Why am I writing about Sammy Hagar? The answer is simple: because he has been a very successful business founder in addition to being a rock and roll star. To become an effective learning machine you will benefit from acquiring knowledge from as many sources as possible, including unconventional sources. For this same reason I have written blog posts on people like Rza, Wheezy, Kanye, Jimmy Iovine, and Biggie Smalls. Last, but not least, I am writing about Hagar to get more people to read this blog post. I have WordPress analytics which proves that blog posts that do not involve something controversial or someone famous are inversely correlated with page views. Sammy Hagar’s life is not boring.
Sammy Hagar started his career in the music business as a member of the band Montrose. He then had successful solo career that included hits like “Your Love Is Driving Me Crazy” and “I Can’t Drive 55.” In 1985 Hagar famously replaced David Lee Roth in the band Van Halen. After his time at Van Halen Hagar performed solo and in several bands including Chickenfoot. One of the more famous businesses that Hagar has is Cabo Wabo Cantina which has locations in many places in the United States. His Cabo Wabo tequila business was acquired by Gruppo Campari in 2010 for $91 million. Hagar and Adam Levine of Maroon 5 are now partners in a business that sells “the world’s first mezquila.”
The usual dozen Sammy Hagar quotes are in bold:
- “The exposure of the band helped promote my tequila company. Lots of people are coming up with tequilas, but you’re going to have to come up with $5-10 million a year to promote a new brand. If you’re me, you don’t have to spend a penny on it. It was a great crossover – rolling my brand into my business.”
The ability of a founder to turn exposure from one business into content marketing for another business is a valuable thing. Hagar is a great example of this practice since few things create free media exposure like a flamboyant rock star. Free media exposure is like invisible money. Hagar was able to invest the equivalent $5-10 million dollars a year into his liquor company without actually spending any cash. That is business alchemy.
The story of how he did this is simple:
“I opened Cabo Wabo in 1990 and then invited the band members to become partners in the restaurant–it felt like the right thing to do. But then, in 1996, I got kicked out of Van Halen. They basically said, ‘You can do Cabo Wabo or be in this band.’ I was like, ‘Why can’t I do both?” At that time, I was so brokenhearted about it, but it turned out to be the best thing I’ve ever done.” “I’m a walking billboard. I got my Cabo Wabo tattoo in 2004. The Van Halen guys hate me for this.”
For any business acquiring a customer can be accomplished in two ways: (1) organically by word-of-mouth at very little cost; or (2) inorganically through expensive paid sales and marketing. The first method is much more valuable than the second not just because customers cost less money to acquire. Bill Gurley points out: “Organic users typically have a higher NPV, a higher conversion rate, a lower churn, and more satisfied than customers acquired through marketing spend.” “If there are two businesses that are otherwise identical, if one requires substantial marketing and one does not, Wall Street will pay a higher valuation of the one with organic customers.”
One drawback of the organic customer acquisition approach is that nothing is harder to predict that customer word of mouth. Getting the necessary bootstrap that creates the positive feedback which drives word-of mouth consumer acquisition is very hard to do and rarely happens at scale. Why? Now that Hagar has sold the Cabo Wabo tequila business, his content marketing has shifted to his other businesses. For example, that is a Beach Bar Rum t-shirt below.
Bands and musicians selling “merch” is, of course, not new. It is not a big journey from selling t-shirts and other traditional concert merchandise to selling a branded product like liquor for someone like Haggar. Yes, if it is not just a licensing deal there is a higher risk of a substantial failure for the celebrity, but the upside is much bigger too. Many other celebrities have followed the path blazed by Hagar: Carlos Santana (Casa Noble) Motley Crue’s Vince Neil (Tres Rios), Toby Keith (Wild Shot) and Justin Timberlake (901 Silver); George Clooney started and sold Casamigos with partners. Filmmaker Steven Soderbergh imports a white brandy called Singani 63. The product sold by the celebrity obviously do not need to be liquor. For example, ED by Ellen DeGeneres is a consumer-products business and Jessica Alba is behind Honest Company.
