Management by Aphorisms

Let’s face it, unless you have been unusually lucky, you’ve probably had at least one boss in your career who made all of their decisions (and probably issued most of their directions) by quoting proverbs, aphorisms, and outright old wives’ tales – many of which had no bearing on the situation at hand. Or, worse yet, they miss-quote those old sayings, resulting in a regular feature for Scot Adams’ “Dilbert Newsletter.” This leads a lot of managers to dismiss all such quips as belonging to those who lack the wit to craft their own gems of wisdom. Unfortunately, some of these old saws actually have a kernel of truth in them, and I thought it might be fun to take a look at some of them.

Let’s begin by considering the saying that might actually apply to this topic itself, a meta-aphorism, if you will: “If it’s stupid, but it works, then it’s not really stupid.” Any large organization will have one or more entrenched procedures, methods, or operating styles that make no sense to someone viewing them from the outside. Some of these may, in fact, be adaptations to long-forgotten market or operating conditions, and no longer applicable or even useful to today’s company. Others may simply be counterintuitive to the observer’s experience in other industries, other locations, or even other business models. The key point here is that no matter how poorly conceived you may find a given procedure to be, if it works acceptably – if it generates profits, prevents losses, promotes the company, makes the customers happy, or whatever – then it serves its purpose. You may be able to design a superior method – and as a manager it is you duty to try – but you should not assume that the existing method is without merit.

One that comes up a lot in large organizations is: “No one is a villain in their own mind.” It’s important to remember that, outside of bad movies and even worse literature, very few people actually go around attempting to do bad things and cause harm just for the fun of it. No matter how heinous the act, it is highly probable that person who is doing it is convinced that it is all for the greater good – of the company, of the country, or in extreme cases, even for the good of the people he or she is screwing over in the first place. At the very least, the villain you are dealing with will believe that they have a right to do what they are doing, that they are entitled to whatever they are taking, or that you should be grateful to them for their leadership, no matter how badly they are screwing everything up. It helps to remember that as you consider your strategy for how you are going to get them to do what you want/need them to do, instead…

One of my personal favorites is a quote from American author David Drake: “Never second-guess the man on the ground – especially when that’s you.” In any management position, you will eventually have to deal with a situation where someone has made a decision with which you do not agree. If you were present at the time, voiced your objections to that decision, and were overruled, you may still have grounds for complaint – particularly if you are being expected to clean up the fallout from that decision. But if someone else was the manager on the spot, the person who had to make the decision right then and there, without support or input (from you or anyone else), then criticizing their decision is nothing more than Monday-morning quarterbacking. It is, in other words, crap, and pretentious, self-important crap, at that. Maybe you could have made a better decision if you had been the person called upon to make it, and maybe you would have made the same one, but we’ll never know, because you weren’t there.

That goes double for questioning your own decisions after the fact. You were the man (person) on the ground when the decision had to be made; never second-guess yourself now that you’ve had time to think it over. This saying is also a subtle comment on the futility of complaining about things that have already happened, rather like “crying over spilled milk.” Or like another of my favorites: “The three most useless things to a pilot are the sky above him, the runway behind him, and whatever happened a tenth of a second ago!”

But that’s a post for another day…

The Second Rule Revisited

Regular readers of this blog will recall that last year I mentioned the Second Rule of Business: "Do Not Annoy The Customer." In a later post, I also mentioned the example of a restaurant that is not open when you want to eat there, which is actually violating the First Rule (“When someone comes to you and says ‘Hello, I would like to give you a lot of money now,’ you say, YES!”) as well. I was not, at that time, referring to the strange case of Jerry’s Famous Deli in Westwood Village, since the Jerry's episode had not happened yet. But now it has, and it mirrors the points I was making in those earlier posts to an almost eerie degree...

