Risk And Return: Laura Trust In Hong Kong

Risk And Returnlaura Trust So I Was Stationed In Hong Kong Where I W

Risk and Return Laura Trust: So I was stationed in Hong Kong, where I was running a division of a large American public company, and we decided to leave corporate America, and do something on our own. And we chose bagels. We found Finagle to be an appealing opportunity for one primary reason, and that was, we thought it had a nice little brand. And we thought we could grow the brand here, and outside of New England eventually. So that’s what attracted us to it initially.

From a financial perspective, the company had four stores, and they did very high volumes at the time, and the margins were quite good. And we saw that there was opportunity to grow, both on the retail side, and, at the time, there was a small wholesale business, which allowed for additional revenue for the company and to maximize the equipment and the back of the house operations. So there was a lot of opportunity. Hi my name is Laura Trust, and I am owner and co-president of Finagle a Bagel. Alan Litchman: Hi I am Alan Litchman, and I am co-president and owner of Finagle a Bagel.

And we like to take gigantic baby steps, which means we try and take, you know, strategic steps, but try and minimize your risk. Okay? And there are some things we’ve done incorrectly, that have cost us a little bit of money, so it’s not the biggest deal. But there are some things we’ve done incorrectly that have cost us a lot of money, and, yeah, sure I’d like to have those over. Trust: When we were looking at growing the business, our strategy was to get it to be about 20 stores, which, we thought, was when you start to show up on the radar of some of the bigger companies.

We were told that “the thing you want to be is a franchisor.†The reason why there are so many franchises out there is, for the franchise alone, the owner of the concept, it’s the quickest, and the most profitable, and the least risky way to grow. And certainly, that requires the least amount of capital. Because for us to build a store was very expensive. For us to allow somebody else to build the store, and just take, you know, the money off of the top, is obviously, you know, a much more profitable way to go. So we were—I don’t know—weeks away from signing a document, potentially, with this company, and when the economy fell apart and credit dried up, the deal fell apart because the franchisees, obviously didn’t have access to credit any longer.

So we had a real problem on our hands. We had 21 stores in the worst retail economy that the country had seen in a century, and we really didn’t know what we were going to do. The differential in the revenue at the store level was, essentially, the profit. So if your revenues go back down by 10 or 20 percent, that’s all profit. So while the people were still coming into the stores, the hit that we took, and the retail world had taken, really affected the business, and the cash flows in the business. Litchman: The CAPM is an effective way to calculate risk. I believe you have to come up with some assumptions on it, to try to understand what’s your risk/return , and what’s your risk-free return, and, yes, it’s an immensely helpful tool to use. And it’s something that you need to sit back and really understand it. And not to simplify things, but no business is run by itself. You know, we have staff, which is necessary, controllers and accountants and we have outside advisors.

Everyone needs to understand these terms, and try your best to adequately use them when you’re making decisions. Trust: So we said to ourselves, “Okay, wait a minute, we have a great product, we have a good brand in New England…how do we exploit that piece of the business?†Because we spent 10 years building this brand, we can’t obviously just, you know, give up on it. And we’ll go bankrupt if we don’t do something. So we decided to start a new business, an entirely new business—a wholesale business—and wholesale our branded bagels to the grocery stores. We had already moved into this facility, which we had actually bought, thinking that we were going to be supplying hundreds of franchisees, so it had tremendous capacity and a lot of flexibility.

And we shifted gears and said we’re going to make the best grocery store bagel we can possibly make and see if we can sell it into the grocery store/wholesale market. Litchman: Risk in the wholesale business is a wonderful question, and it takes a little bit of imagination in the sense that, what we tried to do in our stores is we make a unique product. We make, in essence, a hand-crafted unique product, and what we wanted to do was bring that to the masses, or bring that to the grocery stores. And to do that is difficult. How do you mass produce something that’s hand-crafted?

And we took a lot of time and energy, and we researched a lot, and we decided the best way to do this was to come up with state-of-the-art, or apply state-of-the-art freezing technology, and let’s not change the essence of the bagel. So to jump in the wholesale business was adding a few million dollars in hard assets to the company. But it also involved about a million and a half dollars’ worth of funding the company while we made the transfer. Because you end up with losses. When you’re trying to switch a company around, you’ve got to fund something that’s ongoing to switch it.

