What if you could learn from someone else’s enormous, devastating mistakes instead of having to make those mistakes yourself and suffer the extremely unpleasant consequences?
Well, if you’re like most smart real estate investors and small business owners, you recognize that particular strategy as plain old common sense. And, furthermore, you know that plenty of the biggest names in HISTORY and the most successful people in the world have spent decades telling you to do exactly that.
Warren Buffet? The Oracle of Omaha says:
“It’s good to learn from your mistakes but it’s better to learn from other people’s mistakes.”
Eleanor Roosevelt, Sam Levenson, and Zig Ziglar? All attributed with
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
And probably my favorite: Jim Rohn:
“It is better to learn from other people’s mistakes and BEST to learn from other people’s successes. It accelerates your own success.”
So, this is not a new concept. In fact, I think the first person to say “learn from others’ mistakes instead of your own” was probably some prehistoric human who had just watched the other guy burn down his own tent by setting a fire inside it and going to sleep in that nice, cozy warmth.
Today, we are in the unique position of watching some of the biggest, most successful corporations in the world make some of the most devastating and permanently ruinous business mistakes possible – and they’re making them in uncharted territory. Truly, the ONLY way we can hope to avoid pandemic-related mistakes outside of applying our common sense and hoping for the best is to watch as the biggest and formerly best struggle through themselves.
And, speaking of the pandemic (since that feels like all we talk about these days), let’s take a look at some of our models for what to do (and not do).
Take a look at this list of businesses:
- Cirque du Soleil
- Hertz,
- Neiman Marcus
- Papa John’s
One of these companies does NOT belong with the rest. Now, look at this group:
- Wayfair
- Beyond Meat
- Papa John’s
You’ll notice one brand, Papa John’s, is in both categories. I expect you can tell which company will be on our “Huge Success” roster and which one is comprised mainly of our “abject failures”.
That’s right: Wayfair, Beyond Meat, and Papa John’s have something very important in common: they are all SUCCEEDING in these trying economic times – and for some very important and distinct reasons we will dive into in just a moment. As for Cirque du Soleil, Hertz, and Neiman Marcus? Well, they join the sad ranks of successful businesses now in bankruptcy or bankruptcy protection as a result of the economic 180 that COVID-19 hit the country with starting in the spring of this year.
When a Sterling Legacy Isn’t Enough
Will all of those bankruptcy-list companies really end up out of business? Probably not. Some of them will reorganize, and some will sell to other companies who will either incorporate them or, more likely, pull them apart, cherry-pick the best pieces, and sell off the rest for parts. These are big companies. Legacies of creativity, wealth, and ingenuity.
Hertz has been around since 1918 when a guy named Walter Jacobs started a car rental company with a dozen Model T cars. At the start of 2020, the company was thriving, but COVID-19’s downward pressure on automotive values forced Hertz into bankruptcy when its lenders called its loans, which had been secured by the value of the rental fleet. The pandemic and resulting economic lockdown drove the cars’ value downward and lenders called in the difference.
Cirque du Soleil, while much “younger” than Hertz with a birth date in 1981, has dominated imaginations on the ultimate stage of the Las Vegas Strip as well as all over the world with its traveling tours since 1993. At the beginning of 2020, the company was in the throes of rebranding and restructuring but still expanding and sending new shows onto the stage. By July of this year, however, the company had submitted a takeover proposal to its creditors as COVID-19 had shuttered all 44 productions the world over.
And Neiman Marcus? Well, Neiman Marcus’ storied history begins in 1907 when its three founders rejected a chance to be involved with a fledgling Coca-Cola company and opened a retail business in Dallas. For decades the store thrived on its brand of lavish, luxury goods and attentive customer service. As recently as 2019 the company appeared to be one of the few brick-and-mortar luxury stores that would hold its own against online retailers and it acquired a stake on an online resale platform. Less than a year later, however, COVID-19 drove Neiman Marcus Group and 23 affiliated debtors into Chapter 11 bankruptcy.
“The Rest of the Story”
So what happened? How can we itemize these 3 abject failures and learn from the mistakes of these business behemoths that had been largely navigating the rough seas of change in the new millennium prior to the emergence of the novel coronavirus COVID-19?
Let’s start with Hertz. What’s going on there? Is it really even a company that is going out of business when you cannot get a rental car for “love nor money” in most areas of the country? Well, if those are things you were wondering, then you make a number of very good points. Here is the rest of the story on Hertz:
One of their biggest lenders is an “activist investor” named Carl Icahn, who owned 39 percent of the company’s shares when it filed for bankruptcy on May 22, 2020. Between 2014 and 2020, Icahn invested $2.3 billion in Hertz shares. By mid-June 2020, the company was involved in a $1-billion equity raise and its stock had risen nearly 1000 percent (up to $5.50 from $0.59 a share at the time of the bankruptcy filing) thanks in large part to online stock investing platform Robinhood, where investors were buying like wildfire despite company warnings that stocks and shares “could ultimately be worthless”. Notably, Icahn dumped his shares just days after the bankruptcy filing for a loss of more than $1.8 billion.
