Sunday, August 8, 2010

Administering some Biz-n-ass - The Business Section for the Rest of Us...

I thought this could be a recurring feature of how I try and use my bizness skills to explain the Business Section for the Rest of Us.

At one point or another Manulife Financial was one of the largest insurance companies in the world; in fact, after RBC, Manulife was the second largest Canadian corporation on most Forbes' rankings. Internationally Manulife was in the Top 100 Firms according to market capitlization. Dominic D'alessandro, Manulife's former CEO, was Bay Street's Midas Boy. Under Dom's leadership Manulife, unlike most Canadian companies who are happy to sit in Toronto and bask in the ownership protections that our government alots them (caugh caugh Rogers), was pro-active in the international scene, buying major players in the insurance world like Boston based John Hancock.

That was then and well... recently Manulife hasn't been doing so hot. On Friday Manulife announced a quarterly losses of $2.4 billion.

In explaining how Manulife could fall so quickly Globe and Mail columnist Derek DeCloet has blamed the very way that the insurance industry makes money as a prime reason for Manulife's current troubles, "The very structure also makes insurance a dangerous game: in how many other businesses do you get a pile of cash up front for a product you don’t have to deliver for years, decades, perhaps not at all?"

Well Mr. DeCloet I can think of another example actually. In fact for those of you who are having trouble understanding why Manulife is in the crapper, why not think of something much more accessible? Why not think of establishment Toronto retailer: William Ashley's Fine China?

Picture it: you've schlepped down to William Ashley's only to get your friend a wedding gift. There you are, sipping Perrier, eating the free candy that you took from the kitchen tools section, and judging your friends' taste in china thinking, "Jesus this pattern looks like dreck..."

Anyway don't just judge next time this happens to you; use this as a valuable business learning skill.

As often happens when you buy a gift at Ashley's, the Bride or Groom receives a note from Ashley's acknowledging the fact that you have bought them a soup tureen. However, that does not mean that the bride and groom (or groom and groom, or bride and bride) will immediately pick up your gift. In fact I would argue that the average couple doesn't pick up that cake stand for at least two years.

In the interim, the good people of William Ashley have taken your money, and have transferred said money from your visa account into their current account; however,they aren't debiting their current liabilities for at least two years. This means they have mad cash coming in, but have little cash going out.

So what happens when your bride friends wants her stuff? At some point the bride and groom have moved from their rental in Annex to a house they bought at Bathurst and St Clair, or Bloor and Dufferin or Riverdale and realize that they now have space to store all of their ugly china. They to then must schlep down to Bloor Street, drink free perrier and put in a final order for their china. Most of the time this is fine, William Ashley has the necessary quantities of china in stock.

But what happens if two years from now there is some sort of increase in the price of china and William Ashley actually doesn't have 12 place settings of that ugly pattern in stock and they have to buy some to satisfy the bride? Suddenly William Ashley has to order goods at the new world price in order to meet customer demands. Suddenly they're fucked.

And that was what Manulife was doing and that's why Manulife lost $2.4 billion dollars in three months.

And that is the Business Section for the Rest of Us...

Sidenote, coincidence or conspiracy: William Ashley's store is located in Toronto's Manulfie Centre.

Chew on that for a second and get back to me.

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