Coyote Blog

For a variety of reasons, I was pretty late going out to find a Christmas tree and did not actually begin the search until last Sunday  (I had a conference the week before and my kids were not in town and it is not that much fun to shop for trees without my kids).  Anyway, it turns out that there is some sort of Christmas tree shortage, at least in this area.  All my go-to inexpensive spots (the grocery store, Costco) were out.  The usually high-cost tent location at the plant nursery had trees but double and triple the usual costs -- starting at $250 for a 6 foot tree.  I am a big supporter of allowing price "gouging" during shortages and in this case the pricing mechanism worked just fine -- I passed on these trees at this price, presumably allowing someone who valued these trees more than I to find some still available.

Finally, I went to the Home Depot and they were apparently out as well - they were just selling some miscellaneous branches to people to wanted to make wreaths.  But way in the back was one tree -- and a tall one at that, at least 9 feet.  No one had wanted to buy it because it looked like something out of Dr. Seuss -- it had nice foliage at the bottom, then a completely open 2 foot gap, then nice foliage, than another large gap, etc.   Anyway, my daughter the artist and the undisputed right-brain flag bearer in the family, immediately loved it and insisted I buy it.  The guys there thought they were out of business and did not even have their price list any more.  I said, "hey guys, no one wants this, you have to give me a discount."  We agreed on $40 and we had a tree.

It turned out great.  The large gaps in the tree have become more of a feature than a bug, allowing a 3D ornament display impossible on normal trees.  It is tall and thin and looks great in our tall room.

Then, on the same day we had our tree adventure, we realized that no one had done anything about a Christmas card.  It was always my job in the past to design the card, but last year I passed the mantle on to my daughter.  But we had not explicitly assigned responsibility this year so nothing got done.  At this point my daughter disappears into her room with her laptop for what we supposed was a nap.  But she exited two hours later with our card design.  She didn't have all the fancy Wacom tablets and such she had at art school, only the trackpad on her laptop, so she said she just used the circle tool a lot but to my eye it came out great, and allows the Coyote family to continue its 25+ year run of never buying an off-the-shelf Christmas card.

Decades ago, common carpentry practice (later set in stone by written regulations) specified that certain applications needed a 2 inch by 4 inch board.   The reason this board was chosen was not due to its size per se (in most cases, for cost and space issues, I am sure folks would love to have gotten away with something smaller).  This size board was chosen for a specific application by its load-carrying ability.   For example, two inch by four inch boards spaced every 16 inches apart created acceptably strong framing for a wall.

Anyway, after many years of making lumber, the timber and lumber industry found ways to make the 2 inch by 4 inch board much stronger.  Well, not always stronger, but more uniform in strength such that the weakest board in a batch was much closer to the average than before.  But for standards, this has about the same effect -- 2 inch by 4 inch boards could be considered to be much stronger since the expected value had to be set at the minimum that might be encountered.

So now, all the standard applications are over-designed.  We can get away with a smaller, cheaper board than a 2x4.  Or, for those of you less focused on capitalism and more focused on environmentalism, we can use fewer trees to build the same house.  But how do we switch an entire industry that is steeped from birth as to what a 2x4 should be used for?  How do we rewrite a myriad of regulations that all call for a 2x4?

Well, in the lumber industry, they redefined the 2x4 to actually be something like 1.5 x 3.5 actual inches, a board which under new production processes has the same predicted strength as the old 2" by 4" boards.  In effect, they decided that the essence of a 2x4 was not its dimensions, but its load-carrying ability.  Almost any engineer can understand this immediately.  This means we still frame walls with 2x4's spaced every 16 inches, but the lumber is smaller and less expensive than it was before.  Standards and training don't have to change.  Architects maybe had to adjust a bit because their wall widths changed slightly, but a 3.5 inch board width actually is a nice number because with sheets of 3/4 inch drywall on both sides it makes for a nice round number 6" thick wall.

All of this is background to this absurd story, is using this history to try to commit legal blackmail against a couple large home store chains (via Overlawyered):

Two home improvements stores are accused of deceiving the buyers of four-by-four boards, the big brother to the ubiquitous two-by-four.

The alleged deception: Menards and Home Depot (HD) market and sell the hefty lumber as four-by-fours without specifying that the boards actually measure 3½ inches by 3½ inches.

The lawsuits against the retailers would-be class actions, filed within five days of each other in federal court for the Northern District of Illinois. Attorneys from the same Chicago law firm represent the plaintiffs in both cases. Each suit seeks more than $5 million.

