#BENRIZZO's Profile

I see it a bit differently. 3G’s business model as a private equity firm of profitably investing in large companies relies on thier operating model of aggressive cost cutting at large companies. Specifically, where they have had success has been consumer facing food companies like Burger King, Tim Hortons, and ABInBev, where they have cut costs while still keeping the consumer base engaged. Their KraftHeinz behavior looks to be in line with both their business model and operating model.

On the KraftHeinz front, the cuts described do seem drastic, but none of them seem to have a direct impact on consumers in the short term. I will be very concerned if the cuts do extend to facets of the company that reduce the described resonance with food that has driven the operating success at KraftHeinz in the past. In the mean time I think the operational slimming will result in a more nimble company, laser focused on delivering value to their investors.

Being from Michigan, I was a huge fan of the Shinola story when it first was launched. I’m very concerned that their business model is not sustainable because the operating model focuses too much on a story about a brand, which will change over time and a non-proprietary supplier network which will disperse with popularity.

The brand’s ethos of made in Detroit, relies on the cultural perception of a city going through a renaissance. Launching that brand 10 years ago would have been sure failure, and I think keeping it going for 10 more years will be difficult too. Either Detroit stays cool and the brand become very mainstream (therefore losing some of the price premium for uniqueness) or Detroit falls out of favor and the brand fails entirely. The artificially low labor costs will also be a short term artifact rather than a long term attribute of the city.

Sourcing components has been great for scaling quickly, again however this strategy favors short term success over long term sustainability. Any large success for a given product will cause that product’s supplier to have a strong secondary market for their raw materials or own product lines. Hopefully Shinola has strong agreements in place to protect them from their own success.

Interesting stuff, with lots of parallels to the oil supermajors. Two considerations from oil to apply to BHPB, the first being new production techniques for commodity production and the second leveraging size as a competitive advantage. The supermajors have struggled to capitalize on hydraulic fracturing to unleash significant natural gas value, whereas smaller competitors have made tons of money by cost effectively applying the new technology. I agree with your conclusion that technology adaption will become more important in the mining industry and would bet against BHPB and other large competitors being the beneficiaries of the results in existing resource plays with low barriers to entry. The supermajors do however do well to achieve competitive advantage from tackling projects of greater complexity than their smaller competition can handle. A prime example being capital intensive offshore deepwater production. In those situations, the supermajors apply new technology with great returns capturing resources others cannot. If commodity prices remain high, thereby driving production to more technically complex basins, I think BHPB will prosper.