MAYA

I've been trying to think what makes us try new consumer products. Peter Thiel would tell us that if a new product is 10x better than the existing one, demand would automatically shift towards it. But that doesn't apply to the viral products from Off White, Kylie Jenner or Yeezy.

The answer to this business strategy question comes from the field of industrial design from Raymond Loewy: M.A.Y.A = Most Advanced Yet Acceptable. Derek Thompson explains,

According to Loewy, consumers are torn between curiousotiy of new things and anything too new.  As a result, they gravitate to products that are bold, but instantly comprehensible. He said to sell something surprising, make it familiar; and to sell something familiar, make it surprising.

Humans seek familiarity, because it makes them feel safe. For that reason, the power of familiarity seems to be strongest when a person isn’t expecting it. On the other hand, people are charged by the thrill of a challenge, powered by a pioneer lust. This battle between familiarity and discovery affects us “on every level”. A surprise seems to work best when it contains some element of familiarity.

Virgil Abolh of Off White described his personal design language in a lecture titled “Insert Complicated Title Here” . #3 on his list was his "3% approach". He will only edit an existing design by 3% because he wants his customers to immediately identify the product and notice the changes.

MAYA can be used at a product portfolio level as well. Bernard Arnault of LVMH has used this method successfully time and again. In a 2001 interview to the Harvard Business Review, he said that only 15% of his business comes from new products; the rest comes from traditional, proven products.

A great industrial designer, it turns out, needs to be an anthropologist first and an artist second: Loewy studied how people lived and how machines worked, and then he offered new, beautiful designs that piggybacked on engineers’ tastes and consumers’ habits.

Evolution of the iPod using MAYA iterations

Notes:

1. https://hbr.org/2001/10/the-perfect-paradox-of-star-brands-an-interview-with-bernard-arnault-of-lvmh
2. https://www.theatlantic.com/magazine/archive/2017/01/what-makes-things-cool/508772/
3. https://www.youtube.com/watch?v=biFlrzTJets

B2C is hard

I am the ideal customer for all consumer companies. I will buy anything that solves my problem (that I apparently did not know I had 🤷‍♂️), has a good packaging, attention to small detail, and a somewhat believable story. I will also then proceed to tell all my friends about this cool new thing.

I often see promising brands dwindle away because they could not replicate the small initial success. Inherently, consumer products are not commutative in nature: one can trick ten people once, but it’s much harder to trick one person ten times. It is not entirely their fault too, business cycles have also become shorter and technology has enabled rapid proliferation of competitors. The barriers to entry have been replaced by barriers to scale. Rarely does a company come along who consistently puts out products that their audience cannot stop consuming. But when it does, it creates immense value for all their stakeholders.

From my limited knowledge, I have tried to compile a set of observations on building brands and creating that magic potion:

1. An entreprenuer must be concerned with the unchanging man – what compulsions drive him, what instincts dominate his every action, even though his language too often camouflages what really motivates him. Yes, Jeff Bezos said this first. MSCHF is a new age company which has demonstrated that this works. They worked with the mattress company Casper to build a simple website that would help you fake a social life on Snapchat so that you could relax in your bed instead of going out. Second time over, they developed a chatbot that was capable of a personalised text conversation between 11pm and 5am - everyone loves pillow talk.
2. Is the product a solution looking for a problem or is it an aswer to a problem looking for a solution? A lot of effort, time and money would be saved if the entreprenuer and the investor honestly answered this question.
3. It would be helpful to first segment the customer and not the market. Segmenting a market is somewhat problematic because market segments are ultimately artificial constructs based on what companies think are consumer segments. Focus on the customer and not the competitor.
4. Most new brands do not stand a chance because they were introduced to serve a market rather than create a market. Think of evolution of brands as the evolution of species - divergence will create resilience. From the theories of Clayton Christensen and Peter Thiel we know that innovation only happens on the fringes. Taking this a bit further, Sudhir Sitapati, the ex-CEO of Hindustan Unilever, explains: "counter-intuitively, it is easier to grow a category than it is to grow a brand. This is because an under-penetrated category represents an unsolved consumer problem (assuming the category solves a problem in the first place!) while growing brand penetration in an already penetrated category means nudging out a competitor who has more or less solved the problem. Of course, one should attempt to grow a category only if one is the market leader; otherwise the fruits of your labour will land in the lap of a competitor..... In summary it is easiest to get non-users of a category to adopt the category (get chai users to drink green tea) and it is the toughest to get heavy users of a brand to consume more of it (drink four cups of Brooke Bond Red Label every day rather than two)."
5. Rajiv Bajaj used the teachings of Al and Laura Ries and launched the Pulsar in 2002 and every successive model. He has laid out the entire Bajaj Auto product ideation playbook, and these are 9 criteria they try to answer: 
   
