Columnist Lee Schafer provides short takes on economic incentives and choices, business strategy and performance, market moves, what business leaders are saying and doing and other topics that pique his interest.

The Socially Responsible Employer of Mike McFadden

Posted by: Lee Schafer Updated: April 14, 2014 - 11:24 AM

The race for United States Senate in Minnesota is barely getting started but it’s already reached the point of silly.

The Associated Press reported last week that Sen. Al Franken, a Democrat, was going to have difficulty getting a charge to stick that Republican candidate and former investment banker Mike McFadden was nothing more than a ruthless corporate raider because Franken had invested in a mutual fund that owned shares of McFadden’s former employer, Lazard.

What was even worse politically for the senator was that his investment was held in a well-known, socially responsible mutual fund.

So how could McFadden have worked as an irresponsible, job-killing corporate raider when his employer was owned by a socially responsive fund that the senator himself owned?

For what’s silly about this, let’s start with the idea that Franken blundered by owning this investment. The thing is, it was a mutual fund investment that sparked the AP report, the Neuberger Berman Socially Responsive Fund. Individual investors, of course, don’t make investment choices in a mutual fund.

It’s doubtful that the senator himself read the annual report in sufficient detail to have picked up on the Lazard holding. It’s doubtful he’s ever read the annual report.

If Franken, or more likely Franken’s business manager, wanted to put money into a socially responsive fund, that’s fine. The concept of a fund like this, and Neuberger Berman was one of the first among mainstream fund managers to sponsor one, is that it won’t invest mutual fund owners’ money in companies whose operations, while legal, engage in socially irresponsible activities like selling cigarettes or running gambling operations.

And as of the most recent report, it owned $55 million of stock in Lazard Ltd., the corporate parent of Lazard Middle Market LLC in Minneapolis. McFadden was co-CEO of Lazard Middle Market prior to launching his campaign for the Senate.

In Neuberger Berman's marketing materials, it explains that "socially responsible investing... stems from the belief that responsibility is a hallmark of quality. SRI integrates environmental, social, governance criteria into sustainable impacts across the economy." 

It’s been a top-performing fund, but Neuberger Berman doesn’t provide enough detail in disclosure materials to know why it picked Lazard shares. It’s interesting to note that two of its top 10 holdings are U.S. Bancorp and 3M Co. While I admire both companies, I hadn’t previously thought of either as remarkably socially responsible.

What’s even sillier about the situation, of course, is that the senator’s reelection strategists were planning to manufacture a political issue out of McFadden’s employer.

McFadden was an investment banker at Lazard who tried to help his clients achieve their business goals by finding a buyer for their businesses. And the Neuberger Berman portfolio managers reached the right conclusion: there is nothing even remotely socially irresponsible about that business activity.

Perhaps the senator’s reelection staffers will be embarrassed enough to quietly drop this whole line of attack against McFadden.

Jeff Bezos makes his first move at Washington Post - into Twin Cities

Posted by: Lee Schafer Updated: March 24, 2014 - 5:32 PM

It did not get that much attention locally, but the Star Tribune is part of Amazon.com founder Jeff Bezos’s first real move as the principal owner of the Washington Post.

For those wondering how the Bezos intended to remake the business of selling news (and selling advertisers access to news readers’ eyeballs), the upshot is this: he plans to give content away.

The Post is offering free access to subscribers of the Star Tribune and news sites operated in other markets, including Dallas and Honolulu.

It’s not really a giveaway, of course, as Bezos did not direct Post’s management to mark a path around the Post’s subscription requirement.  It's more an exchange of value. 

Bezos hopes to latch on to the subscribers at other papers that, in a way, are offered more value by access to the Post. At the same time the Post is more highly valued as many of those subscribers click through to the Post site. 

It is significant shift in strategy for the Post, which had largely given up on the idea of having a national news website like the New York Times. Its management had tried to focus on its regional footprint in and around Washington DC and hang on to what it could of the Post’s traditional subscribers and advertisers.

The president of the Post was quoted in the Financial Times last week as reflecting on conversations with Bezos, who had been asking what the Post could do in 2014 to make sure it had a leading news website 10 or even 20 years from now.

