I generally avoid politically-charged topics that don’t directly relate to business, but a recent Business Week article about the US Postal Service reminded me of a controversial topic that impacts all of us: organized unions. Although once essential to protect worker rights, modern day unions have become irrelevant, destructive, and a microcosm of all that’s wrong in the current debt laden climate.
The article talked about the imminent demise of the postal service system and how little can be done to stop the train wreck in large part because of the labor contracts with the union. It’s unusual for anything from Washington to done on time, but the report was released 18 months early because the situation had gotten so bad. As the walls of the post office are crumbling down, the unions have extracted more and more for themselves. They point to a “win-win” by their recent negotiation which yielded guaranteed raises for the next seven years and forbids any layoffs. Win win ?
The main reason the postal system is in shambles is precisely because it can’t right-size to current market conditions. For years, unions have negotiated to the point of an unsustainable cost structure which does not allow them to shed locations or any of its 500,000 FTEs. Meanwhile, the demand for their services continues to decline. The unions are well aware of the imminent demise and are angling for a taxpayer bailout. Given the government’s recent track record, I see this as an almost guaranteed outcome. It seems this may happen as early as 2012.
The frustrating thing is that there are solutions. The three year study explored countries throughout the world for ideas that worked. Most privatized, modernized, expanded digital services, and outsourced offices to third parties. In Germany, Deutsche Post has turned around so remarkably that it actually began making acquisitions (DHL). The irony is laughable – the US has now become the model of unsustainable socialism while Europe has taken a more capitalistic approach to solving real problems.
The auto bailouts were another sign of union carnage. From start to finish, the talks were tipped in the favor of politically powerful unions. The government threw out the bankruptcy rules and ultimately handed over controlling interest to the unions (they became the largest shareholder in Chrysler and second behind the federal government in GM). What happened to the Ma and Pa with GM bonds that were supposed to be first on the capital stack? Gone. And for what purpose? We actually rewarded those that caused the problem in the first place (too high labor costs compared to Japanese competitors). And the bankruptcy rules were completely ignored in the process? Welcome to the alternate universe.
The list goes on and on. State and local governments are in shambles thanks to unfunded liabilities negotiated by hard charging unions. The paltry 401(k) company contributions will not make a dent in most retirement requirements – in large part because of the unfunded liabilities corporations continue to pay to retirees. The unions are simply too powerful to address the real problems we face. Instead, the Bidens of the world focus on immaterial items like website optimization (yes that was top of his list) which won’t solve our huge deficit gap. We all suffer as a result. Tax increases, cuts in services, debt for many generations to come.
When I think about how much damage has been caused by the short-sighted minds of the union, it takes me back to my free market roots. Capitalism is simply the most efficient allocation of resources unfettered by the cloud of politics, power, and gluttony. For all its shortcomings, the other side of the pendulum is far more grim. These golden packages negotiated by unions have no relation to market conditions and will ultimately be paid by all of us one way or the other. We don't fix the problems, we just give in to those that are responsible. Their solution to solving the postal service problems: stop the internet. I’m not kidding; just ask the postal employee whose only job is to convince large banks to continue sending out paper statements. Help. Someone please bring capitalism back.
16 June 2011
29 May 2011
Mark Haines and Individual Contribution
I like to write about companies that bring disruptive innovation, societal value creation, and a new approach to the market in which it operates. This week's sudden death of veteran CNBC anchor Mark Haines reminded me that this can also true of individuals. Through his powerful on-air persona and singular fact-finding focus, Haines brought the closed doors of wall street to main street and helped create the money-minting machine that is CNBC.
Certainly great timing helped Haines leave his important legacy. When CNBC started 20 or so years ago, cable television was at its infancy and had yet to experience its explosive growth. The stock market was at the start of the longest bull run in its history. Thanks to technology and electronic exchanges such as NASDAQ, the barriers to entry for individual investors dissipated. Game changing phenomenons always need a bit of luck and the success of the first 24 hour financial news channel was no exception.
