Will Rising Wages Usher in Automation? | 7investing
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Will Rising Wages Usher in Automation?

July 14, 2021

The pandemic has led to a shortage of workers as some people have opted to not come back to the workforce for reasons ranging from childcare issues (and schools not being fully open) to others opting to keep collecting unemployment. That has forced many large companies offer wages that reach or even exceed $15 an hour. It could also make those same businesses consider they want to spend the money needed to automate their workforce. Anirban Mahanti joins Dan Kline to break down the labor market and what automation might look like.

 

Transcript

Sam Bailey  0:13

Welcome to 7investing Now, a show that teaches you how to take a long term view on investing by better understanding what’s happening in the market now.

Dan Kline  0:24

Good afternoon 7investors and welcome to the beautiful Cherokee Casino and Hotel in Cherokee, North Carolina. How did I get here? Not as easily as I would have hoped. So if you’re watching Delta Airlines (NYSE: DAL), let’s take some notes about how not to do business. I am supposed to fly on a 6:00am flight yesterday to Atlanta and then to Columbia, South Carolina, where my former colleague Matt Frankel was going to pick me up at the airport. We were going to drive up to the casino have a couple of days of gambling that I was gonna fly to Birmingham, Alabama for a wedding on Saturday.

So I was going to spend Thursday night and Friday in Birmingham, go to the wedding Saturday, fly home Sunday. None of that happened. I woke up at about 3:30am in the morning yesterday, to about 15 messages from Delta. First, your flight has been delayed. Well, that’s a problem because it’s now been delayed to past when my layover takes off. That’s, that’s a problem. Then, of course, we have the issue of, here are all the changes you can make. Well, that’ll get me late, but maybe I’ll just rent a car and meet my friends at the casino. That’ll be okay. Go to book it. Yeah, those are all gone. Don’t worry. We’ve changed you. Your layover is now the next day. You could spend a full day in Atlanta. That did not work. So what did I, and I don’t think I said my name. I am Daniel Brooks Klein, as you if you’re listening to this read, you know that of course. I got up at 3:30am in the morning, got my car and drove to South Carolina, but an eight hour drive. Then got in the car with Matt to go with another friend of ours, then drove through the casino, had a nice dinner, gambled all night.

And now I am here doing the show with you from right in front of the parking garage, I believe. Because I tried to do it outside which is picturesque, beautiful. The mountains here are amazing. And that didn’t work. The the internet connection works perfectly inside. Not at all outside.

What are we going to talk about on today’s show, I’m going to be joined by Anirban Mahanti. And we’re going to talk about the worker shortage, and automation. Is a shortage of workers going to force companies to automate? There’s a major investing angle to this. I’m going to be around to take your questions and comments. This is a taped interview. It’s a little bit long, but I will be here. So if you have comments, please share them. We’ll get to them at the end of the show. With that, I’m going to have a cup of coffee. I’m going to sit back and watch this interview. Again from beautiful Cherokee, North Carolina.

Welcome to the show Anirban Mahanti. Sam Bailey if you want to hit that we would appreciate it.

Welcome to 7investing Now Anirban Mahanti, how are things this early, early Tuesday morning over there in Australia?

Anirban Mahanti  3:00

Hey Dan, a couple of you know, I have not fixed. I’m not trying to fix my hair. So I usually will not start a show talking about my hair. But let’s talk about it. You know I was wearing actually a beanie because it is miserable and freezing. And I didn’t want to turn on the heater because I turn on the heater this room becomes like a sauna. So I had a choice between a beanie, Yes. So yeah, so pardon. You know, I’ll say to our listeners and watchers, excuse my head. And I’m wearing this sweater that is double layered right now. So yeah, it’s a fantastic morning.

Dan Kline  3:36

I’ve learned that it’s very cold in Australia, which is something. The picture painted to Americans of Australia always involves doing something at the beach. Or maybe like the Sydney Opera House, there is never, there is never like a TV show that takes place in Australia where people are huddling outside, you know, cold, you know, drinking their coffee. So we don’t get the full Australian picture here in the US as I’m sure you get a much better US picture because obviously you get a lot of our television shows. Right?

Anirban Mahanti  4:05

That’s true. Well, here’s the thing, though. So part of the picture is actually not incorrect. I live about 60 kilometres, 65 kilometers, which you can divide by I guess 1.6 and get into miles. I think that’s correct. No multiply, divide by 1.6.

Dan Kline  4:24

How long does it take you to get there? That’s probably a better

Anirban Mahanti  4:28

That’s a better way to think about it. Yes. So let’s see one hour to the city centre. Right. So it is probably going to be five to six degrees Celsius warmer. And the other thing is that our houses are not insulated because, they’re not properly to their insulation, but they’re not properly insulated like they are in say Canada, for example in North America a cold and cold. America, right? They’re insulated. So what happens is, it might be actually okay outside it’s freezing and miserable inside. So people outside, it’s fine. And it doesn’t, you know, it doesn’t really snow here and unless you go to the mountains, so, Generally, we have good weather, it’s basically a couple of months where I think it’s miserable because it rains, it’s dark. So I’m complaining about stuff that I shouldn’t really complain about.

