What has traditionally been the primary means of making money by McDonald’s corporation? Most of us wouldn’t have to think much before answering that its hamburgers, fries and the fast food items that have been responsible for the genesis of the fast food nation. When I read “Rich Dad, Poor Dad”, it gave a different picture. It said that the primary business was real estate. I couldn’t really understand the logic then, but I have a slightly better picture now.
I am currently reading “Mc Donald’s Behind the Arches”, and am thrilled to know the strategy behind making money by the company. Ray Kroc, a consummate salesman, had total control over the operations, and believed that money will follow. But the $950 franchising fees and the 1.9% of the sales didn’t do much to add value to the corporation. It was the acumen of the behind the scenes Sonneborn who could leverage the successful McDonald’s operations to make money in a way not many can imagine. By leasing out land / real estate to franchisees at 20% and then 40% markup it ensured a constant inflow of cash. While it solved the problem of the smaller franchisees (who were individuals starting off a business with their accumulated life’s savings), it also made sure the corporation made money.
The scheme was simple: the company would take a long term lease over a piece of lucrative land and then sub lease it to the operator. And the company had the rights to terminate the contract should things not go as Kroc wanted. In course of time, Mc Donald’s corporation started buying land and leased them out to the franchisees. This was executed by a separate real estate company, called Franchise Realty Corporation. So while the parent company was virtually a cost center, the realty company was the real profit center.
For such schemes and agreements to come to India would require a considerable amount of maturity in the Indian markets. In the two MNC IT companies I have worked for, the premises have been leased, and so the company only pays a rent on it, without locking in capital. Perhaps it makes sense for them, given that they are in no business of real estate, and would not like to end up like Enron (that had numerous non performing assets taking up space in its balance sheet, before the tweaking started).
Indian companies have traditionally been self sufficient. Particularly in the manufacturing sector, companies have bought land from the government and developed their factories. There wasn’t any one who could lease the land out to them. But now that India is witnessing a real estate boom, a steady growth of over 8%, a lot of direct investment from overseas, it is a signal that markets are maturing. I read about a new avenue of joining the bandwagon. The corporates could use the sale-leaseback to unlock capital and get more funds for their primary business. And this capital put in their core business could translate into high ROI. Sale-leaseback transaction is a technique used by corporations to raise capital, increase shareholder value and remove the real estate assets from their balance sheet. This gives operational control over the assets to the corporations.
Why would an investor put in money? The way Mc Donald’s corporation is making money, investors (realty MFs, FIIs, corporations interested in venturing into realty) could expect steady returns. They could have a right risk return trade off by giving it out to credit worthy tenants.
This transaction, even though currently not too popular, is fast catching up. We might find more companies selling off their land and leasing it back to have more control over their capital.
Sunday, December 17, 2006
Thursday, December 07, 2006
Larry Summers
>From a business standard article
The argument that globalisation is inevitable and protectionism is counterproductive does not provide much consolation for the losers.
Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world's economy from growing faster in the past five years than in any five-year period in recorded economic history.
Given this recent performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration.
Yet in many corners of the globe there is growing disillusionment. From the failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before.
Why is there such disillusionment? Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration's foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth—and that its share of the pie may even be shrinking.
Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.
It is important to remember that the period between the late 18th and early 19th centuries in Britain and continental Europe was called the Industrial Revolution for a reason. For the first time in human history, the standard of living of one generation was demonstrably better than the one before: in a single lifespan, real per capita incomes doubled and then doubled again. If one looks at the growth rate of China during the past 30 years, living standards are increasing at a rate that will lead to a hundred-fold improvement over a single human lifespan. The impact cannot be overstated.
Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.
Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers—whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe—are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.
It is this vast group that lacks the capital to benefit from globalisation and is desperately seeking either reassurance or a change in course. Yet without its support it is very doubtful that the existing global economic order can be maintained.
Let us be frank. What the anxious global middle is told often feels like pretty thin gruel. The twin arguments that globalisation is inevitable and protectionism is counterproductive have the great virtue of being correct, but do not provide much consolation for the losers. Nor can they rally support for policies that maintain, let alone promote, international integration.
Economists rightly emphasise that trade, like other forms of progress, makes everyone richer by enabling them to buy goods at lower prices. But this offers small solace to those who fear their jobs will vanish.
Education is central to any economic strategy, but there is a limit to what it can do for workers in their 40s and beyond. Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 a month.
John Kenneth Galbraith was right when he observed: "All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." Meeting the needs of the anxious global middle is the economic challenge of our time.
In the US, the political pendulum is swinging left. The best parts of the progressive tradition do not oppose the market system; they improve on the outcomes it naturally produces. That is what we need today.
There are no easy answers. The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.
Just as the Federal Housing Administration's effort to make owner-occupied housing more available after the second world war was a crucial part of the policy approach that permitted the Marshall Plan to go forward, so also our success in advancing international integration will depend on what can be done for the great global middle.
Our response will affect not just the livelihoods of millions of our fellow citizens but also the prospects for continuing global integration, with all the prosperity and stability it has the potential to bring.
