Let’s Get Phygital!!! Phygital…

As a 2 year old outsourcing startup that services SMB back office operations for the likes of established firms and new economy businesses, PARR is often faced with difficult decisions about how to find and use facilities to better serve clients.  For all of the firm’s collective experience in complex transactions and professional service delivery, finding the right facility and long-term office arrangements has proven to be one of the company’s hardest challenges.

Given the emergence of the digital economy, real estate choices have grown for all firms.  But the volume of options can predictably lead to some paralysis.  Throughout the search for the ideal facility, Parr faced the constant dilemma of finding the right balance of a functional and attractive physical space with the needs of a flexible, modern and scalable technological infrastructure.

Maybe the whole episode would have been easier if the company learned early on that there was a name for this trend – “Phygital”.   Where have we heard that word before?

One Chicago firm describes the development as applied to commercial real estate:

The “phygital” trend – the blending of physical and digital commerce – continues to redefine the commercial real estate industry. Retailers such as Home Depot and Paypal, Foursquare and Walgreens, and Amazon are exploring ways to bridge the phygital divide. Tools and apps like QR codes and Belly bring the mobile world into the physical consumer experience. The use of social media among landlords is increasing, while traditional office spaces redefine their use as incubators for the next generation of internet giants.

We’ve known about the ongoing convergence (or collision, if you will) of the bricks and mortar world with the digital world for some time, but it was never so clear that the phygital trend has application to the process of site selection that small- and mid-sized businesses (SMBs) struggle with today.

Site selection is a well-established field (actually it’s a conglomeration of many disciplines) that engages some real-estate professionals full-time, and is important enough globally to draw the devoted attention of multinational firms that track the industry on a much larger international scale.  Real estate expertise is so valuable that you can find experts to guide your company’s site selection process within a 5 block radius or a 5 continent radius.  Don’t expect a glossy insert or double-sided brochure to convey the importance of these issues.  This stuff is the subject of white papers, full-blown analytics platforms, and dedicated site selection specialists, all of which cater to both supplier and buyer segments.  Global consulting giant KPMG has a whole vertical devoted to this area with its own brand identity under the Competitive Alternatives moniker.

In some ways the intertwined macro/micro views are like the yin and yang of the commercial real estate market – each exists in its own space, but is integrally bound with the forces of the other.  Despite having a principal with significant experience as a development specialist, Parr experienced first-hand the difficulty of applying that specialized academic and professional knowledge to its own operations, particularly in a quickly evolving local urban realty market like Chicago.

As they do for many SMB firms, the significant capital costs and onerous restrictions of long-term commitments common to commercial leases have proven to be a barrier to setting up shop in a permanent home for Parr.  Some professionals remind us that office costs are probably the second largest expense for most companies behind personnel and labor expenses, and other forms of human capital.  No wonder that it’s tough to pull the trigger on such a significant capital investment when firms are trying their best to remain capital lean. 

Can companies ever commit to a home when they covet their mobility?  This fear of commitment sounds a lot like a bachelor’s restlessness to maintain freedom at all costs.  I guess corporations really are people too, right?

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Belly – a Groupon Affiliate

Tidbits #4 – Is It Unholy To Ask For a Prenup?

If the thought of talking money before saying “I do” makes you feel squeamish, you are not alone.  I personally know one couple who got a prenuptial agreement before exchanging their vows (still married, I’m happy to report) and another who implemented an agreement mid-stream after 2 kids (guess that wouldn’t officially qualify as a pre-nup). 

According to the 2010 Honeymoon Study conducted by The Knot only about 3% of people with a spouse or fiancé have a prenuptial agreement.  But with divorce rates hovering around 50% and more and more folks entering 2nd or 3rd marriages with offspring from previous relationships, having such uncomfortable discussion can save lots of stress and legal bills later in life according to some matrimonial and family attorneys.  The best line I got from a financial planner in justifying the process – “it’s just checking the box on a business transaction that also holds the promise of a future of love and devotion.” 

