No Mercy / No Malice: Scarcity

As read by George Hahn. https://www.profgalloway.com/scarcity-2/ Learn more about your ad choices. Visit podcastchoices.com/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Scott Galloway?

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• 0:48Speaker 01

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• 1:19George Hahn?

  This is "No Mercy, No Malice" by Scott Galloway.

• 1:24George Hahn?

  Scarcity, as read by George Hahn.

• 1:34George Hahn?

  Stabbings, state secrets, horrors masquerading as Supreme Court justices. It's been an especially depressing week in the news. So I'd rather focus on scarves. Specifically, Hermès, the iconic luxury brand. With $12 billion in annual revenue, Hermès now has a larger market capitalization than Nike, which boasts $47 billion in annual revenue.

• 2:08George Hahn?

  I see this as a slow, yet tectonic shift in customer values. Cue dramatic music.

• 2:18George Hahn?

  As Awareness Seeds Grounds to Artisanship.

• 2:24George Hahn?

  Awareness via social platforms has created a generation of empty calorie brands. Kylie Cosmetics, Dollar Shave Club, Andrew Tate. Built on sand. Over the past five years, the three biggest consumer packaged goods companies, P&G, Nestle, and Unilever, whose competence is "building awareness", have averaged annual stock gains of 9% versus 15% for the three largest luxury firms, LVMH, Kering, and Estee Lauder.

• 3:02George Hahn?

  The decline of linear TV is a function of cable TV losing its oligopoly on awareness, and awareness beginning to lose value as brands famous for being famous are less enduring. This trend highlights what has got to be a first-ballot Hall of Fame strategic, head-up-your-ass decision. Do away with one of the great artisanal brands of the 20th century: HBO.

• 3:32George Hahn?

  But that's not what this post is about.

• 3:35George Hahn?

  Key to artisanship is there being few artisans. Specifically, the existence of scarcity. Or, as is often the case, the illusion of scarcity. The strongest brands in the world, MIT, Apple, Hermes, the US, are built on the artificial choking of supply via rejectionist admissions, pricing strategies, production, and visas.

• 4:04George Hahn?

  Thirteen years ago, I started a business intelligence firm that advised luxury, then CPG, brands. It was a successful company predicated on a simple premise: Luxury brands would trade at higher multiples of revenue due to increasing income inequality and their ability to manufacture scarcity. This was the sermon I preached to every executive we met.

• 4:33George Hahn?

  We sold the company in 2017 for eight times revenue.

• 4:38George Hahn?

  Mirroring our client base, we were disciplined about pricing and said no to a lot of potential clients' procurement departments. By the way, awful job.

• 4:50George Hahn?

  My first consulting firm, Profit, had said yes to every client with a checkbook, and it sold for 2.8x revenue. It was the right decision at the time, as I didn't have the capital to utter the sexiest word in the English language: no.

• 5:08George Hahn?

  The richest man in the world doesn't make cars, rockets, or enterprise software. He makes handbags. Bernard Arnault, the CEO of LVMH, is now worth more than Warren Buffett and Mark Zuckerberg combined.

• 5:28George Hahn?

  He's made his fortune not selling things people need, but things they want. LVMH controls the most prestigious luxury brands in the world, from Tiffany & Company to Loro Piana to Louis Vuitton. When you assemble artisans and create scarcity that results in a supply-demand imbalance, you generate a cash volcano that you can cap the same way you do an oil well, and turn on or off as needed. Businesses are either supply-constrained, like rare earth minerals, 1945 Chateau Mouton wine, etc., or demand-constrained, pretty much everything else.

• 6:14George Hahn?

  The companies that trade at the greatest multiples are those that are artificially supply-constrained, where the supply-demand imbalance puts a dial on the spigot that managers control. Imagine the decision to have more revenue is just a function of when you'd like more revenue. See above, Hermes. I wrote about scarcity six years ago: how to create it, how to sell it, why it's so important. Today, scarcity is more important, and scarce, than ever. In sum, this post still resonates. The following was originally published on March 3, 2017.

• 6:59George Hahn?

  Scarcity is key to irrational prices. Beachfront property is scarce and regardless of the economic cycle, always in demand. You can also manufacture scarcity with similar results: crazy town prices. Spoiler alert: Hermes could produce more Birkin bags and yet decides not to. The choking of supply adds heft to the narrative that this is a special bag, and it adds credibility to the urgency. You may be shit out of luck next week if you don't plunk down $14,000 now.

• 7:39George Hahn?