Dan Kline  5:15

It’s raining and dark here. But the one thing we figured out as insulation, because insulation holds in air conditioning as well as, as well as heat. So our homes and also because Florida, at least southern Florida is in the path of hurricanes, any recent construction, I think since 2006. At least the ground level is cinderblock. So cinderblock, just naturally on its own. So you’ll see a lot of ugly houses here on the outside that inside are gorgeous. Now obviously there’s ways to mask that and to Gussy it up, but there’s a lot of very nondescript condo complexes, we look at it just like cinder block on cinder block, and then you go inside. And it’s actually luxury, you know, luxury living so a little bit strange for someone who comes from New England where a lot of houses are wood, I lived in a house from the 1800s that had horsehair plaster, in the upstairs bath bedrooms, you could literally see horse hairs lining the walls, I had copper pipes that were exposed that one turn to dust, but actually easy to fix. Because it’s an exposed pipe, you just go out and get a metal pipe and your plumber friend can come over and fix it.

But that’s not what we’re going to talk about today. As you heard me tease. At the top of the show, we’re going to talk about rising wages. And will that usher in automation, let me set the table a little bit here. So McDonald’s (NYSE: MCD), which is 95% franchise owned in the US, has basically come out to its franchisees and said, look at corporate stores, we’re going to raise wages to $15 by 2024. And we’d really like you to do that. That follows Walmart (NYSE: WMT), Target (NYSE: TGT), Costco (NASDAQ: COST) was already there. Even Chipotle (NYSE: CMG) and Taco Bell, two companies that have sort of famously started people at very low wages. Chipotle, I would argue did it right, they started you at a very low wage. And you could advance very quickly, I was sort of a, you know, an apprenticeship at first, and you could eventually in a couple of years work your way into management, maybe in three to five years become a general manager, but we are seeing a supply and demand issue. That has forced wages up.

So we’re not going to talk about the politics of this all that much. We understand that there are political movements. But here’s what’s happening right now, there are not enough workers. So companies have to raise their wages to attract workers, they are then going to frame that as them doing something nice for workers. That makes sense if if Simon ordered me to give you a gift, this is just an obscure example, and I gave you the gift. I’m not gonna say well, Simon told me to give Anirban gift. I’m gonna think, wow, I am a thoughtful guy who gave you a gift. That is what Walmart is doing. I think it’s fair to say that there are some well intentioned companies here. But that there’s also some companies and I’ll group Walmart in with that, that don’t want to have to do this. But but absolutely have to. So let me throw it out first here Anirban. Is $15, the new normal? Or will we eventually see enough people enter the job market to create pressures in the other direction?

Anirban Mahanti  8:07

Well, my general thought is that once the price, once the price is set at $15, that I think it becomes to default, I think it’s unlikely that you’ll unwind from there. So my first guess would be that I think those those companies that have increased to $15, will stay at $15. And they will use that, you know, in their corporate, you know, letters in the corporate strategy in the advertising strategy as a strategy to basically say, look, you know, we do the right thing, we are paying people a fair, fair wage, and, you know, helping, you know, those people who are the minimum wage, maybe they were at $10, or $9, or whatever it was, and now they were $15. That’s for them a substantial increase. You know, and that will be the story.

So I think it’s, it’s likely to stay I think one of the, you know, I guess what might be there’s a large, probably, I don’t know, I’m guessing large transient population of people who work jobs, you know, students who are and things like that and holiday makers, in the working holiday makers who come who are not there right now to fill that, you know, fill that block, and they will, you know, or whatever, how many hours they allowed by law to work 20 hours, maybe, or 40 in a week, so, but I think the wages probably have gone up, which, you know, we’ll see how it plays out. That’d be my guess. I don’t know. What do you think?

Dan Kline  9:31

Well, I think the wages are gonna stay at the companies we just talked about, but I you’ve probably not spent a lot of time in a Dunkin Donuts which is now just Dunkin but they used to sell donuts are they still sell them? There’s on their name in a Dunkin versus Starbucks (NASDAQ: SBUX) and I’m primarily a Starbucks guy. Starbucks does not pay a $15 minimum wage, but Starbucks overall package could be attractive where they might pay you $12.50 an hour, but they have the free college course. If you work 20 hours or more you can get into health care. There are stock grants, you’re tipped if you’re not management, so you might end up making significantly more maybe not significantly more, but more than $15 an hour. So overall, Starbucks is considered a pretty attractive package. And they’re all corporate owned, with the exception of like the fake Starbucks that are in like hotels and things like that, or like the amusement parks.