6. On pricing the product, the most insightful learning for me came from Rama Bijapurkar, "Those with money are thrifty, those without splurge". This explains the extremely liquid used iPhone market in India. Sitapati goes on to expand on this, "pricing never drives penetration or attracts new users. New users adopt a brand for three reasons: access, awareness and availability. The amount they consume has to do with their satisfaction with product quality and price. Lowering and increasing price changes consumption and not the recruitment of new users."
7. Get creative with distribution. Please do not start off by paying rent to Facebook and Google.
8. Brand extensions do not work, there just isn't enough mind space for a new association. The harsh truth is that you have to let your loyal customers go when they start expecting new product categories. If you are lucky your extension will fail but if you are unlucky it may succeed and destroy the mother ship. A second product in the same category should be as far away from the first one as possible. Royal Enfield executed this beautifully when they launched the Himalayan when they were market leaders with the Bullet.
9. And lastly, it sometimes pays to abandon logic when everyone else is being logical. If all CPG brands are now on Instagram and use pastel colors and beautiful backgrounds to promote their posts, it would be a good idea to approach this medium through the lens of brutalist design. Don't believe me? Check out Poolside.fm. Even Vijay Shekar Sharma found it super cool. Counter positioninng, if executed well, can become a super power.

At the end of the day, all business participants should realise that, "the circumstances of our life may actually matter less to our happiness than the sense of control we feel over our lives". Use pscho-logic.

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Notes:

1. https://www.amazon.in/Never-Before-World-Tracking-Evolution-Consumer/dp/0143423525
2. https://www.amazon.in/CEO-FACTORY-Management-Hindustan-Unilever/dp/9353450845/
3. https://www.amazon.in/Zero-One-Start-Build-Future/dp/0753555190/
4. https://www.amazon.in/Innovators-Dilemma-Technologies-Management-Innovation/dp/142219602X/
5. https://www.amazon.in/Alchemy-Curious-Science-Creating-Business-ebook/dp/B071DCWRG3/
6. https://www.amazon.in/Origin-Brands-Product-Evolution-Possibilities/dp/0060570156/ref=sr_1_1?dchild=1
7. https://www.lennyrachitsky.com/p/how-the-biggest-consumer-apps-go
8. https://twitter.com/vijayshekhar/status/1265334400633327617

The 3G Way of Business

3G Capital of is a private equity firm in Brazil and often partners with Warren Buffett in acquiring companies. Jorge Paulo Lemann and his two partners have created an interesting methodology to successfully run their portfolio businesses. Their practice relies on two basic principles, when linked together can produce a formidable advantage:

1. Hire and incentivise people well: they only hire "PSDs" -- poor, smart and determined. Their compensation structure is focused on a variable component directly linked to performance. Promotion in the organization is going from a bonus to a commission to a partnership stake, the variable component gaining more importance at each level. 
2. Return on equity: they break down the ROE into five components based on the DuPont formula, and then try to maximise each variable. The five variables, namely, the operating margin, tax burden, interest cost burden, asset turns and the leverage ratio. For most entrepreneurs, a single minded focus to improve operating margins by implementing a zero-based budgeting technique and sweating assets would improve results drastically.

"Get great people, give them big things to do and sustain a meritocratic ownership culture." According to them, it's that simple. 

IF by Rudyard Kipling

I find myself going back to this poem every few days.

