The Type-C port meant a Samsung charger could be used to charge an iPhone.

But what triggered this change at Apple?

Before we get to that, let’s understand why Apple kept a unique charging port instead of a universal one. Or rather, why is Apple’s ecosystem so restrictive in interacting with non-Apple devices and accessories. And there were multiple reasons for this.

First, assume you lost your iPhone’s Lightning port charger. You could not use a friend’s or family member’s Type-C Android phone charger. In all likelihood, you’d have to buy a new charger. That means more revenue for Apple. In fact, Apple would make revenue even if you buy a Lightning bolt charger from some other brand. If a company wanted to make Apple-certified chargers compatible with iPhones, it had to pay a licensing fee to Apple.

Not just chargers, any company wanting to make headphones, microphones, camera adapters, car chargers, etc, compatible with Apple devices has to pay a license fee to Apple. And this license is not readily available for a price. The company has to apply to Apple with the intent of making Apple-compatible accessories. They can only use Apple-approved chips in their products. And they have to pass certification tests. Only after all that, can they pay a fee and get the license to make accessories for Apple devices.

All this happens only because, in very simple terms, Apple uses unique hardware and software designs.

The second reason is control.

When Apple designs both the hardware and software, it can make accessories behave exactly the way it wants. For example, AirPods auto-pair instantly with an iPhone, and Apple Watch can unlock your Macbook. If Apple made these accessories fully compatible with Android, it would lose control over drivers, and it would have to support dozens of OS versions. Performance could become inconsistent. Even bugs that were someone else’s fault could be blamed on Apple. Apple preferred having the cleanest experience every time for every Apple customer, instead of having an okay experience for people who were not even its customers.

And that leads us to the third reason.

Apple could cross-sell an iPad or MacBook or Airpods to an iPhone user. And it made sense to iPhone users. Think of it this way. You know your iPhone has the best integration and compatibility with other Apple devices only. So, you would also prefer to buy Apple devices only. Basically, you buy one Apple product, and you are drawn into the ecosystem. You become a customer for life. Why wouldn’t any business want that!

Apple is probably the most successful at making an ecosystem of great products that people are happy to pay for.

If that has been the case, of course its change to a type-C charging port came as a surprise, even shock.

But Apple did not make the switch out of its own accord. It had to obey the new law introduced by the European Union in 2022. The law mandated that by December 2024, all small electronic devices must have a common charging standard. If a device charges via a cable, that cable has to be USB-C. The rules cover mobile phones, tablets, e-readers, earbuds, digital cameras, handheld game consoles, etc. etc. – basically, all the portable gadgets we carry around. Even laptops were required to have type-C starting April 2026.

While no one explicitly said so, it was understood that the new regulations were mainly targeted at Apple.

You see, about 20% of all phones sold in the EU were iPhones. That was a big enough number to cause discomfort to European consumers, but not so big that Apple’s lightning ports could be made a universal standard. About 80% of the phones were using Type-C, so Type-C was made the universal standard.

Beyond consumer comfort, the mandate to standardize chargers was also meant to cut down e-waste. Instead of having four chargers for four devices, wouldn’t it be easier to have one charger for all? A standardized charger would let you have one charger for multiple devices. The European Commission projected that a common charger could save consumers around 250 million euros a year that would otherwise be spent on needless charger purchases. And more importantly, fewer chargers would translate to less e-waste. In the recent decades, Europe has become increasingly greener in its policies. The environmental rationale was a big reason why standardized chargers were mandated.

Of course, Apple was going to resist the move. It kept arguing that the move could “stifle innovation”. Because once a standard design is established, businesses no longer have the incentive to innovate for better designs and efficiency.

Apple also argued that existing iPhone users would be annoyed if they were forced to buy a new charger for their new iPhone, that they could not use the old Lightning cable charger. Extending on that, Apple said that iPhone users would also have to throw away their existing Lightning chargers, and that would create a lot of e-waste in the short term. Basically, Apple flipped the e-waste argument against the European Union. Clearly, it was not going to fly. The mandate remained.

Then there were rumours that Apple might remove all charging ports and offer only wireless charging for all Apple devices. Such a move could create another mountain of e-waste. And EU officials hinted that they were going to target wireless charging next.

Apple realized that it would only be a short-term fix. If it did not comply, it would have to stop selling in the EU. That is something it could not do. Afterall, about 25% of its business comes from Europe. It could not have walked away from a business that large.

With no way out, in September 2023, Apple unveiled the iPhone 15. With a Type-C port. But it did not say that the change was because of the EU. It just said that one common Type-C charger could let them charge everything — their Macs, iPads, iPhones, and even AirPods. They made it a selling point. The inconvenience of carrying multiple cables transformed into a flexibility feature. Apple also spoke greatly of how Type-C was faster than the Lightning cable. Their official communication basically emphasized that it was a great new feature in iPhones, rather than a forced mandate.

Once Type-C was introduced, Apple witnessed several other benefits. For example, its lightning charger, introduced in 2012, was a great connector in 2012. But after about a decade, it was stuck at slower speeds while the world had moved on. For example, the lightning cable would transfer files at 480 MB per second, whereas USB-C could transfer 10 GB per second. If you’ve ever waited to offload a big video over Lightning, you know the pain. And then, Android phones would charge much faster than iPhones. The USB-C improved the file transfer and charging speeds in iPhones.

Apple’s own devices, such as high-end iPads had already abandoned Lightning for USB-C to enable pro-level workflows. So users had different chargers within the Apple ecosystem. The type-C standardized that too. That also meant consolidation of production efforts, because its manufacturers only had to produce the type-C chargers at scale.

That scale was further enhanced because Apple did not limit the Type-C chargers to the EU. All Apple products everywhere came with the Type-C port.

Why so?

Well, Apple avoids fragmentation. The iPhone’s identity is that it’s the same device wherever you buy it in the world. It wanted to retain that identity. On top of that, having two different charging ports on the same generation of iPhone would be a manufacturing and logistical nightmare. It is far more efficient to make one global model.

While a law compelled Apple to make this change, tech enthusiasts and regular iPhone users had, for years, been complaining about the inconvenience of Lightning cables in a world increasingly oriented towards Type-C.

At the end of the day, you might be the biggest company in the world and might have ways of influencing customer habits and preferences, but the law could force you to mend your ways. A regional law, born out of consumer frustration and environmental concern, managed to bend the will of one of the world’s most powerful tech companies.

But also, sometimes it helps to play offence than defense in such a case.

Apple quickly turned the move to Type-C as a way of reinforcing the greatness of its offerings. Rather than publicly framing the move as regulatory compliance, Apple introduced USB-C as a deliberate product improvement emphasizing efficiency, performance, and a simpler charging experience across its devices.

And that’s a lesson for every company.

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Ever noticed those Nescafé or Nespresso machines tucked into office corners or high-end boutiques? You might think Nestlé is in the business of selling high-tech kitchen appliances.

But think again. Nestlé doesn’t actually care about making money on those machines. In fact, for a long time, they’ve been happy to let others handle the hardware entirely.

Today, we’re looking at the Razor-and-Blade model—a pricing strategy popularized by Gillette that turned a failing office gadget into a multi-billion dollar household staple.

The year was 1988. It had been almost two years since Nestlé had launched Nespresso - its coffee machine that made high-end cafe-like coffee within seconds. It was a revolutionary product and solved a real problem. People, especially in the West at the time, loved having coffee regularly. But they didn’t have a convenient way of making good coffee with a consistent taste.

Nespresso solved that problem. However, it was a bulky, expensive coffee machine with only a handful of capsule varieties. So people were not buying Nespresso for their homes. Apparently, Nestlé was also not looking to sell to them. It was initially pitched as a high-end coffee solution for offices and hotels.

But that positioning fell flat. Adoption was dismal even after two years of launch. It did not find too many buyers.

In a last-ditch effort, Nestlé brought in Jean-Paul Gaillard, who had created the clothing brand Marlboro Classics when he worked at the cigarette manufacturer Philip Morris, to find a way of making Nespresso take off. The only other option left was discontinuing it.

Gaillard shook things up. In a series of changes he introduced, the first thing he did was separate the machine and coffee business. Gaillard said that Nestlé was in the business of selling coffee, and not machines. So he licensed Nestlé’s machine technology to partner companies like Krups, Alessi, and Siemens, allowing them to manufacture coffee machines that were exclusively Nespresso-compatible.

Manufacturers who know how to make machines and who can produce them at scale can, in fact, sell at lower prices. This is what Gaillard wanted.He wanted machines to be sold at much lower prices.

Nestle also redesigned those machines into sleeker, smaller models suitable for kitchens rather than boardrooms. And suddenly, you could buy a Nespresso machine under various brand names at department stores. Cheaper, sleeker machines in more stores meant more people demanded and could afford the Nespresso system.

Gaillard’s second move was to raise the price of the coffee pods or capsules that went into the machines. These pods are convenient, single-serve containers holding pre-measured ground coffee, sealed in a filter paper or aluminum casing. These capsules are designed for quick, easy brewing in compatible machines for one cup. They simplify coffee making by eliminating measuring and mess. So Gaillard increased capsule prices by 50%, while also finding ways to reduce their manufacturing cost.

Basically, machines became the low-margin “razor,” and the coffee pods were the high-margin “blades.”

On top of that, only Nespresso’s pods were compatible with Nespresso machines. So, if a customer bought a Nespresso machine, they were locked into buying Nestle’s coffee as long as they wanted to use their shiny new gadget. Under this captive pricing model, Nestle was going to generate a steady stream of revenues and profits by selling coffee pods to those who bought Nespresso machines.

This is what we call the razor-and-blade pricing model popularized by Gillette, and it worked wonders for Nespresso.

But let’s first understand what exactly is this “razor-and-blade” strategy that saved Nespresso.

In simple terms, it’s a pricing tactic where a company sells a primary product at a low price and makes its real money from a complementary, repeat-purchase item. For example, razors. One could sell razors at dirt-low prices and make money by charging high prices for the blades required to use the razors. This is why the term “razor-and-blade pricing strategy’.

Many credit King Camp Gillette for inventing the strategy. However, what he did was develop the modern version of safety razors and started selling them in 1901 through his newly founded company, Gillette Safety Razor Company. Each razor retailed for $5, which was about half of an average workman’s weekly pay in the US then. It wasn’t a cheap razor by any definition. But it was a great product.

When Gillette’s patent on the razor design expired in 1920, many competitors flocked the market with their cheap razors and expensive blades. In order to retain the market share, Gillette also slashed razor prices and made money by selling blades. As a market leader, the model worked in Gillette’s favor. It locked in the customers to buy Gillette blades once they bought the razors.

Basically, Gillette did not invent the razor-and-blade pricing model, as is widely believed. He just popularized it. And businesses in other industries followed the model because it ensures customer lock-in and recurring revenues. One such brilliant adopter of the approach was Nespresso.

In fact, the switch to razor-and-blade pricing made Nespresso a billion dollar brand for Nestlé back in 2006. By 2006, Nespresso sales had been growing over 30% annually for at least six years. The growth was so strong that Nespresso dominated almost 23% of the global espresso machine market at the time.

But soon, the threats emerged.

And it was from none other than Jean-Paul Gaillard, the very man who made Nespresso a global leader. It was 2008. Gaillard launched the Ethical Coffee Company, or ECC. ECC developed biodegradable coffee capsules that were cheaper than Nespresso’s and were compatible with Nespresso machines. Moreover, ECC assured that it had not breached any patents held by Nestlé or Nespresso.

ECC’s entry in the coffee pod industry surfaced a much bigger threat for Nespresso - it was that many others could do what ECC did. For example, an American brand, Sara Lee, started selling Nespresso-compatible pods in the US. Nespresso was present in close to a hundred countries. How could it push back smaller competitors in all of its markets?

Well, it tried. It tried to litigate several rivals, accusing them of patent infringement. But all of it became futile in 2012 when a bunch of Nespresso’s patents were set to expire. Nestlé lost several lawsuits and it was compelled to accept that it could not stop third-party providers from selling Nespresso-compatible pods. Even Starbucks started selling Nespresso-compatible pods.

Competition was going to be there. Period. Nestlé had to change its messaging. It had to argue through its marketing and brand communication that it had better quality, responsibly farmed coffee than its peers. In fact, Nespresso pods are now compatible with non-Nespresso machines too. The coffee pods and machines are now brand-agnostic.

Even so, Nespresso remains a dominant player in the coffee pods segment. It sells around 14 billion pods each year and in 2025, it earned $8 billion in revenue for Nestlé — roughly 7% of the company’s overall sales.

The brand continues to hold some sway.

And just like Nespresso, or Gillette for that matter, there are many other brands and industries that have used the razor-and-blade model to build stable, consistent revenues. Of course, competition almost always shows in the blade part of the strategy, and not so much on the razor part.

Can you think of a few examples of the razor-and-blade approach?

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He said, “Look for a blue sticker below the keypad of your laptop. See what it reads.” That’s the first time I came to know about Intel. It used to be a cool company, but is it now?

Founded in 1968, Intel was an Integrated Device Manufacturer (IDM). Meaning, it would design and manufacture the semiconductors that go into laptops and computer systems. Then, in 1991, Intel launched the “Intel Inside” co-branding campaign. Intel did it in two ways.

One, it would match the marketing dollars of PC makers to feature the Intel Inside logo in their ads. So, if Dell or HP had a TV commercial, Intel’s Intel Inside logo would be featured in it. That catchy jingle was also made for these ads.

Two, it would offer discounts and rebates on its chips for PC makers to feature the shiny Intel Inside sticker on their laptops and computers.

Intel’s payments to PC makers would often run into hundreds of millions of dollars per quarter. These payments were so significant that, in some quarters, Dell’s entire reported profit depended on Intel’s “marketing rebates”.

But authorities grew concerned that the rebates were conditioned on forcing brands to be exclusive with Intel. Intel even faced antitrust proceedings for indirectly forcing PC makers to exclude AMD.

Whatever the tactics, Intel managed to build a credible, trusted brand image among consumers. People insisted on buying laptops that had Intel processors, just like my cousin asked me to. Smart, isn’t it? A product that is otherwise invisible became a selling point for computers and laptops.

Intel held over 80% market share in PC and server CPUs for many years. During the PC boom, Intel enjoyed gross margins well above 60%, and by 2000, its market capitalization neared $500 billion. Its dominance and brand power enabled it to earn billions in profits and invest heavily in cutting-edge manufacturing.

In short, what worked for Intel was owning both the design and the fab, and leveraging its brand to maintain a near-monopoly, which sustained high margins and a virtuous cycle of success.

Yet today, the most advanced chips in those devices are often made by a company whose logo you’ll never find on a laptop. That company is TSMC – the world’s largest contract chipmaker, which even manufactures chips for Intel itself.

Over the past few years, TSMC has risen at over 30% year on year. By market value, Intel is about half of what it was worth in 2000. TSMC is about 8 times larger.

By the way, you can also listen to this post on Apple or Spotify.

How did that happen? How did TSMC come on top?

Founded in 1987 by Morris Chang in Taiwan, TSMC pioneered the “pure-play” foundry model. This enabled many companies to go fabless.