For celebrities entering the liquor businesses will continue to be popular since the profit margins on sales of alcohol are particularly attractive. When a company can generate attractive margins it has pricing power which can translate into higher margins. Warren Buffett believes:
“The single most important decision in evaluating a business is pricing power. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business. And if you have to have a prayer session before raising the price by 10 percent, then you’ve got a terrible business.”
Charlie Munger has made these additional points on the subject of profit margins:
“Over the years, we’ve tried to figure out why the competition in some markets gets sort of rational from the investor’s point of view so that the shareholders do well, and in other markets, there’s destructive competition that destroys shareholder wealth. in other fields—like cereals, for example. If you’re some kind of a medium grade cereal maker, you might make 15% on your capital. And if you’re really good, you might make 40%. But why are cereals so profitable—despite the fact that it looks to me like they’re competing like crazy with promotions, coupons and everything else? I don’t fully understand it. Obviously, there’s a brand identity factor in cereals. That must be the main factor that accounts for it. And maybe the cereal makers by and large have learned to be less crazy about fighting for market share—because if you get even one person who’s hell-bent on gaining market share…. For example, if I were Kellogg and I decided that I had to have 60% of the market, I think I could take most of the profit out of cereals. I’d ruin Kellogg in the process. But I think I could do it. In some businesses, the participants behave like a demented Kellogg. In other businesses, they don’t. Unfortunately, I do not have a perfect model for predicting how that’s going to happen. For example, if you look around at bottler markets, you’ll find many markets where bottlers of Pepsi and Coke both make a lot of money and many others where they destroy most of the profitability of the two franchises. That must get down to the peculiarities of individual adjustment to market capitalism. I think you’d have to know the people involved to fully understand what was happening.”
Some brands are worth less now says Munger and so margins for those businesses are now lower. But some brands are holding their value. Why is there a difference? Looking at some examples can explain the difference. Corn flakes made by a cereal company are made of corn, sugar and salt. The rum that Hagar endorses is molasses yeast and water. The ingredients are similar. Why are profit margins higher for branded alcoholic drinks than cornflakes?
Daigeo’s products include Johnnie Walker, Crown Royal, J&B, Smirnoff, Cîroc and Ketel One, Captain Morgan, Baileys, Don Julio, Tanqueray, and Guinness.
The Kellogg Company’s products include: Special K, Kellogg’s Frosted Flakes, and Kellogg’s Corn Flakes.
Munger has noted one significant change since he made the previous statement abut brand value:
“Kellogg’s and Campbell’s moats have shrunk due to the increased buying power of supermarkets and companies like Wal-Mart. The muscle power of Wal-Mart and Costco has increased dramatically.”
What does this example from Munger say about why brand devaluation is not happening in a uniform way? It seems to me that brands which convey status are generating higher margins and maintaining their value better than brands that merely convey information about something like safety or uniform quality. The brand on a box of corn flakes is less valuable in today’s world than a brand of rum that Sammy Hagar drinks for his fans. Professor Robert Cialdini points out that social proof is a big reason why celebrity endorsements work. As an aside, Hagar is a huge fan of Elvis, who is a great example of a valuable celebrity endorser. Social proof was an effective way to market his music.
Munger has talked about an additional reason why celebrity endorsed brands have significantly greater value:
“A member of a species designed through evolutionary process to want often-scarce food is going to be driven strongly toward getting food when it first sees food. And this is going to occur often and tend to create some conflict when the food is seen in the possession of another member of the same species. This is probably the evolutionary origin of the envy/jealousy tendency that lies so deep in human nature.”
Warren Buffett has made clear that he believes that it is *envy* that makes the world go around rather than greed. People who can’t control their envy do things that are bat shit crazy, like pay a small fortune for a vodka that they saw Diddy or Kanye drink in a club or in a advertisement in GQ magazine. In saying this I’m not saying that Munger hangs out in the VIP section of clubs with Diddy and Kanye. He is just an astute student of life and envy. In any event. from what I hear, Munger prefers to hang out with Kendrick Lamar and Drake. But that is another story.
