Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: This is Wall Street Week. I'm David Weston bringing you
Speaker 2: stories of capitalism this week. As luxury brands fight to
Speaker 2: regain their momentum, does a secondary market help or hurt?
Speaker 2: And what the facts show about deregulation and its effect
Speaker 2: on growth and productivity. Plus when a so called zombie
Speaker 2: company can come back from the living dead. We tell
Speaker 2: you the story of the return of Barnes and Noble,
Speaker 2: but we start with a story of true conflict when
Speaker 2: the approach of the largest country in the world seems
Speaker 2: at odds with the fifth largest economy. When President Trump
Speaker 2: met with Indian Prime Minister Mody earlier this month, the
Speaker 2: tone was cordial, but it was a step back from
Speaker 2: the so called bromance that started in Trump's first term,
Speaker 2: and what the two men said were their core interests
Speaker 2: appeared to be in true conflict. I will very simply
Speaker 2: put America first, Make in India, make for the glow.
Speaker 2: Until now, the Indian growth story has been one of
Speaker 2: the biggest of the post pandemic world. Its growth rate
Speaker 2: touched eight percent. Its benchmark stock index, the Nifty to fifty,
Speaker 2: has outpaced the S and P five hundred since the
Speaker 2: start of twenty twenty one, at least until recently, and
Speaker 2: investors have started to look elsewhere. Indian equities saw almost
Speaker 2: twenty one billion dollars of foreign inflows in twenty twenty three,
Speaker 2: but they plummeted to just one hundred twenty four million
Speaker 2: dollars last year, and investors have withdrawn more than twelve
Speaker 2: billion dollars so far this year. So has something gone
Speaker 2: wrong with the India growth machine? And if so, where
Speaker 2: are we seeing a slowdown or just a blip. Rasher
Speaker 2: Sharma is the chair of Rockefeller Capital Management and author
Speaker 2: most recently of The Rise and Fall of Nations.
Speaker 3: Ever since I've been investing in this country for over
Speaker 3: three decades, which is that this is a country that
Speaker 3: consistently disappoints the optimists in the pessimists.
Speaker 4: Yet over the.
Speaker 3: Long term it's a very good equity market story. In
Speaker 3: particular because even after the Indian stock markets big correction
Speaker 3: over the last few months, the only stock market in
Speaker 3: the world in the last thirty to forty years which
Speaker 3: has produced comparable returns to America has been India. So
Speaker 3: it's this very steady compounding story. But yeah, there are
Speaker 3: times when people get a bit ahead of themselves, the
Speaker 3: excitement gets a bit too much. I think we may
Speaker 3: have reached that point last year when India became the
Speaker 3: most expensive equity market in the world, literally even more
Speaker 3: expensive than America at the top. So that was just
Speaker 3: telling you that the excitement had gone into a head.
Speaker 3: And what we have seen in the last few months
Speaker 3: is a bit of a reset where the optimists are
Speaker 3: getting a bit disappointed.
Speaker 5: Now.
Speaker 3: After sort of thinking that maybe India can break out
Speaker 3: and grow at seven to eight percent, there's a realism
Speaker 3: setting in that India's trained growth rate is closed to
Speaker 3: six percent rather than seven to eight percent, a pretty
Speaker 3: decent growth rate, and that they'd still need to carry
Speaker 3: out some positive reform steps to even keep a six
Speaker 3: percent type growth rate going. So I think what we're
Speaker 3: seeing just now is a return to that old reality,
Speaker 3: so to speak, which has been the case for India
Speaker 3: for thirty to forty years, that it's a country which
Speaker 3: steadily compounds, steadily grows.
Speaker 2: But that might not be enough to reach Prime Minister
Speaker 2: Motive's target of making India a developed nation by twenty
Speaker 2: forty seven. Ragharam Rajan is a former governor of the
Speaker 2: Reserve Bank of India.
Speaker 6: I think we're reverting around the six percent now. The
Speaker 6: blip downwards recently has more to do with the fact
Speaker 6: that we had elections across the board last year and
Speaker 6: spending on infrastructure, which has been a big part of
Speaker 6: the growth story, has sort of faltered over this period.
Speaker 6: I think that will come back, so we'll get back
Speaker 6: to six now.
Speaker 4: The question for India is six.
Speaker 6: Enough, And unfortunately the answer is not, because we're also
Speaker 6: a country that's growing old, and we do want to
Speaker 6: grow rich before we grow old, and that's unlikely at
Speaker 6: six percent.
Speaker 2: The Indian government has stepped up efforts to re energize growth,
Speaker 2: announcing tax cuts in its annual budget in an effort
Speaker 2: to boost middle income spending.
Speaker 6: We have a lot of young people and as a result,
Speaker 6: the dependency ratio, the number of very young people who
Speaker 6: can't work and very old people who can't work, that's falling.
Speaker 4: And this is the.
