Buying a Franchise, Competing with Amazon, and the Limits of Digital Targeting

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RETAIL

There is still a way to compete with Amazon: on quality: “Aside from commodity products, which are more likely to win on price and price alone, shoppers remain discerning and concerned about quality, according to Brian Kilcourse, managing partner at RSR Research. That’s a major reason why most buying and selling continues to be conducted between brick and mortar walls, so that shoppers can check out the merchandise. The retailer may also be missing or ignoring the ethical and sustainability concerns among consumers, especially younger ones, in light of evidence recently uncovered by the Wall Street Journal that its apparel is produced in factories not covered by industry agreements forged after a devastating 2013 factory fire in Bangladesh that killed more than a thousand people.

“’I’m not one of these people who believes that Amazon is going to swallow the world. Amazon does many things that are interesting, they’re very disruptive and not afraid to experiment and fail,’ Kilcourse told Retail Dive in an interview. ‘But Amazon is only half of today’s equation for a retail selling environment, and they know it. It’s inherent in the Amazon Go experience—they recognize that the store has a role. In the long history of humans shopping for things, we now carry the store around in our pockets. But consumers haven’t given up their discriminating behaviors and in fact they’re using their tools to be as discriminating as possible.’”

FRANCHISING

Is it still possible to build wealth by buying a franchise? “Dan Gagne has been a plumber for three decades, but it has been years since he held a wrench. He has built a plumbing business in the Bay Area that generates $20 million a year in revenue and employs 100 people. The money his empire brings in allows him and his family to pursue other interests. ‘The income is more than I’d ever imagined,’ Mr. Gagne, 54, said. ‘I own several homes. We’ve invested in eight acres in Costa Rica and are going to build a health spa. We live there about six months of the year.’ He credited his wealth not to his skill as a plumber but to his being part of a national franchise, Benjamin Franklin Plumbing.

“Just since 2012, about 1,740 brands have tried the franchise model, according to FRANdata, a company that tracks and advises the industry. Opportunities include Sir Grout, which specializes in grout, tile and wood restoration, and Shack Shine, a house detailing service.  The costs for many of these concepts typically range from tens of thousands to hundreds of thousands of dollars (although a single McDonald’s location tops out at $2.2 million). But the comparatively low barrier to entry can cloud the risk assessment for entrepreneurs. Franchises are often promoted as businesses that fare well in a recession, but Darrell Johnson, chief executive of FRANdata, said the research did not support that. ‘Franchising is not an industry,’ Mr. Johnson said. ‘What you’re really asking is, what industries are more or less susceptible to downturns? And within those industries, what’s the presence of franchises?’”

TECHNOLOGY 

How did Pizza Hut fall behind Domino’s when it came to innovation? “Convenience was never Pizza Hut’s strong suit. Although the chain beat everyone to the internet (the company claims to have sold the first physical good online, in Santa Cruz, CA), Domino’s has long offered better technology. … In 1994, Domino’s was developing a website that let customers drag virtual toppings toward an onscreen pie. Pizza Hut’s service merely transmitted typed orders to a center in Wichita before routing them back to Santa Cruz. But what did it matter? As Stanford economist Nathan Rosenberg opined that year, the push to bring pizza delivery online was an instance of ‘sophisticated technology being put to trivial use.’ He was wrong: Online delivery is now the most important part of the pizza business. Post-recession, in the 2010s, Domino’s outdid Pizza Hut and everyone else with a superior delivery app and website. Then it introduced ordering via Twitter and Facebook Messenger and a fleet of DXP cars. Domino’s didn’t have to use food to entice customers. Technology was enough.”