Before CNBC and Haines, the business of investing was limited to the elite and wall-street insiders much like the hedge fund industry is today. Mom and Dad in Kansas relied on their low-paid financial broker for information and advice as there were far fewer information outlets. Not only did CNBC bring boardrooms and stock analysts into millions of US households, it also made it easy for main street to understand markets, business, and global economics. Despite criticism that the network was an "extension of wall street" throughout the years, Haines was always the spokesman for the average investor. He grilled CEOs and political figures to no end, repeated questions until a direct answer came out, and explained somewhat complex concepts in plain English. And he was fun on the air - something very important to CNBC's growth. Haines was also very well respected by the markets, somehow building a bridge between Wall Street and Main Street. Upon news of his death, the NYSE held an impromptu moment of silence - something unheard of during the bustle of normal trading day.
Haines, among the other early anchors, built a cultural phenomenon that made financial information ubiquitous, entertaining, and accessible. NBC has been handsomely rewarded for itt. When acquired by Comcast last year, NBC had a ~$30B valuation. It's hard to get detailed figures on what CNBC represented individually, but it has the second largest cable audience of the network. Some reports pegged CNBC's value alone to be $6B-$7B. Much like ESPN did with sports, CNBC has built a strong cable presence and unique market position that will be virtually impossible to match (just ask Fox).
As companies build innovative concepts to market, its important to remind ourselves of the contributions of the individuals leading to that success. Certainly there would be no Microsoft without Gates or Apple without Jobs. In many instances, it is single individuals that create a disproportionate amount of value for companies. It sometimes takes a tragic event, such as Haines' death, for us to step back and acknowledge this fact.
Certainly great timing helped Haines leave his important legacy. When CNBC started 20 or so years ago, cable television was at its infancy and had yet to experience its explosive growth. The stock market was at the start of the longest bull run in its history. Thanks to technology and electronic exchanges such as NASDAQ, the barriers to entry for individual investors dissipated. Game changing phenomenons always need a bit of luck and the success of the first 24 hour financial news channel was no exception.
Before CNBC and Haines, the business of investing was limited to the elite and wall-street insiders much like the hedge fund industry is today. Mom and Dad in Kansas relied on their low-paid financial broker for information and advice as there were far fewer information outlets. Not only did CNBC bring boardrooms and stock analysts into millions of US households, it also made it easy for main street to understand markets, business, and global economics. Despite criticism that the network was an "extension of wall street" throughout the years, Haines was always the spokesman for the average investor. He grilled CEOs and political figures to no end, repeated questions until a direct answer came out, and explained somewhat complex concepts in plain English. And he was fun on the air - something very important to CNBC's growth. Haines was also very well respected by the markets, somehow building a bridge between Wall Street and Main Street. Upon news of his death, the NYSE held an impromptu moment of silence - something unheard of during the bustle of normal trading day.
Haines, among the other early anchors, built a cultural phenomenon that made financial information ubiquitous, entertaining, and accessible. NBC has been handsomely rewarded for itt. When acquired by Comcast last year, NBC had a ~$30B valuation. It's hard to get detailed figures on what CNBC represented individually, but it has the second largest cable audience of the network. Some reports pegged CNBC's value alone to be $6B-$7B. Much like ESPN did with sports, CNBC has built a strong cable presence and unique market position that will be virtually impossible to match (just ask Fox).
As companies build innovative concepts to market, its important to remind ourselves of the contributions of the individuals leading to that success. Certainly there would be no Microsoft without Gates or Apple without Jobs. In many instances, it is single individuals that create a disproportionate amount of value for companies. It sometimes takes a tragic event, such as Haines' death, for us to step back and acknowledge this fact.
19 May 2011
Google Deals - A case for and against M&A
The Microsoft-Skype announcement reminded of one of my first posts in which I wrote about the perils of large scale M&A. While big deals are value destroyers, there are some instances where transactions make sense. When can an acquisition create meaningful gains to both companies as well as consumers in general ? Let's look at Google, a case study for everything these days, including the merits of dealmaking.
In 2005, Google made its first foray into mobile with the acquisition of a small startup called Android. Fast forward six years later, Android has now become the top smartphone OS with a 30% market share. There is no question Android could not have done this on its own. The pie grew and we as consumers finally had a viable alternative to the closed- system Iphone. Wins all around, right?
