sell 100-year bonds. (2017, June 20). Retrieved from https://www.cnbc.com/2017/06/20/argentina-sees-strong-demand-for-surprise-100-year-bond.html

Vyas, K. (2010, October 05). Mexico Sells $1 Billion Century Bond. Retrieved from https://www.wsj.com/articles/SB10001424052748703298504575534621044294114

Wernau, J., & Dube, R. (2018, September 04). How Argentina’s Evolving Economic Crisis Unfolded. Retrieved from https://www.wsj.com/articles/how-argentinas-evolving-economic-crisis-unfolded-1536062407

 

Coffee Location Decisions

By: Ines Ajimi

How profits, rents and taste determine the position of New York City coffee shops

With over 3,300 coffee shops and coffee consumption over 6 times the national average, N.Y.C. is one of the most caffeinated cities in North America. Yet, all neighborhoods are not served equally: according to the New York City Economic Development Corporation, most coffee shops are clustered in Midtown and Downtown Manhattan, with Williamsburg, Glendale & Park Slope in the lead for the outer boroughs.

What explains this distribution? Will it change in the future and, if so, how?

Location Decision: The Median Customer

For brick-and-mortar stores like coffee shops and restaurants, location is key. Intuitively, picking the ideal spot implies striking the right balance between high consumer density and limited competition. The initiative of opening a store requires securing a lease and buying equipment (both high sunk costs), thus there is little room for experimentation or tweaking.

Hotelling’s Location Model, the best-known theory in geographic economy, offers a simple rule-of-thumb for location decisions. In the model, businesses are spread out across one straight line and compete in geographic location only. Since products are perfectly identical, customers will always go to the business closest to them. The outcome is a cluster of business around the median customer.

However, as even a cursory glance at our neighborhood will tell you, coffee shops are not all alike. Coffee itself is a highly variable product, as it can taste differently depending on the origin, roasting method and blending of the beans. Moreover, coffee drinks can be prepared in many different ways, ranging from espressos to on-tap sparkling cold brew. Coffee shops themselves are differentiated by quality, price, and atmosphere.

Structuring competition and tying together all three of these variable elements is the notion of “coffee culture”. For many people around the country, coffee is synonymous with work. Indeed, it is primarily used today as a quick-acting stimulant, helping employees remain productive throughout the day. Yet, after a persistent decrease in consumption from the 1960s to the 1980s, the industry attempted to re-brand itself, “emphasiz[ing] quality, value, and image” (D’Costa 2011), allowing consumers to define themselves based on their preferred brand.

“Specialty coffee” was the direct result of both this marketing tactic and the work of a few coffee enthusiasts. The movement started off in the United States in the 1970s with the ‘second wave’. As the most successful of those brands (e.g. Starbucks, Peet’s Coffee) expanded and became ‘mainstream’, the ethos of ‘specialty coffee’ passed on to a new ‘wave’ of enthusiasts. The coffee shops born from this ‘third wave’ are smaller, independent, and have strong direct relationships with all components of their supply chain. They also use more expensive, skill-intensive machines and engage in what academic Joey Manzo has described as a “‘theater’ of drink preparation” (think latte art). These specialty coffee shops are additionally more likely to use ‘technical’ jargon or arcane methods which may act as ‘cultural barriers to entry’.

Explaining where taste comes from, and by extension why an individual would have a preference between chains and “specialty coffee”, is a complex endeavor. In his classic book Distinction: A Social Critique of the Judgement of Taste, sociologist Pierre Bourdieu explained ‘taste’ as the result of class-based cultural preferences, where the dominant class is able to shape what is perceived as tasteful and socially desirable. In this view, preferences for ‘specialty coffee’ are intrinsically linked to one’s social environment (though, as Manzo notes, they can also be ‘acquired’ over time).

“Coffee culture” therefore segments the market between consumers of large chains (e.g. Starbucks), “third wave” coffee shops (e.g. La Colombe, Third Rail) and neighborhood joints. Competition exists mainly within these different types of coffee shops. Given that neighborhoods are often socially homogeneous, this implies that coffee shops will cluster in neighborhoods with which they are “culturally aligned”. Therefore, Midtown is mostly occupied with chains (though ‘third wave’ coffee shops have started encroaching in their territory), while ‘Third Wave’ shops have a strong foothold in Downtown and Brooklyn.