STARTUPS

Heal, a “concierge service for health care,” has raised $75 million in funding from investors that include Lionel Ritchie and Jeb Bush: “The back-to-the-future model is simple: Doctor services are delivered to a patient’s home on demand through an app. Users input their personal medical details and credit card information and request a doctor in their local area. … The average visit lasts 30 minutes to one hour, and Heal doctors come with a medical assistant and a host of portable testing machinery to perform everything from an EKG, ultrasound and bone scan to blood testing and allergy screening. They also get a firsthand look at the patient’s living conditions and access to food and prescriptions they need to stay healthy. Unlike traditional doctors, Heal sends a HIPAA-compliant summary of the services to patients within 24 hours. The price for the house call for a patient without insurance: a flat fee of $159. For those with private insurance: a co-pay varies by plan but is typically between zero and $30. The cost for seniors on Medicare: zero, or a co-pay up to $20.”

FOOD AND BEVERAGE

The first cannabis restaurant has opened in West Hollywood with a menu that caters to its target customer: “The food at … Lowell Farms: A Cannabis Cafe, isn’t actually infused with weed. But the cuisine could certainly be described as cannabis complementary. There are vegan nachos and upscale corn dogs; French fries and Angus burgers; and crispy brussels sprouts as well as baby kale and garden salads for those with more virtuous palates when they’re high. (Because, really, what’s nicer than sharing a joint over a plate of edamame and shaved asparagus?) The restaurant, which opened on Oct. 1 and has been packed every day since, is part of West Hollywood’s effort to make the city a kind of cannabis destination within Los Angeles County. Earlier this year voters approved extra taxation on cannabis businesses. West Hollywood estimates that weed tourism will bring in $5 million to $7 million in tax revenue annually.”

TAXES

Michael Milken is one of those benefiting from the Opportunity Zone tax break:While the Milken Institute’s advocacy of opportunity zones is public, Mr. Milken’s financial stake in the outcome is not. The former ‘junk bond king’ has investments in at least two major real estate projects inside federally designated opportunity zones in Nevada, near Mr. Milken’s Lake Tahoe vacation home, according to public records reviewed by The New York Times. One of those developments, inside an industrial park, is a nearly 700-acre site in which Mr. Milken is a major investor. Last year, after pressure from Mr. Milken’s business partner and other landowners, the Treasury Department ignored its own guidelines on how to select opportunity zones and made the area eligible for the tax break, according to people involved in the discussions and records reviewed by The Times.”

REGULATION

A secret agreement has made it easier for homebuilders to block changes to building codes that would require new houses to better address climate change: “The written arrangement, in place for years and not previously disclosed, guarantees industry representatives four of the 11 voting seats on two powerful committees that approve building codes that are widely adopted nationwide. The pact has helped enable the trade group that controls the seats, the National Association of Home Builders, to prevent changes that would have made new houses in much of the country more energy-efficient or more resilient to floods, hurricanes and other disasters. … 

“Homes accounted for nearly one-fifth of all energy-related carbon dioxide emissions nationwide last year. While four seats is a minority on the two committees, which focus on residential building codes, the bloc of votes makes it tougher to pass revisions that the industry opposes. Before the homebuilders gained seats on the committee that handles energy, for example, the energy efficiency of those building codes increased 32 percent over six years, according to a federal analysis. After the industry’s influence expanded, that number was less than three percent over the same amount of time.”

PRICING

A Minnesota clothing retailer is switching to making parkas and selling them  direct-to-consumer: “And its price: $495. Not exactly cheap, but more within reach compared with the parkas of similar quality that [Eric] Dayton is benchmarking himself against that sell for upward of $1,000. ‘It felt like it had become something of a luxury category,’ he said, nodding to Canada Goose. ‘But having a great winter parka to me shouldn’t be a status symbol. It’s something that you need and we want to make accessible to as many people as possible.’ He didn’t want to sacrifice quality to get to a lower price. Instead, he drew inspiration from direct-to-consumer brands such as Away luggage, Harry’s razors, and Warby Parker in eyewear, the latter of which had a small mini-shop inside his store for a few years.

“By selling online, they were able to bypass retail markups that can sometimes double the price. ‘Most of the big companies that exist in this [outdoor] category were built on a retail distribution model so they’re locked in to that,’ Dayton said. ‘Which we knew very well because we were a part of it. We were a retailer. We were buying from these companies at their wholesale prices and then marking it up to retail and the difference was our profit as a store. Now that’s something we’re passing along as value to the customer.’”