I see the arguments on both sides.  Ultimately, it’s a completely personal decision.  By the time this gets published, my wife and I will have had our 10 year anniversary – the best 10 years of my life…  In case you were wondering – no we do not have a pre-nup, no lawyer would draft an agreement to equitably split up $1.50 in my checking account and a ’95 Mustang with 100K miles in case of a split.  Besides, as Jenna loves to say, “what’s yours is mine, and what’s mine is mine.”  Could not agree more honey… :-)

Role of the CFO in Mergers, Acquisitions and Integrations

What makes mergers, acquisitions, integration difficult?  Not every deal is done by the same rules, and no one strategy fits every company.  One thing is for sure – facilitating a transaction or liquidity event is as much art as science, and many industry professionals would argue that the CFO must play three essential roles in order for the deal to work:

1. Strategist – In addition to the CEO and other key executives, the CFO must wear the hat of a strategist during the process, and this goes beyond merely looking at the numbers and deciding whether or not multiples on the table makes sense.  Does the acquisition or divesture fit long-term corporate strategy and vision?  What are the pitfalls that everyone’s overlooking?  Companies without COOs often have CFOs who translate numbers into implementable action items, and this is a logical extension of such responsibility.

2. Synergist – Positive synergies do not just appear in thin air.  If it’s there, it must be fostered in order to reap the rewards.  Same with the negative synergy.  If not addressed or extinguished right away, like a wildfire, it will grow until the entire deal is consumed.  The CFO must manage the synergies, both positive and negative, and seek answers to the fundamental issues and questions at hand.  What are the drivers?  Do we have the right people with right incentives to accentuate the strengths while addressing the weaknesses?

3. Integrator – By this I mean wearing the hat of Chief Implementation Officer.  This is where a CFO’s project management skills (by nature, we are type A, detail-oriented professionals) come in handy, and he/she must roll up the sleeves and their hands dirty.  Run or participate in meetings – implement, monitor, assess and adjust, as my former boss used to tell me.  I’vesbeen brilliant deals fail to live up to their billing due to poor integration efforts.  CFOs must take charge.

Does this mean other executives are chopped liver in the process?  Absolutely not.  Everyone, from a junior analyst to the CEO, plays a critical role in the process of being proactive and identifying opportunities.  This is just one perspective from a key position.  One thing for sure (said I it twice on this post) – if the synergies are not achieved, CFOs are ultimately accountable and stand on the firing line for explanations, so they might as well dive in head first and take control.

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Finer Things in Life – Cure Your Own Bacon (FTIL #5)

Famed celebrity chef Emeril Lagasse made career out of it; certain religions prohibit it; but at the end of the day, there is nothing better than the smell of thick-cut bacon frying on the stovetop Sunday morning.  A friend of mine, a former GM at a restaurant now turned PR agent, once gave me a recipe for curing your own bacon.  He swore by the superiority of home-made bacon over anything you can buy in any specialty store.  Initially I was little skeptical, but given my apartment’s vicinity to Chicago’s Fulton fish and meat markets where I can get relatively inexpensive grade A+ pork belly, thought I’d give it a shot.  As I found out, the process is relatively simple:

  • Start with 4 to 5 pounds of thick cut pork belly
  • Using a mortar and pestle, crush together a couple of table spoons of peppercorns and fennel seeds (licorice scent of fennel really adds to the mix)
  • Add a quarter cup of salt (John said to use kosher, I used Himalayan and it worked just fine…) and a quarter cup of something sugary (sugar, syrup or honey – I like to use Agave nectar)
  • Lastly, add some rosemary or thyme into the mixture (if you have fresh sprigs, great – if not dried seasoning out of bottles will also do) along with some garlic, either whole cloves or crushed

Rub the mixture liberally onto sliced pork belly.  Put them in a Ziploc bag and place in your fridge for a week or so.  Wash in cold water to remove all that salt and sugar then dry thoroughly.  Here is an important step – smoke or bake the pork for an hour at 225~250 degrees before frying them.  Home cured bacon, without all the preservatives and commercial brine, will last a few more days in your fridge.  The best part I believe – curing your own bacon could become part of your wonderful Sunday morning family tradition, not to mention knowing that you are feeding your family one less preserved food.

Hold That Position: Can Lululemon Extend Without Breaking?

