Guest Spotlight: The Biggest Opportunity Since Fast Casual

By Parth Detroja

I’m sick of hearing the bubbly waitress state gleefully, “Oh, we have a salad that is vegetarian!” “Anything else?” I will plea with my fingers crossed. Ultimately, I will most likely end up ordering some sort of technically carnivorous dish with cheese and veggies, sans the meat.

I have been told by multiple people in multiple countries that I’m an awful vegetarian. I don’t deny it. Rarely is there anything green on my plate. Nor will you see couscous or quinoa. My typical meal will consist of some sort of bread or other grain-based substance with cheese, topped with roasted peppers, onions, and mushrooms. Perhaps I’ll add some sort of soy-based “fake meat” for texture and protein. However, I’ll most likely pass on the kale salad.

I’m fed up, no pun intended, with restaurants that offer one dish to satisfy every possible dietary restriction. Don’t get me wrong, I am an Applied Economics major and I understand that the most economical option is to create one all-purpose dish that is not only vegetarian but also vegan, gluten-free, and devoid of all common food allergens like soy and nuts. The problem is, in most cases, the aforementioned dish is bland and rarely filling.

When I’m dining with friends at an upscale establishment, and I am forced to pay $32 for roasted acorn squash—the sole vegetarian option you offer—please understand you have lost my business forever. I believe the cost of that lost lifetime customer value is much greater than that of having a flavorful lacto-ovo vegetarian option on the menu.

Of the Big Three burger chains, the one that is arguably best positioned for 2016 is Burger King. Morgan Stanley recently called Burger King an “underappreciated story” that most people are overlooking and speculated explosive growth in the near future. Granted, while much of this growth will likely have to do with international expansion and better positioning of Tim Hortons, there is one other factor to consider: neither McDonald’s nor Wendy’s offer a vegetarian burger option. However, Burger King astutely provides a veggie burger for America’s 7.3 million vegetarians.

There is a growing trend in America towards meatless meals and it seems those businesses that realize this will experience the most growth. Without indulging in a meal consisting solely of side options and desserts, a vegetarian cannot comfortably eat at either McDonald’s or Wendy’s. Other major players like Subway, Five Guys, and In-N-Out Burger offer surprisingly tasty grilled cheese and vegetable sandwich options for those opting away from meat. In the fast casual sector, everyone from Chipotle with its Sofritas to Shake Shack with its ‘Shroom burger is making a conscious effort to appeal to vegetarian consumers. Even IKEA recently released a veggie version of its iconic Swedish meatballs.

Many restaurateurs will opt to continue overlooking vegetarians, which to their point only constitute 3.2% of American adults. However, consider this: How often do you get lunch with friends? According to a 2014 study by the NPD Group, 43% of meals aren’t eaten alone. Although you may not be vegetarian yourself, chances are you have a friend or two that is, and that one friend’s dietary restriction will likely influence your restaurant selection for the entire group. So say that you have a group of five friends looking to get lunch together. Statistically speaking, there is a 15.01% chance that at least one of you is vegetarian. When you consider that most people tend to go to restaurants with company, vegetarians become much more difficult to marginalize.

Being vegetarian isn’t a trend. It’s a lifestyle choice that is here to stay. In fact, specialty vegetarian food constitutes a $2.8 billion market comprised of individuals who are less price-sensitive than the average omnivore.

Most vegetarians are not lettuce-loving salad fanatics. For sustainable business growth in the restaurant industry, catering to vegetarian consumers with flavorful meatless options is a must.

Indonesia’s Economy: Changing Tides in the World’s Largest Archipelago

Interview by Timothy Higgins of Wijaya Sumono, former Jakarta-based Consultant for The Boston Consulting Group and 2013 graduate of the Johnson School of Management.

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How have declining commodity prices impacted the Indonesian economy, in both the public and private sector?

