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.

Executives Zero in on Pricing

This was a timely article!  I've been studying for my first BUS 501 test covering marketing, including segmentation and pricing and marveling about the potential complexity of pricing when I took a break to review the latest headlines.  This article caught my eye.  This is an article dated tomorrow with the subtitle "CEOs Search for Sweet Spot Amid Rising Costs and Tightening Purse Strings".  The current economy is producing price-sensitive shoppers and companies are noticing.  The article discusses how Starbucks Corp. plans to raise prices of "larger and hard-to-make drinks, while maintaining or reducing prices of some of its other drinks".  Other firms are decreasing discounts or tailoring their price raises to particular markets -- for example, Pernod Ricard, maker of Absolut Vodka is raising prices in Europe, Asia and Latin America while keeping "prices flat in the U.S. because of weak consumer confidence".  The article also cites Royal Caribbean Cruises Ltd. which has a total revenue growth of 7.1% over the same quarter one year ago -- the cruise operator may adjusts hundreds of prices in a single day!

I found this article interesting because it reinforced some of the concepts we've encountered in the last few weeks including pricing strategies and determinants of strategies such as the income effect, which is certainly in play during the current recession.  Each company mentioned had a different approach to capture the market that has become increasingly sensitive to price.

Source:
WSJ.com, September 27, 2010

Bridging the Gap:  Creatively

The Economist this week ran a brief article about Mayor Richard Daley and his "experiment with privatization".   Mr. Daley has been at the helm of the nation's second city for 21 years and "his most interesting legacy...may not be what he gave to Chicago, but what he sold off".  The mayor has sold or leased huge public assets to help close budget gaps (or so was planned).  In 2005, the city leased the Skyway tollway for 99 years at $1.83 billion, parking garages in 2006 for 99 years at $563 million and parking meters in 2008 for 75 years at $1.5 billion.  Apparently a plan to lease Midway airport failed during the early part of the recession.  While the tollway and parking garage deals were very successful, the parking meter takeover was very unpopular -- leading citizens to revolt against higher parking fees by filling coin slots on meters with glue.

While these moves were intended to fill a budget gap, the money has not gone very far.  The article estimates that by 2011, "Chicago will have gobbled up nearly 75% of the proceeds from the 75 year (parking meter) lease".  As most voters "want leaders to balance budgets without federal help, higher taxes or cuts to schools", more cities are looking to Mayor Daley's experiment.  "Dana Levenson of the Royal Bank of Scotland counts about 50 pending deals in North America (for privatization of prior public services) worth between $35 billion and $40 billion."

I found this article quite interesting in light of our discussion in class last night regarding how governments raise money -- essentially taxes -- and how there are some goods that we don't trust to the private sector -- such as our public safety.  It does however appear that certain public services can be successfully privatized -- parking and possibly even roads?  It makes me wonder what the state of Illinois could sell -- the idea of pricing a public service is simply mind-boggling!

Source:
The Economist, September 18-24, 2010. p42.

UPS New Marketing Strategy

This is more of an observation of a new advertising campaign by UPS -- "We <heart> Logistics" -- a reflection of the firm's move to total supply chain management for the businesses it works with.

This is an interesting move and one that reflects UPS's use of IT to gain success by providing an IT utility to those businesses it services.  In my MIS course, we just read Nicholas Carr's article "IT Doesn't Matter" in which he argues that IT is losing it’s strategic importance.  The reasons he cites for this assertion mostly reflect the rapid growth of IT to the point that IT has become essentially a form of infrastructure.  He likens the growth to the spread of other infrastructural commodities such as electricity and the railroad.  When a technology expands robustly, it becomes better shared than used alone.  For example, companies found that they became more efficient (productive?) if all invested collaboratively in expansion of the railroad industry.  This changed the face of mass production in the mid-1800s.  Likewise, IT has become “ubiquitous” and as Carr points out, “what makes a resource truly strategic…is not ubiquity by scarcity.  You only gain an edge over rivals by having or doing something that they can’t have or do”  (Carr p.42).  These points are quite interesting and given the rise capital expenditure to nearly 50% related to IT at the time of Carr’s paper (and book), quite important.  


What I took away from the Carr article is that IT does in fact matter, mostly in the way it is managed.  Thus for UPS, their expansion of IT to a utility function is a strategic advantage.  For the companies that utilize this supply chain management service by UPS, this allows them to minimize their IT expense and focus on the core objective of the firm.  


More information on the UPS evolution can be found at thenewlogistics.com -- very interesting!


Source:
Carr, Nicholas.  "IT Doesn't Matter":  Harvard Business Review, 2003.

How Much Will You Pay For a Movie?

Upon reading this article, I realized I didn't see a single movie in the theater this summer....  Hollywood reported it's biggest "box-office haul in history" but with the lowest ticket sales in 13 years.  Easy to understand when you see movie ticket prices these days!  The Wall Street Journal reports that ticket prices have risen 20% in the last 5 years from an average of $6.41 to $7.88 this summer (averaging in matinees, children and senior rates).  Some of the 3-D movies hailed ticket prices up to $15 for "3-D fees".  Last summer I recall reading that with travel down, movie ticket sale were up - in fact by 5%.  This years attendance has decreased by 3%.  The article indicates that people are spending more time playing videogames, watching television or surfing the internet.

