A Real Fish Story

As a consultant, you become accustomed to common themes:  same industry vertical;  same problems and issues;  if you are unimaginative or lazy, always the same solutions.  However, you occasionally have an opportunity to work on something different, and therein, lies the question for homebuilders.

Gro-Grouper black grouper image

Gro-Grouper, Inc. is a proposed marine aquaculture business formed with the intent of providing a fresh, high-quality marine finfish (black grouper) to upscale restaurants, fresh markets, and on-line retail customers, located anywhere within the United States.

If it ever receives funding, it would be the only production facility in the world that provides a renewable certified source of black grouper, raised in an environmentally-sound, ecologically-sustainable manner – fish that are spawned, raised, and processed in its own recirculating marine aquaculture tank facility, and packaged and distributed through a dependable, on-demand, next-day replenishment system.

In short, a superior version of a highly-valued product, delivered through a vastly superior supply chain.  From the Gro-Grouper business plan, here is the two-fold supply chain/business proposition:

  1. “With the recirculating aquaculture system (RAS) production plant it intends to build, Gro-Grouper achieves price breakeven at a price point for processed portions that is below the cost wholesalers pay at the dock for whole fish, and 60% below the equivalent cost wholesalers would bear at the dock for processed portions.”
  1. “Gro-Grouper will provide fresh, DNA-certified, authentic, black grouper, delivered on a next-day basis to upscale restaurant groups, fresh markets, and on-line retail customers, anywhere in North America.” When a fish is ordered by the restaurant, market, or customer, it is swimming;  one day later, it is delivered;  a black grouper harvested from the ocean is likely seven days old when it is delivered.

It is a $22 million all-equity investment, paid-in in annual stages over a four-year period, that produces annual Revenue, Gross Margin, Net Operating Income, Net Margin, and Return on Equity of $21.2 million, 65.0%, $12.6 million, 59.4%, and 57.4%, respectively.  The IRR calculated for a seven-year holding period is 53.2%;  the more conservative MIRR is 40.7%, using a 2% finance rate and a 4% reinvestment rate.

As planned, Gro-Grouper has tremendous business attributes:  sustainability;  environmentally friendly;  modularity, scalability;  enormously profitable;  outstanding investment yield;  breathtaking innovation and approach;  good for everything and everybody concerned;  a venture that exploits only the problem that created the opportunity.

In a single word, it is . . . compelling.

We helped direct the business case, and the resulting business plan in 2009-10.  The investment remains available;  Gro-Grouper may never get funded;  it might be too far ahead of its time.  But, it raises a question.

What would a project this avant-garde be in the homebuilding industry?

Unfortunately, it would never happen.

We would never see an idea this sweeping, this ambitious, emanating from homebuilding.  We would be told to nibble around the edges, told to focus on the symptom of the problem rather than its root cause, told to engineer incremental improvements that did not change anything about the underlying business model.  We would be told that the goal is industry best practices, we would be told that being no-worse-than-current-best will somehow create sustainable competitive separation.

The argument would be that homebuilding is different;  the presumption would be that homebuilding does not present an opportunity for that degree of change.

Well, yes, homebuilding is different.

It has its own parameters, its own requirements;  it cannot, for example, simply copy the Lean Production practices of the Toyota Production System or any other production method, and obtain the same results.

That, however, does not preclude change or tenure business-as-usual.

In terms of whether anything is going to change, I had a call this past week from Les Shaver, Deputy Editor of the Builder Group at Hanley Wood.  Les wanted to know if I thought there might be five or six lessons that builders had learned through the recession;  in his words, “five or six things they learned to never do again, and have made  dramatic adjustments to prevent from happening again.”.

I told him that I don’t think builders see it as a matter of lessons to be learned.

The analogy that seems to best fit the prevailing sense among builders would be something like the weather in Texas this past week.  For the most part, builders don’t have a victim mentality about this recession, at all;  however, it has been an event that they did not cause, were powerless to prevent, could not avoid, and were unable to end.

Lessons?  Knowing that it rains and river levels don’t always pay attention to flood plains?

Like everyone in Texas, builders more than anything just want a return to some sense of normal, a sense of predictability, a security born of familiarity.

While I was working on the Gro-Grouper project, I had an unrelated discussion with a C-level at a long-standing homebuilding client.  We were discussing different approaches, various changes.  He was aware of our involvement in Gro-Grouper, and he wondered whether that type of change was worth the fight.

I told him that homebuilding may not present the same degree of opportunity, but it would be worth the fight – the consideration of change, innovation, and alternative approaches would be worth the effort – if it was seen as a matter of survival.

I asked him if the current risk in homebuilding was commensurate with the reward.  I asked him if the goal of letting higher velocity act upon higher value – of producing higher benefit in excess of cost, higher margin achieved without price increases – would constitute sustainable competitive separation for his building company.

I asked him how the prospect of 10% Net Margins and a 40% leveraged ROA for his company, suggested by industry best practices (which it regarded as a stretch target in the best of times, and never achieved) appeared against setting a goal of, say, 15% Net Margins on static pricing and an increase in asset turn that resulted in a leveraged ROA of, say, 75%.

I told him if he didn’t like that prospect, then he should consider taking his cash, investing it in Gro-Grouper, where he could produce 60% Net Margins and a 57% Return on Equity (much higher if there was leverage involved) by growing fish.

Here is the point:  change, innovation, alternative approaches;  they are all around us.

Homebuilding does not exist in an economic vacuum.  It exists within a comparative context, one of choices.  It exists where the possibility of breakthroughs never dreamt dwarf a complacent satisfaction with – and a misplaced hope in a return to – industry best practices.

More on Gro-Grouper:  www.gro-grouper.com