Expansion Opportunities in New York City

In the long run, classic economic theory holds that new businesses will enter the market as long as there are positive positive profits to be had. Initially, we would expect coffee shops to locate where demand for their product is highest, i.e. neighborhoods with a high consumer density such as Midtown Manhattan. Over time, new entrants pressure rent upwards. Once higher rents have resulted in zero economic profits, coffee shops expand into new neighborhoods, trading off lower demand for lower rent. This process repeats until the long-run ‘locational equilibrium’, where businesses are indifferent between all possible locations, is reached.

We would therefore expect N.Y.C. coffee shops to locate in the future in neighborhoods where commercial rents are undervalued. Using a machine learning model specifically trained to optimize coffee shop locations in N.Y.C., the data scientists of Topos find that the greatest overall increase would be in the Bronx, which they note “resonates with [its] recent surge in population and jobs in the private sector”. Consistent with the market segmentation strategy aligned above, chains and third wave coffee shops would expand in different neighborhoods ways, with the former moving outwards (into new boroughs) while the latter expands “upwards in Manhattan and outwards in Brooklyn”.

These trends have significant implications beyond geographic business decisions. The expansion of third wave coffee shops to the outer-boroughs is, in particular, tied to gentrification, as the movement of higher-income residents into these neighborhoods allows coffee shops to expand there and their presence, in turn, attracts more gentrifiers.

The location of coffee shops is therefore a complex business decision, balancing on the one hand the density and cultural profile of neighborhoods and, on the other, rising rents. As the former increase, coffee shops are pressured to expand into new neighborhoods, reshaping the commercial and residential map of the city in the process.

 

Works Cited

 

Economic Salvation: Can Privatization Prove to be Prudent for Brazil?

By: Roberto Carlos Ventura

“In the midst of economic downturn, President Michel Temer is spearheading Brazil’s biggest privatization package. However, will this alone save Latin America’s largest economy?”

Brazil is currently fighting through a gruesome recession; it is the worst in more than a century. Ironically, Brazil attracts almost half of all South America’s foreign direct investment (FDI) influx, and these investments continue to increase despite Brazil’s evident economic turmoil. A large chunk of the blame for this turbulence falls on former president Dilma Rousseff’s leftist practice of government intervention, as stated in an article by The Economist, a magazine-format newspaper. Expectedly, leadership in Brazil shifted elsewhere in hopes of achieving economic alleviation.

In the wake of a vacant presidency, following Rousseff’s impeachment at the end of 2015, pro-business President Michel Temer and his contentious administration have come into power and are spearheading the biggest privatization package Brazil has ever seen. Privatization refers to the transferring of ownership and control of a business, industry, or service from the public to private sector. However, the new reform agenda proposed by Temer entails an auctioning off of an overwhelming number of state-owned enterprises. According to an article by the U.S. News and World Report, a multi-platform publisher of news and information, 57 state assets are included in the privatization drive, encompassing Eletrobras–a major Brazilian electric utilities company and, in fact, Latin America’s biggest power utility enterprise. Additionally, as provided in a Financial Times article, Petrobras–a former state-owned oil company–has been shedding assets and selling them to international investors. Petrobras is now deemed as a semi-public Brazilian multinational corporation.

The Brazilian government justifies its privatization agenda with promises of increasing efficiency, attracting more foreign investment, and lifting the economy out of its dreadful pit. Nevertheless, the plan comprises deregulation, which, for many companies, can invite excessive risk-taking and disregard for social responsibilities. Another article by The Economist highlights Temer’s constitutional amendment proposal which would freeze public spending. This amendment is the centerpiece to his plan and could be unmerciful to health and education, which consumes more than a fourth of the country’s revenue. Brazil’s high taxes are also faulted as paying for its past fiscal profligacy.

