THE ENTERPRISE— A WALK AT THE MALL--SCARY--BUT PROPHETIC? CASH IS LIKE OXYGEN!
This edition was panned to lead into one of my most popular old columns—Cash is Like Oxygen— posted below.
While I was thinking about what to say as a lead in, my wife and I decided to go for a walk in the Mall—specifically the Polaris Fashion Place Mall on the north side of Columbus, OH. That started a sequence of events, that led to this long “current events” preamble:
1) I was stunned by how empty & desolate the Mall was (more on that). Many stores closed or closing, or with totally new occupants—unproven upstarts?
2) When we went home, I exchanged emails with son Mike, who recapped a presentation by a Fannie Mae exec.
Being in construction, Mike is very interested in the future of housing, the recovery, and what Fannie Mae is doing/planning to do. The questions cited were: Will the vaccines Work? IF they do work, will consumers return to prior consumption levels? What do you think? When?
3) Just today, less than a week after I started writing this, Polaris Fashion Mall missed its monthly rent payment. The company’s stock plummeted and the mall operator retained advisors to help review strategic options. (There’s a 30-day grace period to pay the rent—whether it can, or will, is anybody’s guess.)
My answers were:
1) Yes, the vaccines will work (pretty well), at least on known Covid variants. Better than Flu shots, not perfect, everywhere, for everyone.
2) If the vaccines work, will enough people get the shots to begin to reach "Herd Immunity" (70-80%) ? Doubtful. Right now 1/3 of people are resisting the shots
3) This is like a place hit by a hurricane or a tornado. It will not be the same for years. First sign of real recovery: Sports and entertainment venues begin filling up.
We went for a walk at the Mall last week.. The photos are from Polaris Fashion Place Mall, a few miles from home—mid-afternoon on a week day. See all the people shopping there? (No?) The other large Columbus indoor mall, Tuttle Crossing, is reportedly in economic trouble too. With Sears is gone & Penney wounded & Dept. stores like Malls relied overbuilt/failing/consolidating, while full of unsold goods and empty of shoppers. Malls are hunting for any way to fill the unused space with something that can produce cash flow.
No. I could have taken these at countless locations. There were a few people, but very few of them were carrying merchandise. Stores are open restricted hours 11-7 most days. Many are full of inventory (tying up cash) like in the aisle shot of a Macy’s store—goods that have been there for months. 25% of the former stores are GONE…another 25% are just hanging on. Half the places in the Food Court are closed. But no one was in them anyway. To add insult to injury an Outlet Mall opened just over a year ago, 11 miles north of Polaris.
I really don’t know how these companies & retailers can even stay in business. All their fixed costs continue, but their revenue based cash flow has been devastated. A huge store might have a few (3?) people working in it…and not sell enough to even pay for them. Inventory, aging in style and seasonality ties up their (cash) working capital.
A Lifestyle “Mall” (outdoor shopping areas) Easton Town Center is doing better—but not great.) Movie theaters are in deep trouble. Crappy movies. Quality is going to streaming. Restaurants that remain are down more than 20%, and many of them are simply closed—gone. Outdoor dining and takeout/delivery got them through summer & fall, with cash flow, but winter weather is coming like a lion right now. Indoor dining is open, in some places, at a fraction of the seating, but even that is often not full.
People are shopping more on line, or at ”popular priced” big box retailers like Target, Walmart, Kohls, etc. Just look at the parking lots. Grocery stores are busy. Costco was full on Monday at mid-morning. Even drug stores are stressed, but less so; they're simply overbuilt; too many of them, too close together.
Indoor dining will still be ailing until it warms up: May? Maybe. Bars may fill up as curfews are lifted. Will consumers return to prior consumption levels? No, not for at least a year or two. And then from a different array of stores and shopping venues.
This is a massive structural dislocation. When will things come back? Who knows. Act too fast and you burn through precious cash. Act too slowly and you miss a chance to generate cash flow. Watch to see when people feel OK about sitting shoulder to shoulder, in a stadium, or a theater or concert, yelling or cheering. Maybe 2+/- years from now…Maybe?
Key takeaways from my exchanges with Mike.
- The pandemic has ACCELERATED traditional retail's demise.
- Hurricanes stimulate the economy via repairs; conversely, the pandemic didn't do "physical" damage to be repaired.
- Government’s actions did psychological and economic damage—tough to repair.
- "Retail" will be re-born to match new lifestyles. ("Going-out" is not dead and gone, although it feels that way (in wintry Ohio).
- Consumption & shopping habits have shifted many times through decades (e.g mom & pop, discount & department stores, 1-800, TV, Big boxes, online, etc).
- There will be more shifts of where/how $ are spent, and on what before it settles down…to a New Normal...someday.
