On May 5th 2020 Disney released its financial earnings. It didn’t go well. The company reported a 58% decrease in operating income for the segment they call “Parks, Experiences and Products segment” compared to the same period last year. What can we learn from this?
Firstly, in person experiences are critical to Disney as a company. They make content which they hope consumers will purchase in person at resorts, hotels, and stores. Covid19 naturally put a big dent in this plan. What else can we learn?
Disney is going to have to shift its strategy going forward if it wants to remain a key brand. With mandatory caps on how many people can attend theme parks Disney will need to hunt for cost reductions or new sources of revenue. One bright spot for the firm is on-line streaming platforms and services, including Disney+ and ESPN.
On May 2nd 2020 Berkshire Hathaway released its annual earnings report. Of note: they fulled divested from their airline holdings. Warren Buffett sees a world with less travel. His partner 96 year old partner, Charlie Munger, is becoming an avid zoom user.
What can we glean from the earnings calls of Disney and Berkshire? I took away a few key lessons that are highly correlated with corporate earnings and cost structures.
Firstly, businesses with high fixed costs and high variable costs are seeing record declines in profitability. Capital intensive businesses (read: airlines and Disney’s amusement parks) are driving negative cash-flows for their respective shareholders. Secondly, asset light businesses (read: streaming platforms) are performing terrifically.
When you think about your line of work you should ask yourself if your business has high or low fixed and variable costs? If your variable costs are high, and you can’t trim variable costs rapidly, you likely will need to search for ways to reduce your corporate overhead. This is where remote work comes into play: it is a viable, sustainable, and holistic solution to driving productivity gains while reducing costs.
According to Disney’s balance sheet, they have roughly $60 billion of property but only $23 billion worth of intangible assets, which includes goodwill, brand recognition, copyrights, patents, and trademarks. If your firm is a real estate company that ratio might be healthy. But if you are not in the real estate business you will need to find ways to hold assets other than land. One way to become more profitable is to have your workers – or a large percentage of them – work remotely.
The advantages of remote work to your balance sheet are two-fold. Firstly, you can reduce the amount of Property, Plant, and Equipment you own. Reducing PPE will free up capital to invest into other asset forms. Secondly, by not owning buildings or expensive leases, for example, you can invest in employee re-training or health benefits. Or you can take these savings and use the extra cash to pay a special dividend. Or you can invest in R&D.
The goal of a successful manager is to either deploy human capital or financial capital successfully. Working from enables a manager (or CEO) to do both at the same time. You can leverage remote staff to reduce costs, increase productivity (less time commuting means more time working), increase collaboration, and enhance client centric outcomes because your staff has more time to listen to, engage with, and sell to clients.
Covid19 and the financial earnings that are now being reported is showcasing two types of companies: firms that can adapt and thrive because they are asset light and have dynamic workers and firms that are stuck holding investments that can’t generate returns. Disney is a great example of a hybrid firm: it’s streaming service are performing well but its amusement parks are suffering. Travel to Disney world has been halted for parents and children as well as those looking to honeymoon in Disney. The only people visiting Disney world will be the NBA.
Berkshire had a similar analysis with the airline stocks it dumped. When you reflect on your own business you should think about the capital intensity of your investments and understand that people – and their minds, knowledge, and skills – can add differentiation in today’s economy more so than fixed, legacy assets.
In summary, some firms are structured such that they can’t allow remote work and can’t open during societal shutdowns. This is too bad for these companies; they will lose revenue and see decreased earnings as a result. If you are lucky enough to not work for this type of company you can start planning today to reduce your footprint and costs in unique ways that add value for your staff, your clients, and your long-term balance sheet. One of the great ironies of heavy fixed cost businesses is that they are predicated on some belief or future vision of what society will look like. But society changes rapidly, and so do the needs of your staff and your clients. Stay asset light, keep a minimal PPE footprint, and empower your staff to do great work. This is how to create long-term durable advantages and creative outcomes. After all, this is how Disney got started.