February 28, 2025 • 38 mins
This week, we look at India’s growth story and its taper as India-US relations grow more complicated. And, luxury brands are struggling to stay afloat… are secondhand retailers a sound solution? Plus, a close look at some of the advantages and pitfalls of the White House rolling back regulations. Later, what does it mean for a company when it reaches zombie status?
See omnystudio.com/listener for privacy information.
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:19):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism this week. As luxury brands fight to
regain their momentum, does a secondary market help or hurt?
And what the facts show about deregulation and its effect
on growth and productivity. Plus when a so called zombie
(00:40):
company can come back from the living dead. We tell
you the story of the return of Barnes and Noble,
but we start with a story of true conflict when
the approach of the largest country in the world seems
at odds with the fifth largest economy. When President Trump
met with Indian Prime Minister Mody earlier this month, the
(01:00):
tone was cordial, but it was a step back from
the so called bromance that started in Trump's first term,
and what the two men said were their core interests
appeared to be in true conflict. I will very simply
put America first, Make in India, make for the glow.
(01:25):
Until now, the Indian growth story has been one of
the biggest of the post pandemic world. Its growth rate
touched eight percent. Its benchmark stock index, the Nifty to fifty,
has outpaced the S and P five hundred since the
start of twenty twenty one, at least until recently, and
investors have started to look elsewhere. Indian equities saw almost
(01:49):
twenty one billion dollars of foreign inflows in twenty twenty three,
but they plummeted to just one hundred twenty four million
dollars last year, and investors have withdrawn more than twelve
billion dollars so far this year. So has something gone
wrong with the India growth machine? And if so, where
are we seeing a slowdown or just a blip. Rasher
(02:12):
Sharma is the chair of Rockefeller Capital Management and author
most recently of The Rise and Fall of Nations.
Speaker 3 (02:20):
Ever since I've been investing in this country for over
three decades, which is that this is a country that
consistently disappoints the optimists in the pessimists.
Speaker 4 (02:29):
Yet over the.
Speaker 3 (02:29):
Long term it's a very good equity market story. In
particular because even after the Indian stock markets big correction
over the last few months, the only stock market in
the world in the last thirty to forty years which
has produced comparable returns to America has been India. So
it's this very steady compounding story. But yeah, there are
(02:50):
times when people get a bit ahead of themselves, the
excitement gets a bit too much. I think we may
have reached that point last year when India became the
most expensive equity market in the world, literally even more
expensive than America at the top. So that was just
telling you that the excitement had gone into a head.
And what we have seen in the last few months
is a bit of a reset where the optimists are
(03:13):
getting a bit disappointed.
Speaker 5 (03:15):
Now.
Speaker 3 (03:15):
After sort of thinking that maybe India can break out
and grow at seven to eight percent, there's a realism
setting in that India's trained growth rate is closed to
six percent rather than seven to eight percent, a pretty
decent growth rate, and that they'd still need to carry
out some positive reform steps to even keep a six
percent type growth rate going. So I think what we're
seeing just now is a return to that old reality,
(03:38):
so to speak, which has been the case for India
for thirty to forty years, that it's a country which
steadily compounds, steadily grows.
Speaker 2 (03:46):
But that might not be enough to reach Prime Minister
Motive's target of making India a developed nation by twenty
forty seven. Ragharam Rajan is a former governor of the
Reserve Bank of India.
Speaker 6 (03:58):
I think we're reverting around the six percent now. The
blip downwards recently has more to do with the fact
that we had elections across the board last year and
spending on infrastructure, which has been a big part of
the growth story, has sort of faltered over this period.
I think that will come back, so we'll get back
(04:19):
to six now.
Speaker 4 (04:20):
The question for India is six.
Speaker 6 (04:22):
Enough, And unfortunately the answer is not, because we're also
a country that's growing old, and we do want to
grow rich before we grow old, and that's unlikely at
six percent.
Speaker 2 (04:34):
The Indian government has stepped up efforts to re energize growth,
announcing tax cuts in its annual budget in an effort
to boost middle income spending.
Speaker 6 (04:43):
We have a lot of young people and as a result,
the dependency ratio, the number of very young people who
can't work and very old people who can't work, that's falling.
Speaker 4 (04:53):
And this is the.
Speaker 6 (04:54):
Time that every Asian economy has experienced a burst of growth,
still growing at the old six percent and not enjoying
that burst. Something is not working as well as it should,
and that's jobs.
Speaker 4 (05:09):
What you see around India is not enough young.
Speaker 6 (05:12):
People have jobs, not enough jobs are being created, so
in a sense, we're not making full use of our
capacity even at six percent growth.
Speaker 2 (05:21):
Some foreign companies have seen potential in the growth of
the Indian market as an alternative to China. Apple has
been slowly growing iPhone production in the country, while more
recently Tesla stepped up hiring in India ahead of a
possible entry into the market. This so called China plus
one strategy of India being a substitute for manufacturing in
(05:43):
China may have worked in the past, but some question
whether it will in the future. Ridika Bachra is Mahindra
Group's Vice president of Americas and a senior fellow at
the Atlantic Council.
Speaker 7 (05:56):
What I have come to realize in the last twelve
months is there is a strange realization with the Indian
policy makers that they cannot sell themselves anymore as a
China plus one strategy. It has to be much beyond that,
because if you look at it, the Indian consumer is
(06:17):
not only inclined towards luxury and lifestyle products unlike a
lot of other emerging markets, but also has a very
strong middle class consumer base which is also price conscious.
So if you put these things together, where India is
trying to sell itself as not just a China plus
one strategy, but an innovation in manufacturing hub with a
(06:40):
skilled workforce, with a solid consumer base, and trying to
differentiate itself with available worker versus available skilled workers. I
think it's a great story to tell.
Speaker 2 (06:53):
Whatever the theory, foreign investors have not always had an
easy time investing in India. Just ask Olkswagen. They were
hit with a record one point four billion dollar tax
bill from the Indian authorities for alleged tax evasion, and
the German automaker raised questions about the very survival of
its India unit.
Speaker 3 (07:13):
Well, because I think it's still a very difficult place
to do business on the ground. David, this is something
which you know, we have felt for a long period
of time that to negotiate the Indian landscape is toff
given the regulations that you still have in place, given
the fact that you can have the tax authorities or
other people come up and present bills to you in a.
Speaker 4 (07:34):
Way that you don't really know.
Speaker 3 (07:36):
A lot of the state chief ministers in India realize this,
and I think this is something which we need to
focus on, which is that a lot of the attention
is on more the center and what DELI is doing
and what initiatives they're taking. But India is a very
federal country and you have so many state chief ministers
(07:58):
with a lot of power to do what they have
to do on the ground. And I think what we
need to see in India foreig and we see some
signs of that is much greater so called competitive federalism,
where the states compete with each other to get foreign
investment because a lot of these regulations and the tough
environment it is to do business in India is something
(08:20):
that some of these state chief ministers need to make
friendlier and not just the center.
Speaker 2 (08:25):
Whatever direction it's going right now, what is the current
state of competitive federalism when it comes to economics? Are
there certain states that it's more conducive to invest into
in India today than others?
Speaker 3 (08:36):
Well, that's been the case in India for a while
now that if you look at India, about twenty percent
of India's population is in the southern states, and yet
those states account for more than thirty percent of India's
GDP and the per capita income is also a lot higher.
Now there are states in the south, such as Karnataka,
(08:56):
which we know well because of Bangalore, which is the
tech capital of India for all practical purposes. And what
we see there is that places like Bangalore and Karnataka
tend to attract much greater foreign investment. And generally some
of the southern states like Karnataka and Telangana and Tamil Nadu,
(09:17):
those states have attracted much more foreign investment over time.
Speaker 7 (09:22):
There is a historical reason for why South has managed
to sort of lead from the front, and those reasons
are the ports that are situated in southern area. They
were the most important reason for traders to come to
India to begin with, and that led to a huge
amount of trading community moving and living in South of India.
(09:45):
In the recent past, we see inphasis taking a lead
in ensuring that they become the global service providers for
technology and that started in South of India and Bangalore,
and one thing led to another where a huge amount
of other tech companies started sort of launching based out
of South India because of the skill availability of engineers
(10:07):
in the southern part of India.
