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We often struggle to answer the question: What is the right thing to do here?
Good Intentions suggests that it is possible to do good in economic matters if we begin with the right assumptions (and begins to ask the right questions):
Our actions can produce outcomes that reflect what we value.
On a frozen December day in late 2002, more than seven hundred people stood in line on the vacant lot at 35 Revere Beach Parkway in Medford, Massachusetts, waiting for a taste of heaven-or at least as close to heaven as a deep-flied, sugarcoated, hot-off-the-conveyer-belt doughnut can bring you.
That vacant lot, once the site of a Bickford's pancake house, was the future home of the first Krispy Kreme Doughnut store in Massachusetts, the doughnut capital of the flee world. According to The Wall Street Journal, there are more than twelve hundred doughnut shops in Boston-or "one for every 5,143 people." (Nearby Providence, Rhode Island, the Journal reported, has a doughnut shop for every 4,226 people.) More importantly, New England is also home to Dunkin Donuts, the king of the American doughnut industry, and Krispy Kreme was invading its territory. The groundbreaking for the Medford Krispy Kreme was the first stage of the invasion.
For the occasion, the store owners brought in the Krispy Kreme Mobile Store, a modified eighteen-wheeler equipped with a mini doughnut factory, capable of recreating Krispy Kreme's hallmark: "doughnut theater." Onlookers watched through a glass window as fresh doughnuts were dropped into a lake of boiling shortening, dunked under a waterfall of sugary glaze, then plucked off a conveyer belt and placed in the hands of a hungry customer.
The combination of a secret recipe-purchased in 1933 from Joe LeBeau, a French chef living in New Orleans-and piping-hot delivery made Krispy Kreme irresistible. Originally founded in 1937 by twenty-one-year-old Vernon Rudolph and two friends, it had flourished as a southern chain, only to go through a downturn in the 1970s when the company was bought by Beatrice Foods. Then, in the 1980s, the company was sold to private investors. A new CEO named Scott Livengood revitalized Krispy Kreme, focusing on its nostalgic image and the magic of doughnut theater. The company began growing like gangbusters.
In early 2003, Krispy Kreme had 292 stores with $492 million in sales, earning $33 million in profits for the previous year. By 2004, according to CFO magazine, Krispy Kreme "reported $665.6 million in sales and $94.7 million in operating profit from its nearly 400 locations, including stores in Australia, Canada, and South Korea." Company stock, which debuted at $21, soon climbed to nearly $50 a share.
During their first week in business, new stores would sell nearly half a million dollars' worth of doughnuts and coffee, with hundreds of customers camped out as opening day approached. When the Medford store opened on the morning of June 24, 2003, nearly 250 people were already waiting outside. Opening-day sales were $73,813, according to the Lowell Sun-a new company record. By week's end, sales had exceeded $500,000.
Two weeks later, on July 7, Fortune magazine pronounced Krispy Kreme "the hottest brand in America." In his cover story, reporter Andy Serwer described Krispy Kreme's success in religious terms: The company's annual meeting was "sacred ground"; its employees didn't just make doughnuts-they had "a calling"; and its success was a testament to "the American dream."
"It may seem grimly amusing that in a time of economic pain, corporate scandals, and troubles overseas, this company should be growing so explosively," wrote Serwer. He went on to say:
But the Krispy Kreme story is about far more than comfort food-the company's wild success in this hard environment is a tale of shrewdness, original thinking, and brinksmanship. The yarn is part Southern gothic-as in long (try six decades) and tortured, replete with heroes and even Yankee villains-and part sophisticated yet homey marketing that helped create the hottest brand in the land.
Serwer ended his article this way: "The world is always filled with unknowns, never more so than right now. With all that's wrong out there, sometimes it's easy to lose focus on the big picture. So take a second and ask yourself'. Is the American dream still alive? Is Krispy Kreme for real? Don't bet against it."
Krispy Kreme was on top of the world. It had a product that inspired fanatical devotion, massive brand awareness (despite doing virtually no advertising), soaring profits, and one of the hottest stocks on Wall Street. It even embodied the American dream.
But then the world turned.
Atkins Diet mania hit the United States and carbohydrates became public enemy number one. Sales of Krispy Kreme doughnuts started shrinking. According to Snack Food & Wholesale Bakery, a trade publication, Krispy Kreme lost $21.7 million in the first nine months of 2004. By the end of the year, Livengood and six of the company's top executives were fired in an accounting scandal. The company stock fell from nearly $50 to less than $4. Eighty stores closed. In 2005, Krispy Kreme lost $197 million. In less than a year, Krispy Kreme-as one business magazine put it-had become "fried."
What went wrong? Two things stand out.
First, Krispy Kreme made too many doughnuts. According to Making Dough, a chronicle of "The 12 Secret Ingredients to Krispy Kreme's Sweet Success," the company's 292 stores made a whopping two billion of them in 2003. Dunkin Donuts, with more than five thousand stores worldwide-more than seventeen times the stores of Krispy Kreme-made only 2.3 billion doughnuts.