- “Kari, my current wife, said: ‘You remind me of Jimmy Buffett.’ I thought she was nuts. But then she took me to see him and I’m going, ‘Holy shit. This is awesome. We beach all day, eat tacos for dinner, drink tequila. I get onstage and play. That’s it.’” “After I left Van Halen, Shep Gordon, a music manager, came to visit me at Cabo Wabo. I was wearing shorts and flip-flops, and he said, ‘You need to roll your whole thing into your whole thing.’”
The realization that Jimmy Buffett was generating huge profits via content marketing and then bundling a Parrot Head lifestyle rather than just individual products was like a light bulb going off for Hagar. This encouraged Hagar to turn the dial up to 11 on his content marketing and expand the types of products he sells. Tequila, rum, different types of restaurants, a television show, “Sammy Hagar’s Rock ’n’ Roll Road Trip,” an autobiography and cookbook are a few examples. In an interview Hagar described his broader ambitions: “[With Sammy’s Island, a lifestyle brand] I’m trying to make available to people the things that I like, like a good hammock or a good barbecue,” Hagar said. Among the other items he plans to offer are utensils, comfortable chairs and beach umbrellas, described as having solid quality at an affordable price for fans.” While I do not think of Sammy Hagar I think about comfortable chairs and utensils, cross-selling can be a valuable way to reduce sales and marketing costs. Selling into an existing customers base is more efficient and less costly.
When Shep Gordon’s suggested Hagar start “rolling his whole thing into his whole thing” he is talking about is bundling (when two or more products are sold together as a package). Jim Barksdale famously said at the end of the Netscape IPO roadshow: “There’s only two ways I know of to make money– bundling, and unbundling.” What did he mean? Chris Dixon has written one of the best explanations of why bundling can make sense. There is also a good Ben Thompson post on why unbundling can also be a good strategy. You can see firms in the market today moving to expand their product lines after they have acquire a customer. Wealthfront, for example, is increasingly moving beyond its original mission of selling automated software-driven financial advice at very low cost. These new complementary products and services offered by Wealthfront have higher profit margins and benefit from lower CAC and churn due to cross-selling and bundling. Alex Rampell of Andreessen Horowitz explains the bundling/unbundling concept with an example: “The first phase of fintech was ‘unbundling’ banks — taking one of the features of a mega-bank, and doing it better. The next phase is rebundling — adding other services, and cross-selling products (like SoFi starting in lending and later adding wealth and insurance). Venture capital will flow to successful startups moving into their second act of rebundling.” What Rampell is saying, and business like Wealthfront are doing, is this: unbundling can be an effective way for a business to build a valuable platform for customers that is eventually used as a fulcrum for rebundling other higher margin services. That rebundling reduces churn and CAC. This phenomenon which was so colorfully described by Barksdale, is a great example of the strong interconnections between lifetime value (LTV) components. A change in any one variable can impact every other variable — a LTV model is alive and since it can feed back on itself, is not always linear.
- “It’s not that [Chickenfoot has] run its course, it’s just that I’m not sure… in everyone’s schedule that we can put aside a year and make a record, make some videos and go out and do a world tour, like what we would have to do. The recording side of it is what’s tough; that takes so much time and finances. And if the record business for a band like that, if we could sell a million records, we’d probably say, ‘Okay, at least we can pay for the record.’ But when you spend half a million dollars on a record and it sells a a hundred and twenty-five thousand copies, I’m sorry, that’s ‘pay to play.” “The record business is kind of done. I mean, I’m sorry to say that. It’s sad.”