Speaker 2 (10:09):
But even if India is moving to loosen restrictions on
foreign investment. It is slow progress and Rajah and warrens
they might be focusing on the wrong sectors. Prime Minister
Motor is pushing to grow the manufacturing sector. Does that
make sense.
Speaker 6 (10:24):
I think the days of growing manufacturing to get strong
growth in jobs are over. I think it's as true
of India as it is of the United States. And
the reason is simply this that increasingly manufacturing is becoming
much more automated, much more dependent on machines. If you
look at an assembly plant for cell phones in India,
(10:47):
it's a sequence of machines, not a sequence of people
sitting soldiering stuff onto motherboards. So the kind of jobs
that traditional sort of low skill manufacturing assembly, electronics assembly
and so on generate.
Speaker 4 (11:01):
They far fewer today. But there are other problems.
Speaker 6 (11:04):
Every country wants to expand its manufacturing and is growing
protectionist against manufacturing manufactured goods coming from somewhere else. So
the space for manufacturing exports is also shrinking. India has
other opportunities in services. It's been a giant in service
exports in recent years.
Speaker 4 (11:24):
That's where it should focus its attentions.
Speaker 2 (11:26):
More on Modi's push to build up India's own manufacturing
base comes as President Trump looks to bring back economic
activity within US borders. It creates a dilemma. Both leaders
talk up their relationship with one another, but can modis
made in India and Trump's America first be reconciled and
(11:47):
if not, which will prevail.
Speaker 6 (11:50):
Every country is turning nationalists now, and everybody is also
has a certain sense of manufacturing fetishism. They want their
own manufacturing industries, and of course this collides.
Speaker 4 (12:03):
I think the.
Speaker 6 (12:04):
Way to reduce this gap is by recognizing that each
country has specialties and by working to ensure that there
is more trade on those specialties. So, for example, lots
of oil and natural gas being manufactured in the United States,
India could buy more.
Speaker 4 (12:23):
There are defense products.
Speaker 6 (12:25):
That are manufactured in the United States, India could buy more.
Speaker 4 (12:28):
So I think rather than seeing.
Speaker 6 (12:30):
Deficits trade deficits as a problem, see it as part
of a process of collaboration and just make sure that
the playing field is level for both sides. I think
that's something that can be worked on.
Speaker 2 (12:44):
Coming up, Luxury brands are looking to get their mojo back,
but do we have too little of them or too much?
That's next on Wall Street.
Speaker 1 (12:52):
Week you're listening to Bloomberg Wall Street Week with David
Weston from Bloomberg Radio. This is Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 2 (13:11):
This is a story about too much of a good thing.
Every brand lives and breathes for exposure, but sometimes it
can be too much. Luxury brands have reaped the benefits
of consumers the world over seeking them out, but now
the red carpet may be getting pulled out from under them,
and my colleague Danny Berger tells us why. It may
(13:33):
be because they are too available to too many people
in too many places.
Speaker 8 (13:39):
Luxury brands are everywhere, from the bags we carry to
the clothes we wear, down to the shoes we step
into every day, but luxury brands are at a crossroad.
LVMH seen as a bellweather for the luxury sector, sort
close to two hundred and fifty percent between twenty nineteen
and twenty twenty four, but it's since fallen around twenty
(14:00):
percent from the highs of last year, with a recent
bounce offsetting some of those losses and leaving investors struggling
to try a path forward for the luxury brands. Joelle
Grunberg is partner at Mackenzie who leads the firms apparel,
fashion and luxury sector in North America and co authors
a yearly report on the state of Luxury.
Speaker 9 (14:19):
When you look at economic profits of the luxury industry,
it basically nearly tripled between twenty nineteen and twenty twenty four.
So it's really been amazing years, and I think at
some point everybody started believing this was the new normal
and started to expect that this would continue. But as
we all know, you know, at some point things stabilized
(14:43):
or normalize, So as we know, in twenty twenty four,
things slowed down in a significant way for the luxury industry.
It has been a tale of different stories. In all fairness,
not all the rounds, not all the corporations have suffered
in the same way, and some are doing great in fact.
But what we think is that twenty twenty five will
(15:04):
overall be a year of normalization. We obviously see continue
to see growth, but I would say in a more
muted way, and it will also significantly depend on the
region and the market. It would also depend on what
category you mainly operated, and it also depends, I would say,
on again the situation of the round overall, because some
(15:26):
runs are doing much better than the others.
Speaker 8 (15:29):
Armez is one of those brands outperforming its luxury peers,
but they are very much the outlier. Just last week,
Armaz reported a jump in fourth quarter revenue, while LVMH
and Karen posted declines, and Grundberg says there's a range
of global headwinds challenging the luxury sector.
Speaker 9 (15:46):
Two main factors contributed to the huge growth that we've
seen since twenty nineteen. One first factor is clearly the
rise of prices in luxury. Most of the rounds have
increased prices in a very significant way, more than double
digit every year, and so that has contributed to eighty
percent of the growth in revenue of these companies. The
(16:08):
second factor is the pool of China. As we all know,
the Chinese customer has been a very very strong contributor
to the growth of luxury globally, and so that you know,
pool has been extremely strong and is slowing down right now.
And what has happened in the past year and a
half is that the aspirational luxury customer, and more specifically
(16:30):
in the US, has been challenged because there's been a
lot of people losing their jobs and so therefore there
have been much more cautious and on pause. So part
of the explanation is linked to that aspirational customer being
a bit more on hold.
Speaker 10 (16:48):
You know, that perfect storm has resulted in some aspirational
customers being priced out of the first hand luxury market.
We're very happy to receive them.
Speaker 8 (16:58):
Maximilian Bitner is the CEO a Vestier Collective, a platform
for pre owned designer and luxury products founded in two
thousand and nine, aimed at making fashion more sustainable and
a more strained consumer means. The second hand market is
seeing significant growth, expected to reach three hundred and fifty
billion dollars globally in twenty twenty eight. That's up from
(17:18):
one hundred and ninety seven billion dollars in twenty twenty three,
with Vestier estimating eighty two percent of its orders prevent
a first hand purchase.
Speaker 10 (17:27):
We definitely do cater to the demand of the aspirational customer,
as certain brands are more affordable, more accessible than they
would be in a first hand store. And I think
we've especially seen this over the last one or two years.
You know, in a period of economic uncertainty, which in
parallel has seen luxury brands increase prices you know, significantly
(17:50):
over the last four or five years. When I joined
vis Year at the end of twenty eighteen early twenty nineteen,
you know, I recognize the incredible brand and community, but
I also recognized the need for us to build a scalable,
profitable business you know, for the next twenty thirty forty years.
Even the last two years, the business has proven extremely resilient,
(18:13):
growing with more than twenty percent revenue growth. So the
business has been you know, throughout the up and down
cycles of pre COVID COVID post COVID remained extremely resilient,
which is great for us to see.
Speaker 8 (18:27):
Vestier is not alone in writing the second hand wave.
The Real Real and Rebag offer similar services, and Rebag's
reach got a lot bigger this year when it partnered
with Walmart to sell its catalog of about twenty seven
thousand items on the retail giant's website, targeting the aspirational customer.
What might seem like a threat to luxury retail, in
reality could be a mutually beneficial relationship.
Speaker 10 (18:51):
I think overall, the mood and the attitude of luxury
brands have dramatically improved over the last five six years
towards secondhand because you know, fundamentally, we are not cannibalizing
their sales. If anything, you know, we pay homage to
their brands by showing to the consumers, both the buyers
(19:13):
and the sellers, how much value is retained in these
products that they're buying firsthand.
Speaker 8 (19:20):
Norma Kamali rose to the top of high end fashion
with the iconic Sleeping Bag coat that she designed in
nineteen seventy three. Since then, the New York based designer
has proven her ideas fresh and innovative time and time again.
Like Bittner, Kamali sees the value of secondhand markets in
luxury fashion.