    If you can keep your head when all about you   

        Are losing theirs and blaming it on you,   

    If you can trust yourself when all men doubt you,

        But make allowance for their doubting too;   

    If you can wait and not be tired by waiting,

        Or being lied about, don’t deal in lies,

    Or being hated, don’t give way to hating,

        And yet don’t look too good, nor talk too wise:

    If you can dream—and not make dreams your master;   

        If you can think—and not make thoughts your aim;   

    If you can meet with Triumph and Disaster

        And treat those two impostors just the same;   

    If you can bear to hear the truth you’ve spoken

        Twisted by knaves to make a trap for fools,

    Or watch the things you gave your life to, broken,

        And stoop and build ’em up with worn-out tools:

    If you can make one heap of all your winnings

        And risk it on one turn of pitch-and-toss,

    And lose, and start again at your beginnings

        And never breathe a word about your loss;

    If you can force your heart and nerve and sinew

        To serve your turn long after they are gone,   

    And so hold on when there is nothing in you

        Except the Will which says to them: ‘Hold on!’

    If you can talk with crowds and keep your virtue,   

        Or walk with Kings—nor lose the common touch,

    If neither foes nor loving friends can hurt you,

        If all men count with you, but none too much;

    If you can fill the unforgiving minute

        With sixty seconds’ worth of distance run,   

    Yours is the Earth and everything that’s in it,   

    And—which is more—you’ll be a Man, my son!

Betting on Water

The movie "The Big Short (2015)" ended with comment that Dr. Micheal Burry had closed his hedge fund and now invested his personal wealth in one resource: water. This got me interested and I tried to know more about his trades. One blogger claims that Burry has been buying up almond farms in California. Why? Well because growing almonds takes a ridiculous amount of water – 1 gallon per almond. Paradoxically, 80% of the world’s almond supply is grown in California, which just went through one of the worst droughts in the state’s history.

Interestingly, there's another hedge fund based out of New York has been buying up water rights across the country. Most of their investment theses rely on the unfortunate fact that there has been a perennial mismanagement of water in the American West.  And that's why they are advocating to allowing people to buy and sell water rights -- they believe that this is a more expedient way to redistribute the West’s water; waste would be discouraged, water would shift to where it’s needed most, and farmers would be compensated.

The common theme in both these cases is the basically the same: rising demand and shrinking supply virtually guarantee that water’s value will increase. Anticipating that day, they're buying up as much as they can.

But I think that this is a very pessimistic view of the world and certainly doesn't lead to a win-win situation for all parties. They're betting that the world will face a water shortage, and they do not want to do anything about it, just make money on the downturn.

There is a better way to invest in this water crisis, one that does lead to a win-win for all stakeholders -- invest in companies like Ripple Foods, Patagonia, Baldwin, Nau and many others. For example, Ripple Foods produces 1 gallon of their pea-based milk using just 1/6th of the amount of water needed to produce a traditional dairy gallon of milk. Past returns are proof that ESG (environmental, social, governance) investing might be an active investment strategy that beats benchmarks. Like for example,  the MSCI Emerging Markets ESG Index outperformed its parent index, the MSCI Emerging Markets Index, by a cumulative 12 percent on a total return US dollar basis—more than 50 percent of the outperformance was attributable to ESG factors alone.

I very confidently believe that us humans identify very well with incentives and when incentives are aligned with the greater good, amazing things can happen.

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Notes:

1. https://www.theatlantic.com/magazine/archive/2016/03/a-plan-to-save-the-american-west-from-drought/426846/
2. http://ripplefoods.com/healthy-environment/
3. https://www.cambridgeassociates.com/press-release/esg-factors-have-helped-investors-achieve-significant-outperformance-in-emerging-markets/
4. http://myjeansdontlie.weebly.com/

Lessons from Amazon.com, Inc.

Amazon.com, Inc. will probably go down in history as the most fabled company of our generation. Quantitatively, it has generated more than 46,000% returns for its investors since its IPO, and qualitatively, it has won over consumers, writers and merchants worldwide. It has defied Wall Street, GAAP measures and every detractor only to become the behemoth it is today. Its relentless focus on free cash flow and customer service has created immense value for all its stakeholders.
Now, this post is not a $AMZN pitch because of two simple reasons: first, as a fundamental investor, it appears expensive to me and second, I do not know how and when $AMZN would mature, because its still "Day 1". I also think that there is little merit in trying to accurately forecast 2021 revenue numbers and running an elaborate DCF for such a rapidly changing company (imagine a revenue growth rate of > 30% and a 45x free cash multiple valuation). But I do think that there are a lot of qualitative lessons to be learned from this story that can be applied to evaluating other businesses. To cut out all the noise, I have organized snippets of their Letters to Shareholders from 1997 - 2015 into the John Kay framework to create a recipe of the 'magic sauce':

On their focus on their core businesses:
From the 1998 AR,

• We intend to build the world’s most customer-centric company. We hold as axiomatic that customers are perceptive and smart, and that brand image follows reality and not the other way around. Our customers tell us that they choose Amazon.com and tell their friends about us because of the selection, ease-of-use, low prices, and service that we deliver.

