When Cost Accounting (Almost) Killed the Sale

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I was walking by C.P. Yang Korean grocery at 73rd and Columbus earlier this afternoon, and saw a delivery truck drop off some spectacular looking lilacs from Sharon, CT.   They literally dropped them on the sidewalk in front of the entrance to the store, and drove off.

I went to do another errand, and then circled back to ask the man tending to the flower stand how much for a bunch of lilacs, which at this point were lying by his feet, but not yet divided into bunches.

“They are not ready for sale yet, I paid $200 for all of them, but I have to count them, to find out how many bunches, so I know how much to charge” he told me.

“Aah, a cost accountant, I do cost accounting too,” I related, hoping to make a connection, and close the deal.   “How about if I pay you $10 for one bunch?”  This is the price I saw for a bunch of lilacs being sold at a nearby store, but I wanted my bunch from this fresh delivery.

“No I have to count them first, they are not ready for sale,” came the terse reply, with no indication of when these particular lilacs might be on the market.

I guess this story is an example of why Cost Accountants usually don’t get promoted into Sales I thought to myself, as I shrugged my shoulders and walked off, lilac-less.

I always advise my clients to only pursue Cost Accounting studies when the investment of time can pay back through better understanding of potential cost savings, or better informed pricing strategy.   But enough of that, I’m off to try to buy a bunch of freshly picked lilacs, which hopefully have been both costed and priced by now, and ready for sale.

 

 

 

Yelp vs. Angie’s List Represents Battle of Conflicting Business Models

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Business model is a term with multiple meanings, depending on the context.

In its broadest sense, it describes the way a company has chosen to conduct business:  what revenue sources does it aspire to, which markets, segments, channels, and how does it fulfill that business when it gets it?

In a more specific sense, a business model is an analytical tool that allows business managers to test the financial outcome of various business strategies or decisions described above, by mathematically modeling the cause and effect of each decision, individually and collectively.  If the models are skillfully built and used, they can provide huge informational benefit, and at a fraction of the cost of actually going to market.

As such, a business model is a way to identify the most profitable set of business decisions, while avoiding a painful “trial-and-error” approach.

The Internet is still so new, we can see companies with starkly different business models battling each other in the same space.  For example, Angie’s List and Yelp both went public within the last five months.  Both are forums for consumer feedback on goods and services, but their business models actually could not be more different.

Yelp’s reviews are freely available on the internet, while Angie’s List reviews are only available to paid members, after a free introductory period in new markets.  Angie’s List feels that a loyal membership base and strong service provider loyalty are the strengths of its business model.  Yelp cited its attractive business model in its S-1 document, prior to its 3/2/2012 initial public offering, and in particular it ability “to attract a large audience of consumers with almost no traffic acquisition costs and a diverse customer base of local business and national brand advertiser.”

So far, neither company has distinguished itself as having a clearly advantageous  business model.  Working on the premise that its member reviews are valuable information worth paying for, Angie’s List was able to raise $114 million from investors in November of 2011, despite having been consistently unprofitable since its founding in 1995.

Embracing the spirit that reviews should be made freely available to build internet traffic, which is coveted by its advertisers, Yelp raised $96 million in early March of 2012, giving it a market cap of approximately $1.3 billion.  This is a pretty rich valuation for a company which had losses of $7.4 million on revenues of $58.4 million for the first nine months of 2011.  Maybe this is a market segment where the best business model is yet to be found.

The same debate between free and gated access to content is being played out by newspaper and magazine publishers.  Recently I’ve been noticing that content is freely available once I find the location of the “click through this ad” button on my screen.   Often it is on the upper-right hand corner of the screen, but now always.  I have a sneaky suspicion that every second it takes me to find the button that lets me move on from the ad to the content is being counted by the publisher, and sold to his advertisers.  This is a business model I can live with.

My wife and I recently attended a seminar on the impact of digital media on newspaper and magazine publishers, and the panelists collectively agreed that they need a better way to monetize content they put on the web.  One of the ideas put forward was compensating journalists whose content is put on the web based on the amount of traffic it generates.  My wife raised a concern that this is not what she is looking for from the “New York Times” and others, and the attendees burst into applause.

These days, it is harder to come up with a new business model in food retailing, but people keep trying.  A few years ago, Really Cool Foods opened a store on the Upper East Side, selling only their own product – convenient, ready-to-eat, high quality – which apparently was manufactured somewhere out on Long Island.    They attracted a few consumers, confused a few others, or as one Yelp respondent posted:  “It looks like a market from the outside…but where is the produce section? And the kitty litter aisle? And the butcher case? “  Retail rents are so high in Manhattan that store owners have to make use of every available square foot, and this store simply didn’t.  Now a couple of years later, I see a store selling prepared organic and raw foods opened up on Amsterdam Avenue in the Upper West Side, using the same approach, and again exclusively selling food made in their parent company’s factory.  Is their food good enough to make this business model work for them better than it did for Really Cool Foods?  Time will tell. For now, I can check out their reviews on Yelp…..for free.