Speaker 11 (19:38):
I think anything that's a creative process that's fun is
good for people, right And if in that secondhand you
get a great better price and you get a brand
that you haven't been able to buy before. There's a
whole cult of people who look for Norma Kamali vintage
(20:02):
and it's fascinating to me. But I see how great
that is because in that generation, there's something I did
when I was that age that is connecting with them.
Speaker 8 (20:17):
Would you say, Norma Kamali is also luxury.
Speaker 11 (20:20):
Luxury to me is something that is accessible, affordable, and
will last in your wardrobe forever. It can't be a
purse that you spend thirty thousand dollars on and sort
of collect in a closet with other purses.
Speaker 8 (20:43):
How do you strike that balance then, of being both
accessible but not oversaturated.
Speaker 12 (20:48):
In the market.
Speaker 11 (20:49):
It's an important thing to do, and I think first
of all, knowing your distribution, being careful about the distribution,
make sure the distribution is to your customer, the person
who connects with you. And we have a global distribution
(21:10):
and we could still be reaching many, many more people.
Speaker 8 (21:16):
There's no question that more consumers are exposed to and
have access to luxury than ever before. But at least
one icon of the industry admits that change is inevitable.
Speaker 4 (21:25):
We start this.
Speaker 8 (21:26):
Conversation with this idea of luxury doesn't mean exclusivity. Do
you think some of those secondhand apps are also changing
the conversation.
Speaker 11 (21:33):
That reguly totally. I think the fashion industry clearly is
going through a huge, huge change, and it's long.
Speaker 3 (21:43):
Overdue, it really is.
Speaker 11 (21:46):
And I think when an industry can have a lot
of variety and a lot of choices and a lot
of price ranges.
Speaker 8 (21:55):
Then it's healthy, healthy for the consumer, but a challenge
for the luxury brands to overcome as they look to
rediscover the growth of the last five years.
Speaker 2 (22:06):
This is a story about unintended consequences. Sometimes even the
best intention to government regulations can do more harm than good.
But then again, cutting back on regulation can also do
real mischief.
Speaker 13 (22:20):
We did the right thing, that was a very important
thing to get right finis and it was also a waste.
Speaker 4 (22:25):
I mean, number one, it was a bad group of
people running it.
Speaker 13 (22:28):
If the CFPB is not there examining these giant banks
to make sure they are following the laws on not
cheating consumers, who is doing that job?
Speaker 4 (22:39):
I can say, no other federal regulator.
Speaker 2 (22:41):
So which is it? Is government regulation holding the US
economy back? Or is it an important foundation for much
of the economic benefits we've reaped? And if it can
be both, how can we tell the difference. Jeff Myron
is Director of Undergraduate Economics at Harvard and the director
of Economics Studies at the Cato Institute.
Speaker 5 (23:02):
I don't think there is a definitive study on productivity
and regulation. There are many studies of individual industries, of
specific time periods, of special cases, but those are all
relatively small pieces of information. Finding an overall clear assessment
is pretty hard. I think many people would point to
(23:23):
key environmental regulation in the United States, the Clean Air
and Water Acts, as having been quite successful, but even
those are not without some degree of controversy. One certainly
finds that as a result of those acts, which are
passed in the early nineteen seventies, air got cleaner, water
got cleaner. But if you then go the next step
and say, were those improvements worth the extra cost, because
(23:46):
of course putting restrictions on what firms do and what
cars can do raises the cost, and there the assessment
is still probably beneficial overall, but not so obviously not
so dramatic. So even for one of the relatively clear successes,
I'd say there's still some room for reasonable people to
(24:08):
disagree about how effective they were.
Speaker 2 (24:10):
Myron has harsher criticism of food and drug regulation, where
there has been mission creep delays and political and legal tangles.
Speaker 5 (24:20):
So the very first major attempt federal attempt to deal
with dangers of drugs and food was all the Pure
Food and Drug Act of nineteen oh three, and it
did something very mild. It said that medicines and food
substances had to include a list of the ingredients on
a label on the outside of the package.
Speaker 4 (24:41):
That's pretty innocuous.
Speaker 5 (24:42):
Even if you're a hardcore libertarian, it's be hard to
get too exercised about that. But that notion that the
government was going to protect people from dangerous products evolved
into creating the Food and Drug Administration in nineteen thirty eight,
which then had the power to keep things from being
on the market at all. That's a much higher bar
Now we have the current system, which involves years of delay,
(25:05):
sometimes billions of dollars in testing before thinks can go
on the market, and that probably prevents some bad drugs
from ending up on the market, but also delays all
the good drugs from getting on.
Speaker 4 (25:16):
The market.
Speaker 2 (25:18):
Coming up. They are called zombie companies for our reason.
There are more companies who don't make enough to pay
their bills than you might think. But we bring you
the story of one of them that came back from
the dead Barnes and Noble. That's next on Wall Street Week.
Speaker 1 (25:36):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 2 (25:53):
This is a story about the corporate living dead. Companies
that don't make enough money to cover their debt after year,
many of them ultimately giving up the ghost end of
an era.
Speaker 8 (26:06):
Off for retail Giant, bed Bath and beyond.
Speaker 4 (26:08):
We have breaking news the party is over.
Speaker 12 (26:10):
As count retailer Big Loss is closing all of its
stores nationwide.
Speaker 2 (26:14):
The annals of business are full of stories of companies
that fought the good fight but ultimately lost. The number
of business bankruptcies in the United States is on the rise,
up over seventy percent in the past two years, and
corporate delinquency rates are the highest they've been in eight years.
Bankruptcy usually is the end of life, at least in
(26:36):
the company's current form, but maybe you've noticed that some
stick around, and there's a term for them, zombie companies.
Vincenzo Spizato is a partner at Carne, writing a yearly
report on zombie companies and their effect on the health
of the overall economy.
Speaker 14 (26:53):
A zombie company, it's fundamentally a financially unsustainable company with
these are companies that are not producing enough operating profit
to pay the interest on their loans, and they've been
in that position for at least three consecutive years. So
when we talk about a zombie, it's not a company
that had a bad year or a startup or anything
like that. We're talking about sustained material underperformance. These are
(27:16):
publicly traded companies that have been in business for at
least ten years that have revenue for each of those
ten years. These are real companies that are having profound
financial issues.
Speaker 2 (27:26):
You study these zombie companies, how many are there?
Speaker 14 (27:30):
Just looking back to put this in perspective, in twenty ten,
there were under two percent of publicly traded companies globally.
We've seen around ten percent annual growth since then, and
so we're up to around six percent of all publicly
traded companies globally. Six out of one hundred are currently zombies.
So we're talking about an not insignificant number of companies.
(27:52):
It's sort of all industries, all company sizes, they're sort
of everywhere.
Speaker 2 (27:58):
In twenty twenty three alone, Arney identified eight hundred and
twenty seven new zombie companies, taking the total number to
almost twenty five hundred globally, with real estate and manufacturing
leading the way.
Speaker 14 (28:12):
A lot of zombies are companies that should not have
gotten financing to begin with, given the sort of easy
access to capital that we saw coming out of two
thousand and eight and the financial crisis, and those are
companies that are going to be very difficult to turn around.
Speaker 2 (28:26):
Normally we think those companies get weeded out, you.
Speaker 14 (28:28):
Would think so, and yet a lot of times they'll
carry that interest forward, the interest payable as a loss.
Capital markets are incredibly rewarding and have been very forgiving recently,
particularly coming out of the financial crisis. There's been just
real easy access to financing to a lot of companies
that one may argue shouldn't have actually received that financing
(28:52):
at such low interest rates that they were able to
sort of kick the can on the issue and move
things forward. So a lot of zombies have in fact
business for a long time. Many of them do ultimately
they either go bankrupt, they get acquired, or every once
in a while they're able to turn themselves around.
Speaker 2 (29:09):
One of those so called zombie companies that's come back
from the dead is the well known bookseller Barnes and Noble,
back in twenty ten, it teetered on the brink, closing
hundreds of stores and laying off thousands of workers, and
then in twenty eighteen became a full blown zombie.
Speaker 15 (29:27):
We've definitely seen an increase in the number of people
coming through the door, that sense of discovery. You know,
it's a different experience, you know, to go from table
to table or day to day and find something new.
