The Speculator -- A soulful lesson on investing and real value

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Posted 4/26/2001

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The Speculator
A soulful lesson on investing and real value
An afternoon at Sylvia's soul food restaurant is a tasty reminder that what makes a good investment is first and foremost a good business.
By Victor Niederhoffer and Laurel Kenner

Whenever euphoria permeates the air, whenever readers are on edge for not participating in a 50% rally in the Nasdaq ($COMPX) , whenever the end of the month approaches with all its attendant bearishness, we go back to the fundamental sources of wealth to maintain our objectivity and distance from the madding throng.

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We know of no better way to do this than to tap into what we consider America's greatest resource -- the character, talent and energy of its millions of entrepreneurs. To this end, always seeking to provide a meal for a lifetime as well as meals for a day, we visited an archetypal example of success -- Sylvia's famous soul food restaurant at 126th Street and Lenox Avenue in Harlem -- in hopes of finding some market lessons and good food.

We were not disappointed in either respect. We were lucky enough to find Sylvia herself, who founded the restaurant in 1962, behind the counter among a crowd of waitresses. Impressed that a successful restaurateur would have an apron on at 3 p.m. on a fine Saturday afternoon, we started asking her questions. She graciously talked about business, child rearing and life while we dined on fine barbecued ribs, catfish, yams and collard greens.

People talk about starting from the ground up in business, and it occurred to us that it might be wise to learn from the ground up from Sylvia Woods. The entrepreneurial spirit is a reservoir that creates the well-being and independent spirit that is the essence of American way of life. There are 5.5 million businesses in the United States, according to the latest Census. Fewer than 10,000 are public, and 2.7 million have five or fewer employees. The situation is by no means static; new incorporations exceed half a million a year -- and an equal number of businesses may be formed without incorporating.

What a world of hope and energy devoted to providing products that people are willing to buy is contained in these figures. Here are some lessons distilled from the story of Sylvia, who turned hope and energy to her advantage:

Make the most of what you have

Work hard. For years, Sylvia put in 16-hour days. "I opened and closed the doors." Even now, she still works five or six hours a day.

Learn your business from the ground up.. She worked seven years as a waitress before buying the luncheonette where she worked.

Have confidence in yourself and let the family help. Nobody in New York would give Sylvia a loan, but her mother believed in her and mortgaged the family farm so she could buy the restaurant with cash.

Build on what you know. She learned to cook on the family farm.

Treat customers well

Make all customers feel welcome. Walk into Sylvia's at any time of day, and you'll find locals as well as people from all over Manhattan who come up in taxis and limos. Everyone is treated nicely, and the mix provides a healthy excitement that keeps everyone interested and a little on edge. Crizette Woods, 34, Sylvia's youngest daughter, says the warmth of the people is what customers like most about the restaurant -- the feeling of being in grandma's kitchen. The net result: During her 39-year history, she has not had one burglary or robbery. The proverb "A well-fed man is a happy man" comes to mind.

Pay attention to customers' needs. When the restaurant closed on Thanksgiving for the first time a few years ago, the Woods family returned to find a bushel of mail from angry customers who had brought relatives for a turkey feast, only to find the doors closed. Since then, Sylvia's has remained open except for Christmas Day.

Provide a product that gives your customers happiness. The barbecued ribs and yams are designed for enjoyment, not dietary improvement. People are more interested in happiness than health, and will spend more for it. Even Sylvia's has mercy on those unable to partake, though; Crizette told us that Bedelia, her older sister, added health-conscious grilled items to the menu, and substituted turkey for pork in the vegetable dishes.

Music adds to profit. Sylvia has jazz bands entertaining on weekends, and gospel singers for Sunday brunch. People enjoy being entertained. The combination of food and music aids the digestion and loosens the wallet.

