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Feeding the Hungry

Guest post by: Nelson Davis

Article Overview: Food for the soul and human spirit is perhaps the hardest meal to find, consume and fully digest. I believe that entrepreneurial thinking is the plate on which that meal is well served. Everyone has dreams and yearnings that can be turned into goals to be passionately pursued. When we as a nation learn how to care for and feed that hunger, we become truly unstoppable.

Feeding the Hungry

This is a subject that has been written about for thousands of years. For starters, the Bible has many references to feeding the poor and less fortunate as a fundamental way of demonstrating our humanity. The drive to my Hollywood office on a recent morning brought a new perspective on the subject for me. I don’t often think of a California freeway as a temple of enlightenment and insight, but I’ll accept it whenever it comes. While exiting the Santa Monica Freeway I was greeted by the all too familiar sight of an able bodied young man standing at the ramp’s edge holding a cardboard sign. Regardless of the actual wording of the sign, he did deliver on the stereotype by asking for a cash contribution to help him “get something to eat.” With a smile and a “not this time” I drove on. However just around the corner and fifty feet up the street was another young man standing on the median next to a bucket of flowers and he was holding a bouquet in his hand which was for sale. It dawned on me that both people were in effect asking to be fed but with two different approaches.

So, I asked myself why one man was begging for money while the other was being entrepreneurial and offering something of tangible value in exchange for a few dollars. In that set of circumstances my actions are often guided by the old phrase “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.” Though many people think that comes from the Bible, it is actually a Chinese proverb. In my opinion giving a person money to buy a meal is simply doing them a favor while teaching them to use their abilities to earn money is really teaching one of life’s most valuable lessons. Which one leaves you with a better feeling long after the moment has passed? Personally I’m most fond of the people who want to learn to fish.

I believe that self reliance can be taught and learned. Our non-profit corporation The Making It Institute for the Advancement of Business recently produced a live event that brought together a group of accomplished small business superstars with newer business owners who are hungry to learn how to grow their enterprises. I’m a strong believer that the best way to learn is to learn from the best and that knowledge equals freedom. Our criteria for being a superstar business owner was that you had to have started with very little money and built the business to an annual gross of $10 million or more. There was a wonderful surprise when I invited a diverse group of entrepreneurs to give of their time and share knowledge with ambitious growing business owners. They all responded with an enthusiastic yes! Their impressive businesses range from sales of about $20 million to $750 million. There were no get rich quick stories, no shortcuts to success, and no quick fixes for problems. They nourished the attendees with the truthful real life business experiences that their successes were built on. What the superstar entrepreneurs said was like water to a parched desert plant as the attendees perked up, took a lot of notes and applauded the speakers.

That entrepreneurial spirit and thinking can change lives and I’ve seen it happen. Some years ago I sat with a Los Angeles grandmother who lived in the Jordan Downs housing project, a pretty tough area. She had been accepting welfare assistance for years but had decided that kind of charity didn’t match with the image she had of herself. She was hungry for something better. There was a lot of emotion as she told me of how she’d taken a bus to the wholesale district downtown and found an importer who would sell her athletic socks at wholesale prices. Back in the housing project, she went door to door selling packages of the socks! That was indeed the beginning of an important change in her life, self reliance and freedom from the drug of welfare money. Heralded government programs such as “The War on Poverty” didn’t change her life, but starting her own micro-business did.

One of the reasons that I’m totally devoted to promoting the entrepreneurial spirit in America today is that I see a great hunger in people across the country who want to learn how to transform their lives in successful ways. That yearning that I observe goes far beyond just tallying up dollars. People want to feel good by bringing principled leadership to their business and family lives. They want to feel hopeful and the kind of real security that comes from self reliance and freedom of choice. Part of the general anger we have with most politicians these days and with some mega business CEOs is the absence of principled and values driven leadership. Our group of superstar small business owners got to their special place by embracing those principles along with their persistent pursuit of a personal vision.

Thinking of those two men standing at the Crenshaw Boulevard exit of the Santa Monica freeway, I wonder about the self images that each carries around with himself. Obviously they were both hungry for something because you generally don’t work street corners unless you are truly motivated. Did the person holding the cardboard sign see himself as a helpless beggar or a as a victim of societal influences? When someone told him that he couldn’t succeed, did he begin to believe it? Why did he lose a sense of hope? Was the man waving a bouquet of flowers holding onto an inner vision of building a much larger business by learning to hustle no matter how humble the enterprise? Who convinced him that selling flowers on the street was an opportunity and potential pathway to a better life? Since I know that our inner picture of ourselves drives our outer actions, my goal is to help people see their true personal potential through our “Making It!” television program and the work of the Making It Institute.