Speaker 12 (29:41):
I think people have attachments to to like their neighborhood
or their corner books. So even if it's like a
larger company like this, it feels warm to be able
to come to an actual location and do exploration in person.
Speaker 16 (29:53):
I think there was a number of things that went
on Amazon came and that took a chunk of the
easy sales disappeared, a fear that people were no longer
going to read physical books, they were just going to
read ebooks, Kendall, Nook and all of that. As people
lost confident in books, they then started selling other things,
which then compromised the ability to present.
Speaker 4 (30:14):
Really good bookstores.
Speaker 16 (30:16):
Publishers panicked books. That has panicked, everybody panicked, and I
think when you lose your compass, then you go off
in really in the wrong direction, and it was that
it was a fundamental loss of confidence. And it happened
not just in the United States, so it happened pretty
much worldwide, and most large books selling chains got themselves
into big trouble.
Speaker 2 (30:36):
Elliott Management stepped in with a six hundred and eighty
three million dollar takeover and appointed James Daunt as CEO,
and the resurrection began. Since twenty nineteen, foot traffic has
increased seven percent at Barnes and Noble, and the company
has opened one hundred and thirteen stores across the United States,
with another sixty due to open this year. When you
(31:00):
came in, what did you do? I mean, what were
your priorities? What did you focus on?
Speaker 4 (31:05):
First?
Speaker 16 (31:06):
Can't sort of dodge around this in any euphemistic way.
We had to cut costs, and that meant reducing dramatically
the head office structures healthfully. My other core principle was
to allow the booksellers in each store to get to
grips with and start working.
Speaker 4 (31:22):
On their bookstores.
Speaker 16 (31:24):
Now, if you do that, you need far less central
direction because you're letting the guys in the stores do
the work. So we were able to reduce our costs
substantially and then turn to the individual bookstore teams and
say sort out your stores. And we just started to
sort of preach that message and put a few practical
steps in place when COVID came along. So we then
(31:44):
had a pandemic when all our stores closed. Turns out
to have being actually a huge stroke of fortune.
Speaker 2 (31:50):
Why was it a huge struggle fortune?
Speaker 16 (31:53):
What we really needed to do was work on the stores,
and that's quite difficult to do if you're still also
running your store. It's full of customers. Suddenly we were
literally having to close our doors, but we kept the
lights on, we kept the people in the stores. So
we kept our experienced booksellers and they worked through the
pandemic inside the stores, moving the furniture around, going through.
Speaker 4 (32:14):
All the books.
Speaker 16 (32:15):
By the time we were allowed to open again, we
had much better bookstores, just through moving, changing, getting rid
of the books that shouldn't be there, presenting better.
Speaker 4 (32:24):
Low and behold.
Speaker 16 (32:25):
During provid lots of people discovered reading and the joys
of reading, and we opened to that re energized customer
base who were coming back on to high streets with
much better bookstores.
Speaker 14 (32:36):
The story of Barnes and Nobles obviously a very famous one.
It's a very popular one, and I think they went
back to the basics. They looked fundamentally at what customers
were looking for, They looked at what worked, and they
spent the time focusing on the areas that were impactful.
Speaker 2 (32:48):
Those keys to success. Understanding customers and individualizing stores was
something brought with him from his experience owning his own
independent bookstore in London, and then apply as the recipe
for success to restore and reinvigorate the Barnes and Noble brand.
Speaker 16 (33:05):
I have the firm belief that if you leave it
to the books team, and it is a team, they
will put the best possible bookstore in front of you.
It is all about recommending the books to the community
that you know and understand. What we've benefited from is
because we relaxed and because we've let the store teams
do pretty much whatever they want, trusted in their common sense,
(33:27):
trusted in, and we have a vocational group of books
that's out there. They love books, and they love talking
about books. They're not selling books, and they also love
getting on social media and being quite fun and foolish
about books, and fun and foolish turns out to be
absolutely what you need to be doing.
Speaker 4 (33:45):
So a lot of our success.
Speaker 16 (33:47):
Has come from us being actually at the forefront of
things like BookTok and that's our booksellers. As I always say,
give it to the one with the blue hair.
Speaker 4 (33:54):
And leave them alone.
Speaker 16 (33:55):
It's going to go well. You don't need people with
gray hair looking like me running a social media and
that's when you're trying to control things that tends to
be what it is. When you just let them get.
Speaker 4 (34:05):
On with it, Miss you forgot something, Thank.
Speaker 16 (34:11):
You, now we will have the odd sort of foolishness.
And again minus, let's not ever react. We know that
fundamentally our booksellers are hugely motivated in everything they do.
Support them, encourage them, and when they make us really mistake,
just get them back into line.
Speaker 2 (34:27):
So if not all zombie companies are headed toward failure,
if some like Barnes and Noble can not only come
back but come back strong, how can we tell which
ones are worth the effort and which ones are better
off put out of their misery. Angela Demartis is an
economist who studies zombie companies globally, using machine learning to
(34:48):
identify zombies and detect patterns in which survive and which
do not.
Speaker 17 (34:53):
If we compare zombie companies to recover, one of the
first things that we see is that there are differences
with respect to leverages, so leverage ratio, but also total assets.
We see that those are one of the first characteristics
that change when a company is in the recovery zone
(35:13):
versus in the zombie in the zombie status. When we
look at other factors in terms of zombies that recover
from the zombie status, there are also other characteristics that
play a role, not only leverage and total assets, but
also for example, how they use cash, for example, how
they use equity taxes, working capital, and other characteristics. What
(35:39):
we find is that the share of zombie companies in
the United States is much lower compared to zombie companies
in Europe, so their prevalence is way higher in Europe
and also emerging countries, and this is mostly relate to,
for example, differences in the characteristics of these companies. We
(36:00):
always look at listed firms and we see differences between
the United States and Europe with respect to, for example,
their financial structure, but also the capital structure of the company.
And also what plays a role is differences with respect
to the institutions, and so this might also explain why
we see a much lower share of zombie companies in
(36:23):
the United States with respect to other European countries in
which the phenomenon is way more prevalent.
Speaker 2 (36:30):
Could a factor be the different ways that companies finance
themselves in the United States versus Europe. My understanding is
banks play a much larger role as opposed to capital
markets in the United States. Exactly.
Speaker 17 (36:41):
Yeah, this is one of the things that we argue
is one of the main points and one of the
main difference that we see. So in one of the studies,
what we do is we look at listed firms in
the United States and in Europe, and we use machine
learning methods to sort of develop an early worm system
that is able to identify zombie companies and also separate
(37:06):
them from the non zombies and also from the recovered
and so at the firm level, for example, we see
that beyond leverage and total assets, there's other characteristics that
do pray our role, like for example, working capital, for example, taxes,
for example, shareholders, equity, And we do see differences between
(37:26):
the United States and Europe that go back to for example,
differences with respect to capital markets, with respect to the
financial structure of the company, and also with respect to institutions.
Speaker 2 (37:40):
Back in the United States, James Daunt sees only one
true threat to his Barnes and Noble falling back into
its former zombie status.
Speaker 16 (37:49):
For a large book seller. The only thing that we
can really trip up on is if we lose our confidence.
That's what happened before, and hopefully it won't happen again.
But if it did, if you lose your confidence and
you stop being a really good bookstore, then people stop
coming to you.
Speaker 2 (38:06):
That does it for us. Here at Wall Street Week,
I'm David Weston. This is Bloomberg. See you next week
for more stories of capitalism.
Bloomberg Audio Studios, podcasts, radio news.
Speaker 2 (00:19):
This is Wall Street Week. I'm David Weston bringing you
stories of capitalism this week. As luxury brands fight to
regain their momentum, does a secondary market help or hurt?
And what the facts show about deregulation and its effect
on growth and productivity. Plus when a so called zombie
(00:40):
company can come back from the living dead. We tell
you the story of the return of Barnes and Noble,
but we start with a story of true conflict when
the approach of the largest country in the world seems
at odds with the fifth largest economy. When President Trump
met with Indian Prime Minister Mody earlier this month, the
(01:00):
tone was cordial, but it was a step back from
the so called bromance that started in Trump's first term,
and what the two men said were their core interests
appeared to be in true conflict. I will very simply
put America first, Make in India, make for the glow.
