POP QUIZ

How much do major companies spend on travel costs for corporate execs to travel by jet? (The answer is at the bottom of this newsletter!)

In The News

🤑 Chinese Officials Load Up Stimulus Bazooka

Photo by Nick Fewings on Unsplash

Extended pandemic lockdowns, rocketing youth unemployment, deflation, indebted local governments, a real estate bubble, and regulatory crackdowns spooking foreign investors encapsulate just a few of the headwinds hitting China’s economy in recent years.

• And as “the world’s factory,” which boasts over a billion of its own consumers, what happens in China matters everywhere.

Special plan: On that note, Chinese officials have highlighted a major plan to shore up the world’s second-largest economy.

• This “special sovereign bond plan” would raise almost $140 billion in new debt, China’s fourth-largest fundraising effort in 26 years.
• With payback dates decades away, these long-term bonds are intended to fund projects related to food supplies, energy, supply chains, and urbanization.

Why it matters:

Ever since the Asian Financial Crisis in 1998, big bond sales like this to fund central government spending have been rare. An exception was made in 2020 to backstop pandemic response measures with a similarly large fundraising effort.

The move reflects a broader strategy shift. China’s President, Xi Jinping, seemingly hopes to tilt spending and stimulus efforts away from local governments to the country’s central government, particularly as regional governments in China have become increasingly debt-laden.

China is open for business: This came as Chinese Premier Li Qiang spoke to business elites at the World Economic Forum in Davos on Tuesday, making unexpected assurances to foreign investors that Chinese investments represent an opportunity — not a risk.

Specifically, he outlined that China’s expected economic growth this year is 5.2%, offering an early preview into the government’s official GDP report for 2023 to be released Wednesday.

• Whether investors buy that forecast remains to be seen, with more than $11.8 billion exiting China’s economy late last year, “implying firms were yanking profits or disinvesting from China altogether,” according to the WSJ.
• That marked China’s first negative quarterly outflow of foreign direct investment since 1998.

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🚜 John Deere Partners With SpaceX

Photo by Darla Hueske on Unsplash

While farm equipment has become remarkably complex, internet connectivity has remained a limiting factor for years. Perhaps not anymore, though, thanks to Elon Musk’s space company.

Space internet: John Deere will tap SpaceX’s satellite fleet to support the company’s efforts to automate planting and harvesting in remote locations.

• John Deere is the planet’s largest farm machinery manufacturer. Its SpaceX deal will help connect tractors, seed planters, crop sprayers, and other equipment in areas with limited internet.
• Said Deere’s chief technology officer, “This takes us a step closer to ubiquitous connectivity anywhere in the world.”

Why it matters:

From software enabling herbicide sprayers to distinguish between weeds and crops to driverless tractors plowing fields, Deere has poured billions into helping farmers digitize their operations.

While SpaceX’s satellite network, known as Starlink, has gained notoriety for its use in the war in Ukraine, automated farming in remote areas represents one of many areas where the company is facilitating compelling new possibilities.

• It’s estimated that 30% of U.S. farmland lacks sufficient Wi-Fi service. That problem is higher globally — in Brazil, for example, 70% of farmland has inadequate internet access.

Digitized farming: For Deere, using satellites to keep their products connected to the internet reflects a broader focus on turning agriculture into a high-tech biz.

• Deere execs hope 10% of company revenues by 2030 will come from software service fees, offering a higher-margin and steadier business model than conventional machinery sales.
• Everybody wants to sell software these days, and Big Agriculture is no different.

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🍔 Burger King Owner Buys Franchisee for $1 Billion

America may run on Dunkin’ — but it also runs on burgers and fries. Industry giants like McDonald’s, Wendy’s, and Burger King rack up tens or billions of dollars in annual sales nationwide, and their stores line many American roadways.

Most of their restaurants are franchises. For Burger King, it’s 99.7% of their locations, to be precise.

What’s new? This week, the owner of Burger King did something fairly unusual: It bought its largest U.S. franchisee for about $1 billion in cash to revamp hundreds of locations and boost sales.

New year, new me: That owner, Restaurant Brands International Inc, will buy Carrols Restaurant Group by the second quarter of this year, then spend about $500 million to remodel 600 of the more than 1,000 locations.

• “This presents an opportunity for us to really take charge of the BK U.S. image transformation,” said a Burger King executive.
• Burger King was founded in 1953 in Florida, though it has long trailed behind McDonald’s and recently fell behind Wendy’s in U.S. sales.

The goal: In short, Burger King wants to refranchise many stores to new or smaller owners, which could take five years or longer. The chain wants to increase its “operator base” in the U.S. to about 400, up from 300.

• Yes, it’s common for a franchisor to buy an operator, but it’s less common to see an acquisition where the owner is buying a large franchisee that is outperforming other franchises.
• “Typically, you want your franchisees to have scale,” one analyst commented. “Most chains are trying to consolidate their franchise systems.”

Burger King executives say the “sweet spot” for franchise operators is about 50 locations, enough where they live relatively close to all of them and can focus on guest satisfaction and the real North Star: profitability.

Why it matters:

The news offers a window into the big world of franchising, which began in the U.S. around 1850. But it didn’t become popular until the 1960s and 1970s as KFC, Dunkin, McDonald’s, Burger King, and other chains grew as automobiles became widespread.

Franchising allows business owners to buy into a much larger company — in this case, Burger King — and become the owner of one or more locations of that business. The franchisee agrees to all kinds of terms, and they’re seen as less risky than starting a business from scratch.

• The cost to open a Burger King franchise includes an initial $50,000 fee, then royalty fees (4.5% of gross sales) and advertising fees (4% of gross sales). Prospective franchisees must be worth at least $1 million with a minimum liquid capital of $500,000.
• The Burger King news comes a year after the parent company launched a $400 million plan to revive the business.

As a Burger King executive said, “I’ve always been a big believer in the network effects, getting an entire portfolio remodeled. I think that when consumers see that across the market consistently, it helps with recruiting, it helps with staffing the restaurants, it helps with the overall image and perception of the brand.”

Watch more on Burger King’s franchising empire

TRIVIA ANSWER

$65 million. That’s how much S&P 500 companies spent on jet-setting corporate executives in 2022. That’s about 50% higher than pre-pandemic norms, according to the WSJ.