Speaker 6: Time that every Asian economy has experienced a burst of growth,
Speaker 6: still growing at the old six percent and not enjoying
Speaker 6: that burst. Something is not working as well as it should,
Speaker 6: and that's jobs.
Speaker 4: What you see around India is not enough young.
Speaker 6: People have jobs, not enough jobs are being created, so
Speaker 6: in a sense, we're not making full use of our
Speaker 6: capacity even at six percent growth.
Speaker 2: Some foreign companies have seen potential in the growth of
Speaker 2: the Indian market as an alternative to China. Apple has
Speaker 2: been slowly growing iPhone production in the country, while more
Speaker 2: recently Tesla stepped up hiring in India ahead of a
Speaker 2: possible entry into the market. This so called China plus
Speaker 2: one strategy of India being a substitute for manufacturing in
Speaker 2: China may have worked in the past, but some question
Speaker 2: whether it will in the future. Ridika Bachra is Mahindra
Speaker 2: Group's Vice president of Americas and a senior fellow at
Speaker 2: the Atlantic Council.
Speaker 7: What I have come to realize in the last twelve
Speaker 7: months is there is a strange realization with the Indian
Speaker 7: policy makers that they cannot sell themselves anymore as a
Speaker 7: China plus one strategy. It has to be much beyond that,
Speaker 7: because if you look at it, the Indian consumer is
Speaker 7: not only inclined towards luxury and lifestyle products unlike a
Speaker 7: lot of other emerging markets, but also has a very
Speaker 7: strong middle class consumer base which is also price conscious.
Speaker 7: So if you put these things together, where India is
Speaker 7: trying to sell itself as not just a China plus
Speaker 7: one strategy, but an innovation in manufacturing hub with a
Speaker 7: skilled workforce, with a solid consumer base, and trying to
Speaker 7: differentiate itself with available worker versus available skilled workers. I
Speaker 7: think it's a great story to tell.
Speaker 2: Whatever the theory, foreign investors have not always had an
Speaker 2: easy time investing in India. Just ask Olkswagen. They were
Speaker 2: hit with a record one point four billion dollar tax
Speaker 2: bill from the Indian authorities for alleged tax evasion, and
Speaker 2: the German automaker raised questions about the very survival of
Speaker 2: its India unit.
Speaker 3: Well, because I think it's still a very difficult place
Speaker 3: to do business on the ground. David, this is something
Speaker 3: which you know, we have felt for a long period
Speaker 3: of time that to negotiate the Indian landscape is toff
Speaker 3: given the regulations that you still have in place, given
Speaker 3: the fact that you can have the tax authorities or
Speaker 3: other people come up and present bills to you in a.
Speaker 4: Way that you don't really know.
Speaker 3: A lot of the state chief ministers in India realize this,
Speaker 3: and I think this is something which we need to
Speaker 3: focus on, which is that a lot of the attention
Speaker 3: is on more the center and what DELI is doing
Speaker 3: and what initiatives they're taking. But India is a very
Speaker 3: federal country and you have so many state chief ministers
Speaker 3: with a lot of power to do what they have
Speaker 3: to do on the ground. And I think what we
Speaker 3: need to see in India foreig and we see some
Speaker 3: signs of that is much greater so called competitive federalism,
Speaker 3: where the states compete with each other to get foreign
Speaker 3: investment because a lot of these regulations and the tough
Speaker 3: environment it is to do business in India is something
Speaker 3: that some of these state chief ministers need to make
Speaker 3: friendlier and not just the center.
Speaker 2: Whatever direction it's going right now, what is the current
Speaker 2: state of competitive federalism when it comes to economics? Are
Speaker 2: there certain states that it's more conducive to invest into
Speaker 2: in India today than others?
Speaker 3: Well, that's been the case in India for a while
Speaker 3: now that if you look at India, about twenty percent
Speaker 3: of India's population is in the southern states, and yet
Speaker 3: those states account for more than thirty percent of India's
Speaker 3: GDP and the per capita income is also a lot higher.
Speaker 3: Now there are states in the south, such as Karnataka,
Speaker 3: which we know well because of Bangalore, which is the
Speaker 3: tech capital of India for all practical purposes. And what
Speaker 3: we see there is that places like Bangalore and Karnataka
Speaker 3: tend to attract much greater foreign investment. And generally some
Speaker 3: of the southern states like Karnataka and Telangana and Tamil Nadu,
Speaker 3: those states have attracted much more foreign investment over time.
Speaker 7: There is a historical reason for why South has managed
Speaker 7: to sort of lead from the front, and those reasons
Speaker 7: are the ports that are situated in southern area. They
Speaker 7: were the most important reason for traders to come to
Speaker 7: India to begin with, and that led to a huge
Speaker 7: amount of trading community moving and living in South of India.