(01:25):
Until now, the Indian growth story has been one of
the biggest of the post pandemic world. Its growth rate
touched eight percent. Its benchmark stock index, the Nifty to fifty,
has outpaced the S and P five hundred since the
start of twenty twenty one, at least until recently, and
investors have started to look elsewhere. Indian equities saw almost
(01:49):
twenty one billion dollars of foreign inflows in twenty twenty three,
but they plummeted to just one hundred twenty four million
dollars last year, and investors have withdrawn more than twelve
billion dollars so far this year. So has something gone
wrong with the India growth machine? And if so, where
are we seeing a slowdown or just a blip. Rasher
(02:12):
Sharma is the chair of Rockefeller Capital Management and author
most recently of The Rise and Fall of Nations.
Speaker 3 (02:20):
Ever since I've been investing in this country for over
three decades, which is that this is a country that
consistently disappoints the optimists in the pessimists.
Speaker 4 (02:29):
Yet over the.
Speaker 3 (02:29):
Long term it's a very good equity market story. In
particular because even after the Indian stock markets big correction
over the last few months, the only stock market in
the world in the last thirty to forty years which
has produced comparable returns to America has been India. So
it's this very steady compounding story. But yeah, there are
(02:50):
times when people get a bit ahead of themselves, the
excitement gets a bit too much. I think we may
have reached that point last year when India became the
most expensive equity market in the world, literally even more
expensive than America at the top. So that was just
telling you that the excitement had gone into a head.
And what we have seen in the last few months
is a bit of a reset where the optimists are
(03:13):
getting a bit disappointed.
Speaker 5 (03:15):
Now.
Speaker 3 (03:15):
After sort of thinking that maybe India can break out
and grow at seven to eight percent, there's a realism
setting in that India's trained growth rate is closed to
six percent rather than seven to eight percent, a pretty
decent growth rate, and that they'd still need to carry
out some positive reform steps to even keep a six
percent type growth rate going. So I think what we're
seeing just now is a return to that old reality,
(03:38):
so to speak, which has been the case for India
for thirty to forty years, that it's a country which
steadily compounds, steadily grows.
Speaker 2 (03:46):
But that might not be enough to reach Prime Minister
Motive's target of making India a developed nation by twenty
forty seven. Ragharam Rajan is a former governor of the
Reserve Bank of India.
Speaker 6 (03:58):
I think we're reverting around the six percent now. The
blip downwards recently has more to do with the fact
that we had elections across the board last year and
spending on infrastructure, which has been a big part of
the growth story, has sort of faltered over this period.
I think that will come back, so we'll get back
(04:19):
to six now.
Speaker 4 (04:20):
The question for India is six.
Speaker 6 (04:22):
Enough, And unfortunately the answer is not, because we're also
a country that's growing old, and we do want to
grow rich before we grow old, and that's unlikely at
six percent.
Speaker 2 (04:34):
The Indian government has stepped up efforts to re energize growth,
announcing tax cuts in its annual budget in an effort
to boost middle income spending.
Speaker 6 (04:43):
We have a lot of young people and as a result,
the dependency ratio, the number of very young people who
can't work and very old people who can't work, that's falling.
Speaker 4 (04:53):
And this is the.
Speaker 6 (04:54):
Time that every Asian economy has experienced a burst of growth,
still growing at the old six percent and not enjoying
that burst. Something is not working as well as it should,
and that's jobs.
Speaker 4 (05:09):
What you see around India is not enough young.
Speaker 6 (05:12):
People have jobs, not enough jobs are being created, so
in a sense, we're not making full use of our
capacity even at six percent growth.
Speaker 2 (05:21):
Some foreign companies have seen potential in the growth of
the Indian market as an alternative to China. Apple has
been slowly growing iPhone production in the country, while more
recently Tesla stepped up hiring in India ahead of a
possible entry into the market. This so called China plus
one strategy of India being a substitute for manufacturing in
(05:43):
China may have worked in the past, but some question
whether it will in the future. Ridika Bachra is Mahindra
Group's Vice president of Americas and a senior fellow at
the Atlantic Council.
Speaker 7 (05:56):
What I have come to realize in the last twelve
months is there is a strange realization with the Indian
policy makers that they cannot sell themselves anymore as a
China plus one strategy. It has to be much beyond that,
because if you look at it, the Indian consumer is
(06:17):
not only inclined towards luxury and lifestyle products unlike a
lot of other emerging markets, but also has a very
strong middle class consumer base which is also price conscious.
So if you put these things together, where India is
trying to sell itself as not just a China plus
one strategy, but an innovation in manufacturing hub with a
(06:40):
skilled workforce, with a solid consumer base, and trying to
differentiate itself with available worker versus available skilled workers. I
think it's a great story to tell.
Speaker 2 (06:53):
Whatever the theory, foreign investors have not always had an
easy time investing in India. Just ask Olkswagen. They were
hit with a record one point four billion dollar tax
bill from the Indian authorities for alleged tax evasion, and
the German automaker raised questions about the very survival of
its India unit.
Speaker 3 (07:13):
Well, because I think it's still a very difficult place
to do business on the ground. David, this is something
which you know, we have felt for a long period
of time that to negotiate the Indian landscape is toff
given the regulations that you still have in place, given
the fact that you can have the tax authorities or
other people come up and present bills to you in a.
Speaker 4 (07:34):
Way that you don't really know.
Speaker 3 (07:36):
A lot of the state chief ministers in India realize this,
and I think this is something which we need to
focus on, which is that a lot of the attention
is on more the center and what DELI is doing
and what initiatives they're taking. But India is a very
federal country and you have so many state chief ministers
(07:58):
with a lot of power to do what they have
to do on the ground. And I think what we
need to see in India foreig and we see some
signs of that is much greater so called competitive federalism,
where the states compete with each other to get foreign
investment because a lot of these regulations and the tough
environment it is to do business in India is something
(08:20):
that some of these state chief ministers need to make
friendlier and not just the center.
Speaker 2 (08:25):
Whatever direction it's going right now, what is the current
state of competitive federalism when it comes to economics? Are
there certain states that it's more conducive to invest into
in India today than others?
Speaker 3 (08:36):
Well, that's been the case in India for a while
now that if you look at India, about twenty percent
of India's population is in the southern states, and yet
those states account for more than thirty percent of India's
GDP and the per capita income is also a lot higher.
Now there are states in the south, such as Karnataka,
(08:56):
which we know well because of Bangalore, which is the
tech capital of India for all practical purposes. And what
we see there is that places like Bangalore and Karnataka
tend to attract much greater foreign investment. And generally some
of the southern states like Karnataka and Telangana and Tamil Nadu,
(09:17):
those states have attracted much more foreign investment over time.
Speaker 7 (09:22):
There is a historical reason for why South has managed
to sort of lead from the front, and those reasons
are the ports that are situated in southern area. They
were the most important reason for traders to come to
India to begin with, and that led to a huge
amount of trading community moving and living in South of India.
(09:45):
In the recent past, we see inphasis taking a lead
in ensuring that they become the global service providers for
technology and that started in South of India and Bangalore,
and one thing led to another where a huge amount
of other tech companies started sort of launching based out
of South India because of the skill availability of engineers
(10:07):
in the southern part of India.
Speaker 2 (10:09):
But even if India is moving to loosen restrictions on
foreign investment. It is slow progress and Rajah and warrens
they might be focusing on the wrong sectors. Prime Minister
Motor is pushing to grow the manufacturing sector. Does that
make sense.
Speaker 6 (10:24):
I think the days of growing manufacturing to get strong
growth in jobs are over. I think it's as true
of India as it is of the United States. And
the reason is simply this that increasingly manufacturing is becoming
much more automated, much more dependent on machines. If you
look at an assembly plant for cell phones in India,
(10:47):
it's a sequence of machines, not a sequence of people
sitting soldiering stuff onto motherboards. So the kind of jobs
that traditional sort of low skill manufacturing assembly, electronics assembly
and so on generate.