From the 2013 AR,

• We’ve reduced AWS prices 27 times since launching 7 years ago, added enterprise service support enhancements, and created innovative tools to help customers be more efficient.
• Yes, we are actively telling customers they’re paying us more than they need to. In the last 90 days, customers have saved millions of dollars through Trusted Advisor, and the service is only getting started. All of this progress comes in the context of AWS being the widely recognized leader in its area – a situation where you might worry that external motivation could fail. On the other hand, internal motivation – the drive to get the customer to say “Wow” – keeps the pace of innovation fast.

From 2015 AR,

• This year, Amazon became the fastest company ever to reach $100 billion in annual sales. Also this year, Amazon Web Services is reaching $10 billion in annual sales … doing so at a pace even faster than Amazon achieved that milestone.
• Superficially, the two could hardly be more different. One serves consumers and the other serves enterprises. One is famous for brown boxes and the other for APIs.
• Under the surface, the two are not so different after all. They share a distinctive organizational culture that cares deeply about and acts with conviction on a small number of principles. I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long-term, and the taking of professional pride in operational excellence. Through that lens, AWS and Amazon retail are very similar indeed.
• Many characterized AWS as a bold – and unusual – bet when we started. “What does this have to do with selling books?” We could have stuck to the knitting. I’m glad we didn’t. Or did we? Maybe the knitting has as much to do with our approach as the arena. AWS is customer obsessed, inventive and experimental, long-term oriented, and cares deeply about operational excellence.

On the Amazon Brand:
From the 1999 AR,

• The Amazon.com platform is comprised of a brand, customers, technology, distribution capability, deep e-commerce expertise, and a great team with a passion for innovation and a passion for serving customers well. We begin the year 2000 with 17 million customers, a worldwide reputation for customer focus, the best e-commerce software systems, and purpose-built distribution and customer service infrastructure. We believe we have reached a “tipping point,” where this platform allows us to launch new e-commerce businesses faster, with a higher quality of customer experience, a lower incremental cost, a higher chance of success, and a clearer path to scale and profitability than perhaps any other company.

From the 2000 AR,

• We have the brand, the customer relationships, the technology, the fulfillment infrastructure, the financial strength, the people, and the determination to extend our leadership in this infant industry and to build an important and lasting company. And we will do so by keeping the customer first.

From the 2013 AR,

• We build automated systems that look for occasions when we’ve provided a customer experience that isn’t up to our standards, and those systems then proactively refund customers.
• When you pre-order something from Amazon, we guarantee you the lowest price offered by us between your order time and the end of the day of the release date.
• Renewable energy, Frustration-Free Packaging, Career Choice, Leave Share, and Ramp Back are examples of a culture that embraces invention and long-term thinking. It’s very energizing to think that our scale provides opportunities to create impact in these areas.

On the architecture of the firm:
From the 1997 AR,

• The past year’s success is the product of a talented, smart, hard-working group, and I take great pride in being a part of this team. Setting the bar high in our approach to hiring has been, and will continue to be, the single most important element of Amazon.com’s success.
• It’s not easy to work here (when I interview people I tell them, “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”), but we are working to build something important, something that matters to our customers, something that we can all tell our grandchildren about. Such things aren’t meant to be easy. We are incredibly fortunate to have this group of dedicated employees whose sacrifices and passion build Amazon.com.

From the 1998 AR,

• I constantly remind our employees to be afraid, to wake up every morning terrified. Not of our competition, but of our customers. Our customers have made our business what it is, they are the ones with whom we have a relationship, and they are the ones to whom we owe a great obligation. And we consider them to be loyal to us – right up until the second that someone else offers them a better service.
• During our hiring meetings, we ask people to consider three questions before making a decision:
  • Will you admire this person?
  • Will this person raise the average level of effectiveness of the group they’re entering?
  • Along what dimension might this person be a superstar?

