by Alexander Green, Chief Investment Strategist, The Oxford Club
Friday, February 26, 2016
Most Americans realize that the government is inherently wasteful and inefficient.
Yet this year we have aspiring presidential nominees on both sides of the aisle promising to give us more of it anyway.
If you understand anything about coffee and sandwiches, you’ll realize what a bad idea this is.
Panera Bread (Nasdaq: PNRA) earned billions over the last decade selling soups and sandwiches. Annual sales are nearly $2.7 billion.
Each Panera store competes with every fast food joint, cafeteria, diner and local restaurant in its vicinity. In a sense, it is also competing with local supermarkets, since you could eat at home or pack a meal for work.
Yet because Panera offers tasty fare at a reasonable price, it attracts millions of customers and makes billions of dollars.
The Starbucks (Nasdaq: SBUX) story is similar.
The Seattle-based company sells coffee and pastries. But then so do all the other coffee shops surrounding its stores. There is no shortage of competition. Yet customers can be seen queuing up at Starbucks at all hours.
Just look at the numbers. Over the last 12 months, Starbucks generated more than $11.3 billion in gross profit on $19.7 billion in net revenue.
It’s hardly a news flash that Panera and Starbucks make billions – in highly competitive markets – selling sandwiches and coffee.
But for an instructive look at the difference between how things operate in the private sector and the public sector, take a look at Amtrak.
The government-funded railroad service has the distinction of losing more than $45 billion over the last 44 years. And the bipartisan Passenger Rail Reform and Investment Act signed into law last year subsidizes Amtrak for another $7 billion from 2016 until 2020.
I’m not suggesting that running a passenger train line is like selling sandwiches and coffee. That would be comparing apples to oranges.
No, I’m going to focus solely on Amtrak’s café car, which sells sandwiches, coffee, pastries, soft drinks, and bottled water – the same things Panera and Starbucks offer.
Here’s the bottom line: Amtrak loses $80 million a year on its food service alone. It has lost almost a billion dollars over the last 12 years.
When you are traveling on Amtrak – as I often am on my way to our home office in Baltimore – there is only one place you can get a sandwich or a cup of coffee: the café car.
There is no competition trying to earn your business. Yet Amtrak’s food service loses tens of millions of dollars every year.
Don’t assume that Amtrak is charging too little. Look at the menu online. A cheeseburger is $7.25, a Pepsi or bottle of water is $2.25, a candy bar is $2.75.
“So how is this even possible?” you might ask.
A government audit discovered that the losses are due to waste, employee theft, lack of oversight and high labor costs. (Employees are covered under the Railway Labor Act. The average onboard worker earns over $42 an hour.)
Why doesn’t Congress do something about this travesty?
You’ll love this part. Since 1981 – 35 years now – Amtrak has been required by law to end its food and beverage service losses. However, Congress doesn’t enforce the statute, so Amtrak’s losses continue to pile up.
Running a food counter that dispenses sandwiches and coffee is hardly brain surgery. Yet the government turns even a simple operation like this into a gusher of red ink.
In the pantheon of government boondoggles, Amtrak’s food losses hardly rate a footnote. But they exemplify why government is inherently wasteful and expensive.
No one in government is penalized for poor performance, so there is no incentive to economize. There is no profit motive, so there is no demand for efficiency. And because voters and taxpayers are largely in the dark, needed reform doesn’t happen.
And we want our candidates for the nation’s highest office to give us more government?
Have a cup of coffee and think about it.
Good investing,
Alex