Its not something you’ll hear often, but sometimes it’s the seemingly ‘boring’ businesses that deliver the best returns. These are the companies that stick to what they know, making incremental improvements over time and operating at a level that outperforms their competitors. The boring businesses tend to attract less competition, and when the industries in which they operate are dominated by mom-and-pop operators, there can be a very long runway for growth. Industry consolidation drives scale benefits and leads to a widening of the competitive advantage.
While Uniform rental doesn’t sound like an exciting business, the returns generated by the industry leader, Cintas Corporation, certainly are. By 2004, Cintas Corporation had delivered sales growth of 23% a year for 35 years while profits grew at a staggering 30% per annum. In fact, a $100 investment in Cintas Corporation back in 1984 would be worth nearly $60,000 today, a return that dwarfs the $4,200 return from the S&P500 and even surpasses the $16,800 return from Warren Buffett's Berkshire Hathaway.
The Cintas story is the veritable rags to riches story. The journey started in 1929 during the Great Depression when Doc and Amelia Farmer collected shop towels from industrial companies along the Ohio River. They washed, recycled and sold the clean towels back to companies. Doc’s son took over the business, and was eventually joined by his son, Richard Farmer. Richard was a visionary entrepreneur who recognized the potential of the uniform rental market and tried to convince his father to expand into this area. Tensions between father and son rose because of this, and at just 25 years of age, Richard was handed the reins of the business. Undaunted, he propelled Cintas to new heights by acquiring over 200 competitors, expanding into a national footprint, and vertically integrating through uniform manufacturing.
Cintas vs S&P500 1984-2023 [Source: Bloomberg]
Cintas exemplifies the "Confederation of Partnerships" business model, which is also used by successful companies like Chick-fil-A, Discount Tire, and Enterprise Rent-a-Car. This model embraces the entrepreneurial spirit and utilizes the collective intelligence of all team members. At Cintas, every facility operates as a separate profit center, and employees are incentivized through a generous profit-sharing program and company ownership. With an unwavering commitment to exceeding customer expectations and a strong drive for continuous improvement, Cintas has a distinct competitive advantage that is difficult for other companies to match.
The engaging book "Rags to Riches - How Corporate Culture Spawned a Great Company" tells the inspiring story of Cintas, written by the late Richard [Dick] Farmer, who was at the helm of the business for over five decades. Below are some of my favorite extracts from the book. Once again, we can observe the same timeless qualitative features that have been identified in many other successful businesses discussed in previous posts. If you are observant, you will notice that most of the checklist items extracted from the recent study of the National Cash Register Company are prominently displayed at Cintas.
Culture
“Corporate cultures separate the winners from the losers.”
“Culture includes common beliefs, ethics, and values. It is the invisible force behind the tangibles and observables in an organisation.”
“Corporate culture is the single most important distinguishing factor between greatness and mediocrity. It is a major reason Cintas is different from competitors and other companies. It is our ultimate competitive advantage.”
“The company holds many values sacred - honesty and integrity - hard work - a spartan approach to business - continuous improvement - positive discontent - and going about our business with a sense of competitive urgency. These are just a few of the values included in the Cintas culture and spirit.”
“At Cintas, our culture is no accident. It is our planned approach to business. And every Cintas Partner must be aware of this approach.”
Competitive Advantage
“Ever since my experience in developing the permanent press uniform, I remembered the taste of what it was like to have an authentic competitive advantage. I swore that I would do whatever it took to develop obvious and authentic competitive advantages.”
“Today, we recognize that our most significant competitive advantage is very rare, intangible, and impossible to replicate. I'm talking—again—about our corporate culture.”
“Our whole strategy in product development was to come up with new products that our customers liked better. By the time our competitors figured it out, we moved on to the next thing. We've held that edge until this day and we hope to hold it forever.”
Purpose, Principal Objective
“Success depends on people sharing a common purpose, counting on one another as partners to do whatever it takes to keep the enterprise growing and healthy.”
“Without a guiding principle on which to base decision-making, organisations are doomed to failure.”
“The principal objective gives us guidance we need to make decisions in the best interests of our shareholders, our partners and their families.”
"The principal objective of our company is to maximize the long term value of Cintas for our shareholders and our working partners (employees) by exceeding our customers' expectations." It was very precise language. For shareholders, we wanted to maximize the value of the stock. For working partners, we wanted to maximize the value of the stock because they were owners through an Employee Stock Ownership Plan (ESOP) and we also wanted to maximize their career opportunities. Growth obviously provides career opportunities. The only way to accomplish this was to exceed our customers' expectations.”