So what’s going on with Hertz? Well, the big mistake seems to be one of leverage. The company was growing so quickly and acquiring so many new assets that it believed the threat of having its loans called in was low-to-nonexistent. After all, the fleet was constantly gaining new cars as collateral. COVID-19 demolished this strategy and, as a result, Hertz found itself facing bankruptcy despite a market absolutely desperate for car-rental services.
What can we learn from Hertz?
Poor leverage strategies will always pose the threat of abject failure. In today’s economy, leverage is harder to come by and easier to lose than ever. Make sure your use of leverage is judicious and allows you to make an exit you can live with (like Icahn) in a worst-case scenario.
Next, let’s take a look at Cirque du Soleil. What’s the rest of the story there?
Well, take a look:
After the company started investigating buyout options, it received offers from shareholders and lenders. The company is close to accepting a lender offer that will provide it with $375 million in new loans while taking control of the company. This is not dissimilar from the way Cirque funded its first show, which was only a success because an investor covered the $200,000 (in 1986 dollars) in bad checks that the company wrote after an unsuccessful performance series outside of Canada. If the company takes this offer, shareholders will be wiped out.
So what’s going on with Cirque? The truth is that the company produces outstanding entertainment but has endured issues with overly rapid expansion that affected the caliber of the shows (most notably in 2009 the company received a series of critical pans in response to Criss Angel: Believe, Viva Elvis, and Banana Shpeel). Similar reviews awaited 2011 releases, and by 2013, the company was laying off employees and making horrifying headlines for allegedly dangerous working conditions that may have led to one acrobat’s onstage fall and death, although the company ultimately received only $25,000 in fines and penalties as a result of a safety inspection in the wake of the tragedy. As of mid-July, Cirque had furloughed or laid off 95 percent of all its workers, but CEO Daniel Lamarre was predicting the company would return to its former glory by 2023 and possibly reopen resident productions in Las Vegas and Orlando by Fall 2020. One Chinese show reopened in June, although its future appears somewhat uncertain.
What can we learn from Cirque?
Sometimes the only investors standing are the ones who play a long game. If Cirque takes the lender-offer instead of an offer from its shareholders, shareholders themselves will lose everything. The lenders, on the other hand, stand to win big if they can hold on through more potential deferred payments as Cirque and the world at large figure out what onstage entertainment looks like in the age of the COVID-19 pandemic. Of course, vaccinations and proven medical treatments that might emerge in the next 6-18 months will play a huge role in this as well.
Cirque’s “abject failure” was one that actually began to manifest long before COVID-19 insofar as the company was great at growing but not very effective in terms of moderation. When coronavirus entered the picture, an already weakened infrastructure that was highly dependent on ongoing shows (this is show biz, after all) crumbled. Real estate investors can learn from Cirque that sometimes there is a “right” industry and a “wrong” industry for success, and when that happens, the wrong industry simply cannot win.
Finally, let’s look at our third “abject failure” and determine if it is truly an “abject failure” and, if so, what we should learn from it. Let’s take a look at Neiman Marcus. Here is where things stand today:
At the end of July, Neiman Marcus agreed to surrender part of its digital platform, MyTheresa, which it acquired in 2014 and transferred to a parent holding company in 2018. Creditors have argued the move stripped Neiman Marcus of a “billion-dollar crown-jewel asset” just when the company was facing pressure in the wake of a private-equity buyout. Neiman Marcus has agreed to surrender part of the MyTheresa business to creditors in order to exit bankruptcy prior to the holiday shopping season. Owners will retain control of MyTheresa, however, and at least 8 executives on the Neiman Marcus leadership team could receive $10-million bonuses for meeting certain performance targets in the settlement.
This might look like a win for Neiman Marcus, but it is actually an abject failure on multiple fronts. For starters, the company has been compelled to throw MyTheresa into the “pot” for creditors due to some questionable dealings that enabled the company to make the purchase in the first place and then the decision to move it out of Neiman Marcus and under a larger umbrella. This is bad business if it proves to be true. Also, while the executive team might snag some huge bonuses, the majority of shareholders are not likely to come out ahead in a bankruptcy settlement. The brand is highly likely to suffer permanently in investors’ eyes. On the other hand, they’re already looking forward toward the holiday shopping season, so it’s hard to call this an abject failure when all is not necessarily lost.
What can investors learn from Neiman Marcus?
Overvaluing your business will always be bad business. It’s great to be optimistic about your business and your worth, but overly optimistic estimates will haunt you if you use them for concrete business activity. Always err on the conservative side of the estimate if you want to keep your business and your reputation intact.