Final Exam Question to Merchants: Calculate your Groupon’s ROI

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Groupon spent $208 million in marketing for the first three months of 2011, this represented 77% of its $270 million of gross profit for the same three month period.   Groupon’s marketing spending for these three months was driven by customer acquisition in international markets it had recently entered.  International sales represented 54% of Groupon revenue for this period.

By comparison, Google spent $246 million in sales and marketing in 2004, the year of its IPO; this represented 14% of its $1,732 million in gross profit for the same twelve month period.  International sales represented 34% of Google revenue for 2004, up from 29% in 2003.

Even allowing for Groupon’s relatively faster penetration of international markets, one might ask: what is it about Groupon’s offering that is requiring it to spend such a high percentage of its gross profit?   After all, coupons have been around for decades prior to the launch of Groupon, while Google’s AdWords product was truly new to the marketplace.  Is there something about the range of possible financial results for merchants on a Groupon promotion that requires more convincing, leading to the need for a relatively high marketing spend by Groupon?

To further explore this question, I asked the students of my Managerial Accounting and Finance class at Polytechnic build a simple Return on Investment model for a hypothetical restaurant owner using Groupon for the first time.

In this hypothetical exercise, a restaurant owner had 1,200 couples per month visiting his restaurant prior to running a Groupon promotion which attracted 240 customers, entitling them to a $100 meal, one that cost the restaurant $40 to serve.   Assuming that half these 240 couples were existing customers, and half were new customers, I asked the students to calculate what percentage of the newly found customers had to become “regulars” for the restaurant to get a reasonable 15% Internal Rate of Return (IRR) on the cost of the Groupon promotion.

The answer…… nearly 25% of the newly found customers had to become regulars.

For a free copy of the merchant Return on Investment model described above, please send a request at David@RudofskyAssociates.com.   It provides an easy way for business owners to model what the Internal Rate of Return of a Groupon promotion might be for them, under a variety of assumptions and scenarios.   And for some more interesting perspectives on merchants’ results with Groupon, check out these articles in “Business Week” and “Harvard Business Review.”

 

 

 

What to Do When the Cook Doesn’t Show Up

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My wife and I had an impromptu lunch a few weeks ago at Harry’s Burritos on 71st and Columbus Avenue in Manhattan.   Our waiter looked flustered when he seated us, and lunch took about forty-five minutes to arrive, way longer than we expected.

When my wife asked the manager why service was so slow, he responded that one of the two cooks had simply not shown up for work, and the single cook was overwhelmed.  He comped us for half our meal.   The food was very good when it finally arrived, and we left feeling sorry for the mom with two young sons at the table behind us, who still hadn’t received her food.

Probably Harry’s Burritos should have closed off part of the restaurant (rather than seating a full lunch crowd), or at least simplified the lunch menu.  Warning customers in advance that it was going to be a longer-than-average wait would have been nice too!

 

NY City Showing Support for Food Manufacturers

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Earlier this week, NY City announced 22 new initiatives to help small industrial businesses stay and grow in New York.   As reported by the NY Times, overall employment by manufacturers in NY City has declined by almost two-thirds since 1990, but the number of jobs in food-making increased by about 6 percent last year, running counter to that trend.

With that in mind, the city has contributed $1 million to a $10 million small business loan pool, intended to help finance the growth of some promising NY City food makers.  Goldman Sachs will contribute the balance of the $10 million, which will be managed by a small business lender to be chosen.

Recognizing that lack of affordable manufacturing space is also an acute problem for growing food makers based in NY City, the Economic Development Corporation is “revamping several spaces, including the former Federal Building in Sunset Park,” the NY Times reported.

Adam Friedman, the director of the Pratt Center for Community Development told the NY Times that businesses typically reach a tipping point when they need more than 30,000 square feet, and that is when they first start to think about leaving the city.   (As an aside, I do consulting work through the Industrial &  Technology Assistance Corporation (ITAC) which among its many services, helps NY City-based manufacturers implement Lean manufacturing techniques,  reducing cost, inventory investment, and space requirements)

It’s great that NY City is taking this step to help support manufacturers, including food makers, which often have a difficult time competing for equity investment with companies in faster growing industries.   $10 million is small compared to the need, but it may be a big help to a couple of small, promising companies.

Haagen-D’Azs was launched by Reuben and Rose Mattus in the Bronx in 1961, acquired by Pillsbury in 1983, and is no longer made in NY City.   I’m going to be attending the Fancy Food Show next month where I hope to visit the booths of NY City based businesses such as Wine Cellar Sorbets and Chozen all natural ice cream. If either of these brands becomes a huge success, it would be nice to think they could continue to  be economically manufactured in NY City.