That’s two technical words, ‘foundry’ and ‘fab’. Simply put, if Apple’s chips are manufactured by TSMC, TSMC is Apple’s foundry. The manufacturing facility, which is called a fab. And Apple became a fabless company.

TSMC only manufactures chips for clients; it does not design or market any chips under its own name. This strategy ensured TSMC would never compete with its customers’ products.

By choosing to stay behind the scenes, TSMC focused on becoming the go-to manufacturer for chip designers worldwide.

All of this happened because TSMC invested heavily in manufacturing technology. It adopted new technologies like extreme ultraviolet (EUV) lithography, while Intel was initially hesitant to use EUV in the mid-2010s. TSMC moved from one process node to the next at a faster pace.

TSMC’s pure focus on manufacturing began paying off. Around 2010, TSMC secured a strategic partnership with Apple, starting with manufacturing chips for iPhones and iPads.

In 2020, Apple moved on from Intel’s chips to TSMC’s chips in its MacBooks. The M-series processors in MacBooks that you see now are all manufactured by TSMC. For over a decade, Apple has apparently remained TSMC’s largest customer, often driving about 25% of its total revenues. However, as of early 2026, the rise of AI may have enabled Nvidia to overtake Apple as TSMC’s largest revenue driver.

You know, it is strange that Intel is seeing a decline in revenue when, in fact, this is a golden period for the entire semiconductor industry. The whole deal with AI rests on semiconductors' ability to enable fast computing.

For a long time, Intel’s integrated approach and its branding machine worked brilliantly, until the industry landscape shifted. One major miss was mobile computing. When smartphones emerged, Intel stuck to high-performance PC chips. It stuck with what it was familiar with and carried rich margins. This decision proved hugely costly.

It did not go after mobile computing, and in PC chips, its direct rival AMD caught up. AMD launched its Zen microarchitecture chips that outperformed Intel’s offerings in key metrics. AMD’s CPUs, manufactured by TSMC on 7 nm technology, started grabbing market share in both PCs and servers.

Intel no longer had the edge on power-efficient performance – even a smaller rival like Apple’s chip design team could beat Intel with TSMC’s help. Basically, Intel’s famed brand could not shield it from the consequences of technology missteps.

Meanwhile, TSMC raced to the top by riding every trend that Intel missed.

By sticking strictly to manufacturing, TSMC was agnostic to which chip design won – whether it was Nvidia’s GPU or Apple’s M-series or AMD’s Ryzen, TSMC made them all. This gave TSMC enormous scale and learning advantages.

By the mid-2020s, TSMC was producing nearly 90% of the world’s most advanced logic chips. In fact, TSMC was ahead of Intel by at least one full node; it began mass production of 3 nm chips in 2022-2023, while Intel was still working to ramp its ~4 nm-equivalent process. TSMC’s tech leaped years ahead of Intel. Customers noticed this gap, and even Intel itself became a customer.

Today, TSMC is far bigger than Intel in terms of technological capabilities, market share, revenues, profitability, and market capitalization.

Intel’s financial stature has shrunk. Years of losing ground have forced Intel into cost-cutting; in 2023-2024, it slashed jobs and, quite unusually, even cut its dividend to conserve cash for its turnaround efforts.

Strategically, Intel is trying to reinvent itself by doing what TSMC did - becoming a major foundry for others. Huge investments are underway: Intel is spending tens of billions on new fabs in Arizona, Ohio, and Europe, buoyed by government incentives like the U.S. CHIPS Act. TSMC, by the way, is also building fabs in the US under the US CHIPS Act.

These expansion plans are part of Intel’s goal to become the #2 foundry globally by 2030. That’s quite ambitious when Intel’s global share as a foundry is a mere 6%. But not all may be up in the air.

In September 2025, Nvidia announced plans to invest $5 billion in Intel to help boost its manufacturing capabilities. This was seen as a vote of confidence and a lifeline for Intel. While that happens, TSMC continues to power the most advanced computing in the world.

A lesson I can take home from this is that semiconductors are not really a consumer product. They power other consumer products. So, the ability of branding to create a lasting effect is limited. Technology leadership ultimately determines who reigns in this industry, and no amount of marketing magic can substitute for being on the right side of innovation.

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“In the factory we make cosmetics; in the store we sell hope.”

That line is from Charles Revson, the founder of Revlon. I first came across it in a marketing class, and honestly, it stopped me cold. What a way to think about your own business. So you can imagine my surprise when, a few years later, I saw the headline: “Revlon files for bankruptcy.”

The brand that once defined glamour. The one that put Cindy Crawford and Claudia Schiffer on billboards. The one that made nail paint aspirational. Bankrupt?

I remember thinking: another brand bites the dust.

I was wrong. But we’ll get to that.

Early Days

Revlon was founded in 1932 in the US by two brothers — Charles and Joseph Revson. Their surname was Revson, so why “Revlon”? Because of the third co-founder, a chemist named Charles Lachman. The L in Revlon is for Lachman.

Their first product was nail polish, but not just any nail polish. At the time, nail paints were dye-based, which meant they came in dull, limited shades and even had health concerns. Revlon introduced pigment-based nail paints in bold, opaque colours beyond just red. Women could now match their nails to their clothes. It sounds simple today, but back then, it was genuinely revolutionary.

Within six years, Revlon had over 21 shades. Within ten, it was a multi-million-dollar company. By the 1950s and 60s, it was the second-largest cosmetics company in the US by sales, and listed on the NYSE in 1955.

Marketing Machine

Revlon didn’t just sell products. It sold a feeling.

It’s widely credited as the first brand to sign a brand ambassador when actress Lauren Hutton signed an exclusive deal for Revlon’s Ultima II line. And that set the template for celebrity endorsements that are now standard everywhere.

Products had names like Fire and Ice, Cherries in the Snow, Plum Lightning, and Moon Drops that were evocative, romantic, playful.

Revlon also sponsored The $64,000 Question, one of the most popular TV game shows of the 1950s, which dramatically boosted its visibility. (There were whispers about Revlon influencing the questions to keep the show and the brand popular. But that’s a story for another day.)

By the 1970s, Revlon had launched fragrances. Its Charlie perfume became a global bestseller within two to three years. And by the 1980s, with a lineup of supermodel spokeswomen including Iman, Cindy Crawford, and Claudia Schiffer, Revlon had become synonymous with fashion and beauty.

It was, by every measure, an icon.

Hostile Takeover & Debt

In 1985, American banker Ronald Perelman launched a hostile bid for Revlon. Revlon’s board fought back and they tried to sell the company to another buyer, Forstmann Little, even though Forstmann was offering less money. The board argued it was better for employees, creditors, and the company’s long-term health.

The matter went to court. And the court ruled against Revlon’s board.

That ruling became famously known as the Revlon Doctrine — the principle that once a company is up for sale, the board’s job is no longer to protect the company but to maximise immediate value for shareholders. The board had to sell to the highest bidder. That was Perelman.

Here’s the part that’s interesting though. Just before acquiring Revlon, Perelman had taken control of a supermarket chain called Pantry Pride. He immediately started selling off Pantry Pride’s grocery stores and used those proceeds plus a mountain of borrowed money on Pantry Pride’s books to fund the Revlon acquisition. He essentially hollowed out a supermarket chain to buy a cosmetics company.

Once he took control, Revlon went private in 1987 and was left carrying enormous acquisition debt. This debt would shadow the company for decades.

Through the late 1980s and 1990s, Revlon the brand remained powerful. It had a presence in around 150 countries. But it was also spending a huge amount each year just on interest payments for debt it had been saddled with since the takeover.

When it went public again in 1996, the pressure of that debt was still there. In 2000, it sold its salon products division — Revlon Professional — to the Colomer Group to pay off some of what it owed. (A small footnote: Revlon had originally bought that same business from the Colomer family back in 1969. They were essentially selling it back.)

Meanwhile, the world was changing, and Revlon was not keeping up.

Young women in the 2000s and 2010s preferred natural looks and neutral shades. Indie brands thrived. Celebrity-owned lines like Fenty by Rihanna and Rare Beauty by Selena Gomez exploded. D2C brands built massive audiences on e-commerce and social media. And even heritage players like L’Oréal and Estée Lauder kept reinventing themselves and outspending Revlon on marketing.

Revlon’s digital presence remained limited. Its product line stayed anchored to its old identity. Sales largely stagnated at ₹1.3–1.4 billion dollars in the years leading up to 2013.

Hollow Acquisitions

To grow, Revlon went on a buying spree. In 2013, it re-acquired the Colomer Group (yes, including Revlon Professional it had sold thirteen years ago). In 2016, it acquired Elizabeth Arden, a well-known competitor.

Both deals added revenue, roughly in line with what those businesses were already making. But they didn’t move the needle on profits and more importantly, they were funded by borrowings, adding even more to an already heavy debt load.

COVID and Bankruptcy.

Then along came the pandemic in 2020. People were wearing masks. Lipstick was, for all practical purposes, useless. Revlon’s 2020 revenues fell 20%, leading to a loss of $619 million. By then, the company’s debt had crossed $3 billion.

Here’s a number to put that in context — on $3 billion of debt with a struggling balance sheet, Revlon was paying roughly $250 million every year just as interest. That’s money that couldn’t go towards marketing, new products, or digital infrastructure. It was simply servicing the cost of past borrowings.

Also, vendors who would normally extend 75 days of credit began demanding cash upfront. The working capital requirement ballooned. Cash was running out.

And with no buyer or white-knight investor in sight, Revlon filed for bankruptcy in June 2022. The stock had fallen over 80% from its mid-2010s highs.

The End of Revlon?

In the US, companies can file under Chapter 11, which allows them to keep operating while restructuring their debt. Revlon did exactly that.

To continue running during this period, Revlon secured $575 million in what’s called debtor-in-possession (DIP) financing from its existing lenders. DIP financing is a special provision for companies in Chapter 11 wherein it lets them pay employees, keep the lights on, and continue operations.

The catch?

This money gets paid back first, before any other creditor, when repayments begin.

The restructuring wiped out all existing shareholders. Perelman’s 85% stake became worthless overnight. Control passed to the lenders, who converted roughly $2.7 billion of their debt into equity and they essentially became the new owners.

The Comeback

In the first quarter after the bankruptcy resolution in 2023, Revlon reported revenues of $490 million and a positive operating income of $51 million, well ahead of expectations.

So when I first saw the bankruptcy headline and thought another brand bites the dust — I had to revise that. Revlon is still a global company. Still selling in markets across the world. Still, in some sense, selling hope.

Whether the new Revlon can keep up with the times, that’s the real question. Only time will tell.

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Of FMCG & Low-Margins

Grocery retail is a brutal, low-margin game. Success isn’t just defined by high markups but by the velocity of sales. And DMart operates on a simple virtuous cycle:

1. Bulk Sourcing: Buying for 400+ stores unlocks massive discounts from FMCG companies.

2. Passing the Value: Those savings go to the customer, driving footfall.

3. Inventory Turnover: This allows DMart to clear its shelves in about 25 days.

Just think about how that last point matters. If you invest ₹1 crore in inventory today and sell it in 25 days, that capital is back in your pocket and ready to be redeployed 14 times a year. That capital can be used to pay salaries or buy more stock.

Ownership vs Renting

The most admired trait of DMart is its ownership model. To understand why this matters for the bottom line, let’s look at two hypothetical stores:

• Store A is owned: DMart buys it for ₹2 crores.

• Store B is leased: DMart pays a monthly rent of ₹2 lakhs.

On the P&L statement, Store A records depreciation, while Store B records rent.

Now there’s an accounting difference here. Depreciation is a non-cash expense. It’s an accounting entry to reflect wear and tear, but no actual money leaves the bank account. Rent, however, is a cold, hard cash outflow every month.

By owning the store, DMart keeps more cash within the business to buy more noodles and detergent. It makes them nimble but the trade-off is often speed. This explains why Reliance Retail has ~20,000 stores while DMart is still in the hundreds — fewer than 500 as of March 2026. Ownership requires massive upfront capital, which acts as a natural speed breaker.

Zero-Debt Paradox

If DMart doesn’t borrow money from banks, why isn’t its debt-to-equity ratio zero?

Firstly and briefly, what is the debt-to-equity ratio? It shows how much of a business’s capital came from external borrowing compared to what came from equity, or business owners. A business with 50 crores in debt and 100 crores in equities has a debt-to-equity ratio of 50%. The acceptable level of debt-to-equity ratio differs across sectors. Many consumer and retail businesses often have no debt, and hence, their debt-to-equity ratio should be equal to zero. But it usually is not.

And the answer lies in something called lease liabilities.

See, even DMart leases a few properties. When a retailer signs a 10-year lease, Indian Accounting Standards (Ind AS) view that contract as a “substance over form” liability. In simple terms what this means is that if something looks like a debt and acts like a debt, you must record it as a debt even if the legal contract says it is “rent” or a “service agreement.” And a 10-year lease is a contractual, unavoidable commitment. If you stop paying, there are legal consequences. In that sense, it behaves exactly like a bank loan.

You can also think of it this way. A company takes a 10-year loan to buy a property. It has to repay that loan over the next 10 years. There is a constant cash outflow to pay for the property.

Now consider another company that does not borrow money or buy the store. It just entered into a 10-year lease with the property owner. It has to pay the rent over the next 10 years and there will be a constant cash outflow towards the rent.

Both companies will see a similar cash flow situation. But if the lease was not considered a liability, the second company will have a smaller balance sheet even if its economic reality is not very different from the first company.

But you must ask, at what value will DMart record the lease liability in its balance sheet?

It cannot be the purchase value, because DMart did not pay that much, and won’t pay that much.

In very simple terms, this is how the reporting value is arrived at. If DMart has a 10-year lease on a store, it will plot all the rent payments over the next 10 years and discount them at an assumed rate of interest to arrive at the present value of the lease.

That present value will be recorded as the lease on the liabilities side of the balance sheet.

And to make the two companies comparable, it only makes sense for both to follow a similar accounting practice.

And if you’re wondering about how they balance the books because liabilities on a balance sheet typically have a corresponding entry on the asset side, right?

Well, it’s the Right-of-Use balancing act.

To balance the books, if you have a lease liability, you must have a corresponding asset. This is called the Right-of-Use (ROU) Asset. And interestingly, the ROU asset is often larger than the liability.

Why?

Because DMart doesn’t just rent a shell; they spend on interiors, parking, and equipment. These “fit-out” costs are added to the ROU asset value.

So yes, that’s a few things you should know about DMart and remember that when analyzing a retail or tech business (even a giant like Infosys), don’t just look at “Bank Debt.” Lease liabilities are real borrowings. They represent a claim on future cash flows.

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What is it that Buffett is seeing differently in American Express? Let’s start by glossing a bit over the origins of American Express.

Express mail delivery business

The time was the 1840s. Express delivery of items like gold, silver, and household goods was becoming increasingly popular in the US. Logistics was a crowded space with many competitors. Then, in 1850, three rivals, Henry Wells, William Fargo, and John Butterfield, felt that merging their operations had some serious business advantages. So they came together to found American Express.