I used to go to a Starbucks in Newington, Connecticut pretty regularly and across the street was a Dunkin every now and then I’d want to change it up and go to Dunkin. All the Dunkin workers did while I was there was complained about how bad their jobs were and how little they were paid and how poorly they were treated. And Dunkin uses a franchise model. So I didn’t know that particular franchise owner, I knew another and I know he had a much better reputation. And his workers, you know, his at least his management, you know, was reasonably well compensated based on the success of the store. But at a lot of Dunkin Donuts, you see the people that Starbucks wouldn’t hire. And I actually think the the rise to $15 is going to dramatically increase that disparity.

So we’ve already seen sort of in the retail world, the winners winning, you know, your Walmart’s your Targets, your Best Buy’s (NYSE: BBY) your Costco’s. They’ve separated themselves from the pack, I think this is going to make it really difficult on your your Coles and your Macy’s (NYSE: M) and your Dillards (NYSE: DDS). And some of those probably pay, you know, in the $15 range or have. But the companies that can’t afford to do this, or like a company like say GameStop (NYSE: GME), which is completely disconnected from their stock price. GameStop relies on hiring mostly people who really like games, and they’re willing to work for relatively low wages to do that.

So I think there’s gonna be some problems and look, if you go to a Dunkin Donuts, the service is not nearly as good as a Starbucks. And I know that’s anecdotal. But I’d say that’s pretty universal, because they’re not attracting as high level of worker. You know, if Chipotle has a career path, their management is going to be better at solving problems. Now, your manager at a McDonald’s is often someone getting paid pretty well. But that’s usually just your top General Manager might be running multiple stores, your shift supervisor, the person making decisions might not be.

So again, I generally think higher wages are a good thing. But I’d like to see and without getting political. I’d like to see some sort of floor in areas tied to cost of living. So look, I want, and we talked about this was hit with health, the guy who makes my burrito, I want him to have a place to live. Like I want him to not have to come to work sick. I think that’s very important. But we’re seeing in the fast food world. So I mentioned Taco Bell and Chipotle. Taco Bell and Chipotle, they both often paid near minimum wage that can often vary by region. And they’ve both gone to $15 an hour, signing bonuses. Maybe not here in West Palm, but certainly in the Orlando area where the competition for workers, what is this going to do to prices? If I went from $8 an hour paying my worker to almost double at $15 an hour. Across, I don’t know how many people work in a taco bell, but 30 or 40? Like, you know, maybe 20 full time equivalents when you add it all together? That’s a lot of money. My crunchy Doritos thing? Or, I haven’t been to a Taco Bell in a long time, my gordita whatever it is, or my Mountain Dew monstrosity, that’s gonna cost more if I have to, if I have to pay workers almost twice as much, right?

Anirban Mahanti  13:30

Yeah. So I mean, here’s the thing, right? So for when you run a restaurant, or in the restaurant, like in a chain, and you have these stores, right, you’ve fixed cost, and you have some variable cost, right? So I mean, the fixed costs are things like you have to pay for the lease, and you have to pay for the equipment lease, and you have to pay for electricity and internet and all those things, right? The variable cost really is your your workers, and I guess, you know, produce, which is, which is gonna vary based on how much you’re you’re buying and how much you’re selling eventually, right.

So, I mean, while the wage might seem, wage rates might like be 200%, 100%. In some cases, in some of the worst case, maybe the overall effect actually on a unit of product that selling, it’s probably not that much, right? Like end up being like five 6%, maybe 7%, you know, 7%, 8%, something like that. And most of these, like if you have it, if you’re running a solid brand, if you have a solid, like I mean, coffee is a commodity, right? But if you have a brand that sells a coffee, then have pricing power.

So you’ve got some bit of pricing power, then every year you increase prices anyways, right? So eventually you will lap that increase. So yeah, there might be some intermediate term margin impact will be very small, relatively small because I mean, again, it seems like again, for a couple of reasons, right? You were already paying anyways, higher wages to some of your salary people, some other people, so you’re paying to a small percentage of people more. And it’s not gonna have that much of an impact. So I think you know, you’ll see some increase in costs, but it won’t be substantial. That would be my guess again.

Dan Kline  15:21

There are going to be places, Walmart’s probably a good example where there’s been a ripple effect, where you can’t just bring everyone to $15 and leave the the low level manager or ship supervisor at the same rate as the people. So there are absolutely going to be some people who get raises above $15. Because of this, and Walmart will always tell you that their average rate of pay plus benefits is much higher than $15. And that could be true if you’re using their education benefit or some of the other things.

So here’s the problem. Here in Florida, we are seeing pretty much $15 as standard you have to go to some pretty sketchy locations. You know, maybe maybe if you wanted to work at like the bad neighborhood 7-Eleven maybe it’s not $15. But most places are $15. But they can’t find enough workers. Now why is that? There’s a couple of reasons. Childcare has not come back at the level it was pre the pandemic, some of that is related to school in that a lot of childcare is tied to school, a lot of summer programs are tied to school, many summer programs weren’t sure how they can open so some opt not to.