The appeal to a partner like the Star Tribune is pretty clear, it’s just another product for paid online Star Tribune subscribers.

The Post, by the way, now charges $99 per year for unlimited access to its website, although it’s not fair to say access to the Post has the same value to readers here the Twin Cities who will get it for free.

As this is written, the second most popular piece on the Post’s website is about the chance of snow on Tuesday. That is, the chance of snow in Washington, DC. 

Here's an easy one, of what ought not be a law

Posted by: Lee Schafer Updated: March 7, 2014 - 12:40 PM

Senate File 1859 is only six lines long but it’s one of the more interesting business-related pieces of legislation tossed in the hopper this legislative session.

It is to amend Minnesota statutes to say that “a license for the off-sale of intoxicating liquor may only be issued to a person who is a Minnesota resident.”

The bill’s author is DFL state Sen. James Metzen of a northern Dakota County district.

The public policy goals here are not particularly clear. Have there been residents of Wisconsin who’ve been particularly irresponsible as license holders of a liquor retailer?

In searching the Star Tribune’s archives, no such cases have arisen that would suggest any threat to the public posed by out-of-staters.

What it’s about, of course, is the market entry into the Twin Cities of Total Wine & More, a wine and liquor superstore retailer based in Potomac, Maryland.  The company has had a store in Bloomington ready to open since before Christmas but can’t seem to get a license. It’s got another in Roseville that will open next week.

And the company is principally owned by David and Robert Trone, two brothers who appear to live in Maryland.

In the past week the company has put on the public relations push to get the word out that they operate good stores and treat the public responsibly.

In a brief conversation with David Trone this week, he said entering a new market sometimes does generate a little heat with retailers already there, but what he has seen in the Twin Cities so far is an “outlier,” although he seems to not be particularly aggravated.

He said he certainly hasn’t seen legislation banning him from a state before, and added, “The fact that somebody would go to that length is astounding.”

Based on the state’s website, it doesn’t look like the bill will get a hearing this year.

Big retail challenges not confined to a Target - Wal-Mart has them, too

Posted by: Lee Schafer Updated: February 28, 2014 - 4:34 PM

The news out of the big retailers headquartered in our region, Target and Best Buy, certainly reflects the kind of fundamental challenges each of them have in maintaining their traditional market position amid all sorts of competition including Amazon.com.

It is important to understand, however, that other traditional retailers have these challenges, too. Consider Wal-Mart Stores. 

Wal-Mart is the largest retailer in the in the world, and one of the things that has always distinguished Target in the investment community is that until Amazon.com came along, it was the only major player to really compete effectively against Wal-Mart.

While it doesn’t have a massive data breach to deal with, it was easily apparent in Wal-Mart’s results for its fourth quarter that it has many of the challenges that Target has. 

In its fourth quarter, comparable store sales were down in the U.S., and store traffic was down even more. It was the fourth consecutive quarter of declining comparable-store sales in the fifth consecutive quarter of the lower store traffic.

Weakening store traffic is particularly worrisome, because Wal-Mart can't sell more merchandise if customers don't even come into the stores. 

One response to these trends is a plan by Wal-Mart to increase its development of smaller stores, while trying to drive prices for products even lower and take out expense in its traditional retailing operations.

The analysts who follow the company are generally cautious on this strategic approach, because it’s far from clear that building out smaller stores and improving its websites is a growth strategy or just a way to divert customers from its own bigger stores.

And if cutting costs means reducing staff or otherwise making the experience of coming into a big Walmart supercenter just a little less appealing, well, it’s hard to see how this would help with store traffic and sales trends.

The senior analyst at investment research boutique Wolfe Research, Scott Mushkin, summed up his views on Wal-Mart’s plans for 2014 with the simple headline “More of what is not working.”

Looking ahead, he suspects that what Wal-Mart is doing now will put pressure on earnings per share growth and lead to further declines in returns on invested capital.

This is not a one- or two-quarter set of problems, either. Looking back over the past five years, the stocks of both Wal-Mart and Target have dramatically underperformed the S&P 500. But over that time period, Target’s has actually done a lot better than Wal-Mart’s.