Step out

Teach your kids. All four -- Van, Bedelia, Kenneth and Crizette -- work in the family business. Even the smallest grandchildren wipe counters. Sylvia's son, Van, in 1992 started a prepared foods business; Sylvia's Soulfood mixes and canned goods are now sold nationally in such chains as CVS and Kroger, doubling the restaurant's revenue. A skin care line is being sold in drugstores. Bedelia manages the catering business, Kenneth does the finance, and Crizette handles the books, personnel and public relations.

Invest in real estate. She owns the entire block around her restaurant. Property values have shot up in recent years. With Bill Clinton moving his office close by, prices may continue to improve.

Execute opportunities well.. Three years ago, she was offered a lucrative contract to cater for 10,000 at the Bloomberg summer picnic. Her ribs, yams and collard greens were the hit of the party, and she has been invited back two years in a row. She has catered the Grammies for four years, and recently was the sole caterer for 7,000 at a party for Sister to Sister, a magazine.

Play to your strength

Segment your markets. Sylvia has a business catering for government and high-end business. She sells canned goods, sauces and mixes to the grocery trade, a business that has doubled her revenue.

Maintain a good profit margin. The restaurant industry's operating margins are about 20%. Our own meal of catfish, ribs, collard greens, yams and tea came to $20 a person. Assuming her cost of goods was $5, or 25%, that leaves 55% to cover her labor and other operating expenses before descending to the industry average.

Expand. Sylvia, who couldn't get a loan from anybody but her mother 35 years ago, had backing from J.P.Morgan (JPM, news, msgs) for a restaurant in Atlanta. A restaurant at John F. Kennedy Airport in New York opens soon.

By the way, we asked Sylvia if she's in the market...and she told us she's only now thinking of buying stocks.

Ordinarily, after a good meal with some lessons for business, we'd feel like going to sleep. Instead, we wanted to do some counting to generalize the lessons into a meal for a lifetime.

Industrywide, a disappointing menu
Sylvia mentioned casually that her business never has a downturn. "People always eat." Inspired by her thought, we checked the last three recessions (defined as at least two quarterly declines in gross domestic product, or GDP.) We found the stocks listed in the S&P 500's ($INX) food industry group beat the index by an average of 9 percentage points for the duration of the recession.

The S&P restaurant index, which only has five stocks, has had mixed performance this year. Tricon (YUM, news, msgs) and Darden (DRI, news, msgs) are up 24% and 15%, respectively, but Wendy's International (WEN, news, msgs) is down 8.8%, Starbucks (SBUX, news, msgs) is off 12% and McDonald's (MCD, news, msgs) is down 21%.

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We turned to Value Line, which lists 26 publicly held restaurant companies with combined sales of about $50 billion. The group has performed in line with the market-i.e., badly -- over the last year and a quarter. In 1999, it underperformed the S&P 500 by 25 percentage points. There's a vast preponderance of insider selling, with recent buying in only three: Luby's (LUB, news, msgs), Lone Star Steakhouse (STAR, news, msgs) and Starbucks. Starbucks is ranked 2 for timeliness by Value Line, 1 being best, but the others are lower. As always seems to be the case in such situations, Starbucks has about doubled in the last year. Value Line's analysis of the restaurant industry is that the fastest-growing segment is the moderately priced casual dining sector.

One food distribution stock that looks interesting is Fleming Industries (FLM, news, msgs). Value Line has awarded Fleming a "1" timeliness ranking, and the last insider trades were buys in September.

All we can say is that if Sylvia decides to heed the call of an underwriter in the near future, she and potential investors may find it's a gold mine. When the stock market is in turmoil, it's easy to forget that success and well-being comes from the millions of Sylvia's that are in the business of keeping customers happy.

No one taught Sylvia to be great, but she should teach us.

At the time of publication, Laurel Kenner and Victor Niederhoffer did not own shares in any of the equities mentioned in this column.

MSN Money's editorial goal is to provide a forum for personal finance and investment ideas. Our articles, columns, message board posts and other features should not be construed as investment advice, nor does their appearance imply an endorsement by Microsoft of any specific security or trading strategy. An investor's best course of action must be based on individual circumstances.