Corporate Idiocy

   You own a pizza parlor; let’s call it Capitalist Pizza.  You sell an average of 100 pizzas a day. The dough, sauce, cheese, and toppings cost you $3.00 per pizza, which you then retail for $15.00 - booking a $12.00 gross profit for each pizza sold. These numbers are very much in line with your main competitor, “Corporate Pizza.”   Then one day, your wholesaler comes along and says to you and your competitor: “Since Biden’s inflation reduction act has passed, from now on, the ingredients will cost you $4.50”.  As the owner, you have several options:

1. You could maintain the $15 retail price and opt to only profit $10.50 per pizza. While this might sound like a poor option, you must consider most of your competitors will be increasing prices due to the higher costs; therefore, in the eyes of the market, a $15 price will look like a bargain - and as a consequence, you will sell more pizzas.  Your daily gross profit before the increase in ingredients was 100 x $12 = $1200. If the $15 price - which is now a bargain in the eyes of the market, can generate an additional 20 pizzas a day in sales, your new profit would be 120 x $10.50 = $1260.  So the real question for the owner choosing to hold the $15 price is how many more pizzas will be sold going forward?

2. The second option is to increase the retail price of the pizza to $16.50. On the surface, this would seem to be the most logical choice as this would allow the profit per pizza sold to remain constant at $12.00 by having your clientele cover the cost of the increase. Raising prices typically would lead directly to selling fewer pizzas, but if your competitors are raising their prices even more than the $1.50 (and most would be), you can expect the number of pizzas sold to increase slightly. A bump up to 105 pizzas per day would yield a profit of 105 x $12 = $1260.

3. The third option as an owner would be to think in percentage terms. The cost of goods went up 50% ($3.00 to $4.50), so the retail price should go up 50% to $22.50 per pizza. This would also increase the profit from each pizza sold by 50% ($12 to $18). The problem is raising the retail price this much will result in selling fewer pizzas. Many will go to your competitors who held the line at $15, a few others will go to the guy selling for $16.50, and a few more will opt to cook at home. To be consistent, let’s say you lose 20 customers to owner number 1 … 5 more customers to owner number 2 … and five more opt not to order pizza at all. This leaves you selling 70 pizzas daily, for a profit of 70 x $18 = $1260.

  In the hypothetical example above, all three owners will net the same $1260 on their pizza sales going forward. As the owner of Capitalist Pizza, which option do you choose?

Corporate America, or anyone with an MBA for that matter, is near unanimous in choosing option number 3, for two reasons. First, they would point to the fact that it’s less work having to sell 70 pizzas than 120, to make the same $1260. While this view may seem reasonable on the surface, the truth is it’s short-sighted. Secondly, they reason the more income streams, the better, so there is no valid reason to diminish the income stream received from selling pizza. This view also seems reasonable, but again, it is myopic.  Bagholder is firmly in the camp of option number one. Yes, he would have to work harder to produce 120 pizzas, as opposed to the 70 of corporate owner #3 - but Bag would have 120 people a day available to buy my $7 drafts and $12 chicken wings, both of which have obscene markups.

What Bagholder understands, which business schools & the corporate drones they pump out do not - is perhaps best explained with this analogy. When you head down to the lake to do a little fishing, the fisherman who gets the best results will be the one whose bait is the most appealing to the fish. If Bag has a plump juicy worm on his hook, and you have a Nancy Pelosi Pez dispenser on your hook, Bag will catch more fish.  The business world works the same way. When Capitalist Pizza keeps its pizza priced at a now below-market $15 (the bait), more customers will find this appealing, and consequently, wander through the door to get “hooked” with $7 drafts and $12 wings. In sharp contrast, the corporate pizza parlor, which also charges $7 for drafts, and $12 for wings, but insists on charging $22.50 for their pizza,  may well be fishing with more hooks, but there is no bait on them. Not only is the corporate parlor left fishing with bare hooks, the lake they are fishing in, has only 70 fish instead of 120 (like Capitalist Pizza).

Corporate pizza is by no means alone in believing it is better to sell fewer units, albeit for a higher price.  According to Bloomberg, the Hotel industry in the US in 2021 reported an occupancy rate of 51%, slightly below the ten-year running average of 56%. This means on any given night, the average hotel is half empty. The only reason Hotels are, on average, half empty is because they insist on charging more than the market will bear - much like the corporate pizza parlor. The hotel operators have a choice. They could charge considerably less for a night’s stay, and have nearly twice as many people eating in their restaurants, buying overpriced bottles of wine in their gift shops, and ordering on-demand movies in their rooms….. Or they can insist on charging more than the market will bear, and continue to watch their occupancy rates suffer.

Another excellent example of this corporate lunacy in action is Bagholder’s local baseball team, the Arizona Diamondbacks. In 2021 they averaged 12,500 fans in a stadium that holds about 50,000.  In other words, the stadium was, on average, 75% empty. If Bagholder owned the Dbacks, he would have 50,000 people there every night - even if the excess tickets had to be given away.  With 82 home games, that equates to 3 million more people through the gate a year available to buy $10 bottles of water, $15 hot dogs, $50 parking, and $200 jerseys. Financially, the Dbacks had their best year in 2021, grossing 40 million in profit (only because they are 65 million dollars lower than the league average in payroll). Had Bag been in charge, with the extra 3 million patrons buying just an average of 1 hot dog & 1 bottled water each, their gross profit would have been north of 100 million.

   Industry after industry out there is littered with this myopic thinking.  You can’t just buy a plane ticket and fly anymore. Now you have to pay to check bags, you have to pay for soft drinks, and you have to pay to change flights.  To most airlines, everything has become an income stream (hook). It is no coincidence that when Covid hit, the airlines (American, Delta, et al.) who charge the most for tickets and operate on the “everything is an income stream model” were in debt up to their eyeballs, and consequently had to be bailed out by the federal government. Meanwhile, airlines selling cheaper tickets that do not charge for bags, soft drinks, and flight changes (Southwest) are making money hand over fist.

     Bagholder was never one to thrive in a system of hierarchical stupidity corporate world. His lone venture into it lasted only months - you can read about it here.  Even someone with little or no economics education can grasp that calculating the potential profit for a given business is simple; the formula is (profit per Item) X (# of units sold). There are two variables in that equation, meaning increasing either will lead directly to higher profits. And yet, corporate America continues to focus ONLY on the profit per Item, and never on the volume. This explains perfectly why the Diamondbacks can’t pay their players, Caesars Corp & MGM (to name just a couple) are busy selling off properties to remain afloat, and the major airlines are all on the verge of bankruptcy.

Oh, hell with it, give me another slice of pizza.