If you noticed, among the three founders, two are Henry Wells and William Fargo, the founders of Wells Fargo. After the success of AmEx, the two founders suggested expansion of operations into California. John Butterfield was not for it. So the two went ahead and founded Wells Fargo, another logistics and banking company, while remaining directors at AmEx.

The main driver of revenues for AmEx was delivery contracts with banks. Banks would spend a lot on transporting checks and other documents. AmEx, as well as its peers, solved for this by clubbing multiple shipments along the same route.

Now, as a delivery service provider, AmEx was competing with the US Post Office. One advantage that the US Post Office had was that it accepted money orders. After about 3 decades of existence, AmEx also launched money order services in 1882.

What is a money order? Well, in today’s age and world, it is a primitive mode of sending money. Let’s say you live in Mumbai and want to send money to your sister in Chennai. Instead of sending an actual courier of cash, you could book a money order with AmEx and then send that Money Order document by courier to your sister. Upon receiving it, your sister would present it to the local AmEx office and have it encashed. That was AmEx’s first step in the financial services industry.

About a decade later, in 1891, American Express introduced a revolutionary form of travellers’ cheques. You see, if you had to travel internationally in those days, you had to carry a traveller’s letter of credit with you. What was that? Let’s say you pay $500 to your home bank. The home bank issues a letter of credit against it. Now you could travel to a different country and present that letter of credit to a local bank. That local bank would give you local currency worth $500. The problem was that these could be easily faked. And also that only large banks in large cities were accepting letters of credit.

In fact, this was a problem American Express President JC Fargo faced during his travels through Europe's smaller cities. That’s when he instructed Marcellus Berry, the creator of AmEx’s money orders, to find a more innovative way of making people’s international travel easy. And thus was born AmEx’s traveller’s cheque.

Travellers’ cheques existed before, but Berry designed a novel dual-signature system. Here, you had to sign the traveller’s cheque at the time of buying it from your local bank. Next, you also had to sign the cheque when encashing it at a foreign bank. Basically, the foreign bank would verify the second signature with the first one to ensure the authenticity of the claim.

This matching system for a traveller’s cheque was far simpler than the complex authentication process required for Letters of Credit. As a result, more banks could join the network and offer cash redemption services to foreign travellers.

This worked well for American Express as it continued with its express mail and travellers’ cheques business for almost the next 30 years.

It also set up a travel division to offer train and steamship tickets, trip planning, and guided tours.

Then came World War 1. The Allied Forces, of which the US was a part, were losing ships faster than they could build new ones. Speeding up production required faster movement of essential goods. At the same time, the private transportation system was overwhelmed, with 44,000 loaded freight cars sitting idle in railyards and about 200 ships sitting idle in shipyards.

By taking control of the entire private transportation system, the US Government could use the entire capacity to move essential goods like coal and grain over the less critical commercial goods. Even the ship designs were standardized to speed up ship production.

So, when taking over all the private transportation systems, the US Government took over the mailing businesses of American Express and Wells Fargo, among others. As a result, American Express largely became a financial services company for travellers.

By the way, you can listen to this newsletter on Apple and Spotify.

The AmEx Credit Card

Then, in 1958, it launched a charge card. A charge card is just like a credit card, only that you must pay the total outstanding amount at the end of the month. By virtue of that, I think even the most coveted AmEx Black cards are charge cards. You must pay up all your spends on a Black card by the end of the month. But beyond that, charge cards have largely been phased out in favour of credit cards.

But it took American Express 3 decades after its first charge card to launch its first credit card. Yes, American Express’ first credit card came in 1987. In fact, Visa and Mastercard launched their credit cards before.

Now, when I see these payment networks like American Express, Visa, and Mastercard, I feel they are like casinos. Because for them, the house always wins. No matter the transaction, they always make money. I think that is why Buffett is invested in all three major card networks. He would probably have invested in China’s UnionPay as well if it were seeking investors.

It’s a different thing that payment methods are changing, and many are doubting the relevance of these major card networks. But you know, many new-age payment networks are also built on top of the stack developed by the likes of Visa and Mastercard. And then you need reliable networks like them for international travel. So I feel they are here to stay.

But you know, there is a nuance in how American Express’s business model differs from that of Visa and Mastercard.

How American Express differs from Visa and Mastercard?

You see, when you go to your bank for a credit card, it will issue a Visa or Mastercard credit card. It could be RuPay, Diners’ Club, or something else. But it generally won’t be American Express. Barring some exceptions, you can get an American Express credit card only from American Express itself.

Similarly, if you are a merchant, you will use Visa or Mastercard’s payment network through your bank. But to get on American Express’s network, you need to directly contact them. Your bank usually won’t be able to get you on it.

Next is the credit card spends. On a Visa or Mastercard credit card, your spends are funded by your bank. The interest you pay on credit card spends are your bank’s earnings. If you do not pay up or delay repayment, it is your bank’s loss. Visa or Mastercard do not carry any credit risk. They just make about 2-2.5% from the merchant on every transaction.

In the case of American Express, it bears the credit risk. Your spends are funded by American Express itself. So, American Express earns interest on your spending and bears the loss if you fail to repay.

Basically, American Express operates a closed-loop model. It issues cards directly to customers, funds their purchases, acquires merchants directly, and runs its own payments network.

Visa and Mastercard, on the other hand, operate an open-loop model. They go via the banks to acquire customers and merchants. They just manage the payment network, while the banks bear the credit risk.

The open-loop model frees up Visa and Mastercard from the responsibility of distributing their cards and offering credit. That is why they have a much wider network.

American Express cannot grow as quickly because it handles customer acquisition and merchant onboarding in-house. So, it has a smaller network. Despite that, American Express’s $72 billion in revenue is far larger than Visa’s $40 billion and Mastercard’s $33 billion.

You see, about 23% of AmEx’s revenue, or about 17 billion, comes from interest income. AmEx also makes about 10 billion in annual membership fees. These revenue streams are unique to AmEx. Visa and MasterCard cannot earn interest income or membership fees, as the banks that issue their cards are entitled to them.

But if you adjust for interest income and membership fees, AmEx still makes about 45 billion from running a card network. That is a higher revenue number despite having a smaller network than Visa and Mastercard.

There are two reasons for that.

1. AmEx earns more per transaction. It typically charges a 2.3 to 3.5% fee per transaction. That is higher than the 1.15 to 2.9% charged by Visa and Mastercard.

2. AmEx has the closed-loop advantage. It keeps the entire transaction fee to itself. Because Visa and Mastercard operate in an open loop, they have to split the transaction fee with the card issuer bank and the merchant’s bank.

To sum it all up, AmEx has built a larger business by riding on quality over quantity.

This is also probably why Warren Buffett has a much larger investment in American Express than Visa or Mastercard.

You will note that Visa and Mastercard have been more profitable, but their profitability depends on a host of external stakeholders to function effectively and efficiently.

Buffett perhaps prefers the control American Express has over its operations and, hence, its profitability.

Goodbye

I am taking on a different role within Zerodha starting next week. These newsletters will continue, but I will stop writing them. It doesn’t change anything for you, though. You will get your regular nuggets of discussions on personal finance, economics, and investments on Mind Over Markets by Zerodha Varsity. Because that is what Varsity is all about. To ensure learning. Continued learning. It has been quite a journey where I learned something new in every single episode. I hope it did the same for you.

This newsletter is written by Vineet Rajani.

Do read “Market fell by 10%. But what about Balanced Advantage Funds?” in our newsletter, Second Order by Zerodha Varsity.

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Narayana Health has a business like that. Its business in the Cayman Islands is far more valuable than its contribution to revenues. This might sound contrary to the general practice of assigning a value to a business vertical based on its revenue share.

You see, a business vertical must be considered “valuable” when it has the ability to:

1. Charge a high price

2. Sell more higher-priced goods or services

3. Control costs

4. A combination of one, two, and three.

Whether a business can charge a higher price or not depends a lot on how severe the competition is and how much its customers are willing to pay. A smaller vertical can dominate value if it wins on those drivers.

Narayana Health’s Cayman Islands business is a winner like that. Started in 2014, that outpost of a business has been delivering strong revenue and stronger profits. Narayana initially had only about 28% stake in the Cayman business. It became a fully owned business in 2018.

Now, Cayman contributes about 21% to Narayana’s total revenues but 40% to its total EBITDA. Clearly, the Cayman business is so much more profitable.

If you are wondering why I chose to compare EBITDA and not operating or net profits, let me assure you that both the Cayman business and the overall Narayana Business have positive operating and net profits.

Why EBITDA?

EBITDA is Earnings before Interest, Tax, Depreciation, and Amortisation. Ponder carefully over the full form, and you will see why EBITDA is a useful measure. Choosing to compare on the basis of EBITDA has three good reasons.

1. To ignore the impact of depreciation - Hospitals are a capital-intensive business. Newly set-up hospitals might have a large depreciation charge, which could dampen the final profit numbers at the organisational level. So, a new hospital might appear to be less profitable than an older one, just because of depreciation. And depreciation is, anyway, a non-cash expense. EBITDA ignores the effect of depreciation on profitability.

2. Debt-fuelled capital expenditure - Whether a hospital was constructed using equity or borrowings has no bearing on its ability to generate revenues and profits. Profits would appear higher if only equity were used. Profits would appear lower if borrowings were used because there would be interest cost on the borrowings.
   More specifically, in the case of Narayana Health, the interest cost in the Caymans could vastly differ from that in India. So, even if borrowings were used to set up a hospital in India and in the Caymans, the impact of interest cost would differ. EBITDA ignores the impact of interest cost.

3. To nullify the tax effect - If a business is spread across various countries, it will be taxed differently in each country. Narayana pays no tax on its business in the Caymans. So, its net profit margins would certainly appear stronger than the Indian business. It would then be unfair to compare the Indian business with the one in Cayman. EBITDA also negates the tax impact.

Essentially, EBITDA allows a proper apples-to-apples comparison, and as we saw, Narayana’s Cayman Islands business outshines its Indian business. So much so that one single hospital in the Caymans accounts for roughly 40% of Narayana’s total EBITDA. They have a second hospital in the Caymans now, but profitability has been more or less the same. Naryana, by the way, has over 21 hospitals and numerous clinics across India. Yes, two hospitals in Cayman are more profitable than 21 hospitals.

By the way, you can listen to this post on Apple and Spotify.

Why is the Cayman business so profitable?

Is it higher prices or lower costs that are driving its profitability? Or are patients choosing more of higher-priced procedures and services?

Let us first look at the prices. In India, Narayana’s identity is built around affordability at scale. So, it has to keep costs low to be profitable. But it does not have to maintain the same identity in Cayman. In fact, the Cayman hospital is located in a region that historically sends patients to the US or other high-cost markets for advanced care. Now, instead of going to the US, those patients can get quality and trusted healthcare in their own city.

Narayana does not have to be the cheapest. It just has to be more affordable relative to alternatives - alternatives that also require travelling abroad. For example, compared to the US, Narayana’s pricing in the Caymans is 30-50% cheaper. But even if Narayana were to charge as much as an average American hospital, it would still be cheaper because it does not require Cayman residents to travel abroad. And that means Narayana has a strong pricing power in the Caymans. A strong pricing power lets you have wider profit margins.

Then there is also the operational and cost advantage of a smaller vertical. A smaller vertical can sometimes execute better. But don’t we usually tout the benefits of scale economies? Well, true. If you can produce more goods with the same set of resources, your fixed costs will go down, and your margins will improve. But hospitals are a service business. Services are difficult to scale up. There’s a limit to how many patients a doctor can treat, a nurse can tend to, or how many beds can be filled in a hospital.

If you want to add more beds or rooms, you will have to add another building, or maybe another hospital. And you will need more doctors and nurses for that added capacity. All that comes at a cost. Of course, scaling up would mean Narayana could get more bulk discounts on its supplies like injections, uniforms, linens, etc., but all other costs will go up. And because there is so much human engagement in delivering a service, the number of moving parts multiply. Operational complexity amplifies.

Does that mean Narayana or any other hospital business should not grow? Of course not. Even if scale-economy benefits are limited, the business can still earn more in absolute terms. If the profit from 1 bed is 1 lakh, it will be about 10 lakh from 10 beds, ignoring all scale-economy benefits.

The Cayman business, on the other hand, has the advantage of a smaller scale and fewer moving parts. The Cayman management has full focus on a very small set of operations that are doing well. In fact, now that they have optimised the margins, the management seems to be shifting focus to revenue growth. And that is where they are also utilising their profits. For example, they added a new facility at Camana Bay in the Caymans in 2023. This new facility will have a radiation oncology block, thereby expanding the scope of offerings.

Safe to say now that the Cayman business contributes far more value to Narayana than its revenue contribution.

But is there no risk here?

There is a concentration risk. If Cayman were to face one shock, like travel disruptions, regulatory changes, or a competitive entry, its margins could tumble. And because the Cayman business makes such a large portion of Narayana’s consolidated profits, that one shock could visibly hurt Narayana’s overall performance. Of course, Narayana Health is working to reduce its profit concentration, as seen in the newly launched insurance business. But it is still a very small part of the overall business, accounting for less than 1% of total revenues.

In fact, Narayana’s management understands the risk of such heavy reliance on Cayman. It acknowledges the seasonality and volatility risks to its performance due to “low volumes” in Cayman—a small base is prone to larger quarter-to-quarter fluctuations.

The ideal valuation method

So, if I were to assign a value to Narayana Health as a whole, I would choose the Sum of the Parts (SOTP) valuation method. I would value the India and Cayman businesses separately, and add them to arrive at the total valuation. Of course, I would discount the Cayman business slightly because of its concentration risk. But clearly, the Cayman business valuation will be more in line with its profit contribution than with its revenue contribution.

This newsletter is written by Vineet Rajani.

Do read “Is India sharing its emergency oil with the world?” in our newsletter, Tell Me Why by Zerodha Varsity.

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Those are not technology features. Those are design features. They were introduced on purpose. And they all draw inspiration from the Japanese concept of Poka Yoke, developed on the production floors of (you guessed it) Toyota.

In Japanese, poka means an inadvertent mistake. Yokeru means to avoid. Put together, Poka Yoke means avoiding inadvertent errors. As a concept, Poka Yoke was born on a factory floor, not a design studio. And it also has a small connection with World War II.

Poka Yoke’s Toyota roots

Toyota was a textile company initially. It started producing cars only a decade before World War II. In fact, during World War II, Toyota was mainly producing trucks. Car production was limited. Towards the end of the war, Toyota’s factories were damaged by Allied bombing.

Japan’s economy was devastated after the war. Hyperinflation was rampant. Demand was weak. Raw materials were scarce. Japan was under U.S. occupation. Economic reforms tightened credit conditions. Toyota struggled with falling sales and rising costs. By 1949, Toyota was in deep financial trouble. In 1950, the company faced a severe cash crunch. It had to negotiate with banks and restructure operations.

The company split manufacturing and sales into separate entities to stabilise operations and secure financing.

Around this time, a group of Toyota executives visited Ford’s River Rouge plant in the United States. They were impressed by its scale but also realized that such a model could not be replicated in Japan.