“Defendant has received significant profits from its false marketing and sale of its dimensional lumber products,” the action against Menards contends.

“Defendant’s representations as to the dimension of these products were false and misleading,” the suit against Home Depot alleges.

The retailers say the allegations are bogus. It is common knowledge and longstanding industry practice, they say, that names such as two-by-four or four-by-four do not describe the width and thickness of those pieces of lumber.

A Wall Street Journal article today looks at problems at Sears in their critical appliance business.  I have no problem believing that Sears is in trouble, and at various times over the past decade (full disclosure here) have held small short positions in Sears.  The author argues that the Sears appliance business has had a number of missteps, and is contributing to Sears growing losses, propositions with which I cannot argue, in part because there is no data provided to confirm or deny the connection between problems in the appliance business and Sears' profitability woes.

The other theme of the article is that recent missteps in the appliance business, particularly the 2009 switch from Whirlpool to Samsung and LG to manufacture its in-house Kenmore brand, is hurting its market share in the retail appliance business, and leading the the growth in market share at Home Depot and Loews.   But the author's own data belie this conclusion.  Here is the market share chart she includes:

While Sears may have lost a couple of points of market share since 2008, and 2013 does not look like a particularly good year so far, the vast majority of its market share loss occurred from 2002-2008, long before most of the recent problems profiled in the article.  In fact, its more likely that the loss coincided with Sears reorganization with Kmart a decade ago, events referred to only briefly in the article.

Look, I have no insider knowledge here, just a pet peeve that trends referenced in an article should match trends in the data.  But Sears is a tired old retailer.  Many of its peers from the same era are dying or dead.  People are shifting their shopping away from the malls where Sears is located.  Lowes and Home Depot were both juggernauts during this period.  I would have said that a story could equally well have been written that despite all the confusion in their business, they have done a pretty descent job arresting the decline in their market share over the last five years.  Of course they are likely dead in the long run.

Postscript:  Oddly, I witnessed a similar Sears private label fracas when I worked for Emerson Electric over a decade ago.  For years and years, Emerson (not the folks who make the cheap radios and TVs) manufactured many of the Sears Craftsman hand tools and power tools.  Sears got tough one year, and negotiated a better deal of some sort with someone else, and an entire division of Emerson saw its sales basically going to zero.  So Emerson bought a bunch of orange paint and plastic, went to Home Depot, and cut a deal for a private label tool line at Home Depot (Emerson separately owns the Rigid tool company, so a lot of the items were branded Rigid).  Emerson ended up in potentially better shape (I did not stay long enough to see how it turned out), partnered with a growing rather than a declining franchise.

For all you hipster large and small towns in the northeast who have taken great pride in banning big box stores like Wal-Mart and Home Depot, good luck rebuilding after the storm.  I am sure you are going to be really happy that you banned retail establishments with worldwide logistics resources and that have developed special skills in routing supplies needed for post-storm cleanup.  Good luck getting a generator from that boutique hardware store you have been protecting.

This is an interesting and frustrating article describing the efforts by environmental groups to ban thermal paper with BPA in it.  The argument is that thermal paper receipts touch money, contaminating the paper money supply such that people will have BPA pass into their bloodstream by dermal absorption from money.

Of course, this is only scary if you have absolutely no common sense about doses.  The exposures are simply absurdly small, from a chemical that it is not even clear has long-term harms (the article talks about nano-grams of exposure -- when you start talking nano-grams, you might as well just count individual molecules).  And, as an added bonus, its ban in thermal paper simply pushes manufacturers to use chemicals that are not necesarily safer, just less studied and without the "BPA" name that the media has tarnished so badly.  Incredibly, at least one state, Connecticut, actually followed through on this useless ban scheme.

You don't have to convince me money is dirty -- I am sure any bill in my pocket is crawling with viruses and bacteria and other weird stuff.  Carrying around money is like toting around pieces of clothing someone else has worn for 6 months without washing.  So I am sure the bills in my pocket are icky, but to get worked up about BPA rubbed off from my last Home Depot receipt is just insane.

This is part of a recurring series on the evolution of my n-scale switching layout.  More after the break...

Continue reading ‘Layout Progress: Base & Initial Trackwork’ »

Graveyard in the middle of a Home Depot parking lot.

For a while I have been asking where the so-called immigrant-driven crime wave is in Arizona, given that crime rates have fallen much faster in AZ than in other parts of the country.

