At C-Level

It's Opportunity Time

For some reason, I have had a million new business ideas lately.  In fact, I was thinking of doing a blog series--100 new business opportunities in 100 days.  Sure, some of the ideas will fade under the light of day.  But I'm pretty sure there are others that would be very successful, and a small number absolute home runs.

Yes, our economic situation makes it difficult to run many businesses.  But the reason for this should signal opportunities for budding entrepreneurs.  Existing businesses are struggling because they are tied to legacy products, systems, strategies and philosophies.  The new business is not.  This principle applies equally to those intrepid companies which are willing to invest in new products, ideas and processes.  The time is right.

I'm not suggesting I would jump into a consumer retail business, although I'm certain there are a lot of good opportunities.  But there should be some that are very obvious.

If gas is high (which it isn't now) find a way to trade off previously unattractive trade-offs.  Like a car pool club.   If companies are cutting back on training, develop an almost-as-effective but significantly cheaper version (see www.trainingmirror.com, launching by early February).  If foreclosures are skyrocketing, find the capital (hey, I never said it would be easy) to buy the houses and rent them back to the current owner to avoid moving (maybe even with a buy-back provision).

I was just reading that Henry Luce founded Fortune Magazine as a high-ticket business magazine in 1930, right after the crash.  Maybe that sounds crazy, but the strategy made sense, as history proved. 

This is not the time to be timid.  The opportunities are out there.  Now, more than ever, Virgil's words ring true: "Fortune favors the bold."

Casual Dining is Reeling

Few industries have been hit harder by the economic crisis than Casual Dining.  My alma mater, Darden Restaurants (DRI) is trading below $17, from $40 a year ago.  Brinker (EAT) has gone from $25 a year ago to $6.70 today.  Similarly, Cheesecake Factory (CAKE) is down about 75% vs. year-ago. While perhaps the market is overreacting, the dramatic trends should not be surprising.  Some recent research shows that 71% of Americans are reducing their dining expenses.  The  market has concluded that the casual dining heyday is over: Traffic is declining quickly and won't bounce back for a long while.

Good restaurateurs understand that the answer cannot be higher prices and lower portions.  That's a death spiral waiting to happen. 

If I was running a casual dining chain, I'd build my strategy on the premise that people are eating out less, so they want a really special experience when they visit a restaurant.  Consider these:

1. Shift the mix to premium quality and higher-priced items that generate more penny-profit, even if it means discounting them or reducing prices.  

2. If you don't take reservations, now would be a good time to start.  I bet long lines aren't your problem these days, even on Saturday nights.

3. Take service to a brave new level.  Get your service manager on the floor during all business hours, greeting every customer at least once, comping a dessert, leaving business cards, learning names, getting emails, etc.  Make each of these guest feel very special.

 
4. Advertise like each visit will be an extraordinary experience, even if you're not Ruth's Chris.  (For some reason, I'm reminded of the Austin Powers provocative but unpretentious trailer back in 2000: "If you're going to see one movie this summer, see Star Wars. But if you're going to see two, see Austin Powers.")

5. Mine your database.  Invite old customers back for something special.  Better yet, call them.  (Yeah, I know that sounds crazy, but you can bet the story will be told.

6. Stick to the basics.  Unless you've got a killer product idea, you're better off promoting what you're famous for and good at.  It's not worth advertising marginal product news, as you'll be disappointed in the returns.

7. Try to make the place look full.  Close off the view of empty rooms and sections.  If need be, close part of the restaurant for remodeling.  Attract large groups (meetings/businesses/gatherings/etc.) on weeknights with generous offers, even if it's at breakeven economics.

8. And of course, need I say, QSC?  Don't cut labor if it leads to slow service, dirty bathrooms and littered sidewalks.

9. Corporately, it's time to close your lowest-performing stores that are showing losses, or worse yet, burning cash.  In the same quarter, add the severance packages from the home office people you choose to let go. Wall Street will give you some credit for these actions, and it's doubtful the stock will get hit much worse from a single drunken sailor story about your awful quarter.

10. And then hang on.  If you've been doing this awhile, you know the good times will return, eventually.

Venture Capital and the Economy

After today's double-digit market gains, everyone is hopeful that the economy is on the road to recovery.  However, it is important that we all recognize that this is a very long road.  We're all going to have to rethink how we do business in the near future, and maybe forever. 