From the 2006 AR,

• In some large companies, it might be difficult to grow new businesses from tiny seeds because of the patience and nurturing required. In my view, Amazon’s culture is unusually supportive of small businesses with big potential, and I believe that’s a source of competitive advantage.

From the 2012 AR,

• I am incredibly lucky to be a part of this large team of outstanding missionaries who value our customers as much as I do and who demonstrate that every day with their hard work.

From the 2015 AR,

• The reason cultures are so stable in time is because people self-select.
• Someone energized by competitive zeal may select and be happy in one culture, while someone who loves to pioneer and invent may choose another.

On innovation:
From the 2002 AR,

• One of our most exciting peculiarities is poorly understood. People see that we’re determined to offer both world-leading customer experience and the lowest possible prices, but to some this dual goal seems paradoxical if not downright quixotic. Traditional stores face a time-tested tradeoff between offering high-touch customer experience on the one hand and the lowest possible prices on the other. How can Amazon.com be trying to do both? The answer is that we transform much of customer experience—such as unmatched selection, extensive product information, personalized recommendations, and other new software features—into largely a fixed expense. With customer experience costs largely fixed (more like a publishing model than a retailing model), our costs as a percentage of sales can shrink rapidly as we grow our business. Moreover, customer experience costs that remain variable—such as the variable portion of fulfillment costs—improve in our model as we reduce defects. Eliminating defects improves costs and leads to better customer experience.

From the 2009 AR,

• Invention is in our DNA and technology is the fundamental tool we wield to evolve and improve every aspect of the experience we provide our customers.

From the 2012 AR,

• One advantage – perhaps a somewhat subtle one – of a customer-driven focus is that it aids a certain type of proactivity. When we’re at our best, we don’t wait for external pressures. We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to.

From the 2013 AR,

• Energy at Amazon comes from the desire to impress customers rather than the zeal to best competitors
• We are internally driven to improve our services, adding benefits and features, before we have to. We lower prices and increase value for customers before we have to. We invent before we have to. These investments are motivated by customer focus rather than by reaction to competition. We think this approach earns more trust with customers and drives rapid improvements in customer experience – importantly – even in those areas where we are already the leader.
• We want to be a large company that’s also an invention machine. We want to combine the extraordinary customer-serving capabilities that are enabled by size with the speed of movement, nimbleness, and risk-acceptance mentality normally associated with entrepreneurial start-ups.

On capital allocation:
From the 2004 AR,

• Amazon.com’s financial focus is on long-term growth in free cash flow per share.
• Amazon.com’s free cash flow is driven primarily by increasing operating profit dollars and efficiently managing both working capital and capital expenditures. We work to increase operating profit by focusing on improving all aspects of the customer experience to grow sales and by maintaining a lean cost structure.
• We have a cash generative operating cycle because we turn our inventory quickly, collecting payments from our customers before payments are due to suppliers. Our high inventory turnover means we maintain relatively low levels of investment in inventory—$480 million at year end on a sales base of nearly $7 billion.
  • The operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days.
• The capital efficiency of our business model is illustrated by our modest investments in fixed assets, which were $246 million at year end or 4% of 2004 sales.

From the 2006 AR,

• Before we invest our shareholders’ money in a new business, we must convince ourselves that the new opportunity can generate the returns on capital our investors expected when they invested in Amazon. And we must convince ourselves that the new business can grow to a scale where it can be significant in the context of the overall company.

From the 2013 AR,

• Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odds with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer. But I don’t think so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in new business arenas. Take a long-term view, and the interests of customers and shareholders align.

On the importance of long term thinking, focus on cash flows and intrinsic value:
From 1997 AR,

• We believe that a fundamental measure of our success will be the shareholder value we create over the long term. This value will be a direct result of our ability to extend and solidify our current market leadership position. The stronger our market leadership, the more powerful our economic model. Market leadership can translate directly to higher revenue, higher profitability, greater capital velocity, and correspondingly stronger returns on invested capital.
• We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.
• When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.

