Cory's Cookies and The 92% Tax Rate
Marginal Revolution recently did a post on CNBC’s The Profit.<br>The Profit is a reality TV show where the host, experienced managerial talent Marcus Lemonis,<br>buys into a struggling small business and uses his management expertise to bring it<br>back into profitability. Out of curiosity I decided to watch a few episodes myself<br>on YouTube. Of the full length episodes available on CNBC’s channel, the one<br>featuring Mr. Cory’s Cookies really stood out to me. In many ways this episode is<br>the perfect representation of the series core themes. Cory’s Cookies is being run<br>by Cory, who is 13 and wants to be a big businessman when he grows up, and his<br>mother Lisa who is by her own admission an uneducated person learned of little but the<br>school of hard knocks. The overall thrust of the episode is that Marcus invests<br>$100,000 into the company, and then builds the family business a real supply chain.<br>The entire episode is fascinating,<br>and I really think that it’s worth your time to give it a watch. However this<br>post is not a review of the episode itself, but rather an exploration of something<br>interesting that’s highlighted within it.
At 17 minutes and 32 seconds into the episode,<br>Marcus sits down with a copacker that Lisa has done a licensing deal with. He’s<br>frustrated to learn that the copacker has managed to get Lisa to sign a 8% royalty<br>deal giving them all retail rights to the Cory’s Cookies brand. As Marcus puts it,<br>a million dollars made from retail sales translates into $80,000 for Cory’s Cookies.<br>This on its own isn’t particularly interesting, on the surface it would just be a<br>predatory licensing deal. What’s interesting is that when Marcus calls the copacker<br>out on this, they reply that 8% is a standard industry royalty. And Marcus doesn’t<br>particularly object, which leads me to believe that’s probably true. When I heard<br>this it blew my mind, it’s an implicit commentary on the value of a business that<br>gives us a platform from which to deconstruct the notion of a “business idea”.
So What Goes Into A Good Business Idea, Anyway?
Here’s a conversation you may have had with a friend before:
YOU: Man, I really want to do a business or something.
FRIEND: Well you could sell lemonade. :P
YOU (thinking to yourself): Thanks for taking this seriously, jackass.
There’s an intuitive level on which you understand “sell lemonade” or “sell cookies”<br>is a bad plan of action for starting a business. Yet Kraft makes millions doing<br>just that so what’s the difference?<br>Is it just capital? Well, no. I’m willing to bet if I dropped 15 million dollars<br>into my average readers lap with the stipulation that they use it to make a<br>kickass lemonade brand their success would be far from consistent. Traditionally<br>economists identify three major resources necessary for business:
Land
Labor
Capital
More recent business texts add a fourth necessary resource that goes by several<br>different names. Generally this is some form of managerial talent or risk taker<br>willing to try a new enterprise. Attitudes toward this range from “that’s dumb”<br>to “this is essential and we’re stupid for not including it earlier”. I started<br>out in the first camp but now find myself firmly in the second. To explain why,<br>it’s illustrative to take a trip back to Mr. Cory’s Cookies and look at exactly what<br>it is Marcus is doing to help their business. Right away Marcus takes note of the<br>fact that the copacker deal only applies to retail, and focuses on making a kickass<br>direct to consumer supply chain. A major problem in doing this is that the cookies<br>are not made with preservatives so their shelf life is absurdly short. Because of<br>this the original copacker Lisa tried to bring the cookies to market with couldn’t<br>replicate Cory’s recipe in a useful way. To make it happen Marcus employs:
Rastelli Global , a shipping company that can work around the fact that Cory’s Cookies<br>have a painfully short two day shelf life using flash freezing technology.
Century Packaging , a printer that can get Cory’s Cookies a proper container to<br>put their cookies in for Rastelli to ship.
A copacker that is only handling the manufacture of cookies, not other aspects<br>of the business like the one Lisa signed a licensing agreement with. As a consequence,<br>they’re getting paid on contract to make cookies, not run the whole supply chain.<br>This leaves a lot more profit margin for Cory’s Cookies to take advantage of.
It’s important to note that these are not random companies, at the very least Rastelli<br>Global and Century Packaging seem to be companies that Marcus has already worked with<br>in the past. Critically, he knows they’ll get the job done at the price point he<br>wants. This information on not just what kind of firm to employ but which ones are<br>trustworthy, along with the necessary resources to make the transactions happen,<br>is worth 92% of the Cory’s Cookies business. Going by the example of the copacker<br>Lisa signed a licensing agreement with, we can conclude...