First -- further details on the economy and its near future:
A few weeks ago, I wrote about the dangers the weak employment figures posed for long-term, healthy improvement to our restaurant industry. That still remains a primary concern of mine, and of a lot of people smarter and more focused on the economy than me. As if that weren’t enough of a downward pressure on our industry, and all others dependent on consumers, the Washington Post recently carried a column by Harold Meyerson (link is http://www.washingtonpost.com/opinions/corporate-americas-chokehold...) which, among other things, notes a study by Michael Cembalest, Chief Investment Officer of J.P. Morgan Chase. Cembalest concludes something that’s been widely speculated on, and discussed, regarding the failure of wages to keep up with overall GDP and living costs; in his words, “US labor compensation is now at a 50-year low relative to both company sales and US GDP.”
The column goes on to discuss whether, and how much, this is related to the decline in the bargaining power of unions, among many other topics, but I want to focus on a question raised by Cembalest’s conclusion: if labor compensation is at a 50-year low related to US GDP, it’s at the lowest point EVER in the life of the restaurant industry, which didn’t really exist in anything like its present form 50 years ago. If we combine the large bloc of unemployed, including the growing number that economists believe may be structurally unemployed for years due to a lack of retraining and re-employment options, with those whose relative purchasing power has declined -- particularly in the past decade -- we reach the conclusion that pricing flexibility will be more difficult for any consumer-facing business, and that low absolute costs and perceived value offerings will be essential to the success of most restaurants for the foreseeable future. Let’s add to that the apparent truth that Federal support for State programs will be scarcer in the coming years, as a byproduct of the budget deal now taking shape, and that States are therefore likely to require further cutbacks in services, leading to fewer employed State and Municipal workers. (Witness California, Wisconsin, and several others already facing this issue in different ways.) Are you ready?
Second -- a kind-of, sort-of defense of the CFO (this is risky territory, and will likely turn into a longer discussion about the relative roles of company officers):
In my years as a lender, I noted that the CFO often received a substantial amount of credit when a company was performing well, and a significant amount of blame when performance was off. During the 90s, and again early in this century, there was a bit of a “cult of the CFO” in the financial markets.
Let’s grant that, in any sufficiently large company, the CFO’s role is likely focused on two or three things which can have a dramatic influence on the bottom line: (1) making the best use of the capital markets, insuring that the company has the fewest demands possible on its cash flow; (2) evaluating, and perhaps leading the charge, on merger and other investment opportunities to build value; and (3) constantly focusing on costs to keep the most flexible operating structure.
As company size shrinks, a few things happen to this list: (1) smaller companies are generally price-takers in the capital markets -- a good CFO may save a few dollars in interest or lease cost (and fees) by careful shopping, but smaller companies generally lack the clout to create unique debt or equity securities which give them a particular advantage; (2) could still be the same in a few cases, but any transaction will more likely be overseen, and led, by an outside private equity investor or other capital partner; and (3) becomes, if anything, more important, although once again the relative size of the company and its suppliers means that the company may have limited leeway on costs.
This isn’t to say the CFO of a small or midsized business isn’t important -- he or she is vital -- merely that they sometimes get credit or blame for the wrong things. CFOs are seldom (don’t say never) the primary party at fault when sales decline precipitously, for instance, although they’re often blamed for the resulting lack of cash and debt defaults.
I’d be interested in your thoughts on this, and will plan to develop it further -- and look at other roles -- during the coming weeks.