The American system relied on massive production runs and large inventory buffers. Japan did not have that kind of capital or domestic demand.

Toyota’s executives had to find a way to work with limited resources and capital. You know how they say necessity is the mother of invention. That is what happened with Toyota. A long-time engineer at Toyota, Taiichi Ohno, developed the Toyota Production System, or TPS, out of sheer scarcity and necessity. The Toyota Production System is a manufacturing system to ensure minimum wastage while constantly striving to improve quality. TPS is efficient, flexible, and extremely quality-conscious.

It evolved over the next few decades, giving rise to several simple but radical ideas like Just-in-Time, Jidoka, and Kaizen. By the way, in one of the earliest episodes on Side Notes, I discussed Toyota’s Just-in-Time approach to inventory management, if you want to check it out.

After Taiichi Ohno, TPS was further refined with the contributions from Shigeo Shingo, an industrial engineer at Toyota in the 1960s. Shingo observed that most defects are not due to people being careless. They happen because systems allow small mistakes to pass through undetected.

An operator forgetting to tighten a bolt. A component is inserted in the wrong orientation. A missing part - are all small mistakes. They’d go undetected if you rely only on inspection at the end of the production process. You’d discover the defect after the value has already been added. By then, the cost of correction is high.

Shingo’s breakthrough was this: don’t inspect for quality. Design processes so that defects cannot occur — or, if they do, they are immediately visible.

That philosophy became Poka Yoke. One of the earliest examples often cited inside Toyota plants was related to assembly errors.

Think of it this way. Let’s say there is a worker assembling a part that requires two bolts. What you would expect is that he has a box of bolts and picks two bolts from it to assemble the part. If distracted, this worker might pick just one bolt instead of two. The car moves forward in the production line. The mistake remains hidden.

What could be a Poka Yoke solution here? Provide exactly two bolts in a small tray for each assembly cycle. If one bolt is left in the tray, the error is instantly visible. The process itself signals the mistake.

Instead of finding the fault only after it is too late, the Poka Yoke system absorbs human fallibility.

By the way, you can listen to this article on Apple and Spotify.

Constant evolution

Over time, Toyota embedded hundreds of such fixes into its production lines. A limit switch that prevents machines from operating if a component is misaligned, a fixture that allows parts to fit only in the correct orientation, and sensors that stop the line if torque specifications are not met are all examples of Poka Yoke, all designed to ensure that a human error on the production floor does not become customer pain.

By building quality into the process, defects could be prevented at the source. Problems would surface immediately. That meant fewer defective products reaching customers. And this reduced rework, scrap, and warranty claims.

Over the decades, this system helped Toyota scale globally. By the 1980s and 1990s Toyota’s production philosophy became a benchmark. Business schools studied it. Competitors tried to replicate it. Businesses from other industries also tried to introduce Poka Yoke into their production processes.

Poka Yoke in everyday products

SIM cards - A SIM card has a notched corner. The SIM slot in your phone mirrors that shape. As a result, there is only one way of inserting the SIM. You don’t have to worry about finding the right orientation of the SIM card. Because the sim won’t fit otherwise. Here, the Poka Yoke design does not let you make a mistake.

Gas stove - Gas stove knobs are an example of the prevention of mistakes. To use the burner, you must press the knob before turning. That prevents accidental gas leakage.

Type C Chargers - Another way Poka Yoke works is by removing the possibility of being wrong. You can insert a Type C charger in your phone either way; it will work. So, you cannot be wrong no matter what way you connect it.

Each of these designs assumes that people are distracted. People are tired. People make mistakes. Instead of punishing the user, the system protects them. If you observe, you will find Poka Yoke everywhere.

This newsletter is written by Vineet Rajani.

Do read “Is India running out of gas?” in our newsletter, Tell Me Why by Zerodha Varsity.

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You know, IBM was the world’s largest PC maker in the 1980s. It sounds interesting, especially given that PCs were not even IBM’s most profitable business.

IBM’s path to starting a PC business

Started in 1911 as a maker of time clocks, computing scales, and punched-card tabulators, IBM was synonymous with enterprise computing by the mid-20th century. In 1964, it introduced the IBM System/360, a revolutionary family of mainframes that established a single, compatible architecture across various models. What it meant was that a business could upgrade its hardware without rewriting software. Before 1964, whenever a company “upgraded” to a faster computer, they had to throw away all their old software and rewrite it from scratch because the new machine spoke a completely different language.

Most of us might find it difficult to connect with that problem. Think of it like having a smartphone, but every time you buy a new one, you have to wait for the developers to rewrite every single app—Instagram, WhatsApp, or Gmail, and everything else—specifically for that exact model. IBM changed that. You could use the same software across different mainframe computer models.

Then, in 1981, IBM’s personal computers, or PCs, came out. IBM wasn’t the first to launch PCs; a few other brands had already launched them. IBM observed that computing was moving out of large corporate data centers into offices. IBM wanted to be the one offering both enterprise computing and PCs to its clients’ employees. IBM soon became the largest PC maker, with about 75% global market share in the mid-1980s.

By the way, you can also listen to this post on Apple or Spotify.

The birth of a “Legend”

To sell worldwide, IBM relied on distributors. Its distributor in China was a company called Legend. Today, we know Legend as Lenovo. Yes, it was rebranded, and we will come back to that.

Legend started in 1984 as a PC distributor for many foreign brands like HP, Toshiba, and IBM in China. Legend used that position to study foreign product designs, build a sales network, and seek local customer feedback. It localised its offerings even for the foreign PC brands. For example, in 1986, it created the “first Chinese character card”, enabling PCs to process the Chinese language.

Legend’s approach sounds simple but great - through distribution, it built relations and learnt what people wanted to buy, what broke, what they complained about, and what they would pay for.

Of course, it employed engineering prowess to develop PCs that people would buy. And in 1990, it crossed over from being just a distributor of PCs to a PC brand owner. Legend scaled through the 1990s and even got listed on the Hong Kong stock exchange in 1994. Legend’s PCs were almost 30% cheaper than the foreign brands. By 1999, Legend had become the largest PC brand in Asia-Pacific, while it continued to serve as a distributor for HP, Toshiba, and IBM.

The rebranding to Lenovo

There was a conflict of interest. Legend was directly competing with the brands it was a distributor for. To maintain its relationship with those foreign PC brands, in 2001, Legend split the business into two. It spun off the distribution business into a separate entity called Digital China. Digital China is a listed company now with a large PC distribution and IT services business.

The PC-manufacturing business was now called the Lenovo Group. Lenovo wanted to go global. The laptop brand was still called Legend. But the word Legend was already trademarked by other businesses in some countries. That could have become an obstacle to its international expansion. Therefore, the brand was renamed to Lenovo in 2003.

And then, in 2005, Lenovo acquired IBM’s PC business for about 1.75 billion dollars. Two angles to look at here. Why was IBM selling? And why was Lenovo buying?

Why was IBM selling?

IBM’s original business of mainframe computers and IT services was more profitable than the PC business. The PC business was less profitable, but it boosted IBM’s brand by making it a market leader soon after launch. It commanded a 75% global market share. It launched the ThinkPad line of PCs in 1992. People loved it for its design and performance. But PCs are a consumer product. And like any other successful consumer product category, the space attracted a lot of competition. And PCs became commoditized.

That means all brands were heavily spending on marketing. And they were competing fiercely on prices. So margins were squeezed. IBM was suffering too.

While it remained the market leader, its market share came down significantly from 75% in the mid-80s to 12% in the mid-90s.

In order to retain its market dominance while controlling costs, IBM outsourced most of its PC manufacturing in 2002. It only kept product designing and marketing to itself.

But that did not help either. It continued to bleed losses for the three years after outsourcing. PC manufacturing could be profitable at scale, but IBM’s interests lie in enterprise solutions, technology consulting, IT services, and the like. And that is when it decided to exit the PC business.

Why was Lenovo looking to buy?

Lenovo had global ambitions. IBM had global reach. And it had built a strong following for its ThinkPad line of PCs. Lenovo wanted to ride on the success of IBM and ThinkPad as brand names.

The deal had more depth to it. IBM took roughly a 19% equity stake in Lenovo. This 19% stake let IBM remain invested in the PC space while exiting the burden of running that business. Lenovo became IBM’s preferred PC supplier. IBM became Lenovo’s preferred services and financing partner. And Lenovo received a five‑year license to use IBM branding, while owning the “Think” trademarks. Lenovo also got access to IBM’s Chinese manufacturing facility and distribution facilities across the U.S., Mexico, Brazil, Scotland, Hungary, and more.

And with the acquisition, Lenovo became the world’s third-largest PC maker. Clearly, the acquisition paid off for Lenovo as it became the world’s largest PC brand in less than a decade and has largely held that position. It currently commands about 27% market share according to a January 2026 report by Gartner.

Similar challenges after two decades

As the world’s largest PC maker, Lenovo is facing the same challenges that IBM faced. The global PC market has been declining. This is probably because home computers are almost a thing of the past. In most of the developed world, where the population has been stagnant or even de-growing, the rate of the newer workforce replacing the older one has been shrinking. So, a smaller workforce will require fewer PCs, right? In fact, by one estimate, the number of active Windows devices has shrunk almost 400 million between 2021 and 2025.

So, Lenovo has also been looking to diversify its business beyond PCs. And it has been doing so over the past decade or so. For instance, in 2014, Lenovo struck another transaction with IBM - It bought IBM’s x86 server business for approximately $2.3 billion.

Lenovo was present in the server business before this acquisition, but it had less than 1% market share. Post acquisition, Lenovo became the world’s third-largest x86 server provider. While there are many other server structures, x86 commands about 75-80% of the global server demand. Other types of servers are fast catching up, though.

Interestingly, in 2014, the same year that Lenovo acquired IBM’s x86 server business, it also acquired Motorola Mobility from Google for 2.9 billion dollars. It was perhaps Lenovo’s attempt to replicate the success it achieved in acquiring IBM’s PC business.

Motorola might be doing well, but it is definitely not a market leader. But such is business, you hit some, you miss some.

Zerodha Varsity is now on WhatsApp. Follow on to keep track of all things Varsity across platforms.

This newsletter is written by Vineet Rajani.

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To start with, D2C is any brand that sells directly to the end consumer. For example, the shoes Nike sells on its website or through stores that it runs are being sold directly to the end consumer. On the other hand, if it sells shoes to a wholesaler who sells them on Amazon or a retail chain operator like Shoppers’ Stop, it is using intermediaries or a traditional sales channel to sell to its customers. In a traditional sales channel, the company does not interact with the end consumer.

For the longest time, wholesale was the way of selling any consumer product. The same was with sports retail. Big brands would primarily sell through other retailers like Shoppers’ Stop, Planet Sports, Life Style, etc. Even in the US, Foot Locker, Finish Line, and thousands of independent shops would sell sports products. Direct retail was a much smaller slice of the pie for most. For instance, around 2010-11, only about 15-20% of Nike, Puma, and Adidas sales came via their own stores or direct sales.

Why the D2C pivot?

The three sportswear brands had come to rule the space globally by using a traditional sales channel. Going D2C meant taking on the additional headache of owning and maintaining stores, dealing with customers, and whatnot.

They were motivated by at least three big reasons.

1. Better margins and profit - See, a traditional sales channel will look like this. Nike sells a shoe to a wholesaler for ₹2000; the wholesaler sells it to the retailer for ₹2500; and the retailer sells it to the end consumer for ₹ 3000. In a direct channel, on the other hand, Nike can sell directly to the consumer at ₹2500. Like that, Nike makes higher revenues per unit while the customer also gets a ₹500 discount. Direct selling cuts out the middlemen.

2. Owning the customer relationship - Brands get first-hand access to consumer data and an opportunity to build loyalty through direct interaction. They do not have to rely on the middlemen’s interpretation of consumer behaviour.

3. Brand experience - companies believed they could present their products better, at full price, in their own stores and sites, rather than on a crammed shelf next to competitors.

By the mid-2010s, Nike, Adidas, and Puma all began charting their respective D2C courses. Let’s look at how they did that, starting with Nike.

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Nike - ditched channel partners, established its own channels

Back in 2011, while wholesale was still the largest share of Nike’s revenues, it was seeing a strong growth coming from direct channels. Direct channels, or D2C, were about 16% of overall revenue. Fast forward to 2017, Nike unveiled its “Consumer Direct Offence” strategy to go full throttle on direct sales efforts.

It significantly reduced the number of third-party stores selling Nike products. There were 47,000 external retail stores in 2010. Nike no longer reports that number. Perhaps because it has gone down.

At the same time, the number of Nike-owned stores went up. From 931 stores in 2015, Nike’s store count now stands at over 1000. A lot of sales must have happened through the website, too. Over the last 10 years, its D2C revenues have tripled, while its overall revenues have grown by 50%. Clearly, the management was focused on growing the D2C channel.

And at least initially, the financial results seemed to validate the strategy. Between 2015 and 2021, Nike’s overall sales and profits surged. Gross margins edged upward in those years, aided by a richer product mix and higher full-price selling through Nike Direct. Even in the depths of COVID-19 (when many physical stores shut), Nike’s strong digital presence paid off – its online sales jumped over 50%, helping offset lost store sales.

Nike was even generating more in D2C revenue alone than some competitors made in total sales. This looked like a triumph of strategy and execution. Nike’s stock price nearly tripled from 2015 to late 2021, as investors cheered its tech-like valuation and DTC-fueled profit potential.

Adidas - World No. 2, following in the footsteps of World No. 1

Adidas watched the growing D2C trend and had its own plans. In the early 2010s, while Adidas had far more owned stores than Nike, its direct sales were not so strong. Wholesale was still its bread and butter.

But around 2015, Adidas started leaning into e-commerce and owned stores as engines of growth. Between 2015 and 2019, Adidas’s overall revenues jumped from €16 billion to nearly €24 billion, partly on the back of booming online sales and new flagship stores.

Direct sales had grown from less than 20% in the early 2010s to 30% in 2019 and as high as 40% in 2020. Adidas doubled down on that momentum: in March 2021, its management announced a new five-year strategy to achieve 50% of its net sales through direct channels.

To get there, Adidas intended to further rationalise its wholesale network, focusing only on key partners and investing heavily in D2C channels. That may not have worked out as planned, though. Direct sales remained at 40% in 2024. Achieving 50% in 2025 could be a challenge.

Just like Nike, Adidas saw the benefits of D2C initially. Through 2018 and 2019, Adidas saw robust growth and improved profitability. The direct push contributed to a record gross margin of 52.0% in 2019, the highest the company had seen, owing in large part to D2C sales. Its share price roughly tripled from 2015 to 2019. Adidas was closing the gap with Nike in the U.S. market. Management explicitly credited DTC for some of this success. Even during Covid, Adidas’s e-commerce saw staggering sales. D2C became a lifeline during Covid.

Not jumping the bandwagon, Puma stayed the course

Historically, Puma relied more on wholesale partners than the other two. In 2014, Puma’s direct business was about 21% of revenue. Puma certainly invested in improving its retail stores and building e-commerce capabilities. However, it did not announce a radical channel overhaul or slash its wholesale network drastically. In fact, Puma consistently described its DTC retail as “complementary to wholesale”, not a full replacement.