So there might be a rush of labor come the second week of August when our kids go back to school. But if I’m McDonald’s, if I’m Chipotle, like even Starbucks, and you mentioned raising prices. Chipotle raised prices 4% in going to a $15 minimum wage, my guess is they’ll raise prices again this year to sort of to cover the whole thing. Starbucks raises prices every year on almost everything. So they’ve already been doing this.

But if I’m any of those companies, I’m looking at automation. I’m not sure that as a Starbucks customer, I care if a robot makes my, you know, makes my drink that already has an exact recipe that has no artistic flair, which you might get an independent coffee shop, I think a Domino’s (NYSE: DPZ) why wouldn’t you automate everything, if all that technology exists. And again, this is going to be a haves and have nots, McDonald’s can afford to put in a Big-Mac-a-Tron-2000. And I’m not so sure that you know, Burger King (NYSE: QSR) or Wendy’s (NASDAQ: WEN) has that kind of cash? Anirban, am I wrong? Are we are we gonna not? Are we gonna see automation? Or am I getting it totally wrong?

Anirban Mahanti  17:31

I think I think you’re right, you will see some automation. Here’s the thing. I’m not 100% sure, about. I’m not 100%. Sure. But I was taught that automation actually replaces the mid tier worker, not the lowest tier worker, not the highest tier worker with the highest tier worker or the higher tier workers you’re paying for essentially, more quantitative value creation. You I think anything that is routine, which is typically be, you know, at the mid mid level can be replaced, right.

And I think the classic example I like to give for this one is you think about bookkeepers. Right? So bookkeeping is a big deal. bookkeeping, you know, involves having certain level of education, having, you know, being able to play with rows and columns and knowing what it means and then to code it appropriately. But bookkeeping has been largely, you know, is slowly becoming default, because of bookkeeping software, which can take your bank feeds and automatically label things. So I think that’s where the sort of, you know, the the impact of automation happens.

In the food industry, though. I’ve mixed feelings about this. Let’s take coffee, right? I can make fantastic coffee using my Nespresso machine at home of whatever flavor I want. Why do I go out and have coffee? Couple of reasons, right? One reason I go out and have coffee is well, I’m lazy. I want somebody else to do it, and I don’t want to have the, you know, the pain to sounds really lame, of taking the pot and putting it in and then you know, making my thing my milk. And so that’s I’m just trying to avoid that. I want to, I want an experience. Part of the experience, though, is when I have coffee, I actually go and have a couple of shops. I don’t go to a third shop, I go to just two shops, because I know those people, and one of the attractions is I’m gonna chat with them about different things. With one of my coffee people I actually talk with Dogecoin. Yeah, like how are the Doge Brothers, and we have a bit of a joke. I don’t think, you can’t replace that to the machine. Right. So I mean, there are coffee serving machines in I think in parts of South Korea, that you know.

Dan Kline  19:54

Yeah, they absolutely exist. You know, the the American Express Centurion lounges have the really nice coffee machine that was in the office of our former employer that can make you a latte, I would put it at the low end of acceptable. But what you don’t see when you’re at a Starbucks is a lot of its automated anyway, the human is is loading the things, they’re doing some of the grunt work that can really be replaced. And if you look at what’s the value of the employee at a Starbucks, the value is that the person knows you, starts to know your order, and knows the appropriate amount of interaction because I go to some local places, in addition to Starbucks, and my favorite local place, I stopped going to for a while, because I used to go at like slower times like 10:00am in the morning, and the general manager was ready for a break. And he knew I was a fan of the New York Rangers, and I was there happy to chat for three or four minutes, not happy to chat for 20 or 30 minutes, because I was there to work.

So for a while I had to just kind of only go there on the weekends, because there’s no polite way to say, Hey, I like you, you know, you want to meet for a drink or go watch a game like, that’s great. I can’t do that at 10 in the morning.

So I think for Starbucks, the role is for them to know a little bit about you. I know, in my case, you know, oh, your son’s not with you today and you chat for two minutes while your drink is being made. That’s the social part that you start to other people in the store, maybe you have a little bit of interaction, that part is really valuable, I actually don’t see any value to the person making my drink. Because again, they’re working from exact recipes. This is not I walk into the artisinal coffee shop in Seattle. And the person can talk about the beans for 20 minutes. And you know, pouring the water at exactly this temperature for exactly this amount of time. Starbucks is engineered to be McDonald’s, basically, McDonald’s, their employees aren’t making the coffee. That’s all very, very automated. I’m in favor of this. And we’re seeing it in a few places.

So we talked a little bit about retail, but Target has made a heavy push into self checkout. Now self checkout doesn’t replace all the people. Why is that? Sometimes I don’t know where the barcode is. Sometimes I want to buy wine and someone has to come over and make sure I’m 21. Sometimes people steal, or they leave something in the bottom of their cart and they unintentionally and someone’s like, Oh, hey, you forgot the toilet paper there. Like, so for like eery four people there’s one. And it doesn’t work that well. I don’t like it. But I do think eventually it will be efficient, it will solve a problem.