The music business has a lot of challenges and a number of potential solutions. I have written about this in a number of blog posts including this one, this one, and this one. The high production costs of a record in the face of low album sales mention by Hagar above is just one of these problems. This description that was in the 2004 book So You Wanna Be a Rock & Roll Star written by Jacob Slichter is sobering for anyone thinking about trying to make profit on an album:
“Elektra would lend us money, called an advance, so we could pay for the recording costs of making an album. As I already knew, those costs would be high – studio rental could run $2,000 per day and recording could take months. Producers’ and engineers’ fees might add another $100,000, not to mention mastering, flights, hotels, rental cars – we could easily spend $250,000. If there were anything left over, we’d get to keep it, but it wouldn’t amount to much. In return, we would grant Elektra the exclusive rights to our recordings. As money from the sales of records came in, we would be allotted a percentage of the proceeds, known as points. In a typical deal, the band gets thirteen or fourteen percentage points. We’d have to give a few of our own points (four perhaps) to the producer of our record (producers typically get a fee and points). Then we’d be down to ten points. Before calculating the value of those ten points, however, Electra would subtract a large percentage of the gross sales to account for free goods, records given away for promotional and other purposes. Thus, the amount on which our 10 percent was calculated would be reduced by 20 to 25 percent. So we’d be down even further, perhaps 10 percent on 75 percent of the wholesale album revenue. If our CD was sold in stores for fifteen dollars, the band’s share of the revenue might be something between fifty cents and a dollar per CD. Would we get to keep it? No! Elektra would add up all of the expenses of recording and promoting our album – rock videos, radio promotion, touring costs, and so on. The total of those costs, which could run into the millions, would be our recoupable debt to the record company. Our share of each CD sold would be swallowed up by that debt. …. When it came time to record and release future albums, any unpaid debt from our past albums would carry forward. In fact, even if we sold millions of records (in which case the size of our share would increase), we might never recoup. As one friend of mine joked, we’d be rock-and-roll sharecroppers.”
4. “Sometimes passion, wanting something different and breaking the rules is the shortest route to success.” “I was a successful solo artist and I joined a band called Van Halen like in 1985 or whatever it was. That’s backward. Most artists quit the big band to become a solo artist. I left being a solo artist to be in a band again.”
Innovation requires that someone break at least one rule. The best founders and innovators have the ability to find the just right rule to break. Break too many rules and you are dead. Learning what rules to break and when, is a skill best accomplished by looking at a lot of examples. The value that a person can get from pattern recognition is why I have written so many blog posts about so many people. The more patterns you see the better that skill gets. For example, there is no recipe for creating a business successfully, but there are best practices and patterns to recognize. In Hagar’s case, he went from being a solo performer to being a singer in a band which many people would consider a step back. Of course, Van Halen was not just any band, but Hagar still did something unusual. You cannot outperform other people in life by following the crowd all the time. Being a contrarian all the time isn’t workable either. I plan to write soon about the great blues guitarist Buddy Guy. The story about the way Buddy Guy invented a new sound just by paying attention to life is a great example of how a lot of innovation happens:
Buddy first recognized the importance of guitar feedback as a creative tool in 1959 when he observed a young woman’s skirt brush up against his guitar resting by the band stand and heard a squeal coming from his amps. By the time Jimi Hendrix broke out in England and came back to the states, he was heavily incorporating feedback he’d learned from Buddy.
As Yogi Berra famously said: “You can observe a lot just by watching.” As another aside, if you ask Hagar what music moves him the most, he will say: “Blues. Old R&B. Otis Redding. Then you listen to John Lee Hooker or Lightnin’ Hopkins or Jimmy Reed. Listen to James Brown.”
- “I do things that make money and I do things that make me more famous, but I don’t do it for those reasons.” “If you get one idea that makes you excited, and you put your heart and soul into it – there is no stopping that.” “I’ve never started a business thinking, Oh, I’m gonna make money off of this. All my ideas have come from sheer enthusiasm.”
Hagar is a missionary business founder, which increases the odds that his business ventures will be successful. Missionaries are able to power through what Scott Belsky calls “the messy middle.” These are the times between the exciting first days of starting of the business and hopefully a glamorous IPO or sale of the business. Venture capitalist John Doerr’s slide on this is difference in attitude is:
- “I didn’t really want to sell the tequila company. But Campari offered me so much money that I thought, ‘If I don’t do this, I’m going to regret it.’ Even if I don’t need the money, I’d say, ‘Why the hell didn’t I do that?’ But after I sold it, I felt like there was a hole in my life.”