The yoga craze is getting everyone’s attention in today’s health & wellness-oriented culture – spawning yoga brands, if you can believe it.    Devotees to the yoga lifestyle know familiar names like Gaiam, Lucy, Prana, Shakti and Lotuswear, but the most recognizable phenomenon in yoga has to be Lululemon Athletica.  We’re not just talking about yoga pants and leotards.  Lululemon accessories are ubiquitous around Chicago.  On the local El train you’re more likely see  their purses among female commuters than brands you’d expect, like Coach or Kate Spade. 

After going public in 2007, Lululemon has rolled into the enviable position of media darling, with a market valuation above $10 Billion to the fascination of the Wall Street crowd…and it’s kinda popular with its customers as well.  The attention is great, but can it stand the scrutiny?

While some leading firms started with deep roots in yoga’s core philosophies and culture (Gaiam, for example, was founded in 1988 with a focus on teaching media and materials before evolving into a full-blown lifestyle company), Lululemon is one a number of industry leaders created by yoga newbies and converts.  Snowboard and surfing entrepreneur Dennis “Chip” Wilson founded the company in 1998 after his very first yoga class.  Ironically, the level of buzz and brand loyalty Lululemon has generated seems to be something that perhaps only could have been achieved by a “cool” outsider.  For all of its well-earned credibility as one of the first recognizable yoga brands, Gaiam’s image is often mired in the “new age” haze, and it’s easy to see why the company can’t connect with consumers as readily as Lululemon when you endure Gaiam’s prominently placed 3 minute informational video.  After watching it, I asked myself whether there is a word that means the opposite of “buzz”?  Gaiam’s website tries to educate you, while Lululemon gets right to the point with a website that pushes its exclusive wares the instant you arrive.

According to a recent Wall Street Journal feature, exclusivity is one of the key drivers that Lululemon has used to effectively reach sales figures that help it outpace established firms like JCPenney, as well as high-end juggernauts like Nieman Marcus in key metrics such as valuation and sales margins.  Lululemon accomplishes all this in part by going against modern conventions, including a very intentional orientation away from technical analytics and data mining of its customer activity, according to its Chief Executive, Christine Day.  Beyond its focus on offering quality products, the company does not just rely upon the illusion of exclusivity, it actually creates it by stocking limited quantities of popular items.

While a large part of Lulu’s strategy is getting the product right, an equally important part is keeping it scarce. The goal is to sell gear at full price and to condition customers to buy when they see an item rather than wait. “Our guest knows that there’s a limited supply, and it creates these fanatical shoppers,” says Ms. Day.  New colors and seasonal items get three, six or 12-week life cycles so stores feel fresher. Sheree Waterson, Lulu’s chief product officer, says a hot-pink color named “Paris Pink” that launched in December was supposed to have a two-month life cycle but sold out its first week.

This whole discussion sends my mind back to one of my favorite economics jokes, surprisingly enough courtesy of Jim Henson’s famed Muppets.  In the opening scenes Muppet Christmas Carol, Gonzo (in the role of the earnest Bob Cratchet) chides Rizzo the Rat for eating the wares for sale in his apple cart.  Rizzo’s classic response, “I’m creating scarcity…Drives the price up.”  (If you’re too impatient, just skip to the 3:30 mark.)  I guess what was true in this Victorian-era flashback remains true today.

Who’s to say whether yoga devotees will start feeling sore after being manipulated in that way?  Analysts and investors won’t be the only ones asking whether Lululemon’s “cultivated scarcity” can last now that it’s competitors and its customers are waking up to the secrets at Lululemon’s core.

Lululemon – WSJ Analyst Discussion

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Exported From Detroit

After BMW, Mercedes, Porsche and other luxury brands proved that having an SUV in their line-up does not necessarily dilute either brand image or value of flagship products, other ultra-luxury brands such as Bentley, Maserati and Lamborghini announced their intentions to jump into the segment with price tags of around…   are you sitting down?  200g’s.  While certainly pricey, complete with hand-crafted everything, 500+ horses (some with 12 cylinder engines), picnic set with silver and Lalique crystals standard, these brands are betting that there will be ample demand despite the current economic doldrums.  Not necessarily arguing with the logic (besides, what do I know – I only drive a Q7, which my business partner has repeatedly labeled as a chick-mobile), but I do find Maserati’s announcement that it will produce its SUV called Kubang in Detroit at a factory where the workers currently assemble Jeep Grand Cherokees and Dodge Durangos little more than curious.  They went further to specify that Kubang will share the same platform as the Jeep.

