Behind a Company’s Move – Is the bottom line the only factor?
Thanks to this smartphone video of one company’s announcement of their moving operations to Mexico, coupled with a certain presidential candidate’s ongoing tirade against US businesses moving out of the US, there seems a growing element of discontent across the country with the priorities of businesses in general – priorities that place the bottom line ahead of the people whose work, ironically, allows there to be a bottom line.
Rather than join in the ruckus we decided to take a look at a handful of high-profile businesses that are presently on the move and see just what is behind their decisions to relocate. Why are companies moving? Turns out it’s not always a simple matter of increasing profits.
Ahold USA employs over 100,000 people to run their supermarkets, which include Stop & Shop, Giant Food, Martin’s Food Markets and Peapod. They are part of a larger corporation, the Ahold and Delhaize Group, that between the US and Europe manages 7,500 stores, employs 375,000 associates and serves 50 million customers every week. For their efforts they realized sales in 2015 of 38.2 billion Euros. (Source: Ahold.com)
But no matter how big you are, it’s the little things that matter. In this spirit Ahold has decided to move its warehouse operations from the Buffalo, NY area to facilities in Pennsylvania and Massachusetts to better serve their grocery stores. In the process 600 jobs will be lost.
Letting whole groups of employees go is never pleasant, but at least in some cases it seems an unavoidable by-product of improving logistics and increasing efficiency in such a massive operation. After all, a quick search told us there was not a single Stop & Shop or Giant within 20 miles of Buffalo, Rochester, Ithaca or even Watkins Glen, NY.
600 people. That’s not a significant percentage of their overall workforce, though that probably amounts to little consolation to those 600. The severance packages may help, and for this Ahold can be lauded. Looking at the big picture, a company that does not stay competitive eventually disappears. None of us could possibly say what competitive edge this move will give Ahold, but losing hundreds of jobs is certainly less regrettable than losing thousands.
Room to Move
Spokane, Washington’s Costco store has resided at 7619 N. Division Street since 1992. For well over a decade this meant the warehouse discount giant stood outside the Spokane city limits. But things changed in 2005 when Mayor Dennis Hession told his cheering urban constituents that he would take a more aggressive approach to annexing urbanized county land. (This is like a person moving the fence around his property further out so he can have a bigger backyard.)
In 2008, taking Mayor Hession’s cue, the Spokane City Council decided they didn’t like how their maps looked and redrew them to include the stretch of N. Division Street that included Costco, redirecting the store’s healthy tax revenue away from the county and into the city’s coffers.
But now, it seems, the party is over for the municipality. Costco has outgrown their 134,000 square feet of space and has all but formally announced a move to a 160,000 square foot facility further north and east, back into county land and out of the city’s expanded backyard. The Spokesman-Review suggests the city tried to play nice: “Spokane City Council President Ben Stuckart said staff had worked with Costco over the past several years to try to find a new location within city limits, but were unable to do so.” (Evidently their backyard was full.)
Spokane County’s chief budget officer, Bob Wrigley, is understandably tickled about the return of tax revenue to his rural domain outside the city’s fences. “No doubt about it,” Wrigley said. “Anytime you get a Costco, or a Walmart, or a Lowe’s, any kind of big retail store, those are all pluses.” And Costco gets the added space they desired.
Meanwhile Ben Stuckart is left to lick his wounds, saying loss of city sales tax revenue would be disappointing, but at least the dollars would stay local. “As long as it’s staying in the county, that’s a good thing,” Stuckart said. Then he pulled a red marker from his desk and reached for his map.
A More Stimulating City
Last summer Connecticut lawmakers passed a budget that will increase taxes by $1.2 billion over two years. Understandably, this drew protests from some of the state’s biggest corporations. One of those corporations was General Electric, the behemoth that last year manufactured and sold $117 billion of aircraft engines, locomotives, power turbines and household appliances. The increased taxes on that $117 billion seems the catalyst that has prompted GE to vacate their headquarters in Fairfield, Connecticut, their home since 1974, and move up I-95 to Boston (which just happens to be one of the top 10 most viable cities for startups, which makes for a fertile place for established businesses like GE as well).