Food for the soul and human spirit is perhaps the hardest meal to find, consume and fully digest. I believe that entrepreneurial thinking is the plate on which that meal is well served. Everyone has dreams and yearnings that can be turned into goals to be passionately pursued. When we as a nation learn how to care for and feed that hunger, we become truly unstoppable.

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Article Tags: human spirit, hunger, poor, yearnings



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How about discussing Costco's biz model?? And CEO - Here's a recent article that covers both.............. Costco: The 'anti-Wal-Mart' The warehouse-club retailer 'has figured out the big, simple things': Hold down expenses and prices, treat employees well, make discount shopping fashionable and keep shareholders happy. By Barron's "Membership has its privileges." That slogan belongs to American Express, but it might better apply to Costco Wholesale, the leading warehouse-club operator in the U.S., whose determination to deliver value and innovative products to its 23 million members has made it one of the country's top retailers. Costco (COST, news, msgs) has succeeded by flouting industry norms. The big-box retailer charges customers a base yearly fee, now $50, to shop in its sprawling stores, which offer quality goods at low markups. Consequently, its margins are among the slimmest in retailing. The privileges also extend to employees, who are paid well and enjoy generous health-care benefits. This formula has generated fierce loyalty among both shoppers and workers while rewarding long-term investors. Costco shares, which traded Thursday around $58, are up from a split-adjusted price of $1.67 when the company went public in 1985. True, they no longer are dirt-cheap, but in view of the company's superior management and opportunities for growth, neither are they rich. Small businesses are big customers at Costco, but the company also has managed to make discount shopping fashionable for affluent Americans by offering fine wines, books and big-screen televisions at low prices, and staples such as paper towels and razor blades in bulk. By offering one-time specials like discounted Prada bags or Callaway golf clubs at individual outlets, Costco has created what it calls a "treasure-hunt" atmosphere in its stores. Not the Wal-Mart way Costco is among a handful of retailers that has flourished despite Wal-Mart Stores' (WMT, news, msgs) onslaught; Wal-Mart's more downscale Sam's Club chain runs second to Costco. With its strong labor relations, low employee turnover and liberal benefits, Costco has been called the "anti-Wal-Mart." Its approach has paid dividends because Costco, based in Issaquah, Wash., hasn't encountered the same community resistance as Wal-Mart when it has sought to open stores. "Retailing isn't rocket science. Costco has figured out the big, simple things and executed with total fanaticism," says Charles Munger, a Costco director for the past 10 years. The outspoken Munger, 82, is better known as Warren Buffett's longtime partner at Berkshire Hathaway (BRK.A, news, msgs), where he serves as vice chairman.Crucial to the chain's success is CEO Jim Sinegal, who co-founded Costco in 1983 with Jeff Brotman, the company's chairman. "Jim would be on any intelligent list of the top 10 retailers of the past century," Munger says. Sinegal, 70, also is one of the biggest bargains among big-company CEOs: In an era of seven- and eight-figure pay packages for CEOs, Sinegal earned a salary of $350,000 in Costco's latest fiscal year, which ended in August. He garnered other compensation of about $100,000. What's more, Sinegal got no bonus last year, after the company determined that it had failed to measure properly the appropriate date for certain option grants from 1996 to 2002, although no evidence of fraud or falsification of records was found. "Jim wouldn't let the board give him a bonus. His view was that the option glitch happened on his watch," Munger says. "How many people behave like that? No wonder everyone loves him." Unlike Buffett, who draws a salary of just $100,000 as the CEO of Berkshire, Sinegal isn't a billionaire. He owns Costco stock worth about $135 million and has options on 1.2 million shares. Sinegal's compensation and demeanor offer a welcome contrast to former Home Depot (HD, news, msgs) CEO Robert Nardelli, who alienated employees with his autocratic style and whose gargantuan exit package of $210 million didn't sit well with shareholders. Video: Behind the scenes at Costco None of this has been lost on the investment community. At nearly $58, Costco trades for 22 times fiscal 2007 projected earnings of $2.58 a share. It has one of the highest price-earnings ratios among major retailers. Target (TGT, news, msgs) shares, at nearly $63, trade for 17 times estimated 2007 earnings, while Wal-Mart, at $48, commands 15 times projected 2007 profits. Though some retailing analysts deem Costco shares expensive, the company seems to qualify under one of Buffett's investment dictums. Buffett has said he'd rather buy a good business at fair price than a fair business at a good price. Berkshire owned 5 