Speaker 4 (11:01):
They far fewer today. But there are other problems.
Speaker 6 (11:04):
Every country wants to expand its manufacturing and is growing
protectionist against manufacturing manufactured goods coming from somewhere else. So
the space for manufacturing exports is also shrinking. India has
other opportunities in services. It's been a giant in service
exports in recent years.
Speaker 4 (11:24):
That's where it should focus its attentions.
Speaker 2 (11:26):
More on Modi's push to build up India's own manufacturing
base comes as President Trump looks to bring back economic
activity within US borders. It creates a dilemma. Both leaders
talk up their relationship with one another, but can modis
made in India and Trump's America first be reconciled and
(11:47):
if not, which will prevail.
Speaker 6 (11:50):
Every country is turning nationalists now, and everybody is also
has a certain sense of manufacturing fetishism. They want their
own manufacturing industries, and of course this collides.
Speaker 4 (12:03):
I think the.
Speaker 6 (12:04):
Way to reduce this gap is by recognizing that each
country has specialties and by working to ensure that there
is more trade on those specialties. So, for example, lots
of oil and natural gas being manufactured in the United States,
India could buy more.
Speaker 4 (12:23):
There are defense products.
Speaker 6 (12:25):
That are manufactured in the United States, India could buy more.
Speaker 4 (12:28):
So I think rather than seeing.
Speaker 6 (12:30):
Deficits trade deficits as a problem, see it as part
of a process of collaboration and just make sure that
the playing field is level for both sides. I think
that's something that can be worked on.
Speaker 2 (12:44):
Coming up, Luxury brands are looking to get their mojo back,
but do we have too little of them or too much?
That's next on Wall Street.
Speaker 1 (12:52):
Week you're listening to Bloomberg Wall Street Week with David
Weston from Bloomberg Radio. This is Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 2 (13:11):
This is a story about too much of a good thing.
Every brand lives and breathes for exposure, but sometimes it
can be too much. Luxury brands have reaped the benefits
of consumers the world over seeking them out, but now
the red carpet may be getting pulled out from under them,
and my colleague Danny Berger tells us why. It may
(13:33):
be because they are too available to too many people
in too many places.
Speaker 8 (13:39):
Luxury brands are everywhere, from the bags we carry to
the clothes we wear, down to the shoes we step
into every day, but luxury brands are at a crossroad.
LVMH seen as a bellweather for the luxury sector, sort
close to two hundred and fifty percent between twenty nineteen
and twenty twenty four, but it's since fallen around twenty
(14:00):
percent from the highs of last year, with a recent
bounce offsetting some of those losses and leaving investors struggling
to try a path forward for the luxury brands. Joelle
Grunberg is partner at Mackenzie who leads the firms apparel,
fashion and luxury sector in North America and co authors
a yearly report on the state of Luxury.
Speaker 9 (14:19):
When you look at economic profits of the luxury industry,
it basically nearly tripled between twenty nineteen and twenty twenty four.
So it's really been amazing years, and I think at
some point everybody started believing this was the new normal
and started to expect that this would continue. But as
we all know, you know, at some point things stabilized
(14:43):
or normalize, So as we know, in twenty twenty four,
things slowed down in a significant way for the luxury industry.
It has been a tale of different stories. In all fairness,
not all the rounds, not all the corporations have suffered
in the same way, and some are doing great in fact.
But what we think is that twenty twenty five will
(15:04):
overall be a year of normalization. We obviously see continue
to see growth, but I would say in a more
muted way, and it will also significantly depend on the
region and the market. It would also depend on what
category you mainly operated, and it also depends, I would say,
on again the situation of the round overall, because some
(15:26):
runs are doing much better than the others.
Speaker 8 (15:29):
Armez is one of those brands outperforming its luxury peers,
but they are very much the outlier. Just last week,
Armaz reported a jump in fourth quarter revenue, while LVMH
and Karen posted declines, and Grundberg says there's a range
of global headwinds challenging the luxury sector.
Speaker 9 (15:46):
Two main factors contributed to the huge growth that we've
seen since twenty nineteen. One first factor is clearly the
rise of prices in luxury. Most of the rounds have
increased prices in a very significant way, more than double
digit every year, and so that has contributed to eighty
percent of the growth in revenue of these companies. The
(16:08):
second factor is the pool of China. As we all know,
the Chinese customer has been a very very strong contributor
to the growth of luxury globally, and so that you know,
pool has been extremely strong and is slowing down right now.
And what has happened in the past year and a
half is that the aspirational luxury customer, and more specifically
(16:30):
in the US, has been challenged because there's been a
lot of people losing their jobs and so therefore there
have been much more cautious and on pause. So part
of the explanation is linked to that aspirational customer being
a bit more on hold.
Speaker 10 (16:48):
You know, that perfect storm has resulted in some aspirational
customers being priced out of the first hand luxury market.
We're very happy to receive them.
Speaker 8 (16:58):
Maximilian Bitner is the CEO a Vestier Collective, a platform
for pre owned designer and luxury products founded in two
thousand and nine, aimed at making fashion more sustainable and
a more strained consumer means. The second hand market is
seeing significant growth, expected to reach three hundred and fifty
billion dollars globally in twenty twenty eight. That's up from
(17:18):
one hundred and ninety seven billion dollars in twenty twenty three,
with Vestier estimating eighty two percent of its orders prevent
a first hand purchase.
Speaker 10 (17:27):
We definitely do cater to the demand of the aspirational customer,
as certain brands are more affordable, more accessible than they
would be in a first hand store. And I think
we've especially seen this over the last one or two years.
You know, in a period of economic uncertainty, which in
parallel has seen luxury brands increase prices you know, significantly
(17:50):
over the last four or five years. When I joined
vis Year at the end of twenty eighteen early twenty nineteen,
you know, I recognize the incredible brand and community, but
I also recognized the need for us to build a scalable,
profitable business you know, for the next twenty thirty forty years.
Even the last two years, the business has proven extremely resilient,
(18:13):
growing with more than twenty percent revenue growth. So the
business has been you know, throughout the up and down
cycles of pre COVID COVID post COVID remained extremely resilient,
which is great for us to see.
Speaker 8 (18:27):
Vestier is not alone in writing the second hand wave.
The Real Real and Rebag offer similar services, and Rebag's
reach got a lot bigger this year when it partnered
with Walmart to sell its catalog of about twenty seven
thousand items on the retail giant's website, targeting the aspirational customer.
What might seem like a threat to luxury retail, in
reality could be a mutually beneficial relationship.
Speaker 10 (18:51):
I think overall, the mood and the attitude of luxury
brands have dramatically improved over the last five six years
towards secondhand because you know, fundamentally, we are not cannibalizing
their sales. If anything, you know, we pay homage to
their brands by showing to the consumers, both the buyers
(19:13):
and the sellers, how much value is retained in these
products that they're buying firsthand.
Speaker 8 (19:20):
Norma Kamali rose to the top of high end fashion
with the iconic Sleeping Bag coat that she designed in
nineteen seventy three. Since then, the New York based designer
has proven her ideas fresh and innovative time and time again.
Like Bittner, Kamali sees the value of secondhand markets in
luxury fashion.
Speaker 11 (19:38):
I think anything that's a creative process that's fun is
good for people, right And if in that secondhand you
get a great better price and you get a brand
that you haven't been able to buy before. There's a
whole cult of people who look for Norma Kamali vintage
(20:02):
and it's fascinating to me. But I see how great
that is because in that generation, there's something I did
when I was that age that is connecting with them.
Speaker 8 (20:17):
Would you say, Norma Kamali is also luxury.
Speaker 11 (20:20):
Luxury to me is something that is accessible, affordable, and
will last in your wardrobe forever. It can't be a
purse that you spend thirty thousand dollars on and sort
of collect in a closet with other purses.
Speaker 8 (20:43):
How do you strike that balance then, of being both
accessible but not oversaturated.
Speaker 12 (20:48):
In the market.
Speaker 11 (20:49):
It's an important thing to do, and I think first
of all, knowing your distribution, being careful about the distribution,
make sure the distribution is to your customer, the person
who connects with you. And we have a global distribution
(21:10):
and we could still be reaching many, many more people.