Speaker 7: In the recent past, we see inphasis taking a lead
Speaker 7: in ensuring that they become the global service providers for
Speaker 7: technology and that started in South of India and Bangalore,
Speaker 7: and one thing led to another where a huge amount
Speaker 7: of other tech companies started sort of launching based out
Speaker 7: of South India because of the skill availability of engineers
Speaker 7: in the southern part of India.
Speaker 2: But even if India is moving to loosen restrictions on
Speaker 2: foreign investment. It is slow progress and Rajah and warrens
Speaker 2: they might be focusing on the wrong sectors. Prime Minister
Speaker 2: Motor is pushing to grow the manufacturing sector. Does that
Speaker 2: make sense.
Speaker 6: I think the days of growing manufacturing to get strong
Speaker 6: growth in jobs are over. I think it's as true
Speaker 6: of India as it is of the United States. And
Speaker 6: the reason is simply this that increasingly manufacturing is becoming
Speaker 6: much more automated, much more dependent on machines. If you
Speaker 6: look at an assembly plant for cell phones in India,
Speaker 6: it's a sequence of machines, not a sequence of people
Speaker 6: sitting soldiering stuff onto motherboards. So the kind of jobs
Speaker 6: that traditional sort of low skill manufacturing assembly, electronics assembly
Speaker 6: and so on generate.
Speaker 4: They far fewer today. But there are other problems.
Speaker 6: Every country wants to expand its manufacturing and is growing
Speaker 6: protectionist against manufacturing manufactured goods coming from somewhere else. So
Speaker 6: the space for manufacturing exports is also shrinking. India has
Speaker 6: other opportunities in services. It's been a giant in service
Speaker 6: exports in recent years.
Speaker 4: That's where it should focus its attentions.
Speaker 2: More on Modi's push to build up India's own manufacturing
Speaker 2: base comes as President Trump looks to bring back economic
Speaker 2: activity within US borders. It creates a dilemma. Both leaders
Speaker 2: talk up their relationship with one another, but can modis
Speaker 2: made in India and Trump's America first be reconciled and
Speaker 2: if not, which will prevail.
Speaker 6: Every country is turning nationalists now, and everybody is also
Speaker 6: has a certain sense of manufacturing fetishism. They want their
Speaker 6: own manufacturing industries, and of course this collides.
Speaker 4: I think the.
Speaker 6: Way to reduce this gap is by recognizing that each
Speaker 6: country has specialties and by working to ensure that there
Speaker 6: is more trade on those specialties. So, for example, lots
Speaker 6: of oil and natural gas being manufactured in the United States,
Speaker 6: India could buy more.
Speaker 4: There are defense products.
Speaker 6: That are manufactured in the United States, India could buy more.
Speaker 4: So I think rather than seeing.
Speaker 6: Deficits trade deficits as a problem, see it as part
Speaker 6: of a process of collaboration and just make sure that
Speaker 6: the playing field is level for both sides. I think
Speaker 6: that's something that can be worked on.
Speaker 2: Coming up, Luxury brands are looking to get their mojo back,
Speaker 2: but do we have too little of them or too much?
Speaker 2: That's next on Wall Street.
Speaker 1: Week you're listening to Bloomberg Wall Street Week with David
Speaker 1: Weston from Bloomberg Radio. This is Bloomberg Wall Street Week
Speaker 1: with David Weston from Bloomberg Radio.
Speaker 2: This is a story about too much of a good thing.
Speaker 2: Every brand lives and breathes for exposure, but sometimes it
Speaker 2: can be too much. Luxury brands have reaped the benefits
Speaker 2: of consumers the world over seeking them out, but now
Speaker 2: the red carpet may be getting pulled out from under them,
Speaker 2: and my colleague Danny Berger tells us why. It may
Speaker 2: be because they are too available to too many people
Speaker 2: in too many places.
Speaker 8: Luxury brands are everywhere, from the bags we carry to
Speaker 8: the clothes we wear, down to the shoes we step
Speaker 8: into every day, but luxury brands are at a crossroad.
Speaker 8: LVMH seen as a bellweather for the luxury sector, sort
Speaker 8: close to two hundred and fifty percent between twenty nineteen
Speaker 8: and twenty twenty four, but it's since fallen around twenty
Speaker 8: percent from the highs of last year, with a recent
Speaker 8: bounce offsetting some of those losses and leaving investors struggling
Speaker 8: to try a path forward for the luxury brands. Joelle
Speaker 8: Grunberg is partner at Mackenzie who leads the firms apparel,
Speaker 8: fashion and luxury sector in North America and co authors
Speaker 8: a yearly report on the state of Luxury.
Speaker 9: When you look at economic profits of the luxury industry,
Speaker 9: it basically nearly tripled between twenty nineteen and twenty twenty four.
Speaker 9: So it's really been amazing years, and I think at
Speaker 9: some point everybody started believing this was the new normal
Speaker 9: and started to expect that this would continue. But as
Speaker 9: we all know, you know, at some point things stabilized
Speaker 9: or normalize, So as we know, in twenty twenty four,
Speaker 9: things slowed down in a significant way for the luxury industry.