But according to Reuters, GE had been thinking about a new location for more than three years. The 124-year-old company is undergoing a major restructuring, cutting upwards of 6,500 jobs in Europe while changing the face of their headquarters in an attempt not only to lift profits but to emphasize their growing digital capabilities. In other words, this isn’t the dishwasher company our parents and grandparents grew up with. Like most of the rest of the product manufacturing world, these guys are going high-tech.
The new Boston headquarters will be the same size as Fairfield, but its makeup will change, GE said. The new office will employ about 200 administrators and 600 “digital industrial product managers, designers and developers spread among the company’s GE Digital, Current, robotics and life sciences divisions, sharing technology developments across business units and helping develop software to run the machinery the company manufacturers.” They may still make dishwashers, but they’d be the kind you can turn on and off with your smartphone while you are stuck in rush hour traffic on I-95.
But over the past three years GE had been looking at several dozen potential new homes. Why Boston?
“Greater Boston is home to 55 colleges and universities,” explains GE Chief Executive Jeffrey Immelt. “Massachusetts spends more on research and development than any other region in the world, and Boston attracts a diverse, technologically-fluent workforce focused on solving challenges for the world. We are excited to bring our headquarters to this dynamic and creative city.”
That’s not to say money was not an issue. On the Connecticut side GE was certainly pushed away by the specter of many millions in raised taxes while Massachusetts put together a sweet financial package to lure them in. Reuters tell us that the state “offered General Electric $120 million in grants and other financial incentives to persuade it to move to Boston, with the city kicking in another $25 million in tax relief.” One stipulation, we should note, is that “the state funds must be spent on public infrastructure, including site preparation, building acquisition costs and road and building improvements.” We understand this to mean this money isn’t supposed to go to executive retreats in the Caymans.
But that’s okay because, we are told, “GE also is eligible for $1 million in workforce training grants, and up to $5 million to foster relations between the company, research institutions and universities.” Read another way, this is an invitation to use at least some of these funds to foster those relations through an open buffet and bar tab at the Union Oyster House and a few luxury boxes at Patriots and Celtics games.
John Fish summarizes the situation like this: “This wasn’t only about dollars and cents (for GE) but what Boston and New England brings to the table.” And who is John Fish? He’s the chief executive officer of Suffolk Construction Company, New England’s largest building company. Of course he’s not complaining about the project.
Moving Back Home
Another aspect of GE’s massive reorganization is the transfer of GE Healthcare from London to Chicago, bringing the company’s only major overseas subsidiary back to American soil. Why the trans-Atlantic shift? Writer Greg Hinz explains via Modern Healthcare.
“GE Healthcare has deep roots in Chicago and significant operations here and in the Milwaukee area. The original parent company was founded in Chicago in the early part of the last century as a manufacturer of X-ray equipment, eventually moving to Milwaukee because of good access to glassblowers in the beer business.”
Meanwhile John Flannery, president and CEO of GE Healthcare, added this in the press release announcing the deal: “Chicago has a rich industrial heritage, terrific international transportation links, and is close to some of the world’s leading health care and academic institutions.”
That’s it? Glass-blowing brew masters and great transportation to some good schools and hospitals? Really? No eye on the bottom line in all this?
“My sources tell me,” Hinz maintains, “the city of Chicago offered no financial incentives to bring the headquarters here. It’s still unknown whether the state offered any.”
Though with two professional baseball teams sharing the city with the Bears (not to mention the Chicago Oyster House) there are even more luxury boxes to be had.