Having run a few venture-funded companies, I started thinking about how the economy would impact VC funding, and the answers were not intuitively obvious.  So I asked a few VC friends from around the country how the economy shift was going to affect their investment strategy.  Their answers were interesting:

Jordan Clements, Peterson Partners, Salt Lake City

As a hybrid investor (cross between late stage VC and private equity) about two-thirds of our investments include an element of debt financing.  For example, if we buy a company for a 5x multiple of EBITDA, we might fund that with 2x equity, 2x senior debt and 1x seller financing or mezzanine financing.  With senior debt no longer available for the foreseeable future, we’re going to have to be more creative in how we structure buy-outs.

  As to the balance of our investment activities that are in the nature of growth capital investments, no debt financing is involved.  My anticipation is that for the near term, most of our investments will be structured as growth capital investments (all equity), even those that would historically have been structured as a leveraged buy-out.  But that means that we’ll raise the bar for the quality of cash flow and growth potential for any deal that requires all equity.  And our anticipation is that at a future date we’ll be able to use debt to refinance a significant portion of our investment.

Greg Lee, Dominion Ventures, Walnut Creek 

I don’t think it’s going to affect us very much at all.  There’s plenty of money out there already chasing deals, so it’s not going to dry up any time soon.  Now if firms are trying to raise a fund, that will be much more challenging in this environment.   

Alan Veeck, Meacham Becker Venture Capital, Pittsburgh

The current slowdown shouldn’t affect our investment strategy too much.  Since we are a relatively new firm with a first time fund, we have spent the last 2-3 years gradually refining our investment strategy (I call it “tuning the Sniffer”), and we have become significantly more picky about what we invest in as a result.  We have codified several core beliefs about areas in which we AVOID investing (not a strict rule, but directional): 

·         Enterprise Software companies (SaaS, installed, or otherwise) – except in a couple of exception categories of enterprise spend.

·         Hardware companies – anyone making a hard product; it always takes more (2-4X) money and time than founders tell you.

·         Ad-Supported Revenue companies – unless the idea is out-of-the-ballpark, these will almost always remain small companies without more legitimate revenue streams.

·         Biotech/Life Science companies – these are “binary bets” (i.e., they either work or they don’t; no middle ground) and take wheelbarrows full of cash.

Some people might ask, “After those exclusions, is anything left?” – fair play to ya’.  The answer is YES; but not many.  For a small first time fund like ours that focuses on early stage investment, our core belief is that the above types of businesses will have a difficult time gaining significant traction in both good times and poor – so we will continue to refine our investment strategy, but without any big changes.

Interesting perspectives from all three.  It's long been true that in a down economy college enrollment goes up.  Jobs are scarce, so the relative returns of education looks better.  The same might be said for a start-up, assuming you have a VC deal vs. debt financing.

Warren Buffet on The Economy

It's really hard to think about anything other than the economy (or perhaps politics) these days.  While the market is dropping 2-5 percent every day, even the best ideas about strategic management feel a bit like rearranging the deck chairs on the Titanic.  Now I optimistically expect this to change by the end of the week.  The market will start to slowly creep back --how slowly remains the question.  And once on that long road to recovery, we will again start talking about how to strengthen our core businesses, sharpen our marketing and manage better.  But in the meantime,  we're all peering through the fog searching for a friendly lighthouse.

Enter Warren Buffet.  If you didn't catch his interview with Charlie Rose last week, you might want to watch:

http://www.charlierose.com/shows/2008/10/01/1/an-exclusive-conversation-with-warren-buffett

The Oracle of Omaha talks so matter-of-factly about the whole economic crisis, and with a calm command of the big-picture facts that reminds me of Peter Drucker.  Is it any wonder that both McCain and Obama said he would make a great Treasury Secretary?  Heck, he'd make a great president!

So while we're singing his praises, once you start your recovery from economic anxiety, you might also check out his legendary letters to the Berkshire shareholders, which are highly entertaining and just plain smart.  Every one of them has the equivalent value of a class at Harvard Business School--maybe more.

http://www.berkshirehathaway.com/letters/letters.html

Some timely advice from the 2007 report:  "After decades of pushing the envelope – or worse – in its attempt to report the highest number possible for current earnings, Corporate America should ease up. It should listen to my partner, Charlie: 'If you’ve hit three balls out of bounds to the left, aim a little to the right on the next swing.'”