Jerry's is a chain of well-known, if not exactly "Famous" deli-style restaurants, one of which is located in Westwood Village not far from my office. It's too pricey for an every-day breakfast place (and the service is a little too slow), but we would sometimes go there when we wanted a big breakfast (on a day when lunch is going to be problematic, for example). It's also an excellent venue for breakfast meetings, and a lot of people use it for that purpose. Or did, anyway...

One morning we were going to meet someone for breakfast before work, and showed up at the Jerry's, only to discover that they were not open. A sign in the window announced that their new hours included an opening time an hour later. We were rather annoyed, but we managed to call the person we were meeting with by cell phone and divert the meeting around the corner to the cafe which has become our regular breakfast place (the one mentioned earlier this week, with the unlimited coffee refills). For the next few weeks we were amused to note groups of people standing around the entrance to Jerry's, some of them obviously quite irate, waiting for it to open or calling other people to move/reschedule breakfast meetings...

Yesterday we happened to go to Jerry's for lunch, and we ended up chatting with the woman who had been our regular waitress when we were having breakfast there. She confirmed that the shortened hours were a cost-cutting measure (because that hour of breakfast shift wasn't bringing in enough money), and that the company has also reduced the number of wait staff who are on duty during the remaining breakfast shift, to the point where she's sometimes the only person on the floor and her customers are having to wait for her to deliver food and drink orders for as many as 12 tables at a time...

The upshot is that in addition to losing all of their 7:00 am to 8:00 am business (because they're not open anymore), Jerry's has lost most of its 8:00 am to 10:00 am business because people are either annoyed by the shortened hours or by the lack of customer service during the hours they are open. At this rate it's only a matter of time before they lose their breakfast shift altogether and have to start opening at 11:00 am or 11:30 for the lunch shift...

Now, I'm not going to tell them this is a financial mistake until I see the books for this location; if they really were losing money from 7:00 am until lunchtime, these moves may make sense from that standpoint. I will only note that losing your entire breakfast shift in order to save money on one hour is stupid -- and annoying all of your breakfast customers is likely to have negative consequences for the rest of your day, as well...

The Great Prune Fiasco

It's about time the public learned the truth about the Great Prune Fiasco of 1994 -- especially since we've been talking about loss-leaders in this space recently. Those of you who have heard the story before may still want to stay with us for this one; it definitely bears repeating...

In the fall of 1994, the company then known as Sav-on Drugs issued one of its weekly sales flyers in the mail in Los Angeles County, containing several loss-leaders intended to bring people into the stores. None of these were terribly exciting, because the company did not really want to effectively give away a huge amount of merchandise for free. A typical offering on this sales flyer was the 1-pound box of prunes offered for the price normally charged for a 10 ounce box -- a substantial savings and, in fact, a sale price of just 1 cent ($0.01) more than cost for the item, but not something likely to bring people flocking into the stores. I mean, who really eats prunes in bulk in the first place?

Well, as it happens, there is a demographic group that buys (and eats) all of the prunes they can afford: elderly people, particularly those of Eastern European ancestry. Just like the majority of the people who lived in the area surrounding the Sav-on store at 3rd and Fairfax in Los Angeles, across from the Farmer's Market. Where I was working as the Assistant Manager at the time the ad ran...

We had expected a huge run on prunes (sorry), and our Operations Manager had put in a maximum buy -- three full cargo pallets of prunes, of probably 500 - 600 units each, or the better part of a ton of dried plums. What we hadn't counted on was that the advertising people at Corporate had forgotten to put the "limit 4" text into the circular ad. Or, perhaps, had just figured that no one was going to want to purchase more than 4 pounds of prunes at a time, anyway...

The ads were in effect from Sunday through Saturday of each week, and sure enough, bright and early Sunday morning the store was full of old folks, buying all of the prunes they could carry and getting very belligerent when anyone suggested they leave some for the other customers. There was no limit in the ad, by golly, and the other customers could go roll their hoops; these folks were looking out for #1 and taking everything they could grab. By lunchtime, four hours after the sale went into effect, we were cleaned out (as were a number of our customers, I expect). We put in a frantic order for another load of prunes, but our next supply run wasn't until Thursday, and by now there were hoards of elderly people storming around the store, demanding their prunes, and when offered a raincheck, demanding that we write the raincheck for 24 boxes or 36 boxes (or in one case, 144 boxes) of prunes. By the end of Monday we ran out of rainchecks, too...