Each Krispy Kreme store could pump out between 48,000 and 120,000 doughnuts a day, but those stores, which cost $2-3 million each, needed nearly twice the sales of a Dunkin Donuts to break even. Even worse for Krispy Kreme, the company made almost a third of its revenue ($152.7 million, reports CFO magazine) selling doughnut mix and machinery to franchises. When sales at franchises fell, the company felt a double whammy.
Krispy Kreme was also in the wrong business, at least in New England. Its rivals-Dunkin Donuts and Honey Dew Donuts-made most of their money selling coffee, whereas Krispy Kreme made most of its money on doughnuts; coffee represented only 10 percent of its total business. Even Fortune's Adam Serwer later admitted that Krispy Kreme's doughnuts-no matter how tasty they were-were not enough to draw customers into stores on a regular basis.
"Starbucks you can go to every single day," he said on CNN's In the Money after Krispy Kreme's troubles became public. "I happen to go there twice a day.... [But if] you go into Krispy Kreme every day, you've got a problem. That's too much."
Too many doughnuts. Not enough coffee. A business plan so flawed that nothing-not heavenly doughnuts, not Southern gothic myths, not America's hottest brand, and not even the American dream-could save Krispy Kreme from disaster.
Everyone involved with Krispy Kreme-the company's leaders, the media, the investors, and the analysts-fell in love with a magical, wonderful idea. Hot glazed doughnuts produced in a theater. They even talked about it in religious terms. But nobody asked, "Will this work? Who's going to eat all these doughnuts?"
Krispy Kreme's executives thought their ideas were so special-so blessed-that the normal economic rules didn't apply to them. They were wrong, of course, and it cost them dearly.
"There's Never Ever Ever Been a Show Like Veggie Tales"
Phil Vischer had a big idea.
In the early 1990s, Phil Vischer, an aspiring computer animator and Bible-school dropout-he'd been kicked out for failing to attend chapel-began working on an idea for a computer-animated video series for kids. Starring a pair of Abbott and Costello-like singing vegetables that loved Jesus, the series featured Bible stories remixed in a style that was part Monty Python, part Joseph and the Amazing Technicolor Dreamcoat.
Vischer provided the voice of Bob the Tomato. His friend, Mike Nawrocki, played Larry the Cucumber. They called the series Veggie Tales. The company was christened Big Idea Productions. Working on a shoestring budget out of a six hundred-square-foot storefront on Foster Avenue in Chicago, Vischer and several friends labored feverishly on the project for months-at one point working fifty-seven hours straight. Money was so tight that Big Idea couldn't even pay its heating bill. In his book Me, Myself, and Bob, Vischer recalls coming into the office late one frigid evening to find his friend Robert Ellis dressed in a parka and covered in a blanket, sitting next to a space heater while hard at work on "Where's God When I'm S-Scared?" the first Veggie Tales episode.
This first episode was completed a week before Christmas 1993, just in time to ship out the five hundred preordered copies. It wasn't enough copies to pay for production costs, but Vischer remained hopeful. Within a year, Veggie Tales began to catch on, thanks in large part to college students who worked at local Christian bookstores. They became big fans and played the video over and over again. The parents shopping in the stores saw "Where's God When I'm S-Scared?" and started buying it in droves.
In 1994, Big Idea sold fifty thousand copies. By 1997, they'd sold more than two million videos and had moved to a new office in Chicago. Big Idea had $4 million in the bank and no debt. "For the first time in our four year history, making payroll was no longer a concern," Vischer wrote in Me, Myself, and Bob. "Money was coming in faster than we could spend it."
Dick Leach, owner of Lyrick Studios (the creators of Barney), got ahold of a Veggie Tales video and signed on as Big Idea's distributor. By 1999, annual sales reached seven million videos-bringing in close to $40 million in revenue. In an interview with Christianity Today, Vischer called it a "hockey stick" growth curve: straight up with no end in sight.
Big Idea was featured in The Wall Street Journal and Time magazine, and it even appeared on The Today Show. Wal-Mart began selling the videos in massive quantities. And Hollywood was knocking on Vischer's door. His big idea had become a reality. So he came up with a bigger one.
Inspired by a desire to tell as many kids as possible that God loved them-and having read Built to Last, the best-selling business book by Jim Collins-Vischer came up with a "Big, Hairy, Audacious Goal": to build Big Idea from an animation studio producing a single video series into a media giant capable of challenging Nickelodeon and the Cartoon Network. Big Idea would become the new Disney, Vischer thought. God had blessed his first dream, and he was sure that God would bless this new one as well.
Unfortunately, Vischer, a goateed, bespectacled, natural-born storyteller, was not an empire builder-not really a CEO. And unlike Walt Disney, whose brother Roy was the brains behind the company, Vischer never found a business partner who could bring his vision to life. Instead, armed with a history of ever-rising sales, Big Idea built a master plan on shaky ground. It projected that sales would grow from $40 million in 1999 to $125 million in 2002. The company expanded, hiring staff and borrowing and spending money as if it were a Hollywood studio instead of a company that made half-hour, direct-to-video shows for kids. Vischer would later admit that he took his eyes off the money, believing that his dream was enough.
