Gross Margin, Netflix billboard, Employee communication, Global growth & supply
3rd October 2021 Evolution Partners Newsletter
“What the wise do in the beginning, fools do in the end.” — Warren Buffett
Hope you’re Thriving!
I’ve had a great week in Darwin on holiday with the family! It’s the first time I’ve had a holiday since before the pandemic, and it’s been great to jump on a plane and getaway. For those who aren’t familiar with Australian cities, parts of the movie Crocodile Dundee was filmed in Kakadu, near Darwin. So I’ve spent a lot of time around man-eating crocodiles and seeing the sights. Two interesting facts from my trip to Darwin: first, authorities took 343 man-eating crocodiles out of the Darwin harbour this year, and second, Melbourne is 20 kilometres closer to Antarctica than it is to Darwin, giving context to the size of Australia.
This week, I came across an interesting discussion about gross margin, which seems like an uneventful accounting measure but is one of the most important measures in your business. The debate was around whether employee costs should be placed above or below the gross profit line. My response was that salaried employees should be below the line because they are fixed, and contractors should be above the gross profit line because they are variable costs. If your revenue suddenly stops, you will stop engaging the contractors, whereas you will need to continue paying employees under your legal obligations.
Last year my podcast partner Kevin and I recorded an episode on gross margin that may interest you. Here’s the synopsis.
Gross Margin – Understanding the most important number in your business. This week on The Growth Whisperers, Kevin and Brad talk about the most important number in business – Gross Margin, why it’s the output of a great strategy, how to understand your Gross Margin, and what to do when you see a declining Gross Margin. Also, they talk about how salespeople affect Gross Margin, what to do about it, and provide simple tools to analyse Gross Margin and one tool to bring discipline to and turn around Gross Margin erosion.
Listen to the podcast here Gross Margin – Understanding the most important number in your business
Also, this week I came across an interesting image from Netflix advocating readers to not give up on their dreams, stating that they started with DVDs. While it’s cute, it’s also interesting to consider that Netflix probably knew that video streaming would revolutionise the way people watch TV in the early days. And that they were building the core competencies through their Netflix distribution of DVDs within vending machines across North America.
Employee communication rule
How do you maintain written communication discipline with employees, if at all? This week I came across an excellent way to set expectations with employees so that you don’t get overwhelmed and they don’t get confused. I love it because it’s as simple as it is impactful, and the CEO I learned it from said it has made their life significantly easier with this simple rule.
I will reply to your emails within 72 hours.
I will reply to your chat messages within 48 hours.
I will reply to your text messages within 24 hours.
On a final note, he said he almost never gets text messages.
Global growth is good
I use a lot of red, amber, green dashboards in the work I do because it makes a clear visual of macro trends. And this week, I found the image below showing the global growth rates per country year-on-year change, which is one of the most significant macro trends I’ve seen in a long time. As you can see, since Q1 2020, most of the world has been in negative growth. Yet, in Q2 2020, the world as a whole is growing at an average of between 10 and 20 per cent.
Global supply is not good
As I’ve discussed before in this newsletter, the world is experiencing both growth and supply chain challenges. Yet, one could make a case that these challenges may continue to get even worse with more inflation and more shortages throughout 2022. One of the reasons is China, where the majority of global manufacturing occurs. China, as you may know, is a communist country and is centrally planned. This means things like electricity usage are allocated in Beijing by party officials instead of governed by the supply and demand of the market.
At the beginning of 2021, Chinese party officials set electricity quotas for each province. As a result of supply chain disruptions from COVID-19 and unprecedented factory demand, many provinces have already used more electricity than planned. Now China doesn’t have enough coal power and has begun restricting electric usage for provinces based on how much electricity they have used this year. They have set a red, yellow, green system for each of the provinces dictating how much electricity they can use, as shown in the image below. Yellow regions can only work four days a week instead of six. Their production has been cut by 33%, and these cuts are likely to last until the Chinese New Year (1 February 2022).
One example of the present issue is that 93% of the world’s stainless steel drinkware production happens in one Chinese province. Of that production, about 50% will occur between now and Chinese New Year. That means that about 20% of the world’s output won’t be built this year!
But products manufactured in the more restricted red regions are being hit even harder, and there are already stories about areas having to operate by candlelight due to the power rationing. This has all occurred because of cascading failures within the global supply chain. If production continues to drop so dramatically over the coming months, then manufacturers will discontinue products, and shortages will lead to us seeing more and more empty shelves.
Then we need to consider what occurs after February when central planners determine next year’s electric quotas. The lack of production caused by electricity shortages will cause unprecedented demand on Chinese factories next year.
Also, there are two other factors impacting electricity production. Firstly China is currently rolling out its “2022 Autumn and Winter action plan for air pollution management”, which further curtails more production from factories with higher pollution. Second, in China, electricity prices are regulated and capped, but against that capped-price, the cost of coal has skyrocketed, and Chinese power companies have a disincentive to produce more power because the more power they produce, the less profit they make.
Read an interesting article about the Chinese electricity issue here China power crunch spreads, shutting factories and dimming growth outlook
Australians are turning to the internet in a big way – an average of 48% of Christmas presents are likely to be purchased online
This week on The Growth Whisperers podcast
This week we’re talking about the curse of being in a great leadership team.
And the curse is that if you leave and you go back to a normal team it can be quite confronting to realise all the small things that added up to make the team great, simply aren’t at the new team.
We discuss what you can do if you find yourself in this position, how you can be a positive catalyst, using your past experiences to help a not so great team most towards greatness.
The curse of being in a great leadership team
Listen to The Growth Whisperers
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