Speaker 9: It has been a tale of different stories. In all fairness,
Speaker 9: not all the rounds, not all the corporations have suffered
Speaker 9: in the same way, and some are doing great in fact.
Speaker 9: But what we think is that twenty twenty five will
Speaker 9: overall be a year of normalization. We obviously see continue
Speaker 9: to see growth, but I would say in a more
Speaker 9: muted way, and it will also significantly depend on the
Speaker 9: region and the market. It would also depend on what
Speaker 9: category you mainly operated, and it also depends, I would say,
Speaker 9: on again the situation of the round overall, because some
Speaker 9: runs are doing much better than the others.
Speaker 8: Armez is one of those brands outperforming its luxury peers,
Speaker 8: but they are very much the outlier. Just last week,
Speaker 8: Armaz reported a jump in fourth quarter revenue, while LVMH
Speaker 8: and Karen posted declines, and Grundberg says there's a range
Speaker 8: of global headwinds challenging the luxury sector.
Speaker 9: Two main factors contributed to the huge growth that we've
Speaker 9: seen since twenty nineteen. One first factor is clearly the
Speaker 9: rise of prices in luxury. Most of the rounds have
Speaker 9: increased prices in a very significant way, more than double
Speaker 9: digit every year, and so that has contributed to eighty
Speaker 9: percent of the growth in revenue of these companies. The
Speaker 9: second factor is the pool of China. As we all know,
Speaker 9: the Chinese customer has been a very very strong contributor
Speaker 9: to the growth of luxury globally, and so that you know,
Speaker 9: pool has been extremely strong and is slowing down right now.
Speaker 9: And what has happened in the past year and a
Speaker 9: half is that the aspirational luxury customer, and more specifically
Speaker 9: in the US, has been challenged because there's been a
Speaker 9: lot of people losing their jobs and so therefore there
Speaker 9: have been much more cautious and on pause. So part
Speaker 9: of the explanation is linked to that aspirational customer being
Speaker 9: a bit more on hold.
Speaker 10: You know, that perfect storm has resulted in some aspirational
Speaker 10: customers being priced out of the first hand luxury market.
Speaker 10: We're very happy to receive them.
Speaker 8: Maximilian Bitner is the CEO a Vestier Collective, a platform
Speaker 8: for pre owned designer and luxury products founded in two
Speaker 8: thousand and nine, aimed at making fashion more sustainable and
Speaker 8: a more strained consumer means. The second hand market is
Speaker 8: seeing significant growth, expected to reach three hundred and fifty
Speaker 8: billion dollars globally in twenty twenty eight. That's up from
Speaker 8: one hundred and ninety seven billion dollars in twenty twenty three,
Speaker 8: with Vestier estimating eighty two percent of its orders prevent
Speaker 8: a first hand purchase.
Speaker 10: We definitely do cater to the demand of the aspirational customer,
Speaker 10: as certain brands are more affordable, more accessible than they
Speaker 10: would be in a first hand store. And I think
Speaker 10: we've especially seen this over the last one or two years.
Speaker 10: You know, in a period of economic uncertainty, which in
Speaker 10: parallel has seen luxury brands increase prices you know, significantly
Speaker 10: over the last four or five years. When I joined
Speaker 10: vis Year at the end of twenty eighteen early twenty nineteen,
Speaker 10: you know, I recognize the incredible brand and community, but
Speaker 10: I also recognized the need for us to build a scalable,
Speaker 10: profitable business you know, for the next twenty thirty forty years.
Speaker 10: Even the last two years, the business has proven extremely resilient,
Speaker 10: growing with more than twenty percent revenue growth. So the
Speaker 10: business has been you know, throughout the up and down
Speaker 10: cycles of pre COVID COVID post COVID remained extremely resilient,
Speaker 10: which is great for us to see.
Speaker 8: Vestier is not alone in writing the second hand wave.
Speaker 8: The Real Real and Rebag offer similar services, and Rebag's
Speaker 8: reach got a lot bigger this year when it partnered
Speaker 8: with Walmart to sell its catalog of about twenty seven
Speaker 8: thousand items on the retail giant's website, targeting the aspirational customer.
Speaker 8: What might seem like a threat to luxury retail, in
Speaker 8: reality could be a mutually beneficial relationship.
Speaker 10: I think overall, the mood and the attitude of luxury
Speaker 10: brands have dramatically improved over the last five six years
Speaker 10: towards secondhand because you know, fundamentally, we are not cannibalizing
Speaker 10: their sales. If anything, you know, we pay homage to
Speaker 10: their brands by showing to the consumers, both the buyers
Speaker 10: and the sellers, how much value is retained in these
Speaker 10: products that they're buying firsthand.