What Hagar is saying reminds me of when Craig McCaw sold McCaw Cellular Communications to AT&T in 1994. McCaw was not happy after that sale. Like Hagar, he felt like there was a hole in his life. That hole was part of the reason why McCaw famously did not want to be on the AT&T board. There were other factors involved too. For example, he couldn’t bear to see the machinations of a bureaucracy at such close range. The official statement by McCaw was captured by The New York Times:
“in a strenuously polite statement, the 45-year-old entrepreneur took pains to discourage speculation that he had fallen into a dispute with AT&T. “Much to its credit, AT&T is working exceedingly hard to develop a broad array of products and services,” he said. ‘Those very efforts make it difficult for me to make even minor contributions to the telecommunications industry and not be perceived to be technically in conflict with my duties as a director.’”
The best founders truly love their business. McCaw loved what was sold to AT&T. So he set out to fill the hole in his life by acquiring other businesses.
Selling a business that you created to someone else is really hard. Warren Buffett is an attractive buyer for many founders since he wants them to keep running their business. Buffett knows that his reputation as being business owner friendly is golden only as long as he does not treat the businesses he buys with respect. This reputation allows him to buy business at a more attractive valuation and he gets the management he wants.
- “We have a home in Maui, and we spend a lot of time there. I heard about this guy who was making vodka out of pineapples. I went to meet him and said, ‘You’re in the middle of these sugarcane fields. Why aren’t you making rum?’ A week later, he comes over with a little barrel. I tasted it and was like, ‘This is the best damn rum ever.’”
Hagar’s decision to go into the liquor business again reminds me of when Craig McCaw bought Nextel to get back in the game he loves. Nextel was in many ways harder since, as Warren Buffett likes to say, “turn arounds seldom do.” Craig McCaw and his family invested $1.1 million in January 1996. Founded as Fleet Call in 1987, Nextel initially focused on fleet management, and had been steadily growing through mergers with OneComm and Dial Call. iDEN was launched as a commercial network by Nextel in the US in September 1996. Nextel Direct Connect service, which allows any subscribers in the same local calling area to contact each other instantly on a private “one-to-one” call or on a group call. In December of 2004 Nextel was acquired by Sprint for $35 billion. But before then there were some days in 2002 when Nextel stock was trading at ~$2 that things were touch and go. I am old enough to remember the stock market volatility that occurred in 2002 after the Internet bubble popped. This chart shows Nextel’s share price that year. Holding NXTL through July 2002 wasn’t similar to a picnic in the park on a sunny day.
- “My strategy for running companies successfully is to find the right person.”
The better the quality of the employee, the more the founder can delegate to that employee. To do this an upfront investment is finding the better manager is required. Being able to delegate effectively makes your quality of life and business outcomes better. Delegation to the extent practiced by Warren Buffett only works if you buy the right businesses says Charlie Munger: “Our success has come from the lack of oversight we’ve provided, and our success will continue to be from a lack of oversight. But if you’re going to provide minimal oversight, you have to buy carefully.” A good jockey on a band horse won’t perform well say Buffet and Munger. Buffett and Munger also select managers who love what they do enough that financial motivation is only part of the reason they love the work they do. The best place to see this Buffett/Munger philosophy set out in the Berkshire “Owner’s Manual.” Costco, Munger’s favorite company after Berkshire, is an example of a company that realizes to get the right people you must treat and pay them better than competitors. Jim Sinegal of Costco has put it this way: “Paying good wages is not in opposition to good productivity. You’ll get good people”
- “El Paseo is my fine-dining restaurant in Mill Valley. Fine dining is tough: five waiters per table, crystal, finest silverware and china. I opened it because it’s in my hometown, and the building was rundown and needed to be preserved.”
Hagar knows how hard the restaurant business is from actual experience. He has operated the Mill Valley restaurant El Paseo for years (until recently in a partnership with Food Network star Tyler Florence). Hagar knows well that a restaurant will make an actual profit on some dishes and merely break even on others. This info-graphic from Joe Bastianich illustrates the idea:
I wrote about the restaurant industry and Waffle House. The profit margins in this business are tight and the margin for error is small. Barriers to entry are low and just about everyone thinks they could successfully open a restaurant, so there are always competitors opening and closing. Even worse, some restaurant owners love the business so much they are willing to make little or no money just to do it. Whenever you have an occupation or business that people would pay to do, compensation and investing returns tend to be low. For example, river rafting guides will never be fabulously wealthy just doing that for a living.