Tom Maguire argues that the overall drop in the crime rate in Arizona over the last decade or so hides a possible increase in crime rate in rural areas, which I suppose he might argue is due in part to Mexican immigrants.  Check out his data, it does in fact show an increase in the crime rate outside of MSA's (metropolitan areas) though the data is mute on causes.  One potential cause is simply mix shift -- it is clear from the enormous drop in population in these non-MSA areas that some areas classified as non-MSA in 2000 have been reclassified MSA in 2008.  So the comparison is not apples to apples, and some of the shift (or even all of it) could be the changing mix of areas in the metric.

To the extent the rural numbers are driven by immigrants, my sense it is due to the violent well-armed drug gang flavor of immigrants, a group not particularly intimidated by SB1070, as most of them are not spending their time at Home Depot in day labor recruiting areas waiting for the next Sheriff Joe roundup.

My kids' middle school has a tradition among 5th and 6th graders that once a year each student creates a science model out of food.  The kids love it, because they get to eat them after each presentation.  But all we parents know how stressful science fair projects can be.  Trying to create a meaningful science display from only edible materials is really a pain.  We pretty much nuked the kitchen this Sunday and spent all day with this.  But it's the last one!  And it came out pretty well -- this is my daughter's "physics of the circus."

PS - TGFF - Thank God For Fondant, a material used in making fancy cakes that you can think of as edible clay.  The materials here are graham cracker, Hershey bar, and sugar wafer stands, gum drop and lemon ball audience, frosted vanilla cake for the platforms, pretzels for the posts, licorice for the ropes, donuts for the cannon and the hoop, and fondant for the animals and people.  And two full pounds of royal icing to glue everything together.

PSS - One of the things you discover about food is that despite the incredible amount of quality control on its composition and taste, there is not much quality control on its construction properties.  Pretzel rods that always seemed straight enough turn out to be, when you come to actually build something from them, more warped than picked-over Home Depot lumber.  Ditto graham crackers.  Mini donut sizes vary tremendously.  Licorice tensile strength that always seemed fine turns out to be woefully inadequate.  And don't even get me started on gumdrop repeatability.

Yesterday I saw Live Free or Die Hard, and I must say that it was an unexpectedly enjoyable film.  Good action from earlier movies combined with an unlikely buddy movie element.  I was disappointed only with one bit towards the end that overtaxed my suspension of disbelief.

Anyway, not to spoil too much, a mysterious group has hacked into government computers to shut down most public functions - air traffic control, traffic lights, emergency response.  They've also messed with communications and stock market computers. 

In pushing their terrorist attack, the message was interesting.  I can't remember the exact words, but it was stuff like "what if you called the government and no one was there to answer.  What if you needed help and government agencies could not help you.  You are all alone"  This struck me as a thoroughly modern form of attack -- the terrorists cut the welfare state off from the government, forcing them to take responsibility for their own lives, and everyone panics in response.

I remember one line where Bruce Willis says "Surely the government has departments full of people to deal with this kind of thing" and the other character says "it took the government five days after Katrina to get water to the Superdome."  Again, the assumption is that as the tools of civilization fail, only the government could put things together again, and they were undermanned.  But after Katrina, Wal-Mart and Home Depot had extra inventory in their local stores, with a focus on plywood and generators and the like, in hours rather than days.  FEMA on the other hand spent more time after Katrina keeping individuals from helping in New Orleans of their own initiative than doing anything themselves.   Civilization was built by individuals, not the government, and if it ever comes to rebuilding it, the same will be true.

Apparently, the Democratic Congress is trying to "take on" high executive pay with some kind of punitive taxation plan.  This fits well into a class of legislation I would describe as "useless at best, probably counter-productive, but of high symbolic value to our base," something to which both parties are unbelievably susceptible.

I'm confused, by the way, about why exactly I should care how much CEOs are paid, particularly for executives that don't work for companies in which I own stock?  I don't think Paris Hilton, George Clooney, or the CEO of Home Depot are worth what they are paid, but I don't know how it affects me except perhaps for some simmering envy.  Does anyone with above a 5th grade education really believe that they will pay one cent less for gas or a refinery worker will make one dollar more if the CEO of Shell is paid less?

I do understand why the shareholders of Home Depot might be pissed off about what they were paying their CEO, or more accurately, what they paid him to go away.  I am sure the Arizona Cardinals felt the same way about Dennis Green.  Now, if Democrats wanted to suggest that shareholder voting and corporate governance rules needed to be amended to make it easier for shareholders to hold managers accountable for bad decisions and to overrule sweetheart deals between buddies on the board, I am very open to listening.