That same year, Google also invested in Dodgeball, a location-based social network. Similar to Android, the founders were brought onboard to integrate the company into the Google ecosystem. This time, the Google experiment flopped. The company ultimately killed the service altogether; and in early 2009, the founders of Dodgeball left to create an exact replica company. FourSquare, one of the hottest tech properties, now boasts a 7.5M userbase (and growing) and is frequently sited as a potential IPO candidate.
How could the same company buy two different startups the same year, employ the same execution strategy, and have such divergent results? One blossomed into a transformative software platform while the other quelched a new idea that ultimately thrived on its own.
With Android, there was a defined, specific goal in mind. Google wanted to give away a mobile OS to layer in its search, so it bought Android. There was no need to create some new product or capability that didn't exist. There was very little execution risk- Google simply needed to throw more money at the nascent company, leave it alone, and take it to market. As we all know, large companies don't accelerate innovation or product development (not even Google), but they provide the thing that startups need the most -- money and distribution. How else could Android have forged partnerships with all the major handset makers and carriers in such a short amount of time? Given the size and savvy of its competitors (Microsoft, Blackbery, Apple), they might have missed the window of opportunity had it chose to go alone.
What was Google going to do with Dodgeball? They knew social networks were a threat but didn't know how to combat it (and still don't for that matter). Buying Dodgeball got them "in the game", but there was no clear cut strategy for what to do with the company. Dodgeball didn't need distribution the way Android did, they simply needed time to grow. Android thrived not because of what Google did with it, rather what Google brought to the table. The Dodgeball deal was an attempt to mask a larger company weakness with no real rationale for the deal itself.
Successful deals happen when there is a simple well defined strategy and a predetermined endgame. It needs to be easy to execute and the expected value of the good needs to outweigh the negatives of big company inertia with little risk. Distribution plays are the most common. Kashi cereal is widely available thanks to Kellogg. I bought a Goose Island draft on my last trip to New York because of the deep pockets of Anheuser Busch. Selling a new beer to a bar that is already a customer is not rocket science.
If company executives can't explain why they are doing a deal and how they will execute it in 20 words or less, it's probably not one worth having. Ballmer probably needs 12 Powerpoint slides to outline the Skype rationale, whereas its far more clear what Nestle plans to do with the Austin-based Sweet Leaf deal it announced last week (say it ain't so Leaf).
In 2005, Google made its first foray into mobile with the acquisition of a small startup called Android. Fast forward six years later, Android has now become the top smartphone OS with a 30% market share. There is no question Android could not have done this on its own. The pie grew and we as consumers finally had a viable alternative to the closed- system Iphone. Wins all around, right?
That same year, Google also invested in Dodgeball, a location-based social network. Similar to Android, the founders were brought onboard to integrate the company into the Google ecosystem. This time, the Google experiment flopped. The company ultimately killed the service altogether; and in early 2009, the founders of Dodgeball left to create an exact replica company. FourSquare, one of the hottest tech properties, now boasts a 7.5M userbase (and growing) and is frequently sited as a potential IPO candidate.
How could the same company buy two different startups the same year, employ the same execution strategy, and have such divergent results? One blossomed into a transformative software platform while the other quelched a new idea that ultimately thrived on its own.
With Android, there was a defined, specific goal in mind. Google wanted to give away a mobile OS to layer in its search, so it bought Android. There was no need to create some new product or capability that didn't exist. There was very little execution risk- Google simply needed to throw more money at the nascent company, leave it alone, and take it to market. As we all know, large companies don't accelerate innovation or product development (not even Google), but they provide the thing that startups need the most -- money and distribution. How else could Android have forged partnerships with all the major handset makers and carriers in such a short amount of time? Given the size and savvy of its competitors (Microsoft, Blackbery, Apple), they might have missed the window of opportunity had it chose to go alone.
What was Google going to do with Dodgeball? They knew social networks were a threat but didn't know how to combat it (and still don't for that matter). Buying Dodgeball got them "in the game", but there was no clear cut strategy for what to do with the company. Dodgeball didn't need distribution the way Android did, they simply needed time to grow. Android thrived not because of what Google did with it, rather what Google brought to the table. The Dodgeball deal was an attempt to mask a larger company weakness with no real rationale for the deal itself.