I got on the phone and called all of the other stores in the district to see if my counterparts had any extra prunes. The minimum order for this special was half a pallet load (about 10 cases), and I didn't think that many stores would have the demand we were having. Sure enough, none of the other Assistant Managers had been able to move more than a few boxes. I said I'd take all of the prunes off their hands, and as one, they were all quite grateful for the offer. On the Inter-Store Transfer truck on Tuesday, which normally brought us a pallet or two of mixed goods, I was quite pleased to find the equivalent of 7 full cargo pallets of prunes -- nearly 2 tons. There were also another 1,000 or so raincheck forms...

Needless to say, perhaps, we sold all 4,200 boxes of prunes before the end of the day on Tuesday, and I ran out of raincheck forms again on Thursday. Another ton of prunes arrived on the Thursday truck (4 cargo pallets), and they were gone in less than three hours. By the end of Saturday we had sold all 14 pallet-loads of prunes (about 300 cases, if I remember correctly, or on the order of 7,200 pounds), and written rainchecks for at least another 50; I honestly believe that if the company had sent me a tractor-trailer filled with prunes (20 or 30 tons worth, depending on the truck) I could have sold them all that week. And the torrent of rainchecks ensured that no prunes would stay on the shelf for more than a day for months to come...

All in all, it's one of the worst cases of a loss-leader item gone wrong I had ever seen. And it remained that way for nearly a month, until the Great Metamucil Fiasco...

But that's a story for another day!

Trade Non-Secrets

It has been said that all trades (and most professions) have their own little secrets, known only to the practitioners. This may in fact be true, but in my experience, these gems of wisdom are not going to be of much help to the layman. I'm never going to need to know the secrets of filling a dental cavity, pressure-testing the hull of a submarine, or filing a legal brief, just to take three obvious examples. Telling me these things would be interesting, but not very helpful. What are frequently more useful are the things that EVERYONE in a given profession knows (and takes for granted), but the layperson does not. Certainly, this is the case in Business...

For example, most trained businesspeople know that in certain types of business (notably retail stores, restaurants, and other businesses that serve the public directly) there are three critical factors to success: location, location, and especially location! If the store isn't easy to find, if it isn't easy to get to, if the signage is poor (or non-existent), if there's nowhere to park, if the neighborhood is so bad that no one wants to go there, or so boring that no one would go there for any other reason, then it doesn't matter how good our merchandise is, how great our decor is, or how wonderful our employees are; no one is going to shop there. And if there is no one in the area who wants to purchase what we sell, we're already in trouble...

Then there's the fact that we all need a plan. In this case, the profession in question is Strategists; many people in business (even some trained as Managers) do not understand the need to plan out your enterprise well in advance. But no one trained in strategy would even consider running a complex enterprise without a detailed plan, and most people with any training in business would realize that asking a banker or venture capitalist for the money to start or expand a business without first providing a detailed business plan is absurd. Yet several bankers of my acquaintance (and just about every venture capitalist I've ever met) have stories to tell about people coming to see them, describing a brilliant concept for a new business, and then pulling up short when asked for a written business plan...

To someone with business training, the idea that someone would just hand you large sums of money because you have a good idea and articulate it well seems, well, preposterous; yet hundreds of people, many of them extremely knowledgeable in other fields, make this assumption every day. Equally silly is the idea that bankers (and venture capitalists) don't want to make loans, and will invent reasons for not doing so. Bankers, in particular, get a good laugh out of this (very popular) view their industry. Banks make all of their money on interest; if they're not making loans, they're not making money. But by the same token, no one wants to just give money away to someone who is going to lose it, squander it, declare bankruptcy, or never pay any of it back. The fact is your banker wants to loan you money, and he or she wants you to be wildly successful in your new enterprise, so that you can pay back your loan (along with gobs of interest) and then, someday soon, take out an even bigger loan (paying even more interest!) when you expand into a larger operation...

