“Pinch Pennies. Work Hard. Make Sacrifices. Reinvest in the business. And go for the long term”
Cintas. What an incredible founder-led story about a family-owned business growing up to a 400 bagger since IPO in 1983. Cintas was listed in 1983 at an equivalent share price of $0.94 and has grown to over $400 in 38 years, generating a share price CAGR of ~17.3%. Compounding is the never-ending lesson; these numbers still surprise me. In May 2004 when this book was written, Cintas had completed its 35thconsecutive year of growth in sales and profits. At the time of writing the only other public company to have achieved it was Wal-Mart (a few others reached the benchmark but couldn’t maintain it for so long). Cintas achieved a 35yr record of 23% CAGR in sales and 30% CAGR in profits to 2004. What a compounding machine. There are some distinct patterns evident in the way Cintas achieved such enormous scales as decentralized management, incentives, and culture. The book Rags to Riches is written by Richard T Farmer who was the president and second-generation family founder, Richard’s grandfather ‘Doc’ Farmer was the original founder of the business which was invented out of the “grinding poverty of the great depression”.
A summary of some elements of overt high-performance culture through the Cintas history include:
A 10yr stock option plan with none vesting for the first 5 years and then 20% each year after.
Cintas managers always wear business attire, no casual Fridays, our business is making people look sharp - lead by example.
Operate exceedingly clean plants, Farmer used to inspect the bathroom as a key indicator of manager quality
Even while a private company the profit and loss was shared with all employees every year
To improve profitability incentivize the team to satisfy customers, increase competitive advantage and be more productive.
Cintas started its life as Acme Wiper and Industrial Laundry. Acme Wipe’s core business was collecting used towels from industrial factories, These towels were then washed and resold back to industrial customers. Acme Wiper then discovered they had a core competence in servicing customers with regular clean garments which eventually lead to outsourced cleaning and provision of uniforms. The business has since grown into one of the largest service businesses in the world.
Culture
“You’ll hear lots about culture in this book. It is, without doubt, our most important competitive advantage. Competitors can copy our sales material, our products, and even some of our systems but they cannot copy our culture”.
Farmer outlines at the end of the book that to achieve the grand ambitions he needed very talented people however, he was always more comfortable with “partners” than “employees” so whenever he came across exceptional people, he saw to it that they were owners and partners in the business, not just employees.
Farmer outlines that the best way to communicate the culture of a business is by telling stories about where and how it came about, this is almost exactly the way Bezos describes culture at Amazon –“stories of past successes and failures that become a deep part of company lore”.
Some of the stories about how Cintas grew its culture came from near-death experiences. In 1945 when Cintas was a small family business with 12 employees the factory burned down and although there was insurance it wasn’t enough to truly rebuild the business. Doc Farmer exclaimed that “we are not out of business! you can take our equipment, but as long as we have our people we’ll be okay”. Having to rebuild from nothing with only your staff teaches you the true enduring nature of your people.
Another story about the workplace environment was developed through many experiences including Richard working in the drying room which was stiflingly hot, lifting heavy drums of wet rags that were 200 pounds apiece, eating lunch in the restrooms because there was no lunchroom, scooping out grease from the sump pit by hand in waist-deep oil and grease. All these examples enforced the culture to provide a safe and enjoyable workplace.
Incentives – the rule of 35
“I’ve always believed there is nothing more motivating than ownership”
There were a lot of factors involved in creating such a motivated group of people but one element was how we compensated them. The compensation program worked like this. A General manager of a plant was paid a salary of $10,000 a year. That’s it. Everything else depended on how they performed. They were entitled to six percent of the profits after expensing all corporate overhead and taxes. And Cintas still do it that way today. Each business unit (Plant or branch) would have a separate profit and loss statement and the GM is totally responsible for that P&L. They are running their own business. Each GM reports to a vice president who also only earns a modest salary and earns a profit of the group of business units reporting up.
During the 80s the rule of 35 was born. It was designed out of the experience that a GM could greatly increase short-term profits by cutting back on investing in advertising and sales. Conversely, a manager could invest in future profits by ramping up sales growth. Some markets also had differing sizes and opportunities. Farmer announced at a managers meeting “wouldn’t we be just as happy if a manager increased sales by 25% and had a profit margin of 10% as we would be with 25% margin and 10% sales growth?”. The rule of 35 was born.
