Analysis: Three Things H&R Block MUST Do To Prevent Bankruptcy.

Funny story written by anthonyrosania

Saturday, 10 July 2010

image for Analysis: Three Things H&R Block MUST Do To Prevent Bankruptcy.
The Penn Central Railroad was worth $15 billion in 1968. It went bankrupt in 1970.

Write this on a rock: H&R Block is f--ked.

With the defection of CEO Russ Smyth to a "large company in Chicago" which Smyth refuses to name, Block is on its 257th CEO in 10 years. Field and corporate leadership is now trying out "Configuration Plan ZZ", and still Kansas City's jade-green monolith is hemorrhaging cash at an alarming rate.

Here is the solution.

1.) Pick a team: Company owned or Franchise.

As HRB Chairman Richard Breeden proved when he decimated the field leadership team at Applebee's, he believes that the key to success is to have franchisees run his offices.

This is a double-edged sword: Franchise offices tend to be more profitable than company-owned, because it's their own cash on the line. For the first time ever at the 2009 HRB National Convention, Franchise owners and District Managers for company owned stores met at the same time.

Company-owned leadership was amazed at the mutants that Block allows to own franchises, and franchise owners were shocked to learn that company owned offices actually spend money on infrastructure.

Both groups were shocked to learn that H&R Block is essentially two companies; one supporting franchisees, one supporting company-owned.

But the belt-tightening needed to make franchisees profitable leads to franchise owners not investing in things like paint or toilet paper, negatively impacting brand quality, and client service.

Nevertheless, Breeden so believes in the franchise model that he brought former McDonalds executive Russ Smyth over to be CEO for a week and a half.

No matter which model they choose, having two redundant infrastructures is per se wasteful. One has got to go.

And, trust me, it'll be company-owned that gets the heave-ho.

#2) Get out of the H&R Block Bank business.

According to SEC filings, H&R Block spent over $15 million pursuing a Charter for the H&R Block Bank.

There is one brick-and-mortar H&R Block Bank office, in the lobby of Block's corporate office in Kansas City, Missouri.


H&R Block Bank's charter was a vanity project for former CEO Mark Ernst, pure and simple, meant to keep in-house all of the delicious fees charged for the Emerald Card, the Ernst-developed method of putting an IRS refund on a prepaid debit card.

The Bank also proved fortuitous when Block subsidiary and Option One Mortgage began to hemorrhage like Gary Coleman's brain.

(It should be noted that Option One was bringing in nearly $2 billion dollars a year at one point, while oppressing FICA-impaired homeowners to the level of crimes against humanity. Three years later, Option One couldn't be sold, and was simply dismantled. Interestingly, Ernst directed HRB Bank to buy some of the sh-tbag mortgages from Option One, effectively covering its losses with Retail Tax profits.)

Block Bank positioned itself to fail in two ways:

First, to turn the Emerald Card into a 12-month-a-year bank product. A third of Emerald Card client are otherwise unbanked. The Emerald Card was marketed to be the one-size-fits-all banking solution for them.

"Use it for your tax refund, get your paychecks direct deposited to it, pay your bills online with it, make your laundry April-fresh with it!"

Instead, Emerald Card users drained their tax refund off of the card, threw it in a drawer, then replaced it the following January with the next refund. It didn't help that the Bank charged $2.00 just for a BALANCE INQUIRY, and $5.00 to refill it via the Green Dot network. Also, people like to be able to visit their money, to see the building where it is being held. Unless they lived in downtown K.C., that couldn't happen.

Second, to finance Refund Anticipation Loans. RALs saved Block. RALs - expensive, short-term consumer loan secured by a taxpayer's expected tax refund- were the be-all and end-all of HRB's marketing for years. Consumers loved quicker access to refunds, versus waiting 488 months for the colorful IRS check to come.

And, boy-howdy, can you charge a sh-tload of fees, and usury-level interest rates on 'em!! What better way for a company who touts its morals and ethics to exploit their clients??

