How Working Capital Can Change a Business
In an effort to boost winter sales and "deseasonalize" a summer category, Unilever PLC is rolling out more collection points to target customers for ice cream products (under brands including Ben & Jerry's, Magnum, Klondike and Popsicle) and pitching that it is always "20 degrees [Celsius] on your sofa." Interestingly, the company originally got into ice cream to reduce seasonality:
“Deseasonalizing” ice cream, as the industry puts it, to make sales less lumpy has been a Unilever priority for years. Ironically, the company’s nearly 100-year-old ice cream business started as an effort to offset slumping meat sales in the summer months.
Source: Saabira Chaudhuri | “Ben & Jerry’s in Winter? If You’re Home Anyway, Why Not?” | The Wall Street Journal | 12/11/2020 | Visit
Why would an active entrepreneur with no interest in retiring sell their business? A recent article provided a very concise explanation using Brynn Putnam's startup Mirror as an example:
A big reason Ms. Putnam joined that parade of founders who sold out but stayed on: Mirror can’t become the next Peloton, NordicTrack or StairMaster without deep pockets. Most startups go through what Airbnb Inc. founders call a “trough of despair” before really hitting it big time, and that can last years. In the case of Airbnb, sometimes they go through two.
The heat is rising for Mirror. Copycat products are hitting the market at prices below the $1,500 Mirror. And research and development isn’t getting any cheaper. And global manufacturing and delivery operations require tons of working capital. And it is tough to get footing in retail without the heft of a partner like Lululemon. And...and...and...
Source: John D. Stoll | “Mirror Entrepreneur Sold Her Fitness Startup to Lululemon. Letting Go Meant Sticking Around.” | The Wall Street Journal | 11/27/2020 | Visit
A WSJ article citing how lower inventory balances allows Apple to invest more than rival Samsung in R&D:
Meanwhile, back in China, armies of low-cost labor in Zhengzhou, also known as “iPhone City,” and other manufacturing hubs help Apple churn out the devices so quickly that it only needs about a week of global inventory. That makes more cash available for R&D. Rival Samsung, which does more of its own manufacturing, has held about 60 days of inventory on average in the past five years.
Source: Nathaniel Taplin | “Dear America, A Cold War With China Will Be Expensive” | The Wall Street Journal | 6/2/2020 | Visit
The Amazon platform provides two huge benefits as it relates to customers and suppliers:
- The company can sell inventory very effectively and quickly.
- The company has leverage over most suppliers because it is a dominant reseller.
Combined this allows the company to create substantially liquidity. An article in Barron's explained it rather well:
"In some ways, Amazon is like Berkshire Hathaway, but with better returns. Berkshire sells insurance, where premium payments roll in long before claims are paid, allowing CEO Warren Buffett to invest other people’s capital free of charge. Amazon sells inventory so quickly that it often collects from customers before it pays suppliers, creating an ongoing free float of cash to use."
Source: Jack Hough | “Amazon’s Profits Are Soaring: Why That Could Be Bad for the Stock” | Barron's | 5/6/2017 | Visit