Crying over spilt milk or why higher interest rates are hard

Should you invest in a business? If interest rates are zero, the answer is probably yes. When money in a savings account or a bond earns nothing, any reasonable business promising a non-zero returns starts to look good. If it sells electric cars and promises a 10x payday in a decade, all the better. Sure, the business may not make money until then, but neither will the savings account. Savings accounts are also boring. People will buy you drinks to hear about an electric car company, not a zero-interest savings account. So, you invest.

But when interest rates rise, the calculation changes. Now when someone knocks on the door promising a 10x payday in a decade, you look at the cheque from your bank, which reads: “Interest: $1,000”, and think about how easy that was. Maybe you say thanks, but I’d rather receive cheques from my bank which read “Interest: $1,000”. People buy you less drinks, but you can now afford to buy your own.

In a world of zero interest rates, investors call founders. At 4% or 5% interest rates, founders call investors and sometimes the call goes to voice mail. When investors do pick up, they offer far less money, with far more strings attached. Unfortunately this happens just when businesses most need money. Higher interest rates mean fewer jobs and less spending. Bad for business.

Last week, MilkRun, an Australian business that delivers groceries by bicycle, said it would close. Here’s founder Dany Milham in an email to staff, reported by the Australian Financial Review:

“Since we announced our structural changes in February, economic and capital market conditions have continued to deteriorate, and while the business has continued to perform well, we feel strongly that this is the right decision in the current environment.”

MilkRun, which was recently losing money on each order, had spent months shopping around for more funding. Last year they raised a record haul with help from giant US fund Tiger Global Management. But investors aren’t picking up the phone anymore! Here’s one, quoted in a separate story:

Investors are wary of funding companies that don’t have a very clear commercialisation plan. We need to be clear about how that business is going to make money and generate revenue.

When the bank sends meaty interest cheques each month, investors start to ask hard questions, like: “Do you make money?”, “Will you ever make money?”, “Will you make me more money than my bank?”


Pizzapreneur Falls On Hard Times

Don Meji is a pizzapreneur. Head of Dominos Pizza Enterprises, he oversees an empire of 3,700 slightly-cramped, brightly lit stores from Australia to Germany. Don Meji is also a little hard up.

Who isn’t? Interest rates are rising and banks are sending polite letters to people who owe them money, asking them to pay a little more money on the money they owe. At least some of the people eyeing Dominos “Value Max Range” for a Pepperoni pizza ($6.99) are economising. So is Don! From an announcement to the Australian Stock Exchange on Thursday:

Domino’s Pizza Enterprises Limited (the Company) advises that the Managing Director, Mr Don Meji, has sold 150,000 shares. The funds from these transactions will be used to take a prudent approach to reduce Mr Meji’s personal borrowings in a period of rising interest rates”

Prudently reducing personal borrowings is a sensible thing in a period of rising interest rates! Even if you run a company that made $165 million last financial year. Especially if you run a company that made $165 million last financial year.

Don sold his shares on February 23 for A$8,302,000 or, as a pizzapreneur surely prefers, 1,187,696 pepperoni pizzas and change.

“I appreciate there is no ideal time to sell any shares but my long-term track record shows my alignment with the future of our business and interests of shareholders and franchisees,” Mr Meji said

I dunno Don. I can imagine more and less ideal times to sell shares. For example, shares in Dominos lost a quarter of their value on the 22nd, the day before his sale (people are buying fewer pizzas!). Seems a less than ideal time to sell shares.

But don’t cry for Don, he still owns about twelve million pepperoni pizzas worth.