The Weekly: Edition #54 - July 17th, 2020
Margin
“A crisis doesn’t build character, it reveals it.” - Steve Tanger
As the coronavirus pandemic continues to take its toll on American economic prosperity, the importance of margin in our lives has never been more apparent. On a personal, professional, and corporate level, having built-in margin allows for flexibility with time and financial commitments. This week, we highlight a case study on Target that puts the concept of corporate margin (or lackthereof) on display.
The Target case study is a deep dive into what went wrong for Target during its expansion into Canada. If you're looking for a case in point about setting aggressive timeline goals with little to no margin for error and massive downside risks associated with failure, look no further. Several themes are readily apparent in the piece that highlight Target's emphasis on speed at all costs:
1) Unrealistic expectations for an opening schedule and supply chains:
"From the very beginning, there was a clock that was ticking,” says the former employee. “And that clock was absurd.” The company did everything it could to remove barriers that might slow progress and to ensure decisions could be made quickly. Timelines were hugely compressed. Building a new distribution centre from scratch, for example, might take a few years. Target was going to do it in less than two years—and it planned to construct three of them.
2) Technological change without the necessary forethought and planning:
“While SAP might be considered best in class, it’s an ornery, unforgiving beast. Sobeys introduced a version of SAP in 1996 and abandoned the effort by 2000. (It wasn’t until 2004 that the grocery chain tried again.) Similarly, Loblaws started moving to SAP in 2007 and projected three to five years to get it done. The implementation took two years longer than expected because of unreliable data in the system. Target was again seeking to do the impossible: It was going to set up and run SAP in roughly two years. The company wasn’t doing it alone, however, and hired Accenture (which also worked on Loblaws’ integration) as the lead consultant on the project.”
“The investigative team estimated information in the system was accurate about 30% of the time. In the U.S., it’s between 98% and 99%."
3) Lack of experienced talent and suffient bandwidth:
“In Canada, the company succeeded in hiring people with the right personalities, but young staff received only a few weeks of training, according to former employees who worked at Target in both countries. The Canadian team lacked the institutional knowledge and time to properly mentor the new hires. “Everyone was stretched thin. We didn’t have the manpower to get everything done in the time frame that was laid out,” says a former employee. Another was surprised to see how green his colleagues were. “I was one of the older people there, and I was in my mid-30s,” he says.”
The coronavirus has been an epic reminder that we should seek to build in a little more margin into our lives during the good times in preparation for the bad. Whether it is freeing up a packed schedule, cutting costs in a razor thin budget, or stepping away from low priority commitments (either personally or professionally), having margin allows for life's inevitable curveballs and the occasional storms. This week, take time to examine your personal life or business and ask where things are stretched thin, think about what can be eliminated, and keep first things first.
The last days of Target Canada (Canadian Business)
+ “Nobody disagreed with the negative assessment—everyone was well aware of Target’s operational problems—but there was still a strong sense of optimism among the leaders, many of whom were U.S. expats. The mentality, according to one former employee, was, “If there’s any team in retail that can turn this thing around, it’s us.” The group was riding a wave of momentum, in fact. They had overcome seemingly endless hurdles and worked gruelling hours to get to this point, and they knew there were costs to delaying. The former employee says the meeting ultimately concerned much more than when to open the first few stores; it was about the entirety of Target’s Canadian launch. Postponement would mean pushing back even more store openings. Everyone else in attendance expressed confidence in sticking to the schedule, and by the time the meeting concluded, it was clear the doors would open as promised. “That was the biggest mistake we could have made,” says the former employee. Roughly two years from that date, Target Canada filed for creditor protection, marking the end of its first international foray and one of the most confounding sagas in Canadian corporate history. The debacle cost the parent company billions of dollars, sullied its reputation and put roughly 17,600 people out of work.”
CMBS delinquency rates surge for third straight month, nears all-time high (Trepp)
+ “The percentage of loans with the special servicer grew from 6.07% in June to 8.28% in May. According to June servicer data, 20.5% of all lodging loans were in special servicing, up from 16.2% in May. In addition, 14.3% of retail loans are with the special servicer, up from 9.3% in May. The percentage of loans on servicer watchlist in June was 20.9%.”
The Tanger Outlets CEO thinks online shopping is overrated – now he’s betting on it. (Wall Street Journal)
+ “It’s a bet Mr. Tanger has been making for years, even as online retail threatens to flatten every shopping center in America. Wall Street investors have taken the other side of that bet, sucking his company’s share price steadily downward since 2016. Mr. Tanger’s strongest rebuttal is that human beings will always prefer to buy some merchandise in person. Maybe not diapers or dog food, but definitely fashionable clothing. And because his company’s 39 outlet centers, spread across the U.S. and Canada, specialize in discounted apparel, Tanger is well-positioned to take whatever the economy dishes out. “In good times, people like a bargain,” he often said. “In tough times, they need a bargain.””
Don’t call time on the megacity (Exponential View)
+ “The forces of attraction are the mixing, mingling, diversity, convenience, economics. The forces of repulsion the anonymity, over-crowding, expense, pollution and disease. The balancing point between these forces is determined by many factors which change over time. If it wasn’t for the balancing point, we would have seen much larger cities than we previously did throughout history. Two millennia ago, Rome exceeded one million inhabitants, as did Alexandria. But cities did not subsequently achieve that scale again until London reached it in the 19th century.”
The forces that will reshape American cities (Bloomberg)
+ “Indeed, the migration of families from superstar cities to suburbs and less expensive metros was well underway before the virus and its related crises struck. As the Brookings Institute demographer William Frey has documented, the growth of hyper-expensive cities like New York and San Francisco had begun to reverse over the past five years, as people began heading to smaller metros, suburbs, and rural areas in search of more affordability. What the current crises have done is accelerate this process, compressing family-formation moves that would have been made anyway over the next several years into one or two months. And Covid-19 is not the first significant health crisis that has accelerated the shift of Americans with families to the suburbs. The period immediately following the Spanish Flu was one of rapid suburbanization.”
Pinduoduo and the rise of social e-commerce (Y Combinator)
+ “Social shopping may seem like a new concept, but the reality is that in the physical world, shopping is meant to be “interactive and fun” and purchases are regularly informed by friends and family. Consider how much harder it feels to purchase a new clothing item without immediate feedback from friends. E-commerce platforms like JD, Alibaba, and Amazon don’t account for this. Instead, they optimize for efficiency, funnel conversion, and purchase rates. Pinduoduo, on the other hand, has tried to mimic the offline shopping experience online by building community via their team purchase model, driving engagement via fun and interactive games and rewards, and offering personalized experiences and value via recommendations.”
The coronavirus impact on marketing agencies: 3 months into lockdown (Orbit Media Studios)
+ “Most providers of media planning, social media and PR reported a major negative impact. Consumer behavior has changed so drastically and quickly that advertisers are pulling back, despite falling CPMs on sites like Facebook. Most retainer-based services take a hit as brands look to reduce monthly expenses in anticipation of an almost certain recession. CMOs and CFOs everywhere are debating what to cut. The most impacted agencies serve most impacted industries: travel, hotel, events, higher education and entertainment.”
Indigenous circuits (Computer History)
+ “I learned that from 1965-1975 the Fairchild Corporation’s Semiconductor Division operated a large integrated circuit manufacturing plant in Shiprock, New Mexico, on a Navajo reservation. During this time the corporation was the largest private employer of Indian workers in the U.S. The circuits that the almost entirely female Navajo workers produced were used in devices such as calculators, missile guidance systems, and other early computing devices.”
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