Declining commodity prices have had a direct negative impact on the Indonesian economy, adversely affecting both the private and the public sectors. Nearly 60% of Indonesia’s exports are commodities, which include coal, palm oil, rubber, coffee, cocoa – to name a few. Coal prices in particular have dropped by some 50% over the past four years ever since China, the world’s largest consumer and importer of coal, actively took steps to reduce coal consumption. Evidence of severe losses in coal mining across Indonesia’s public and private sectors is prevalent, and many mine sites have been abandoned. Similar stories are also heard in other commodity sectors. Take natural rubber for instance. Due to the global economic slowdown, which led to a decline in both the auto and subsequently tire industries, the price of natural rubber has fallen from over $5 per kg in 2011 to $1.4 per kg (according to the price of rubber futures at Singapore Commodity Exchange). Local farmers have since cut down on tapping rubber trees, either to curb losses or to look for better opportunities elsewhere. Production outputs of crumb rubber factories (natural rubber processing plants) subsequently took a deep hit in recent years. In 2015, the Director General of Indonesia’s tax office resigned from his post, having missed its 2015 tax revenue budget by around USD 18 billion, from the original target of approximately USD 94 billion.

Have these declines resulted in a boost to consumer spending from greater purchasing power?

It’s unclear whether lower commodity prices have positively impacted consumer spending, but if anything, the opposite seems to be true. Due to a slowing economy, and hence reduced incomes, consumers have subsequently cut back on spending. The majority of SMEs across virtually all sectors that I have encountered have lamented poor business. One good indicator of healthy domestic consumption is auto tire sales, which have declined by 20 to 30% y-o-y in 2015 (according to the Jakarta Post) – indicating a slowdown in demand for motor vehicles. The only sector bucking the trend seems to be the recently booming tech industry. Venture capital and private equity firms see huge upside potential in Indonesian markets thanks to the country’s large and growing population (the fourth most populous in the world), and several billion-dollar companies have recently been created in the tech space, thanks to large injections of foreign capital.

How have foreign and domestic companies reacted to regional geopolitical issues like conflict in the South China Sea and clashes over fishing rights?

Conflicts in the South China Sea haven’t had a strong direct impact on Indonesia, since it does not dispute over territory to the same extent that China does with Brunei, Malaysia, the Philippines and Vietnam. However, China has contributed to rising tensions with Southeast Asian countries over fishing rights in the region. The waters around the Indonesian archipelago supply approximately 10% of the total global catch, and Indonesia has aggressively strengthened its maritime sovereignty rights, starting with the appointment of Indonesia’s incumbent Minister of Maritime and Fisheries, Susi Pudjiastuti. Minister Susi has been very vocal and aggressive in cracking down on illegal poaching in Indonesian waters. Since 2014, Indonesia has sunk 174 foreign boats caught fishing illegally in Indonesian territories. On Tuesday (April 5th, 2016), Indonesia blew up 23 foreign boats – 10 Malaysian and 13 Vietnamese, to send a clear message on its tough stance over its maritime sovereignty.

Which industries have been most affected by slowing demand in China? Have other importers in the region (Japan, Korea) become stronger trading partners as a result?

Many industries have impacted by slowing demand, and the majority of commodity sectors have been adversely affected. While I don’t have data regarding changes in Indonesia’s trading volume with respect to specific countries, I believe it has stayed relatively constant. Regional slowdown in consumption has had a serious impact on the local economy in other ways than just exports, however. One recent example is from February this year, when Panasonic and Toshiba announced the closure of their TV and lighting plants respectively in Indonesia, leading to almost 2500 layoffs against the backdrop of a series of business closures across the country.

Is there a pervading consensus on the Trans-Pacific Partnership among the Indonesian business community, and if so, what is it?

The Jokowi administration has repeatedly asserted its interests for Indonesia to take a more active role on the international stage. President Jokowi had stated that he will sign the TPP agreement during his meeting with President Obama last year. However, I do not think there is any consensus among the business community on what form that role should take, nor was there much discussion that went on which involved the public.

Shorting the Devil

By Hunter Bosson

One of the few places where student protesters are taken seriously is the institution that takes their money: universities. The university, with its resources, publicity, and networks, offers a praxis for political and social change far beyond campus.

One tactic for wielding the academy’s power is divestment: selling stocks, bonds, and investment funds of businesses that engage in ethically ambiguous practices. Since their genesis in the 1970s, worldwide campaigns for divestment have been as varied as they have been contentious, tackling such issues as South African apartheid, Big Tobacco, climate change, and the Israeli-Palestinian conflict. The debate continued onto Cornell’s campus when the Board of Trustees recently rejected a proposal to divest from the 100 largest oil companies for their contribution to climate change. The divestment campaign has its limits and costs, but as universities increasingly acknowledge the legitimacy of financial activism, students must be the ones who define that role.