Then there are industry-specific truisms, like the fact that most restaurants need to make the rent in the first four days of each month to turn a profit (and within a week to break even), the fact that real estate goes through boom and bust phases in a predictable cycle (about 7 years in Southern California, for example), or the fact that certain brands of cheap tinned corned beef will implode if you stack the cans more than 4 high on a shelf without external support...

I could go on, I suppose, but you get the point. In most cases, it’s not the intricacies of a new business that will defeat the unwary; it’s the everyday rules that you don’t know about that will do you in. And for that, it’s not the industry secrets you need to discover, assuming your industry has any secrets in the first place. It’s the things that everyone in the business already knows – and which you’d better find out right away…

A New Business

I've been watching with great interest over the past few weeks as they've taken down an old building in Westwood Village, near my office at UCLA Extension. It was the site of a movie theater, but while the theater itself always seemed cavernous (with a huge screen, one of the largest pre-IMAX screens I ever saw), the lot itself is fairly small. Not big enough for an office building like the one I work in, for example; not even big enough for a modest strip mall. About the size of a gas station, in fact, which it might have been decades ago, but certainly not in recent times. The question is, if it were your property, what would you build there?

Westwood has a fair amount of resident traffic, from the neighborhoods just to the north, and it's about to get a lot more residents when the new development on the eastern side opens (up to 700 high-end apartment dwellers, or so I'm told). It also gets a lot of foot traffic from all of the people who work in the commercial buildings along Wilshire and Westwood blvd. And, of course, there are the occasional waves of UCLA students who will wander down from campus looking for something to do. I waste your time pointing out these three groups because the type of business you put on this space will depend (or should depend, anyway) on which group or groups you intend serve.

Residents, for example, will be looking for services that well-to-do people would like to have near their homes. Westwood already has three high-end markets (a Ralph's Fresh Fair, a Whole Foods and a Trader Joe's that will open at the same time the apartments do), so another market probably isn't a good idea, but a dry cleaners, a video rental store, or a hardware store might be. There's already at least seven coffee houses and a dozen take-out restaurants in the Village, not to mention many regular restaurants that will provide take-out orders if you ask for them, so any of those businesses will find it fairly tough going. A bookstore might work, and an auto-repair business would certainly be handy, but there's not enough room for the garage, and several other bookstores have already tried to make a go of Westwood, only to fail and pull out.

Some of these same services would appeal to the businesspeople who work in the area; particularly a place where they could get their clothes cleaned, their shoes fixed, their cars repaired, and so on. A gas station would appeal to these folks, too, but the only remaining full-service station was driven out of the Village last year by the outrageously high rents. The business people would like any new lunch place, of course, but several new ones have opened in the past few months already. All of the other basics for people in this demographic (and the high-end residents demographic) are already covered; the Village already has a stationary store, two electronics stores, a bicycle shop, a barber shop, several drug stores, a couple of banks, a Kinko's, a doughnut shop, jewelry stores, cell phone stores, clothing stores, and food service establishments...

As for the students, the problem is that while they are a ready source of customers, most of them don't have a great amount of disposable income, and none of them want to purchase the same goods as the other two groups. Westwood already has bars, movie theaters, pizza joints and junk food stands, and even a couple of nightspots. Our generation kept several record stores afloat, but the iPod generation is downloading their music, and the only music store left is selling used and vintage discs -- including a fair amount of antique vinyl records.

Of course, once you've decided what type of business you'd like to launch, you've still got to plan out how. But that's a post for another day...

Free Coffee and Other Loss Leaders

“It seems odd that this place lets you take as much coffee as you want,” my father remarked the other day, glancing around our favorite breakfast place. “The coffee house across the street charges more for a cup to begin with, and they charge extra for a refill. Why do you suppose this place doesn’t?”