But instead of growing, sales went flat in 2000. Suddenly, Big Idea could no longer afford to pay its bills. To survive, drastic cuts were needed. That meant laying off staff, whom Vischer had come to see as family. Layoffs, he believed, could not possibly be God's will. Like many entrepreneurs, Vischer became so closely attached to his business that he couldn't let go. Committed to saving the company and the jobs of the people he loved, he risked everything to keep Big Idea alive.
Big Idea needed a miracle. The company's last hope was Jonah: A Veggie Tales Movie, its first feature film. Made for around $10 million dollars, the movie could have saved Big Idea had it been an unexpected hit on the order of My Big Fat Greek Wedding. On opening night, as the first box office results came in, there was a glimmer of hope. Reports from the first showings were higher than expected. But box office receipts began to slip as the night wore on, and before the end of the evening, it was clear that there would be no miracle. The next morning, Vischer announced that most of Big Idea's animators would be laid off.
Not long afterward, Lyrick Studios sued Big Idea for breach of contract (in 2001, following the death of Lyrick president Dick Leach, Big Idea had switched distributors, signing with Warner Home Video). In April 2003, a Dallas jury ruled in Lyrick's favor, awarding it $11 million in damages. The suit was eventually thrown out on appeal, but that was too late to save Vischer and Big Idea.
Big Idea went bankrupt and was sold to Classic Media for enough money to pay off its debtors. The company survives and still makes Veggie Tales videos with a small creative staff led by Mike Nawrocki, the voice of Larry the Cucumber, but the vision of becoming the next Disney is long gone. A big idea was not enough.
Results Matter Results matter-whether you are making heavenly doughnuts or creating computer-animated vegetables that love Jesus. And more often than not, they are predictable. That, in a nutshell, is the point of this book. And it might just be one of the most important lessons that Veggie Tales and Krispy Kreme doughnuts have to teach.
Why aren't good intentions enough? Because we live in a world of scarcity, a world where we can't get everything we want for free. That's one of the first principles that beginning economics students learn. When most people hear the word "economics," they think of stock markets, the Federal Reserve, unemployment reports, and other topics covered in The Wall Street Journal or the business section of the local newspaper. But at its core, economics is really about people, about understanding the choices people make when there's not enough to go around.
Economics offers a set of tools to help people make good decisions about how to distribute limited resources in the most effective way possible, to help people understand the consequences of the decisions that they make, and to help people understand how others will likely react to those decisions.
Economists don't try to make us feel good about ourselves when we shouldn't. Nor do they try to prop up bad decisions that were sentimentally made. Rather, economics is about helping people make their lives better by using information to make effective choices.
In the chapters that follow, we'll look at some of the most pressing issues confronting Christians in the twenty-first century. Issues such as poverty and global warming, education and immigration. Issues where the stakes are high, and where the decisions of Christians-how they vote and how they spend their money-have real-world consequences for millions of people.
We'll look at good intentions, to be sure, but we'll ask another important question as well: Does it work?
A case in point ...
The ABCs of HIV
In the late 1980s, the African country of Uganda faced a life-or-death crisis. Fifteen percent of the population was infected with HIV (the virus that causes AIDS), one of the highest rates in the world. Millions of people had the disease. Unless the epidemic was contained, millions more would get it, and the country risked falling into ruin.
With little money and an overtaxed health-care system-as Harvard AIDS researcher Ted Green put it, "even something as simple as aspirin was in short supply"-Uganda's situation seemed desperate. But then something remarkable happened. The prevalence of AIDS-the number of people infected with HIV-began to drop dramatically, down to about 6 percent of the population. While still a serious threat, the epidemic was contained. Uganda remains the only African country to have reduced its AIDS prevalence. The country's efforts in AIDS prevention seemed nothing short of miraculous.
Excerpted from GOOD INTENTIONS by CHARLES M. NORTH BOB SMIETANA Copyright © 2008 by Charles M. North and Bob Smietana. Excerpted by permission.
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TABLE OF CONTENTS
1. Is the Road to Economic Hell Paved with Good Intentions? / 9
2. Is Greed Ever Good? / 27
3. How Can We Give Poor Kids a Million Bucks? / 45
4. Must the Poor Always Be with Us? / 65
5. Is Bono Right? / 81
6. Is Wal-Mart Evil? / 101
7. How Did Ben and Jerry Get So Rich? / 121
8. Does Globalization Exploit the Poor? / 133
9. Are Immigrants Taking All of Our Jobs? / 151
10. Is Capitalism Ruining the Environment? / 165
11. Why Are Gas Prices So High ? / 183
12. Is Massachusetts a Family-Friendly State? / 193
Epilogue: The Parable of the Good Economist / 207
Acknowledgments / 213
Posted September 29, 2008