Happy New Year 2018, The New World in Business Models
As the new year blasts into reality for 2018, I’m going to try and write a good deal more in blog posts for the coming year having to do with many things including genealogy, the stock market, leveraged buyouts and politics. Now why leveraged buyouts? Well leverage buyouts were the lifeblood of the 1980s and probably still are today. However leverage buyouts simply do not have the all those years ago. Although you can go buy a company and hold it until you die, that’s not the way the world is going anymore. Technology has taken over and all the sudden you have websites like this. This is kind of the business model of the future.
I happen to be caught in the middle. I am not exactly a techie, but I am not exactly an old school leveraged buyout guy either. Rather a little bit of both. I used to love the idea of being a leveraged buyout guy. I would listen to Henry Kravis and hope one day that he would impart his expertise on me and I would go on to make big deals. In fact, I did do some deals, but they just were not that big. I loved the idea analyzing companies just like I did when I was a banker. But it sort of got old and then the Internet Technology showed up and that was and the newest shiny object. A course the Internet was no shiny object it was a shiny galaxy. Here I sit more interested in the Internet down I never could be and leverage buyouts. However I still teach how to do leveraged buyouts because quite frankly not everybody is interested or even cut out for doing online businesses. There’s nothing wrong with bricks and mortar businesses as long as they stay in business.
Basically you can make your big money one of two ways. You can own a bricks and mortar company or you can own an online company. I find this a fascinating juxtaposition of collections of business models. I can attest to working both. So, what are the differences? Well we can go into a lot of different points. The old school bricks and mortar company is a very static world. It breaks down into a number of different categories which are universes unto themselves. For example, manufacturing companies are completely different than retail stores. Distribution companies are completely different than service companies. Yet I had just about covered in those previous two lines about every type of company in the bricks and mortar world. The online world is the wild west, the new breed, the new economy, the high tech world. This world is filled with colorful stories of the pioneers, Jobs, Gates, Case, AOL, Microsoft, Apple.
You have Gates at one end and Buffett on the other? Gates symbolic of technology, Buffett the old school value investor. Which one do you follow? The new or the old? If you are just starting out you must be torn, I know I am, and I am not even starting out.
The Manufacturing Model
Of course, if you have been keeping up with current events you might think that manufacturing companies are a thing of the past. You might believe that China owns all the manufacturing of the world. While this has become a reality in the last few decades, it certainly wasn’t always the case. Indeed, the highest quality products still come from the United States. Until recently, China was the new Japan. Following the Second World War, Japan became a symbol of cheap manufacturing. They essentially had to rebuild their infrastructure, and with it came brand new manufacturing facilities.
And then came China. China still has the stigma of low quality manufacturing, but it also has a much higher rate of technological advance as well as pay much more vibrant growth curve from manufacturing. Starting a manufacturing company still takes some substantial amount of capital to build the required manufacturing equipment. However, my business was never starting companies in the old world. My business was buying them, and manufacturing companies provided an excellent leveraged buyout structure because of the value of the equipment and assets are retained in the companies.
These days the world at large has not embraced the idea of starting up manufacturing companies. It costs too much money and too much time. It is now much easier to buy goods from the manufacturers in China and sell them right here in the United States. This utilizes an element of arbitrage to sell cheap foreign goods using cheap labor to wealthy Americans at heavily marked up prices. This is a great business model, especially if you are utilizing the potent marketing aspects of the Internet. Or perhaps you’re using the potent aspects of such selling platforms as Amazon and eBay. To the outsider looking at Amazon, or Home Depot, or target, or Walmart, it seems we are flooded with so many physical goods that it is a wonder anyone buys anything at all anymore.
I have an eBay account through my business. If it sells the most obscure hardware component’s imaginable. I’m amazed that sells anything at all, but it does. So even though we are flooded with so many physical goods, it doesn’t matter, there’s somebody out there to buy them. It might just be a question of where they’re located, and perhaps having the right price point.
So, what used to be a manufacturing model in the United States is now a distribution model, or perhaps a wholesaling model, or perhaps a OEM model. The private labeling craze is alive and well. By product from China, put your name on the product, and sell it as your own. This allows you to market the price and differentiate your brand from others in the same space.
These days there still is a place for manufacturing, but if you are not buying from China then you better have a good business plan to get off the ground in the United States. The wages are high and so are the rest of the costs. But there is one advantage, that is that you don’t have to ship your U.S. made products from the other side of the world. This reduces a substantial amount of costs. But if you have ever run a business you know that employees cost a great deal of money in the United States. It doesn’t even take a bunch of old corrupt unions to make it so. You have minimum wage, you have a competitive environment, highly skilled workers, and packages of benefits that make everybody cost six figures. So let’s presume for the moment that we must leave the manufacturing duties to those in the third world and move onto another business model.
The Distribution Model
So now have the distribution model. We have just seen how the manufacturing model has taken a back seat in the United States to China. What used to be a highly profitable proprietary business model is now relegated to obscurity. In contrast, the distribution model is now flourishing. The distribution model used to be typified by a very thinly capitalized, thinly margined, high volume food or dry goods distributor in an urban warehouse. Perhaps the business was distributing paper goods, hardware or many other commodities with tiny margins and the propensity to borrow heavily to support high inventory levels and not so fast turnover. Such companies still exist today, but you don’t care about them because they aren’t particularly exciting. They also don’t grow as fast as they used to grow unless they have embraced certain aspects of modern technology, namely an online presence.
So few of them have developed an online presence and that is quite surprising. Most of these old line companies still exist in the boroughs of New York, such as Bronx and Queens and low priced areas of the city where they have existed for generations in closely held family ownership, and often from immigrant backgrounds and surviving barely, long past their heyday.
However, today’s version of the flashy distribution business model is quite different. Now there are such things as online platforms which can make you a distributor overnight. There are third party warehouses that rent out space and manpower which can eliminate rent, overhead and even inventory levels. There are vendors that drop ship goods from anywhere in the world, reducing the carrying costs of your products. All the costs that used to burden the old style distributors can be reduced or eliminated in the new millennium business model.
All this has made the risky proposition of a distribution company into a high tech machine capable of generating high volumes and high margins. So what we have here is a dramatic shift in business models over the course of the decade or two. We now have a manufacturing environment which is pretty depressed and a distribution environment which is a budding entrepreneurial playground. Now it shouldn’t be too difficult to see that the likes of Amazon and EBAY are the face of the new distribution model. Funny that Amazon and eBay can’t manufacture anything, but they manage to grab the lion’s share of sales of everything. So the new breed of distributors, or perhaps wholesalers, or perhaps even retailers, are replacing most everything having to do with manufacturing. This model embraces efficiency rather than innovation. The innovation is taking place, not in the manufacturing sector, but in the software and systems area.