Zuru’s Knockoff Success, How Lehman’s Went Full Amish, and a Warning Sign in RV Sales

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MANAGEMENT

It’s always interesting when big companies figure out things that most smaller companies have long understood. For example, maybe profits aren’t the only thing that matters: “That single-minded devotion overran nearly every other constituent, pushing aside the interests of customers, employees and communities. That philosophy was rooted in an idea that has an air of nobility about it. Shareholder democracy was the name given to investors asserting themselves in corporate governance. The idea was that investors would wrest control of companies from entrenched managers, letting the actual owners set their corporate priorities. But what we really got was something else: an era of shareholder primacy.

“That may have a chance—a chance—of changing now that 181 chief executives have lent their signatures to a new ‘Statement on the Purpose of a Corporation’ that was published by the Business Roundtable on Monday. The statement from the leaders of companies including JPMorgan Chase, Apple, Amazon and Walmart affirms that the nation’s largest companies have a ‘fundamental commitment’ to all their stakeholders: putting employees, suppliers and communities on a pedestal that once belonged only to shareholders.”

Founded by three siblings, Zuru, which makes cheap toys, has $400 million in annual revenue despite never taking on debt or outsider investors: “The siblings picked up early momentum by swiping other companies’ designs. The knockoffs: a money bank and a light-up frisbee made by two small toy manufacturers. ‘We found these two products online, and we basically copied them,’ Nick admits. Zuru brought the toys to the New York Toy Fair—into the lion’s den, one of the industry’s biggest events of the year—and sold the designs to a distributor. But before the convention ended, the toys’ original creators discovered the knockoffs, and the maker of the frisbee sued Zuru. (The case ultimately settled.)

“Following the upheaval, the Mowbrays began paying to distribute toys to international markets, like spinning rubber discs and a helicopter-shaped boomerang from a Hong Kong company, Zing. Eventually, in search of bigger paydays, they refocused on producing toys of their own. More turbulence followed. In 2005, the siblings partnered with a Chinese manufacturer and paid $1 million for the rights to a handheld video game player in which users could play as the soccer star David Beckham. The manufacturer financed the deal on the basis of a $29 million purchase order from Walmart for 2.2 million devices.

“As production began, Walmart’s excitement waned, and the retailer moved to cancel more than 80 percent of the order, which would have put Zuru in the red. ‘I was flying back and forth basically pleading with Walmart,’ Nick says. Begrudgingly, Walmart agreed to pay for 800,000 devices. When the toys hit the market, ‘it was an absolute disaster,’ Nick says. ‘It just would not sell. It was like concrete on the shelf.’ Zuru wound up blackballed by Walmart for years.”

Lehman’s, a family business in Ohio, has thrived for 64 years by looking for “the last new thing”: “In 1955, while the rest of the country swooned over newfangled inventions like wireless TV remotes and home microwave ovens, Jay Lehman started selling all things non-electrical to the local Amish population. Over the next six decades, others discovered the business, says Galen, who is Jay’s son and the CEO. (Jay’s daughter, Glenda Lehman Ervin, is vice president of marketing.) Today, gardeners, environmentalists, preppers, homesteaders, and the chronically nostalgic flock to this 120-employee business for their cook stoves and canning jars, candle-making supplies, and composting toilets. …

“The store’s Amish-made products are extensive, ranging from rocking chairs and cherry baskets to whisk brooms and croquet sets. Amish manufacturers suit Lehman’s because they operate on a small scale and so don’t require huge minimum orders. The flip side is they typically can’t or won’t ramp up volume when demand for something unexpectedly surges. ‘A lot of times they will say, I can’t make your product because it is time to make hay or I need to plant the fields,’ Galen says.”

FAILURE

WordPress.com bought Tumblr for a pittance”: “At its apex, Tumblr had more users than both Instagram, now estimated to be worth close to $200 billion to parent Facebook , and Pinterest , which has a market cap of nearly $18 billion. In 2013, Tumblr sold to Yahoo for $1.1 billion. … “The real scandal of Tumblr isn’t that it’s now worth a fraction of its former selling price. The scandal is that Tumblr was ever valued so highly at all. Having a very popular product and only the vaguest idea how to make money on it does not, it turns out, a world-changing business model make.”

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THE ECONOMY

It’s not just the yield curve. RV shipments are slipping, too: “Elkhart, Ind., is flashing a warning sign about the economy. Capital of the country’s recreational-vehicle industry, the northern Indiana city and the surrounding area are watched by economists and investors for early indications of waning consumer demand for luxury items, often the first sign of economic anxiety. Shipments of recreational vehicles to dealers have fallen about 20 percent so far this year, after a 4.1 percent drop last year, according to data from the RV Industry Association. Multiyear drops in shipments have preceded the last three recessions. ‘The RV industry is better at calling recessions than economists are,’ said Michael Hicks, an economist at Ball State University, in Muncie, Ind. Mr. Hicks says softening consumer demand for RVs coupled with rising vehicle prices due to tariffs suggests the economy is either in a recession or soon headed for one.”

Concerned about a recession, senior White House officials are considering a payroll tax cut: “The talks are still in their early stages and have included a range of other tax breaks. The officials also have not decided whether to formally push Congress to approve any of these measures, these people said … Millions of Americans pay a payroll tax on their earnings, a 6.2 percent levy that is used to finance Social Security programs. The payroll tax was last cut in 2011 and 2012, to 4.2 percent, during the Obama administration as a way to encourage more consumer spending during the most recent economic downturn. But the cut was allowed to reset back up to 6.2 percent in 2013.”