“Probably for the same reason they don’t charge extra for refills on these soft drinks,” I replied, raising mine. For reasons unexplained, I don’t like coffee, so I was having my usual Diet Coke with my breakfast. “This soda cost me $1.50, and it isn’t possible to drink $1.50 worth of soda without rupturing yourself, so they’ll make money on me even if I sit here all day refilling my cup. The coffee costs about 10 to 15 cents a cup; a bit more if you add cream or sweetener, but most people won’t have more than a cup or two at a sitting, and they’re charging $1.80 for the coffee. If you drink two cups instead of one their margin goes down a bit, but they’re still making money.”

“Well, I suppose that’s true,” he replied.

“Plus,” I went on, “There’s an excellent chance that if you sit here long enough to enjoy your second cup of coffee you will go back up to the counter and purchase more food to have with it.”

My father, who had just done exactly that, glanced over at the cash register. “That’s certainly true,” he agreed.

“And then there’s the competitive advantage it gives them over the coffee house,” I concluded. “Not only do they have actual food choices here, but somebody who just wants to sit, drink as much coffee as he feels like having, and relax is much more likely to come in here, once he thinks of it, than go sit at the coffee house where he’ll have to buy his refills and deal with huge crowds of people storming in and out of the place to get their coffee.”

“You spend way too much time thinking about these things,” he told me.

“It’s an occupational hazard,” I replied. “Most people only think of loss-leaders in terms of items they can sell for lower cost than the competition, to bring in more customers. They don’t even consider ways you could add value for the customer by making their actual purchases go farther, but that’s just what a free refill policy does – without having to take an actual loss on the product.”

“Sure, but that’s only going to work for drink refills – and anything else that doesn’t really cost much by volume,” he objected.

“Not necessarily,” I replied. “Think about one of those ‘Buy 4, get 1 Free!’ deals. If the item costs $1 and you sell it for $2, then a 5-for-4 special means you’re selling $5 worth of product for $8. If the customer was only going to buy 1 or 2 of them, you’re making more money on the sale than you would have to begin with, and even if they take you up on the deal, you’re still making a good profit. If the product costs you $1 and you sell it for $10, they you’re selling $5 worth of product for $40, and I can’t see anything wrong with that idea. Of course, none of this will work on products with low profit margins; for that you’ve either got to find something that increases value for the customer without costing money, or convince them to purchase some other product from you. But the principle is the same.”

It was about that point that we had to leave to get to work. As we were leaving I reflected that in all fairness, there are some types of business where the “loss-leader strategy” will not apply, and some in which it will never be necessary, but the basic concept of increasing perceived customer value always works. Have you considered how you might offer more value to your customers lately? Maybe you should…

Why Reference Checks are Important

The other day, one of my coworkers was complaining to me about how much he hates having to call people to check references on prospective employees. I was duly sympathetic, at least up to a point; the fact is that everyone hates to check references, and most people worry (as this fellow does) that the people you are calling will try to make the prospective employee you are calling about look better than they really are, for one reason or another. But I could not bring myself to agree with him when he denounced the entire process as a waste of time. As much as we all hate to do them, sometimes they can be an excellent way of avoiding stepping into something unpleasant.

A case in point came up a few weeks ago, with regard to a rash of several cases of fakery in the newspaper. There was a minor scandal surrounding the autobiography of a woman who claimed to be a Holocaust survivor (and had never even been to Europe), and a slightly larger scandal regarding the autobiography of a woman who claimed to have grown up in a foster South Los Angeles as drug runner and gang mascot (she grew up in an affluent neighborhood in the Valley and attended an exclusive private high school). Either of these stories could probably have been debunked with a very small amount of effort on the publisher’s part, and the failure to run even a cursory background check on either on will cost each publishing company a great deal of money and embarrassment. Neither one compares to the Robert Irvine scandal at the Food Network, however.

