A Deal That Lasts Forever?

Starbucks May Spill Kraft’s Coffee is the article title in the WSJ Financial Analysis Commentary section today.  This topic has appeared several times in the last few weeks as Starbucks seeks to dissolve ties with Kraft, who has been operating the mostly grocery retail side of Starbucks since 1998.  The interesting part about this article that caught my eye is that the relationship was to last “forever.”  I wonder how often this happens in business, it seems like a rather permanent statement in a dynamic environment!  It has been a profitable relationship for both parties it appears and Starbucks does have options as demonstrated in the article – it is currently attempting to prove breach of contract by Kraft.  The article states that if this is not effective, Starbucks may be able to buy the retail operations from Kraft, however this would be rather expensive, estimated to require a EBITDA multiple of at least 12 along with a 20% premium.  This is steep, in conjunction with Starbucks needing to invest millions in a distribution business of its own. 

Starbucks May Spill Kraft’s Coffee, WSJ November 29, 2010.

"Dear Entrepreneur:  Think Cash, Not Ideas"
Magic Johnson and Starbucks

This is a blog that I ran across while researching a paper for another class, the title obviously caught my eye.  Written by Anthony Tjan, the CEO, Managing Partner and Founder of the venture capital firm "Cue Ball", he wrote this piece for the Harvard Business Review.  In his writing he identifies the joint venture of Magic Johnson and Starbucks.  Twelve years ago, Johnson collaborated with Starbucks to form Urban Coffee Opportunities with which the goal was to "reinvigorate under-served neighborhoods with jobs" -- together they opened more than 100 franchise locations across the country in cities such as Harlem, Chicago, Detroit, Atlanta, New York and Washington D.C.  They created numerous jobs and sparked local economies.  Last week, Johnson sold his franchises back to Starbucks for an estimated $75 million.

Tjan comments that the success of this venture "is an important endorsement of the power behind small businesses with real cash flow models...and a counter-intuitive lesson to leaders about how good businesses and good partnerships can work in under-served areas."  He points out though, that these ideas are "less sexy" to venture capitalists than start up tech and pharma firms, even though they represent a more secure investment and can be good for society.

He points out that in Johnson's 10 seasons with the Lakers, he earned approximately$20 to $25 million..."over roughly the same number of years after his NBA career, Johnson's Starbucks venture earned him more than three times that amount.  Not bad for the kind of investment many venture capitalists would dismiss before even finishing their cocktail..."

Source:
Tjan, A.  "Dear Entrepreneur:  Think Cash, Not Ideas"  Harvard Business Review.  October 29, 2010.

Skill Shortage Clouds Prospects for British Energy

An article in the New York Times, Global Business section dated October 18, 2010 reports on the "lack of engineering and technical skills in Britain" that pose a threat to the countries abilities to expand its renewable energy industry.  The problem is traced to lack of effective science education in British schools and universities.  Sounds familiar to reports from the United States.

They cite a 2008 study that revealed that one in four secondary schools in Britain did not have a physics teacher and this was almost 50% in urban London schools.  It was also estimated that 26 % of those teaching physics were leaving or retiring.  Graduates with degrees in engineering are often drawn to other sectors, for example, the financial sector "in search of better job security and higher salaries."

All of this means that there will not "be enough trained and experienced workers to install, run or mainatin the technology that [renewable energy] will require to achieve its full potential..."

Is suspect that in the United States, the results are quite similar!


Source:


Loftus, L.  "Skill Shortage Clouds Prospects for British Energy"  The New York Times, October 18, 2010.

An Interesting Small Business

In the small business section of the Wall Street Journal today I read an article regarding describing private autopsy companies.  This is apparently an area of high demand with an increase in the requested number of private autopsies in the US over the last 30 years, secondary to the decline in the number of autopsies performed in US hospitals as a result of budget cuts.  The article states that only 2% of US hospitals conduct autopsies today compared to 42% in 1965.  In considering common practice, there are several reasons an autopsy may be requested.  The obvious reason is certainly if an unnatural death is suspected to determine cause of death.  Further reasons include to determine cause of death in sudden deaths, perplexing diagnostic situations and family requests.  In teaching hospitals, there is also emphasis to perform examinations for learning purposes.

The obvious question is who pays for autopsy services, which are performed by an MD trained in pathology.  If the examination is ordered as part of an investigation, the cost is incurred by the requesting county.  If the attending physician requests an autopsy (agreed upon by family), the cost is generally incurred by the institution as part of general pathology services.  If the examination is requested by family, that cost is generally the responsibility of the family.

One firm in Los Angeles estimates they perform 600 exams a year at fees of $2000 to $3500 per body.  For a firm with 4 employees, that is up to $2.1 million per year in gross income.  Some of those mentioned in the article have established franchise business models.  I honestly did not realize that private-autopsy services existed on this scale -- but, given the decline in autopsy rates that I've observed in my short time in the medical field clearly indicates that there is a shortage of supply of services with a fairly consistent demand.  These businesses fill that supply.

Sources:


Nishi, Dennis.  "Demand Breathes Life into Private-Autopsy Companies"  Wall Street Journal, October 13, 2010.


Reichert, CM et al.  "Prognosis for the Autopsy" content.healthaffairs.org/cgi/reprint/4/2/82.pdf. 1985.

