Big Boring Billionaire Business

Obscene profits. That was the headline one evening of CBS News in 1979. It was a report on the Iran hostage crisis. Petroleum prices had reached all time highs. Exxon had reported excessive quarterly earnings of over one billion dollars. The words OBSCENE PROFITS flashed across the TV screen of a twenty three year old musician. That young man was Brad Jacobs.

“That sounds pretty good,” he thought, “maybe I ought to check out the oil sector.”

Last week on Methods of Prosperity.

Howard Schultz pitched his Italian-style espresso bar concept to a group of investors. These were three prominent Seattle investors, and Howard needed them. He needed to raise a total of $1.25 million. His company, Il Giornale, was to open eight stores. The group invested $750,000. With their investment, Howard raised a total of $1.65 million from 30 partners. That included seed capital.

Howard Schultz teamed up with Dave Olsen, Seattle’s coffee pioneer. Together, they made Il Giornale successful. By mid-1987, Schultz acquired Starbucks from its founders. He raised $4 million from existing investors. He merged Starbucks with Il Giornale, and rebranded the business. Schultz expanded, hiring executives like Lawrence Maltz and Howard Behar. It was important to focus on generous employee benefits to reduce turnover. Starbucks’ refusal to franchise ensured quality control. Starbucks became known as a “third place” for social interaction.

In 1991, Starbucks introduced its stock issuance program for employees. This aligned employee and company success, which led to significant value growth. The 1994 coffee price surge and market volatility posed challenges. Howard’s strategic decisions maintained Starbucks’ reputation and growth. Schultz stepped down as CEO in 2000. He returned in 2008 during the financial crisis, and finally left in 2023. Under Schultz, Starbucks grew into a global brand. Starbucks had 38,000 stores and $36 billion in revenue in 2023. Starbucks is a market leader alongside giants like McDonald’s and Apple.

Part 60. Brad Jacobs.

You can read this week’s TL;DR here.

Key Lessons:

• Recognize problems as opportunities.

• Have free time to find problems.

• Get the major trends right.

• Seek economies of scale.

• Improve efficiency.

• Do your best work.

• Repeat what works.

• Free up data flow.

Now there’s a collectible version of this newsletter! Methods of Prosperity newsletter number 23 is available to collect as of August 1, 2024. If you’re so inclined you can permanently own it!

Brad Jacobs was born August 3, 1956 in Providence, Rhode Island. He’s the son of Charlotte Sybil (née Bander) and Albert Jordan Jacobs. His father was a fashion jewelry importer. The summer after eighth grade, Brad attended a school for gifted students of art and music. His school’s guidance counselor nominated him for this enrichment program. On the first night, a speech given by one of the leaders captivated Brad. The leader congratulated the students. Then he explained why the guidance counselor selected Brad and the other students.

“This program is a special opportunity,” the leader explained, “but it’s up to you to take advantage of it. You have a choice. You can waste the next couple of months and not accomplish much – just party and do fun stuff,” he said, “or you can go all-in and accomplish much, much more. Whether you’re a musician or a painter, a dancer, a poet, a writer, a film maker, or a photographer. This is an opportunity to go deep on a project and do the best work you’ve ever done. But you have to decide if you want it.” Brad realized that he could be part of something important.

Without completing high school, Brad became a college freshman. He received a scholarship from Northfield Mount Hermon (NMH) Boarding School. A year later, Bennington College offered him a scholarship. He studied math and music. He set out to finish his education at Brown University. Brad dropped out in 1976.

With $1,000 of his Bar Mitzvah money, Brad Jacobs got into the oil business. He co-founded Amerex Oil Associates Inc. in 1979 at the age of 23 and served as CEO. Under his leadership, Amerex grew into one of the world’s largest oil brokerage firms. His company had offices in Houston, London, Tokyo, and New Jersey. Annual gross contract volume was approximately $4.7 billion.

Jacobs oversaw all aspects of the business. This included brokerage activities for refined petroleum products, residual fuels, and energy futures. Amerex Oil Associates Inc. directed all brokerage operations for international and domestic crude oil.

Back then, information moved slowly. There was a need to capture and share information. A newsletter was the main source, the Platts Oilgram Price Report. It has been a key publication in the oil industry since 1923. In 1979, Platts was part of McGraw-Hill. It includes daily prices of benchmark crude oils.

Lack of timely information was a big problem for oil brokers like Amerex. They made money by matching buyers and sellers and taking a commission. Valuable oil pricing data was inefficient. Brad discovered an arbitrage opportunity. He knew that if they could figure out a better way to share that information, they could unlock a lot of value. The problem was there were no off-the-shelf solutions available at the time. Amerex improved data sharing by building their own network. It was a global IT system, a crude precursor to the internet. Appliance-sized computers and large green screens made up the network. They contained a fraction of the computing power of today’s smartphones. This was revolutionary.

System users entered any new data about buyer and seller activity or the price of oil into the database. Amerex shared that information to brokers around the globe. The process took hours instead of days. For that era it was instantaneous. This gave Amerex a competitive advantage. A French commodities trading firm acquired Amerex in 1983.

Brad Jacobs used the proceeds to found Hamilton Resources Ltd. in 1984. He used the same kind of systems as with Amerex, growing the company to $1 billion in revenue over six years. He pioneered leveraging information sharing in the oil industry. Hamilton Resources Ltd. focused on crude oil trading, pre-finance, and refinery-processing deals. In 1989, global competition entered the market.

One lazy Sunday, a new opportunity caught his attention in London, 1989. He was reading Merrill Lynch research reports in bed. A top ranked analyst had written the report. The two largest companies in waste management were each making a half billion in profit per year. That’s when Brad wondered how hard could it be? Have trucks pick up trash, deposit it in a safe place, and send out an invoice. He wanted to learn more. Waste management turned out to be a straightforward business with two big trends. Land fill capacity was becoming precious. Government regulations put small trash dumps out of business. The second trend was integration of hauling and disposal. This presented an opportunity for end-to-end consolidation. Jacobs then transitioned to the waste management industry. He founded United Waste Systems that year.

Brad repeated the same protocol as before. He put together the technology that would cut inefficiency. This time off-the-shelf software did exist. It was expensive routing software, but this was the same kind of big trend that improved data sharing. As this innovation increased efficiency, costs came down and profits went up. Once again his enterprise had a competitive advantage. In 1997, United Waste Systems sold for $2.5 billion.

After that, Brad prepared to roll up another industry, construction equipment rental. Companies buy machines and rent them out to contractors. This was the next big trend he and his team would come across. There was a disconnect between the number of equipment supply and demand. 85 percent of this equipment was not used. There was only one national provider, a subsidiary of Hertz. Thousands of potential acquisitions were available. This was a huge opportunity. That’s when Brad Jacobs founded United Rentals.

Once again, data science gave United Rentals the competitive advantage. By 1997, the industry used software made by Wynn Systems Inc. Owning this company would give United Rentals the industry platform. It also gave them access to high level industry macro trends. This acquisition gave Brad’s company more dynamic pricing and equipment use. It put their competitor, Hertz, on defense.

Hertz had been the undisputed leader of the equipment rental business. They were doing around a billion dollars of annual revenue. This was over the course of 37 years. United Rentals surpassed that in 13 months. One day, Brad received an invitation from their CEO to join him for lunch at New York’s Metropolitan Club. Brad didn’t know what to expect. Did Hertz want to make an offer to buy out their competition? 

To be continued…

I like you,

– Sean Allen Fenn