Successful deals happen when there is a simple well defined strategy and a predetermined endgame. It needs to be easy to execute and the expected value of the good needs to outweigh the negatives of big company inertia with little risk. Distribution plays are the most common. Kashi cereal is widely available thanks to Kellogg. I bought a Goose Island draft on my last trip to New York because of the deep pockets of Anheuser Busch. Selling a new beer to a bar that is already a customer is not rocket science.
If company executives can't explain why they are doing a deal and how they will execute it in 20 words or less, it's probably not one worth having. Ballmer probably needs 12 Powerpoint slides to outline the Skype rationale, whereas its far more clear what Nestle plans to do with the Austin-based Sweet Leaf deal it announced last week (say it ain't so Leaf).
21 April 2011
The Franchise Misnomer
In the wake of the largest franchise IPO ever last week (Archos), I was reminded of a topic that I've pondered for quite some time. With franchise chains being the easiest way to get a business jumpstarted, it's no wonder that there are almost 1M locations representing $1T of sales in the US alone. No MBA required, no resume massaging; just a roll-up the sleeves attitude and a propensity to work hard is all you need to sign up. But are franchisees actually entrepreneurs? Do they run their own business or are they merely buying themselves a living?
Let's look at the dynamics of the largest franchisor on the planet, Subway, as an example. Subway makes it easy for new locations: a very small upfront fee ($10k or so), soup to nuts setup and management services, and a straightforward royalty model (take ~12% off the top). This looks great, right? If atmabus wanted to leave the corporate world for business-ownership, this seems to be a low risk option right? Let's look a bit closer of who would actually "own" this business.
Subway controls more aspects of this endeveour than atmabus would. In addition to the branding, Subway mandates your procurement for everything from napkins to lettuce (at a profit for corporate). They dictate how the store should look, how much you need to spend on improvements, and mandate computer and accounting systems. Margins and pricing is controlled at some levels -- most franchises actually lose money on the $5 footlong (but have limited say in what they can do). Sure Atmabus would manage some parts of the operations; but he would not control supply chain, advertising, pricing, and product offerings under this franchise agreement. So what's left?
Let's look at the dynamics of the largest franchisor on the planet, Subway, as an example. Subway makes it easy for new locations: a very small upfront fee ($10k or so), soup to nuts setup and management services, and a straightforward royalty model (take ~12% off the top). This looks great, right? If atmabus wanted to leave the corporate world for business-ownership, this seems to be a low risk option right? Let's look a bit closer of who would actually "own" this business.
Subway controls more aspects of this endeveour than atmabus would. In addition to the branding, Subway mandates your procurement for everything from napkins to lettuce (at a profit for corporate). They dictate how the store should look, how much you need to spend on improvements, and mandate computer and accounting systems. Margins and pricing is controlled at some levels -- most franchises actually lose money on the $5 footlong (but have limited say in what they can do). Sure Atmabus would manage some parts of the operations; but he would not control supply chain, advertising, pricing, and product offerings under this franchise agreement. So what's left?
When you think of entrepreneurship, you think of control and unlimited upside potential. Here you get neither. Given your sales are limited to your foot traffic in a specific geography, the only way to scale is to buy more franchises. Couldn't Subway technically "own" the stores and pay a management fee to operators and accomplish the same thing? This model feels more like a distributor relationship versus a B2B one as advertised by the franchisors. Remember the Coca-Cola bottlers? Look who owns them now.
Certainly new franchisors will command less control and costs than established players like Subway. But ultimately franchise models tilt in favor of the corporations. Incentives are misaligned; the $5 footlong promotion benefits franchisors (Subway sells the ingredients) at the expense of franchisees. Most hotel chains are moving away from ownership to franchise models because their is frankly more profit and less headache for them through the arrangement. As long as their are people willing to live on site and work 7 days a week, they can continue along this path.
Don't get me wrong - there is money to be had for franchisees. Many make a decent living doing them. You just have to do it in a big way since so much of the margin is taken by franchisors. If you get in on the ground floor of a bustling one, you might be able to negotiate a sweet deal. Plus just the mere fact that its considered a "business" gives owners a path to tax benefits associated with ownership. Given the limited control, upside, and autonomy for franchise owners, its hard to consider them entrepreneurial ventures.
05 April 2011
Are You Undervalued or Overvalued ?