Exceed Customer Expectations
“We do not want to just satisfy our customers. We want to exceed their expectations and make them raving fans of Cintas.”
“How have we achieved our phenomenal growth? The answer is simple. We have run our business to satisfy the needs of our customers. We try to exceed every customer requirement every time. When making business decisions we always ask how this decision will benefit our customers.”
“Exceeding customers’ and fellow partners’ needs is the simple, overriding business necessity. That is the attitude required to successfully compete and at Cintas, we pursue it with a passion you can feel. We call this attitude ‘Competitive Urgency’ and define it as follows: ‘Competitive Urgency - attending to every detail of our business with a sense of urgency, enthusiasm, professionalism, and thoroughness.’”
“Only total customer satisfaction is acceptable.”
“In our organization, the customer is the boss. We have only two kinds of partners at Cintas: those who serve customers, and those who serve the people that do. Our working partners realize that their paychecks do not come from Cintas; they come from our customers.”
Promote & Share Ownership
“I realised that in order to achieve our dream, we needed very talented people. I have always been more comfortable with ‘partners’ than ‘employees’. And so, as I added key people, I saw to it that they were owners and partners in the business.”
“My goal was to share equity with people who would stay for the long term. What is important, I thought, is what your piece of the corporate pie is worth, not what percentage of the pie you own. I needed people who could make my piece of the pie more valuable.”
“I continued to provide stock to talented executives who had already joined the company or who were joining… giving them shares in a private company that would eventually be worth something. I wanted them to think of themselves as partners.”
Incentives & The Best Paid Employees
"The general manager’s compensation system that we perfected was very similar to the one I put in place when we set up our first satellite in Cleveland in 1968. A general manager in our uniform rental division would get a salary of $10,000 a year. That’s it. Everything else depended on how he or she performed. They got six percent of their profit after expensing all corporate overhead and local taxes, but not federal taxes. We still do it that way today. While the $10,000 salary is ridiculously low by today's standards, each plant is far larger than originally visualized. So the six percent of profits yields a very nice income. Today, general managers at Cintas are by far the best paid in the industry and in many other industries as well.”
Separate P&L
“We decided that each business unit, whether a plant or a branch, would have a separate profit-and-loss statement, which is an unusual arrangement in corporate America. The general manager is totally responsible for that P&L, including personnel. They are running a business. They report to a group vice president, who has other plants reporting to him or her. This vice president also has a modest salary and gets most of his annual compensation in the form of a bonus based on the profits of his or her group.”
Entrepreneurial Atmosphere
“The structure of incentives and guidelines helped us maintain a very entrepreneurial atmosphere despite the fact that we were getting bigger. I kept saying to myself, I want everybody to be a Dick Farmer. That may sound like I was letting my ego get out of control, but the point was that I wanted everybody to be in business for themselves. We obviously had to have some centralized rules and procedures, but the goal was to give everyone as much latitude as possible to run their business. As a result we became much more performance-oriented in our compensation system than the vast majority of companies I know.”
“Even the top people in the company – the very top – have a program heavily weighted toward performance.”
Smallness & Local Knowledge
“Our goal was to achieve economies of scale, but at the same time be attentive to local needs. We wanted each satellite's profit centre to be run by a general manager who had excellent local knowledge, providing the sort of service that only small, local companies can. This would be a classic balancing act. We'd be a big company nationally—but a small company in each locality.”
Hiring and Employee Turnover
“High employee turnover became our No. 1 priority and challenge. We had been growing so fast that we were hiring out of desperation instead of hiring meticulously… [We] put together a program to lower our employee turnover. The first thing we had to do was measure the turnover, by location and by job classification. The second thing we had to do was determine the reason some-one left. We did that by calling every single person who left to find out why he or she left. We found the biggest reason people were leaving was because they were bad hires in the first place. For example, we had been hiring people with no transportation to get to work. We also had hired people who lived 40 and 50 miles away from our plants. They obviously wouldn't stay long. So we put together a list of specific hiring criteria. Our hires had to have certain characteristics.”
Fanatic
“I had total passion for the business. I always had business on my mind 24 hours a day, seven days a week, whether I was on vacation with my family or whether I was home watching TV. I always had a pen and pencil in hand to jot down business ideas as they came to mind.”