  Snap Inc.'s stock began trading yesterday and bankers did a masterful job of manufacturing scarcity. The triple threat of social, video, millennial is uber fashionable, and the underwriters ensured that after placing the bulk of shares with institutions, which implicitly commit to holding for a long-ish time, the bankers let only 14% of the shares float or be available for trade. So, even if a Birkin bag or Snap shares are not intrinsically worth $14,000 or $25 a share, if scarcity supports the price, then God bless them, no? No.

• 8:25George Hahn?

  Hermes can maintain scarcity. However, over the next 24 months, seven times the number of Snap shares could hit the market. The network's artisanship or specialness is also about to become less scarce as Instagram Stories continues counterfeiting the Snap bag. I believe in 2018, Snap shareholders will discover they don't own a Birkin, not even a Coors or a Kate Spade. But, an esprit, black-brown, round-barrel-bag, purse-shoulder-small hipster.

• 9:04Speaker 03

  Shares of a Snap plunging after hours on an earnings miss down more than 26%. Currently on pace for the second-biggest drop since going public.

• 9:12George Hahn?

  We've been reading words for several hundred years, listening to words for thousands, and learning from images for millions. We, as a species, are great with images. We can interpret and absorb an image 50 times faster than words, as we've had a lot more practice with visuals. Just as music is cemented into our being in our late teens, the images of our early childhood become fixed into our gray matter. When I was seven, we lived in a house near the beach in Laguna Nogal. My dad would come home early, he was a salesman, and we'd go body surfing and see seals and porpoises just offshore.

• 9:56George Hahn?

  When there was a storm, we'd go to Newport Beach. From the end of the pier, we'd look several hundred feet out and alert each other when millions of gallons barreling towards shore morphed into a blue-gray hemi-cylinder, eight, maybe 10 feet high, and wait for the pier to vibrate, even shake, as the rising seafloor thrusts the cylinder up and the wave crashed down on the water. On one of four consecutive nights, beginning on the full and new moons in spring, my mom would wake me at midnight, and armed with flashlights, we'd go down to the beach and

• 10:36George Hahn?

  watch what looked like hot slices of metal dancing in the shallow surf. The grunion were running. They weren't all images from the title sequence of The O.C. I remember, on TV, a skinny guy wearing a ski mask on a hotel balcony interrupting awe-inspiring performances from Mark Spitz and Olga Korbut. The only reason it stuck is every time this guy came on screen, my parents stood in front of the TV, visibly uncomfortable.

• 11:09George Hahn?

  When my father was going on a business trip, my mom and I would go with him to Orange County Airport. More than an airport, it felt like a restaurant where people pulled up in the back in commercial aircraft. There was a bar with a wraparound balcony on the second floor that you could access via stairs from the street. No security.

• 11:29George Hahn?

  My dad would take me out on the balcony and cover my ears as aircraft engines screamed in anticipation of the pilot releasing the brakes and beginning the 5,700-foot transformation from beached seal to soaring eagle. He taught me the difference between a 727 and a DC-9. Three jets versus two. And between the DC-10 and the L-10-11. Third jet is part of the fuselage versus finding residence halfway up the tail. The backyard of this restaurant was dominated by two brands. Air California and Pacific Southwest Airlines.

• 12:10George Hahn?

  Pacific planes had a smile painted on the nose, grinning at us through the big windows.

• 12:17George Hahn?

  My parents were living the American dream. Two immigrants with an eighth-grade education, they applied hard work and talent to the greatest force of good in history, the US economy. We lived close to the beach, but they, mostly my dad, fucked up, and soon we were living in two houses, neither near the beach. After the divorce, my dad would pick me up after work every other Friday in his Gran Torino from our 800-square-foot apartment in Encino. I had to wait outside, sometimes for an hour, far from our apartment because my mom didn't want to risk seeing my dad or even his car, as she hated him.

• 12:59George Hahn?

  I became skilled at identifying cars from a distance by the shape and luminosity of their headlights. AMC Pacers were easiest.

• 13:15George Hahn?

  Anytime I hear sound in the air, I still look up. And most of the time, I can identify the plane and airline. Last weekend in South Beach, my friends pretended to be impressed with my ability to distinguish the A380 headed to Munich, Lufthansa, from the double-decker Airbus flying to Paris, Air France.

• 13:39George Hahn?

  Gazing upward and cataloging air traffic is an instinct for me. Look up, identify an object, and think of when we were a family and lived near the beach.

• 13:55George Hahn?

  Life is so rich.

• 14:15Speaker 04

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• 14:22Speaker 05

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• 14:45Speaker 06

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