In Puma’s eyes, its thousands of retail partners were essential for broad distribution and growth, while its own flagship stores were there to showcase the brand and test concepts. Over the decade, Puma did grow its direct sales, but only from 20% in 2014 to 28% in 2024. Puma was content to let Foot Locker, JD Sports, and regional sporting goods chains continue selling the bulk of its product.

This approach may have reflected Puma’s smaller size and budget, but it worked well for them. The company nearly doubled its sales from ~€4 billion in 2014 to €8.8 billion in 2024, and its stock rose exponentially from about €20 in 2015 to over €100 by 2021. Interestingly, Puma often benefited when Nike or Adidas faced supply constraints or pulled product from certain stores – wholesale partners would fill the gap with Puma merchandise.

Safe to say, then, Puma’s strong sales came by being a replacement for Nike and Adidas, and not because it was a product of first choice.

Puma’s stock price has since fallen by over 80%. Macroeconomic headwinds and large inventory levels are commonly cited reasons for its poor performance today. However, the brand also acknowledges that it has become a bit too commercial. It is perhaps not as coveted a brand as Nike or Adidas.

But did the D2C strategy play out for Nike and Adidas?

For both of them, D2C sales grew well up until Covid, and shot up after that. And then sales fell. Several other D2C brands sprang up globally with quality and appeal that were comparable to those of Nike and Adidas. Retailers were giving more shelf space to brands like On Running and Hoka that were gaining popularity in Western countries. In India, too, Comet and Gully Labs started raking in a loyal customer base.

Post-Covid, when sales growth started to plateau, Nike began quietly re-embracing whole partners. It realised that many shoppers like to buy their sports gear at multi-brand stores or department stores – places where they can compare Nike’s shoes side by side with Adidas, Puma, On, or others.

However, because other brands were already occupying shelf space, those stores offered Nike less space. As a result, Nike found itself forced to heavily discount.

Adidas had its own challenges. In 2022–2023, it lost its major Yeezy partnership after severing ties with Kanye West. This disproportionately hurt Adidas’s online and hype-driven sales. It reported a net loss of €75 million, its first annual loss in decades.

In both Nike’s and Adidas’s cases, their slowing or declining sales were not because of D2C. Many challenges were external. But surely a heavy reliance on D2C amplified the impact. Owning D2C channels means owning distribution and supply chain up until the last mile. That is a cost, and a lot of it is fixed or rigid cost. Slow sales or not, that channel still needed to be maintained because Nike or Adidas owned it.

All of these moves signalled that Nike and Adidas had realised the drawbacks of an all-in D2C approach and that a multi-channel strategy would serve growth better.

The lesson to take home is that D2C is one of the many tools in the toolkit. It might be a better strategy to take both direct and channel routes and reap the benefits of diversifying across strategies.

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Both were driven by some external forces, some management moves, and the market’s interpretation of those moves. But you know, you can even dissect their Return on Equity (ROE) to see that story play out.

Let’s start with a lemonade stand, as an example. Say you invest ₹100 to start your own lemonade stand. At the end of the year, you’ve made a ₹20 profit.

Here, you invested ₹100 in equity and made a profit of ₹20. So, your return on equity (ROE) is 20%. Mind you, this is not profit margin. Profit margin would be 20 divided by the revenues. We have not discussed the revenues. But that’s okay. We have focused only on ROE so far.

Now, ROE can be driven by various factors.

How did Trent race ahead?

Trent’s net profit margin, which is net profit divided by sales revenue, grew from 3.5% in FY2020 to 9% in FY2025. This happens when profits have grown faster than revenue. It could also happen that revenue remained stable but profits grew, and hence, the net profit margin improved. Net profit is the first step of a three-step DuPont analysis. We’ll come back to this.

Trent’s revenues have grown fivefold since 2020, but net profit has grown almost 14-fold.

It seems like Trent enjoyed better margins due to economies of scale. As you grow volumes, you can bargain for a better price with your suppliers. And your fixed costs remain largely fixed. So that reduces the cost per unit, thereby helping improve margins.

But did that happen? Did fixed costs remain fixed? It seems so. Mostly. You see, back in 2020, for every ₹100 worth of assets, Trent was making about ₹86 worth in revenues. In 2025, it generated ₹207 in revenue for every ₹100 in assets. Basically, asset turnover improved from 0.86x to 2.07x. That is a threefold improvement in efficiency. Asset turnover is the second step.

This happened because Trent’s revenues grew faster than its asset base. Asset base grew only 70%, while we already know the revenues grew fivefold. Asset turnover can also improve if revenues remain the same while assets are reduced. But that rarely happens.

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Now let’s think about how Trent’s assets grew. How did Trent get the funds to pay for those assets? There are three ways to do this.

1. Raise equity. Get the existing owners to invest more in the business. Or ask external investors to invest in the business as equity. Basically, those investors also become shareholders. They have a share in profits and losses. Trent did not do that.

2. Raise debt. Issue bonds to external investors. Since it is debt, the business will have to pay interest on it. This is a double-edged sword.
   Let’s go back to the lemonade example where you put ₹100, and the ROE was 20%. Suppose you want to grow the business because it yields good returns. You want to invest an additional ₹100, but you don’t have it. So you borrow the amount from a bank at a 10% interest rate.
   The business now has a 200-rupee investment - 100 from you and 100 from the bank. So, it should make ₹40 in profit. But you will pay a ₹10 interest on the borrowed sum. Out of the profit of 40, you paid 10. Ignore taxes for now. You are left with a ₹30 profit while your own investment remains the same ₹100. That is a 30% ROE. You basically improve ROE by taking debt.
   However, if the business suffers losses, you will still have to pay the interest. That amplifies your losses further. Debt works both ways - it amplifies profits as well as losses.

3. Internal accruals. Let’s say you do not take out the ₹20 profit from the lemonade stand for personal use, but instead keep it in the business. You can use it to buy more assets or more capacity to grow the business. This growth might be slower and ROE lower than debt-fuelled growth, but it is more sustainable. There is no double-edged sword hanging over the business.

Trent used internal accruals. But it did not use all of its internal accruals to acquire more assets and grow the business. It even used some of them to reduce debt. That’s why accruals grew faster than assets, and financial leverage reduced. Financial leverage is the final step.

In essence, ROE could have grown faster if more accruals or debt had been used, but Trent chose safety. And that is good. You need a business that is strong at its foundation.

So, in total, Trent’s ROE grew because its net margins and asset turnover improved, while it was capped due to a reduction in financial leverage, but that is nonetheless great.

If you multiply net margin by asset turnover and financial leverage, what you get is return on equity (ROE). The three ratios help you analyse what drove or strained the ROE.

What happened to Asian Paints? Why did its ROE decline?

Over the last five years, Asian Paints actually witnessed an 11% growth in revenues. However, net profit growth was slower at 6%. Net profit margin has declined steadily.

That means either some expenses or the tax payments have grown faster. The most commonly blamed element here, specifically in the case of Asian Paints, was that it increased marketing expenses.

You see, the Birla Group launched Birla Opus, its new paints business, about two years ago. The market was divided. Some believed Birla would snatch market share from Asian Paints. Others felt Asian Paints had withstood all the competition so far, and it would continue to do so.

But Birla Opus launched on a large scale. It did put a dent in Asian Paint’s market share. So, it was assumed that Asian Paints would spend more on advertisements, thereby hurting its profits. However, ad spends as a percentage of revenues have largely remained stable. In fact, ad spends have not even grown as fast as revenues in the last five years.

The one thing that has grown is Asian Paints’ trade receivables (debtors). Debtors are those parties who owe money to Asian Paints. Debtors have grown at an annual rate of 19%. Why so? Perhaps this was in response to Birla Opus’s entry in the market.

You see, Asian Paints relies on channel partners, whom we call distributors, wholesalers, and retailers, to sell paints. So far, Asian Paints has done that phenomenally well. Very few businesses can have a distribution network that is so far and deep as Asian Paints, let alone any other paint business.

But Birla Opus, backed by the heavy capital it has from the Aditya Birla Group, managed to reach far and wide like Asian Paints. Then there are other paint businesses too that have been trying to encroach on Asian Paints’ turf.

To ward off competition, it is common to offer more favorable terms of trade to your distributors and wholesalers. So, Asian Paints must have probably relaxed the credit period for its channel partners.

And that is what happened with Asian Paints. Its receivables days increased from 29 days in 2020 to over 40 days in 2025. That means, earlier, a distributor, on average, took 29 days to pay back for the goods it bought from Asian Paints. Now, they are taking 40 days.

Higher receivable days indicate that the business will have to employ more capital in its operations since money they would’ve otherwise received is still pending. That explains the 18% growth in Asian Paints’ current assets, compared to only a 13% growth in current liabilities. Receivables, by the way, are part of current assets.

Overall, assets have grown faster than revenues, thereby hurting Asian Paints’ asset turnover, which in turn is reflected in its declining ROE.

Asian Paints’ leverage has not moved, suggesting that the share of debt and equity has not moved much. Financial leverage remained stable. So, the net margin and asset turnover essentially had an impact on its ROE.

Having said that, this is a five-year phenomenon for both Trent and Asian Paints. Their trends have reversed in the last year. You could employ a similar lens (DuPont) to study the difference in their stock price performance over the last year, but that would be too short a time frame. Usually, such short time frames depict how a stock reacts to external factors. Longer time frames depict how the management is responding to those external forces.

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All the data in the tables is sourced from company annual reports and internal calculations.

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Or imagine you are running a social media app that competes with the app that got banned. This was Instagram and YouTube’s situation.

It was devastating news for TikTok while great for Instagram and YouTube. How you take the news depends on whether you stand to win or lose from it. The trickiest part is that neither business has control over the situation.

An opportunity that many chased

With 200 million users, India was one of TikTok’s largest user bases. The goofy dances, viral challenges, and creative short videos on TikTok had become a cultural phenomenon across India. Then, citing data privacy and national security concerns amid geopolitical tensions, the Indian government abruptly banned TikTok along with dozens of other Chinese apps. For TikTok’s parent company, ByteDance, this was a blunt blow – it lost access to an enormous market in an instant. But for Instagram and YouTube, it was a hot new opportunity.

In July that year, that is, within a month of the TikTok ban, Instagram introduced Reels in India. And by September, YouTube introduced Shorts. For Instagram and YouTube, the opportunity was so compelling that they hurried to launch their short videos in India, and much before they offered these features to the rest of the world. American users got to use Reels one month after Indians did. And they got YouTube Shorts six months after.

A few more short-form video platforms, like Moj, launched in India around the same time as Reels and Shorts. However, Moj was one more app download for a user. Moj had to make sure it could be discovered by its target users.

Instagram and YouTube did not have this issue. They did not have to be discovered. They were already on people’s phones. It was easier for a user to simply watch short videos on Instagram and YouTube, where they already consumed content. Instagram and YouTube did a good job of swiftly integrating short videos into their existing offerings, so people quickly got used to Reels and Shorts.

Could Reels and Shorts have worked without the TikTok ban?

It is not natural for people to start using new features in an existing app just because they are easy to access. We don’t have to look too far for an example. Instagram launched Threads, a direct competitor to Twitter (or X, as we call it today).

Threads was a separate app, but was pushed to all Instagram users on the Instagram app. Your Instagram account could easily be linked to your thread account. You could also import your Instagram followers to Threads. Basically, an influencer with a large Instagram follower base did not have to start anew on Threads.

Despite all that easy discoverability and accessibility, Threads could not take off. Of course, Threads could ride on Instagram’s network benefits, but in hindsight, I can think of two reasons why Threads could not take off.

1. Instagram and Twitter users are very different. Even users who have both accounts use both platforms for very different purposes. So, easy access was not enough for Instagram users to start using Threads. They had to be interested in using Threads. So, basically, Threads had to attract Twitter users to shift to Threads. But that is also a problem.

2. People had gotten used to Twitter for microblogging. They were not willing to shift to a new platform just like that. All their network and followers were on Twitter. Why would they want to start from scratch on a new platform?

By that logic, Reels and Shorts could have failed in India. Over 200 million or 20 crore Indians were already using TikTok. They would not have moved to Reels or Shorts. They did only because they had to, because TikTok was banned in India.

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See, TikTok’s moat was its network effect. As more and more people signed up for short video content, more and more people started making more short video content. As the quality and variety of short video content improved, more and more people signed up on TikTok. It became a self-reinforcing cycle.

It was almost impossible for a second or third player to break into TikTok’s virtual monopoly in the category. Think about it, why would anyone watch short videos on any other platform when the ecosystem had already evolved on TikTok?

The only way its network effect could be superseded was through a blunt external force. The ban on TikTok in India was that blunt force. By banning TikTok, India didn’t kill the appetite for short videos (that wasn’t the intent anyway) – it merely displaced it.

Social media users had grown accustomed to a feature that was taken away. Instagram and YouTube jumped in to fill that gap.

Collateral damage

There was a hapless group of people who lost in this regulatory juggle. Many individual creators on TikTok lost their huge follower count overnight. Some managed to rebuild on Instagram, but they had to start from scratch.

As far as users are concerned, they quickly got used to Instagram and YouTube for short videos.

An average Indian now spends about 2.5 hours on social media every day, with YouTube, Instagram, and WhatsApp being the most popular. And short videos are the most consumed form of content. In fact, a study by Meta, Instagram’s parent, suggests that 97% of Indians watch short videos on any platform at least once a day, as compared to 83% who watch TV daily. Basically, more Indians are watching short videos more regularly than TV.

And it is not just in India; Reels account for 50% of the time spent on Instagram globally. While Instagram is considered the largest short-video platform, some argue that YouTube is the largest.

The debate is understandable. YouTube comes pre-installed in most Android devices, so it has over 10 billion downloads. Of course, a fraction of those people actually use YouTube. YouTube also has a large and growing reservoir of long-form videos, so users must be watching those long videos, too. Some of those users must be watching YouTube Shorts. Of course, that number also runs in billions.

By some estimates, YouTube Shorts has 1.5 billion monthly active users globally, while Instagram leads at 2 billion.

No matter who leads the market, both Instagram and YouTube made their short-form videos big in India after the TikTok ban.

Not the first regulatory blow

I think the freshest in our memory is the ban on real-money gaming apps. That ban wiped out the whole industry, not just a company. There was no opportunity for a peer or rival to capitalize on.

Then Rapido, the bike-hailing app, has been at the mercy of state regulations. It has had to suspend operations in a few states, like Maharashtra and Karnataka, in the past because those state governments had imposed bans. Uber and Ola could have possibly benefited from it.

The lesson to take home: a great product or great marketing could lead your business to success, but those features can be of little help if the law of the land goes against you.

This newsletter is written by Vineet Rajani.

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RC Cola launched Diet Rite Cola, the first diet soda drink in the US, targeted at diabetics. But it became so popular that about half of its consumers weren’t even diabetic. They were just watching their weight.

Noticing RC Cola’s success, Coca-Cola launched Tab, and Pepsi launched Patio Diet Cola. Did you notice that neither big cola giant used Coke or Pepsi in their diet cola versions? They wanted a slice of the calorie-conscious market, but also understood the risks of being associated with a healthy narrative - they could lose the appeal to the cool consumers of their regular colas. So they introduced a separate healthy brand.