million Costco shares at the end of September. Growth and more growth This is a genuine growth story. Earnings per share have increased at a 12% annualized rate in the past five years. Neil Currie, a retailing analyst at UBS Securities, believes the company is capable of generating 13% growth in earnings per share in the next few years and an even higher rate if it gets more aggressive in repurchasing shares. The bullish Currie carries a 12-month price target of $66. With large annual buybacks, Costco could earn more than $4 a share in fiscal 2010, Currie estimates. That could support a stock price of $80. The company plans to open 36 to 40 stores in the current fiscal year and about 35 annually in subsequent years. The store base totaled 474 on Dec. 31, including 371 in the United States. Costco says domestic and international markets ultimately can support more than 1,000 stores. Outside the U.S. and Canada, the most promising markets are likely Mexico, the United Kingdom and Japan. Costco's merchandise sales in its most recent fiscal year rose 14% to $59 billion, while membership fees generated $1.2 billion in revenue. This year, sales are expected to rise more than 10%, reflecting lower prices for gasoline. Sales at stores open at least year, a key gauge of retailing success, were up a healthy 8% in fiscal 2006. Could the company be a candidate for a leveraged buyout? Costco does possess some of the key characteristics that private-equity players seek. It has a strong balance sheet, a predictable cash flow and a durable franchise. Its market value is a hefty $26 billion, but LBOs of that size are doable these days. Costco bought back $1.5 billion of stock in its latest fiscal year and $400 million in the quarter that ended Nov. 30. But it has resisted a large debt-financed buyback like the one under way at Home Depot, and to date it hasn't sought to raise funds through the sale of its real estate. The company takes pride in its impressive financial condition. "Have we gotten to the point in America that balance-sheet strength is a negative?" Munger asks.Currie argues that Costco could keep LBO operators at bay by launching a more aggressive buyback program and taking on a moderate level of debt. "The best way for Costco to protect its independence is to have a high multiple on its stock," the analyst says, adding that an augmented buyback would help achieve that goal. He believes Costco comfortably can repurchase $2 billion or more of stock annually. The dividend yield on the stock is a low 0.9%. Most income from members' fees Its cooperativelike operation makes the retailer's business model unusual. In its latest fiscal year, Costco generated pretax income of $1.75 billion, about 70% of which came from membership fees. An additional $125 million was kicked in by the interest income on the company's cash. Costco earned just $400 million from its stores, for a retailing operating margin of less than 1%. The low margin is intentional and reflects the company's commitment to low prices. As a matter of corporate policy, Costco refuses to mark up any product by more than 15% above its cost. When the company signed a new contract in 2005 with a supplier for Brooks Bros.-style men's cotton and button-down shirts, and got a significant price reduction for a massive two-year order, it immediately cut the price of the shirts to $12.99 from $17.99, notes Richard Galanti, Costco's chief financial officer. Other retailers might have phased in the reduction and captured added profit, but that's not the Costco way. The shirts now cost $14.99 because they are made with better-quality cotton. One attraction in the eyes of a potential buyer would be the opportunity to lift margins. Costco leads Sam's Club in most financial measurements, including total sales, sales per store, sales per square foot of retail space and sales per employee. But Sam's operating profit margin of 3.5% tops Costco's 2.8%. Some complaints on Wall Street If Costco were to raise its margins to Sam's level, it would translate into an additional 65 cents a share of net income -- a large amount relative to the current-year consensus estimate of $2.60 a share. Sinegal has talked in the past about lifting Costco's margins to 4%, but little progress has been made. This has led to some criticism on Wall Street. An analyst report in December, after Costco reported its fiscal-first-quarter profits, was entitled "Still No Margin." Galanti says management has no interest in going private. "The public model has worked for us. We have no plans to change," he says. Video: Behind the scenes at Costco Many Costco shareholders are also happy with the current situation. "Costco refuses to be undersold and thinks so long term that the company will not even remotely degrade the value it gives customers, even if it would fuel a healthy increase in margins and earnings and very few customers would notice," says Ken Charles Feinberg, a co-manager of the Davis New York Venture Fund (NYVTX) and Selected American Shares (SLADX), both run by Davis Selected Advisors. "That's how a great management builds a great business franchise that's built to last." The Davis funds are Costco's largest shareholder, with a 