The other place you’re seeing, you’re seeing robots is inventory. I don’t need a human to go to the shelf and do a scan and see that there should be 30 rolls of paper towel. There’s only five. You’ve also seen some cleaning being done by robots, which, you know, that’s certainly something with the protocols, the COVID protocols, we’re gonna see more of overnight sanitation, robots, and things like that.

But Anirban, let me ask you, do you think we’re moving towards a world where it’s more like Amazon Go (NASDAQ: AMZN ) where like the clerk and the checkout is irrelevant, because I actually think that’s a loss for a lot of stores. Like as someone who worked the counter when I ran the toy store. That’s one of the ways I got to know my customers, but in the grocery world in the mass retail world. Is the checkout person still relevant?

Anirban Mahanti  23:11

Well, that’s a good question to ask. Because in my experience, it’s something that I’ve observed personally, like the two big grocery chains here in Australia, Coles and Woolworths. I think 10 years ago, there was no self checkout. And they were always manned by someone right? Now, they have the same number actually, of human man checkout points. This is to have humans there anymore. Their closed and you do exactly what you’re assuming you could you basically self checkout, and there’s someone standing there to help you out with a machine. Can’t you know, machine is unhappy that the weight of the object doesn’t look like the weight of the object should be and things like that. I think a lot, majority retail stores are gonna be like this, where, you know, it’s gonna be 80% self checkout, 20% you know, checkout by human being because, you know, somebody can’t do it or somebody needs help or whatever. It’s, I think, inevitable.

Dan Kline  24:10

Or I live in Florida, somebody is paying by cheque, that that is that is certainly possible. The way I see it, Starbucks, I think is actually an anomaly because their CEO Kevin Johnson has said, we’re not automating to take people out of stores. We are automating to put people in front of customers. So right now they’ve automated things like inventory, so there’s no store person who has to be counting how many napkins they need to order, and instead, that store person could be making sure I have a napkin or could be saying hello to me, or it could be jumping in and producing more drinks or warming up more croissants or whatever it is. I actually think that’s not going to be the norm. I think we’re moving towards a world where again, your [inaudible] your McDonald’s, McDonald’s franchise, McDonald’s franchisees did not love it when the company decided on McDonald’s 2.0, you know, store the future, I think is what they call it. And that meant iPads and ordering kiosks.

And what did you find? When you have people order via an iPad, there’s a little bit of a pain point, well, they learn how to do it. And then they order more, they also order a little more finicky, because maybe they don’t like pickles. But they’ll just take them off. It’s not that big a deal. It’s really easy on the iPad, there’s a lot of customer satisfaction, once you get over that initial hurdle that obviously tied really well into their app. And at some point, you argue like, Well, why do I need an iPad, like who doesn’t have a phone, and that might be true.

So I think you’re gonna see sort of the end of that traditional ordering, you’re going to see some production, like making fries is always the same. So there’s really no reason that just can’t be a robot arm and, and maybe a person has to fill the bin the way someone has to pour the coffee into the Starbucks, mostly automated machine. But I do think we’re moving towards automation. But I don’t think and again, feel free to tell me I’m wrong. I don’t think we’re moving to some sort of crisis of workers, unless you’re a worker not capable of being in a customer facing role. Because I do think the vast majority of workers, even if they’re doing reshelving, or other things, the person reshelving at Target has to be able to stop what they’re doing, answer my question and find me the item I want. And that’s not every person. So I do think there’s going to be some workers that maybe have to find a new line of work.

But I think we’re talking like a 10% reduction of 15% reduction. And you’ll also see a boomerang effect, you know, not to get too Australian here, where some businesses go the other direction. And they say everything we do here is handmade like like our coffee shop, we’re not Starbucks where our typical coffee house and and you know, every bean is hand ground, we don’t even use an electric grinder, like we whip our own cream. Like, I think you’ve seen that, you know, sort of folksy, you know, farm to table, you know, tail as well. So I’m not overly worried about a worker crisis.

But I do think higher wages mean and it’s probably not great for teenagers, I have a 17 year old who, if he had a car could easily get a job, but in the places right around here cannot. And I’m not so sure if I was Target, and you could walk to target from my house, that I’d want to hire a limited availability teenager and have to pay him $15 an hour. I’d much rather pay him $9 an hour when he works for me for a year and he’s college age or wants a full time job. You know, maybe that I’ll pay him $15 an hour. Am I my reading any of this incorrectly? I think it’s it gets so political, that we forget that just it’s real business involved here.

Anirban Mahanti  27:40

Yes, I think the internship point, like, you know, when you have somebody who’s a worker, but really is an intern, you kind of got to pay them intern wages, and that’s good for both sides, one person gets kind of less work, but is training a person and that person gets experience? And I think it works hand in hand. I think I totally see the the the point we’re making, I think it’s true where people will have, we always fear automation, right. And I use the bookkeeping example. You know, before that Excel came, and people were worried that you know, all these people who are, you know, doing record keeping manually, right, that it has an impact, I think it has an impact on a transitory basis, those people who can’t retrain or go to another job, right, that’s sort of the disruption.