One issue plaguing divestment campaigns is that misinformation abounds as to how it works. By selling shares and bonds in a company, the divesting institution does not actually take money away from said company, but merely sells the equity or debt that it holds to someone else. The idea is that by liquidating positions in a firm, it raises the cost of borrowing and lowers the value of the company, the latter being of great importance to company executives compensated in part by stock options. As prominent institutions divest, it raises awareness for the issue it addresses and provides movement catalysis. Despite its circuitous nature, divesting has shown real results.

Divestment began as a particularly promising student political strategy. The first major campaign began in the 1970s, as campus protests pressured universities into selling shares in firms that did business in or with South Africa in protest of apartheid. Large firms, including IBM and GM, were targeted by institutions such as the University of Michigan, Columbia, and the University of Wisconsin Madison. The movement’s momentum snowballed, eventually dragging nonprofits, counties, and states into the fray until its culmination in 1986 with the Comprehensive Anti-Apartheid Act, banning new investment in South Africa. By the time the apartheid regime fell shortly thereafter, 155 universities had divested. Even today the anti-apartheid movement is the godfather of divestment campaigns; one is hard-pressed to find an activist who does not pay homage to its success.

Divestment’s popularity soon began to fall as the morally dubious issues started hitting closer to American homes. The next major divestment campaign focused on the American tobacco industry, a similarly distasteful lot, but this time the social crusade was less decisive. While numerous high profile universities, including Harvard and CUNY, divested from America’s original poison peddlers, the movement faced stronger opposition. Critics argued that shares should be retained so that responsible investors could wield shareholder power for good, such as preventing tobacco advertisements directed at children. Although tobacco divestment won press, little evidence has emerged that the divestment campaign applied noticeable downward pressure on stock prices.

The most prominent divestment campaign today targets fossil fuels. The coal, oil, and gas industries have inherited the title of societal boogeyman and are paying the price on college campuses. Over a hundred universities have divested, including Stanford, Cambridge, Oxford, and the University of California System. Divestment has been much more popular, and successful, among smaller colleges and educational institutions (perhaps in part due to a lack of financial exposure). However, the reasons for divestment provided by larger institutions are damning: Stanford invoked its investment responsibility policy, established in 1971, barring investments in firms whose actions could pose a “substantial social injury.” A particularly vocal group of proponents are scientific academics, many of whom fear the coal and oil lobby’s impact on climate change research. Opponents, with dazzling predictability, called the movement pointless and unproductive. However, in addition to the usual tropes, some investors have raised valid points: energy sector firms’ stock price movements have the lowest correlation with other industries, making their shares a key tool for diversification, arguably the most important component of an endowment’s investment strategy.

Perhaps the most polarizing target of divestment campaigns today is Israel. In 2005 the Palestinian Civil Society called for a campaign of boycotts, divestments, and sanctions (BDS) against Israel and firms with ties to the Israeli military or Israeli control of the West Bank. Unlike other major divestment campaigns, this BDS campaign faces the challenge that Israel’s actions do not receive the same level of condemnation as South African apartheid and Big Tobacco. Proponents claim that BDS is justified due to Israel’s occupation of the West Bank and the Gaza Strip, even going so far as to call it an “apartheid state,” making companies such as Caterpillar and Raytheon, who contract with the Israeli military, prime targets for divestment. Opponents claim that Israel’s actions do not merit any form of condemnation, and have even gone so far as to label prominent members in the BDS campaign as anti-Semitic. The BDS movement is especially controversial on Cornell’s campus, where a website called SJP Uncovered recently began a PR campaign aimed at Cornell’s BDS movement. The rather shady organization advertised directly to Cornell students on Facebook, accusing the organization Students for Justice in Palestine of working against the Israeli-Palestinian peace process, including for its advocacy of BDS.

Concerning divestment issues, Cornell remains well behind the times. The university’s equity holdings and business deals have sparked three organized divestment movements, targeting fossil fuels, Israel, and private prisons respectively. Some proposals have catalyzed action, with Cornell recently announcing that it will honor Black Students United’s demands that security firm G4S’s contract with Cornell’s Herbert F. Johnson Museum of Art be terminated for its business in private prisons. But overwhelmingly, the university’s attitude towards divestment has been patronizing and unsympathetic. A resolution for BDS against Israel was not even given a vote by the Student Assembly, and when presented with resolutions by Cornell’s student government organizations in January calling for divestment from major polluters, the Board of Trustees voted against divestment. The Board instead issued guidelines that the university would divest only from firms partaking in “morally reprehensible” actions, such as apartheid, genocide, and child labor law violations.

