In their recent episode of the VALUE: After Hours Podcast, Jake Taylor and Tobias Carlisle discuss National Cash Register – A Century Of Innovation. Here’s an excerpt from the episode:
Jake: Okay this is National Cash Register, fascinating history of this company. This came from my friend, Adam Mead, who wrote the terrific, Comprehensive Berkshire Financial Compendium. I forget the exact title of the book. I apologize, Adam.
But it’s basically The Complete Financial History of Berkshire Hathaway, I think it’s called. He has a friend, this guy named Jesse that’s on YouTube, who saw Buffett talking in the ’98 shareholders meeting, and Buffett and Munger are talking about NCR and this report, and Munger saying like, “God, you could have read that in 1906 and it would have just been blindingly obvious that this was a good situation to get involved with.” It’s an absolute layup.
Tobias: In fact, I did.
Jake: Yeah. In fact, I was long to the gills in it.
Tobias: He doubled down twice, then, he cut the position half when it bounced back.
Jake: Yeah, later. [laughs] Jesse, on YouTube, he went and was like, “Okay, if these guys liked this so much, let me see if I could track it down.” He couldn’t find it. No one had it. He asked around all over the place, I think actually got in touch with Sean Iddings, who’s friends with Ian in writing the Intelligent Fanatics and they have a chapter in one of their books about NCR and John Patterson, who is the CEO.
This guy, Jesse eventually tracks down, like, calling all these different libraries and all over the place. I think it cost him a couple hundred bucks to get a PDF recreation of it that he’s now shared with everybody and Adam sent this over. I read through it and it’s a great read. It says it’s 72 pages, but it’s really more like 35, because the last half of it is just listing of people, who work at the company, basically. Well, I want to hit some of this shareholders’ meeting or the annual report from 1906.
First of all, the company already existed and this guy, John Patterson, he was operating a general store in this little coal mining town in the 1880s. He had $3,000 worth of capital tied up in his general store and they had great margins. And yet, somehow, at the end of the day, there was no profit in this business, like, “What the hell is going on here? Where’s the money going?” It just turns out, when you’re running without a cash register, like, you just have leakage, whether it’s on purpose or not.
Sometimes, just forgetting– If people would buy on credit back then more often directly with a store. You go to the general store and get a bag of flour or whatever and like, “Okay, bill me at the end of the month and then I’ll come back and settle up my bill.” People would just forget or the record keeping wasn’t very good. The register solved a lot of this problems.
He bought one of these cash registers and in the first year, he had $12,000 of profit that all of a sudden showed up with no change in the amount of business that was being done. It’s just like a revelation. He realized like, “Oh, my God, this is such a game changer. I got to get into this business.
He gets in there, and gets control of NCR eventually, and the first few years, they sold basically only to grocery stores and cafes. By 1906, when this report was written, they’re selling to all kinds of businesses like all over the world at that point. In the 1890s, they had sales of $1.8 million. By 1905, it was $12.6 million.
The 6x sales, but there’s a 14% CAGR for 15 years, not knock your socks off, but still very, very consistent growth, just like every year, that was better business. At that point, they were all over the world and they were starting to expand in the far east.
He’s talking about how he went on this trip a couple years ago, which would have been 1904 to China and just saw, “Oh, God, there’re so many people here.” Basically, he was long civilization at that point. The more that civilization came about-
Tobias: Ooh, that’s a good line.
Jake: -in commerce. Yeah, that is a good line. What they were going for was the best machines, the most sales, which allowed them to have the lowest prices. This is basically like you’ve heard this scale economies shared that it’s been popular lately talked about Amazon or some other classic examples of just getting a big business, like, Costco is a prime example.
Tobias: Costco, yeah.
Jake: Yeah, right. The bigger you get, the better that you can do on the pricing, the better that you can lower the cost to the customer, and then, share some of those economies with the customer. At that point, they had 4,000 manufacturing employees, 1,400 sales reps, and they had the sales training schools all over the world that were training up their sales staff. It’s funny to see basically an old balance sheet of this.
They had a bunch of acres of land, 14,000 or can’t read my own notes here. Jesus, what a mess? 13 factories, 1.4 million square feet, and every year, they were putting on 10 times as many patents as were expiring. They were just pouring money into R&D of these cash registers. What’s even more amazing, they had a list of 1 million retail shopkeepers in the US and Canada.
1906 Style CRM
Patterson basically invented direct mail. He would send literature to these 1 million shopkeepers and another 600,000 in all the other foreign countries. He had this customer list that early on like no one really had this kind of data about their potentials.
The salesmen have daily reports on who they visited, what they think the probability was that they would turn into a customer, and the number of towns that they visited per year, so they could see like, “Okay, this rep spread too thin or not? Are they hitting enough of the customers?” This is all early sales funnel stuff that probability of sale, all that stuff that you would see in Salesforce– [crosstalk]
Tobias: CRM, yeah.
