More on this book
Community
Kindle Notes & Highlights
Surviving the Culling: Cash Is King
For the last decade, the markets have replaced profits with vision and growth when determining the value of a company.
Companies with cash, low debt or cheap debt, high-value assets, and low fixed costs will likely survive.
Costco is well positioned to buck the ugly trends in retail for a number of reasons, including 11 billion of them sitting in its bank account. Honeywell’s $15 billion will likely carry it into a post-corona land of milk and honey. Johnson & Johnson has nearly $20 billion—it’s not going anywhere.
In every category, there will be more concentration of power in the two or three companies with the strongest balance sheets.
The biggest toll will be on bigger companies with a lot of employees that had a bad balance sheet. I said in March 20204 that Ann Taylor will go away, and by July its operator, Ascena, filed for bankruptcy, owing $10–$50 billion to 100,000 lenders, mostly real estate owners. Chico’s will also go away.
Sector plays a big role here: some are doing great (technology), some are just okay (transportation, healthcare), and some are struggling (restaurants, hospitality).
If the strongest asset is the brand, but the business is in structural decline, think seriously about milking the brand until it dies. As much as we humanize them, brands are not people—they are assets to be monetized.
In sum, the best that many second-tier players with no rainy-day fund can do is look for a graceful exit that protects employees and doesn’t leave customers in the lurch.
Instead, J&J cleared 31 million bottles of Tylenol off the shelves, established a hotline, offered rewards for information about the crime, and replaced purchased bottles. Was the poisoning J&J’s fault? No. Did the company overreact? Yes. Did it assure the health of the public and restore the credibility of the company? Yes and yes.
“If you need to be right before you move, you will never win. Perfection is the enemy of the good when it comes to emergency management. Speed trumps perfection. And the problem we have in society is that everyone is afraid of making a mistake.”
You can’t protect jobs, but you can protect people. You have to be fairly Darwinian and harsh around job cuts, but then do everything you can to provide good severance.
Clean up the deadwood. Now is the time to take away the “semi”-retired founder’s corner office, cancel the fourth and fifth magazine subscription for the lobby, and tighten up the travel and late-night-meal policy.
Microsoft’s interest in acquiring TikTok is only the beginning of an M&A (mergers and acquisitions) environment that may be the most robust in a decade.
For example, Lululemon spent $500 million in cash to buy Mirror, and the markets rewarded the company, recognizing the work(out)-from-home movement had leapt a decade, juicing its value $2 billion the next day.
The post-corona world will prize contactless transactions of all kinds. We’ll be dumping business travel, business dinners, and business golf (thank god) in favor of more efficient email, phone, and video communication, and what we all need more of—dinner at home and time to unwind.
In terms of digital, anything you can do to save your customers time will build your NPS (Net Promoter Score) more than flowery marketing language about “these unprecedented times.”
Cash is great for survival purposes, but the real gangster move is to be capital light, that is, to have a variable cost structure. Uber is the paradigm of this new model.
Revenue can go to zero in a crisis, and Uber can take its cost down 60–80%. Hertz, on the other hand, owns its cars and went bankrupt. Boeing has $10 billion in cash, but if its revenue goes down 80%, they can take costs down maybe 10%, maybe 20%.
The Uber model is exploitative, to be sure. Uber’s “driver partners” still have to make their car payments and insurance premiums. The model is akin to United Airlines telling its flight crews to bring their own 747 if they want to get a paycheck. But it’s a model that works. For Uber.
Airbnb is another well-positioned player, despite being in an industry that virtually disappeared for a few months.
The gig economy is attractive for the same reasons that it’s exploitative. It preys on people who have not been casted into the information economy, as they didn’t have access to the requisite credentialing or can’t work a traditional job—they might be a caregiver, have a health condition, or just not speak great English.
Covid-19 is accelerating dispersion across many economic sectors. Amazon, of course, took the store and dispersed it to our front door. Netflix took the movie theater and put it in our living room. We’re going to see this dispersion across other industries, including healthcare.
Teladoc Health, the largest independent U.S. telemedicine service, is adding thousands of doctors to its network.
Of everything wrought by the pandemic, perhaps the most visible and widespread trend acceleration is the radical transition to working from home.
Like so much else in the pandemic, its greatest benefits are being reaped by the already wealthy, who have home office setups, childcare help, or other means of making money during lockdown.
As a business owner, I’ve long been skeptical of work-from-home cultures.
But presence is also expensive. Office space, commuting, dry cleaning, overpriced sandwiches—the costs add up.
Despite stereotypes that telecommuting breeds slacking, early data suggests productivity is up, at least at some companies.8 As of June 2020, 82% of corporate leaders plan to allow remote working at least some of the time, and 47% say they intend to allow full-time remote work going forward.
