Absence Of Paranoia

Generations are often most accurately defined not by the passage of years but by a set of experiences. Those old enough to remember the attack on Pearl Harbor are in some way different than those whose defining memory is the death of President Kennedy. I know that I am destined to forever perceive the world differently than my children because they were born after the attack on September 11.

The same goes for business where certain experiences forever color ones understanding of the world. I remember as a boy visiting my grandfather, Harry, who had been a produce wholesaler and auction buyer in New York for most of his professional life. The visit was in 1974 and my grandfather seemed out of sorts.

It turned out that one of his longtime customers, H.C. Bohack and Co., had filed for bankruptcy. I don’t know how many readers are of an age where they can remember the name Bohack, but by 1939 they had 740 stores all over Brooklyn, Queens and Long Island. The stores were small, but Bohack was an institution.

My grandfather told me he had once visited the company’s headquarters in Maspeth and that it was a city. It had a railroad line, a fire department, a bakery, and countless warehouses for dry, refrigerated and frozen goods.

What I remember most about that day was my grandfather turning to me and saying, “If you can’t sell Bohack, who can you sell?” — he meant that if the credit wasn’t good for H.C. Bohack and Co., the credit was good for nobody.

That was long ago and far away, and both Bohack and my grandfather have faded from the scene living only in memories. My grandfather’s voice is but a melody I hear deep inside.

In fact, I hadn’t heard that voice for a long time until I discussed the bankruptcy of Winn-Dixie with my father, Michael. He was a produce wholesaler, exporter and importer most of his professional life and his response was to remember when Lincoln Meena, the old buyer at Winn-Dixie, would order 15 loads of honeydew and my father would jump to attention. My father is a more worldly man than my grandfather, specializing for years in investing in junk bonds, so once-proud names such as W.T. Grant and Pan Am are familiar to him. Yet, as he explained the enthusiasm with which he wrote up the orders for Winn-Dixie, I heard my grandfather’s voice once more whispering, “Who can you sell?”

Winn-Dixie had the misfortune of having stores across the south where land was available. So Wal-Mart moved in and Winn-Dixie became schizophrenic, with half the chain trying to compete with Wal-Mart on price and the other half trying to go upscale to compete effectively against Publix and other competitors. But with each approach, Winn-Dixie found itself competing against companies that were better than it was.

And it is worth noting that Winn-Dixie’s problems are not a financial problem; it is not a case of some leveraged buyout that left sound operations with too much debt. It is an operational collapse and one of the greatest retail collapses of all time. It is unlikely to be successfully reorganized in Chapter 11; this once-mighty chain will probably be liquidated.

There are some lessons: Let’s start with being careful about who you let on your Board of Directors. From 1981 to 1986, none other than Sam Walton served on the Board of Winn-Dixie. He left the board shortly before the opening of the first Supercenter. Guess who got the most out of that arrangement? Of course, this may be unfair to Sam. There are no reports he was anything but an exemplary board member. The real question is what did Winn-Dixie do to tap into his knowledge about retailing, general merchandise and employee motivation? Safe to say not too much.

One big lesson is that computers, easy access to capital and the homogenization of society is speeding up competitive threats. Peter Lynch, the famous longtime manager of Fidelity’s Magellan mutual fund, used to say he loved buying stock in retailers and restaurants because the pace of competition was much slower than in manufacturing.

He meant that if a company introduced a new TV, it was instantly everywhere, and if a competitor had an old style inferior TV, that competitor was at great risk. Whereas if you invested in a chicken chain in Boston, even if a superior concept product was launched that year in Seattle, it could be decades, or never, before that concept bothered your business in Boston.

But the Winn-Dixie collapse shows that this is no longer true. It was only 1998, long after the launch of the Supercenter, long after people in the know knew a lot about Wal-Mart, that Winn-Dixie’s stock hit a peak, with the Davis family holdings, a little over a third of the company, valued at $3.5 billion. Today the value approaches zero.

So if between 1998 and 2005, Wal-Mart expansion could erase ten billion dollars in value in just one company, it is easy to see why supermarkets in California and New York are desperately trying to put up roadblocks to Wal-Mart building new stores. Anything to slow down the juggernaut.

But the business lesson is that Wal-Mart is exemplary, perhaps ahead of the curve, but not unique. So everyone in every business has to be paranoid all the time. Andy Grove at Intel wrote a book and got it exactly right: Only the Paranoid Survive.

The challenge is to expect your own Bohack to collapse, to anticipate your Winn-Dixie being pulled out from under you. And at the truly great businesses all around the world, when news of Winn-Dixie’s filing came across the telecosm, the only acceptable response was sweating bullets and thinking, “How do I avoid being next?”