Daily Speculations
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The Marathon Runner
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(address is not clickable)11/08/2005
Dept. of Trees & Markets: Dutch Elm Disease Among Retail Chains
Chains retail with admirable efficiency, but their vulnerability to weak links curbs my enthusiasm.
Consider the American Elm. There are two basic vascular strategies for tree structures: diffuse-porous and ring-porous. The vessels of ring-porous trees like elms are more efficient, but are more likely to become clogged. Dutch elm disease suffocates the trees by clogging low cells so that water cannot flow up from the roots to the leaves. (Leaves use water to dissolve minerals.) Moreover, because Dutch elm disease spreads through roots, it can destroy a whole grove at once.
This strikes me as being true of chains and franchises. Yes, they are efficient in branding a reputation and building a clientele. A good chain repeats its formula, ring after ring. The formula is noticed by customers as "the (insert chain) Way" of doing business. A good chain's philosophy permeates everything it does.
However, the chain's hard-earned reputation is vulnerable to the weakest link. Its reputation is often only as strong as its worst stores or products. A quality decline at the lower levels can be disastrous. It can kill individual stores, but it also spreads amongst the grove.
A "decline in quality" may be hard to "count." But I would suggest that when it's obvious to a client or an investor, it is time to get out. This has worked for me, a person inclined to optimistically stay in with my few "winners" too long, enough times that it clearly not random.
Russell Sears is a star runner and actuary.