The Tale of André Prenner, a Parable for our Times (Part One of Two)

Today, we take a brief pause from our normal economic and financial market commentary with this tale of common sense economic calculation and action. And no, we do not believe that the world is any more complex than we present it here. If you want to understand economics, you need first understand two things: That the human condition is one of scarcity and uncertainty; and that absent rational economic calculation and a certain degree of passionate risk-taking, nothing good can ever come of it.

Yeoville was a small Midwestern town of farmers, a few shops and cottage industries. It had grown slowly through the years and had not changed much. Once in a while there was a good year, less frequently a bad one. On occasion these were related to poor weather or other reasons for a poor harvest. There was also the difficult time when a large portion of the young men went off to fight in a war. Fortunately, most returned, although their absence put a huge strain on the remaining residents to make ends meet. But on the whole the townsfolk thought well of their position and went about their business with a healthy mix of realism for today and optimism for the future.

Mr. André Prenner was one of the more successful small businessmen in Yeoville. He was now in his 60s.  His father had been a baker and manager of the town bakery, Yeoville Bakers. He was descended from immigrants from France, or so he was told by his parents, hence his first name.

André learned the baker’s profession from a young age, at first informally, assisting his father outside school hours and, after graduating the local high school, working part-time while taking a degree course in business at the local community college in the larger town a few miles downriver. As time would tell, André was not only given to work, but to greater ambition.

Taking advantage of youth, some savings from his part-time work, and a strong dollar, André celebrated completion of his business degree by taking an extensive trip to France–back to where, supposedly, his family was from–and also around various other countries in Europe. What he found astonished him: Unlike at home, where bread was simple, white and cheap, in France and in Europe generally, there was an endless variety of breads, in all shapes, sizes and even colors. It was as if the bread changed village to village. Even breads that looked the same tasted somehow different.

André returned to Yeoville some months later with a passion and a plan. He was going to turn Yeoville Bakers into something far greater than just a typical, small-town Midwestern bakery. He was going to introduce a range of European breads for distribution all over the state!

Now this was easier said than done. Anyone could, with enough searching around in a large city library, find a book with recipes for various types of European breads. But where to source the ingredients? And just because he loved the variety, would a range of pricey European breads sell well to a customer base which had lived its entire life chewing on the basic, cheap white stuff?

André promptly answered each such question with his passion. He was just going to have to give it a go.  He was young; he knew the trade; he had learned to love European breads in short order; he had the support of his father even, who had a soft spot for his presumed French heritage. The worst that could happen is that he would go bankrupt and, as an experienced young baker, would then seek an assistant manager’s job at one of the many small-town bakeries in the state. In other words, his worst case was really quite similar to what he would do if he didn’t even give it a try. So give it a try he did.

It didn’t take long to discover that, if you knew where to look, ingredients for European breads were not difficult to come by. Indeed, the bigger US cities, in particular on the mid-Atlantic coast, were home to some well-established bakeries producing European-style breads. He soon found how to get access to those same ingredients, transported to Yeoville for what he believed reasonable cost. He also researched the cost of distributing his breads to other towns in the region and how to partner with local shopkeepers to sell his product. That was the easy part. More difficult was that he was going to need to expand the existing bakery by adding new equipment. If he simply stopped producing basic white bread, the bakery would generate no income at all during an uncertain transition period and risk losing its client base. No, he would need to develop the new range of breads in parallel.

As the bakery had not generated enough retained earnings to cover the purchase of the required new equipment, André was going to have to go to the local bank for a loan. Business plan in hand, he took his years of experience, good local reputation and enthusiasm into the bank. When he departed that day, he had secured a business loan, itself secured on the new equipment he was about to acquire.

Once he had arranged for the purchase of the new equipment–which would be delivered, installed and operational within just two months–he set out looking for the three new employees that would be required to run it. Only one needed experience, as he had that himself in spades. The other two could just be hard-working, reliable and willing to learn. He found the experienced employee at a bakery in a nearby town who was keen on a new challenge. The other two he found locally, both of whom had been doing odd jobs since graduating high school a year before, but according to their references they did quality work when they could get it and were quick to learn new skills.

For the first few months André didn’t give a thought to making a profit from the new operation. He wanted to sample customers’ tastes and make the decision regarding on which breads to focus for the first year so that he could secure the needed ingredients in affordable bulk rates. He travelled to many towns and even some small villages in his bakery truck, giving away free, fresh samples everywhere he went. Once it became clear what people liked and were willing to pay a bit more for, he contacted his suppliers, ordered the necessary ingredients for regular, weekly deliveries over the coming year, arranged for the printing and distribution of promotional material, finalized agreements with shopkeepers all over the state, and sent the new baking operation into high gear.

Already in the first year the new breads were contributing a substantial portion of the overall Yeoville Bakers’ profit and André repaid one-third of the bank loan. The business was growing rapidly, but now all costs were variable, internally-generated cash was substantial and, as such, the loan was no longer required. He paid it down fully within three years, two years ahead of schedule. This freed up additional cash which was used the following year to finance the lease for a new bakery, in another town about 50 miles away, which would make full statewide distribution a reality.

André was pleased with his success as a businessman but nothing pleased him more than when he entered the bakery at 5am each morning–bakers are notoriously early risers due to their need to prepare for everyone else’s breakfast–and smelled those European breads that he had first encountered several years prior on that auspicious trip to Europe. Bread was his business but remained his passion.

Many years later André was the most prominent baker in the state. He even distributed some to neighboring states. He employed nearly 100 bakers and a handful of young apprentices. But then came hard times: A major national recession. Budget cutting was the norm and, when it came to bread, customers were buying far less of his gourmet European breads. The operation was losing money rapidly and something had to be done.

Setting his passion aside for expediency, André took immediate action to protect his business. Having learned his trade by baking the simplest, cheapest bread possible, he went back to his roots. He cancelled his contracts with his suppliers for the gourmet ingredients and, once existing supplies were depleted, reoriented his entire operation toward making basic bread again. A dozen employees focused on the gourmet breads business were let go on the understanding that they would be re-hired once business turned for the better again. Other staff was expected to take a temporary pay cut. A few resisted but, once it was clear most of their fellow employees were willing to accept it, they went along.

To be continued…

Regards,

John Butler,
for The Daily Reckoning

[Editor’s Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]