🔔 How Does X Make Money?

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Taking a step back from everything that's going on today and digging into something that made me pause and think.

It's easy to assume that clever people already know everything you know and more...

But that's not always true (nor probable, but we'll ignore that for now). I know that. Yet I was still surprised by this...

 Incredible. I did not realize that in most years auto dealerships are banks that happen to sell cars. https://t.co/dyoM2BbWGJ pic.twitter.com/tS03MjLxWP— Morgan Housel (@morganhousel) March 2, 2022 

It's only surprising to me because I love Morgan's work.  I've subconsciously put him on a bit of a pedestal and assumed he knows everything about everything or whatever.

Anyway, I was wrong. And it got me thinking about how often we might assume that we understand how a business makes money, but actually don't.

So, how DO those car dealerships make money...?

Financing, insurance, and a margin from the actual the vehicle sale.

2020 & 2021 have been outliers on the vehicle side, probably because many manufacturers focused on higher margin models due to parts shortages.

To get more granular, CarDealershipGuy popped up in the replies. 👇

 USED CAR DEALERSHIP ECONOMICS

Our average gross margin (by type of deal): 👇

1. Finance (w/ upsells): $3,251

2. Cash-only (w/ upsells): $2,540

3. Finance (no upsells): $2,103

4. Cash-only (no upsells): $1,462

What questions do you have?— CarDealershipGuy (@GuyDealership) March 1, 2022 

Not just taking his word for it. A mate of mine worked at a car dealership and the proportions match up with what he explained to me a couple of years ago.  

Cash is definitely not king for car dealerships.

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How about Mcdonald's and their famous golden arches... Don't they make all of their money selling McBurgers?

Not exactly...

Back in 1956, McDonald's employee Sonneborn saw the writing on the wall; fast food didn’t make enough profit to sustain their expansion plans.

Something had to be done. Investors were sought, and banks were tapped, but neither Kroc nor Sonneborn found anything landing in their favor.

60 years later, McDonald's have a real estate portfolio of ~$35 billion, and a market cap of $157 billion...

The business model?

The only reason we sell 15 cent hamburgers is because they are the greatest provider of revenue from which our tenants can pay us rent - Harry Sonneborn

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When you go to the movie theatre/cinema, it's pretty well-known that a lot of their revenues come from the high margin add-ons: Sweets, drinks, popcorn etc.

Didn't realise popcorn was a multi-billion dollar industry or that AMC sells 50 tons of it on a good day...

 AMC announces an expansion. Going into the multi-billion dollar popcorn industry in 2022. Freshly popped at malls, home delivery/to go from theatres, and microwavable sold at supermarkets. So obvious. Who knows more about popcorn than AMC? On a peak day, we sell FIFTY TONS of it! pic.twitter.com/J9iqql1i9L— Adam Aron (@CEOAdam) November 4, 2021 

And they're going into merch too...

Sure. Merchandise is one of these other ideas that came pouring in from our retail shareholder base in 2021. It sounds like they want to buy it. And if they want to buy it, we want to sell it to them.

So we started to experiment back in November. When "Ghostbusters: Afterlife" emerged, we created a special merchandise item, a "Ghostbuster" ambulance. It was like $40 or something. I think we sold 40,000 of them.

In like days, we sold out, which reminded us that our shareholder base and our customers are really interested in merch. We just, this week, are going forward with a big Batman popcorn holder. It's about a six-inch high Batman head in which your popcorn will be served. I'm hoping they'll sell out.

And merchandise is going to be a big project for us in 2022. I would expect that toward the middle of this year, we'll have a broad array of merchandise, AMC-branded merchandise that our shareholders and our guests can buy, whether they do it online or possibly many of our theaters.

Befoire investing in a business, it's probably a good idea to know how they make money, and how they plan to make money in the future.

And if one part of their business is more dominant than another too. One last example 👇

Chart shows Lockheed Martin (LMT), Northrop Grumman (NOC) & Rolls Royce (RR).

LMT & NOC are clearly two huge defence contractors, so no surprise to see them rise in times of conflict.

But Rolls Royce also have strong defence links. Just last year they landed a $2.6 billion contract to manufacture the B-52 Stratofortress engines.

So why didn't Rolls rise with the other two defence behemoths?

CEO Warren East had just announced his exit, and then Russian flights were stopped. Rolls Royce core business is the maintenance contracts, or "power-by-the-hour” of aircraft engines.

Essentially, the customer is billed for every hour of performance of the engine, while Rolls-Royce retain ownership and maintenance obligations.

No Russia flights, no Russia revenues...

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