Getting Out of Cali
In 2013 Andrew F. Puzder, CEO of fast food chains Carl’s Jr. and Hardee’s, sat down for a chat with the Wall Street Journal. Between talk of Super Bowl ads and Obamacare Mr. Pudzer found time to talk about the growth of his business – and why it wasn’t growing in California.
These days, California – the leading state in business survivability – is one of the few states where the company isn’t looking to expand, WSJ tells us.
“Like many businesses, we love California and would love to build more restaurants,” Pudzer says. “But California is not interested in having businesses grow.” He backs this up with a comparison of how long it takes to get a building permit after signing a lease in Los Angeles (285 days) and Novosibirsk, Russia (125 days). “I can open up a restaurant faster on Karl Marx Prospect in Siberia than on Carl Karcher Boulevard in California,” he says.
But Mr. Puzder’s favorite California bites business story, WSJ tells us, is a law that requires employers to pay general managers overtime if they spend 50% of their time on non-managerial tasks like working the register if they’re short-staffed, “which is what we pay and bonus them to do in just about every other state,” the burger master explains. And since managers were filing class-action lawsuits against the company for not being paid overtime, “every retailer in the state basically has now taken their general managers and made them hourly employees.”
There were other reasons Pudzer was considering moving his company headquarters out of California, and just this March he announced his plans to relocate to Nashville, Tennessee.
CKE Restaurants, the parent company of Carl’s Jr., will leave its Carpenteria, California office next year and head across the Mississippi. Meanwhile Hardee’s will be making a move as well, from their headquarters in St. Louis to the same new Nashville corporate center, completing the company’s corporate consolidation. But take note: The move has, and will, involve much more than simply switching corporate addresses.
Carl’s Jr. and Hardee’s has had both company-owned restaurants and franchise restaurants. The company-owned shops have been set up in the areas where corporate headquarters are – Carl’s Jr. in Santa Barbara County and Hardee’s in St. Louis. But these too are now headed for franchising. At the same time, CKE has not been franchising in Nashville – a trend that goes back several years, a sign that Pudzer has been thinking of moving everyone to Nashville for a while.
But why the geographical differentiation? “It can use its company-owned stores there (in Nashville) to test new menu items and concepts before making them available to franchisees,” we are told.
No word on how long it takes to get a building permit in Tennessee. We’re sure it’s less than LA. And probably Novosibirsk too.
It’s Not You, America. It’s Us.
Moving out of a state – or a country – isn’t necessarily a matter of an onerous business environment. The 130-year-old cosmetic company Avon (originally the California Perfume Company, started by a New Yorker named David McConnell who was at the time selling books in Georgia) has seen some impressive growth in the second half of its existence: Avon says its number of sales representatives has grown from 100,000 in 1957 to 6 million in 2009. This may seem evidence of a booming American presence – until we realize most of this growth has occurred outside the United States.
“Our commercial operations are now fully outside of the United States,” said Sheri McCoy, Avon’s chief executive. This is the rather obvious factor in Avon’s decision to move their operation out of the US although they will remain incorporated in New York. “A company spokesperson said the move of its headquarters to the U.K. wasn’t for tax purposes, but rather to move the corporate functions closer to the bulk of company operations,” reports the Wall Street Journal. Yet while the move itself was not an attempt at the recently-controversial practice of tax inversion (where a larger American company sells to a smaller company abroad in order to avoid paying certain US taxes) Avon Chief Financial Officer James Scully said the company was examining strategies to reduce its tax bill.
Then again aren’t we all?
A Move to Fit the Company Culture
In keeping with the trend that started back in the dotcom boom many companies – and tech companies in particular – are occupying buildings that not only suit their needs but reflect their personalities. In so doing, these organizations are able to create an environment consistent with the company culture, a prominent feature of the quickly-evolving business space landscape.
To illustrate this concept we look to an area in downtown Chattanooga called the Innovation District. (That Chattanooga has an area called the Innovation District should in itself tell us something about the changing landscape.)