Industry analysts cite a host of reasons for our decline in movie attendance.  This was a summer of sequels including "Twilight", "Toy Story 3" and "Iron Man 2" which drew significant audiences but there were no "surprise" hits or "sleepers" to round out the numbers.  It seems that 3-D movies were all the rage, after "Avatar" (which I watched at home).  However, the ticket sales were not impressive.  In fact, some of the high profile 3-D movies including "Cats & Dogs:  The Revenge of Kitty Galore" and "Piranha 3-D" (what a terrible idea for a movie!) bombed.  Interestingly, these movies were rushed to 3-D format at the "last minute" to replicate the success of "Avatar".  This appears to have the industry rethinking the future of 3-D films.  Analysts also cited a shorter summer season -- by a week as a source of weak ticket sales.

The revenue side of this Hollywood season rose 2% over last year -- $4.35 billion compared to $4.25 billion.  This article means to me that we will most likely continue to pay more for that movie theater experience -- we'll all have to decide the value of that experience for ourselves...

Source:
The Wall Street Journal:  Friday, September 10, 2010

Whopper of a Deal?

The Wall Street Journal reported today that Burger King Holdings, Inc. has agreed to a leveraged buyout.  This is a $3.3 billion deal by the private equity firm 3G Capital Management.

Because of my limited business background, I had to review the meaning of a "leveraged buyout."  BusinessDictionary.com defines a leveraged buyout as "acquisition of a firm by raising its purchase price mainly through borrowing secured by the same firm's assets...after the purchase, the loan is paid from the firm's cash flow and/or by selling off its assets."  The Wall Street Journal further describes that 3G has debt financing almost $2.8 billion from JP Morgan Chase & Co and Barclays Capital, describing this deal as "highly leveraged."  It is also noted that Moody's Investors and Standard & Poor have placed Burger King's debt rating under review, thus reflecting for me the potential risk in this buyout.

Interestingly, 3G Capital Management is a company primarily backed by Brazilian businessman (one a former surfer and Wimbledon tennis star).  The company has had holdings in several fast food chains including Wendy's, Jack in the Box and in Anheuser-Busch InBev.  Burger King would be the company's first acquisition and would take the Burger King brand private once again.

Relevant to this week's classroom discussion, it appears that Burger King may be suffering from lack of effective marketing.  In Thursday's Wall Street Journal, it was reported that franchisees were displeased with Burger King Holdings, Inc. for "scant menu development...focusing on so-called super fans" or a narrow range of potential customers.  In contrast, McDonald's has an "expansive menu" that appeals to a broad base of consumers.  Analysts and franchisees point to revenue and net income differences.  In the last quarter, "McDonald's revenue rose 5% and its net income was up 12%, while Burger King's latest quarterly revenue fell 1% and its profit was down almost 17%."  It appears that Burger King needs to create more "want" for its products and more effectively identify potential customers if it is to remain competitive in this industry.

Also interesting to me is the anticipated strategy of 3G to accomplish a more competitive firm.  Apparently only 35% of McDonald's revenue is generated in the United States and Canada, compared with 69% of Burger King's revenue.  Thus, 3G plans to expand the Burger King brand internationally, in particular to South America, which it seems naturally poised to do.  The accompanying editorials seemed to identify this as a lucrative deal for 3G, that will most likely be completed late this year.


Sources:
1.  The Wall Street Journal, Thursday September 2 and Friday September 3, 2010.
2.  www.BusinessDictionary.com

August 29, 2010

Gannett Revamps USA Today for Web, Pares Work Force


USA Today is about to undergo a major restructuring according to the Wall Street Journal.  As someone who admittedly peruses several news outlets on-line (in addition to my print subscription of the Wall Street Journal and various medical journals), I've often wondered about the current state of printed media.  USA Today is currently the country's second largest newspaper by circulation.  It was in fact the largest newspaper until 2009, when it was surpassed by the Wall Street Journal.  Circulation of USA Today began in 1982 with the goal of targeting reading travelers.  The paper's trademark became "liberal use of color and graphics" in addition to shorter articles.  Interestingly, half of the paper's circulation was through partnerships with hotel chains.

Over the last year, ad revenue has declined 29% and average paid circulation has declined 14% for USA Today.  The Pew Project for Excellence in Journalism publishes "The State of the News Media: An Annual Report on American Journalism" yearly.  This is really an interesting report that covers all forms of media including newspapers, online, television, magazines and reviews trends in economics and ownership to name a few aspects of the site.  Specific to overall printed news media, the Pew report states that advertising revenue has decreased at least 43% over the last three years.  In addition, 13,500 full-time, newsroom professional jobs have been lost -- meaning "newsrooms have shrunk by 25% in three years".  Circulation has declined 25.6% since 2000.  They do report that "newspapers, contrary to what is frequently alleged, are not dying in droves" -- the papers that went of out business the past few years were mostly small in circulation, and second papers in their market.  However, you may recall the significant bankruptcies of the Tribune Company (LA Time, Chicago Tribune) among others in 2009.

It would seem that printed news would have to find a way to obtain revenue from online sources.  Apparently, this source of revenue was robust a few years ago, but is beginning to decline as well.  The Pew report estimates a decline in this source of 10% per year.  In a society that has become accustomed to "free" news, it is hard to imagine that print companies can convince their readers to begin paying for content they see online.  Overall, the trend seems to be in a negative direction for this industry...






Sources:

1.  Wall Street Journal, August 28-29, 2010.

2.  Pew Project for Excellence in Journalism:  The State of the News Media, 2010.          www.stateofthemedia.org/2010