Frank Underwood

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On December 14, 2015, Frank Underwood commented on New Belgium: Brewing Success :

Technically, the employees aren’t legal shareholders of record, though they have all the economic benefits of the shares.

There is a trustee who oversees the ESOP, who votes the shares on behalf of the employee “owners”. In the case of board election, the trustee generally has discretion over how the shares are voted, but for major financial decisions (i.e. whether to sell or merge the company), ESOP members have direct votes, and there are very explicit laws about the fiduciary duties of the trustee.

The CEO is still appointed by the Board of Directors, but the ESOP trustee and Board of Directors effectively appoint each other. So, in order to fire the CEO, the employees would need to effectively convince both the trustee and the Board this was a good idea. If employees only convinced the trustee, the Board could replace the trustee, and if employees only convinced the Board, the trustee could replace the Board. Said another way, ESOPs are not good tools for employee/shareholder activism, but are good for aligning the long-term financial incentives of employees and employers.

On December 10, 2015, Frank Underwood commented on Rocket Internet: Starting Businesses in the Fast Lane :

How do you think Rocket Internet’s model contrasts with design thinking / IDEO, and why don’t you think HBS teaches about Rocket as a part of FIELD? To me, Rocket’s model seems far superior to what IDEO does in that it actually allows for rapid deployment of business models where many of the bugs have been worked out, therefore lowering the likelihood of failure, while IDEO’s “rapid prototyping” still leaves it well short of implementable business solutions. In addition, HBS teams are arguably ill-equipped for design thinking due to the relative lack of diversity of skillsets, whereas the ability to identify success business models, quickly change the few key aspects which may not translate to a developing economy, and watch the $$$ roll in seems core to the MBA toolkit.

On December 7, 2015, Frank Underwood commented on Zara: disrupting the traditional cycle of fashion :

Being able to quickly meet customer demand is a key success factor in apparel retail, as is avoiding stale merchandise and discounting. My question is whether competitors have tried to copy this model, and whether there’s any evidence of success in doing so? This model just seems like such an upgrade over what most fashion apparel companies do today that I can’t see why they wouldn’t try, other than that it’s hard to do well and requires a lot of capital + expertise they don’t necessarily have today. Also, any sense for how they’ve aggregated data from stores? Are they asking managers to fill out standardized, quantitative surveys, or is it more qualitative and free-form? I can imagine the latter being time-consuming to sort through.

On December 6, 2015, Frank Underwood commented on New Belgium: Brewing Success :

Alcohol distribution laws vary highly state-to-state and are pretty complex, but generally, producers will have exclusive relationships for a given territory or state. I would guess there will be a fairly significant push by distributors to get the product into both large and small retailers. One thing you definitely can’t do in Massachusetts is provide payments to bars to stock your product, which is a little strange if you’re comparing to other retail-type verticals where slotting fees are common. I think they’ll be pretty successful getting into large retailers, as these retailers probably know the company from their locations elsewhere in the US, and retailers have been generally adding craft SKUs to their assortment.

In terms of keeping employees happy with the ESOP valuation, there is a one-year waiting period between joining the company and becoming an owner via the ESOP, so that will give the new plant time to generate profitability for the company before their new employees dilute the pool. The company can also control how many shares it wants to grant, which manages dilution.

Finally, my experience (having worked on a transaction where my private equity firm purchased an ESOP) is that while the ESOP has to get an annual outside valuation, since these are private companies without many comparables, there are enough assumptions to be made that there’s always a little wiggle room to show a more stable trend while staying on the right side of the rules (growth and margin estimates, control premium used, comps selected, etc).

On December 6, 2015, dannymcbee commented on 3G Capital’s playbook for success :

While I’m very curious about the operating model described above and I agree that it does a great job of identifying driven people and helping them collaborate, I question whether we know enough to declare the “3G model” as a whole a success. While the businesses 3G invests in are generally more recession-resistant than the average company, I imagine there’s still significant risk that in a recession, the company’s stock price would decline, leading to employees not receiving the incentive compensation that keeps them working so hard. I would then wonder whether 3G can retain all these people, or whether they’d go to a competitor where they’d make similar base money but not work as hard.

I also think it’s worth delineating the potential for continued performance between firms where significant M&A is still an option (i.e. Restaurant Brands) and those where anti-trust concerns will likely limit future M&A (i.e. AB-InBev post SAB Miller). If 3G has already stripped out costs from the core business and any acquired targets, and they can’t acquire more targets, organic growth is the only major lever left. Is there significant evidence that companies like AB-InBev can grow organically, given the overall low growth nature of their end markets and off-trend positioning within them? I believe per-capita US consumption of Budweiser has declined by over 40% over the last decade…

On December 5, 2015, dannymcbee commented on sweetgreen: a healthy dose of operating model alignment :

Great write-up of a company! They also do a good job publicizing their suppliers – in fact, I recall seeing something about Ward’s on their Instagram not too long ago. I had no idea they were this linked into long-term planning with suppliers but it’s clear how critical that is to suppliers, and probably helps them attract the best growers and suppliers.

Having lived in DC (where Sweetgreen started), it was really interesting to watch them change store operations as they learned more. For example, their Bethesda location didn’t initially have an open kitchen, and also served frozen yogurt, which made their operations more complex.

One question I have is your thought on their success as a lifestyle brand, specifically their decision to run a major music festival in the DC area. Do you think this is a logical extension of their business model, is it irrelevant, or does it detract from potentially running their stores better?

Also, thoughts on their decision to source certain ingredients differently across regions? For example, the bread I get at a DC sweetgreen isn’t the same as what I get in Boston. A customer probably can’t tell the difference between kale sourced from one farm versus another, but they may notice the bread.

On December 3, 2015, dannymcbee commented on New Balance: Keeping America Running :

The recent growth at New Balance seems to be somewhat driven by the company’s expansion of its product set away from just the “classics” and more into running and training shoes. It seems like the fashion risk with these products would potentially be higher than the walking and casual shoes the company is better known for, making one potential benefit of being US-made higher for these new products. That said, setting up a new plant in the US to focus on a relatively unproven product category seems risky. Any idea how the company thinks about what products to make in the US versus abroad?

On December 3, 2015, dannymcbee commented on New Belgium: Brewing Success :

Thanks for the question, Brian. I think the risk of being viewed as a “national brewer” is something certainly worth keeping in mind. While New Belgium is large and nearly national (35-40 states today, expected to have distribution across all 50 states by 2018 as their Asheville brewery scales up), there is still a wide gap between New Belgium and Sam Adams in terms of size. I also think that the dichotomy for most customers isn’t just size, but independent versus “corporate”, i.e. owned by AB-InBev, Miller Coors, Heineken, or another multi-national alcoholic beverage company. There has been significant, loud, and public outcry from loyal customers when craft brewers sell to AB-InBev (for example, Elysian).

Ultimately, I think it will be interesting to see how New Belgium performs in the Northeast, which is the only part of the country they don’t sell in today. It seems that their CO brewery is at capacity (they’re not forecasting any growth in 2015), so there’s probably some potential pent-up demand that Asheville helps them meet, but ultimately, success of the new brewery will be driven by how they enter a market that hasn’t really had a chance to get their product to-date.