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Comment by chrisseaton | Hacker News Reader

> there are business people who are apparently content running a business with such slim margins ... I'm left wondering why anyone would even bother

A percentage margin is expressed relative to the value of the sales.

Low margin on high value sales is as good as high margin on low value sales, in terms of how much money you make.

Low margin is only a problem in low value sales.

Why shouldn’t people running a business with extremely high value sales, due to low margins? I can’t see what you’d find that a bizarre thing to do?

I’d be happy making 5% if I was selling a jumbo jet a day, for example.

You can’t criticise just the margin in isolation like you’ve done.

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My expectation would be that if you’re used to operating in a high margin business you have ample room for error or fluctuation in conditions.

In a low margin business, you don’t have such room for error, and you actually have to fluctuate with conditions. This isn’t a deal breaker: most business operate this way!

But it’s scary for someone looking in from a high margin business.

Some businesses are inherently more controllable: for example, you cant expect 5% accuracy on NASA building a telescope that has never been done before but you can expect +% accuracy on the price of commodity product

You might think that, but errors and fluctuations tend to routinely cause high margin businesses such as software to collapse in large numbers. Think of the dotcom bust. I suspect part of the problem is these businesses flourish when the conditions are easy, but many don't have the experience or exceptional margins to survive long enough to adapt when conditions change.

The dot com bust was negative margin businesses.

When I look at Uber I don't think anything has changed.

Perceived high-potential-margin businesses with lead time lead to speculative investment in low- (or negative-) margin businesses in the same field with perceived potential, which is sensitive to fluctuations in the broader investment climate (e.g., payoff timelines) or reassessment of profitability potential. That’s what the dotcom boom and bust were about.

The actual high-margin businesses wouldn't be taken out in the bust unless they were high margin only because they were selling into the boom.

"The actual high-margin businesses wouldn't be taken out in the bust unless they were high margin only because they were selling into the boom."

Exactly.

This is why the National Restaurant Association always lobbies furiously against minimum wage hikes - it will never destroy the restaurant industry but it sure as heck destroys actual restaurants.

Which seems absolutely crazy to me. I would have expected them to push for them harder than your typical org since such a sweeping change would affect everyone basically the same. Nobody would be immune from raising their prices and the value differential would nudge customers away from fast food.

I think it doesn't affect not-yet-open restaurants nearly as badly as existing restaurant owners. NRA doesn't represent the restaurant market as a whole it represents a % of restaurant owners that currently exist.

Restaurant workers are, of course, going to be fairly indifferent to restaurant bankruptcies especially if an existing restaurant is swiftly replaced by a new one that pays more.

It’s also important to look at capital expenditure intensity. Spending $100k to make .01% could make sense but spending $1B to make .01% is much tougher, from an NPV perspective.

Isn't ROIC the more important variable? Let's say I want $100k of profit per year. With 5% margins, I need to do $2M of business. But that doesn't mean I need to pay for all the inventory I'm going to transact up front. I don't have to have $2M capital invested in the business.

I might even be post-paying for the inventory (net 30 terms, for example). I post-pay the labor as well. In this case, it's kind of meaningless how much the inventory that I'm turning over costs, given a fixed margin. What matters is how much capital I have invested in the business. It also matters how quickly I can adjust to changing market conditions. If I can respond to changing conditions instantly, it's impossible for me to lose money. In practice this is not possible because of leases and delivery schedules, though. That's where the risk comes from.

Of course, variability of demand is also an important factor. That's where the risk comes in, because there are fixed costs that don't vary with business.

I think the issue is that ROIC is harder to assess and harder to understand than a simple profit margin calculation. For reference, in it's heyday Windows-and-Office Microsoft had a 42% ROIC.

Yeah, ROIC is really tough to get right and be meaningful. NPV is less “right” but more accurate.

You're describing all high-capitalization industries: heavy manufacturing, utilities, etc.

There’s still a big spectrum. Then we can look at “tech” companies like Lime which end up being extremely capital intensive.

> You can’t criticise just the margin in isolation like you’ve done.

The article is specifically discussing all you can eat buffets. I don’t think they are selling jumbo jets at Old Country Buffet.

No, but they might be getting a lot of volume. 5% on 100 customers a day is different from 5% on 500.

We're talking about all-you-can-eat buffets. I don't think they're selling a jumbo-jets worth of food a day.

The size of the US restaurant industry revenue in 2019 is "projected to total $863 billion in 2019 and equal 4 percent of the U.S. gross domestic product." [1]. Compared to $467 billion for the global software industry [2], or $19.1 for the global music industry [3].

I think there is some money to be made selling food.

[1] https://restaurant.org/Downloads/PDFs/Research/SOI/restauran... [2] https://www.statista.com/forecasts/963597/software-revenue-i... [3] https://www.ifpi.org/news/IFPI-GLOBAL-MUSIC-REPORT-2019

Everyone has to eat -- multiple times a day, even.

I don't die if I miss out on the latest version of ServiceNow or Adobe. Or the new Taylor Swift album.

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