I have to echo this post from Glen Reynolds about fluorescent replacement bulbs for the home.  If you have not bought any in the last two years, they have come a long, long way.  They are much cheaper - home depot was running a screaming deal on multi-packs here this weekend.  The buzzing fluorescent sound is gone.  And the ones at Home Depot came in a range of three color temperatures - from warm white, which comes close to matching the light color and temperature of incandescent bulbs, to bright white and daylight.  The latter have a brighter, cooler (blue-er) light that you might more closely associate with fluorescent.  I use the warm ones indoors and the cooler white ones outdoors.  I can barely tell the difference even for bare bulbs in my ceiling cans between the newer warm fluorescent and the older incandescents.  And if the bulb is in a lamp under a shade, I really can't tell the difference.

These are a total no-brainer.  They pay for themselves in longer life alone, and the 70-80% energy savings comes on top of that.  Highly recommended.

In an earlier post, I wrote a defense of price gouging.  Incredibly, one of the best simple summaries of why "profiting off disaster" is actually a good thing comes from the NY Times of all places:

All this, of course, is capitalism at work, moving quickly to get
resources to where they are needed most. And those who move fastest are
likely to do best.

Exactly (by the way, the above is quoted from an Austin Bay post, which was aimed more at criticizing the NY Times for dropping such pro-capitalist sentences from its European version.)

Higher prices for generators and lumber in the disaster area is what tells Home Depot and others that it makes sense to shift lumber and generator inventory to Louisiana from California.  High prices for gas give the following two messages simultaneously and unambiguously to hundreds of millions of people:  "you can make some good money if you can figure out how to get more gas to consumers right now" and "you might want to drive a little less right now". 

Think about that last statement.  Congress has over the last 30 or so years generated numerous energy "plans" and has spent billions of dollars to figure out ways to promote conservation and increased supply.  All of these plans have been expensive failures.  But now, post Katrina, in less than 48 hours, with no one in charge, the market has achieved what Congress could never do.  The least valuable auto-miles will be eliminated, without years of study by Congress to figure out which miles are the least valuable.  The most economic new sources of gasoline will be tapped, without debating in Washington what those sources are.  All bottom-up, with no one ruling the process, by the voluntary self-interested efforts of hundreds of millions of Americans reacting to a simple price signal.

(previous paragraph best read out-loud with someone humming America the beautiful in the background)

Postscript:  Apparently, according to Austin Bay, Texas and more specifically Houston are now the great Satan.   Since I am a white male in my forties who is fairly well-off, still believes in free markets, and was born Houston, Texas, I guess that makes me the ultimate oppressor.

Technorati Tags:  Katrina, Economics

So what does valet parking, soft drinks, and firewood have in common?  More in a second.  First, some background.

We have had a problem over the last few years in our California campgrounds.  We sell a lot of firewood to campers, usually in bags of 6-8 sticks.  We are having difficulties getting a good, inexpensive firewood source in the Owens Valley.  We can find a bunch of people who will deliver stacks of firewood by the cord for a very good price, but only one person in the valley bags the wood.  As a result, the bagging step alone is effectively costing us between $1 and $2 a bundle, which is a lot for something we sell for $5-$6. 

In kicking the problem around, we considered what is becoming an increasingly common approach - if bagging is labor intensive and costly, lets see if we can outsource that step to our customers.  Outsourcing to your customers has been around for a while, but has gotten more popular of late.  Many furniture and equipment makers have been doing this for years, by outsourcing final assembly to customers.  While some of this is to reduce shipping costs, part of the benefit to manufacturers is that they save on assembly labor.

Service industries have started to get into the act of late.  Banks have been outsourcing teller functions for years via ATM's.  Most fast food restaurants have outsourced soft drink cup filling to the customers.  Grocery stores (and now Home Depot) have hopped on the bandwagon, providing self-service checkout for those who don't want to wait in line.

What all these examples have in common is that they seem to meet with customer acceptance if they provide some sort of value to the customer(short-circuiting lines, easier drink refills, the right amount of ice in the cup) , and not just cost-savings to the company.

Which brings me to the examples that really irritate me - of companies outsourcing their payroll to me.  [Note, I am a libertarian -- please do not interpret the following as a call for government action!]  Tipping, in its purest form, is a way to reward exceptional (meaning - beyond the standard or expected) service.  Unfortunately, restaurants and other service establishments have twisted this act of reward and generosity into having customers pay the wages of their staff.  Restaurants are simultaneously increasing tipping expectations (from 15% to 20%+) while requiring tips on more and more occasions by building them automatically into the bill.