Globalization of the American Dream:  "China's Car Economy Revs Up"

I learned that China is the world's largest car market in the world -- automobile sales are up 46% with the central government building 30,000 miles of expressway in the past decade.  It seems that China is following in America's footsteps, as our US Interstate Highway System once upon a time sparked our own economy by "lowering distribution costs, increasing manufacturing employment and boosting productivity."  The huge increase in mobility has lead to some interesting 'downstream' effects -->  currently McDonald's Corporation has 105 drive throughs in China and is planning to build 300 more over the next 3 years, tourism is up 33% with hotel occupancy alone up 21% in the first half from a year ago.  InterContinental Hotels Group PLC plans to double the number of hotels in China in the next five years.  Commercial radio advertising is rising as more Chinese spend longer amounts of time in their vehicles.  Even bulk consumer goods are increasing in popularity as people have the ability to transport a 12 pack of soda home rather than buying 1 or 2 bottles at a time.

There is some concern however about overcapacity in this industry as warned by a senior official at China's National Development and Reform Commission.  Behind this concern is the government's approach to growth -- the economic structure gives incentives to local subsidiaries to  produce capacity, in an effort to create growth but sometimes without regard to demand.  However, industry analysts point out that "For at least the last ten years there have been dire warnings about overcapacity...each time, Chinese consumers have made the warnings look foolish."  Only time will tell!


Sources:


Burkitt, L.  "China's Car Economy Revs Up"  Wall Street Journal, October 7, 2010.


Shirouzu, N.  "Is China Building Too Many Cars?"  Wall Street Journal, October 7, 2010.

Toward a New American Century

An opinion column in today's WSJ by Michael Milken provided some interesting food for thought.  He begins by citing America's woes and the fear that this is the end of the American Century -- the time when we will lose our pre-eminence.  He then lists and explains six different opportunities for change, if America is willing to assume some personal responsibility -- one of these six opportunities certainly hits home for me.

The first he considers is housing -- stating that we've had it wrong -- non-recourse loans should have been money made available to small businesses rather than those buying homes.  "Ironically, a larger share of the population own homes in many other countries where borrowers don't have a mortgage-interest tax deduction and put up far more equity...In the long run, jobs support housing, not the other way around..."  That would have been quite a stimulus injection for small businesses.  The second opportunity are entitlements (though I guess you could argue that each of his remaining five points are entitlements!).  "Unrealistic promises of overly generous health and retirement benefits forced General Motors...into bankruptcy..." and parallels this to the government as an institution and our Social Security System and other social entitlements.

He goes on to address education, immigration and energy in a similar fashion.  The opportunity that resonated with me was his discussion of healthcare.  "But we should also demand more of ourselves.  The Milken Institute's 2007 study "an Unhealthy America" notes that 70% of health costs are related to lifestyle."  As an internist, I would certainly say this is true.  I take care of patients everyday that heavily utilize the healthcare system as a direct result of obesity, tobacco use, excessive alcohol use and a sedentary lifestyle, either in isolation or in striking combinations.  While I try in earnest to counsel my patients about a healthy lifestyle, it often seems to fall on deaf ears -- and in reality, these are things that people know anyway right?  They just choose not to eat healthy or exercise in any way, and at the point where they are heavily utilizing the system, they often perceive that it is too late to change.  I'm not sure of the solution -- how do we motivate people to assume personal responsibility for their own health?  It seems like such a basic concept.  Perhaps it is taxation -- some feel it would be unfair to levy higher taxes on "fast foods" -- is that because access to fast foods is a right just as access to healthcare (regardless the reason for your illness)  is perceived as a right?  In decreasing the cost of healthcare, I would argue that prevention of illness at the individual level is a must.

Milken, Michael.  "Toward a New American Century".  Wall Street Journal, October 7, 2010.

Games India Isn't Ready to Play
Op-Ed, New York Times

This piece caught my eye as I was reading a few of Thomas Friedman's pieces (at the urging of Dr. Karri). There has been much buzz in the last few weeks on BBC radio about the fate of the Commonwealth Games and whether or not India was ready to host.  Even a few days before the start of the Games, star athletes and entire countries of the former Commonwealth were threatening not to appear given the physical state of the facilities, particularly the athlete's village, not to mention the collapsed footbridge and falling ceiling tiles in one of the competition facilities.  The government spokesman continued to assure the world that they could pull it off, just as Beijing had with the 2008 Olympics.  This was India's time to shine on a world stage, but challenges certainly abounded.

Pankaj Mishra's piece discusses this aspect of modern India as well as the recent verdict in Ayodhya regarding the birthplace of Lord Rama.  Her focus on Kashmir and the ongoing threat of radical Islamists in Pakistan and guerrilla Maoists in central India reminded me that what we understand from the Western media is truly a limited view of this large country.  I am used to seeing information that hones in on India as the "rising economic superpower" as stated by Mishra.  But I think it's important to consider the totality of the situation, just as in other developing nations and certainly in our own -- it's amazing how we can focus on success, particularly in business and forget the toll of daily life...it can be quite a reality check!

Source:
Games India Isn't Ready to Play, New York Times Op-Ed, October 2, 2010.