By then the government will have dumped more than $5 Trillion (all borrowed or printed money), to fix the mess it made, and try to prop up the people it hurt. In doing so, handouts are destroying the people's "will to work” via too-lucrative unemployment and welfare payments. (Most people are saving more than ever of the government handouts. They are no fools; they know this is a temporary solution—and a very expensive one at that.) Many parts of the trillion $$ handouts haven’t even been used and yet, more are being authorized.
Why? They are trying to replace cash flow! No cash flow = no Oxygen. Cut off the oxygen to any living organism and it dies!
Somebody has to eventually pay for all this welfare; welfare which kills the will to work, and the spirit of free enterprise and capitalism. (Socialism has been tried over and over. It doesn’t work. Someday, (as Margaret Thatcher once said) "other people's money runs out," and gratitude turns into resentment.)
Here’s what I wrote 25 years ago...
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Cash is like Oxygen.
Without it, you can't survive long enough to make a profit.
©John Mariotti 1995
Lately, I've encountered a number of companies who seem to be running short of cash. At the same time, cash flow appears to have fallen out of vogue as a hot measure for management theorists, being supplanted by economic value added (EVA)--a term coined by consultants at Stern-Stewart. Strong Positive EVA measures depict a business that is earning returns in excess of its cost of capital.
This shift in the measurement emphasis may be creating a problem. While a positive EVA indicates good long-term business health, cash flow is the ultimate necessity for short-term survival.
Most business people are familiar with the income statement and the balance sheet. These two accounting stalwarts are where encounters with the IRS most often occur. As a result, most managers have learned to emphasize pre-tax profit and various balance-sheet ratios as the prime indicators of financial well-being.
Cash flow, the third major measure, is too often ignored. When you show a negative profit, but maintain a positive cash flow, life goes on--for a while at least. Run out of cash, and trouble brews real fast. Payrolls cannot be met. Suppliers cannot be paid. New products cannot be launched.
My most memorable personal cash-flow crunch occurred just before I became a newlywed. The $100 deposit on a new apartment (this was a long time ago) was due. Since I was fresh out of grad school and hadn't earned a paycheck in over nine months, I was down to my last $50 in cash. The first paycheck in the new job was four weeks away. I was forced to humbly ask my fiancée to help. She didn't have much more than I did, but at least she'd been working. Together, we scraped up the $100.
Whether it is a personal or business crisis, that "out of cash" feeling is very unpleasant. When entrepreneurs start new businesses, they often go deeply into debt. Some max out their credit cards. Others mortgage their homes. Only the fortunate few find an "angel"--an investor who puts up seed money for a “modest” part of the equity in the business, in contrast to venture capital investors who want majority ownership. As these businesses grow, their margin for financial error is usually quite small.
Planning for cash needs is not all that complex. Yet many companies fail to do it properly. Often, they're misled by income-statement and balance-sheet projections that show the company will be financially healthy at the end of the year--if they get that far.
Astronauts who take off on a long space flight must take along plenty of food and water (their "healthy balance sheet"). If they happen to run out of oxygen any time between takeoff and landing, all that food and water is of no use to them. They will be goners. Cash is like oxygen. When it's there, it's easily taken for granted. When it's not, death can come quickly.
Why do many budding entrepreneurs overlook this simple fact? They fail to do an accurate, detailed, and realistic cash-flow projection on a month-by-month, week-by-week basis. The killer is usually working capital needs. To make a product, it is necessary to purchase raw material and parts, and to pay employees who convert that material into the product. You also have to pay for product designers, tooling, equipment, a sales force, marketing materials, travel expenses, phones, computers, etc. And those outlays must be made before the first product is sold.
Keep in mind that "sold" doesn't mean you have an order. It means the product has been produced, shipped, and “paid for.”
If product design takes four weeks, and the lead time to obtain materials and produce the product is another four weeks--both unusually short periods compared with real situations--and if nothing major goes wrong, then at least eight weeks worth of working capital is needed for inventory, payroll, overhead expenses, and so forth. The payment terms--usually 30, 60, or 90 days--don't start until the product is shipped.
Since we started eight weeks in the hole, we may now be 12 to 21 weeks without any cash coming in! Easily one-quarter to one-third of a year may elapse with all the cash flow going out, rather than coming in. At this point, the venture capital "vultures" may begin to look like friendly creatures.
It is hard to believe that a company with a great product, big potential profit margins, and strong market demand can still end in financial collapse. But it happens. And, ironically enough, sometimes the bigger the demand, the faster and harder the cash problems hit--all because inadequate attention is given to planning for cash needs.
Before you take off, be sure to check your oxygen supply carefully. You'll enjoy the journey more--and you'll still be around at the end of it.
BEST WISHES
JOHN
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