There is a long standing debate about whether or not the stock market is 'efficient.' In a perfect world, forces such as the free market system, access to information, and the law of supply/demand would price stocks at their intrinsic value. But as we know, the world is not perfect; stocks tend to be either overvalued and undervalued. Can this same logic apply to jobs and compensation?
In a vacuum, the value created by an individual would guide his or her salary; but it doesn't happen like that in the real world. One's paycheck generally have very little to do with their societal worth or even the intersection of where supply meets demand. Further, similar to daytraders in the stock market, does this inefficiency create a business opportunity?
The most overvalued job that comes to mind is a real estate agent. If you strip it down to its basest level, a real estate broker gets 6% of the value of your home to open your front door. That's it - that's really all they do. Contracts are standardized by the states, risk is mitigated by escrow agents, and frankly the negotiations really lie in the hands of the buyer and seller. Real estate agents do not create demand for your house; they simply post it online to their proprietary MLS closed system. Because of this monopoly, they have been able to keep their fees artificially high. Sure sites like Zillow and FSBO have brought fees down slightly, but there is a opportunity to bring this function to its true intrinsic value. 6% of the housing market - pretty big market size for a hungry entrepreneur.
What about wall street bankers? Goldman Sachs gets gobs of money for advising companies such as AT&T on whether they should buy T-Mobile. Do bankers have more industry knowledge than the brain trust at AT&T? Has the AT&T CEO not heard about T-Mobile ? Is AT&T's legal staff and M&A teams incapable of leading a transaction of this magnitide? If the answer is no (which i think it is), how can the market allow such enormous fees? At least in this case, there is no 'closed' system, but certainly it leaves you to wonder. Don't get me wrong, I see a huge value in the investment banking/brokerage function; its just the value significantly diminishes as the sophistication of buyers and sellers increases. This is precisely why smaller investment banks (usually started from ex-bulge bracket folks) are growing at such a fast clip these days.
On the other side of the coin, what about undervalued jobs? Certainly folks such as policemen and teachers come to mind. The most underpaid job on this planet is a stay-at-home parent. They bring in a whopping $0 and have the uneviable task of shaping our children's future. America's CEO, Obama, only gets paid $400k for the most important position on the planet. Sure, budgetary constraints of government/non-profit limit salaries of high worth positions; but how sustainable is this in the long-run? There are also many instances of this in the for-profit world.
Accountants are underpaid, overworked, and are in short supply and high demand. Yet their salaries are the lowest in the business world. The Big 4 can't find enough talent to fill open positions (PwC spent millions in a desperate attempt on LinkedIn), yet they continue to underpay and experience high turnover. Another example is the primary care physician. Demand continues to soar, supply is falling, and wages are flat at best. Without accountants, we couldn't rely on financial statements; without PCP's, we wouldn't be healthy. Not exactly low value positions; These fields will either face a major restructuring, a significant drop in quality, or a healthy rise in fees.
You would think money always follows where the world is going and intersect at the point of equibrium. There seems to always be external factors that create a market imbalance between compensation and value creation. For example, the value of atmabus' business insight relative to how much he gets paid for it is grossly imbalanced. So are you undervalued or overvalued? Where else are there market inefficiencies to capitalize upon?
In a vacuum, the value created by an individual would guide his or her salary; but it doesn't happen like that in the real world. One's paycheck generally have very little to do with their societal worth or even the intersection of where supply meets demand. Further, similar to daytraders in the stock market, does this inefficiency create a business opportunity?
The most overvalued job that comes to mind is a real estate agent. If you strip it down to its basest level, a real estate broker gets 6% of the value of your home to open your front door. That's it - that's really all they do. Contracts are standardized by the states, risk is mitigated by escrow agents, and frankly the negotiations really lie in the hands of the buyer and seller. Real estate agents do not create demand for your house; they simply post it online to their proprietary MLS closed system. Because of this monopoly, they have been able to keep their fees artificially high. Sure sites like Zillow and FSBO have brought fees down slightly, but there is a opportunity to bring this function to its true intrinsic value. 6% of the housing market - pretty big market size for a hungry entrepreneur.
