Archive for the ‘Brian’s Blog’ Category

Will Businesses Accept Lower Margins? Will Consumers Accept Higher Prices?

Monday, April 27th, 2020

The debates are raging about how to open up the economy.  The next few weeks and months will certainly be interesting as states take different approaches to bringing businesses back online. 

One thing that is clear is physical distancing will remain in place at least until there is a therapeutic treatment or vaccine that is widely available.  For many consumer facing businesses, physical distancing is going to pose incredible challenges not only logistically but economically.  Think about a restaurant that has a maximum capacity of 100 people.  Can it make money if that maximum capacity is 50 people for the foreseeable future?  Does it accept lower margins associated with lower occupancy?  Do consumers accept limited service or limited menus?  Do consumers accept higher prices as a result of restaurants trying to spread fixed costs over a smaller number of patrons?

During this shutdown, many restaurants have offered free delivery.  Nothing is free; restaurants are subsidizing delivery fees in order to keep some revenue coming in while their physical locations are closed.  In other words, they have accepted lower margins during the crisis.  Only time will tell if that will continue.  Will consumers pay a fee if restaurants decide not to subsidize delivery?

From a macroeconomic perspective, the US has been a consumer driven economy since World War II.  The US consumer has been the engine for world economic growth for the last 85 years.  God help the world economy if the US consumer does not return to profligate spending soon. 

Squirrels Need to Eat Too!

Monday, April 20th, 2020

When I was a kid, my grandmother loved “feeding the birds” as she referred to it.  My grandfather had built a huge platform with a large birdhouse.  My sweet grandmother actually cooked for the birds.  She would fry bread in butter and add birdseed and peanut butter to her special concoction.  The fattest birds in Ohio lived in my grandparents’ yard.

Squirrels were my grandmother’s sworn enemy.  She never said a bad word about anyone or anything except squirrels.  My grandfather actually bought a pellet gun to take potshots at the squirrels.  Because he was only supposed to scare the squirrels and not hurt them, the gun had absolutely no power.  It is now part of family lore that we could see pellet arc as he shot at the squirrels.  To my knowledge, he never got one.  For a young boy, there was nothing better than my grandfather saying, “You can shoot but don’t tell anyone I let you, especially your grandmother or your mother.”  He would wink and hand the gun over.  It was our little secret.  He did that with all of his grandchildren.

Flash forward over thirty years.  (It pained me to write that.)  Our son feeds the birds.  Despite the presence of large dogs, albeit a little old and slow, guess who comes to dinner?  The other day, before he put the birdseed away, a squirrel was hanging on our son’s birdfeeder.   We chased the squirrel away and I told the story of my grandfather’s pellet gun for the umpteenth time.  Of course, he asked if he could get a pellet gun and “not tell Mom.”  I told him, “I’m generally a risk taker but that’s a risk I won’t take.”  He understood and acknowledged his understanding by saying, “Oh well.  I guess squirrels need to eat too.  I’ll put more food out.”    

His simple solution and understanding made me smile.  It reminded me that in these challenging times, it is easy to overthink, over complicate, and over emphasize everything.  Simplicity is often underrated.   

Does the Rule of Law Still Matter?

Monday, April 13th, 2020

One of the not so secret reasons the United States has thrived is its adherence to the rule of law.  In layman’s terms, we are all subject to the same laws and same interpretation of those laws in our judicial system.  Regardless of your political power (or who is in power), we are all treated the same by the law.

