Pookie-nomics and the Soho House Problem

Briefly noted:

Rakon — What the hell is going on here? (one of Munger’s favourite phrases). We haven’t heard “boo” from the company since January, when the co issued some twaddle about AI. We know there is a suitor and we know who the suitor is — thanks to the AFR — surely the company should be disclosing more to its long suffering shareholders? We are — strongly — in favour of selling the thing. The nay-sayers say it’s worth more — I say don’t look a gift horse in the mouth. Paging Lorraine and co — waiting for Godot over here.

AOF — Trading down at dirty at 0.055c. We think it’s worth more given the tech stack. Management could be replaced — nice people but have done a sustained disservice to the stock px, which has fallen ~69% in the last five years. Best case is the co is sold as a bolt-on to the appropriate company. Trading at 1.3x sales and 0.5x book. Soon I will start writing letters to potential acquirers trying to get it sold. Best case scenario is a MHM Automation-like deal. Don’t think it’s beyond the realms of possibility given i) a falling knife of a stock px and ii) the very low multiples it trades at.

MFT — Our highest conviction NZ company at the moment. When I said just buy EBOS, IFT and MFT, I wasn’t joking….sitting well below the COVID-highs of ~$90-95.00 and Don Braid is the single best manager in NZ. If I was to be in a coma tomorrow, I’d instruct my trust to place a substantial sum there (that’s just me…you could buy a Ponzi scheme bitcoin if you want).

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The Soho House Conundrum

“I refuse to join any club that would have me as a member.” — Groucho Marx

Imagine you launch a little member’s only club in 1995. What are your key selling points? Same as Hermes, really — exclusivity, scarcity, desirability. You probably want the “right” kind of people — artists and creatives — and you probably want to create an exclusive yet bohemian atmosphere, and you probably want good piss and other things — it’s the 90s, Kate Moss is Queen of the World and Tony Blur is almost PM of the UK.

Here’s our Kate in 1995:

Why wouldn’t want to hang out at a club with our Kate? Better yet if you can’t be a member…scarcity economics is a wonderful thing.

OK. Fast forward a decade or two and you’ve got multiple clubs as far as the eye can see (40+) and there’s 220,000 members. That’s uh, not that exclusive. That’s ten and twenty of you and then a couple of hundred thousand of my best friends. And their financials — whoo, boy.

Obviously I am talking about Soho House, which I visited a lot in 2008 or ‘09 — it was still happening then. I was a tiny fetus and I had my first wine (ever) and Vito Schnabel was there and other “scentsters” — I was there doing the fashion thing I did at the time and very young and impressionable. Here’s a picture of me that Jamie Morgan of Buffalo fame took. I used to be young and pretty and relevant. Also Larry Gagosian gave us his gallery to shoot models & Yayoi Kusamas in. Wild times. Again — a journalist asked me what my process is — the answer is — I’ve been living this fashion thing a lot longer than most, kiddo.

A 16 year old yours truly

The Barbican

Anyway now it is 2024 Soho Houses are about as common as a CostCo membership card and the numbers are not pretty. $117mn loss — hilarious, “adjusted EBITDA” is somehow $128mn (Munger — “whenever you hear the words Adjusted EBITDA substitute “Bullshit Earnings”). I’m always curious about how companies adjust EBITDA (who cares about turning straw into gold — just hire an accountant to make up adjusted EBITDA!) — here’s the tea:

Adjusted EBITDA is defined as Net income (loss) before Depreciation and amortization, Interest expense, net, Income tax (expense) benefit, adjusted to take account of the impact of certain non-cash and other items that we do not consider in our evaluation of ongoing operating performance. These other items include, but are not limited to, Gain (loss) on sale of property and other, net, Share of loss (profit) from equity method investments, Foreign exchange, Share of equity method investments adjusted EBITDA, Share-based compensation expense and other applicable items. We believe that Adjusted EBITDA is an appropriate measure of operating performance because it eliminates the impact of expenses (income) that do not relate to ongoing business performance.

That last bit should make you laugh — “eliminates the impact of expenses that do not relate to ongoing business performance”

OK. But these are all real expenses — you have to pay tax, you have to depreciate things, you have to pay interest on debt and so on. You can’t just throw up your hands and say “YOLO! I’m not gonna pay that this year!” It just — it just doesn’t work.

I’m getting a little waylaid — let’s go back to basics. Why doesn’t the Soho House model work? Because everyone’s a member, dummy. Why does the Hermes model work? Scarcity.

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Pookie-nomics

@campbellhuntpuckettjust feel so grateful 🥹🙏🏻 #dream #birkin #kelly #hermes

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There’s this girl on TikTok called Campbell and her husband talks and dresses like he is a 70 year old geriatric from Aspen, though he appears to be about my age. They’re viral. He always says “Pookie, you look absolutely fire”. I want you to watch the TikTok because it explains precisely the kind of scarcity economics that makes Birkins so fantastic. Look how excited she is — look at the excitement at merely getting an appointment. I looked into her husband — he does sell-side advisory for dental related transactions (who knew there was a gap in the market solely to advise dentists where they should sell to). The point is, husbands love making their wives happy and Birkins are the ultimate modern status symbol — they’re continuing to sell.

Let’s extrapolate that data and assume there’s a few thousand “Pookies” at least. They all socialise in similar circles; they all have capital to spare; because they all socialise in similar circles they all reinforce the same messages to each other — like a virtuous Birkin cycle. They all suffer from FOMO and not owning a Birkin is almost a sign of social ostracization. Finally, their “spend” at a Hermes botique has already gone into the thousands before they have even been offered a Birkin — they have mental mindshare. It’s “sunk cost” bias at its finest.

This is the best possible business you can own. One where the customer is your main sales person, and where you can charge as much as you want because it is a luxury product. It takes advantage of a lot of powerful psychological- biases. By the time clients get an appointment they are grateful to spend money. That’s an extraordinarily powerful model that is very hard to replicate.

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