Whoa…   Am I the only person thinking this will never work, despite Kubang being slated to get Ferrari engines?  Many know that Audi / Porsche / VW have the same owner as do Toyota / Lexus, Honda / Acura and there are countless other mainstream and luxury brands that share similar DNA.  But Maserati and Jeep (Maserati is owned by Fiat, which bought Chrysler, who owns Jeep and Dodge brands)?  If this works, I think it will be one of the biggest automotive coups ever and good for Detroit.  If it doesn’t, maybe Maserati’s marketing team can blame it on the name – Bangku, slight change in order of the letters, means fart in Korean and I believe the word sounds similar in other East Asian languages.  Perhaps Maserati is not planning on many sales in those parts of the world – remember the classic gaffe by Chevy years ago, Nova?  And they wondered why the vehicle did not sell well in Spanish speaking countries…

Now only if Rolls comes up with minivans….

 

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LEXECON 1 – Invest in Plastics: Chicago’s Bucket Boys

Photo: LensImpressions.net

From an early age I was always interested in business, and was the only kid in my grade school who regularly read the “Business” Section of the local paper, and who considered it normal to read publications like “Business Week” and “Forbes” from cover to cover.  Growing up in a family of teachers, it’s no surprise that I’ve always been an avid student of many things.  Though I’ve studied business for most of my life in some form or another (including college and graduate work), it didn’t come naturally to me.  Passing the two decade mark since my first formal education as a B-School undergrad, it’s intriguing to learn valuable lessons in business practically every day, whether they come from high-minded academic sources or even from simple observations on the street.

Invest in Plastics – Chicago’s Bucket Boys

Spring announced its arrival this week in Chicago with unseasonably warm weather, but one of the most familiar signs to locals of the change of seasons is the clatter of complex beats tapped out on plastic utility buckets cutting through the urban noise and congestion of city traffic and pedestrian mobs.  After your ears adjust to the high-pitched rattle and you get over the impulse to ask whether these drumming youngsters should be in school or somewhere other than Chicago’s famous boulevards (maybe like here), you begin to appreciate that there’s more to your typical bucket drummer corps than raw rhythmic talent – these kids can be pretty savvy.   Don’t be fooled into lumping them in with the average panhandler (a topic for another day).  The “Bucket Boys”, as they are known to some Chicagoans, are smart, and they’re about business.  The once underground phenomenon has become so prevalent in some areas that many cities are trying to bring these performers out of the shadow economy with licenses and permits.

At the end of one of last year’s Taste of Chicago events, I walked out of Grant Park with thousands of others right back past the spot where one group of bucket drummers had been performing earlier near Michigan Avenue.  I could tell from before that they could play and knew how to work the crowd to earn a fair amount of tip money.  Their chants and songs were cheeky, yet effective, but they knew their performance cues as well as the most polished professional musicians.  As they were breaking down, I stopped in my tracks shocked at what I saw.  One kid, who I’d recognized earlier as a skilled drummer and a leader of sorts, had begun counting the day’s take and handing out shares.  He broke up the money for distribution.  I could see there was some hierarchy in effect, which meant the shares weren’t completely equal, but no one in his crew questioned their take or his authority.

What impressed me more was the fact that he when he couldn’t get them to lug away their buckets and sticks after finishing, he struck up a conversation with some other kids, and just a few moments later…he had sold all of their equipment to some complete strangers, who were determined to have their own try at earning a few dollars from the departing crowds.

As the new entrants to street entertainment began to take up their places for the evening set, the head of the original group laughed aloud as he counted his money.   I couldn’t tell if he had improvised it, or if that was part of his usual business model (“get in, get paid, get out”), but I’d never seen such a clean business operation and well-executed exit strategy as these.   I didn’t bother to hang around for amateur hour, I had already seen the pro at work.