Speaker 8: Norma Kamali rose to the top of high end fashion
Speaker 8: with the iconic Sleeping Bag coat that she designed in
Speaker 8: nineteen seventy three. Since then, the New York based designer
Speaker 8: has proven her ideas fresh and innovative time and time again.
Speaker 8: Like Bittner, Kamali sees the value of secondhand markets in
Speaker 8: luxury fashion.
Speaker 11: I think anything that's a creative process that's fun is
Speaker 11: good for people, right And if in that secondhand you
Speaker 11: get a great better price and you get a brand
Speaker 11: that you haven't been able to buy before. There's a
Speaker 11: whole cult of people who look for Norma Kamali vintage
Speaker 11: and it's fascinating to me. But I see how great
Speaker 11: that is because in that generation, there's something I did
Speaker 11: when I was that age that is connecting with them.
Speaker 8: Would you say, Norma Kamali is also luxury.
Speaker 11: Luxury to me is something that is accessible, affordable, and
Speaker 11: will last in your wardrobe forever. It can't be a
Speaker 11: purse that you spend thirty thousand dollars on and sort
Speaker 11: of collect in a closet with other purses.
Speaker 8: How do you strike that balance then, of being both
Speaker 8: accessible but not oversaturated.
Speaker 12: In the market.
Speaker 11: It's an important thing to do, and I think first
Speaker 11: of all, knowing your distribution, being careful about the distribution,
Speaker 11: make sure the distribution is to your customer, the person
Speaker 11: who connects with you. And we have a global distribution
Speaker 11: and we could still be reaching many, many more people.
Speaker 8: There's no question that more consumers are exposed to and
Speaker 8: have access to luxury than ever before. But at least
Speaker 8: one icon of the industry admits that change is inevitable.
Speaker 4: We start this.
Speaker 8: Conversation with this idea of luxury doesn't mean exclusivity. Do
Speaker 8: you think some of those secondhand apps are also changing
Speaker 8: the conversation.
Speaker 11: That reguly totally. I think the fashion industry clearly is
Speaker 11: going through a huge, huge change, and it's long.
Speaker 3: Overdue, it really is.
Speaker 11: And I think when an industry can have a lot
Speaker 11: of variety and a lot of choices and a lot
Speaker 11: of price ranges.
Speaker 8: Then it's healthy, healthy for the consumer, but a challenge
Speaker 8: for the luxury brands to overcome as they look to
Speaker 8: rediscover the growth of the last five years.
Speaker 2: This is a story about unintended consequences. Sometimes even the
Speaker 2: best intention to government regulations can do more harm than good.
Speaker 2: But then again, cutting back on regulation can also do
Speaker 2: real mischief.
Speaker 13: We did the right thing, that was a very important
Speaker 13: thing to get right finis and it was also a waste.
Speaker 4: I mean, number one, it was a bad group of
Speaker 4: people running it.
Speaker 13: If the CFPB is not there examining these giant banks
Speaker 13: to make sure they are following the laws on not
Speaker 13: cheating consumers, who is doing that job?
Speaker 4: I can say, no other federal regulator.
Speaker 2: So which is it? Is government regulation holding the US
Speaker 2: economy back? Or is it an important foundation for much
Speaker 2: of the economic benefits we've reaped? And if it can
Speaker 2: be both, how can we tell the difference. Jeff Myron
Speaker 2: is Director of Undergraduate Economics at Harvard and the director
Speaker 2: of Economics Studies at the Cato Institute.
Speaker 5: I don't think there is a definitive study on productivity
Speaker 5: and regulation. There are many studies of individual industries, of
Speaker 5: specific time periods, of special cases, but those are all
Speaker 5: relatively small pieces of information. Finding an overall clear assessment
Speaker 5: is pretty hard. I think many people would point to
Speaker 5: key environmental regulation in the United States, the Clean Air
Speaker 5: and Water Acts, as having been quite successful, but even
Speaker 5: those are not without some degree of controversy. One certainly
Speaker 5: finds that as a result of those acts, which are
Speaker 5: passed in the early nineteen seventies, air got cleaner, water
Speaker 5: got cleaner. But if you then go the next step
Speaker 5: and say, were those improvements worth the extra cost, because
Speaker 5: of course putting restrictions on what firms do and what
Speaker 5: cars can do raises the cost, and there the assessment
Speaker 5: is still probably beneficial overall, but not so obviously not
Speaker 5: so dramatic. So even for one of the relatively clear successes,
Speaker 5: I'd say there's still some room for reasonable people to
Speaker 5: disagree about how effective they were.
Speaker 2: Myron has harsher criticism of food and drug regulation, where
Speaker 2: there has been mission creep delays and political and legal tangles.
Speaker 5: So the very first major attempt federal attempt to deal
Speaker 5: with dangers of drugs and food was all the Pure
Speaker 5: Food and Drug Act of nineteen oh three, and it
Speaker 5: did something very mild. It said that medicines and food
Speaker 5: substances had to include a list of the ingredients on
Speaker 5: a label on the outside of the package.
