Weekly Thoughts: Investment and Shareholder Value, Client Service and NHL Moneyball
Here are three things that caught our eye this week:
Investment and Shareholder Value
We have been following up on our previous discussion of the benefits and risks of shareholder value maximization. According to Bloomberg, companies are on pace to spend 95% of earnings this year on dividends and share repurchases. Naturally, this has created vigorous debate about the utility of such practices. Most commentators fully agree that 1) returning cash to shareholders positively impacts short term returns and 2) the monetary policy environment of low rates and ample liquidity has promoted the use of such practices. However there is a difference of opinion regarding whether this is indeed the best capital allocation decision firms can make. From the FT:
“The post-financial crisis performance of the economy, dubbed by some as a ‘secular stagnation’ during the QE era, has animated critics of buybacks. Rather than returning excess cash to shareholders, they say companies should invest in their businesses and recruit more workers at higher wages to sow the seeds for sustained long-term growth of the economy.”
In contrast, supporters of buybacks argue that the stagnant recovery and the secular transition toward a service based economy have reduced the need for capital intensive investment. Adding to the discussion, this week we came across a terrific new research paper that focused on comparing the investment decisions of public and private firms. The paper, soon to be published in the Review of Financial Studies, is titled “Corporate Investment and Stock Market Listing: A Puzzle?” by John Asker, Joan Farre-Mensa and Alexander Ljungqvist and concludes that:
“compared to private firms, public firms invest substantially less and are less responsive to changes in investment opportunities, especially in industries in which stock prices are most sensitive to earnings news. These findings are consistent with the notion that short-termist pressures distort their investment decisions.”
Ultimately, we believe there is no “one size fits all” strategy for capital allocation. That said, we hope that our focus on private company investments will allow us to approach the issue with a clearer perspective, so that we can always concentrate on making strategically optimal decisions.
FT Article, Economist Article, FT Article 2, Bloomberg Article
As people who have heard “We’re sorry, but we’re experiencing unusually heavy call volumes. Good-bye.” and “Your call is important to us. Please continue to hold.” on numerous occasions, we know intuitively that customer service is important to brand perception and loyalty. However, this week we saw a fascinating infographic depicting the actual value of client service. Some key-takeaways we gleaned from the data:
While many management teams focus time on sales plans and growth metrics, they should not forget that the stakes to provide good service are high: 89% of customers have reported that they’ve stopped doing business with companies because of bad service. In fact, bad customer service costs American companies an estimated $83 billion annually as the cost of attracting a new customer is 6-7x the cost of keeping an existing customer.
These costs can be expected to grow, as technology has exponentially increased the negative repercussions of bad service: the modern consumer is twice as likely to talk about bad customer service than good customer service, and after a poor experience, more than ¼ of consumers will post a negative, company related comment on social media.
While the stakes are high, if a company can crack their client service code, they are rewarded with brand loyalty, which translates into more business. In fact, consumers are willing to spend 13% more with companies that provide excellent customer service, and there is a 0.71 correlation between a great experience and willingness to consider another purchase.
So what is good client service? The actual activities that cause consumers to stick with a brand are not insurmountable – 83% of consumers will stick to a brand simply due to friendly employees or customer service representatives. Fortunately for business owners, the key to providing good service is not rocket science, it’s just plain old human decency. For instance, if an offending company responds to a service complaint, 51% of customers subsequently had a positive reaction, showing that a simple apology can go a long way in restoring brand faith. We have heard several examples of this dynamic in the hospitality industry; a hotel might mess up a room reservation, only to solve the problem with an suite upgrade and free champagne resulting in satisfied, loyal, customers.
To some, sales is the sexiest, flashiest, most exciting part of business. Staying true to our authentically boring roots, we believe that providing a first class client experience maximizes retention, which, in turn creates a powerful platform for growth. Once we shift into operating mode, we anticipate spending a significant amount of time understanding our client’s experience, and we endeavor to establish best in class client service practices in our industry.
The weather is getting colder and as a result hockey season is upon us. With that in mind we have been interested to read some season preview articles which highlight the “arms race” for quantitative talent among NHL front offices. Although popularized in baseball years ago and brought to national attention in Michael Lewis’s “Moneyball,” the practice of trying to quantify player value is still developing in the NHL and is promoting new strategic thinking. From an article on Motherboard:
“In terms of on-ice strategies, teams are already recognizing the value of holding onto the puck. Kent Wilson, whose analysis has appeared in places like the Sporting News and Hockey Prospectus, said he believes the way NHL teams value players will change completely.
‘In the very near future, I expect possession players to become more valuable on the market,’ said Wilson suggesting a guy who keeps control of the puck might be more valuable than a guy who pots a couple goals every few games. ‘While the best two-way skaters have always been highly valued, I think teams will be able to identify the middle tier guys who drive play but don’t stand out quite as much as the elite players.'”
Ultimately, advanced statistics aren’t necessary to identify the true All-Star hockey players. Talent eventually shines through. However, statistics can be invaluable when differentiating one middle of the road player from another. Again from the article:
“Where the new analysis can really make a difference is in identifying overlooked players, as well as those who may be overvalued. ‘I’d say a competent analytics department could pay for itself 10 times over if its only mandate was to help the team avoid making terrible bets in free agency,’ said Wilson. ‘Being less wrong is the low-hanging fruit of the new NHL stats movement.'”
We think there is an important lesson here that can apply to any business. Using data can improve consistency and over the long term that can have important compounding effects. Like many teams in the NHL, we aspire to use data effectively in the constant pursuit of “being less wrong.”
Oilers Nation Article, Motherboard Article, SI Article
Have a great week,
Your Chenmark Capital Team