Dec 15, 2014

#86 My Kind of Market

All Rights Reserved © 2009 Thomas W. Day

About 30 years ago, I worked for a small "acquire and mangle" company in Omaha (Sort of a mini-Bain Capital run by three min-Mitt Romneys.). The business plan was to buy companies that made decent products, "turn them around" so that the acquisition company's managers could milk the maximum profit in the minimum time, and sell what was left to the next set of suckers before the cooked books could no longer hide the damage done. One of the companies we bought was owned by a semi-retired engineer who told me "the secret of a successful retirement." He said the trick is to find a product or business that had past its prime, but still had customers with money to spend. For an engineer, the perfect market would be some sort of technology that was approaching obsolescence but still had a core of affluent customers. In that market, a business will have a predictable cash flow and minimal competition and a reasonable business lifetime.

For example, the business my employer bought from this engineer made high voltage coil testing equipment. That product was, and probably still is, in steady demand from transformer and electric motor and generator manufacturers and high-end users, like power plants and heavy machinery. However, building and testing that kind of equipment required manufacturing exposure to extremely dangerous voltage and current. Larger companies tend to shy away from products that occasionally fry assembly workers and customers. So, those constraints resulted in no competition and an exorbitant profit margin. His product was so consistently profitable that even the characters I worked for couldn't screw up the business--and these were some seriously talented MBA-types who normally had no problem busting bowling balls in padded rooms. Two years after I left, they sold that one division to a much larger company for a reasonable profit.

Since that career moment, I've kept my eye open for that kind of product or business. The older I get, the more interested I become in self-employment (especially if I can ever figure out how to avoid doctors and hospitals). I've identified a few of this sort of business opportunity in thirty years since I met that insightful engineer.

One of the first examples that I spotted was practically anything related to high-end bicycles. On a trip to the old Steamboat Springs Vintage Motorcycle Week, I stumbled on a custom bike builder brazing together a titanium frame road bike for a wealthy, overweight (saw his picture), middle-aged wanna-imagine-myself-a-bicycle-racer. This custom bike was going to cost the rich customer $10,000! Yeah, it had top-of-the-line components. True, the paint job was really cool. More importantly, the builder got to spend two months working on one bike and he made a good living doing it.

I picked up a bicycling magazine in that shop and read a three page article about how to blow snot while bicycling; how to use a "farmer's Kleenex" without getting it on your expensive Lycra. I realized that any customer-base dumb enough to need that kind of assistance with what ought to be an animal response is my kind of customers. I've kept bicycle crap in mind, ever since.

If you don't believe me, check out a high end bicycle shop. Look at the $2,000-10,000 bicycles and explain to me how a 22 pound bicycle can cost as much as a liter sportsbike. Better yet, look at bicycle helmets. Those things are as low-tech as a motorcycle faceshield and, yet, a "decent" bicycle helmet can easily set you back $100-250. There is no way a bicycle helmet has even a fraction of the manufacturing/liability costs of a motorcycle helmet, but even with a much larger customer base bicycle helmets' retail price is in the same ballpark. Bicyclists are clearly a total sucker market, but that is so obvious that everybody wants a piece of it and bicycles are unlikely to "approach obsolescence."

More directly in my line of sight has been audiophile products. A company like Mapleshade will give you an idea of how many crazy, over-priced products are possible in that realm. This guy sells a 15" x12" block of maple for $300 and it is intended to be a stand for a power amplifier! Now we're talking about a business aimed at complete whackos. Whackos with $300 to spend on $30 worth of wood. There are so many crazy products in the Mapleshade catalog that I wouldn't know where to begin creating competition for this dude. That's not a bad problem to be stuck with.

Two years ago, at least a couple of sections of the motorcycling market were ripe for this kind of marketeering. The guys who sold $100 billet aluminum foot pegs for cheese-burners, for example. Why do you need a lighter foot peg on an underpowered 800+ pound motorcycle? How many things are wrong with a foot peg shaped like a spike? How about the characters peddling stick-on faux $350 "works" carbon fiber tank covers? Sure, the real "works" riders glue crap to their steel tanks to make them lighter. For the yuppie "adventurer tourist," at least a couple of companies sell spray-on dirt products, one of which is "a bottle of real Shropshire mud" for the owners of dual-purpose bikes that see the same adventurous use as 99.99% of the world's SUVs. You can spray this crap on your $80,000 Range Rover or $125,000 Porsche Cayenne Turbo S, too. Obviously, no sane person would ever take one of those finicky rattletraps off-road. Whether a sane person would buy a Range Rover is another question.

In today's wreaked economy, I'm questioning the viability of some of those products. When 15% of us are out of work and 360,000 of our homes are in foreclosure and 20% of the properties listed for sale are bank-listed, I suspect that hippo-lightening and fake mud is not at the forefront of many consumer's minds. Fluffy, pointless products don't sell in times of depression. So, I'm back to scanning the mid-tech business world for something practical with limited competition, moderate setup-costs, and wealthy customers.

Bummer.

It's just as well, though. I've always suspected that I needed a cool Italian last name or upper-crust British accent to sell audiophile gear. Not many rich guys are silly enough to buy a racing bicycle from a fat guy who clearly couldn't out-petal a Hoveround. There is still the motorcycle market, but I wonder if I could sell that stuff without laughing? It takes a lot of self-control to take advantage of P.T. Barnum's marketing advice, "There's a sucker born every minute" or H.L. Menken's observation, "Nobody ever went broke underestimating the intelligence of the American people." Just ask any banker. There's a reason that bankers live with a perpetual scowl, though. You have to make an effort to keep from laughing in the faces of your intended victims.

Winter 2009

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