So we have, you know, I don’t know if it’s three or four million dollar losses in totality on the new investment in the company. Hey that’s a lot of money! Trust: While we were starting up this new wholesale business, at the same time we really needed to pare down the retail stores. So we began getting out of, or closing stores where leases where coming up. The one good timing thing with the recession was it came after essentially 10 years of business. And many of our leases were up after 10 years. You sign a lot of 5-year, 5-year or 10-year leases, so we had the opportunity to close a lot of stores when the leases were up around that time and we began doing that. Litchman: It’s, you know, the things like in the years we’ve rolled into this company, no one could have foreseen the Atkins issue, um…being unsystematic risk, which would be, you know, “the carbs are bad for youâ€, and it was a very difficult six months, or eight months. You know, I remember seeing that. Systemic risk, we try and think it through.

We try and understand what’s there, you know, leasing the space, coming up with new product lines. What’s it going to cost? I mean, the building we’re standing in had an electrical issue, and we had to add a $100,000 generator. Okay? I mean there’s things that we think about. To ask the question “if we’ve seen a fair return on original investment,†is a complicated question. We bought the company, and the money we spent…we bought 60% of the company, and the money we spent for the 60% of the company has been a home run. Okay? While it was a fair amount of money at the time, in the scheme of what we have today, and what we’ve grown, and what we’ve taken out of the company, the profits we’ve made over the 14 years, that’s inconsequential. It’s an infinite return, and it’s wonderful. If you ask the question about all the monies that we’ve invested since we’ve owned it, yeah, some of them would have negative returns. We try and look at it at a project by project basis, instead of its totality. And some of them, they’re wonderful, and some of them have been horrible. And I like to use baseball terms. And we try and hit doubles all the time, you know, it’s really hard to hit home runs, and you never want to strike out.

Trust: Today, after all of the work that we’ve done over the last two to three years, we are in a much better place than we were. And I think we’re where we hoped we would be when we came up with this strategy three years ago. I will say that the last two to three years was very difficult. And it was very risky in that we didn’t know if we would be successful in the wholesale business, or if we would get the…if we would get to the break-even that we needed to to run the plant. A lot of that was a pure gamble. Closing 14 stores, which is essentially your only source of revenue, was very scary. We had to really take a leap that this was the right thing to do. And that, when we got rid of the stores, that the remaining stores would be able to support the infrastructure and the overhead that we had built up, planning on having 100 franchises. There was a fair amount of overhead. So it was very risky on both sides. Litchman: You know, we’re 18 months or 24 months into it, and the run rate just looks like it’s going to really prove to be a good decision. Parrino, Fundamentals of Corporate Finance, 2/e The Time Value of Money – Boch Automotive Ernie Boch, Jr.: My name is Ernie Boch, Jr. I’m third generation, my grandfather started this company in the mid ‘40s, my father took over in the late ‘50s, and I took over in the early 2000s. We retail automobiles; we have two Toyota stores, two Honda stores, Ferrari/Maserati, a used car center, and a body shop. I also distribute Subarus throughout New England.

We have north or south of $100 million in the lot at one time. New cars, until you get to the end of the model year, pretty much hold their value all year. But with used cars – I learned this from my father – used cars he considered used cars like a fruit stand. You have to turn over the inventory or the depreciation will kill you. It’s like fruit, you have to…you have to sell it while it’s fresh. We have a custom program for the retail stores that we developed that’s part of our proprietary software, which will punch up the oldest vehicle in stock. So if you want a Corolla, the chances of you buying the Corolla that was just delivered yesterday is pretty rare, unless that car is rare, and it’s the only one that’s on the lot, and of course, you’d get it. But we keep the inventory moving very very well, so the car’s are fresh, there’s no damage, everything’s beautiful. We’re not really chasing too much money that’s out there. The factory will help the dealer finance the vehicle.