What about wall street bankers? Goldman Sachs gets gobs of money for advising companies such as AT&T on whether they should buy T-Mobile. Do bankers have more industry knowledge than the brain trust at AT&T? Has the AT&T CEO not heard about T-Mobile ? Is AT&T's legal staff and M&A teams incapable of leading a transaction of this magnitide? If the answer is no (which i think it is), how can the market allow such enormous fees? At least in this case, there is no 'closed' system, but certainly it leaves you to wonder. Don't get me wrong, I see a huge value in the investment banking/brokerage function; its just the value significantly diminishes as the sophistication of buyers and sellers increases. This is precisely why smaller investment banks (usually started from ex-bulge bracket folks) are growing at such a fast clip these days.
On the other side of the coin, what about undervalued jobs? Certainly folks such as policemen and teachers come to mind. The most underpaid job on this planet is a stay-at-home parent. They bring in a whopping $0 and have the uneviable task of shaping our children's future. America's CEO, Obama, only gets paid $400k for the most important position on the planet. Sure, budgetary constraints of government/non-profit limit salaries of high worth positions; but how sustainable is this in the long-run? There are also many instances of this in the for-profit world.
Accountants are underpaid, overworked, and are in short supply and high demand. Yet their salaries are the lowest in the business world. The Big 4 can't find enough talent to fill open positions (PwC spent millions in a desperate attempt on LinkedIn), yet they continue to underpay and experience high turnover. Another example is the primary care physician. Demand continues to soar, supply is falling, and wages are flat at best. Without accountants, we couldn't rely on financial statements; without PCP's, we wouldn't be healthy. Not exactly low value positions; These fields will either face a major restructuring, a significant drop in quality, or a healthy rise in fees.
You would think money always follows where the world is going and intersect at the point of equibrium. There seems to always be external factors that create a market imbalance between compensation and value creation. For example, the value of atmabus' business insight relative to how much he gets paid for it is grossly imbalanced. So are you undervalued or overvalued? Where else are there market inefficiencies to capitalize upon?
15 March 2011
Cheers to the great american startup
The American beer industry has long been known for its deep roots and rich history. From the Midwest boom years to the more recent ubiqitous TV brand building, the industry has long had visibility in most households. Despite all of this, it's ironic that in this current day, the largest American beer company is only 25 years old, founded by a Harvard MBA, and runs like a startup.
Boston Beer Company's (aka Sam Adams) roots dates back to an 1860s family recipe used in its most popular Boston Lager. It was founded by Jim Koch in 1984 with the simple goal of bringing quality craft brew to the American public. At the time, microbrews were non-existent, so it was virtually impossible for him to catch the attention of distributors and bar owners; Koch literally brewed the first batches at home and drove bar to bar with samples trying to convince establishments to serve the local beer on tap. Growing first in the Boston area, it gained national prominence by winning the top spot in the Great American Beer Festival just a few years later. The rest is history - it amassed $500M of revenue in 2010.
Despite having less than 1% of the US market, Sam Adams is the largest remaining American brewer. Budweiser sold to Inbev (Brazil/Belgium), Miller to SAB (South Africa), Coors to Molston (Canada). As these players commoditize the industry by getting bigger and bigger, Sam Adams takes the exact opposite approach. It remains very localized, differentiatied, independent, and driven by passion for quality. Annual trips to Germany are made for its premium raw materials; Sam Adams kept production local and acquired the brewery locations to ensure consistency (95% of the beer is brewed in its company-owned breweries in the US). Koch owns 100% of the voting stock and has somehow built a strong foundation in the midst of significant pressure from industry consolidation.
Sam Adams revolutionized the industry by its success. When Koch started, there were no US craft breweries. Now there are roughly 1600, representing almost 10% of the market. They frankly put quality beer on the map - No longer were tastings and premium ingredients reserved for wine aficianados. Koch also supports the industry despite potential negative impacts to his company. It sold 20,000 pounds of hops to competitive craft brewers at cost during a 2008 shortage; it funds new brewers (and other new businesses) through a partnership with a microfinance organization.
Its refreshing to see a successful American startup stay true to its roots despite its rapid growth. Sam Adams has successfully created a new concept in the midst of mass commoditization, led the industry in innovative products, remained independent, and kept production here in the US. So next time you are in an airport, have a cold Boston Lager in appreciation for the great American startup; its a shame that Obama chose a foreign beer (Bud) at his reconciliation "beer summit."