The argument that globalisation is inevitable and protectionism is counterproductive does not provide much consolation for the losers.
Against all odds, we are living in a time of plenty. Neither the after-effects of September 11 2001 nor a tripling in oil prices has prevented the world's economy from growing faster in the past five years than in any five-year period in recorded economic history.
Given this recent performance and the pricing-in by world markets of an optimistic outlook, one might have expected this to be a moment of particularly great enthusiasm for the market system and for global integration.
Yet in many corners of the globe there is growing disillusionment. From the failure to complete the Doha trade round to pervasive Wal-Mart-bashing, from massive renationalisation in Russia to the success of populists in Latin America and eastern Europe, we see a degree of anxiety about the market system that is unmatched since the fall of the Berlin Wall and probably well before.
Why is there such disillusionment? Some anti-globalisation sentiment can be seen as a manifestation of resistance to the US arising from the Bush administration's foreign policy misadventures. But there is a much more troubling source: the growing recognition that the vast global middle is not sharing the benefits of the current period of economic growth—and that its share of the pie may even be shrinking.
Two groups have found themselves in the right place at the right time to benefit from globalisation and technological change. First, those in low-income countries, principally in Asia and especially in China, who are able to plug into the global system. The combination of low wages, diffusible technology and the ability to access global product and financial markets has fuelled an economic explosion.
It is important to remember that the period between the late 18th and early 19th centuries in Britain and continental Europe was called the Industrial Revolution for a reason. For the first time in human history, the standard of living of one generation was demonstrably better than the one before: in a single lifespan, real per capita incomes doubled and then doubled again. If one looks at the growth rate of China during the past 30 years, living standards are increasing at a rate that will lead to a hundred-fold improvement over a single human lifespan. The impact cannot be overstated.
Second, it has been a golden age for those who already own valuable assets. Owners of scarce commodities have seen their returns rise prodigiously. People running businesses that can take advantage of globalisation to source labour less expensively and sell to larger markets have seen their incomes rise far faster than incomes generally. Certainly those in the financial sector in a position to benefit from the asset revaluations associated with globalisation have prospered.
Everyone else has not fared nearly as well. As the great corporate engines of efficiency succeed by using cutting-edge technology with low-cost labour, ordinary, middle-class workers and their employers—whether they live in the American midwest, the Ruhr valley, Latin America or eastern Europe—are left out. This is the essential reason why median family incomes lag far behind productivity growth in the US, why average family incomes in Mexico have barely grown in the 13 years since the North American Free Trade Agreement passed, and why middle-income countries without natural resources struggle to define an area of comparative advantage.
It is this vast group that lacks the capital to benefit from globalisation and is desperately seeking either reassurance or a change in course. Yet without its support it is very doubtful that the existing global economic order can be maintained.
Let us be frank. What the anxious global middle is told often feels like pretty thin gruel. The twin arguments that globalisation is inevitable and protectionism is counterproductive have the great virtue of being correct, but do not provide much consolation for the losers. Nor can they rally support for policies that maintain, let alone promote, international integration.
Economists rightly emphasise that trade, like other forms of progress, makes everyone richer by enabling them to buy goods at lower prices. But this offers small solace to those who fear their jobs will vanish.
Education is central to any economic strategy, but there is a limit to what it can do for workers in their 40s and beyond. Nor can education be a complete answer at a time when skilled computer programmers in India are paid less than $2,000 a month.
John Kenneth Galbraith was right when he observed: "All of the great leaders have had one characteristic in common: it was the willingness to confront unequivocally the major anxiety of their people in their time. This, and not much else, is the essence of leadership." Meeting the needs of the anxious global middle is the economic challenge of our time.
In the US, the political pendulum is swinging left. The best parts of the progressive tradition do not oppose the market system; they improve on the outcomes it naturally produces. That is what we need today.
There are no easy answers. The economic logic of free, globalised, technologically sophisticated capitalism may well be to shift more wealth to the very richest and some of the very poorest in the world, while squeezing people in the middle.
Just as the Federal Housing Administration's effort to make owner-occupied housing more available after the second world war was a crucial part of the policy approach that permitted the Marshall Plan to go forward, so also our success in advancing international integration will depend on what can be done for the great global middle.
Our response will affect not just the livelihoods of millions of our fellow citizens but also the prospects for continuing global integration, with all the prosperity and stability it has the potential to bring.
Tuesday, December 05, 2006
Understanding supply chain risk
From http://www.mckinseyquarterly.com/article_page.aspx?ar=1847&L2=1&L3=26&pagenum=1
In a survey conducted by McKinsey, the enormity of the risk associated with the supply chain is on a rise. The executives most likely to say that their company's level of risk has risen are those in retailing, manufacturing, and energy; those in the energy industry are by far the most likely to say their risk has increased significantly
What are companies doing to mitigate their increasing risk? Executives cite a range of actions; of these, entering into performance contracts with suppliers is cited most often. Actions that could mitigate labor-related risk are rarely mentioned. The degree of disconnection between risk and its mitigation may be one reason that executives rate fairly poor their company's ability to mitigate their key supply chain risks, 39 percent say they are at best slightly capable of doing so.
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