‘Customer Awareness Duty’
“When we first started trying to make sure everyone at the company stayed in touch with customer needs, we met some resistance. So we began putting teeth into it. We decided that no one could get a raise unless they did Customer Awareness Duty every year. That means actually riding on a route with a service sales representative actually servicing our customers or going to a Cintas plant or facility and working with the partners there.”
“Anytime anyone does their Customer Awareness Duty, they must write a memo to their supervisor, passing along whatever they learned and any ideas they came up with. It is almost impossible for someone to work with a customer, whether an external or internal one, and not come up with ideas on how to improve things. This process has been invaluable. We've gotten some great ideas through this program.”
People : the Growth Limiter
“The major impediment holding us back from faster expansion was our ability to attract managers. .. If we were going to be able to establish a national presence within the two-year time frame, we had to attract talent in a hurry.”
Frugality and Finding Efficiencies
“The Cintas story proves, if there was any doubt, that the real way to build sustainable wealth is to pinch pennies. Work hard. Make sacrifices. Reinvest in the business. And go for the long term.”
“Another ‘Farmerism’ I used was aimed at making sure everyone was as cost-conscious as possible. We should all be on the lookout for barnacles, I'd say. When a new ship is put into the water, it has a clean hull. It moves fast through the water and is very manoeuvrable. It has nothing to hold it back. But if that ship sits in a port for a year, barnacles will accumulate on the hull. It'll slow down the ship. It'll take more power to run the ship than it should. It will become less manoeuvrable because of all the drag. Businesses are just like ships. We have to look for the barnacles. Whether we know it or not, we've got barnacles. Your job is to find those barnacles and scrape them off. Then I'd give examples of barnacles—buying things that you decided you needed 10 years ago and you don't need them anymore. Or having somebody prepare a report that was very important to you five years ago, but now you no longer need it. But they're still preparing it for you. That's a barnacle. People we've outgrown or are occupying positions that are no longer needed—they're barnacles too.”
Intuition & Decision Making
“Cintas means ‘The Uniform People.’ Sometimes when you have a gut instinct among just a handful of key players, you should go for it. Sometimes the intuition of people who are deeply involved in an issue is better than all the research that money can buy. If you wait for all the gears to grind, you might never make a decision.”
Never Satisfied
“We are never satisfied with the status quo. We constantly strive to improve the process, the systems, the products and the service. We have a sense of ‘Positive Discontent’ at Cintas - a constructive discontent focused on making things better than they are.”
“We created a Continuous Process Improvement initiative for all our plants. We started having brown paper sessions throughout the company. The savings and quality improvement were tremendous.”
“Like everyone else at Cintas, our R&D department had an attitude of positive discontent. Nothing is ever perfect. Nothing is ever good enough. We are never satisfied. We wanted everyone to be challenging and questioning everything we do. So in that spirit, our R&D department told all our suppliers that the first product you sell us will be your worst one- because we'll work with you to make it better.”
Family
“The spirit of Cintas is rooted in its history and family values.”
Ethical and Moral Standards
“We live by the rules, we have high ethical and moral standards… We believe business relationships are based on value exchanged between two companies. Service and value generate loyalty and repeat business, not gifts, meals or entertainment. So, we will politely decline gifts, regardless of circumstances.”
Value & Empower Employees
“We are humble, and respect the partners on the front line. We view everyone in the company as important. Everyone in the organisation is performing a vital function, contributing to our principle objective.”
“We want every working partner to challenge, in a positive way, every aspect of our business, so that we can constantly improve the products and services we provide to our customers.”
“One of the first things we typically did was refurbish the lunchrooms of companies we had acquired. We repainted them. Then we put in new refrigerators and new vending machines… "The old man really cares about our conditions," I could almost hear them saying. "He is a stickler for cleanliness."
Decentralised Decision Making
“Part of our character is the humble realisation that leaders do not know it all. We have learned that when there is a problem, the person who knows most about it is the partner on the shop floor, who actually does the work. Our partners are likely to know far more about the problem and how to solve it, than the supervisor.”
“If we are buying new trucks, the partners driving them are involved in the decision. If we are considering buying a piece of machinery, the operators help decide what we’ll do. If we are thinking about a new office procedure, our office partners get involved before we do anything. This kind of input has avoided costly mistakes and earns the commitment from everyone for better results.”
“One enduring lesson that I carried with me through life was that the folks on the line know better than anyone else why a particular quality problem or scheduling problem might develop. Long after I had become an executive, I always went to the people on the front line to get their opinion on how to solve a problem. They usually knew the answer better than their supervisor.”