STARTUPS

Cerebras out of Silicon Valley debuted the largest computer chip ever built and its purpose is to power AI: “Some experts believe these chips will play a key role in the race to create artificial intelligence, potentially shifting the balance of power among tech companies and even nations. They could feed the creation of commercial products and government technologies, including surveillance systems and autonomous weapons. … [Conventional] AI systems operate with many chips working together. The trouble is that moving big chunks of data between chips can be slow, and can limit how quickly chips analyze that information. ‘Connecting all these chips together actually slows them down—and consumes a lot of energy,’ said Subramanian Iyer, a professor at the University of California, Los Angeles, … Cerebras, a three-year-old company backed by more than $200 million in funding, has taken a novel approach. The idea is to keep all the data on a giant chip so a system can operate faster.”

Modular home startup Blokable constructs housing complexes with units stacked on top of each other: “For most of its history, the signature public-facing element of Blokable has been the Bloks, manufactured smart housing units that come together to build inexpensive but high-quality complexes. The company also offers ‘housing development as a service,’ to speed up how quickly projects can be planned and built, thereby lowering costs and giving owners more control of the schedule. Blokable pitches the service as ‘turnkey’ for non-profits, housing trusts, developers and others and handles the entire process with help from a network of architecture and contractor partners. The company makes money in two different ways. For market-rate housing, Blokable owns the units and makes money off the equity they gain. For affordable housing, Blokable develops units for nonprofit partners for a fee in addition to the cost of the project.”

It seems billionaire entrepreneurs want to live longer: “Mike Cannon-Brookes, the billionaire co-founder of Australian software giant Atlassian, has invested $10 million into Juvenescence, a UK firm that’s trying to increase human longevity. … Juvenescence isn’t working on a single moonshot project but aims to build a ‘longevity ecosystem,’ or a portfolio of interlinked companies working on therapies and treatments that could enable people to live longer, healthier lives. … Oracle founder Larry Ellison has donated millions to research via his medical foundation, Jeff Bezos has reportedly invested in Unity Biotechnology, while Alphabet owns Calico, which has a staff of around 150 working to understand the biology that controls lifespans.”

FOOD AND BEVERAGE

Domino’s Pizza and Jimmy John’s won’t be partnering with DoorDash and UberEats anytime soon: “Domino’s Pizza is one of the largest chains to stay off the new third-party delivery apps altogether. The company relies on its own employees to make deliveries from its 6,000 US stores and most of its 11,000 international ones, and it runs its own online-ordering app. Chief Executive Ritch Allison said the profit hit and reputational risk of working with delivery companies isn’t worth the extra sales. … 

“The strategy comes with risks. Domino’s notched its slowest same-store sales growth in nearly seven years during its most recent quarter. Mr. Allison told investors that competition from companies delivering everything from burritos to dosas was hurting Domino’s sales. … Both Jimmy John’s and Domino’s have built their reputations on fast service, going so far at times as to guarantee orders will arrive by a certain time. That has made control over their delivery fleets all the more essential and the risk of contracting out to independent drivers too high, executives have said.”

We have all heard about plant-based meat, but what about plant-based eggs? “When people buy eggs at the grocery store, they typically choose the kind that come in shells. Liquid eggs—the kind that come in cartons, yolked or yolkless—are very much a smaller category. … JUST founder and CEO Josh Tetrick claims his company has sold the plant-based equivalent of 10 million eggs since the launch of the new product in December 2017, and he’s hopeful that it’ll claim even more dominance in the space. It likely will. JUST today announced its egg product is being picked up by one of America’s largest national grocery retailers, Kroger. The JUST Egg will be pushed into 2,100 of Kroger’s stores. That includes a few grocery brands owned by Kroger, such as Ralphs, Fred Meyer, and QFC.”

OXFORD STRATEGIC ADVISORY DEAL OF THE DAY  

City Pipe & Supply, a supplier of pipes, valves, and fittings to the upstream, midstream and downstream sectors of the oil and gas industry, reached an agreement to be acquired by Russel Metals, a metals distribution and processing company. The deal value is $160 million. 

VENTURE CAPITAL

Root Insurance, an online car insurance provider, raised $350 million in a Series E round. The valuation of the company is $3.5 billion following the round.

Ally, a provider of an objectives and key results management platform raised $8 million in a Series A round.

TECHNOLOGY

Perhaps because of the valuations tech companies attract, it seems every company wants to be a tech company: “Are direct-to-consumer brands like Glossier (makeup) and Away (luggage), where you purchase goods online but otherwise don’t interact with technology, tech companies? Amazon and Etsy, which primarily function as online marketplaces—are they tech? What is it that makes Tesla a tech company but not General Motors? GM uses plenty of technology and is even making competing, autonomous electric cars. Airbnb? DoorDash? Blue Apron? Uber? Lyft? Sweetgreen? The list goes on, as does the justification. … ‘The first question is, Does the company sell tech? That’s easy. If yes, that’s a tech company,’ [emerging tech analyst Paul] Condra said. ‘If they don’t, then you have to ask yourself, Is there some kind of modern technology core to its customer acquisition or customer retention?’ But as technology becomes increasingly central to companies’ businesses, that line becomes harder to draw.”

And that’s what’s ahead.

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

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