Speaker 8 (21:16):
There's no question that more consumers are exposed to and
have access to luxury than ever before. But at least
one icon of the industry admits that change is inevitable.
Speaker 4 (21:25):
We start this.
Speaker 8 (21:26):
Conversation with this idea of luxury doesn't mean exclusivity. Do
you think some of those secondhand apps are also changing
the conversation.
Speaker 11 (21:33):
That reguly totally. I think the fashion industry clearly is
going through a huge, huge change, and it's long.
Speaker 3 (21:43):
Overdue, it really is.
Speaker 11 (21:46):
And I think when an industry can have a lot
of variety and a lot of choices and a lot
of price ranges.
Speaker 8 (21:55):
Then it's healthy, healthy for the consumer, but a challenge
for the luxury brands to overcome as they look to
rediscover the growth of the last five years.
Speaker 2 (22:06):
This is a story about unintended consequences. Sometimes even the
best intention to government regulations can do more harm than good.
But then again, cutting back on regulation can also do
real mischief.
Speaker 13 (22:20):
We did the right thing, that was a very important
thing to get right finis and it was also a waste.
Speaker 4 (22:25):
I mean, number one, it was a bad group of
people running it.
Speaker 13 (22:28):
If the CFPB is not there examining these giant banks
to make sure they are following the laws on not
cheating consumers, who is doing that job?
Speaker 4 (22:39):
I can say, no other federal regulator.
Speaker 2 (22:41):
So which is it? Is government regulation holding the US
economy back? Or is it an important foundation for much
of the economic benefits we've reaped? And if it can
be both, how can we tell the difference. Jeff Myron
is Director of Undergraduate Economics at Harvard and the director
of Economics Studies at the Cato Institute.
Speaker 5 (23:02):
I don't think there is a definitive study on productivity
and regulation. There are many studies of individual industries, of
specific time periods, of special cases, but those are all
relatively small pieces of information. Finding an overall clear assessment
is pretty hard. I think many people would point to
(23:23):
key environmental regulation in the United States, the Clean Air
and Water Acts, as having been quite successful, but even
those are not without some degree of controversy. One certainly
finds that as a result of those acts, which are
passed in the early nineteen seventies, air got cleaner, water
got cleaner. But if you then go the next step
and say, were those improvements worth the extra cost, because
(23:46):
of course putting restrictions on what firms do and what
cars can do raises the cost, and there the assessment
is still probably beneficial overall, but not so obviously not
so dramatic. So even for one of the relatively clear successes,
I'd say there's still some room for reasonable people to
(24:08):
disagree about how effective they were.
Speaker 2 (24:10):
Myron has harsher criticism of food and drug regulation, where
there has been mission creep delays and political and legal tangles.
Speaker 5 (24:20):
So the very first major attempt federal attempt to deal
with dangers of drugs and food was all the Pure
Food and Drug Act of nineteen oh three, and it
did something very mild. It said that medicines and food
substances had to include a list of the ingredients on
a label on the outside of the package.
Speaker 4 (24:41):
That's pretty innocuous.
Speaker 5 (24:42):
Even if you're a hardcore libertarian, it's be hard to
get too exercised about that. But that notion that the
government was going to protect people from dangerous products evolved
into creating the Food and Drug Administration in nineteen thirty eight,
which then had the power to keep things from being
on the market at all. That's a much higher bar
Now we have the current system, which involves years of delay,
(25:05):
sometimes billions of dollars in testing before thinks can go
on the market, and that probably prevents some bad drugs
from ending up on the market, but also delays all
the good drugs from getting on.
Speaker 4 (25:16):
The market.
Speaker 2 (25:18):
Coming up. They are called zombie companies for our reason.
There are more companies who don't make enough to pay
their bills than you might think. But we bring you
the story of one of them that came back from
the dead Barnes and Noble. That's next on Wall Street Week.
Speaker 1 (25:36):
You're listening to Bloomberg Wall Street Week with David Weston
from Bloomberg Radio. You're listening to Bloomberg Wall Street Week
with David Weston from Bloomberg Radio.
Speaker 2 (25:53):
This is a story about the corporate living dead. Companies
that don't make enough money to cover their debt after year,
many of them ultimately giving up the ghost end of
an era.
Speaker 8 (26:06):
Off for retail Giant, bed Bath and beyond.
Speaker 4 (26:08):
We have breaking news the party is over.
Speaker 12 (26:10):
As count retailer Big Loss is closing all of its
stores nationwide.
Speaker 2 (26:14):
The annals of business are full of stories of companies
that fought the good fight but ultimately lost. The number
of business bankruptcies in the United States is on the rise,
up over seventy percent in the past two years, and
corporate delinquency rates are the highest they've been in eight years.
Bankruptcy usually is the end of life, at least in
(26:36):
the company's current form, but maybe you've noticed that some
stick around, and there's a term for them, zombie companies.
Vincenzo Spizato is a partner at Carne, writing a yearly
report on zombie companies and their effect on the health
of the overall economy.
Speaker 14 (26:53):
A zombie company, it's fundamentally a financially unsustainable company with
these are companies that are not producing enough operating profit
to pay the interest on their loans, and they've been
in that position for at least three consecutive years. So
when we talk about a zombie, it's not a company
that had a bad year or a startup or anything
like that. We're talking about sustained material underperformance. These are
(27:16):
publicly traded companies that have been in business for at
least ten years that have revenue for each of those
ten years. These are real companies that are having profound
financial issues.
Speaker 2 (27:26):
You study these zombie companies, how many are there?
Speaker 14 (27:30):
Just looking back to put this in perspective, in twenty ten,
there were under two percent of publicly traded companies globally.
We've seen around ten percent annual growth since then, and
so we're up to around six percent of all publicly
traded companies globally. Six out of one hundred are currently zombies.
So we're talking about an not insignificant number of companies.
(27:52):
It's sort of all industries, all company sizes, they're sort
of everywhere.
Speaker 2 (27:58):
In twenty twenty three alone, Arney identified eight hundred and
twenty seven new zombie companies, taking the total number to
almost twenty five hundred globally, with real estate and manufacturing
leading the way.
Speaker 14 (28:12):
A lot of zombies are companies that should not have
gotten financing to begin with, given the sort of easy
access to capital that we saw coming out of two
thousand and eight and the financial crisis, and those are
companies that are going to be very difficult to turn around.
Speaker 2 (28:26):
Normally we think those companies get weeded out, you.
Speaker 14 (28:28):
Would think so, and yet a lot of times they'll
carry that interest forward, the interest payable as a loss.
Capital markets are incredibly rewarding and have been very forgiving recently,
particularly coming out of the financial crisis. There's been just
real easy access to financing to a lot of companies
that one may argue shouldn't have actually received that financing
(28:52):
at such low interest rates that they were able to
sort of kick the can on the issue and move
things forward. So a lot of zombies have in fact
business for a long time. Many of them do ultimately
they either go bankrupt, they get acquired, or every once
in a while they're able to turn themselves around.
Speaker 2 (29:09):
One of those so called zombie companies that's come back
from the dead is the well known bookseller Barnes and Noble,
back in twenty ten, it teetered on the brink, closing
hundreds of stores and laying off thousands of workers, and
then in twenty eighteen became a full blown zombie.
Speaker 15 (29:27):
We've definitely seen an increase in the number of people
coming through the door, that sense of discovery. You know,
it's a different experience, you know, to go from table
to table or day to day and find something new.
Speaker 12 (29:41):
I think people have attachments to to like their neighborhood
or their corner books. So even if it's like a
larger company like this, it feels warm to be able
to come to an actual location and do exploration in person.
Speaker 16 (29:53):
I think there was a number of things that went
on Amazon came and that took a chunk of the
easy sales disappeared, a fear that people were no longer
going to read physical books, they were just going to
read ebooks, Kendall, Nook and all of that. As people
lost confident in books, they then started selling other things,
which then compromised the ability to present.
Speaker 4 (30:14):
Really good bookstores.