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THE ECONOMY 

The federal deficit is likely to reach $1 trillion by 2020: “The year-over-year widening in the deficit reflected such factors as revenue lost from the 2017 Trump tax cut and a budget deal that added billions in spending for military and domestic programs. Forecasts by the Trump administration and the Congressional Budget Office project that the deficit will top $1 trillion in the 2020 budget year, which began Oct. 1. And the CBO estimates that the deficit will stay above $1 trillion over the next decade. … As far as most of us can tell, the huge deficits don’t seem to threaten the economy or elevate the interest rates we pay on credit cards, mortgages and car loans. And in fact, the huge deficits are coinciding with a period of ultra-low rates rather than the surging borrowing costs that economists had warned would likely occur if government deficits got this high.”

Home improvement and maintenance is forecasting a decline for the first time in nearly a decade, but business owners aren’t worried yet: “Besides keeping the cash registers busy at hardware stores and lumber yards, remodeling activity is a good barometer of the housing market and consumer confidence. Home sellers usually spend to spruce up their houses before listing them, while buyers often renovate purchases. Homeowners staying put tend to embark on remodeling jobs when property values are rising because they are more likely to be able to borrow against the equity in their homes to pay for the work. … Sherwin-Williams said Tuesday that third-quarter same-store sales in the US and Canada rose 8.1 percent year-over-year and it still planned add between 80 and 100 new stores this year even though it had opened only 31 through the previous three quarters.”

VENTURE CAPITAL

In the aftermath of WeWork, the unicorns are enduring a reckoning: “All of this is fallout from an investment bubble that had formed in the private markets that fund startups, as big investors with billions of dollars piled in. Behind this wave of investment was a change in rules on private investments, record low interest rates and a fear of missing out on the next transformational tech company like Google or Amazon. Fund companies including Fidelity and T. Rowe Price, which had typically invested only in public companies, started taking part in private funding rounds, and so-called mega funds, which could make huge bets on a single firm, most notably SoftBank, were born. Soon the sums raised in private markets were dwarfing the money from IPOs.

“Over the past six years, companies have raised about $550 billion from venture capital funds, easily exceeding the $320 billion of proceeds generated from IPOs over that period, according to data from PitchBook and Dealogic. But the private money meant companies could grow without the scrutiny of public-market investors—no quarterly financial updates or demands for proof that they would find a way to become profitable. Now that they are moving into the glare, it has become evident that a number are still far from being ready to live up to the market’s demands.”

Maze, an operator of a biotechnology company that finds modifier genes for genetic diseases, raised an undisclosed amount of Early Stage VC funding.

Nice Recovery Systems, a manufacturer of a cold plus compression therapy device, raised $2.43 million in an Early Stage VC round.

Ginger, a behavioral health coaching app, raised $7.5 million in funding from High Velocity Capital.

MARKETING 

Maternity brand Mothers Lounge sent a package congratulating thousands of women on their pregnancy, except many of them weren’t pregnant: “The card was purple and had a cartoon avocado with a heart over its pit. It read: ‘Holy guacamole! You’re going to avo baby!’ Inside was what looked like a handwritten note, signed with a heart from ‘Jenny B.’ It said: ‘Congratulations!!! I’m so excited for you! I hope you like these.’ Included were a handful of coupons, five gift cards that amounted to $245 and a receipt proving their value. … Why had these women received the mailings? ‘The qualified recipients for this mailer have, at one point, subscribed to an opt-in list for maternity deals and coupons through a third party marketing company,’ Mr. Anderson said. ‘All information from third party companies is only used internally for Mothers Lounge and is not sold or used for anything else other than the direct marketing of Mothers Lounge.’

“Although the advances in targeting of digital advertising allow marketers to better identify their audiences, such efforts are not always totally successful. Identifying nonpregnant women as pregnant seems about as unsuccessful as possible.”

And that’s what’s ahead.

Please send comments and suggestions to mattg@oxfordcenter.com and lfeldman@oxfordcenter.com

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