Here's how it works:

Block prepares the tax return and electronically files it with the IRS. Within 24 hours of submission, Block receives IRS confirmation that the submission was free of mathematical errors, and that the filer had no liens or delinquent federal student loans. This meant that there was good chance that the IRS would pay the refund within weeks, barring fraudulent income reporting. Block issues a check for the refund, minus the cost of tax preparation, a loan originating fee, and compounded interest.

How much interest? In 1995, the New York Times reported that Block's 39% fee-simple interest, $30 filing fee and $59 loan fee amounted to a 250 percent APR on a refund of $1,000.

Two-hundred-and-fifty-percent interest.

H&R Block was sued every year, from 1994 through 2010, for issues with RALs.

Every. Year.

Fortunately, many states have outlawed RALs. Active military members can't get one, and competitors like Jackson Hewitt can barely find bank financing for their RAL product. More importantly, consumers are getting hip to the scam.

Philosophical question: If H&R Block Bank throws a RAL party, and no clients show up, can they charge a fee?

#3) Either sell Block to Jackson Hewitt, Liberty Tax or Intuit, or acquire one of them.
#3a) Find a Way To Generate Income in Block Offices in the Off-Season As Well.

Forget Jackson Hewitt and Liberty Tax: JH is too cash poor and its business too unstable. They lost a boatload when they lost RAL financing, and probably can't make up for it. Liberty Tax is just too small.

More importantly, most of the people farting into chairs in JH's and Liberty's waiting rooms are former H&R Block clients, going to where the grass is greener. Should Block pay for clients that they will just alienate again?

Intuit is the key here.

In recent years, Intuit's Turbotax software ate Block's lunch, and is now responsible for serving 22 million clients that, 20 years ago, would have had no choice but to be overcharged by Block.

Thus: Turbotax = great software with no retail tax support. H&R Block = sh-t software with a HUGE Retail network behind it.

Now imagine Intuit acquiring Block, rebranding all offices with big orange check marks, calling them "TurboTax Centers," and selling and supporting the software therein.

An added benefit would be using the offices to sell and support Quicken, QuickBooks, and all of Intuit's small business solutions year round.

Currently, from April through December, Block uses their offices to host tax classes and store next year's window signs.

Block has attempted -for years- to find a way to have the need for cash registers in their offices 12 months a year. Everything from subletting to political campaigns to renting out the space for retail storage has been tried, but nothing performed well enough to roll out nationwide.

The "off-season" is where Block has the bandwidth. They've tried adding business services, and audit services, but only spent about 35 cents to support the initiative. Intuit has the products, and one could imagine a scenario where Intuit has Apple-Store-like Genius Bars for small business from May through Christmas, and then shifted to tax preparation when necessary.


Novel, innovative companies can take over the market, or reshape it, and prove unimaginably profitable.

And many novel, innovative companies have had to change focus to remain profitable. Mitsubishi used to be a coal mining company. American Express was mail carrier in Albany New York. Henry Wells and William Fargo left Amex to start Wells Fargo, a competing mail carrier.

F.W. Woolworth's renamed itself Foot Locker, Inc., when it shifted focus to its most profitable subsidiary.

And novel, innovative companies can become stale, and brittle, and a ridiculous anachronism in the marketplace, without change. Ask those unemployed by the Penn Central Railroad, which was worth $15 billion in 1968. It went bankrupt in 1970.

H&R Block was a novel, innovative idea when it first opened.
So was TWA.
And Commodore Computers.
And Fotomat.
And Bethlehem Steel.
And Polaroid.
And Sharper Image.
And Studebaker.
And Atari.
And Crazy Eddie's.
And RCA.
And pets-, boo-, webvan-, Jennicamlive-, beenz-, sixdegrees-, google answers-, Ogrish-, numedia- and napster-dots-com.
And Lionel Kiddie-City.
And Napster.
And Tower Records.

The funny story above is a satire or parody. It is entirely fictitious.

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