Mmm Mmm Good

Yesterday, one of the worst days in the history of the U.S. stock market, 499 of the S&P 500 stocks were down.  The single gainer?  None other than the Campbell's Soup Company, which closed at $37.75, up 12 cents.  Perhaps it is simply a curious outlier; a product of chance.  But I doubt it.  The market, despite its sometimes herd instinct and often warped logic, is very rarely cavalier.  Rather, I suspect there are reasons investors weren't dumping the stock.  And perhaps if we know the reasons, we can uncover a few lessons about how to win in a morbid economy.

1. Soup is a staple, and while consumers are turning away from frivolous expenditures, they will turn back to the basics.

2. Soup is inexpensive.  A nearby grocery store recently had Campbell's Chicken Noodle Soup on sale for $.33 a can.  In a tough economy, you can't do much better than that.  Throw in a grill cheese sandwich (with Velveeta, of course) and a glass of Kool-Aid and you've got a very affordable family meal.

3. Soup reminds us of Mom.  It conjures up memories of having lunch at home on cold winter days and all things good and wholesome about our past.  In perilous times, even the most cold-hearted investor is not going to sell out Mom and family.

I suppose if you sell luxury yachts, Prada shoes or BMW's these lessons are neither encouraging nor particularly useful.  Oh well, there's always the soup line.

Wall Street Schadenfreude

 scha·den·freu·de [shahd-n-froi-duh]   noun

 Satisfaction or pleasure felt at someone else's misfortune.

A friend of mine who teaches a marketing strategy class to second-year MBA’s asked his students last week how many were happy they had chosen a marketing emphasis over finance. Nearly every hand went up, which isn’t surprising given the recent pummeling of Wall Street, with businesses failing, reputations being shattered and fingers pointing this way and that. 

 

The public relations whipping that the financial community has taken will likely have long-term implications on how the career path is viewed. Having said that, I think it’s safe to assume that even after all the pink slips have been issued it is the investors who will feel the financial hit of the recent collapse, much more than those who have been pocketing extraordinary commissions and bonuses for the past six years.  And as everyone knows, it is a profession that has always attracted those most attracted to a surfeit of commas and zeros.

 

While the markets may take some time to recover, and the industry suffers the knee-jerk impact of a Congress fueled by high-minded populism, it won’t be long before capital is again available and those that turn (and churn) the gears of investment banking will be raking in eye-popping compensation once again.

 

In the meantime, the marketing guys can indulge in their schadenfreude. Sure, their businesses are suffering. Sales and profits are down. But there remains a small consolation. They still have their dignity.

 

 

Santa's Not Coming This Year

Almost everyone in the retail sector ought to be bracing themselves for a very challenging fourth quarter. Some hopefuls might point out a few rays of light in the economy, but it’s too little, too late. Now that the effects of the stimulus package are fully played out, the grim reality is settling in. Nordstrom just reported 2^nd quarter profits down -21%.  Kohl’s was -12%. Both due to sizable drops in same-store sales. Macy’s is down. Tween Brands took a -44% stock hit and looks to be on the ropes. Back to school spending was below projections and virtually all mid- and upper-end brands are suffering. The only good news coming from the retail sector is Wal-Mart and other low-price positioned retailers and brands. Wal-Mart’s Q2 profits were up 17% on +4.5% same-store sales growth.  It’s got the right positioning for the economic times, bolstered by an impactful and strategically smart ad campaign: “Save Money. Live Better.”

I expect these trends to continue, and if I had a retail brand that relied on fourth-quarter sales I’d prepare for the worst.  Help is nowhere to be found. Oil prices won’t make an impact, even if they do turn slightly. Housing won’t rebound in time (although Alan Greenspan just predicted early 2009 for them to stabilize). Unemployment won’t get better. Neither will the stock market. And the November elections can only hurt, not help.

And don’t look for help in the electronics sector, typically the high-profile driver of holiday sales. HDTV penetration is already at 50% in the U.S. and I doubt we’ll see anything like last year’s consumer enthusiasm for it. Blu-Ray DVD is still too expensive and not ready. Video players are mid-cycle, although Wi availability will give it a boost, particularly if they price down to $199. But what’s the big consumer idea? Uhhh … iPhones? I don’t think so. Not broad enough in appeal or availability.

Now is the time to cut costs, scale down production and compete on price to drive inventory turnover. And if you’ve got good cash reserves, early 2009 will be a good time to look at acquisitions. There should be good buys available as companies reel from a disastrous 2008.