The event that brought my irritation to a boil the other day actually happened valet parking my car at a restaurant.  As background, the establishment charged $4 to valet park your car.  Now, I am not a socialist, so I accept that value is not driven by cost but rather by what I am willing to pay for it, and I was willing to pay $4 to avoid having to walk a few blocks from the free lot  (those of you from Boston or NY are wondering what the fuss is about -- a valet parking charge of any amount is virtually unprecedented in Phoenix, at least until recently).

So I paid my $4, and then I saw the sign:

"Our employees work for tips"

What?  You mean I just paid your company $4 for what amounts to about 5 minutes of labor, and now you are telling me that in addition, I need to pay your employees' wages for you too?  This is pretty nervy - I mean, other than a percentage concession payment they are probably making to be the parking company at that location, what other costs do they have?  I didn't want to hurt the young guy actually doing the parking, but for the first time in years I didn't tip the valet.  That little sign turned, for me, an act of goodwill into a grim obligation, extorted from me by guilt. 

Which brings me back to firewood.  In outsourcing bagging to the customer, I did not want to tick off our customers like I had been angered by similar steps, so I set two criteria for my managers and any plan they came up with:

• It had to save a substantial amount of money, some of which we could pass back to customers as a price savings
• It had to offer the customer more value - a better product somehow.

The plan my managers hit on was to purchase a number of small milk crates that customers could fill with wood for the same price as the old bag.  These crates would hold a bit more than the old bag, so customers can get more wood for their money.  In addition, customers can pick out their own pieces of wood from the stack.  This is actually something that has been requested in the past - some customers complained the bags had too many small sticks, some complained they had too many large sticks.  Now people can get what they want.  We will try this out in a few sites to see what customer reaction is, and, perhaps more importantly, to see if we can hold on to our milk crates without them walking away.

Yesterday, my kids and I set out to buy ourselves a Christmas tree.  Instead of going to Home Depot first, like we usually do, we stopped at one of those tent places that grow up this time of year on vacant lots, mainly because the tent was closer.  We soon left the tent, though, moving on to Home Depot, but not before the tree sales person made sure to tell my kids that he thought their dad was a jerk.  Here is how we got there:

I walked around the lot - there were only about 20 trees up, which is kindof a small selection, but they were all sitting in a pan of water, which can be a good sign that they are trying to keep the trees fresh.  I immediately saw a couple of trees that would work fine, so I walked up to them, looking for a price tag -- no price.  I looked around to see a posted price list, or a list of prices per foot - no price list.  I asked the guy working there where the prices were - he said just pick the one I liked, bring the tag to the register, and they would tell me there how much it costs.

At this point, I turned to my kids and said "lets go someplace else".  In my book, businesses can operate and price most any way they like, but I can also decide if I want to do business with them.  I don't like doing business with companies that have no posted prices (similarly I hate doing business with people like car dealers whose posted prices aren't the real prices, but that's another story).

The guy asked me why I was leaving.  I should have known better.  I should have just said something like I don't see one I like.  But I actually tried to explain what I was thinking.  I said, "What would be your reaction if you went into a Walmart and none of the items had prices - if the only way you could find out what the prices were was when they rang you up at the register.  Would you shop there?"  What I left unsaid, because I didn't want to discuss it in front of my kids, was that I didn't want to be put in the position of having my kids fall in love with a tree (they get very emotional about this choice) and then having to tell them a few minutes later that sorry, it was too expensive.  I much prefer the Home Depot approach, where each set of trees is clearly marked, so I can steer them away from even looking at the $100+ trees.

Anyway, I confess I probably was huffy about it, because this is one of my hot buttons, and as I called my kids to me the guy told them their dad was a jerk.

I probably am.  I know this guy is trying to make a living.  He may well not have had prices posted just out of lack of sophistication rather than any sinister desire to trap me into buying more tree than I wanted.  So I probably need to be publicly chastised -- feel free to use the comment section to do so.

In the previous post on buying a company, I discussed what I have learned about finding and valuing a small company. In this post, I will discuss a second technique I used to find a seller, and then show how we conducted due diligence and selected the form of the deal (e.g. C vs. S Corporation, Asset vs. Equity purchase). In the next installment, we will get to the various legal documents and financing strategies.

Continue reading ‘Buying a Company, Part 2’ »