For those not familiar with the chef or his program, Robert Irvine is the star of the Food Network show “Dinner: Impossible” in which he attempts to complete various food preparation and cooking challenges with limited resources, time, equipment, supplies, and so on. It’s been a huge success, appealing to many viewers who would never consider watching an ordinary cooking show, and improving the Food Network’s prime-time ratings in many geographic and demographic areas. Part of this success is the reality-show atmosphere of the program; the suspense of whether Irvine will succeed in his “mission” and how he will meet and overcome the challenges involved. Some of it is the man himself; an impressive looking fellow who claims to have cooked for kings and presidents, worked on the wedding cake for Prince Charles and Lady Diana, been knighted by the Queen (and given a castle in Scotland), and earned various other military and professional honors.

Except, unfortunately, he isn’t any of the above. Robert Irvine isn’t a knight; he was not befriended by Prince Charles; he did not cook for any known Royal event or any White House banquet; the University he claims as his alma mater has no knowledge of him, and the chef who actually make the cake for the Royal Wedding has stated publicly that he never heard of Irvine until recently. This last denouncement is hardly surprising, considering that Irvine was born in 1965, and would have been 15 years old at the time of the Royal Wedding in 1981. Even if we are willing to concede that he was some kind of pastry savant, it seems unlikely that anyone would have hired him to work on a project of that importance before he could have gotten a driver’s license…

Why no one at the Food Network thought to check on any of these claims before giving the man his own show is a mystery, especially considering that this is not the first time the Network has had this problem. Last year the winner of their highly-publicized contest to recruit their next network star also ran aground when the probable winner turned out to have falsified his application to the contest (he claimed to have graduated from a culinary school, but had actually dropped out, and claimed to have served with the U.S. Marines in Afghanistan and Iraq, but had been Stateside during his tour). The Network wound up having to go with one of the runners-up, instead, when a single telephone call to the school in question could have prevented the whole thing.

This is not to say that everyone who applies for a job with your company is a cheat, a liar, or even that they’ve padded their resume. I’m just saying that if someone claims to have been working on a world-class project when their birth certificate says they would still have been in middle school, it’s probably worth taking a moment to call and verify that…

Change The World?

This past week saw the passing of one of those rare individuals who really did change the world, or at least the Human part of it, so that all of history has a “before” and an “after” his influence, much as it has time before and after Ford, Edison, Carnegie, Marconi and Gates. I refer here to the co-creator of the famous (or infamous) Dungeons and Dragons role-playing game, E. Gary Gygax. Mr. Gygax did not invent the role-playing game, any more than Henry Ford invented the automobile or Marconi invented the radio – or Bill Gates invented DOS. But like the other businessmen on this list, it was his product – the first complete role-playing system to be mass-marketed – that created a new type of purchase, a new kind of customer, and ultimately a new way of life. The full scope of his impact on the popular culture in which we live is difficult to overstate…

If you’re not familiar with this product category I’m not sure you’d be reading web logs, either, but for the sake of completeness, a role-playing game is a construct of rules and concepts that participants use to take on made-up roles (or “characters”) which they then act out collaboratively in the course of various adventures (known collectively as a “campaign” or simply as a “game”). The idea isn’t exactly new; children had been playing Cowboys and Indians (Itinerant Livestock Herders and Native Americans), Cops and Robbers (Law Enforcement Personnel and Habitual Criminal Offenders), Spacemen (Starfleet™ vs. Klingons ™, Rebel Alliance ™ vs. The Evil Empire ™, Colonial Warriors ™ vs. Cylons ™ and so on) and Pirates (Pirates) since it became possible to do so without fear of being burned at the stake, but role-playing games (RPGs) and fantasy role-playing games (FRPGs) establish rules, capabilities, game balance, and all of the other elements needed to sustain such an collaboration and establish actual parameters for success for failure.