Jake: CRM. These guys were running it in 1906 and crushing it. By the way, also, John Patterson invented the idea of, like, get a receipt with every single transaction. That wasn’t a thing before. Now, he’s the reason for why CVS gives us an entire book for [laughs] when you go buy a tube of toothpaste. All right, so, another thing that they had going on was, they had this idea of a welfare work that they called it, which is really early employee wellness programs.
Their factory, one of the first ones that had, lots of glass windows, so that the light got in, and they had showers, and an onsite doctor, all this medic, almost like early Google campus type of amenities that before anyone else had that.
They had $3 million in labor costs in 1905, which is about 25% of revenue, which anything 25% to 33% is what you could expect for a manufacturing facility as far as labor concentration per dollar revenue, labor intensity. You’ll like this one a lot and this is hilarious.
They invited competitors to come to their Dayton factory and see what they were up against. Just come watch, who you’re going in business to try to compete with.
Tobias: Yeah, to scare them off.
Jake: Scare them off. He thought it was a great idea, because it saved them money from wasting money on like, “You can’t compete with us. There’s no way you’re going to get your cost down as low as we have. Like look at the ship that we’re running here.” And also, obviously, that allowed NCR to have 95% market share in 1905.
They carried a 2% dividend and the rest was basically reinvested into R&D, and manufacturing, and ways to lower the cost, so that they could share those economies with their consumers. Carried no debt, no discounting ever. They had this deal, where they could say, “We’ll pay you $100 if you can ever find anyone who is able to buy one of our registers for less than what we sell it for other than a 5% discount for paying cash up front.”
Jake: Otherwise, it was like no discounting. “We have the best machines, you’re not going to chisel us, we’re never going to erode this brand by discounting it.” They sold these machines anywhere from $25 to $820 different sophistication levels of machine. I tried to back into what that would be today and the CPI calculator only goes back to 1913, founding of the Fed. Today, those numbers adjusted would be $720 up to $23,000, basically. So, it’s pretty high-priced item in today’s dollars, at least for a shop.
Tobias: Yeah, the top end, $23,000, that’s fancy.
Why Munger Liked NCR
Jake: That’s a fancy register. Yeah. This is why Munger, I think liked this NCR situation so much. Not only does this thing save labor, but more importantly it brings morality and honesty to a community, because it takes away really the temptation to steal, and cheat, and cook the books, basically. This idea of bringing morality in making that sort of the default, you can see why Munger is all about that for a society. It’s totally in his, like, everything that he preaches.
He talks all the time in the annual meetings about how despicable he thinks it is that when our professionals allow accounting to decay from reality and become bastardized, and politicized, and all these gross things that have happened at different periods of time, especially, the expensing of stock options when they weren’t doing that. He thought this is the reverse of that. They would give guided tours to 40,000 people a year that wanted to come visit their facilities and see how this machine was running.
Then, I looked a little bit further into what happened to NCR over time, because it’s actually still around as a public company. In 1974, they commercialize the barcode and now people can easily buy ean barcodes, like scanner and the ATM as well. It was an early invention for them that they really built out, and then, they got into personal computers really early on, and then, in 1991 they were acquired by AT&T, but now, they are public.
I guess, they must have been spun out of AT&T at some point. I don’t know the details of that. I was late in even realizing they were still a public company. Yeah, so, that’s NCR and this– It’s amazing to me to see all this stuff and see there really is nothing new under the sun. It’s all just been repackaged in different way. Patterson’s talking about how, they’ve even paid like an efficiency wage, basically at that time to get a higher quality cut of employee.
They’re doing all the stuff, thinking about the wellness, holistic ESG-ish, almost like the governance side of things of stakeholder as opposed to just shareholders, all that stuff was being done in 1906 as well. So, lest we think that we’re all geniuses today that are summitting new heights, all that stuff’s been done before. If we could just go back in history and look, we could find a lot of the same stuff that people think is special today.
Tobias: Couple good comments here. One is from Dylan Thompson, “The new automated registers at Dunkin go for $10,000.”
Jake: I believe that.
Tobias: So, not that far. I guess, that makes sense, doesn’t it?
Jake: Yeah, you think technology would lower the cost of the best version of something. Of course, it’s probably a million times more powerful, but then, what the 1906 version was at for $23,000.
Tobias: NCR has been cheap on occasion over the last 10 or 15 years since I’ve been doing. It’s something that I’d bought and sold a few times. I don’t know if it’s the same entity or I don’t know what the relationship is, but it’s point of sale. So, it could be related to reasonable earner and it just seems to– I don’t know what drives it, but it gets cheap and expensive. You can have a look at the stock chart over the last 10 or 15 years/
Jake: Is it a shower, not a grower?
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