May 2020 – GEORGE ROTHERT

Doing Business in the Pandemic

“The market has seismically changed.”

We are at the edge of a full-on depression thanks to COVID-19 virus and our government’s mis-handling of it. Many businesses, restaurants in particular, will not reopen. Some will, but maybe not for long under the new social-distancing reality. “Non-essential” businesses are gasping for air, trying to stay afloat. Highly-leveraged companies such as J. Crew and Hertz are trying to save themselves through bankruptcy protection.

Newspapers, already struggling in the new media landscape, are suffocating from even less income as shuttered businesses stop buying advertising.

Some operations are doing well. Supermarkets’ sales are up. Walmart and Target are enjoying increased business. Amazon is overwhelming landfills with packaging material and is getting closer to becoming the only place we can buy anything. The Amazon overlord may also be the owner of the last operating newspaper.

It probably surprises no one that alcohol sales are up. Sequestered people are drinking more. Alcohol-delivery sales have increased five-fold. That’s good news for the spirits trade. But not for the entire industry. The big guys are doing well; the small producers, not so much. Sales for craft distillers and brewers have fallen precipitously. We may be drinking more, but we’re drinking the cheap stuff. One example: Anheuser-Busch is selling a lot more of its Bud Light “beer.” The local craft brewer is reckoning how to stay solvent.

As a craft-distillery owner put it: “There’s a difference between feel-good booze and pandemic booze. Craft distillers make lovely spirits meant for savoring and sharing with friends. If you’re unemployed or don’t know where your next paycheck is coming from, craft is perceived as a little bit of luxury.”

National brands also have the advantage with beverage distributors. The small guys have little leverage. The nationals can pay for premium placement on liquor store websites and shelves. In the retail business, it’s known as a “slotting fee” and is normal practice for a new product to get shelf space. (In Alan Freed’s era, it was called “payola” and earned him a Congressional investigation and a ruined career.)

The wholesaler has a stranglehold on distribution. In many states producers are not allowed to sell directly to the consumer. Now-archaic post-Prohibition laws mandate a three-tier system: distiller or brewer to distributor to retailer.

Restaurants were an important outlet for craft producers. Now that is gone and is unlikely to come back as it was.

A new world is evolving. We don’t yet know what it will look like.

Baker City Election Results

Direct Democracy in action

Citizens of Baker City in northeastern Oregon, population not quite ten thousand, cast their ballots, giving overwhelming approval for sale of a twenty-five-year-old backhoe the city decided it no longer needed. An archaic provision in the municipal charter requires voters’ approval for the city to sell any equipment or vehicles with a value of more than $10,000. ($5,000 for land or buildings.) The 1995 Case backhoe’s estimated value is $16,000.

The sale was approved with 92% voting “Yes.” (One wonders what reasons the other 8% had to disallow the equipment’s sale.) Baker City’s public works director admitted that a few years previously a street sweeper may have been sold in violation of the law, although no record was kept of the sale price. (An obvious coverup!)

In the same election, residents also voted, by a 65% to 35% margin, to amend the city charter putting some limit on direct democracy. The city in the future will be allowed to sell surplus equipment without obtaining voters’ consent. This will simplify the possible sale of a Case excavator and a 1988 International dump truck, each valued at more than $10,000.

A third measure on the ballot would have discontinued the stipend paid to Baker City’s commissioners. Perhaps voters feared that it would be a step toward plutocracy. The measure was defeated. The seven city-council members will continue to receive their ten dollars per meeting.

Deja Vu All Over Again

Plus ça change, plus c’est la même chose

Let’s take a ride in the Wayback Machine. Forty years ago, we saw incessant news reports about Mt. St. Helens, kind of like the non-stop COVID-19 reporting today. For months the mountain had been bulging, and expelling steam and ash almost daily.

Scientists said there was imminent danger and the area should be closed off. Washington-state authorities agreed and put a quarantine in effect, blocking access into the danger zone. Right away noise began about infringing on people’s constitutional rights and the damage to tourism and the economy. The mountain’s burping was the new normal and nothing more was going to happen. (This was the era before patriots paraded in camouflage outfits and brandished combat weaponry.)

Interviews with one crusty old-timer, named Harry Truman, who lived on the mountain and said he wasn’t leaving, were a regular feature on the nightly news. According to Truman’s niece, “He thought (the volcano) would just go straight up and that somebody would be able to come and get him.”