Their diet colas were well received, and after just 1 year, in 1964, Pepsi renamed its Patio Diet Cola to Diet Pepsi. Coca-Cola retained TaB. Coca-Cola still felt that introducing a diet version under the Coke brand name might dilute its appeal.

The introduction of Diet Coke

Fast forward to the 1980s. Coca‑Cola was riding high on its classic soda, but calorie-conscious consumers had become a much larger market than in the 1960s. In response, Coca‑Cola launched Diet Coke in 1982. TaB soda still existed, but Diet Coke was a more serious launch. It was the first extension of the “Coke” name to a new product.

The Diet Coke was an instant success. It was positioned as the soda that let you indulge without the guilt. By the end of 1983, it had become the No. 1 diet soft drink in the U.S. – and more importantly, “the top soft drink brand among women”.

Coca‑Cola had targeted Diet Coke to those watching their weight. Any man or woman watching their weight could have a Diet Coke. However, women somehow flocked to it more than men did. The product’s very name included “diet.” And that resonated strongly with weight-conscious consumers, a segment where women were the most responsive at the time.

Instead of worrying too much about it appealing to only women, Coca-Cola played along with the perception. For years, Diet Coke ads were squarely “aimed at figure-conscious women”.

But that was also a problem. Success with one demographic alienated another. Diet Coke’s huge popularity among women created a perception that it was a “women’s drink.” And because of that, a lot of men wouldn’t touch it.

There’s a term for this phenomenon – Gender Contamination. Once a product gets strongly associated with one gender, the other gender will absolutely avoid it.

Gender contamination created a marketing dilemma for Coca‑Cola in the 1990s and early 2000s. On one hand, Diet Coke was a blockbuster – by 2010, it even overtook Pepsi to become the No. 2 soda in the U.S. behind only regular Coke. On the other hand, there was a whole segment of customers, mostly weight-conscious men, that Diet Coke wasn’t reaching effectively.

Coke Zero - The Way Out

The company tried various tweaks, including, over time, positioning Diet Coke in some markets in more gender-neutral ways. In the UK, for example, by the mid-2000s, about 40% of Diet Coke drinkers were actually men, which prompted Coke’s British team to test its first unisex Diet Coke ads in 2004. Still, the word “Diet” itself remained a sticking point. Studies found that men are much more reluctant than women to buy products labeled “diet” – possibly due to cultural perceptions around dieting and masculinity. Despite changing attitudes, a man ordering a Diet Coke at a bar could still get a funny look.

Coca‑Cola felt the need for a “diet” cola that men could feel was made for them.

So, in 2005, Coca‑Cola introduced Coke Zero, a new zero-calorie cola. It was basically a sibling to Diet Coke, but with two big differences:

1. A new formula intended to taste closer to the classic Coca‑Cola, and

2. Marketing and packaging explicitly designed to attract men.

The term “Zero” in Coke Zero implied zero sugar or calories, but without the feminine connotation of “diet.”

The black can with bold lettering was clearly meant to appeal to the masculine taste. And it helped that it looked in stark contrast to Diet Coke’s light silver look.

Early Coke Zero advertising leaned heavily into stereotypical “guy” themes. Coca‑Cola’s marketers openly stated their intent. They wanted Coke Zero to be “a defender and celebrator of guy enjoyment.” Its ads showed “guys being guys”, doing things like watching sports, playing video games, and goofing off with buddies.

Coke Zero clicked with male consumers. Basically, Coke Zero successfully “de-contaminated” the idea of a diet cola for men by creating a separate brand. Men who wouldn’t buy Diet Coke had far fewer qualms about grabbing a Coke Zero. So, Coke Zero was a hit.

In fact, Coke Zero became so popular that it started stealing market share from Diet Coke. A lot of consumers, especially men, were choosing Zero over Diet.

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The business impact on Coca-Cola

Coca‑Cola had finally managed to appeal to a demographic that it had inadvertently ignored. Essentially, it found that if it changed the packaging, name, and messaging, it could sell the same core product to a whole new audience.

But mind you, Coca-Cola was already a very big, highly saturated brand by then. Saturated businesses or brands are those that have reached their maximum potential and cannot grow much faster than the population growth or average income levels. So, launching Coke Zero kept Coca-Cola relevant, but it did not give a visible boost to the business. Its revenues grew only 6% and 4% in the two years after Coke Zero was launched.

But here too, Coca-Cola was actually slow to change. Just like Diet Pepsi came much before Diet Coke, Pepsi’s male-focused drink also came before Coke Zero.

Pepsi had launched Pepsi Max in the UK, Australia, and Italy back in 1993, about 12 years before Coke Zero. Pepsi Max was a sugar-free cola positioned as a high-flavor alternative to Diet Pepsi, explicitly aimed at young male consumers. The initial advertising campaign featured “dudes” engaged in extreme sports. But Pepsi Max was only sold in international markets. It was launched in the US in 2007, about 2 years after Coke Zero.

It was becoming increasingly clear that you need different positioning to appeal to men and women. And this idea of separately targeting men and women with essentially the same product isn’t limited to soft drinks. It crops up in many industries. Often, it starts when a product becomes popular with one gender, and the brand fears the other gender won’t buy it.

Such preferences are often rooted in cultural perceptions about gender. So companies often adjust branding to align with those perceptions.

Breaking the stereotypes

But be it Diet Coke, Coke Zero, Diet Pepsi, or Pepsi Max, they all have been around for decades now. With gender discussions more common and gender-based classifications more fluid today, haven’t the perceptions changed or evolved now?

Interestingly, there are signs of convergence. Coca‑Cola, in recent years, has downplayed overt gender targeting and instead talked about “complementary” roles for its sugar-free colas.

In 2024, the company even launched new Diet Coke campaigns aiming to “broaden Diet Coke’s appeal” beyond women. Coke Zero, on the other hand, was rebranded in some markets as Coke Zero Sugar to clearly emphasize its no-sugar message. The idea is to resonate with health-conscious consumers generally, not just men.

Having said that, Diet Coke and Coke Zero each still have loyal followings, and Coca‑Cola has profited by catering to both. In the end, whether you’re a “Diet Coke person” or a “Coke Zero person” might say less about your taste buds and more about brilliant marketing.

This newsletter is written by Vineet Rajani.

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A sovereign wealth fund, in simple terms, is a nation’s investment vehicle for its surplus money. The surplus money typically comes when export earnings exceed import spending. But several countries have been setting up Sovereign Wealth Funds even when they do not have a surplus.

And many of them model their funds after Temasek, one of Singapore’s two sovereign wealth funds. One such interesting example is of Malaysia, which modeled its Khazanah Nasional explicitly after Singapore’s Temasek.

The history behind Temasek, and Singapore

Malaysia and Singapore were separate British colonies. The Malaysian population is predominantly Malay. And the population in Singapore is mainly of Chinese origin. The British believed it would be easier to govern the two ethnic groups separately.

Malaysia gained independence from Britain in 1957. Singapore was slowly becoming a self-governing state, with Britain just responsible for defense and foreign affairs. Singapore’s economy was mainly dependent on the entrepot trade under British rule. Britain’s slow retraction also led to a gradual economic decline.

Finally, in 1963, Singapore gained independence from British rule and became part of the Federation of Malaysia. However, communal, political, and economic differences could not be resolved. As a result, Singapore was granted independence from Malaysia in 1965. It could now govern its people and land on its own terms. But Singapore is the only country in the world that gained independence unwillingly. The newly formed nation had to survive on its own, something it was not prepared for.

The split from Malaysia left Singapore with a dire economic situation. Unemployment was widespread. Over two-thirds of the population was living in poverty. Singapore lacked natural resources, sanitation, proper infrastructure, and water supply. Singapore’s pleas for international aid also went unanswered. It was on its own.

That it did not have cordial relations with its only two neighbors, Malaysia and Indonesia, further added to its woes. With no domestic market to rely on, Singapore actively courted multinational corporations from distant countries to set up factories by offering tax breaks and a stable, corruption-free business environment. It introduced harsh measures such as strict law and order, suppression of communal violence, and curbs on strikes to reassure foreign investors about the safety of their capital.

By the early 1970s, foreign investments were pouring in. New industries sprang up in shipbuilding, electronics, petrochemicals, and banking. Crucially, the government also set up a few enterprises. The Malaysia-Singapore Airlines was split to make Singapore Airlines. Singapore took over Keppel Corporation from the British Royal Navy when it withdrew from the region.

It was important for the Singapore government to set up those businesses because private investment is usually nearly non-existent when poverty is widespread. This happened in India, too. The Indian government set up so many large banks, industries, hospitals, and educational institutes soon after independence because private investments were understandably going to be scarce.

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No business to be in business

The Singapore government did not want to run businesses. In 1972, Dr Goh Keng Swee, the first Finance Minister of Singapore, who was then Minister for Defence, said:

“One of the tragic illusions that many countries of the Third World entertain is the notion that politicians and civil servants can successfully perform entrepreneurial functions. It is curious that, in the face of overwhelming evidence to the contrary, the belief persists.”

The Singapore Government felt that it was necessary to separate governance from business management. That a government should focus only on policymaking and regulations.

It was this principle that led to the establishment of Temasek. In June 1974, the Government of Singapore incorporated Temasek Holdings and transferred ownership of about 35 companies and various state investments to Temasek. Singapore Airlines, Nat Steel, and Keppel Corporation were among the organizations that Temasek took over. The portfolio value at the time was SGD 354 million. It is now valued at over SGD 430 billion.

Temasek has divested and liquidated many of those businesses, as and when it deemed fit. It has invested and set up several others since then. Temasek’s mandate was to be an active investor and shareholder that would nurture these assets, seek new opportunities, and deliver sustainable returns in the long run. It was allowed complete commercial freedom.

From the beginning, Temasek was structured more like a private enterprise than a typical government agency. It was and remains wholly owned by Singapore’s Minister for Finance, but Temasek owns its assets outright and is governed by an independent board of directors, not by civil servants. It pays taxes like any other company and declares dividends. As its only shareholder, the Singapore government receives all those dividends.

It was and remains wholly owned by the Singapore Government through its Minister for Finance, but owns its assets outright and is governed by an independent board of directors, not by civil servants.

In its early years, Temasek’s role was largely to hold and manage Singapore’s domestic industries. Many of its portfolio companies were essential to the country’s development: Singapore Airlines would go on to become a world-class carrier, Singtel grew into a leading telecom player, and DBS became one of Asia’s strongest banks. Temasek, at its level, also does not interfere with the functioning of the businesses it owns. Former Temasek Chairman, Mr S Dhanabalan said back in 2010, “When Singtel wants to buy the second largest telecoms company, they did not consult Temasek. When SIA bought billions of dollars of planes, we only read about this in the newspaper.”

The Temasek of today, beyond Singapore

Around the early 2000s, Temasek set its eyes beyond Singapore. It invested overseas in banks, telecoms, and tech firms in China, India, Europe, and the US. It has stakes in Manipal Hospitals, NSE, and nearly every large private bank in India. Today, Temasek has 14 offices in 10 countries. It is invested in listed as well as unlisted companies. In fact, about half of Temasek’s investments are in unlisted holdings today.

One thing that stands out about Temasek is that, after nearly five decades since it was established, it hasn’t changed its operating principle as a commercial entity. Temasek still manages its investments with a long-term, returns-driven mindset.

Interestingly, Temasek voluntarily publishes its annual report, although it is not required to do so.

Temasek has become one of the Singapore government’s financial engines. Besides the taxes and dividends, Temasek also pays 50% of the expected net long-term returns to the Singapore government every year. Temasek, along with GIC, makes up about 20% of Singapore's Government’s annual budget. This means Singapore can fund infrastructure, education, and social programs in part by using returns from Temasek and GIC’s investments, easing the need for high taxes.

GIC, by the way, is the Government of Singapore Investment Corporation. It is the second sovereign wealth fund of Singapore. Temasek is, of course, the popular one.

How Malaysia emulated Singapore’s model?

I had earlier mentioned that Malaysia’s Khazana Nasional was modelled after Singapore’s Temasek. It is interesting for two reasons.

1. After Malaysia ousted Singapore, Malaysia was in a better economic position than Singapore. It was a three-times larger economy than Singapore. The two nations did not share cordial relations. Within just 10 years, Singapore set up Temasek. By the early 1990s, Singapore’s GDP had caught up with Malaysia’s. Temasek’s obvious contribution to Singapore inspired Malaysia to establish its own sovereign wealth fund, Khazanah Nasional, in 1993. Just like Temasek, Khazanah also has a board of directors and a professional management team.

2. Temasek was not even meant to be an SWF. It was set up as a quasi-VC fund with the Singapore government as its sole investor. SWFs typically invest the government’s excess reserves. Temasek was never started with that purpose. It was started by transferring government-controlled companies to it, so the government could focus on governance. Temasek has grown as much as it has because it has carefully reinvested its profits, not by seeking follow-up contributions from the government. In fact, Singapore has GIC, a separate Sovereign Wealth Fund that operates like a true Sovereign Wealth Fund.

Simply put, Temasek behaves like an investment firm that just happens to be owned by a nation.

While Khazanah and others have had successes, Temasek remains distinctive in its scale and global reach. It consistently ranks among the top 10 state investment firms worldwide by size.

The story of Temasek is intertwined with the story of Singapore itself – a narrative of survival, astute planning, and forward-looking innovation. What began as a desperate effort to manage a motley collection of state assets in the 1970s has turned into one of the world’s most respected investment companies.

And thanks in part to Temasek, Singapore stands as a thriving hub of business and finance.

This Newsletter is written by Vineet Rajani.

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That doesn’t feel right. Zomato is not just about food delivery anymore; the name still has a strong association with food, though.

Zomato wanted outsiders to know that it was not just a restaurant review or food delivery platform anymore. It had become a multi-vertical organization.

To establish the perception that Zomato, the organization, had grown into a comprehensive food-tech ecosystem connecting consumers, restaurants, and delivery partners across India, Zomato Limited became Eternal Limited in February 2025. The food delivery app is still called Zomato. And Eternal Limited is the parent entity that owns Zomato, Blinkit, Hyperpure, and District.

There’s also a strategic marketing angle. With a name like Eternal, the company can more easily be compared to a tech conglomerate or holding company rather than a single-product firm.

The name change, however, had a mixed reception. Some people admired the aspirational tone of the name Eternal. Others felt it was unnecessary. That Zomato tried fixing what was not broken.

Many also drew direct parallels with Google becoming Alphabet and Facebook becoming Meta, saying that corporate rebranding seems to be a trend among tech giants and industry leaders.

So, let us actually look at the two parallels.

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G for Google, A for Alphabet

It was 2015. Google had already become a verb. If you wanted someone to look something up on the Internet, people had started saying, “Just Google it.”

But Google was far more than just a search engine. It had YouTube, Android, Gmail, and Google Maps–products that billions of people use. It had also invested in a host of far-flung ventures such as self-driving cars, life sciences research on aging, internet-delivering balloons, smart home gadgets, and much more. It has since added several other ventures, like Cloud and Gemini.