Michel Temer’s goal is to strike out every barrier listed in Brazil’s foreign investor profile. According to the U.S. Department of State: 2014 Investment Climate Statement, Brazil is considered friendly for FDI, however, taxes, local content, and regulation are its impediments. Therefore, it makes sense as to why the president’s agenda targets these three facets of the economy, as it would allow for greater attraction of foreign investment and Brazil to proceed with privatization. But, is this plan of action enough? Does privatization ensure efficiency and can it singlehandedly lift Brazil’s economy out of its economic downturn?

In the same statement by the U.S. Department of State, it was noted that Brazil had begun a Logistics Investment Program worth 240 billion dollars with the aim of attracting private capital and managerial expertise to upgrade the country’s infrastructure–including roads, ports, airports, energy, urban mobility, etc; all infrastructure concessions are especially open to foreign companies. Notably, this program’s ambition had been put in place right on time as Temer’s government set its intention to sell off everything from the mint to the state lottery in order to raise revenue and boost infrastructure investment, as written in the Financial Times article. Steven Horwitz, the Schnatter Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, explains this favor of privatization as one that stems from the private sector’s ability to provide goods and services at a lower cost and higher quality than the government can. Sounds ideal, except, as Horwitz points out, privatization is only the first step and alone cannot achieve this efficiency that Temer and his government so urgently want to reach.

According to Horwitz, there is an essential stepping stone to attaining the paybacks of privatization and it lies not necessarily in private ownership, rather in competition amongst private owners. He also claims efficiency may require private ownership but it alone is not enough, that is, until de-monopolization is introduced. Changing from a government monopoly to a private monopoly apparently does not lead to clear economic solutions. Horwitz distinctly underlined in his account of privatization, “notice that the private monopoly ultimately has to please the politicians who dispense the monopoly privilege, not consumers.” Therefore, de-monopolization is vital in the initiation of competition, which then enables a country to attain the private sector’s fruitful efficiency–providing greater quality, lower cost goods at the benefit of consumers instead of government agents reaping political benefits.

With the wave of ownership shifting to the private sector, Brazilians grow worrisome and skeptical. The U.S. News article reveals Brazilians’ suspicion regarding the selling of state-owned assets to private hands, for these private, foreign entities are accused of making corrupt deals with the government in the first place. In fact, Temer was apparently taped participating in a discussion of bribes with former chairman of JBS, a major meat packing company, as brought to awareness by a Financial Times article. Moreover, there has been talk about corruption scandals in both Eletrobras and Petrobras. Nevertheless, these allegations may not come as a surprise to Brazilians for even the U.S. Department of State has referred to corruption scandals as regular features of Brazilian political life.

Still, there are great severities directly affecting Brazilians on a day-to-day basis. According to last week’s The Economist magazine, state governments–such as Rio de Janeiro–are experiencing failure of policing, financial mismanagement, and economic misfortune, which give the state no other option but to turn to the federal government for aid. However, the helping hand that is the federal government places certain conditions on its support, specifically on cuts in spending. This has lead the state of Rio de Janeiro to cut 30% of security spending–a vital necessity for an area filled with ever-increasing gang violence–as well as the halt of salary payments for public workers, especially policemen. With law enforcement winding down and violence increasing at a quicker rate, many Brazilians are at the center of a chaotic catastrophe. Citizens are going missing and flying bullets are becoming so common that victims can barely be distinguished. Are Brazilians supposed to wait until the privatization process takes effect and foreign investment improves infrastructure, and with it a possible end to what is still an ongoing violence within favelas? Government has its plan set but action is gradual and may prove to have gaps in its implementation.

After almost 6 years of leftist government interventionism by Dilma Rousseff, President Temer and his government have shifted gears and set Brazil in course for privatization. Although this course of action may possess potential for Brazil to finally overcome a pernicious recession and government meltdown, its execution is questionable. If Steven Horwitz’s exposition holds true, Brazil’s leadership may be overlooking a crucial aspect of the process that can ultimately direct Brazil to a much needed economic salvation. Brazilians anticipate the day when they no longer live in anxiety and amid corruption.