Recently, many statements and actions by politicians and business leaders are putting the rule of law at risk.  Consider the following:

  1. Several state legislatures are proposing bills that essentially re-write insurance contracts.  Many businesses carry business interruption insurance.  Business interruption insurance pays cash when a business is unable to operate.  Most policies are specifically written to define the interruption must include physical damage.  In other words, I get paid business interruption insurance if something happens to my building and I cannot operate my business in addition to my property being replaced.  Politicians want policies to pay for business interruption due to coronavirus.  Most business interruption insurance policies specifically exclude coverage of viruses or other illnesses.
  2. Seemingly every politician has encouraged landlords to “work with tenants” on rent payments.  Leases are contractual obligations.  I understand the politicians want to be helpful to people impacted by coronavirus and it sounds like they are looking out for the little guy.  That’s all fine and dandy but our economic system relies on trust.  If I don’t trust that I am going to be paid, I won’t do business with you.  That fear will create lasting repercussions we cannot even imagine.
  3. Perhaps the most egregious danger I have seen was the CEO of an oil company in Texas asking his competitors to “reduce production to better balance supply and demand and improve pricing” ON NATIONAL TELEVISION.  A month ago, that would have been considered collusion and he would have been arrested. 

I know we are living in an unprecedented time.  I also know adhering to the rule of law got us through every other unprecedented time our forefathers faced.  I fear the long term consequences of short term thinking.  The rule of law must be protected. 

Five Surprises from Coronavirus

Monday, April 6th, 2020

Prior to peddling labels, I spent time in the investment banking and investment management worlds.  Byron Wien became a famous Wall Street strategist by issuing a list of “surprises” every year.  These predictions often went against consensus thinking and were meant to challenge the assumptions behind your investment decisions.  You can read his 2020 list here:

https://www.blackstone.com/the-firm/press-releases/article/byron-wien-and-joe-zidle-announce-ten-surprises-for-2020

Without further ado, here are my five surprises that emerge from this global pandemic.

  1. The “farm to table” concept spreads to other goods.  Local restaurants often name the farm your food comes from along with the distance the food traveled to get to the table.  High end retailers will start to do the same for clothing. 
  2. I’ve written before about having a milkman when I was a kid.  Delivery routes will return.  It costs money to deliver items.  You will put stuff on your list and it will be delivered on a specific day each week.  Someone smarter than I will figure out how to consolidate purchases from several places and deliver them together.  (Hello, my packaging distributor clients!)  You’ll pay a premium for one time deliveries. 
  3. Supply chain logistics becomes the most popular major in college.  These skills are in high demand across companies big and small.  “Just in time” becomes a curse word, replaced by “safety stock.”  Power in big companies goes from the corporate finance department to the supply chain department.
  4. Trends towards urbanization decline.  As we are starting to see, some cities and states will fare better than others.  If you are a parent of a young person, do you want him or her chasing a dream in New York City or San Francisco?  Hello, flyover country!
  5. Prime packaging loses ground to functional packaging.  Do you need a fancy label or a fancy package if a product is never going on a store shelf?  Companies will rethink branding. 

I’m a broken clock that will be right every few years:  all of this (and monetary looseness) points to higher inflation.  Some of the inflation will be offset by reduced demand that will become permanent or semi-permanent.  Office space will be reduced.  Corporate travel will be reduced.  Other changes will reduce aggregate demand.  It will be interesting to see how the demand picture shakes out and its implications on inflation and/or deflation.  As always, it will be complicated.  Some items will rise in price; others will plummet. 

Shocks change the world in ways we cannot imagine.  Take some time to use your imagination and think about the future.  Let me know what you think might happen.

Don’t Forget to Drain the Swamp!

Monday, March 30th, 2020

My father started his business when I was two or three years old.  The first time I remember” going to work” with him, I was around five or six years old.   Every business owner’s kid goes to work, either out of curiosity or to get the kid out of the house and give a spouse a break.  I remember seeing a plaque on his desk that said, “When you are up to your ass in alligators, it is easy to forget that you came to drain the swamp.”  I had just learned to read, so it was cool in my juvenile mind that I could say ass in front of my dad.  That memory makes me smile to this day.  I can still remember that plaque.  It was a vintage 1970s piece of art – loud colors on glass and an alligator with a grin on his face standing cross-legged leaning up against a pole with a swamp in the background.  If I had any artistic ability whatsoever, I could reproduce it.  Unfortunately, I have limited artistic ability and I have no idea where the plaque went. 