Speaker 16 (30:16):
Publishers panicked books. That has panicked, everybody panicked, and I
think when you lose your compass, then you go off
in really in the wrong direction, and it was that
it was a fundamental loss of confidence. And it happened
not just in the United States, so it happened pretty
much worldwide, and most large books selling chains got themselves
into big trouble.
Speaker 2 (30:36):
Elliott Management stepped in with a six hundred and eighty
three million dollar takeover and appointed James Daunt as CEO,
and the resurrection began. Since twenty nineteen, foot traffic has
increased seven percent at Barnes and Noble, and the company
has opened one hundred and thirteen stores across the United States,
with another sixty due to open this year. When you
(31:00):
came in, what did you do? I mean, what were
your priorities? What did you focus on?
Speaker 4 (31:05):
First?
Speaker 16 (31:06):
Can't sort of dodge around this in any euphemistic way.
We had to cut costs, and that meant reducing dramatically
the head office structures healthfully. My other core principle was
to allow the booksellers in each store to get to
grips with and start working.
Speaker 4 (31:22):
On their bookstores.
Speaker 16 (31:24):
Now, if you do that, you need far less central
direction because you're letting the guys in the stores do
the work. So we were able to reduce our costs
substantially and then turn to the individual bookstore teams and
say sort out your stores. And we just started to
sort of preach that message and put a few practical
steps in place when COVID came along. So we then
(31:44):
had a pandemic when all our stores closed. Turns out
to have being actually a huge stroke of fortune.
Speaker 2 (31:50):
Why was it a huge struggle fortune?
Speaker 16 (31:53):
What we really needed to do was work on the stores,
and that's quite difficult to do if you're still also
running your store. It's full of customers. Suddenly we were
literally having to close our doors, but we kept the
lights on, we kept the people in the stores. So
we kept our experienced booksellers and they worked through the
pandemic inside the stores, moving the furniture around, going through.
Speaker 4 (32:14):
All the books.
Speaker 16 (32:15):
By the time we were allowed to open again, we
had much better bookstores, just through moving, changing, getting rid
of the books that shouldn't be there, presenting better.
Speaker 4 (32:24):
Low and behold.
Speaker 16 (32:25):
During provid lots of people discovered reading and the joys
of reading, and we opened to that re energized customer
base who were coming back on to high streets with
much better bookstores.
Speaker 14 (32:36):
The story of Barnes and Nobles obviously a very famous one.
It's a very popular one, and I think they went
back to the basics. They looked fundamentally at what customers
were looking for, They looked at what worked, and they
spent the time focusing on the areas that were impactful.
Speaker 2 (32:48):
Those keys to success. Understanding customers and individualizing stores was
something brought with him from his experience owning his own
independent bookstore in London, and then apply as the recipe
for success to restore and reinvigorate the Barnes and Noble brand.
Speaker 16 (33:05):
I have the firm belief that if you leave it
to the books team, and it is a team, they
will put the best possible bookstore in front of you.
It is all about recommending the books to the community
that you know and understand. What we've benefited from is
because we relaxed and because we've let the store teams
do pretty much whatever they want, trusted in their common sense,
(33:27):
trusted in, and we have a vocational group of books
that's out there. They love books, and they love talking
about books. They're not selling books, and they also love
getting on social media and being quite fun and foolish
about books, and fun and foolish turns out to be
absolutely what you need to be doing.
Speaker 4 (33:45):
So a lot of our success.
Speaker 16 (33:47):
Has come from us being actually at the forefront of
things like BookTok and that's our booksellers. As I always say,
give it to the one with the blue hair.
Speaker 4 (33:54):
And leave them alone.
Speaker 16 (33:55):
It's going to go well. You don't need people with
gray hair looking like me running a social media and
that's when you're trying to control things that tends to
be what it is. When you just let them get.
Speaker 4 (34:05):
On with it, Miss you forgot something, Thank.
Speaker 16 (34:11):
You, now we will have the odd sort of foolishness.
And again minus, let's not ever react. We know that
fundamentally our booksellers are hugely motivated in everything they do.
Support them, encourage them, and when they make us really mistake,
just get them back into line.
Speaker 2 (34:27):
So if not all zombie companies are headed toward failure,
if some like Barnes and Noble can not only come
back but come back strong, how can we tell which
ones are worth the effort and which ones are better
off put out of their misery. Angela Demartis is an
economist who studies zombie companies globally, using machine learning to
(34:48):
identify zombies and detect patterns in which survive and which
do not.
Speaker 17 (34:53):
If we compare zombie companies to recover, one of the
first things that we see is that there are differences
with respect to leverages, so leverage ratio, but also total assets.
We see that those are one of the first characteristics
that change when a company is in the recovery zone
(35:13):
versus in the zombie in the zombie status. When we
look at other factors in terms of zombies that recover
from the zombie status, there are also other characteristics that
play a role, not only leverage and total assets, but
also for example, how they use cash, for example, how
they use equity taxes, working capital, and other characteristics. What
(35:39):
we find is that the share of zombie companies in
the United States is much lower compared to zombie companies
in Europe, so their prevalence is way higher in Europe
and also emerging countries, and this is mostly relate to,
for example, differences in the characteristics of these companies. We
(36:00):
always look at listed firms and we see differences between
the United States and Europe with respect to, for example,
their financial structure, but also the capital structure of the company.
And also what plays a role is differences with respect
to the institutions, and so this might also explain why
we see a much lower share of zombie companies in
(36:23):
the United States with respect to other European countries in
which the phenomenon is way more prevalent.
Speaker 2 (36:30):
Could a factor be the different ways that companies finance
themselves in the United States versus Europe. My understanding is
banks play a much larger role as opposed to capital
markets in the United States. Exactly.
Speaker 17 (36:41):
Yeah, this is one of the things that we argue
is one of the main points and one of the
main difference that we see. So in one of the studies,
what we do is we look at listed firms in
the United States and in Europe, and we use machine
learning methods to sort of develop an early worm system
that is able to identify zombie companies and also separate
(37:06):
them from the non zombies and also from the recovered
and so at the firm level, for example, we see
that beyond leverage and total assets, there's other characteristics that
do pray our role, like for example, working capital, for example, taxes,
for example, shareholders, equity, And we do see differences between
(37:26):
the United States and Europe that go back to for example,
differences with respect to capital markets, with respect to the
financial structure of the company, and also with respect to institutions.
Speaker 2 (37:40):
Back in the United States, James Daunt sees only one
true threat to his Barnes and Noble falling back into
its former zombie status.
Speaker 16 (37:49):
For a large book seller. The only thing that we
can really trip up on is if we lose our confidence.
That's what happened before, and hopefully it won't happen again.
But if it did, if you lose your confidence and
you stop being a really good bookstore, then people stop
coming to you.
Speaker 2 (38:06):
That does it for us. Here at Wall Street Week,
I'm David Weston. This is Bloomberg. See you next week
for more stories of capitalism.
Popular Podcasts
Stuff You Should Know
If you've ever wanted to know about champagne, satanism, the Stonewall Uprising, chaos theory, LSD, El Nino, true crime and Rosa Parks, then look no further. Josh and Chuck have you covered.
Dateline NBC
Current and classic episodes, featuring compelling true-crime mysteries, powerful documentaries and in-depth investigations. Special Summer Offer: Exclusively on Apple Podcasts, try our Dateline Premium subscription completely free for one month! With Dateline Premium, you get every episode ad-free plus exclusive bonus content.
On Purpose with Jay Shetty
I’m Jay Shetty host of On Purpose the worlds #1 Mental Health podcast and I’m so grateful you found us. I started this podcast 5 years ago to invite you into conversations and workshops that are designed to help make you happier, healthier and more healed. I believe that when you (yes you) feel seen, heard and understood you’re able to deal with relationship struggles, work challenges and life’s ups and downs with more ease and grace. I interview experts, celebrities, thought leaders and athletes so that we can grow our mindset, build better habits and uncover a side of them we’ve never seen before. New episodes every Monday and Friday. Your support means the world to me and I don’t take it for granted — click the follow button and leave a review to help us spread the love with On Purpose. I can’t wait for you to listen to your first or 500th episode!