Pressure to reopen the area increased. Officials met to discuss what action to take. Scientists expected reaffirmation of the closures and were surprised that the discussions were about plans to reopen the area. Five days later Mt. St. Helens blew. Mr. Truman and fifty-six other people died. Most died from thermal burns or inhaling hot ash. According to some estimates the death toll may be higher, that many unknown victims were swallowed by the debris flow.

Plus ça change, plus c’est la même chose.

Vote-by-Mail Fraud

“… you’d never have a Republican elected in this country again.”

Twenty or so years ago, in California, I signed up for permanent absentee voting. A few years ago I moved back to Oregon, where all voting is by mail and has been since 1998. The Elections Division notify me by e-mail and text message when my ballot has been sent to me and again when they have received and counted my vote. This year, I even received a postage-paid return envelope with my ballot.

In these days of COVID-19 upheaval, the governor of California issued an executive order that all registered voters be sent mail-in ballots for the November election. The state will still have in-person polling places open, although they expect difficulty in staffing. The White House is outraged, stating that people cheat with vote-by-mail ballots and that it is a “corrupt” practice. The president’s re-election campaign sputtered that it is a “wide open opportunity for fraud.” A bedrock Republican principle is that voting fraud by Democrats is rampant. (As with the Republican belief that lowering taxes increases revenue, just because it’s never happened doesn’t mean it’s not true.)

The current occupant of the White House voted by mail. So did Melania. (Hers was not counted in the last election. She mailed it late.) The vice-president votes by mail. (Pence listed his address as the governor’s residence, where he hasn’t lived since 2017.) Commerce Secretary Wilbur Ross mails in his ballots. Economic advisor Larry Kudlow and HHS Secretary Alex Azar also vote by mail. Jared Kushner and Ivanka Trump cast their ballots by mail, too.
What’s fine for them is not OK for us. The problem is that the more people who vote, the worse Republicans do. In an inadvertent moment of candor the coWH said of mail-in voting, “… that if you’d ever agreed to it, you’d never have a Republican elected in this country again.”

In actual fact, the only documented case of organized voter fraud was in North Carolina, committed by — surprise! — Republicans. (Technically, it was election fraud.) The state had to have a do-over election for the Ninth Congressional District.

For the upcoming, and all future elections, Republicans will step up their efforts to make it more difficult for citizens to vote.

The First Coronavirus Bankruptcy

J. Crew, the purveyor of preppy fashions and a stalwart in malls around the country, has filed for Chapter 11 bankruptcy. (Luxury vendor Neiman Marcus filed for bankruptcy protection a few days later. J.C. Penney’s bankruptcy is expected any day.)

News headlines announce that J. Crew is the first major retailer to fall as a result of the COVID-19 pandemic. Health experts tell us that those most susceptible to the virus are those with underlying conditions: lung problems, including asthma, heart disease, diabetes and obesity, weakened immune systems. The same is true of businesses. J. Crew carried $1.7 billion debt from a leveraged buyout by private-equity firms.

Private-equity firms are in the business of buying businesses and selling them. They typically have no interest in actually running the business other than what can be done quickly to attract buyers. A leveraged buyout is a purchase of a company with borrowed, i.e. other people’s, money. The purchased company is burdened with debt. To service the debt, new owners usually take measures to make the company operate more efficiently, which usually involves employee layoffs and/or selling off pieces of the business. With every deal made, whether it’s good or bad, the dealmakers pay themselves outsized fees for their genius in dealmaking.

Add to this the relentless long-term pressure from on-line retailers, even for luxury goods. The coronavirus was the final nudge, not the root cause. And somebody always makes money with a bankruptcy; ask the current resident of the White House.

For a fun dive into the leveraged-buyout frenzy of the 1980s, read “Barbarians at the Gate.” It tells the tale of the R.J. Reynolds/Nabisco fiasco and the parasites it attracted. HBO made a movie of it in1993 with James Garner.

Another Business Battered by Coronavirus

A Mexican drug cartel’s largest customer base is in the United States, and so much of its revenue is in U.S. dollars. Being a cash business, the next step is to get the money into Mexico and converted to pesos.

As with food and toilet paper, the drug supply chain has also been disrupted by COVID-19. The price of methamphetamines has doubled in just a few months. And the cash has been piling up, literally. The problem is that the pandemic has also messed up the money-laundering business.