Hey! What About that Huge Success?
If you’ve been reading about our abject failures solely in hopes of getting to the feel-good portion of this article where we will deal with that “huge success” in the title, it’s time for you to stop skimming and start reading every word. However, you should also go back and read the first 2000 words or so. Remember all that stuff about learning from others’ mistakes? You can’t do that if you don’t know what they are!
Now, however, it’s time to get to the fun stuff: the huge success.
So, let’s talk about Papa John’s and its COVID-19 pandemic response strategy.
In mid-March Papa John’s business took off. After all, everyone was locked down to one degree or another. We were out of school and exhausted by remote work and remote learning, not to mention the combination of the two. We ate a lot of pizza, and Papa John’s worked hard to help us feel good about that decision by sending out plenty of clear, concise information about their new “touch-free” pizza delivery and making sure we knew that no one would have their germy hands anywhere near our crust after it exited that hot and toasty oven where anything other than pizza would surely die in 450-degree heat. By July, Papa John’s stock was up more than 165 percent; the company was getting ready to hire another 10,000 team members (on top of the 20,000 it had already hired) and to put the parmesan topping on the top, Papa John’s announced it would expand its college tuition benefit program to include two new partners that would offer team members and their family members reduced tuition options.
Spokesman Marvin Boakye explained, “COVID-19 has changed how we live, work, and learn.” Papa John’s CEO Rob Lynch chimed in, “unprecedented numbers of families are relying on Papa John’s. We are rising to this challenge, hiring thousands of new team members, safeguarding our supply chain, and carefully managing our finances.”
Now, it is worth noting that Papa John’s is not the only pizza chain hiring. Dominos announced it would hire an additional 10,000 employees in March 2020 and Pizza Hut announced there were 30,000 positions in its company just waiting to be filled. Papa John’s however, is the business making the headlines – in large part because almost all of its “traditional restaurants” remained open and fully operational throughout the pandemic. This is due in large part to a) the “traditional” Papa John’s model being a small, open kitchen with a sales front and b) to very clear messaging from the company about what it was doing and how it was doing it when it came to protecting customers and employees.
So what can real estate investors learn from Papa John’s huge success?
We can learn a lot. First of all, communication is incredibly important – no more so than during a crisis or unprecedented event. Papa John’s has communicated exactly what it wants customers and investors to know – and it is reaping the rewards of great PR and a dedicated customer base that feels good about the decision to eat a $20 pizza at least once a week.
You must communicate with everyone in your supply chain as well, from your tenants to your investors and lenders. Letting everyone in your business know how you are handling things (not just that you will handle things) gives rise to a confidence that money alone and returns alone will never be able to buy.
Papa John’s also has listened to what people want and made judicious decisions about how to market itself and how to respond to those desires in ways that make working with the company attractive. For example, note that Lynch observes not just that the company is hiring but that his company is one upon which more and more people are relying on for a livelihood. In return, he’s trying to provide options for continuing education so that delivering pizza becomes more than a way to get by. Now, it’s a way to grow and move forward! That’s great messaging and, if the program is legitimate, then it’s also a great way to build respect, rapport, and loyalty from both employees and customers.
Real estate investors should consider how to incentivize the decision to work with and for their company as well. Whether you are trying to figure out how to get your renters to prioritize making rent payments over other expenses or wondering how to keep contractors and employees on the job in a time when their skills are demanded elsewhere, listening to their needs and responding judiciously with useful offerings (and communicating those offerings across the board) will help you establish and maintain loyalty in tough economic times.
Finally, Papa John’s does not operate in a vacuum. You can be quite sure that CEO Lynch and all the other executive team members are talking to each other and to consultants and experts constantly to figure out the best way to navigate the treacherous waters of the COVID-19 pandemic. After all, it was not that long ago that the company’s founder, John Schnatter, generated massive controversy over the alleged use of a racial slur on a conference call. (Schnatter maintains he is the victim of a smear campaign, but he resigned as CEO and sold off enough shares that he is no longer in the top 10 shareholders). Lynch, a former Arby’s executive, came on board to replace him along with NBA hall of famer Shaquille O’Neal. The point is not to talk about whether Schnatter is an awful guy or a great one (or even to talk basketball), but to show that Papa John’s has a history of responding to what threatens its business with productive, well-advised actions. That is the hallmark of a truly successful company with a good shot at long-term success – even in the midst of a worldwide viral pandemic.
Wish you could get this kind of insight applied directly to your real estate business? You can! It’s not too late to attend the Good Success Mastermind and Bootcamp and gain access to your own personal “Board of Directors” dedicated to helping you create a thriving business, partnering with you in future endeavors, and systematizing and optimizing your business for success in 2020 and beyond.
Start to conversation today and get access to the next Good Success Mastermind and Bootcamp by clicking here to request your free invitation.