When I was older, my Dad told me that someone bought him that plaque when he started his business.  He kept it as a reminder to the time he hung his shingle out and prayed for someone to return his phone call.  I relayed that story to a colleague at work and she gave me the plaque that proudly sits on my desk.  It is a reminder of my father and a reminder, especially now, that I came to drain the swamp.  That swamp for me is building a long-term, sustainable, successful business. 

With the deluge of coronavirus news, yes, we have to focus on day to day challenges.  But everyone, especially leaders, needs to also look ahead.  What happens in 1 month, 3 months, next year, five years from now?  At some point, things will get back to “normal.”  Of course, every crisis has an impact on what that normal is.  Spend some time thinking about what that normal is going to look like in your industry, for your customers, for your career.  You’ll be better for it. 

Boring Businesses Matter in Times of Crisis

Monday, March 23rd, 2020

Just a few short weeks ago, all talk on every financial and business channels was about technology companies and technology stocks hitting record highs.  In January, a “master of the universe” from Wall Street, Ray Dalio, proclaimed, “Cash is trash.”  Oops.  You blew that one, Mr. Dalio.  I am a fan of your book, though. Your videos on the economy are great as well.  Can’t believe you missed the cash thing.  If you ran a business that doesn’t quite scale like a hedge fund, say a label manufacturer, you’d understand why CIMITYM is my mantra: Cashflow Is More Important Than Your Mother.  (Sorry, Mom.  God rest your soul.  Miss you, especially now.)  Most businesses do not scale with a computer terminal.  We need to buy equipment, hire people to run that equipment, train them, produce stuff, sell it, and wait for customers to pay us.  Cash matters.

Now, the CEOs of companies like Sysco Foods (food distributor) and Tyson Foods are rock stars.  They are the ones keeping everyone fed.  They were doing that prior to this crisis but no one seemed to care.  Funny how we see what really matters when things get crazy. 

To all of you in “boring businesses,” thank you.  You are keeping this country from chaos.  Maybe clout will turn from the finance guys who pushed companies to move manufacturing overseas to save money to those who create real products with real people.  That is the silver lining in the coronavirus chaos.  Making stuff and getting stuff to consumers isn’t sexy but it matters more now than ever.  Stay healthy!

The United States of Bailouts

Thursday, March 19th, 2020

Are we having fun yet?  What a week.  As I wrote earlier this week, take deep breaths.  Alcohol or other mood alternating substances might be in order as well. 

Our good ol’ government is working on aid for businesses impacted by the massive slowdown in the economy.  Hopefully, they learned from the 2008 bailouts.  Here are a few things I’d like to see put in place if company takes government money.

  1. All executives take a 50% cut in salary immediately.  No bonuses or equity grants for any senior management until the taxpayers are paid back.
  2. No repricing of options for any employee of a public company that takes money.
  3. No share buybacks while government loans are in place. 
  4. All loans are secured and senior to any other debt.  If bondholders and existing lenders won’t subordinate, use the bankruptcy process. 

I know we are in unprecedented times.  I also know the last bailouts created a lot of winners and losers.  The government should not be in the business of picking winners and losers.  Crony capitalism is what is destroying the social fabric of our country. 

It is sad how small companies are being decimated by this crisis.  What is even sadder is the vitriol being spewed on Twitter and other social media outlets about “greedy companies that don’t care if their employees get sick.”  I have talked to no fewer than 25 business owners in the last week.  Everyone one of them says the same things:

  1. I want and need my employees to be healthy.  I don’t have a business without them.
  2. How do I pay my employees during this crisis?

Of course, there are bad employers, just as there are bad employees and bad people.  But they are not the majority.  Bad employers make the news.  Bad employees do not.  Most employers provide health insurance which they pay the lion’s share of.  Do you think they want their costs to go up?  Employers know they don’t have businesses without employees. 

I pray our government officials get this right.  If recent history is a guide, we need a miracle. 