Emergent Effects
“Our objective is to build a self-regulating organisation with everyone understanding what they should or should not do.”
Optimism
“We are enthusiastic! Positive attitudes and optimism are a must in a fast-paced environment like ours… We do not let situations we cannot control cloud a positive approach to our jobs.”
Win-Win
“Unless a corporation maximises its value for customers, shareholders and working partners it’s doomed to failure, along with the people who have spent their careers working there.”
Cintas Management System
“We created what we call now the Cintas Management System. It consisted of written guidelines on how to handle recurring problems. We went back over the files and notes that had accumulated over the years. We documented the systems that we had developed. We put it all in writing. This may seem like some sort of bureaucratic exercise, but it wasn't. It wasn't perfect at first, but over the years it has become one of the key ingredients in the Cintas culture. Each time we identify a recurring problem, we huddle up to determine the best way to solve the problem. We issue a preliminary policy and invite comment from managers. Then we issue the policy and we expect everyone in the organization to follow it until we change the policy. This practice started way back in the 1960s in response to a very real challenge.”
Stick to The Knitting
“There is also commonality among all the things we now do. They are business services, not consumer services. They typically are recurring services, meaning we do them over and over. Most are based on route delivery. As long as we stay in that sweet spot, our expertise in one area can be translated into another.”
Teaching Culture & Hiring
“We began to talk about our character - how people viewed us from the outside and what they thought of us when they met us or did business with us. We began to define our character, which in a word is "professional." We wanted everyone who visited a Cintas plant or saw a Cintas truck or met a Cintas person to say, "Wow. These people are professional." We lived by the rules, we acted with competitive urgency in everything we did, and we had a sense of positive discontent. We weren't grumblers and complainers, but we looked for constructive ways to make things better than they were. So we defined our corporate culture in writing. From that time on, we have had a formal process of teaching corporate culture to every new manager or supervisor.”
“It takes about three hours to stand in front of a group of 20 to 30 new people and explain our corporate culture in detail. Defining, documenting, and teaching our corporate culture has had a tremendous impact on our company. People now understand what our culture is and why each of the three elements—the principal objective, corporate character, and management system—is so important. And, among other things, defining our culture has helped reduce turnover. The second thing we did in 1981 was change our recruiting systems. Instead of targeting people between 25 and 35 years of age who had been exposed to other corporate cultures, we decided to go after younger people who were just graduating from college. At that age, they weren't used to any particular kind of corporate culture. This led to the creation of our Management Trainee Program.”
Training
“Beginning that year of 1981, we began to hire people graduating from college, putting them through a two-year training program.. We took each new class of trainees and started them as supervisors in the factories and on the routes. We rotated them to new positions every six months.”
“You may accuse me of trying to create a Marine-like environment to shape young people and you wouldn't be too far from the truth. We eventually expanded our efforts to reach out to young people. Today, we hire 350 to 400 people right out of college each year. We also hire many Junior Military Officers. They are a great source of talent.”
“The Cintas Scholars Program involves hiring freshman or sophomore college students as summer interns. After their first summer we invite those students whom we want back to return for the next summer. When they come back, they are given a higher level of responsibility and more pay. At the end of their college career, they have been with us for two or three summers. They know us and we know them. It's tough for any other company to offer them more money than we can because they already have the grassroots experience that we would expect a management trainee to obtain in two years. We are way ahead of the recruiters working for other companies.”
Best Team Wins
“The reason recruiting is so important is that business is just like sports. The team with the best players wins. Of course, you have to have the quality of coaching and the facilities have to be top-notch, but the quality of people is without a doubt the No. 1 challenge. Over time, this has shaped our whole culture.”
Acquisitions
“I was aware, early on, that our industry would consolidate. It had all the characteristics. It consisted of mostly family-owned companies and there were often two or three such companies in a single city… My strategy was to play a major role in the coming consolidation of the uniform business.”
“Most of the owners I dealt with were confronted with one or more of these problems:
They were in their 60's and were tired of working every day, but had no successors lined up;
They had a son or daughter in the business, but were aware that their offspring weren't strong enough managers to take over;
They just wanted liquidity. All were wealthy, but their wealth was tied up in buildings, trucks, equipment and inventories. That was the plight of the entrepreneur;
They were second- or third-generation managers who had siblings, but they were not in the business. So they had no way to share the value of the business unless they sold it.
I became very knowledgeable about these problems. I could "speak the language" of these owners.”
“Cintas has played a master role in the industry consolidation. We have acquired more than 220 companies.”