References:

Can Google’s Pixel phones succeed? Insights into Google’s Entry into the Cell Phone Business

By: Madhav Ramesh

“Google has just released the new Pixel 2 and Pixel 2XL cell phones. Google’s aim is to compete with the likes of Samsung and Apple. Can Google succeed in entering the competitive marketplace of cell phones despite their prior failures? Has Google found the blueprint to success or simply repeating the same mistakes?”

Google has been so influential in our daily lives that the word “Google” has found its way into our day-to-day dictionary. When we think of Google, we often think of the software solutions that Google offers its users, from its search engines to Google Drive. However, Google wants to expand its business in various directions, some of which have proven successful and others not-so-much.

Google’s official business strategy, as directly quoted from its website is to, “Deliver the analytical insights our leaders use to enable us to innovate. Whether it’s identifying acquisitions and investments, monetizing strategies for products, or developing partners in emerging markets such as Africa and India, Business Strategy Googlers anticipate opportunities and execute programs critical to Google’s short- and long-term growth” (Google, n.d.).

Google’s strategy shows that they are pushing to expand the Google product into other markets rather than solely the software world. Recently, Google has released the Google Pixel 2 and the Google Pixel 2 XL, the second in the new cell phone series they created in 2016. These phones were received with mixed reviews, but Google continued expanding and investing in the hardware market of cell phones. The cell phone market is extremely difficult to break into, especially now, as there are so many different companies and high-end flagship phones, the specific market that Google is attempting to enter, is in essence a duopoly between Samsung and Apple. According to TrendForce research firm, Samsung has a market share of 26.1%  and Apple closely follows with a market share of 16.9% globally in the first quarter of 2017(Reisinger 2017). These are significant percentages, as the rest of the smartphone market is heavily divided amongst other competing companies. Simply looking the statistics, it is simply evident that Google must take deliberate steps into making the Pixel phones appeal to consumer, enough to chip significantly into the market shares of Apple and Samsung.

Google has invested heavily into development of these phones. They have invested $1.1 billion to employ HTC workers to engineer future Pixel phones and bought the intellectual property rights to HTC’s license. According to Rick Osterloh, an executive responsible for Google’s hardware, “[Google] focused on building [their] core capabilities, while creating a portfolio of products that offers people a unique yet delightful experience only made possible by bringing together the best of Google software—like the Google Assistant—with thoughtfully designed hardware”. Google understands that solely investing into the phone industry is rather foolish, as their investment may result in an empty return. They are positioning themselves to compete in various different markets, like the cell phone, home assistants, and portable computers  industries, just to name a few. Diversifying allows them to take more risks and to see which industry to invest in the future.

However, though Google’s approach seems bold and avaricious, the Pixel-line of phones have not been Google’s first shot at creating phone hardware. Google created a series of phones called Nexus. These phones were made through partnerships with other manufacturers, similar to the Pixels, but these phones did not sport a Google logo on the backs of the phones, but had the unique Google-version of Android. The reasoning behind the Nexus phones were similar to the idea behind starting the Pixel line of phones. According to a Google representative’s statement to Tech Insider, “ The Nexus program is our effort to push what’s possible in hardware design while unlocking the ideal software experience. It’s Google’s take on the total user experience…we think these devices serve as a beacon to show the industry what’s possible” (Gilbert 2015). Basically, Google was trying to create a software experience through cell phones that was unparalleled to its competitors, which the Pixel also shares to differentiate themselves from the competition. While these specific phones were not intended to compete with the likes of Apple and Samsung, they still eventually fizzled out due to the sheer number of competitors and the exclusivity of the phone. The Nexus phones were only available online and while they were unlocked, meaning that all carriers could accept them, not many consumers even knew they existed and thus, only cell-phone enthusiasts predominantly ordered them. Google’s communication manager, Chelsea Maughan, even called the Nexus “a good learning experience” (Silbert 2015). The demand even shows that the Nexus, while the line showed some promise, had miserable results in sales. According to a survey in 2013 by Yankee Group, out of a sample of 16,000 smartphone consumers, the amount of consumers that owned a Google phone in the was 1.04%, with a margin of error of 1% (Hamblen 2013). This survey alone showed that while the Nexus received positive reviews amongst those that purchased the phone, it barely made any mark, if any, on the overall cell phone market.