But after that, it just happens that, you know, when, you know, human beings are good enough at picking up other skills that, you know, compliment that machine. And we do that pretty well. So customer service, for example, is something that, you know, is machines a long way off from doing customer service. It’s a long way off from doing customer service, right.

Dan Kline  28:52

And you’re smarter companies, your Walmart’s, or your Target. They’re doing their own version of school, where they see where the world is going. And they’re offering training opportunities. And I’ll go back to when I used to work in my family business, the location I ran was a factory, almost entirely a factory. And I went, well, that’s not going to work. Like we’re buying more things from China, like a lot of what we make is just not long for this world.

So I brought in scaffold rental. And that was a difficult choice to make, it’s very expensive, it’s probably, you know, a, you know, a half million dollar initial investment of equipment you have to bring in, and I sat the workers down, and I said, Here are the jobs we’re gonna have available a year from now. So if anybody wants to step up and be like the foreman of the scaffolding group and go, go learn this stuff and where it is and what it does and how to load trucks. Well, that’s gonna be a management opening that someone could step up up into, and the existing manager there who ran everything was very resistant, and I sat down with him multiple times, and I said, Look, you got to go to another location and learn these skills, because I can’t pay your salary to run a factory that’s going to half as big that that I can run because it’s only going to make a couple of products. And after a year of being ignored, when I, when I had to let him go, it was awful. It wasn’t fun. I liked this guy. But he wanted to do the same job he’d always done.

I think that’s going to be a challenge for some of these companies that they have entrenched, workers that don’t want to learn new skills. But again, I think this is going to be a haves and have nots. So let’s talk about how do you invest this. In my mind, if you’re going to invest in automation and sort of the changing workforce, I would look at the companies that can afford to make the best decision. Now Starbucks might decide that it’s great to automate heating up its croissant, but they should never fully automate the coffee, even if it’s just the illusion that a person is creating your drink. I trust them to figure it out and do it the right way.

Same thing with McDonald’s same things with with Target with Walmart. I mean, there’s been heavy automation of things like inventory using drones at you know, at a Walmart, and there’s heavy investment. When I look to that second tier of retailers, or restaurants, I’m not so sure your your Chili’s (NYSE: EAT) and your Popeye’s (NYSE: QSR) and your Burger Kings of the world aren’t necessarily going to keep up. So might they succeed because people like their products? Sure. But from an investing point of view, this is a drive to quality, your thoughts Anirban?

Anirban Mahanti  31:24

Yeah, I think I agree with that. So whenever there’s a big shift, I think that that’s the impact, right? The the winners here who actually significantly benefit, and the ones who are either tier two, tier three are actually going to be the ones that are not going to benefit are going to be left behind. Because a either that, you know, paying more for them has an impact in terms of inability to pass on the cost. So the margins go down, right? And then the same time, are they able to actually invest in new technology that’s required to compete and bring, you know, relatively reduce their cost elsewhere? For the cost increase that they’re seeing on the wages front?

So I think it makes sense. I mean, quality is interesting, from that point of view. And quality is always interesting, because it’s sort of you know, one simple thing about quality is that it is basically betting on a team of people who know how to navigate the time’s right. And that’s why the good companies win over the long period, whereas not so good companies. They, they are the ones who actually go down over a long period, right over the over the longer timeframe. Right, the mediocre ones are the ones that suffer and the quality ones actually shine.

So I think, you know, focusing on people and systems around a company really helps. In the, you know, I don’t have any other basic part, unless you don’t you really covered, I think that in the quality aspect is is the one. I guess I’ll add one thing, if you think about automation, it also things it is, you know, so there’s automation industries, and then we can therefore think about, you know, if you think about retail or if you’re thinking about, you know, automation in say home building, you want to think about those companies that can benefit from it.

The other thing to think about is, what are the companies that are gonna help in automation. And so there could be some technology companies there that might help with automation, there might be some robotics companies there that might actually help with automation. So it might be worthwhile to think about whether they’re, you know, one or two winners, that seem like the obvious, or at least are shaping up at this point to look like the obvious winners of that category. So if it’s enough, if it is, if somebody has this, you know, automated coffee machine with a robotic arm that does everything that everyone’s gonna have, then well, that’s a good company maybe to bet on. Right? So something to think about is, are there other sectors that you know that are going to be driving this trend that will actually benefit from it.  So there’s a couple of thoughts there.

Dan Kline  33:56

So I think we’ve seen a version of this already in the logistic space, where your biggest players, your Amazon, your Walmart, your target, and maybe just those three, had the ability to spend the money to handle all their own logistics and their supply chain. And then you’re seeing a couple of other companies you’re seeing FedEx (NYSE: FDX) on one level, handle a lot of logistics for companies. And the real winner, I would say is Shopify (NYSE: SHOP), you’re seeing Shopify sign up some really big brands that are not big enough to build out an Amazon style supply chain. Now Amazon is also getting into that space with their BigCommerce (NASDAQ: BIGC) deal, which we talked about on the show a couple of weeks ago.