As a parent entity, Google wanted to be known for all those ventures. That is why Google founders Larry Page and Sergey Brin formed Alphabet as a new parent holding company.

Under Alphabet, Google was one subsidiary with all the core internet businesses such as Google search, ads, YouTube, Chrome, and Android. All other ventures would be separate subsidiaries under Alphabet.

Those other businesses got more freedom to develop their own identities and leadership, almost like startups inside the larger organization. More than rebranding, this was corporate restructuring.

For investors and external stakeholders, the restructuring helped gain clarity on how much was being spent on those experimental bets even as Google, the core internet business, remained profitable.

Basically, Google’s identity was now insulated from any possible losses, controversies, or regulatory troubles that could come with those moonshot projects. Take Waymo, for example. It operates robotaxis in parts of the US. Right from when it was just a self-driving car project at Google, up until now, as a subsidiary of Alphabet, it has ignited several ethical, regulatory, and safety debates. But Google has managed to distance itself from it.

But why the name Alphabet? In his letter while announcing the rechristening of Google to Alphabet, Larry Page said, “We liked the name Alphabet because it means a collection of letters that represent language, one of humanity’s most important innovations, and is the core of how we index with Google search!” He also said that the word was a combination of two words, ‘Alpha’ and ‘Bet’. In very simple terms, alpha is when your investments deliver returns that exceed market returns. So Larry Page and Sergey Brin basically wanted all their experimental bets to generate alpha - hence the name Alphabet.

The name was generic, so it could never overshadow Google. Google is still a verb, although ChatGPT might be taking that away. But that’s another rabbit hole.

Beyond Facebook, Meta!

Similar was the story of Facebook when it rechristened its corporate entity to Meta while retaining Facebook as the social media app.

Started as a social media platform, Facebook went on to acquire other social media apps like Instagram and WhatsApp. Unlike Google, which had several speculative bets in disparate businesses, most of Facebook’s bets were in the internet space. And by 2020, its most ambitious bet was building the metaverse.

What is the metaverse? According to Google, the metaverse is a virtual-reality space in which users can interact with a computer-generated environment and other users. It is like walking or moving in an imaginary space that feels real because the technology makes you feel like that.

Zuckerberg saw the metaverse as a way for people to connect. Think about it - you are in India, and your cousin is in the UK, but both of you can hang out together in the metaverse. Maybe even play a game or something.

It was a bold pivot. It required technological prowess that was perhaps much more complex and different from social media. Facebook wanted to be a social technology company and not just a social media company. But the name Facebook was synonymous with social media. So, a name change could help update its identity.

However, there was more to the motivation behind Facebook’s name change. Throughout 2021, the company was under intense scrutiny for a series of scandals and whistleblower revelations. It was accused of playing a role in spreading misinformation and causing political unrest. There were increasing cases of deteriorating teen mental health due to social media. And as the world’s largest social media platform, Facebook was receiving all the flak.

By renaming the umbrella company to Meta, the leadership was hoping to draw a line between the new ambitious company vision and the old social network baggage. Many observers felt the rebranding was Facebook’s effort to reboot its reputation.

You could say that Facebook tried to kill two birds with one stone - one was to depict a wider organizational vision, and the other was to mitigate the effect of bad PR.

Whether either goal was achieved is a separate discussion. Metaverse is still a very long-term bet. Meta is now balancing its focus between developing AI and the metaverse, while continuing its ad-revenue-generating social media businesses.

The outcome

Did you see, in all these examples, be it Eternal, Alphabet, or Meta, that the new names had more widespread and overarching tones? Each symbolized that the organization could do so much more, that there was no limit to how far and wide their aspirations could be.

But did that translate into real business gains or shareholder value?

In the five years before the rebranding, Google delivered about 160% absolute returns. In the five years after the rebranding, Google, or rather Alphabet, delivered 125%. And in the five years after that, it grew 175%. Clearly, the business grew on its own, and the stock did fine before and after the rebranding.

As for Facebook, it grew by over 140% in the five years before it became Meta. It has been about four years since the rebranding, and Meta has grown by over 130% since. Again, not much conclusive evidence for or against the rebranding.

And as far as Eternal is concerned, it does not have a long stock price history before or after the name change. In fact, it changed its name only in early 2025. So the jury is still out.

A word of caution here. Not all rebrands work. Small organizations going for a name change without any real business pivot may not benefit. In fact, the small customer base they might have built could be lost because of such an overhaul.

Safe to say, renaming an organization may have more to do with identity and marketing and little with shareholder value.

This Newsletter is written by Vineet Rajani.

Do read “The rise of labour unions” in our newsletter, Tell Me Why by Zerodha Varsity.

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“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”

-Jeff Bezos, in his 1997 letter to Amazon shareholders.

It took Amazon nine years to post its first full-year profit. Bezos did not care much about profits at first.

It was Bezos’ smart business acumen, many observed. But why did losing many make sense?

Let’s start with first understanding the difference between profits and cash flows. Say, you sold goods worth ₹100. You had incurred costs and taxes of ₹80 for those goods. So, your profit is ₹20 from that sale. However, you made that sale on credit. You have yet to receive those ₹100 rupees. So, while you have profits, you do not cash inflow.

On the other hand, you might have a positive cash inflow, but incur losses due to non-cash expenses, such as depreciation and stock options. Jeff Bezos preferred this situation. He felt that the business was doing fine as long as its cash flow was positive and sufficient to support growth and make capital expenditures.

Bezos believed that a share of stock represents a share of a company’s future cash flows, so growing those cash flows would ultimately create the most shareholder value.

This long-term mindset was unusual – many companies were chasing quick profits – but Bezos was clear that Amazon cared more about building an “enduring franchise” and maximising future cash flows than showing a big profit on the income statement in the short run.

And how did Bezos ensure positive cash flows?

There was this one example. Amazon would collect payments from customers as soon as the order was placed, while often paying suppliers later. That gap meant Amazon held extra cash in hand. Many consumer companies, such as ITC and HUL in India, follow a similar practice to fund their working capital requirements. They extend a short credit period but take a longer period from their suppliers. Effectively, Amazon, ITC, and HUL turned their suppliers into zero-interest lenders financing their inventory.

By running a tight operation and keeping costs lean, Amazon often managed to achieve positive operating cash flow, even during years when it reported accounting losses.

This positive cash flow could be immediately reinvested into expanding warehouses, building new business lines (like Amazon Marketplace or AWS later on), and improving customer experience. It fuelled a virtuous cycle of growth. In short, cash coming in, even if profits on paper were slim or negative, enabled Amazon to keep growing aggressively without constantly needing to raise new capital.

Then the dot-com bubble burst in 2000. Amazon’s share price dropped 90% but business remained as usual.

Many internet companies were going bust, often because they ran out of cash. Amazon’s survival at this time vividly illustrates the power of focusing on cash flow.

Despite its razor-sharp focus on cash, Amazon had only achieved positive operating cash and not yet positive free cash flows. Free cash flow is what is left from operating cash after making capital expenditures. So, after years of rapid expansion, Amazon was still unprofitable in GAAP terms.

When Amazon survived the dot-com bubble burst, Bezos shifted gears to improve efficiency and achieve positive free cash flow. They spent nearly two years cutting costs and improving efficiency. In 2002, Amazon generated positive free cash flow for the first time. In his 2002 shareholder letter, Bezos reported net sales of $3.9 billion (up 26%) and free cash flow of $135 million. Of course, Amazon was still loss-making in 2002. But more importantly, it wasn’t bleeding cash. Through tighter cost control and effective working capital management, Amazon’s operations were now generating cash.

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The first full-year profit

By late 2003, Amazon recorded its first full-year profit, although a modest $35 million. Bezos emphasized that this profit was not the main goal – the focus remained on expanding customer base, market share, and cash flow.

Over the years, Amazon went on to become more than just a bookstore as it started selling practically everything under the sun. Essentially, it was directly competing with Walmart, which had nearly 10 times the free cash flow and 50 times the revenues of Walmart. Amazon’s strategy was to rapidly close that revenue gap by plowing cash into expansion.

Along the way, Amazon also made 100s of acquisitions across media houses, news publications, video streaming services, movie production houses, and whatnot. It launched AWS, the cloud business, which later became a major driver of profitability.

By 2017, twenty years after Bezos’ first shareholder letter, net margin was still slim at 1.7%. Amazon had reported a net profit of $3 billion on revenues of $178 billion. But free cash flow was robust at over $8 billion.

Amazon was staying true to what Bezos had once said - Amazon should be earning “low margins forever”. He saw low margins as a way of winning more business.

Through all these years, profits were still choppy. Not every year ended with net profits. Shareholders were patient because they saw a clear path to growth.

Their bets started paying off. From 2018 onwards, its net income exceeded $10 billion annually. There was a loss in 2022, but that was just an accounting write-down of Amazon’s stake in EV maker Rivian. In terms of operations, Amazon’s retail business faced headwinds such as rising costs and a post-COVID slowdown in 2022, but AWS was still profitable.

Free cash flows have remained robust. All of this essentially shows how Amazon can pull back on investments or reap benefits in different cycles. By 2024, Amazon’s businesses like AWS and advertising were extremely cash-generative, more than offsetting the heavy investment phases.

In summary, Amazon proved that focusing on cash flows and customer value can create a juggernaut. It took roughly 20 years for Amazon’s net profits to truly blossom, but when they did, they were huge. Meanwhile, Amazon’s stock price over the decades closely tracked the growth in its cash flows.

The half-followers

Amazon’s strategy has been emulated by countless startups and tech companies globally. They don’t worry about profits as long as they deliver growth in customers, revenues, and scale. This is where they just took half the lesson.

They focused on not making profits, but forgot about the cash flows. This growth at all costs does not seem very prudent. The risk of focusing only on growth without managing cash flow is that you can run out of money and crash hard. Let’s discuss a few cautionary examples:

1. Uber was often cited as “the next Amazon”. Uber indeed spent billions to grab market share globally. However, Uber’s cumulative losses have been enormous. By 2021, Uber had racked up over $23 billion in losses.
   And Amazon turned profitable by year 10, whereas Uber is now over 16 years old. Only in 2023 did it manage to report a GAAP profitable quarter. Uber’s cash flow has improved recently, but it took massive shareholder funding to get there. Investors tolerated Uber’s losses because they hoped it would become as indispensable as Amazon – but the jury is still out.

2. WeWork explicitly told investors to ignore losses and look at growth – after all, “Amazon wasn’t profitable for years,” they would argue. But WeWork’s model involved renting office buildings long-term and subleasing short-term. It had huge fixed costs and not enough cash coming in. WeWork kept bleeding cash, requiring constant fundraising. As of 2023, WeWork filed for bankruptcy, with around $10 billion in cumulative losses having piled up and no cash to continue.

Many startups interpreted Amazon’s story as an excuse to lose money endlessly, but they didn’t build the same virtuous cycle of cash generation. Just because Amazon succeeded, it doesn’t mean others would. In fact, Flipkart, the Indian equivalent of Amazon, has still not been able to deliver profits after nearly two decades of operations.

Amazon’s story offers a valuable business lesson in the distinction between accounting profit and economic reality. A company can survive without profits, but it cannot survive without cash. Positive cash flow gave Amazon the optionality to invest in the future. And as it seems, Amazon did it well.

This Newsletter is written by Vineet Rajani.

Do read “The American Empire you don't know about...” in our newsletter, Tell Me Why by Zerodha Varsity.

For any feedback or topic suggestions, write to us at varsity@zerodha.com.

Not just soaps, HUL has multiple brands under almost every product category it has a presence in.

Surf Excel, Rin, and Wheel are all detergent powder brands under HUL.

Clinic Plus, Sunsilk, Dove, and Tresemme are its shampoo brands.

But why does a business need to sell so many brands of the same product? Is HUL gaining anything out of it?

Well, the answer lies in management strategy and consumer psychology.

You check out any quick-commerce app, and you will see that a basic Dove bar costs about ₹70, Pears is ₹54, and Lux is about ₹48. The price difference between the three is noteworthy. A cost-conscious customer will probably choose Lux, because it is the cheapest detergent.

A brand-conscious user or someone with high disposable income might choose Dove. Such a customer might even be willing to pay for a body wash. Body washes are usually more expensive, and most HUL soap brands sell body washes. Essentially, HUL wants to cater to all price segments, and it is doing that with different brands.

If you give it a thought, even the ad campaigns for these brands are distinct.

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Different brands, different campaigns

Dove usually does not use celebrities in its ads. It mostly features women in their everyday selves, without makeup. It uses a very simple tone to talk about real skin problems. It has even celebrated beauty at any age. It uses the kind of signaling and messaging that would appeal to people who can afford to be brand loyal. They are looking for a brand that they can associate with emotionally, and not just a cleansing soap bar.

Pears might or might not use a celebrity. But if they do, it usually is one that connects with the most mid-segment consumers. It usually features an actor who is a mother in real life. The ad discusses product features while also establishing an emotional connection with its target users through the bond of mother and child. It is targeted towards consumers who want augmented features, want to feel premium, but also want the maximum value for their money.

Then there is Lux. Lux almost always uses celebrities. And it is usually the contemporary top-rated actress. Lux ads primarily sell the aspiration of beauty. The use of top actresses is meant to reach the masses. The price is the most affordable. The whole proposition is meant to appeal to cost-conscious consumers looking for bargain deals.

I was honestly surprised, even shocked, when I first learnt about Lux, Dove, Sunsilk, Axe, and all those brands being owned by HUL alone. But that begs a question - Why didn’t HUL simply create different versions of the same brand? It could be Lux Basic, Lux Premium, and Lux Luxury, or something like that. Come to think of it, each brand requires its own branding and marketing. A single brand could’ve saved so much of the marketing expenses. But the idea is not so simple.

Brand perception is a big thing.

If a cost-conscious consumer perceives a brand to be expensive, they would not consider buying it, regardless of whether the product is actually affordable or not. Also, a customer seeking premium products may not want to purchase a brand that is perceived as inexpensive.

So, a business that wants to cater to all consumer segments ideally creates different brands for each segment.

In fact, price is not the only factor in categorizing consumers.

For example, while HUL has soaps under Lifebuoy, Pears, Lux, and Dove brands to cater to different price points, it also has a new-age brand of personal care products called Love Beauty & Planet. It targets the vegan and climate-conscious consumers. Then it has the Axe brand, which caters specifically to men.

And then there is the advantage of dissociation. Say you had a bad experience using Dove. So, you switch to Pears or Lux. Essentially, you change your brand but remain with HUL. HUL manages to keep you as its customer even when you dissociate with one of its brands. This is likely because an average user may not know that HUL is the parent of all those soap brands.

Not just HUL or any consumer brand, every business that interfaces with consumers might want to create different brands to cater to different consumer segments. Look at hospitality. Marriott Group has 30 hotel brands, and Accor Hotels has 54. Each brand of hotel caters to a different segment, including premium, luxury, affordable luxury, family vacations, business travel, luxury business travel, adventure, and more. Then you have Maruti Suzuki.