With the new Google Pixel line, however, Google is trying to mend the mistakes that they made with the Nexus series. Google has allowed the Pixel to be carried by Verizon Wireless, an exclusive carrier of the phone. Although that does limit the consumer yet again like the Nexus, Google has allowed the unlocked version to be available to consumers through the website. However, this still significantly decreases the amount of consumers, as more consumers purchase through carriers versus the unlocked version online. However, with Google still entering the market, by partnering with Verizon is a step in the right direction comparing to Google’s minor debacle with the Nexus. However, Google is seemingly making very similar mistakes as the Nexus, which eventually led to the downfall of the Nexus series. While Google branded the Pixels with the Google logo making it look like a specifically Google phone, Google does not have a strong manufacturing industry and is forced to partner with different companies for their hardware. For the Pixel 2 series, they partnered with HTC and LG to make the Pixel 2 and the Pixel 2 XL, each company making the respective phone. This has angered the consumers, as the designs do not match and the quality is noticeably different. While the Google has improved the reach of the phones through the partnership with a wireless carrier and has marketed the phone to a more general audience to cause a more mainstream appeal to compete with the likes of Apple and Samsung, the plaguing hardware issues and the ongoing exclusivity of the phone are reminiscent of the downfalls of the Nexus brand. The Google Pixels need to improve their subscriber shares, the shares from initial investors, from the atrocious 0.7%–compare that to Apple’s 45.5% and Samsung’s 29.5% subscriber shares (Frommer and Molla 2017). Google’s phone needs to simply appeal to more people, as shown by these eye-popping statistics.

Will the Google Pixel phones succeed? Yes, because it is Google. These phones are not replicas of iPhones and Galaxy phones like other companies are doing. These promote the importance of software which uniquely distinguishes Google from the competition. This is important for Google to get a foothold in the market. However, with the stiff competition, Google must fix these mistakes that they are making and expand their reach to consumers to think of competing with their adversaries–Apple and Samsung.

Sources:

A Ride Sharing App plays the Political Game (and wins)

By: Ines Ajimi

On January 28, 2017, the enactment of an executive order banning citizens from seven majority-Muslim countries sparked protests in airports across the United States, including New York’s very own John F. Kennedy International Airport. While the New York Taxi Workers Alliance declared an impromptu strike in solidarity with the protests, Uber responded by disabling its price surge feature at the airport. Activists retaliated to this by launching #DeleteUber, a hashtag encouraging Twitter users to post screenshots of themselves removing the app from their phones. The following day, Lyft, Uber’s biggest rival in the United States, declared its opposition to the travel ban and made a formal commitment to donate $1 million to the American Civil Liberties Union (ACLU) in a blog post titled “Defending Our Values”.  Despite a statement from Uber announcing it would create a $3 million defense fund for its drivers affected by the ban, Lyft had, by the following week, surpassed Uber in Apple Store downloads for the first time in its history.

Prior to these events, Lyft had been slowly gnawing at Uber’s market share, but the timely intervention helped it grow from an 18% market-share this January to 25% in May, as reported by The Economist.  Moreover, Uber’s leadership crisis, following founder and former CEO Travis Kalanick’s resignation due to allegations of sexual harassment and sexism within their corporate structure, have impeded its ability to respond to its challenger. Lyft’s latest advertising campaign, “Sit for Something”,  which promotes a feature allowing users to donate to both political and charitable organizations in-app, suggests that the company attributes at least part of its success to its political positioning. Understanding why this may be the case here may help us shed light on how value positioning can be used by firms to gain a competitive advantage.

Why Be Political?

By and large, Uber and Lyft offer near-substitute services: both are mobile phone applications allowing users to remotely hail rides. Customers can switch costlessly between the two and compare prices and wait times at the press of button. Product differentiation is therefore essential to attract riders.

