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The Fool's Business Strategy . . . All Too Often Seen in Senior Living

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By Steve Moran

Who doesn't have in their kitchen cabinet even today some food product made by Kraft Heinz? Ketchup, mustard, mac & cheese . . . something? Even if you don't right now, I bet you ate some of those products as a kid and have fond memories of them.  

On Thursday, February 21, 2019 -- after the markets closed -- Kraft Heinz earnings report was a disaster, with drastically reduced earnings and dividends being reduced. That Friday, the stock price was down by 27% -- and 60% over two years.

Here is the problem in a nutshell:

“It seems that Kraft Heinz was so focused on cutting costs that it forgot the most important thing for a food company to do:
Make tasty products that people actually want to buy and eat.”  - CNN Business News

Two Views of Capitalism

There are two fundamentally different, perhaps even diametrically opposed, streams of capitalism. The first says that focusing on shareholder value is all that matters. It is a kind of take-no-prisoners approach. The market softens, slash costs, and lay off team members. Sure, it causes hardship to families, but the first obligation is to shareholders' value.

The second approach is that capitalistic companies have a social-moral obligation to both make a profit and do good. This view says that sometimes profits, and in the public arena, share price must be allowed to slip because while profitability is critical so is protecting the customers and the team. This approach further assumes that while over the short-term earnings and profits may slip, over the long-term the company will have higher profits,  higher shareholder value and, at the same time, meet their social obligation.

The Captain of the Ship

Kraft Heinz is controlled and managed by finance people from the Brazilian investment firm 3G, not food people. They have worked to grow profits by cutting costs and acquiring other companies. They have seemingly paid very little attention to the fact that people are eating healthier foods and their iconic brands are mostly not that.  

Senior Living and the Public Markets

It takes a dose of courage to run a public company no matter how profitable or how good the economy is. It takes even more courage . . . massive amounts of courage, when there is pressure to get a pop on shareholder value, in spite of what is good for long-term value, the resident, and the team.

In my view, though, perhaps Brookdale leadership may not agree, this was a fundamental problem that drove their share price from around $40 to where it is today. I am talking about the prior management regime, not the current one, which seems to have a much more holistic long-term view.

It Always Applies

When occupancy drops and profits suffer, when there is investor pressure to make more money, smart operators take an extremely measured approach to the pressure. There is no doubt that in the short-term cutting expenses results in more money flowing to the bottom line. It also almost always creates a degradation in services and that degradation can very quickly eat up and surpass any cost-cutting savings.

We are entering a time in the senior living sector that is going to be tough. We can only raise rents so far. Costs are going up faster than rents. Those who are courageous and work on quality first will be big winners, while others . . . not so much.

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