Tidbits 2 – Fallen Stars

A while ago there was an article on WSJ.com regarding post-playing career bankruptcy rates for professional athletes.  While I cannot recall the specific numbers, the highest rate was in the NBA (some 70%+ within 3 years of hanging up the sneakers), followed by the NFL and the MLB had the lowest (but it was still ~30%).  The vast majority of us can only fantasize about a pro-athlete’s paychecks – $100MM+ multi-year contact, plus endorsements (there are 11 of them in the NFL, including Michael Vick, the only player in history of any league to have more than one such contract, e.g. pre-incarceration and post-incarceration).

So two recent articles on Sports Illustrated on Lenny Dykstra and Antoine Walker really befuddled my mind…   Both had ~100MM in life-time earnings, one going to jail for fraud (Dykstra) and the other languishing in Boise’s developmental league with a seven-figure debt and a myriad of lawsuits.  How is this possible?  Aren’t there start-ups (including one of mine), that would go like gangbusters to produce positive returns for investors, if given a mere fraction of these earnings?  These former all-stars in their respective sports blame the  rock-star lifestyle (Dykstra was still flying private planes while penniless), poor investment decisions (both invested in real estate during industry decline) and surrounding themselves with bad influences (Walker at one time had up to 70 friends and family members on payroll).  Some blame such downfall to rags-to-riches mentality, e.g. many pro-athletes came from nothing so when they have something, they make poor decisions, much like how a good chunk of lottery winners go bankrupt not too long after winning their millions.

Others blame the league front office for their failure to mentor, educate and intervene.  I say you just have to look in the mirror to lay the blame.  Sad stories indeed – hopefully there’s good endings for both…

Tidbits – Webber’s Latest Bouquet Openings

Sir Andrew Lloyd Webber is arguably the most successful composer of our time.  Many are familiar with his enchanting creations – the music behind Cats, The Phantom of the Opera, and Evita, just to name a few.  This talented maestro creates musicals, partakes in philanthropic endeavors and owns theaters.  Now, thanks to a record-breaking auction of a portion of Webber’s personal wine collection through Sotheby’s Hong Kong, the rest of the world caught glimpse of his other passion, collection of great reds which he says he began at age 15.  While both his celebrity status and the location of the auction (the Asian market has exploded for fine wine and arts recently) undoubtedly pushed up the valuation, we laypeople still have to shake our heads at the amount of money that was raised from only a fraction of his collection – 6MM USD or 3.5MM GBP.  Good for Sir Andrew Lloyd Webber….

Out of Touch – Guest Post by Jeff Pryzbyl

On February 1, the Chicago Teachers Union began the negotiation of their June 30 expiring contract.  Their requests – raises of 24% in year 1 and 5% in year 2 (on top of annual raises and advanced degree raises), smaller class sizes, and the hiring of 2,600 support staff.  At a cost of over $700 million, their proposal suggests the state and city raise taxes to fund their request.

How do the proposed increases square with the current economy?  Since 2001, the annual rate of inflation has exceeded 3.25% just once (2008) and was even negative (-.34%) in 2009.  Social Security recipients have gone 2 of the last 3 years without any cost of living increases.   Last year was the first year my real estate taxes actually declined, finally following  the decline in property values in my area.  In last January’s lame duck session of Congress, the Illinois House and Senate passed a 66% tax increase on personal income.

How many businesses can afford a 25% increase in compensation expense and enjoy the pricing power to pass this cost along to its customers?  Especially for a workforce that works 39 weeks per year, receives two weeks of vacation during the 39 weeks and requires at least one year of mentoring and guidance before being terminated.

I know plenty of teachers, public school and private school, City of Chicago and suburban.  A common argument is that the profession is severely underpaid for the work they do.  It is a demanding occupation and, even after leaving the school at 3:00-3:30 in the afternoon, they must grade papers and/or create lesson plans at home.  How many of us can get to work at 8:30 am, leave by 3:30 and not have unfinished work?

So now, the Chicago Teachers union, led by Karen Lewis, who recently came under fire for mocking Secretary of Education Arne Duncan’s speaking lisp, wants local politicians, who already voted to extend the Chicago school days and approve a tax increase just 13 months ago, to increase taxes again so the whole state can fund their requests.  Any wonder Wisconsin and Indiana have moved to reduce collective bargaining among public sector unions?

Jeff Pryzbyl is a guest contributor to SMB Matters.  Views and opinions expressed are those of the contributor.

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