As Uber and Lyft have come to a head in most American states, this differentiation has occurred on two fronts: pricing and branding. Both companies have engaged in repeated price wars, using some of their venture capital funds (through their respective investors) to simultaneously cut fares and raise employee benefits. Though highly beneficial for consumers, aggressive price competition is ultimately detrimental to firms as their profits will be driven down. By contrast, successful marketing can create ‘brand loyalty’, fostering a user base which will consistently re-use the app and be less sensitive to price differentials than others.

Thus, both companies have sought since their inception to create a strong brand image: Uber, the incumbent, positioned itself early on as a ‘luxury’ transportation service, while Lyft promised a unique social experience for its customers. Though Lyft’s ‘niche’ appeal allowed it to get its early start, it did not appeal to a sufficiently large market to be a viable strategy.

Today, Uber’s controversies have given Lyft a unique opportunity to segment the ride-sharing market along ideological lines. By positioning itself as a liberal-friendly alternative, Lyft has become the preferred app for liberal-leaning consumers. As such, it is able to extract economic rents from these users in exchange for providing them with the satisfaction of consuming in accordance to their values. This marketing strategy is only useful if it targets a group with a high “relative profitability” – i.e. a group which is either comparatively larger or less price sensitive. A Pew Survey reports that as much as 65% of Uber and Lyft’s users identify as Democrats, which suggests that this consumer contingent may be indeed big enough.

However, according to Margaret Chon, a Professor of Law at Seattle University,  at least two conditions must be met for political affiliation to translate into consumer activism. Firstly, there must be a salient political issue which, in their opinion, is insufficiently being addressed by the government. Secondly, brand practices must be highly visible, allowing consumers to ‘police’ the firm’s behavior.  Together, they create a demand for brands to fill in the policy gap by pro-actively addressing these issues. In the case of #DeleteUber, a strong, pre-existing social movement became aware of the company’s opportunism and decided to hold it accountable through a social media campaign. Lyft’s branding, which had long emphasized their attachment to community-centered values, allowed it to quickly capitalize on the rising anti-Uber sentiment.

A Successful Strategy?

At a first glance, Lyft’s canny political positioning has given it a much-needed boost in its fight against Uber. Firstly, as mentioned previously, Lyft’s downloads rose for the first time to the Apple Store’s Top 10 immediately following the boycott. Secondly, the Financial Times has reported that the Uber boycott has led to a persistent drop in its market share “from 84% at the beginning of this year to 77% at the end of May”. This is especially apparent in urban areas such as New York, San Francisco and Boston, where it has decreased by approximately 10%. More broadly, Lyft has been able to press its advantage to narrow the gap in downloads between apps  from 165% in 2016 to 70% in 2017.

Though encouraging for Lyft, savvy marketing is far from sufficient to overturn Uber in the long-run. Companies eventually recover from PR disasters: Samsung, Volkswagen and United Airlines have all been rocked but not toppled by their respective scandals. Moreover, companies which have a presence abroad can rely on foreign streams of revenue to alleviate political pressures at home. However, Uber’s ability to do so may be limited by its continued clashes with local taxi companies.

More importantly, a survey by Pew Research has found that only 17% of users use ride-sharing applications more than weekly. Thus, to increase revenue, Uber and Lyft will have to either encourage riders to user their service more frequently or continue to expand their reach. Indeed, both firms have reportedly been trying to launch subscription services and Lyft has recently increased coverage to rural regions where its rival is absent.

Learning From Lyft

The recent slew of politicized ads from brands ranging from Airbnb to Pepsi suggests that value positioning is viewed as a lucrative marketing strategy. Lyft was particularly successful in doing so for several reasons. Firstly, Lyft responded to consumer demand for brand activism in a way which held true to its previous brand image. Secondly, this decision was motivated by sound economics, namely its need to differentiate itself from Uber and its resonance with a lucrative segment of its user base. Finally, Lyft recognized that advertising isn’t sufficient in the long-run and has simultaneous pursued other competitive policies. In the Art of War, Sun Tzu says, “In the midst of chaos, there is also opportunity.” Lyft saw that its enemy was weak, and decided that it was time to strike.

 

SOURCES