From the 2000 AR,

• Ouch. It’s been a brutal year for many in the capital markets and certainly for Amazon.com shareholders. As of this writing, our shares are down more than 80% from when I wrote you last year. Nevertheless, by almost any measure, Amazon.com the company is in a stronger position now than at any time in its past.
• So, if the company is better positioned today than it was a year ago, why is the stock price so much lower than it was a year ago? As the famed investor Benjamin Graham said, ‘‘In the short term, the stock market is a voting machine; in the long term, it’s a weighing machine.’’ Clearly there was a lot of voting going on in the boom year of ’99—and much less weighing. We’re a company that wants to be weighed, and over time, we will be—over the long term, all companies are. In the meantime, we have our heads down working to build a heavier and heavier company.

From the 2004 AR,

• Why not focus first and foremost, as many do, on earnings, earnings per share or earnings growth? The simple answer is that earnings don’t directly translate into cash flows, and shares are worth only the present value of their future cash flows, not the present value of their future earnings.

In an interview in 2011,

• If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavors that you could never otherwise pursue. At Amazon we like things to work in five to seven years.

From the 2012 AR,

• We don’t celebrate a 10% increase in the stock price like we celebrate excellent customer experience. We aren’t 10% smarter when that happens and conversely aren’t 10% dumber when the stock goes the other way.

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Notes

1. Amazon Letter to Shareholders 1997 - 2015
2. Stone, Brad. The Everything Store: Jeff Bezos and the Age of Amazon. New York: Back Bay, 2014. Print.
3. https://www.valueinvestorsclub.com/idea/AMAZON.COM_INC/138820
4. http://theirrelevantinvestor.com/2017/01/04/looking-for-the-next-amazon/
5. https://www.wired.com/2011/11/ff_bezos/

Enzo's Pizzeria

I recently read Lowenstein's book on Buffet, and I was particularly intrigued by Buffet's process to analyze private businesses. I think that's the true benchmark for they way we, investment analysts, should look at opportunities. Last week, I wanted to test what I had learned from that book by challenging myself to come up with a value I would pay to buy my favorite pizza place in Westwood. I was happily surprised with my findings as a lot of them fit the guidelines of a 'good business'.
Enzo's Pizzeria a 17-year old restaurant that makes the largest (23") New York-style pizzas in Westwood. They have been immensely successful even when competing with chains like California Pizza Kitchen, Pieology and 800 Degrees. I did some homework trying to understand restaurant economics and then went to speak to the owner of the restaurant to understand more about the place. 

These are the key insights I gathered: 

1. In the commodity-like business of cheese pizza, they are the lowest cost providers. They use the highest quality ingredients (like tomatoes from Maples and cheese from Wisconsin, often paying 3x for raw materials as compared to their competitors) and yet charge half of what 800 Degrees would charge for the same quality of food ($0.05/sq inch vs $0.11/sq inch).
2. They are able to keep their costs down because of their ability to identify and cater to their core customer - the frugal college student. They have a small restaurant which lowers maintenance expense by reducing number of staff required to serve; they focus on deliveries more than dine-ins; and do not have a liquor license because they know that college kids do not pay $5-$7 for a beer with dinner.
3. In stark contrast to their competitors, they spend no money on discount coupons because their giant pizza boxes (almost 2.5 ft wide) are self-advertising. They keep costs low and pass on these savings to customers.
4. They are the official and exclusive sponsor of the UCLA Recreation and they supply pizza to a lot of sporting events. Because of their accounting structure, they are one of the few vendors who are able to work with purchase orders, they are able to supply to UCLA meetings and thus make big margins on bulk orders.
5. They raise prices each year (slightly more than inflation) and are not worried about losing market to competitors, because as the owner told me, as long as UCLA keeps enrolling a higher number of students each year, their volume sales will keep going up.
6. The best part - because of their lean operating structure and high-volume business, their pre-tax margin is about 20% whereas the competitors are anywhere between 6-10%.
7. Based on the volume numbers the owner gave me, I estimate them making ~$600,000 in revenue each year which translates into $90,000 in net income. They have very little maintenance capex as their cooking equipment is pretty basic. So the $90,000 can be assumed as owners earnings, and if we can buy the business today for $500,000 and sell it after 15 years for the same amount, it would generate a 18% IRR.

 

Just a fun little exercise I indulged in while procrastinating on school work.

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Notes:

1. Enzo's Pizzeria: http://www.enzospizzeria.com/
2. Link to my class presentation: https://drive.google.com/file/d/0B_uPXHuj2aJqc2VZTUNKZGFiZHc/view?usp=sharing