The Dungeons and Dragons system wasn’t even the earliest FRPG to reach the market, but it was the first to achieve enough sales to support follow-on products, tie-in and spin-off merchandise, and name recognition as a product line. It must be conceded that the repeated flare-ups of attempts to ban the game and its tie-in products as “satanic” by various fundamentalist Christian groups probably helped to cement the game firmly into the counter-culture of the 1970’s, but the rise of competitive products (consider RuneQuest and the somewhat later Rolemaster systems if you haven’t already) really owe more to the considerably financial success of the Dungeons and Dragons franchise. Ultimately, there were books, movies, cartoons, coloring books, and almost unlimited consumer products using the D&D theme, and other companies wanted a share of the pie.

With the perspective of history, we can easily dismiss much of the D&D phenomenon as simply a new class of consumer product being brought to market at the ideal time. New developments in television and movies were creating an unprecedented demand for fantasy (and science fiction – note that science fiction role-playing games like Traveler and Gamma World began to appear as early as 1977), and the FRPG offered those people who were so inclined the change to “go inside” the stories and act out their own fantasy. The distinction is, however, unfair to the FRPG authors and ultimately meaningless; every great development in consumer goods owes at least parts of its achievement to having appeared in the right time and place to find its proper market – and many product failures can be blamed on nothing more than poor timing. Gary Gygax and his publishers may have seized their moment when it came, but this in no way lessens their importance to 20th Century history – and beyond.

I will leave it to others to comment on the effect of FRPG products on our popular culture, and on the lives of the participants (generally known as “gamers”) involved, although if the reader has not read Wil Wheaton’s excellent blog on this subject, it can be found here. For now, let us just say that without FRPG and the man who will forever be associated with the most successful one, life would have been a lot less enjoyable for a whole lot of us. Here’s to you, Mr. Gygax. Wherever you are…

The Ethics of Tax Breaks

A few weeks ago at breakfast, a question came up about the stores across the street from our usual breakfast place, which have been empty for months now (and in some cases years). I’m working for UCLA Extension these days, and thus we’re eating breakfast in Westwood Village, just south of the campus. It’s an expensive part of town; in fact, the rents are so high that most small businesses have been forced out of the Village altogether. Most of the space, retail, food service and commercial, is now taken up by regional or national chains (which can absorb the overhead) and high-margin/low-volume retailers who can operate in very small square footage while making very large amounts of money on each sale. If you can afford to operate in Westwood in the first place, however, the tremendous population density (from both the campus and the office buildings along Wilshire) can make for an extremely lucrative business.

Past experience indicates that the primary barrier from this market is, in fact, the high cost of renting space in the Village. One could, of course, lower the rents until they become affordable to a customer without quite as much working capital, on the principle that 75% of a preposterous rental fee is better than 0% of the same fee. What a number of these landlords have chosen to do, however, is maintain the high rent level, wait for a client who can afford the rent they are asking for, and take the loss based on the empty (e.g. unrented) space as a tax credit. As a result, a number of storefronts, some in absolutely prime locations, are just sitting fallow.

Now, I’m not going to argue against the tax credits allowed for business losses; without those laws, most conventional business models would never work. And I’m not going to complain about extending those laws to include landlords who have rental properties sitting fallow; anything else would mean massive numbers of foreclosures and bankruptcies every time there was a downturn in the real estate markets. What I’m pointing out is that those laws were never meant to encourage property owners to just leave their buildings empty in order to maximize prices. Even worse, leaving all of those stores empty effectively lowers the overall property values in the area, both because the average rental income is lower and because the empty storefronts are unattractive to potential shoppers and residents.

So the question is, do those landlords have any obligation to their peers, to the other businesses in the neighborhood, or to the residents of that neighborhood, to actually rent those spaces to deserving businesses? Or should they be allowed to keep the rents artificially high and take the tax credit in order to improve their overall bottom line?