Maruti Suzuki launched the Nexa-branded showrooms to sell higher-priced cars. Perhaps it was aware that people came to Maruti Suzuki for its affordable cars and not premium cars. It knew it had to give a differentiated experience for customers to be willing to pay higher prices for Maruti Suzuki-branded cars.

I think it hit the bull’s eye with Nexa showrooms. Customers are willing to pay a premium for the Maruti cars sold at the Nexa showroom.

It makes sense, no? Consider Tata Motors. They acquired Jaguar Land Rover (JLR). They could’ve rebranded JLR cars to Tata cars. But then JLR cars would have lost appeal to luxury car buyers. After all, you don’t associate luxury cars with Tata Motors. By retaining the JLR brand name, Tata Motors lets JLR retain its luxury identity while the Tata-branded cars explore their own path.

Whether it’s soaps, hotels, or cars, multiple brands are essentially designed to cater to different target markets, thereby securing business from people with varying levels of affordability and distinct choices and preferences. It is how a business owns the market.

This Newsletter is written by Vineet Rajani.

Do read “Why you shouldn’t trust stock market predictions?” in our newsletter, Tell Me Why by Zerodha Varsity.

For any feedback or topic suggestions, write to us at varsity@zerodha.com.

We revived Mind Over Markets in January 2025 with about 4,000 subscribers, guided by the same philosophy that defines Varsity — free and open financial education for all. A year on, that community has grown to over 36,000 learners. Thank you to all our readers from the bottom of our hearts ❤️.

Our endeavour with Mind Over Markets is to bring you, each week, one carefully chosen story from economics, business, and personal finance, explained in simple, accessible language. In a world of information overload, we focus on sharing only the most important ideas.

With that, here’s wishing you a 2026 filled with joy and learning.

Happy New Year 🎉

Team Zerodha Varsity

Yes Bank’s stock is down 70% over the last 6-7 years, but its market capitalisation has increased by over 200%. How is that possible?

The many scams at Yes Bank that came to light between 2018 and 2020 resulted in value destruction for the investors who held the stock around that time. Many investors came in later at a discounted price of around 10. For them, the stock has given significant gains.

This tale of unevenly distributed gains in the Yes Bank stock begins with various shenanigans, financial or otherwise, that its then-management is accused of perpetrating.

The first cracks appeared almost 10 years back, in 2015-16, when the RBI conducted an Asset Quality Review (AQR) across Indian banks. The RBI found that many reputed banks had under-reported their NPAs or Non-Performing Assets.

What’s an NPA? When a bank lends money to someone, that loan becomes an asset. When a borrower is unable to repay the loan or the interest on that loan, it becomes a non-performing asset (NPA) for the bank.

Yes Bank’s under-reporting of NPAs was of a phenomenal extent. The RBI discovered Yes Bank’s NPAs of ₹4,900 crores, more than 5 times the reported figure of ₹750 crores.

The RBI has prescribed guidelines on how and when a loan must be reported as NPA. For example, if a borrower has not been able to pay the interest or repay the principal for more than 90 days, they are reported as NPAs.

But there was a way of side-stepping this guideline, and that is what was done at Yes Bank. Instead of issuing loans to some businesses, Yes Bank invested in the debentures issued by those businesses.

What was the reason? Some of these borrowers, such as DHFL, Reliance Commercial Finance and Reliance Home Finance, had poor credit ratings. Directly lending to them could invite shareholder fury. After all, there was a high certainty that those borrowers would become NPAs. By buying the debentures issued by those poorly rated companies, Yes Bank was essentially lending to them, not in the form of loans, but in the form of investments.

In effect, this could delay or avoid classifying the exposure as an NPA, even if the borrower was in financial distress, since a debenture might have a longer maturity or different payment structure.

And when the payment became due, Yes Bank would buy another round of debentures from the same borrower. Essentially, it would provide the borrower with fresh funds to repay older debentures. This is called as evergreening of loans, and of course, it is illegal.

In total, structuring loans as investments, evergreening loans, and money laundering were among several financial frauds for which the top management of Yes Bank was found guilty.

By the way, you can also listen to this post on Apple or Spotify. The podcast was released last year, so its numbers are different, but the concept remains the same.

Citing the bank’s poor governance and NPA under-reporting, RBI refused to allow Rana Kapoor an extended term as CEO, and he was forced out in early 2019. Subsequently, when Yes Bank’s condition deteriorated and a run on deposits loomed in early 2020, the RBI imposed a moratorium and seized control, acknowledging that the bank had chronically under-recognised its bad loans. The true scale of bad assets became evident: gross NPAs jumped to ₹32,877 crore by March 2020.

Yes Bank’s share price pummelled over 80% in less than a year. Many bonds lost value. Shareholders and bondholders suffered huge losses.

The bank was nearing a shutdown, but that would mean a systemic risk. On any given day, banks hold debit and credit balances with most other banks in the country. Yes Bank’s collapse could have hurt several other banks.

Also, Yes Bank had millions of customers. If it were to shut down, those customers would lose all their money. It could affect their ability to repay their liabilities they might have held with other banks.

Collapsing banks can collapse economies. A government wouldn’t want that. So, the RBI got all major Indian banks like SBI, HDFC Bank, ICICI Bank, and others to pick equity stakes in Yes Bank. Against that equity, they infused about ₹12,000 crore in the bank, which allowed it to slowly revive its regular operations.

Since then, Yes Bank has issued fresh shares to many other investors to sustain its operations. This constant dilution has caused the share price to decline, but the market capitalisation to rise. The math behind it is simple.

We know the Market Capitalisation of a company is its current share price multiplied by the total number of its outstanding shares.

Market capitalisation = Number of outstanding shares x Current share price

So when you see a company’s market capitalisation go up, it could increase because of an increase in either

1. The outstanding shares,

2. Or the share price, or

3. Both

With so many new shares issued through multiple investment rounds, the number of outstanding shares has gone up.

Just before Yes Bank was taken over by the RBI, it had about 231 crore outstanding shares. Now, the total number of outstanding shares has grown almost 15 times to 3137 crore.

What about the share price? It was about ₹90-100 a year before the RBI took over Yes Bank. And the market cap was about ₹21,000 crores (231 crore * 90).

However, the share price fell as the issues began to surface. Those new investors got new shares at prices even below the fallen market price. Those major banks paid only ₹10 per share. When new shares are issued at a lower price, the market price also drifts towards that lower price.

Its share price has recovered significantly now, but is nowhere near its highs. Currently trading at ₹21-22 per share, Yes Bank is valued at about ₹67,000 crores (₹3,137 crore * 21).

In summary, the quantum of new shares issued was far bigger than the decline in share price. That is why, Yes Bank’s market capitalisation grew despite a decline in share price.

This Newsletter is written by Vineet Rajani.

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HAL is a defense PSU that develops, designs, manufactures, and supplies aircraft, helicopters, avionics, and communications equipment for military and civil markets.

Interestingly, HAL has no debt on its balance sheet. It has not taken any loans. However, it has a high financial leverage. How does that work?

You see, financial leverage shows how much of a company’s assets are funded by borrowings or liabilities. Let’s say you invested ₹100 in equity for your business and bought a building and machinery worth ₹200. Where did the other 100 come from? Most likely, you borrowed that money from a bank or lender.

So, how will your balance sheet look?

On the equity and liabilities side, you will have 100 in equity and 100 in borrowings. The total is 200. On the assets side, you will have buildings and machinery worth 200.

Here, your financial leverage, or just leverage, is 2X. Assets of 200 divided by equity of 100. Assets are twice the size of equity.

The more you borrow, the higher your leverage becomes. So if your assets were worth 300 on an equity capital of 100, your leverage would be 3X.

But if HAL has no borrowings, how can it have financial leverage?

That is where the nuance is. Financial leverage shows how much of a company’s assets are funded by borrowings or liabilities. Not just borrowings, but also liabilities.

So in this example, instead of borrowing the 100 rupees, you could have purchased the plant and machinery on credit and promised to pay back sometime later. In the balance sheet, you would mention “Creditors” or “Accounts Payable” instead of Borrowings. The numbers would still be the same. The leverage would still be the same.

In the case of HAL, it has no borrowings, but it has substantial liabilities. In fact, every company has some liability and hence, leverage.

What is this liability on HAL’s balance sheet about?

About half of HAL’s liabilities are Other Current and Non-Current liabilities. Most of these Other Liabilities are customer advances and milestone receipts.

You see, HAL’s aviation and communications products are made-to-order. That is, a customer places an order for an aircraft or a helicopter with HAL, and only after that does HAL start making the product. The time between receiving the order and delivering the aircraft could be a few months or even years.

But customers are asked to make advance payments for their orders (see Section A in the screenshots below).

Alternatively, customers may be required to make payments for milestones (see Section B in the screenshots above).

Let’s say the customer has to pay 10% of the contract price for every 10% incremental completion of the project or product. The project is 30% complete, and the customer has also paid 30% of the total amount. However, particular to the nature of the product, accounting standards may require the revenue to be reported later in the future. It also cannot be recorded as an advance because the payment aligns with project completion. In such cases, the payment will be reported as milestone receipts.

There could also be contracts that are a combination of advances and milestone receipts, depending on the mutually agreed-upon terms with the clients.

By the way, customer advances and milestone receipts may be classified as both current and non-current liabilities. Contract liabilities for the part of the product that is expected to be completed within the next year are classified as Current. The rest are Non-current.

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So, when does HAL recognize revenues?

HAL gets cash inflows as an advance payment for the order. However, it can only record them as revenues upon delivery of the final order or parts of the order. Until that happens, HAL creates a contract liability on the liabilities side and reports it as a cash balance on the assets side of the balance sheet.

It is a liability for which HAL does not have to pay anything; it has to just deliver the product it had promised.

Nonetheless, as a liability, customer advances create leverage in HAL’s balance sheet, reaching as high as 2.9 times in March 2025.

When the aircraft is delivered, HAL will recognize the contract liabilities as revenues, cancel the contract liabilities in its balance sheet, and reduce the inventory against it on the assets side.

Mind you, cancel does not mean write off. The liability was to deliver the product. Once the product is delivered, there is no liability for HAL. So, the revenue is recognized, and the liability is struck off against the inventory that was delivered for the product.

If the liability decreases, its leverage will also decrease. But any business operates in a continuum. By the time HAL fulfills its current contract liabilities, it may have received new orders, which would again create leverage.

But you know what? That’s okay. This kind of leverage is good. HAL does not have to put in a lot of working capital. It can simply use the cash from advance payments to run its operations.

It also means lower equity capital requirements. And that could mean a stronger Return on Equity, or ROE as we commonly call it.

Having said that, it might be useful to compare the growth in HAL’s contract liabilities with its revenue growth. If revenue growth lags contract growth for several quarters or years, it might be a sign that HAL is struggling to fulfill its commitments.

If you look at HAL’s performance over the last three years, you will see that revenues have grown while leverage has remained stable.

Besides HAL or aviation, can you think of other sectors where high leverage without debt is a common feature?

This Newsletter is written by Vineet Rajani.

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But the oil you find in the US is not crude oil. It is shale. What is shale oil, and how has it made the US the world’s largest oil producer?

This post is a follow-up to last week’s post covering the value chain from crude oil to petrol.

The science and geography behind shale oil

Crude oil or natural gas are usually found in sedimentary rocks. Some sedimentary rocks, such as sandstone and limestone, are relatively not as hard as other sedimentary rocks like shale. All these types of rocks are usually found together. Shale is heavier and more solid, so it is usually found below limestone and sandstone.

The Middle Eastern countries have been extracting crude from limestone and sandstone. The US had been doing the same, but its resources were depleting fast around the late 1990s and early 2000s.

American oil producers sought to tap into the oil and gas trapped within the harder sedimentary rock, shale. You require a different technology to extract shale oil.

It is actually a combination of two breakthrough technologies - horizontal drilling and fracking, both of which exert more strain on the environment than the conventional method of oil production. After years of trial and error, American oil producers have mastered both technologies.

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Does that mean the Middle East can tap into its shale oil reserves after it exhausts the conventional sources of hydrocarbons? Probably not.

The process of high-pressure fracking requires huge amounts of water, which is scarce in the Middle East. Therefore, unless a new technology is developed that does not require water, the current fracking technology will not be economically viable in the Middle East.

Anyway, conventional oil is so cheap and abundant in the Middle East that shale hasn’t yet been a financial priority for them or other major oil producers.

But guess what, shale drilling and fracking are expensive technologies to own and operate even in the US.

The business of shale oil

When shale extraction was commercialised in the early 2000s, its breakeven price exceeded $70s per barrel. So, it made sense to sell shale oil only when crude prices were high.

However, shale drilling meant that around 2008-09, American players suddenly added a new supply of oil to the global markets, and prices fell. In an effort to maintain market share and stifle American players, the conventional oil-producing nations, or OPEC nations as we call them, decided to keep oil production high and prices low.

We learnt in the previous episode that OPEC, or the Organization of Petroleum Exporting Countries, is a group of 12 oil-producing countries. The member countries primarily coordinate to control oil production and influence oil prices.

In response to the US asserting its position as a major oil producer, OPEC+ was formed in late 2016. Major oil-producing countries such as Russia and Mexico, which were not part of OPEC, joined OPEC+ to coordinate oil production and influence its prices. Oil prices remained firm for a year or so after the formation of OPEC+.

While the new American capacity was causing discomfort among conventional players, shale extraction was still a very expensive process for American oil producers.

They found it unsustainable to operate in the face of low oil prices, leading to many bankruptcies. In 2016 alone, the total debt from these bankruptcies reached $82 billion.

It is thrilling how shale oil production finally became affordable in the US. I will simulate a very simple explanation for this.

Let’s say there is a company A that invested $100 million in a shale facility in the early 2000s. For its business to break even, it needed oil prices at $70 per barrel, but the market price was around $50. It could not sustain the losses and went bankrupt.

Then came Company B, which acquired Company A’s assets for $80 million. It needed to sell oil at $60 to break even, but the market price was $50. So it faced losses and went bankrupt.

Then, Company C acquired those assets for $50 million. It needed to sell oil at $35 while the market price was still $50. That’s a profit of $15 per barrel.

That is when American shale oil producers became competitive with OPEC prices.

Technological enhancements further helped improve costs and scale up production, thereby making the US the largest oil producer globally.

But before technology became cheap, shale oil became cheaper due to bankruptcies. A few capital owners bore the cost of making the commodity cheap on a global scale. That is capitalism in its truest form. It is natural, then, that it happened in the US.

Chevron, Exxon Mobil, and ConocoPhillips, among others, are major American shale oil producers.

The US’s emergence also broke the hold of the Organisation of Petroleum Exporting Countries, or OPEC, on the global crude oil prices.

Do you know of any other outcomes of this? Until the 2000s, there was a widespread understanding that crude oil was limited and that it must be used conservatively. That narrative broke once shale oil was commercialised.

Now that we know oil reserves are not really limited, the only argument against the use of petrol or diesel is that they cause pollution. Can you think of any other argument? Or is this segment expected to be resilient in the age of alternative fuels?

This Newsletter is written by Vineet Rajani.

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