The nexus of the Cintas stock option package started in 1967 when Farmer employed Bob Kohlhepp. When Farmer met with Kohlhepp it was suggested they become partners it worked like this, Farmer sold stock to Kohhlepp at a fair price, instead of paying in cash the company lent the money and kept the stock as collateral. This loan was non-interest bearing but would be terminated if certain events occurred such as departure from the company. Farmer always focused on finding ‘partners’ not ‘hired hands’.
Vision
“I painted my vision for our people at every chance I had – that was their light at the end of the tunnel. That was the great motivator when times got tough”
Farmer tells the story of a man walking down the street in the middle of a big city and how he came across a construction site. He came across three men in a ditch, he asked the first man what are you doing? “I’m digging a ditch,” the first man said, he then asked the second man what are you doing? “We’re digging a ditch for the water line for that building going up over there”. He then asked the third man what are you doing? The man looked up and said, “we’re building a cathedral. It will be big and beautiful with five big spires and large stained windows and it will seat 500 people the biggest in this city”. The third man is proud of what he is doing because he shares the vision. This simple story demonstrates why it is important to have a vision and share it with everyone.
Tom Dick or Harry?
“One of the disappointments I’ve had over the years is watching promoted individuals experience failure – It’s a fact of life that some people are more talented and capable than others”
When conducting performance review Farmer continuously used the Tom Dick or Harry story and it went like this. There was once a gentleman in New York City with three sons. All of his sons had the same education, same household, and worked for the same company but one was much more successful than the others. One day the father called into their place of work to see if he could understand what was happening. After he met the owner and asked “could you explain to me why Tom is doing so much better than the others” the owner said of course why don’t I show you.
The owner called Harry into the office and said “Harry, there is a Russian ship that just arrived at the dock. I understand it has some beautiful furs. Would you go down and check it out and let me know what you think I should do?” Harry disappeared and came back shortly after “you’re right boss there is a Russian ship there. They have lots of furs and would like to sell them if possible, would we have any interest?”. The boss said he would consider it.
The owner then asked Dick to undertake the same errand. Dick returned and said, “You’re right boss. There is a ship loaded with magnificent furs. They have 5,000 mink furs. 2,000 sable furs, and 3,000 lynx furs. They want $1.3M what should I tell them?”. The owner said he’d think about it.
The owner then called in Tom and asked the same. Tom returned and gave his report “Boss you’re right. There is a Russian ship loaded with outstanding furs. They have 5,000 mink furs. I took three people down with me to inspect them. They are A-Grade quality. They have Sable and Lynx furs which we inspected also. They want $1.3M I offered them $1M cash payable in 10days. They agreed and I have the purchase order for you to sign if you would like to proceed. I have also organized our warehouse to take possession, if you sign this I will make it happen”. The owner of the business said to the father – see your other two sons are great but Tom is a star.
After telling this story in the performance review Farmer would ask so which son are you? It was a great way to explain the different values.
The Cintas Growth Engine
“I was aware early on that our industry was going to consolidate”
In the 1940s and 1950s, there were numerous family-owned breweries in a single city, by the 1960s these were gone. The dairy industry was the same. The Cintas strategy was to play a major role in the consolidation of the uniform industry.
Cintas made very few acquisitions during the 1970s except for one small company in 1973, this was because of the new fabric technology (Permanent press uniforms). Cintas began making acquisitions from family-owned businesses that didn’t even keep accounting records. By the mid-1970s Farmer and the team figured that there were some 1,000 companies in the uniform industry, most of these were family-owned and operated and the majority had made the upgrade to the new fabric. The team made a list of them and graded them by priority. Alongside the acquisitions, Cintas was rolling out new factories in new regions that leveraged their network.
As Cintas continued the aggressive rollout across the country, they encountered some resistance (legal and illegal), when they entered the Cleveland market a large competitor called WorkWear decided to counter-attack Cintas on their home turf in Cincinnati. WorkWear approached every Cintas customer and offered to slash prices, to defend the home market Cintas went and visited every customer and offered them a piece of paper and a pen with the opportunity to “name their price” most customers handed it back and ignored the opportunity for the discount.
The IPO
At the time of the IPO in August 1983, Cintas had 23 operations and a little over $60M in annual revenues. The company is listed with a market cap of $110M (an adjusted share price of $0.95 today). The stock price was a 50 bagger from the IPO price to December 1999 (26% CAGR), after this it went sideways for almost 14years after which it added another $400 per share or 400bags from the initial investment. Cintas has grown revenues from $60M in 1983 to over $7B today.
What an incredible story of growth!
Hope you enjoyed the read.
Shaun Trewin CA
Quality Compounders