Speaker 4: That's pretty innocuous.
Speaker 5: Even if you're a hardcore libertarian, it's be hard to
Speaker 5: get too exercised about that. But that notion that the
Speaker 5: government was going to protect people from dangerous products evolved
Speaker 5: into creating the Food and Drug Administration in nineteen thirty eight,
Speaker 5: which then had the power to keep things from being
Speaker 5: on the market at all. That's a much higher bar
Speaker 5: Now we have the current system, which involves years of delay,
Speaker 5: sometimes billions of dollars in testing before thinks can go
Speaker 5: on the market, and that probably prevents some bad drugs
Speaker 5: from ending up on the market, but also delays all
Speaker 5: the good drugs from getting on.
Speaker 4: The market.
Speaker 2: Coming up. They are called zombie companies for our reason.
Speaker 2: There are more companies who don't make enough to pay
Speaker 2: their bills than you might think. But we bring you
Speaker 2: the story of one of them that came back from
Speaker 2: the dead Barnes and Noble. That's next on Wall Street Week.
Speaker 1: You're listening to Bloomberg Wall Street Week with David Weston
Speaker 1: from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
Speaker 1: with David Weston from Bloomberg Radio.
Speaker 2: This is a story about the corporate living dead. Companies
Speaker 2: that don't make enough money to cover their debt after year,
Speaker 2: many of them ultimately giving up the ghost end of
Speaker 2: an era.
Speaker 8: Off for retail Giant, bed Bath and beyond.
Speaker 4: We have breaking news the party is over.
Speaker 12: As count retailer Big Loss is closing all of its
Speaker 12: stores nationwide.
Speaker 2: The annals of business are full of stories of companies
Speaker 2: that fought the good fight but ultimately lost. The number
Speaker 2: of business bankruptcies in the United States is on the rise,
Speaker 2: up over seventy percent in the past two years, and
Speaker 2: corporate delinquency rates are the highest they've been in eight years.
Speaker 2: Bankruptcy usually is the end of life, at least in
Speaker 2: the company's current form, but maybe you've noticed that some
Speaker 2: stick around, and there's a term for them, zombie companies.
Speaker 2: Vincenzo Spizato is a partner at Carne, writing a yearly
Speaker 2: report on zombie companies and their effect on the health
Speaker 2: of the overall economy.
Speaker 14: A zombie company, it's fundamentally a financially unsustainable company with
Speaker 14: these are companies that are not producing enough operating profit
Speaker 14: to pay the interest on their loans, and they've been
Speaker 14: in that position for at least three consecutive years. So
Speaker 14: when we talk about a zombie, it's not a company
Speaker 14: that had a bad year or a startup or anything
Speaker 14: like that. We're talking about sustained material underperformance. These are
Speaker 14: publicly traded companies that have been in business for at
Speaker 14: least ten years that have revenue for each of those
Speaker 14: ten years. These are real companies that are having profound
Speaker 14: financial issues.
Speaker 2: You study these zombie companies, how many are there?
Speaker 14: Just looking back to put this in perspective, in twenty ten,
Speaker 14: there were under two percent of publicly traded companies globally.
Speaker 14: We've seen around ten percent annual growth since then, and
Speaker 14: so we're up to around six percent of all publicly
Speaker 14: traded companies globally. Six out of one hundred are currently zombies.
Speaker 14: So we're talking about an not insignificant number of companies.
Speaker 14: It's sort of all industries, all company sizes, they're sort
Speaker 14: of everywhere.
Speaker 2: In twenty twenty three alone, Arney identified eight hundred and
Speaker 2: twenty seven new zombie companies, taking the total number to
Speaker 2: almost twenty five hundred globally, with real estate and manufacturing
Speaker 2: leading the way.
Speaker 14: A lot of zombies are companies that should not have
Speaker 14: gotten financing to begin with, given the sort of easy
Speaker 14: access to capital that we saw coming out of two
Speaker 14: thousand and eight and the financial crisis, and those are
Speaker 14: companies that are going to be very difficult to turn around.
Speaker 2: Normally we think those companies get weeded out, you.
Speaker 14: Would think so, and yet a lot of times they'll
Speaker 14: carry that interest forward, the interest payable as a loss.
Speaker 14: Capital markets are incredibly rewarding and have been very forgiving recently,
Speaker 14: particularly coming out of the financial crisis. There's been just
Speaker 14: real easy access to financing to a lot of companies
Speaker 14: that one may argue shouldn't have actually received that financing
Speaker 14: at such low interest rates that they were able to
Speaker 14: sort of kick the can on the issue and move
Speaker 14: things forward. So a lot of zombies have in fact
Speaker 14: business for a long time. Many of them do ultimately
Speaker 14: they either go bankrupt, they get acquired, or every once
Speaker 14: in a while they're able to turn themselves around.