“The biggest mistake we made in integrating acquisitions was waiting too long to install Cintas management people. Too often, we let the acquired management team take their best shot at making everything click. It hardly ever worked. We were way too tolerant.”
“We were very dedicated to converting the culture of the acquired companies to the Cintas culture. In [most cases], we had to work at meshing our cultures. We had special seminars for the managers of the acquired companies including the corporate culture course. That helped tremendously in opening their eyes to the difference between their culture and ours and showing them the benefits of adopting our culture.”
No Consultants
“We created our compensation system ourselves. We never used consultants and paid no attention to compensation surveys. I didn’t really care what someone else was getting paid at another company. I didn’t give a hoot.”
Appearances
“We cannot afford the risk of allowing our attire to leave a bad impression with a customer or prospect. It is important that our appearance impresses people. Appearance is important in other ways, too. We pay attention to house-keeping in our facilities, our trucks and equipment. They are orderly, clean, efficient and businesslike. The plant floor shines. Our desks aren’t littered. We want anyone who comes in contact with Cintas in any way to have a favourable impression.”
Tone From The Top
“I suspect a lot of people think I'm a fanatic, but I see how the smallest actions that top managers take are magnified throughout the company and its culture. If the boss picks up a scrap of paper he finds in the hall, other people will be inclined to do similar things.”
Vision - Buy In
“I've always encouraged all of our operating managers to paint a vision for their staff. They should try to communicate the full picture of what they're trying to accomplish. That way, employees are not just doing a job. They're sharing a vision. If they share a vision, a job is more than a job.”
Transparency
“One other thing I started doing soon after Dad gave me the keys was showing our books to employees at the end of each fiscal year. I started having an annual meeting with our top people. We reviewed the sales and profits for the year just finished and talked about goals for the coming year. I told people where we were doing well and what we needed to improve on. Eventually, we graduated to taking space in a local motel to show everybody the numbers. I also started publishing an annual report with black and white pictures. I sent it to my bankers, lawyers, accountants, and employees.
“Dad thought that revealing our financials was stupid. "Everyone will want more money," he said. "Well, we've got to deal with that if they want more money," I replied. "We either have to give it to them or explain why we're not going to give it to them." My philosophy was, "How can you win the game if you don't know the score?"
Harness Technology
“Our industry had been trying for a long time to determine how to make technology work, but Cintas was the first to put all these elements into place. The fact that we began to use state-of-the-art technology as we grew meant that it was relatively easy for us to absorb newer technology as it came along. Other companies that started late had to try to make quantum leaps to catch up. That is highly risky and prone to failure.”
Reading
“I was an avid reader of business articles. I read Fortune, Business Week and Forbes cover to cover every time they appeared.”
IPO Pricing - Win-Win
“As we travelled and kept meeting potential investors, my attitude began to change. I was beginning to understand that the worst thing we could possibly do was be too greedy and have people buy our stock, only to see the value decline. I decided I had the wrong attitude about trying to get absolutely the most I could get out of this IPO. I talked to Bob Kohlhepp and he finally agreed with me that the best way to run a public company was to make sure the initial investors have a nice run-up in the value of their shares. That way, we would have long-term, loyal investors. We wanted everyone to have a good deal, not just me.”
Summary
Cintas' success over the last five decades can be attributed to its unique company culture, starting with the committed leadership of Dick Farmer, the type of business manager that Buffett admires. Farmer prioritized a long-term view, focused on the company's core competencies, shared profits with employees, embraced technology, fostered innovation, and empowered his team to exceed customer expectations.
Although manufacturing, renting, and cleaning uniforms may not be the most glamorous occupations, the Cintas story highlights the attractive returns these businesses can generate when you combine superior management in an industry largely protected from disruption. Warren Buffett famously wrote to his shareholders at the turn of the century that he had invested in such "cutting-edge" industries as bricks, carpet, insulation, and paint. ‘Try to control your excitement,’ he wrote. As Ralph Wanger once noted, investors sometimes pay an entertainment tax for stocks with an exciting story, which is worth keeping in mind in your investing endeavours. Riding a multi-decade, multi-bagger like Cintas is as close to the holy grail of investing, and anything but boring!
Sources:
‘Cintas: The Spirit is the Difference,’ Richard T Farmer, Cintas Corporation 2010.
‘Rags to Riches - How Corporate Culture Spawned a Great Company,’ Richard T Farmer, Orange Frazer Pr Inc, 2004.
Further Reading:
‘Ten Years', Investment Masters Class. 2017.
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