The start-up Sidekick offers an always-on tablet aimed at small teams that want constant and spontaneous communication among coworkers, simulating sitting together all day long.10
As K–12 goes back to 100% in person by 2021, the benefits of WFH will hopefully loom larger (no commuting, no morning rush, less time getting ready, working from several spots in your house).
THE DISPERSION OF WORK Some retailers stand to benefit. If I’ll spend another 10–20% of my waking hours at home, I’ll get the great couch from CB2 or invest in Sonos.
home may help create greater opportunities for women. Women under 30 who don’t have children have closed the pay gap with their male counterparts. Once women have kids, they go to 77 cents on the dollar relative to their male counterparts.
However, there are risks to working from home. If your big tech job can be moved to Denver, there’s a decent chance it can be moved to Bangalore.
Career advancement is often the result of in-person, informal communications, like drinks after work or impromptu lunches. Presence has implications for who is top of mind for a promotion, or whom an executive is most familiar and comfortable with.
Sixty percent of jobs that pay over $100,000 can be done from home, compared to only 10% of those that pay under $40,000.
It’s a trend worth watching, but I wouldn’t write the obituary of cities just yet. Forty years ago, it was fashionable to predict the death of the city, but they came roaring back, and not because people had to live in them for their jobs. Young people brought cities back because they wanted to live near other young people and to get access to culture and entertainment.
Outside of technology, even many of the lions of American capitalism have been declawed: shares in ExxonMobil, Coca-Cola, JPMorgan Chase, Boeing, Disney, and 3M were down 30% halfway through the year, for an aggregate loss of market capitalization of nearly half a trillion dollars.
Tech leaders from Netflix to Shopify, and tech-adjacent Tesla, have done exceptionally well. The biggest of the bunch are the companies I call “the Four” (Amazon, Apple, Facebook, and Google), along with Microsoft.
These five companies make up 21% of the value of all publicly traded U.S. companies.
Often, those observations came with a caveat: what goes up must come down. The rapid rise of these companies must mean that there’s froth in their stock price, and that when the music stopped, they would come down just as fast as they rose. Nope.
People often ask me what stocks I own. My investing advice is simple: I only invest in unregulated monopolies.
Big tech is the twenty-first century version of John D. Rockefeller and Andrew Carnegie, and there is no trust-busting Teddy Roosevelt on the horizon to rein them in. Not on our horizon anyway—Margrethe Vestager, you are my hero.
Once they got into the open field, however, they turned their attention toward protecting their advantage. Defending a market is far easier than creating a new one. How do they do this? Obfuscate. Conceal their monopolistic position with gauzy promotional videos bubbling with buzzwords and extolling their boy genius founder, while pouring millions into K Street lobbying operations and public relations schmoozing. Make CNBC into their bitch and treat the Department of Justice like an annoying kid brother. All to obfuscate the fact that they long
From the outside, companies including Airbnb, Uber, Compass, and Lemonade look like rental agents, ride-hailing services, real estate agents, and insurance companies. But in fact, these are technology companies, differing only by the analog industry they’ve chosen to deploy their technology against.
THE FOUR EXPAND EVERYWHERE Some examples. First, delivery. Amazon has decided it wants to own the delivery business. So, it’s going to turn what used to be an industry (delivery), into a feature (Prime).
iPhone. Apple’s wearables business (Apple Watch, AirPods, and Beats) alone generated over $20 billion in revenue in 2019, making it bigger than McDonald’s.4 If spun, which it should be (if we had an FTC or DOJ), the business would likely be one of the 20 most valuable firms in the world. But as smart as Cook is, and as good at designing glass rectangles as Jony Ive was (talk about leveraging a core competency), if you think that’s how Apple will sell $20 billion worth of watches and headphones this year, you’re not paying attention. It’s the flywheel. Rolex makes a beautiful watch, but I don’t
...more
Large entertainment media firms (Comcast, AT&T, Verizon, Fox, Sony) will cede value to Amazon and Apple—two tech giants for whom media is not a core business, but just a part of the flywheel, a feature. Similar to Walmart, Disney is the only incumbent with the assets, leadership, and shareholder base to land counterpunches on the purveyors of paper towels and AirPods.
In the 13-month period between January 2019 and February 2020, Apple and Amazon added Disney, AT&T/Time Warner, Fox, Netflix, Comcast, Viacom, MGM, Discovery, and Lionsgate to their market capitalization. Read the last sentence again.
Netflix continues to increase its content budget at the same rate, by 2025 Netflix will spend more on Stranger Things, You, The Crown, and other original content than the U.S. spends on food stamps (SNAP). Who says capitalism isn’t working?