Speaker 2: One of those so called zombie companies that's come back
Speaker 2: from the dead is the well known bookseller Barnes and Noble,
Speaker 2: back in twenty ten, it teetered on the brink, closing
Speaker 2: hundreds of stores and laying off thousands of workers, and
Speaker 2: then in twenty eighteen became a full blown zombie.
Speaker 15: We've definitely seen an increase in the number of people
Speaker 15: coming through the door, that sense of discovery. You know,
Speaker 15: it's a different experience, you know, to go from table
Speaker 15: to table or day to day and find something new.
Speaker 12: I think people have attachments to to like their neighborhood
Speaker 12: or their corner books. So even if it's like a
Speaker 12: larger company like this, it feels warm to be able
Speaker 12: to come to an actual location and do exploration in person.
Speaker 16: I think there was a number of things that went
Speaker 16: on Amazon came and that took a chunk of the
Speaker 16: easy sales disappeared, a fear that people were no longer
Speaker 16: going to read physical books, they were just going to
Speaker 16: read ebooks, Kendall, Nook and all of that. As people
Speaker 16: lost confident in books, they then started selling other things,
Speaker 16: which then compromised the ability to present.
Speaker 4: Really good bookstores.
Speaker 16: Publishers panicked books. That has panicked, everybody panicked, and I
Speaker 16: think when you lose your compass, then you go off
Speaker 16: in really in the wrong direction, and it was that
Speaker 16: it was a fundamental loss of confidence. And it happened
Speaker 16: not just in the United States, so it happened pretty
Speaker 16: much worldwide, and most large books selling chains got themselves
Speaker 16: into big trouble.
Speaker 2: Elliott Management stepped in with a six hundred and eighty
Speaker 2: three million dollar takeover and appointed James Daunt as CEO,
Speaker 2: and the resurrection began. Since twenty nineteen, foot traffic has
Speaker 2: increased seven percent at Barnes and Noble, and the company
Speaker 2: has opened one hundred and thirteen stores across the United States,
Speaker 2: with another sixty due to open this year. When you
Speaker 2: came in, what did you do? I mean, what were
Speaker 2: your priorities? What did you focus on?
Speaker 4: First?
Speaker 16: Can't sort of dodge around this in any euphemistic way.
Speaker 16: We had to cut costs, and that meant reducing dramatically
Speaker 16: the head office structures healthfully. My other core principle was
Speaker 16: to allow the booksellers in each store to get to
Speaker 16: grips with and start working.
Speaker 4: On their bookstores.
Speaker 16: Now, if you do that, you need far less central
Speaker 16: direction because you're letting the guys in the stores do
Speaker 16: the work. So we were able to reduce our costs
Speaker 16: substantially and then turn to the individual bookstore teams and
Speaker 16: say sort out your stores. And we just started to
Speaker 16: sort of preach that message and put a few practical
Speaker 16: steps in place when COVID came along. So we then
Speaker 16: had a pandemic when all our stores closed. Turns out
Speaker 16: to have being actually a huge stroke of fortune.
Speaker 2: Why was it a huge struggle fortune?
Speaker 16: What we really needed to do was work on the stores,
Speaker 16: and that's quite difficult to do if you're still also
Speaker 16: running your store. It's full of customers. Suddenly we were
Speaker 16: literally having to close our doors, but we kept the
Speaker 16: lights on, we kept the people in the stores. So
Speaker 16: we kept our experienced booksellers and they worked through the
Speaker 16: pandemic inside the stores, moving the furniture around, going through.
Speaker 4: All the books.
Speaker 16: By the time we were allowed to open again, we
Speaker 16: had much better bookstores, just through moving, changing, getting rid
Speaker 16: of the books that shouldn't be there, presenting better.
Speaker 4: Low and behold.
Speaker 16: During provid lots of people discovered reading and the joys
Speaker 16: of reading, and we opened to that re energized customer
Speaker 16: base who were coming back on to high streets with
Speaker 16: much better bookstores.
Speaker 14: The story of Barnes and Nobles obviously a very famous one.
Speaker 14: It's a very popular one, and I think they went
Speaker 14: back to the basics. They looked fundamentally at what customers
Speaker 14: were looking for, They looked at what worked, and they
Speaker 14: spent the time focusing on the areas that were impactful.
Speaker 2: Those keys to success. Understanding customers and individualizing stores was
Speaker 2: something brought with him from his experience owning his own
Speaker 2: independent bookstore in London, and then apply as the recipe
Speaker 2: for success to restore and reinvigorate the Barnes and Noble brand.
Speaker 16: I have the firm belief that if you leave it
Speaker 16: to the books team, and it is a team, they
Speaker 16: will put the best possible bookstore in front of you.