Before you answer that, there’s another problem. If we decide that the landlords DO have a responsibility to find tenants, then how do we enforce such a policy? Do we really want all of the knavery, chicanery and buffoonery that come with Rent Control? Do we really want to punish small landlords in other parts of the city who are having trouble renting? Do we really want to start passing laws that affect only one part of the city, or even worse, one 12-block area? It’s a well-known principle that passing laws, even local ordinances, to deal with one specific problem is bad government, and ultimately more trouble than it’s worth, but is there any other way to compel a private citizen – or even a private company – to do what we want them to do and not what they feel is in their best economic interest? At some point the good of the community must override the business interests of the few, but do we really want to bring that point down to something as trivial as setting the rents on a few commercial spaces in Westwood Village?

It’s worth thinking about…

The Success Paradox

Did you ever notice a business operating in your neighborhood that seemed to be doing everything right, packing in the customers, raking in the money, generally outselling all of their (apparent) competition, and then vanishing without a trace? Not a seasonal business (like a Christmas tree lot or a pumpkin stand) or one that was intended as a one-off event (like a public liquidation sale), but a regular business that seemed too good to possibly fail – and yet, somehow did? Ever wonder how that happens? Well, needless to say, there as at least as many causes of business failure as there are failed businesses in the world, but many of those failed businesses were doomed from the start, never worked in the first place, or had some fatal flaw built into their business concept. I’m speaking here of the paradox of a company that was so successful that it actually did them in.

Consider the case of two restaurants I’ve patronized frequently over the past few years. I’m not going to name any names, again, because I don’t want to publicly embarrass anyone (and I’m not that keen on being sued, either), but neither of these cases is exactly unique. If you ask around, there are probably parallel cases in your neighborhood. First, we have the case of a diner, not that far from here, that was packed full most of the time, and on high-traffic times (like Sunday morning and early afternoon) literally had a line out the door. The wait for a table could be over an hour, and even if you could get a table, the atmosphere was like being in a basket full of kittens, but the food was good, the service was excellent, and the prices were reasonable. They also catered to the fitness and bodybuilding crown in the beach cities, offering huge “protein plates” with no carbohydrates and enough cholesterol to choke a horse. People would wait hours for a table.

So what happened to them? Well, people got tired of waiting for a table and began exploring the other options for brunch in the area. Some of these, like the IHOP location I mentioned back in November, took this opportunity and ran with it, siphoning off a lot of the diner’s less patient customers. Other customers got tired of the noise, the crowds, and the sensation that somebody else’s child was about to run over your foot every few seconds, and changed their eating-out patterns, too. The stress level got to a lot of the veteran employees (lowering the quality of service and eventually the quality of the cooking, as well), and the owners spent money on the wrong things (new menus, an outdoor seating area, more television sets, and so on) instead of keeping their operational standards high.

The upshot is that the last few months, the Sunday Brunch traffic has dropped off until there’s no wait for a table at all. The owners are attempting to cut costs (presumably to keep profits up) by scheduling fewer waiters, using busboys for more direct service functions. They haven’t gone under yet, and may still be able to pull out of this tailspin – IF they return to what made them a success in the first place. But each week there are fewer and fewer cars in their parking lot when we drive by…

The other case is even simpler. The owner of a very popular restaurant was getting a divorce, and did not want to pay his wife any spousal support. So he shut down the restaurant during the proceedings, ostensibly for “redecorating”, figuring his effective income would drop to zero, he’d be off the hook, and he could just re-open and go back to raking in the profits. Unfortunately, many of his operating costs continued while he was closed, such as rent, advertising, interest on loans, and so on, and the divorce case dragged on far longer than he’d expected. I can’t say for sure if his wife or her attorneys did so on purpose (to counter his “no income” tactic), but the upshot was the same. By the time the dust settled, the owner was in bankruptcy, with no way of re-opening the restaurant even if he’d wanted to. The runaway success of his enterprise had made him think he could game the system, but as previously noted, the laws of Economics may not be as precise as those of Physics, but they’re just as difficult to ignore…

Of course, in addition to overconfidence, lack of concentration on your core business, bad spending choices and pure hubris, there are other errors that attack successful businesses. But that’s a post for another day…