The core of Cornell’s distaste for divestment was stated by board member Donald Opatrny when he extolled that the endowment’s main purpose is to “provide income for the advancement of the university’s educational objectives.” Admittedly, if ever there were a university that needs to worry about its finances, it is Cornell: last year its endowment’s 3.4% return on investment was the worst in the Ivy League, and at least 2.4 percentage points behind any other Ivy. But Cornell’s administration used the same rationale in the 1980s when it declined to join the divestment campaign against South African apartheid. Cornell’s actions are striking: today its administration has the gall to advocate divestment from apartheid, when it was one of few large universities never to do so, while deploying the same financial myopia it used in the 1970s and 1980s to avoid new divestment campaigns. Even those who reject that propagating climate change is a “morally reprehensible” action must find it hard to stomach such a carelessly two-faced and opportunistic institution.

Central to the rejection of such financial activism is the misguided belief that divestment does not work. A single university, opponents pointedly argue, holds far too little of a company’s stock or debt to affect its equity or borrowing prices in a noticeable way, even in mass divestment movements like that for fossil fuel. Even the anti-apartheid movement’s economic results can be attributed to congressional action. However, the awareness that the campaign raised certainly paved the path for more efficacious changes down the road. And that is the necessary lens for divestment: it is not a painful sanction but a powerful protest. Like any meaningful protest it incurs financial cost, although concerns about cost are wildly blown out of proportion. While energy stocks represent an important source of diversification, targeted fossil fuel stocks compose less than 0.5% of Cornell’s endowment. And that’s the kicker: so long as they are reasonable, divestment initiatives will never impact the endowment enough to noticeably change its composition or its return.

Clearly we should not rule out divestment completely. While most issues at the butt end of divestment campaigns are highly contentious, there are some obvious investments that no conscionable human being would be able to make. An example would be German bonds in the 1930s: perfectly legal to hold, and very profitable before war broke out, but representing an investment in actions unforgivable. Even if secondary stock purchases do not directly flush a company with cash, by holding shares one literally owns a piece of that company. As a stockholder, one not only acknowledges that company’s right to existence, but seeks to profit from its success. Not even practitioners of the dismal science can be that indifferent.

Exxon-Mobile is not the Third Reich, but we first have to acknowledge that what divides us is not whether one can rightly divest from an ethically bankrupt institution, but where to draw the line separating the acceptable from the unforgivable. Divesting from every company that has even the smallest ethical infraction on its record is functionally impossible. However the ultimate arbiter of Cornell’s investments’ moral merit should not be Cornell administrators themselves. They have proven themselves to be opportunistic, inconsistent, and borderline incompetent, establishing a litmus test to serve the university’s “interests” without bothering to listen to what its own students want. If ever there were a responsibility to devolve to Cornell’s dilapidated student assemblies, it would be this.

Divestment campaigns will continue to be a powerful tool for any student activist, and rightly so. They do, however, in many ways represent a morally conscious university’s greatest fear: having to put its money where its mouth is. A university’s divestment sends a powerful signal even if it has a negligible financial effect, one that has the potential to grow into something more. Cornell should welcome such moral convictions. And for the tuition Cornellians pay, their university might at least respect them.

Exchange Traded Funds: Where did they come from and where are they going?

By Emma Nelson

The speed of technological development and an anxious market forces the banking system to adapt faster and innovate further, all in the name of pleasing investors who readily take on risk to achieve any return the market will give them. And as they have time and time again, the financial industry delivers.

From the safe and dependable pass-through mortgages, to the rise of securitization in the 1970s, to the intricate technological monstrosities of credit default swaps and collateralized debt obligations that brought the economy to its knees during the financial crash of 2008, technology has a way of completely changing the landscape and rules of the market, leaving investors running to catch up.