Take a Deep Breath*

Monday, March 16th, 2020

Schools announced shut downs.  The NCAA tournament was canceled.  Disney closed all of its theme parks.  Tom Hanks is sick.  And that was just one day. 

The constant bad news barrage brought back a song from my youth by REM.  And, no, it is not “It’s the End of the World.”  For some reason, the opening lines of Radio Song kept going through my head. (I’ll bet that threw you for a loop!)

Opening Lyrics from Radio Song

The world is collapsing
Around our ears
I turned up the radio
But I can’t hear it

Yes, it seems like the world is collapsing around our ears.  We hear the constant concerns about coronavirus.  Every media outlet showing an updated case count.  The barrage of negativity can be overwhelming. 

Take a deep breath.  Turn off the news.  Focus on what you can control.  And please, don’t hoard toilet paper.  They’ll make more. 

Those of you in a certain age group will enjoy the You Tube link.  Turn it up and dance like Michael Stipe!

*Take a deep breath only if you have properly socially distanced yourself from others. 

https://songmeanings.com/songs/view/123180/

Change from a Position of Strength

Monday, March 9th, 2020

Just a few months ago, Elizabeth Warren was leading in the Democratic Primary.  Just a few short weeks ago, Bernie Sanders had “all but locked up” the Democratic nomination (CNN commentator).  Now, it looks like the standard bearer, Joe Biden, is the guy for the democrats this fall.  What happened? 

Change – real change – is really hard.  The far left candidates focused their platforms on radical change.  When things are relatively good, people don’t like to change.  Sanders and Warren continue to campaign on all that is wrong in the world.  That strategy doesn’t work when things are relatively good. 

Isn’t it amazing that we all now love our private health insurance when it is compared to a government program?  Really?  As I’ve written in the past, our health payment system is broken and I think both sides agree with that.  They might not agree with how to solve it, but it cracks me up that even Democrats are running on keeping private insurance.  Why?  Because things are relatively good for most Americans (coronavirus concerns aside). 

Humans are wired to not change until something bad happens.  As was quipped in 2009 by Rahm Emanuel and others before, “Never waste a good crisis.”  We don’t change our diets until we have heart issues.  We don’t change our spending habits until we’re out of cash.  Isn’t that dumb?  Shouldn’t we fix things before it’s too late?  We’re not really good planners.  We are good at reacting to problems. 

Business is relatively good right now for most sectors.  I submit we should “fix” things in our businesses now and not wait for the crisis.  The economy will turn at some point.  No one knows when.  Do you want to be forced to make changes?  Don’t wait until next year to change what you know needs to change.  Next year is now.  Change from a position of strength. 

Will Coronavirus Lead to Inflation (that the Government Actually Reports)?

Monday, March 2nd, 2020

For a long time, I have questioned how our government reports inflation.  For example, according to their metrics, a car is “cheaper” today than it was twenty five years ago because of added features that government economists place some magical value on.  But in terms of affordability (as a percentage of income), a car is much more expensive today than it was twenty five years ago. 

Anyway, back to my point.  I have three anecdotal stories to share regarding coronavirus and its impact on product availability and prices.

  1. This is from a business leader in the shrink sleeve industry:  “We had an interesting week with three “old” customers returning and several new companies requesting quotes.  Looks like the issues in China are getting people scared and they are looking for USA sources.”
  2. My brother and sister in law are building a house.  They ordered a custom shower insert.  It was supposed to ship from China last week.  That didn’t happen.  They have no idea when it will ship. They are now scrambling to find a different source.  It’s going to cost more.
  3. I was recently on a plane with a man in the clothing industry.  Supply is good now but his company is getting concerned about supply in the fall and winter, as the major factories they use are closed right now. 

Even if coronavirus does not get worse, it will have a lasting impact on global supply chains.  Companies are going to realize that you don’t have a business if you can’t get a product.  Maybe the long sought after inflation our Federal Reserve has desired is finally coming.