As another aside, Hagar and another well-known Food Network personality not only seem to friends but share sartorial attributes:
- “I’m interested in business because I was so poor growing up. We were dirt-ass poor. My mom was basically raising four kids on her own, so things were tough. But it made me grateful for every bit of success I got. And I always wanted more. It drove me to say, ‘I’ll never be poor again.’”
No one wants to “return to go” in life. The older you get, the more this is true or should be true. Charlie Munger tells this story about risk:
“I know a man named John Arriaga. After he graduated from Stanford, he started to develop properties around Stanford. There was no better time to do it then when he did. Rents have gone up and up. Normal developers would borrow and borrow. What John did was gradually pay off his debt, so when the crash came and 3 million of his 15 million square feet of buildings went vacant, he didn’t bat an eyebrow. The man deliberately took risk out of his life, and he was glad not to have leverage. There is a lot to be said that when the world is going crazy, to put yourself in a position where you take risk off the table. We might all consider imitating John.”
Munger also tells the story of a man who late in his life tried to get even richer by investing everything he had in a new venture. That new venture failed and the man had to support himself late in his life working as a store cashier. You are only old once. Having twice as much money when you are already financially well off does not make you anywhere close to twice as happy. Spending the last years of your life living in poverty or not being able to financially help people you love because you went all-in on an investment and lost is a bad outcome.
- “My wife thinks I’m crazy. If I ever go to rehab it’s because I’m a workaholic.”
Some people love what they do. Is it really work if that is the case? Are they really workaholics? Bloomberg recently published an article entitled: “People Start Hating Their Jobs at Age 35.” If this article describes you, then you are doing it wrong. I mean work is often work, which is why it is called work, but “hate” your job? That’s not a great outcome. One of the things I like to tell your people is that the quality of your life is often determined by the choices you have. If you must work at a job you hate you have lousy choices. Lots of people don’t realize that the very best thing about having money is that you can use it to have better choices. I don’t mean having the choice to buy an expensive sports car, but rather the avoid doing things that you hate. Being happy is highly underrated,
It is true that you can be so active in doing what you love that you adversely impact your health or relationships that you care about though. As an example, I think the relatively recent Becoming Warren Buffett special on HBO is partially an admission by Buffett that he did not pay enough attention to certain relationship in his life given the nature of his personality and his love for his work. He is a special person with unique personality attributes and I believe he recognizes that. For example, Buffett asks his wife Astrid put the money he needs in a cup for his breakfast at McDonald’s is not ordinary. Depending on what breakfast he wants that day the cup may hold $2.61, $2.95, or $3.17. Everyone has things they are good at doing and things they do not very well.
- “If you come up with a brand or business and the idea is just for money, you won’t feel it in the long run. You’ll just want more and more.”
Hagar has created a charitable foundation to “walk the talk” about making his ventures about more than just accumulating more money. In an interview Hagar has said: “I want to give a dollar to somebody and have it go right in to their pocket. I want to put food on the table. I’m a grassroots guy. The day I write the check; the next day I want to have someone benefit from it.” This view about how to give money away is more and more common. Carol Loomis writes about the trend in giving to require that money be put to use quickly in this way: “Buffett and Gates and his wife, Melinda, set the goal: They are driving to get the super-rich, starting with the Forbes list of the 400 wealthiest Americans, to pledge at least 50% of their net worth to charity during their lifetimes or at death.” This is a big change from traditional charitable foundations which were founded to exist in perpetuity, paying out just 5% per year for charitable purposes. as an example of this trend, The Bill and Melinda Gates Foundation will have spent all its resources by 50 years after the last of the benefactor’s deaths. Buffett’s donations will be given away no more than 10 years after his estate is settled.
One of my own charitable activities this year was to write my seventh book and give away 100% of the royalties to a charity called No Kid Hungry. This blog is in part content marketing for that charitable effort even though the primary intent is giving back by teaching. Even if you do not buy my new book, if you like this blog, as a favor to me, please think about buying some extra non perishable food next time you are in the grocery and dropping it in the food bank box. I think Sammy Hager would also like it if you did that.