So I look at like a Shopify and say, they might be able to go into the space of outsourcing some of this, like I’ve seen, you know, some some products that are not millions of dollars that allow a grocery store to automate much of the order picking process. Well, maybe a small regional chain can’t do that. But they can provide a warehouse and partner with someone who can do that. That’s I don’t know how to invest in that yet though I probably bet on Shopify being being part of the answer there, and I think you’re gonna see though, you’re gonna see those plays as well.

But I will say Anirban, there’s great technology that can make you a coffee or a drink. But it’s not all the way there yet, because I’ve told this story on air before I was in Las Vegas with our friend, Matt Frankel, and we both sat down at a at an automatic Bionic Bar, and I paid $15 and I got a gin and tonic and it sloshed all over, it, it overflowed. There’s no robot napkin, that comes and cleans cleans it up. And then I’ve got some drink that was like undrinkable. It was it was absolutely too sweet. There’s no human being to go complain to.

So I mentioned the the coffee machine before, it’s pretty good. It’s good enough. If I’m in the American Express lounge, it doesn’t cost me any more money, I might do that. Rather than go spend $7 at an airport coffee shop. I think there’s a ways to go. But we already did see like a fully automated Shake Shack (NYSE: SHAK), which was a bit of a gimmick ran a couple of years ago. So this is going to be an interesting one to play out for investors. Yeah, I would look a little bit at, are there any emerging companies to watch that are in this space that could get acquired, we’ve seen a lot of big acquisitions, you know, Amazon buying up Kiva was a good example. These companies don’t often make it to public we saw that with Shipt and Target. So logistics and robots. If you can get in on some of these, there might be investing advice. Right now. It’s one to keep an eye on.

So we’re going to shift gears here a little bit. And we’re going to move into the homestretch. So this is a question. I’ve asked much of the team not all the time, because I can never remember who I’ve asked, and there’s so many shows. But here’s the question, “what’s one red flag that generally keeps you from buying a stock”. Mine was treating customers well, so if a company hates me, I don’t want to own their stock, no matter how good a business it is. So I don’t care what dividend AT&T (NYSE: T) pays. I’m not buying AT&T stock, because they clearly don’t like their customer base. I apologize to the AT&T executives offended by that. But your track record says that no matter how hard you’re trying, you haven’t fixed it.  Anirban, your thoughts here.

Anirban Mahanti  37:06

Yeah, I love good customer service is excellent, actually, is a really good indicator, you know, what my, one of the things I look for is dilution. How much? You know, how much have you quoted, how much quantitative easing is a company doing? Every company nowadays thinks that they’re the Federal Reserve, and therefore, they can print as many shares as they want to. And this, I’ve seen this happen a couple of times, with companies that I’ve invested in which, you know, Twitter (NYSE: TWTR), actually, at one point had investment. And, you know, it was not growing as fast as you say, you know, Facebook (NASDAQ: FB) or something else, but it was growing, the problem was that the share count was growing as fast. So there was no growth on a per share basis.

So I really watch for companies dilution, and it really, I think, it’s something that goes under the radar for a lot of people, because, you know, you have to look at the balance sheet. And, but I just, I have a, I have a little bit of a, you know, love hate relationship with a dilution. I mean, you know, you can use it appropriately to reward your, you know, your sales and marketing team and your executives and your R&D team and things like that. But you need to know how to use it carefully. And it shouldn’t be like, you know, more than a couple of percentage points. And if there’s more than that every year, then you better have really fantastic growth, or you have a huge, you know, total addressable market. So, yeah, that’s something to keep an eye on.

Dan Kline  38:35

Yeah. And I’m fine with a company using dilution to acquire sales. So if you’re, if you’re adding 25% in revenue by diluting your stock that could pay off, especially if there’s synergy and back end savings. I actually, we’ve talked about this with Apple (NASDAQ: AAPL), when the opposite happens and the share count decreases. That is tremendously beneficial. That’s also a slippery slope. Because I don’t like seeing share buyback, unless a company has so much cash, that it can still do all the R&D, all the acquisitions, all the things it needs to do, and then have cash leftover there aren’t that many companies, Apple and Microsoft (NASDAQ: MSFT) come to mind. I’m sure there’s a few others. But there aren’t that many that can do that. But that just becomes a wealth builder for people. So yeah.

Anirban Mahanti  39:23

Apple, for example, has I think decreased its share count by something like 30% in the last five or six or some some number of years, so it may be 10 years, or I don’t know. But that’s a huge impact. Right. And it’s not that it has covered the cost of his R&D to your point. Yeah, I mean, you know, yes, actually, here’s the other thing. This is this is not a red flag, but I think people use this as a green flag. And I have problems with using it as a green flag. I should, this is interesting. So using R&D spend as a green flag doesn’t necessarily mean that it’s useful R&D.