This time, a new product is poised to become a household name just as the alphabet soup of ‘asset-backed securities’ and ‘mortgage-backed securities’ have in the past. They are known as exchange-traded funds, which only a short time ago were known only to those who traded them. What exactly are these exchange traded funds or ‘ETFs’? Simply put, ETFs are an offshoot of the typical mutual fund structure. They allow investors to trade a portfolio of securities or index just as they do shares of stock. This hybrid security seeks to mimic a benchmark, say an index like the S&P 500 or a portfolio of a specific sector in equities or bonds, as closely as possible to generate similar returns in an efficient manner. Rather than purchasing every stock of every company in the entire S&P 500 and managing that portfolio themselves, an investor can instead purchase, for example, Vanguard’s S&P 500 ETF, which will closely track the S&P 500’s return. All the investor needs to do is buy one share, which can be bought on an exchange without an exorbitant commission fee from a financial advisor, and instantly become a stakeholder in a fund that is being passively managed by companies like Vanguard and BlackRock.

The convenience of not having to pay for an actively managed fund really lies at the heart of the popularity of ETFs. While only $1 billion was invested in commodity ETFs in 2004, this value had grown to $109 billion in 2016. In fact, ETFs now comprise one-third of the entire market of publicly traded equities. With major tax advantages compared to actively-managed funds that also charge large commission fees for financial advisor input and security selection, ETFs provide portfolio diversification without exorbitant cost. By giving investors access to a vast array of investment opportunities that the average investor would not normally enjoy, such as complex derivative options, ETFs provide instant liquidity and the broad capabilities of the market through diversification of asset classes and financial instruments in a portfolio.

Every innovation comes with risk. This was no more evident than during the flash crash of 2010 when ETFs rapidly crashed after high frequency trading (highly complex and rapid computerized trading programs) sent the algorithmic trading methods utilized by investors around the world into a panic, causing the entire system to fail temporarily and resulting in devastating losses for many investors’ portfolios. Like a genetically-mutated new strain of a disease resistant to traditional cures, new technological instruments of the economy react differently to market conditions than those of the past. In the new market environment, normal relationships between asset classes have completely broken down, in part from disrupters like ETFs that grow even more complex by the day. From Leveraged ETFs that promise to deliver a multiple of the return on a given index, to synthetic ETFs that don’t even hold an underlying asset, but instead use a complex algorithm to try to match the return using derivative trading, ETFs are experiencing relentless pressure to grow more complex from a market in search of ever higher returns.

Security trading and selection in the past used to require an analyst to have a gut feeling about a certain company or the direction of a sector of the market. With the rise of ETFs and other complex investment products, investing requires a new set of skills: a keen knowledge of market fluctuations and advanced computer programming abilities, to name just a few. Meeting this demand has completely transformed the identity of Wall Street. The finance world now employs more and more PhDs with advanced mathematical and engineering degrees, especially in firms like Jane Street that mimic Silicon Valley’s commitment to intellectualism and innovation in how it operates its massive $1 billion investment fund, which specializes in these highly advanced ETF trades. These highly-educated analysts who once were derogatively nicknamed “quants” are now well-respected and integral members of any trading floor. This reversal in sentiment is ample evidence that the Street has had to evolve with advances in technology.

ETFs are the financial tool of the future, which is exactly the reason why they are so popular amongst the Millennial generation. According to one study conducted by Cogent Reports, 40% of the age group reports owning ETFs. In an interesting yet gimmicky twist, at least two investment companies are even building ETFs designed to hold shares of companies that sell to the generation born between the early 1980s and the early 2000s. This union of Millennials and ETFs makes sense: in the smartphone age, the need for a constant stream of information from investments, combined with the ease and cost of investing, make ETFs the Millennial financial tool of choice. Where Generation X and Boomers look for more traditional tools, Millennials are moving away from the wisdom of traditional market relationships and embracing the new.

It is the new, however, that often forgets the old. History has shown the great things that can be achieved with innovation, but it can also demonstrate the huge risk that underlies the foundation of many of these advancements. The changing face of Wall Street is by no means a surprise or a bad thing. Innovation brought about by these talented analysts is inevitable. However, technology outpacing our understanding of the financial world is also inevitable. There is no greater illustration of this simple fact than what we saw in the financial crisis, which was brought about not because of the new complex mortgage products on the market, but from analysts and market participants not fully comprehending how these instruments affected the macroeconomy at a fundamental level. This event was not an anomaly, but rather will continue to be the rule if risk management divisions and federal government regulation do not closely monitor these new financial tools in their introductory stages before they have a chance to wreak havoc on the financial system if something goes awry. So as ETFs grow in popularity and complexity, it is important to keep a mindful eye about the incredible potential – both positive and negative – that they can bring.