Why does something fail? Why do businesses that have been around for decades or even centuries seemingly fall out of favor with the masses and end up closing their doors?
The answers to these questions are probably much deeper than my normal Monday post can answer in the one thousand or so words but it is something that I am thinking about as I sit in a movie theater waiting for the lights to dim and the curtain to pull back. The movie theater for me is the ultimate example of what an industry looks like when bigger and better things begin to pass them by. Not only that but also when there is a fundamental change in the way that consumers get the goods that a company built their name upon. I believe that retail has been at the forefront of this scrutiny only because theaters are thought of as even more of an out-of-date experience.
I would say that I am a person that grew up going to movies, not all of the time but maybe on a bi-weekly basis. When a big movie came out it was mandatory that it was to be seen at the theater, with popcorn and butter and if at all possible a large box of candy (my preference was Sour Patch Kids). Movies were also places for people to go on dates and "dinner and a movie" was a saying that was common. Now is much different and while I believe that there are many variables to any industry's struggles, I think you can sum it up in three I's (that's convenient right?).
This I believe is pretty straightforward in the way that most people look at businesses. Simply when you look at the industry that a business is in you can usually see how it is trending in the world's eyes. Take the company Square (SQ) for example. Square deals in payments (credit cards mainly) and how to make it efficient and affordable for anyone in the world to possess. This was a revolution when it began and recently has been somewhat volatile because of the thought of them being involved with the acceptance of cryptocurrency. This is an industry specific event that could push this company, and the companies that do the same type of transactions, further.
On the flip side let's take a look at solar companies such as First Solar (FSLR). FSLR recently took a hit on the thoughts that the Trump tax plan would be potentially devastating (I may be exaggerating) for those in the solar industry. This again is an industry specific event that may not have the same effects on anyone else. These are types of things that I really look to when beginning an evaluation of whether I believe that a company will fail or whether it may just be going through a rough (or awesome) patch.
Take for example the retail space. When you look at companies such as Sears (SHLD) and JC Penney (JCP) they are truly in a realm that Amazon (AMZN) has taken over. The same types of discount goods that these two made their names on are the same ones that AMZN will have at your door in two days for free. This is not the only reason why these two companies are failing but it is a major factor.
This is truly one of the biggest reasons that I believe companies fail, especially companies that go public too soon. Take Blue Apron (APRN) for example. This company has been crushed since entering the public sector and for right reason. The balance sheet shows that they have an inability to produce enough margin in comparison to marketing costs to survive unless something changes. This is in-efficiency. If you have a marketing campaign that spends more to get customers than those customers actually return to you in profit then you have big problems.
This is also where I believe that the cryptocurrency boom has taken hold and has been driving forward many of the payment processing companies along with it. The efficiency of payment (or potential of it) is a huge plus when you think about the reach of a company. If cryptos go international then who says that a company like AMZN won't now have a bigger reach in Africa? More people to spend new money, no matter the currency, is a main driver of force for those with the reach. Online retailers are that reach.
Efficiency is also a driving force in the race to control the electric vehicle market. While Tesla (TSLA) had the luxury EV market in a potential stranglehold they also ventured into the economy market as well. This for TSLA is a great move but only if they can quickly and efficiently meet the demand for the cars that have been ordered. Will Ford (F) and General Motors (GM) beat them to it? There are a lot of people that are betting they will!
Now this is really a two-part venture when you are looking at a company and whether it will thrive, survive, or die. Take a company like Target (TGT). If you look at my portfolio you will see that I own TGT and a quick look at my blog will show that I actually have a positive outlook on their future as well.
This is because I believe that TGT has an improvement plan that is being put in place to IMPROVE THEIR CURRENT WAY OF DOING BUSINESS.
This is the first part of the improvement train that I will look for a ride on. Is their a company that has run into some tough sledding but has a viable way to turn it around? I believe that TGT has a good plan of creating more boutique-like stores that will improve the customer experience. Add to this the inclusion of brands only available at their stores and I think that they have a good chance at drawing back customer interest.
While TGT has a good hold on the first part of improvement, it does not succeed at the second.
This is IMPROVEMENT OF INDUSTRY PRACTICES.
This is something that AMZN has done and why they are what they are. You used to have to go to a store and buy goods or order from a catalog. Now with one touch you have something ordered that, in some cities, will be there the same day by 8pm! This is revolutionary! Apple (AAPL) did the same thing with the iPod and the iPhone.
Who is doing this now? Netflix (NFLX) is a great example and the polar opposite of what movie theaters are doing. Has there been any improvement to the movie industry in terms of theaters? Screen size? 3d? Sure maybe those two but that really hasn't been revolutionary. This is why I believe that they are doomed to failure at some point. Don't get me wrong, I still love the movies, but how long can they keep playing 4pm showings to a group of six people?
To wrap up this random rant, that honestly seemed to meet more of the "Musings" criteria than any of my previous posts, I will leave you with this:
If you want to know whether you should invest in a "down & out" company just look at their industry, their in-inefficiencies, and where they can improve themselves or their industry's practices. If you can't find a great reason that the company will succeed then there probably isn't one right now. If there isn't one, then stop looking and point your compass towards another direction.
As always thanks for listening and leave any comments below.