Boston Beer Company's (aka Sam Adams) roots dates back to an 1860s family recipe used in its most popular Boston Lager. It was founded by Jim Koch in 1984 with the simple goal of bringing quality craft brew to the American public. At the time, microbrews were non-existent, so it was virtually impossible for him to catch the attention of distributors and bar owners; Koch literally brewed the first batches at home and drove bar to bar with samples trying to convince establishments to serve the local beer on tap. Growing first in the Boston area, it gained national prominence by winning the top spot in the Great American Beer Festival just a few years later. The rest is history - it amassed $500M of revenue in 2010.
Despite having less than 1% of the US market, Sam Adams is the largest remaining American brewer. Budweiser sold to Inbev (Brazil/Belgium), Miller to SAB (South Africa), Coors to Molston (Canada). As these players commoditize the industry by getting bigger and bigger, Sam Adams takes the exact opposite approach. It remains very localized, differentiatied, independent, and driven by passion for quality. Annual trips to Germany are made for its premium raw materials; Sam Adams kept production local and acquired the brewery locations to ensure consistency (95% of the beer is brewed in its company-owned breweries in the US). Koch owns 100% of the voting stock and has somehow built a strong foundation in the midst of significant pressure from industry consolidation.
Sam Adams revolutionized the industry by its success. When Koch started, there were no US craft breweries. Now there are roughly 1600, representing almost 10% of the market. They frankly put quality beer on the map - No longer were tastings and premium ingredients reserved for wine aficianados. Koch also supports the industry despite potential negative impacts to his company. It sold 20,000 pounds of hops to competitive craft brewers at cost during a 2008 shortage; it funds new brewers (and other new businesses) through a partnership with a microfinance organization.
Its refreshing to see a successful American startup stay true to its roots despite its rapid growth. Sam Adams has successfully created a new concept in the midst of mass commoditization, led the industry in innovative products, remained independent, and kept production here in the US. So next time you are in an airport, have a cold Boston Lager in appreciation for the great American startup; its a shame that Obama chose a foreign beer (Bud) at his reconciliation "beer summit."
24 February 2011
Taxes and Entrepreneurship
I read an interesting article this week in Inc. magazine which suggests that there is no correlation between a country's tax environment and entrepreneurship. This theory runs counter to the common belief that profit incentives drive innovation and new enterprise. Isn't this the crux of capitalism - self-interest creates economic value?
Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.
There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.
Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?
I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?
Meet Norway - the exact opposite of the US. A country where there so many taxes that even Nancy Pelosi would say no: 50% on income, 3 times US payroll, 25% sales, and even a 1% "wealth tax" on total assets on people making more than $120k per year. Stifling for business, right? Apparantly not. Per capita, there are more entrepreneurs than there are stateside. The rate of startups exceeds the US and the gap continues to widen. Government programs seed startups in Norway because of its large coffers. And Norweigan entrepreneurs don't seem to mind paying the lion share of their profit to support the greater good.
There are many reasons why according to the article, but i'll discuss a couple relevant to this topic. For one, people don't worry about education, health care, and retirement. All bills paid by Uncle Sven. Think about the contrast in the US; most of us are tied to our corporate job specifically because of these things. We'll stay in suboptimal situations rather than launch a risky new venture where no health benefits exist for example. Also, entrepreneurs are not driven purely by money. They want to build businesses, their reputation, and make a mark on society. Sure money helps, but successful entrepreneurs have loftier goals in mind. Warren Buffett and Bill Gates didn't start businesses to make millions; it was the effect of them building great businesses.
Are we jeopardizing the long run for short-term wins? By not providing the necessities, are we incentivizing corporate drones at the expense of the next game changing industry? Is our money-centric culture preventing us from seeing the bigger picture of what business is designed to do (such as raise the standard of living for its residents)?
I'm not convinced that socialism is a business incubator at all. I think Norway has succeeded in spite of their tax code rather than because of it (due to factors such as its net exporter situation, small size, etc...). How many Googles or IBMs has Norway produced? The US simply has done it for a longer period of time and on a much greater scale than any other country in the world. And I do think free enterprise is the most efficient vehicle to change the world for the better. But it raises an interesting question, do we undermine the power of entrepreneurship by focusing only on the wallets of the entrepreneur ?
Subscribe to:
Posts (Atom)