12% stake. Feinberg says that Costco's effective valuation is lower than its stated price-earnings ratio because of the company's conservative approach to depreciation. He recently calculated that Costco trades for about 16 times his projection of calendar "owner earnings." This profit measure adds to operating earnings depreciation expense in excess of what is needed to maintain the existing store base. Feinberg believes Costco is a "compelling bargain" for long-term investors. Sinegal doesn't talk much to Wall Street and wasn't available to speak with Barron's. Even at 70, he maintains a grueling schedule. He aims to visit each Costco store twice a year and is about 70% successful in that goal, Galanti says. This means he's on the road 40 to 45 weeks a year. Costco executives jokingly refer to Sinegal's weekly travels as a "death march" because he usually begins each day at 7 a.m. and finishes at 10 p.m. Dressed in sneakers, khaki pants and Costco's now-$14.99 button-down shirts, Sinegal asks store managers what's selling, what's not and how Costco prices compare with the competition. He has no set plans to retire, although he has talked casually about holding the job for five more years. Because he hasn't set a retirement date, there is no heir apparent. But Costco has a strong group of managers who share Sinegal's passion and vision. Unlike most CEOs, Sinegal has no severance or golden parachute in his contract, which runs less than a page. He insists on one-year contracts, believing the Costco board should have the opportunity to evaluate him annually to determine if he's still up to the job. Sinegal's view is that the restrained terms of his contract send an important message to employees. In the view of Berkshire's Munger, one of Costco's great strengths is that its two founders, Sinegal and Brotman, are still active. Brotman, 64, focuses on real estate. "There is no better site acquisitor in the retailing industry," Munger says. "I'd like to see Jeff get more credit. He deserves it." Costco has chosen to focus on more affluent coastal markets; California alone is home to 30% of its stores. Finding sites for new outlets in densely populated areas is one of Brotman's specialties. The company features products that offer its members large cost savings over what they would pay at traditional retailers. The chain carries just 10% of the items in a typical supermarket, which might stock 40,000 products.The formula works. Costco sold 1.5 million TVs last year and has successfully built what it calls ancillary businesses such as prescription drugs and eyeglasses, filling 26 million prescriptions in 2006. Hungry Costco members bought 63 million hot-dog-and-soda combinations last year at in-store snack bars -- priced at only $1.50 and with free soda refills. The dogs are even kosher. Costco's customer-focused strategy is apparent in its 87% membership-renewal rate. The retailer allows returns on nearly all items at any time, with no questions asked; computers are the lone exception. It doesn't even need to see receipts. This liberal policy has proved costly in the past year because the company is seeing returns of an unusually large number of big-screen TVs. Analysts suspect that many members are taking advantage of the sharp drop in TV prices to return models bought in the past 12 months so they can buy new ones at lower cost. Costco said it is evaluating its TV-return policy but emphasizes that no change will be retroactive and that it still plans to maintain the industry's most generous return policy on electronics. Low turnover among employees Workers get a relatively good deal at Costco -- a point of emphasis for the company, which contends it's also a matter of good business. Despite fewer stores, Costco's sales are about 50% above those of Sam's Clubs, and sales per employee are about $500,000 a year versus $340,000 at the Wal-Mart unit, UBS' Currie calculates. Sinegal was asked in a recent Bloomberg TV interview about the company's health-care benefits. Costco provides health insurance to its 93,000 domestic employees and pays 90% of the cost, which runs about $6,000 annually per employee. Video: Behind the scenes at Costco "We're 100% committed to maintaining this program," Sinegal said. "It works for us, and our people count on it. We think they're entitled to that security." Costco has one of the lowest turnover rates in retailing. Among employees who have been with the company for at least a year, just 6% leave annually. That may be because store employees such as cashiers can earn more than $40,000 a year after only four years on the job. Costco shares aren't a bargain at current levels, but patient investors could be rewarded because the company is an industry leader with top-notch management, a loyal customer base and solid growth prospects in the U.S. and abroad. In Street-speak, Costco may be "under-earning," meaning its profit margins are lower than they need to be. Management is loath to tinker with a successful formula, but margins probably have only one way to go: up. In time, the shares are likely to follow. This article was reported and written by Andrew Bary for Barron's


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