Do Not Adopt This Business Model
One of the perils of being an equity analyst is that the constant drive to evaluate businesses begins to intrude into other areas of one’s life. This happened to us this week, after buying Pinocchio (Disney Gold Classic Collection)
The problem began in act two, when a nefarious character is introduced. He offers a fox a large amount of gold to lure disobedient boys to a place called Pleasure Island. Fortunately, this evildoer is not some creepy MySpace lurker. It turns out that upon reaching Pleasure Island the boys are simply allowed to do whatever they please. Free desserts and tobacco products, an amusement park, fights to start, windows to break and so on. After hours of behaving like jackasses, they literally turn into donkeys and are sold off to work the salt mines.
For now let’s ignore the fairly obvious ethical issues surrounding kidnapping children, genetically modifying them and selling them into slave labor. We’re business people. If you think business people have any ethics you have never seen a Michael Moore movie. But no matter: even the least ethical person would avoid this business simply because it is bad business.
Apparently it was quite a profitable enterprise at one point, as the villain was able to support not only payment to the fox but the cost of setting up an amusement park that is subsequently permitted to be destroyed. Perhaps he was using aggressive accounting practices in an early version of the WorldCom scandal. Or perhaps jackasses were just in high demand. At any rate, he seemed to be doing well. But entrepreneurs beware: we fear this business model has gone the way of the buggy whip. Consider our analysis:
Let’s begin with the revenue line: According to World Vision, which allows people to donate domestic animals to needy recipients in the developing world, a mule can be donated with a gift of $400. That is likely a good estimate of the going rate for a donkey these days. In the movie it looked like there were about 1,000 kids being lured into Pleasure Island, so we are estimating total revenue for the scheme of $400,000.
Now we move on to costs. The fox was paid a bag of gold containing perhaps 250 coins. Assuming these coins are the one-ounce variety, 250 ounces at today’s spot rate of $676.80 per ounce is a cost of $169,200. Then we have an amusement park. Cedar Point spent $10 million in 2005 just on upgrades, let alone an entire park. On the other hand, Cedar Point’s daily attendance of 10,000 is much higher than that of the villain’s park in Pinnochio. So for the sake of conservatism we will estimate that it only cost $1 million to build the park. The park was completely destroyed, so each batch of asses requires a new park to be built. Finally, we assume that during the course of 12 hours each boy can consume $25 worth of food, drink and tobacco (at cost). Total expenses: $1,194,200.
Net loss: ($794,200.) Like we said: don’t adopt this business model.
P.S: If you insist on being a member of the kidnapping/gm/slavery trade food chain, we recommend doing so as an end user. Assuming a typical mule can carry 175 pounds per load, 10 loads per day, six days a week brings you a total of 546,000 pounds of salt per year. Over a 20-year work life, that amounts to about 10 million pounds of salt, or 5,000 tons. At $20 per ton for rock salt, that amounts to $100,000 in potential revenue per $400 mule.
Disclosure: Author is long STREETTRACKS GOLD (GLD) at time of publication.
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