Rob Thomas's Profile

Interesting piece that is a good representation of what a lot of American manufacturers are facing in the current environment. One interesting question to me is how automation and shipping affects the calculus. My thoughts here are inspired primarily by the Fuyao Glass case. If you look short to medium term, the spike in labor costs due to onshoring may be quite dissuasive to following through with onshoring since while the threat to protectionist policies from the Trump administration are real, they are far from certain. However, as we saw in Fuyao, labor costs may become increasingly less relevant in the onshore vs. offshore consideration over longer periods, and also, extremely low shipping rates right now are likely to rise as supply in the shipping business contracts, increasing the relative advantages of onshore productions. Given the automation and shipping considerations, mitigating the protectionist risk by building factories in the US is relatively more attractive.

Interesting piece and insightful comments. A few reactions to both the original article and comments so far:

While the short-term FX benefits may be a boon, I don’t think it should factor in much to their long-term decision making on where to locate elements of their supply chain. FX can be very hard to predict in the long term and medium term and they shouldn’t try.

While JLR lobbying the UK government alone on Brexit response likely wouldn’t do much, they should band together with companies in similar decisions. Together they can likely have an impact. What Brexit will mean is certainly still undetermined and with the election of Macron and continued power of Merkel, there is hope that counterparties across Europe will be continued to have interest in a softer Brexit.

JLR should not count on the EU for any relief to make the cost of JLR automobiles cheaper to the European consumer. Given the luxury positioning of JLR cars, the EU power will not care about those prices for their consumers. More broadly, while the EU may not want to lose factories of foreign companies, there is a strong portfolio of EU-made car brands that will provide plenty of cars at a range of price options and the EU will likely be happy at the advantages those brands will face.

The ultimate headquarters of JLR is probably not that relevant. It is different for companies like financial institutions who don’t have a supply chain or a lot of hard assets. For companies like JLR, what’s most relevant is where its supply chain and consumers are.

Your question about whether Glenmorangie should be producing its own renewable energy is an important one that applies to many companies who have a long-term interest in becoming more sustainable to combat climate change. It might not be the most efficient move for Glenmorangie to buy and operate its own solar panels. Perhaps it would be better off buying renewable energy or renewable energy credits from a larger-scale, more efficient renewable energy operation (could be wind or others, not just solar) than doing it in-house. While there is nice symbolism for companies to produce their own renewable energy, perhaps the investment dollars that they would need to spend to produce the renewable energy themselves would go further in reducing carbon emissions if they “outsourced” renewable energy production by buying it elsewhere or buying credits, which is the motivation behind a system like cap and trade.

I agree with Fede that water prices would have to go up substantially to meaningfully affect the price of beer directly through water COGS, but I think that when you consider the other effects of lower water availability / higher prices, even moderate increases in water prices (corresponding to lower availability) could be quite problematic for craft beers. This is because higher water prices would also flow through to COGS related to agricultural inputs, which are substantial for beer-making. The combined effect of higher water prices on water COGS and agricultural input COGS could significantly increase the cost of craft beers, even if prices went up moderately. As others have pointed out, large beer companies would be better able to handle the double effect of higher water prices, which would increase their competitive advantage.

Interesting piece! Very thoughtful analysis of the problems facing Gamestop and smart suggestions for how it can try to survive (surely a challenge, as you acknowledge). Even before Blockbuster’s collapse, large music retailing chains like HMV and Virgin Records also disappeared. In a world where it no longer made sense to distribute content in a physical medium, they could not find a new compelling existence. The record stores and video stores that still exist are local, independent ones with a strong community following for true classic fans, and those too are struggling. Movie theaters, however, have remained a decent business, and concerts are as popular as ever. That is because going to a movie theater is still a communal experience and concerts offer both a communal experience and an ability to see something live in its best format, like eSports could be (concerts also make money on selling associated merchandise). I agree with you and Oswald that experiential is the way to go. Movie theaters and concerts, I believe, provide two additional supporting pieces of evidence for this hypothesis.

I disagree with this analysis on the impact of Starboard’s REIT idea. In the real estate market, the most common metric for valuation is capitalization rate, which is the ratio of rent to property value. When capitalization rates are low, market valuations are considered to be high (sort of like how when bond yields decrease bond values go up). Right now, capitalization rates are near all-time lows (see p. 3 of http://www.lazardnet.com/docs/sp0/4915/Lazard_USRealEstateIndicatorsReport_201403.pdf). Low capitalization rates are a major reason why the real estate market is near an all-time high. As valuations become less lofty, capitalization rates will go up, which means that a given property will have more rent relative to it’s value. Thus if Macy’s offloads its real estate now and secures leases, it can do so at low rents relative to the property values (rather than very high as Peter says). Starboard’s more detailed proposal contemplates using its REIT strategy to pay down most of the debt at core Macy’s (p. 15 of http://www.starboardvalue.com/publications/Starboard_Value_LP_Presentation_M_01.11.16.pdf). This would actually increase cash flow by lowering its interest burden and reduce risk to core Macy’s shareholders by decreasing financial leverage at core Macy’s).

In summary, I agree with Michael Love’s suggestion that the Starboard’s proposal could be an excellent decision by Macy’s. By allowing Macy’s to lock in low rents relative to its property values, reduce financial risk at the core business, and have more cash to invest in transforming itself for the new economy, Starboard’s proposal is in the best interest of the company and its shareholders.