A couple of high-tech companies with roots in Chattanooga, we are told by the Times Free Press, have shifted into edgy, newly renovated office space in this ambitiously-named section of town. “We want to make this a technology hub in Chattanooga,” said Joseph Mandel, work experience manager for OpenTable, an online reservation system developer moving into their refurbished 80-year-old building. Chattanooga Mayor Andy Burke chimes in by saying “the Innovation District is about making sure we concentrate entrepreneurial businesses in one area so they’re constantly running into each other and expressing new ideas.” Mayor Burke has been one of the driving forces behind the development of the District.
Centering this technology-driven effort in a building from the 1930s may sound contradictory but the 20,000 square foot ‘701 Building’ offers the kind of character many young tech firms are drawn to: an open, non-linear floor space, exposed brick walls and concrete floors, steel truss ceilings and reclaimed wood accents along with terraces to offer tenants some highly-desirable outdoor space. Locally based Fidelity Trust Co. bought the three-story building and has plowed about $2.7 million into the revamp while saving red brick walls, concrete floors, wall-to-wall picture windows, and the limestone exterior which form the building’s structural foundation.
The offices for the tech firms were designed to hold the modern space needed for their workforces. “Hopefully, the best talent you can find will work here,” said Matt McGauley, who purchased the building with his father, Mike. Taylor Jones is the co-founder of Whiteboard, an interactive design and development firm that relocated from a different part of town not only for the added space but a better place to bring in clients and host community events. “We needed a place more impressive and which had better amenities,” he said about the site that also holds a library and second-floor conference room with glass walls. “This was a move of maturity for us.”
This last statement lends further proof of the changing office space landscape, as Jones lets us into Whiteboard’s so-called “war room,” a creative planning center where the meeting table can accommodate ping-pong.
Fellow 701 tenant Dave Arthurs will likely also be creating a non-traditional conference table/war room for his people. “You’ve got to go above and beyond technology to recruit and retain employees,” says OpenTable’s vice president of engineering for restaurant products.
Sounds like fun.
It also sounds like Milwaukee.
Moving to Attract Millennials
Up in Milwaukee, among the beer brewers and glass blowers, HSA Bank has left their suburban digs for the downtown appeal of Schlitz Park. The reason?
According to this piece in the Milwaukee Journal Sentinel, “the need to attract and retain younger professionals is driving more employers like HSA Bank to move downtown from Milwaukee’s suburbs.”
Hmm. Care to explain this need for younger professionals?
Okay, you got it. “As a greater portion of the workforce becomes millennial,” says developer Stewart Wangard, “the employers are looking for sites that will attract the best talent.”
So companies are relocating for these young millennial punks?
That’s right. And they aren’t just moving from Point A to Point M. They are redesigning their entire office environment. Wangard, in his effort to bring in tenants for his new downtown office project, believes in “urban sites (that) have better alignment with millennial values.” That belief has led to the demolition of the former Schlitz brew house and replacing it with a public square, fitness centers, bike-sharing stations and renovations to the remaining surrounding buildings.
Meanwhile Sandy Botcher, vice president of facility operations for downtown’s largest ongoing office project, Northwestern Mutual’s 32-story office tower, says the endeavor is partly tied to the growing preference among young professionals to work in an urban environment. “We believe the unique nature of being located on the lakefront and in the center of downtown enhances our ability to recruit top talent locally, regionally and nationally,” Botcher added in her statement to the Sentinel.
Well when I was young I walked three miles to work. Uphill. Both ways.
Hey, we don’t make the rules. We just try to keep on top of them.
So What’s Going On?
Lots. Laws change, taxes go up, customer bases shift and generational values evolve. Of course, if we look closely enough we see that the bottom line is in there somewhere. But taking in the big picture it is clear that corporate moves occur for all kinds of reasons.
Why are companies moving? Taxation, location, and a millennial nation. Luxury boxes and oyster bar buffets are just the occasional bonuses.