We pay within 30, sometimes 15. They turn the vehicle, they don’t pay. Mark Doran: Well we’ve…our inventory at this store has been as high as over $50 million. My name is Mark Doran, I’m the general manager at Boch Honda. I’ve been with the Boch organization about 12 years. And I often use the time value of money in my remarks to the managers – the sales managers – on the desk. We have to move these vehicles, and they’re not appreciating as they’re sitting in the back. Boch: I think the business is a success. I mean, it makes money, we’re…we lead the nation in sales, we lead the nation in innovation. There’s many many things we do that other dealers don’t do. Doran: The owner of the company used to pay cash for the vehicles; there was no floor plan. Floor planning is that we finance through a bank that we have a relationship with. It’s cost effective for the dealership and for the owner of the company for us to have that relationship with the bank. Boch: Well, we don’t have any mortgages, so we’re not paying the bank for the land and the building, and the strict cost control and the sheer volume that we do allows us to sell for less. Commercial: Nobody smashes sticker prices on new 1966 Dodge’s… Doran: On pre-owned cars, we…the rule of thumb is 60 days, and if we haven’t sold the car in 60 days, we send it to the auction. On new cars, we’ll have some cars in inventory, but we’d like to move them within 90 days. Commercial: The second-largest Toyota dealer on the planet. Boch: My two Toyota stores sell as many cars as five or six or seven Toyota stores combined. Doran: There are many options to the customers on financing. Boch: You can pay cash for the vehicle out of your savings or wherever, you could finance it yourself with your credit union, your bank, or you could finance through us. And we are a pass-through, you aren’t financing with Boch Automotive, you’re financing with Toyota Motor Credit, or one of the many banks that we use. Doran: It makes the whole process a lot easier, if we can accommodate them and finance the vehicle here, they can often take the delivery of the vehicle the same day.

Sample Paper For Above instruction

Introduction

Risk and return are fundamental concepts in finance, representing the potential profit and risk involved in investment decisions. This paper explores the practical application of these principles through the real-world examples provided by Laura Trust and others, illustrating how strategic decisions, risk management, and understanding of financial tools like the Capital Asset Pricing Model (CAPM) influence business outcomes.

Understanding the Business Context

Laura Trust's narrative about transitioning from corporate America to running a bagel business underscores the importance of strategic planning in entrepreneurship. The decision to pursue growth via franchising reflects an understanding of risk minimization and capital efficiency. Similarly, the challenges faced during economic downturns, such as store closures and the shift to wholesale markets, exemplify how external risks—systematic and unsystematic—impact business viability. These experiences highlight the necessity for entrepreneurs to assess risk carefully and adapt strategies accordingly.

Risk Measurement and Management

The CAPM provides a systematic framework for evaluating risk-adjusted returns, incorporating assumptions about risk-free rates and market premiums. As Litchman emphasizes, understanding and applying CAPM allows business owners and managers to make informed decisions about investments and growth strategies. The examples from Laura Trust's enterprise demonstrate how risk assessment influences decisions like expanding into wholesale markets and closing unprofitable stores. Managing both systemic risks—such as economic downturns—and unsystematic risks—specific to market segments—is crucial in maintaining business resilience.

Growth Strategies and Risk Considerations

The case of Finagle Bagel's shift toward franchising and wholesale operations illustrates how strategic growth can either mitigate or amplify risk. The decision to move into wholesale, involving significant capital expenditure and technological innovation, exemplifies risk-taking in pursuit of expanded market reach. Closing stores during a recession reflects risk mitigation to protect cash flow. The balance between aggressive growth and cautious risk management underscores the importance of incremental decision-making, akin to taking "doubles" rather than "home runs," in maintaining sustainable business development.

The Role of Financial Tools

Utilization of financial tools such as the time value of money (TVM) is pivotal in managing inventory and financing arrangements within automotive sales. Doran's emphasis on moving vehicles quickly to avoid depreciation demonstrates strategic application of TVM principles. Finance options, including relationships with banks and third-party credit providers, further exemplify how effective financial planning supports operational efficiency and growth. These practices underline the critical role of financial literacy in optimizing risk and return profiles for business success.

Conclusion

The practical insights from these diverse business cases underscore that understanding and managing risk are vital to achieving favorable returns. Whether in food retail or automotive sales, strategic decisions grounded in financial analysis and risk management frameworks determine long-term sustainability and profitability. Entrepreneurs and managers must continuously evaluate risk, leverage financial tools, and adopt incremental growth strategies to mitigate potential downsides and capitalize on opportunities.

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