As Wal-Mart is proving, the challenges in big company retail have not been that easy to meet. 

Why I really want to buy some Allen Edmonds shoes

Posted by: Lee Schafer Updated: February 14, 2014 - 1:48 PM

Sometime in the past week the thought crossed my mind that the Allen Edmonds marketing budget for 2014 had to be nearly exhausted, with more than 10 months to go in the year.

Allen Edmonds, a premium shoe manufacturer and retailer based in Wisconsin, has been on an online advertising campaign so thorough that it seemed that every website open on the screen had a small Allen Edmonds shoes advertisement.

Just a moment ago, when checking the latest stock price for Ecolab on Google Finance, right there on the right-hand side of the screen was a small announcement of the Allen Edmonds winter clearance sale.

It was the only ad on the page.

Paul Grangaard, the CEO of Allen Edmonds and a well-known executive here in his hometown, explained Friday morning that there was something fundamental about online marketing that I didn’t get. The company isn’t really advertising every day on every website in North America.

I had apparently searched for Allen Edmonds at some point using the Google search box, and Google stuck a little piece of software on my personal computer to remind it of that. To get rid of Allen Edmonds ads I would have to cleanse my Google Chrome browser of cookies, although he added that his company's Google campaign was going to be dialed back a bit, anyway.

Ah, now I get it.

That explains also why I see Volvos advertised every day all over, too, usually in a rotation with Allen Edmonds shoes.  I had once “googled” Volvos here at work for news on the expected launch date in North America of a new Volvo plug-in hybrid station wagon, and now have long since forgotten why I once considered that something worth knowing.

I’m not sure Allen Edmonds and Volvo are getting their money’s worth repeatedly advertising at my workstation. On the other hand, I really want a new Volvo and I really want a new pair of Allen Edmonds Park Avenue shoes.

And I have budget for at least one of them in 2014.

Labor Participation is Up - For a Month, Anyway

Posted by: Lee Schafer Updated: February 7, 2014 - 11:53 AM

One of the most interesting parts of Friday’s job report, beyond the headline of just 113,000 new jobs, is news that the labor force participation rate "edged up to 63.0 percent” and the employment-population ratio increased by 0.2 percentage point to 58.8 percent.

If this is the start of a new trend of greater labor force participation, it would be viewed by economists and policymakers as a really good thing.

There isn’t any particularly good reason, however, to think that the trend of lower labor force participation is reversing.

A Congressional Budget Office report earlier in the week projected that the labor force participation rate would decline to 60.8% by 2024. Also this week, the same office put out a report on the budget with an updated forecast of the impact of the Affordable Care Act on workforce participation, which was viewed by gleeful ACA critics as sharply negative, and that was the report that got all the attention during the week.

The CBO forecasts labor force participation to reach 60.8 percent in a decade, quite a drop from the current 63 percent. And as recently as the early 2000s the labor force participation rate was above 67 percent.

As the report states, “Employment at the end of 2013 was about 6 million jobs short of where it would be if the unemployment rate had returned to its prerecession level and if the participation rate had risen to the level it would have attained without the current cyclical weakness.”

The CBO attributed about half of the decline since 2007 to what economists call “inevitable withdrawal from the labor force,” or when someone gets older and elects to retire.  Think about baby boomers making their exit, a trend that will accelerate in the next decade.

The rest of the change it attributed to continued weakness in the labor market coming out of the past recession, including what it called “unusual aspects of the slow recovery that led workers to become discouraged and permanently drop out.” 

In its look ahead, the CBO cited many more boomers aging out of the workforce as a big factor in declining overall labor force participation, but it also thanks the cyclical weakness in the labor market as a result of the recession and slow recovery will last “throughout the decade.”

Labor force participation is important for a couple of reasons, not least of which is slower economic growth. Having productive people making things and providing service (and spending their good compensation), is sort of what drives economic growth.

But think also of the human tragedy of productive people of working age just giving up and staying at home. Six million workers is a lot of people who could be a whole lot more productive.

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