And the reason I point this out is there are companies you know, that can be spending 20-30%, you know, on their R&D. But the thing you need to see is what you are getting out of the R&D. And have you actually reduced your R&D spend and what did you get. And two companies that are really good and frugal with R&D. One is Apple, its R&D spend is actually as a percentage basis of revenue, which is what most people will look at, is actually significantly lower than other big tech.

The other one that’s really good with its frugal R&D spend is Tesla (NASDAQ: TSLA). It doesn’t spend as much on R&D compared to, again, the big tech, but it gets a lot out of it. So I think getting more bang for your buck really basically means it is indicative of focus, right? It says you’re focused on a small set of products or smaller set of things, you want to bet not the farm on multiple things, but you want to bet the farm on few things, which can go wrong, but which also increases the probability I think of success because you hire the people that you need for those particular products, or those particular things that you want to explore.

Dan Kline  40:55

Yeah, I mean, the opposite model has been Alphabet (NASDAQ: GOOGL), where a lot of Google shareholders would like to see them spin off their their moon shots and all these divisions. Now, realistically, if they’re spending all this money across, you know, 20 different projects, and one of them pays off, it might turn out. But so far, that’s largely been a sinkhole. There’s been a lot of failures. I spent a lot of years writing about Google Fiber, which is not a thing. I mean, if it might exist in some markets, there’s been a lot of mistakes there.

I want to see companies spending small amounts, nibbling at the edges of things I imagine there are small teams at Apple working on things we would never imagine they’re working on with all sorts of milestones. That was certainly true when I was at Microsoft that there were projects that you know, never really saw the light of the day, a light of day that you might do some internal testing on. But those weren’t big teams. Those weren’t billion dollar bets.

Anirban Mahanti, we’ve talked way too long. I want to finish up the show, I want to get back to the beautiful Cherokee mountains, I am in like one of the prettiest places I’ve ever been. It is 80 degrees. The pool is absolutely wonderful here, the gambling is good. I am with a handful of our former colleagues. So I’m very delighted to be catching up with people. But I’m also delighted to have gotten to catch up with you now and we will see you perhaps on Friday’s show if you happen to wake up. That is a whole team show airing at 12:30pm EST. So a little bit later than usual, but if not, certainly next week, probably from Orlando, Florida, or technically Davenport, Florida.

Until then, I guess I will throw it back to myself [end of interview].

Back to me. Thank you Sam Bailey. Interview from West Palm Beach. I am now as I said in Cherokee, North Carolina, on my way to Birmingham, Alabama. Mom, thank you for your concern. Sam throw up that first comment from Dee [unknown name]. Let’s take that to close this segment out, “software engineering jobs are not safe either. OpenAI and GitHub, developed Copilot a code completing bot things like that will make software developers 10 times or even 100 times more efficient”. Yes and no. So we’ve seen this a lot in the development world. A lot of the people I worked with back in the early internet days that were coding to maintain server farms. Well, some of them evolved, and they work in the cloud. And some of them don’t work or they work for companies that still use server farm. So I think you’re gonna see there will be jobs in the technical space, there’s gonna be room there.

We appreciate so many of you watching the show. We know it’s a little weird, when we don’t go live and fully interactive, but we’d like to get Anirban on. I was a little bit worried about the internet connection here in North Carolina up in the mountains. If you are not a subscriber, it is time for you to join 7investing, that is $49 a month, or $399 a year, you can join us at www.7investing.com/subscribe. And if you join, before Friday morning, you will get access to our new member call. That’s 10:00am and our advisor update call of all of our team. Maybe not Anirban because of the time difference. We’ll talk about our picks, our highest conviction recommendations, all of the questions you want answered, we’ll do that from 11:00am to 12:30pm. And then from 12:30pm to around 1:30pm we will do a special time 7investing Now with everybody. We’re going to talk about how we build our portfolio that’s going to be the theme of that show.

So again, we know it’s a little strange, because this show is usually really interactive. And we promise that’s what it’ll be like on Friday, but we want to get Anirban in we appreciate so many of you for watching.

Sam Bailey, let’s hit our finisher, “What’s your biggest red flag when it comes to a stock?” This was overwhelmingly bad management. I’m actually gonna go a little bit different and say it’s poor customer service. Sam you can take this down. There’s companies that have bad management that overcome it. I don’t know that they’re all that many companies with poor customer service. But a lot of people said in the Twitter comments here, you know, you can’t overcome it all comes from the top and you’re probably right so I’m going to give that one to you.

This has been a special episode. I am on the road quite a bit in the next few weeks going to be coming to you from Jacksonville, Florida at some point, Davenport, Florida, maybe a cruise ship, maybe the Bahamas, not even sure a lot of different places.

If you’d like to get in touch with us that’s info@7investing.com. The people who are in the coffee shop with me today are probably wondering what the heck is going on? And that is for questions about your membership questions about joining questions about how this service works. If you want to interact with us, opinions on the news of the day that is @7investing on Twitter. We appreciate you for watching. We’ll all be back. Don’t forget it’s 12:30pm live on Friday

Sam Bailey. Thank you. We’ll see you Friday.

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