Speaker 16: It is all about recommending the books to the community
Speaker 16: that you know and understand. What we've benefited from is
Speaker 16: because we relaxed and because we've let the store teams
Speaker 16: do pretty much whatever they want, trusted in their common sense,
Speaker 16: trusted in, and we have a vocational group of books
Speaker 16: that's out there. They love books, and they love talking
Speaker 16: about books. They're not selling books, and they also love
Speaker 16: getting on social media and being quite fun and foolish
Speaker 16: about books, and fun and foolish turns out to be
Speaker 16: absolutely what you need to be doing.
Speaker 4: So a lot of our success.
Speaker 16: Has come from us being actually at the forefront of
Speaker 16: things like BookTok and that's our booksellers. As I always say,
Speaker 16: give it to the one with the blue hair.
Speaker 4: And leave them alone.
Speaker 16: It's going to go well. You don't need people with
Speaker 16: gray hair looking like me running a social media and
Speaker 16: that's when you're trying to control things that tends to
Speaker 16: be what it is. When you just let them get.
Speaker 4: On with it, Miss you forgot something, Thank.
Speaker 16: You, now we will have the odd sort of foolishness.
Speaker 16: And again minus, let's not ever react. We know that
Speaker 16: fundamentally our booksellers are hugely motivated in everything they do.
Speaker 16: Support them, encourage them, and when they make us really mistake,
Speaker 16: just get them back into line.
Speaker 2: So if not all zombie companies are headed toward failure,
Speaker 2: if some like Barnes and Noble can not only come
Speaker 2: back but come back strong, how can we tell which
Speaker 2: ones are worth the effort and which ones are better
Speaker 2: off put out of their misery. Angela Demartis is an
Speaker 2: economist who studies zombie companies globally, using machine learning to
Speaker 2: identify zombies and detect patterns in which survive and which
Speaker 2: do not.
Speaker 17: If we compare zombie companies to recover, one of the
Speaker 17: first things that we see is that there are differences
Speaker 17: with respect to leverages, so leverage ratio, but also total assets.
Speaker 17: We see that those are one of the first characteristics
Speaker 17: that change when a company is in the recovery zone
Speaker 17: versus in the zombie in the zombie status. When we
Speaker 17: look at other factors in terms of zombies that recover
Speaker 17: from the zombie status, there are also other characteristics that
Speaker 17: play a role, not only leverage and total assets, but
Speaker 17: also for example, how they use cash, for example, how
Speaker 17: they use equity taxes, working capital, and other characteristics. What
Speaker 17: we find is that the share of zombie companies in
Speaker 17: the United States is much lower compared to zombie companies
Speaker 17: in Europe, so their prevalence is way higher in Europe
Speaker 17: and also emerging countries, and this is mostly relate to,
Speaker 17: for example, differences in the characteristics of these companies. We
Speaker 17: always look at listed firms and we see differences between
Speaker 17: the United States and Europe with respect to, for example,
Speaker 17: their financial structure, but also the capital structure of the company.
Speaker 17: And also what plays a role is differences with respect
Speaker 17: to the institutions, and so this might also explain why
Speaker 17: we see a much lower share of zombie companies in
Speaker 17: the United States with respect to other European countries in
Speaker 17: which the phenomenon is way more prevalent.
Speaker 2: Could a factor be the different ways that companies finance
Speaker 2: themselves in the United States versus Europe. My understanding is
Speaker 2: banks play a much larger role as opposed to capital
Speaker 2: markets in the United States. Exactly.
Speaker 17: Yeah, this is one of the things that we argue
Speaker 17: is one of the main points and one of the
Speaker 17: main difference that we see. So in one of the studies,
Speaker 17: what we do is we look at listed firms in
Speaker 17: the United States and in Europe, and we use machine
Speaker 17: learning methods to sort of develop an early worm system
Speaker 17: that is able to identify zombie companies and also separate
Speaker 17: them from the non zombies and also from the recovered
Speaker 17: and so at the firm level, for example, we see
Speaker 17: that beyond leverage and total assets, there's other characteristics that
Speaker 17: do pray our role, like for example, working capital, for example, taxes,
Speaker 17: for example, shareholders, equity, And we do see differences between
Speaker 17: the United States and Europe that go back to for example,
Speaker 17: differences with respect to capital markets, with respect to the
Speaker 17: financial structure of the company, and also with respect to institutions.
Speaker 2: Back in the United States, James Daunt sees only one
Speaker 2: true threat to his Barnes and Noble falling back into
Speaker 2: its former zombie status.
Speaker 16: For a large book seller. The only thing that we
Speaker 16: can really trip up on is if we lose our confidence.
Speaker 16: That's what happened before, and hopefully it won't happen again.
Speaker 16: But if it did, if you lose your confidence and
Speaker 16: you stop being a really good bookstore, then people stop
Speaker 16: coming to you.
Speaker 2: That does it for us. Here at Wall Street Week,
Speaker 2: I'm David Weston. This is Bloomberg. See you next week
Speaker 2: for more stories of capitalism.