Patel Motel Dhandho
A case study on a business phenomenon from the book Dhandho Investor
Patel Motel Dhandho
Many people have heard about the Patel Motel Mafia. Charlie Munger even said that nobody can compete with them in motels. Why is this? What are these Patel Motel and why are they so special? In the book, Dhandho investor Mohnish Pabrai does a wonderful job of explaining this case study.
So Patel’s currently own 50% of all the USA motels and they are all profitable. How has this come to be? Patels tend to run these motels on their own. So effectively they just buy the motel and then run it themselves which reduces costs drastically. ‘They live in the goddamn motels’ to quote Charlie Munger here.
So Patels have no cost but how did they decide to own motels why not start a new grocery store or start a home appliances store? Why did they choose motels?
For this, we have to travel back in time and see where and how did Patel’s land up in the USA and what was their condition when they were in the USA. Many Patels migrated from South Gujarat to Africa where they were diamond merchants. There were a lot of Gujaratis in Uganda and they were one of the big reasons for the economy being good and they were all rich. In the 1970s there was a new president came in charge Idi Amin who had a narrative that Africa was for Africans and hence he removed all the Gujaratis from Uganda. At this time India was already dealing with a lot of refugees from Bangladesh so India effectively ignored these people. The next choice was to go to the UK so a majority of the Gujaratis went there. The next option was the USA which is where a few went but even there due to the Vietnam war, not a lot of people could be taken. But the people who did go there went into the motel business.
So to answer the question of why they started the motel business over other businesses is that motel businesses could accommodate them as well as make good money. So at the time they went, there was a recession causing motel prices to go down making it a good opportunity to buy them.
This all sounded like a great idea but where would they get the capital from? After all the Patel came from Uganda with not a lot of money as they were evicted so they could only get a few thousand dollars from the assets they sold and smuggled in.
So this is where it is wonderful. Patels with joint families combine all their money and get $5,000. With this, they get a loan with the collateral being the lien on the motel. So they can get the motel for cheap, live there and run a profitable business what more do you need eh.
Now the Patels take over the motel and they decide that they don’t need any staff they can just work themselves as they live there. So they treated the motel as a house and took care of it. This brought down the costs of the business drastically and gave them a competitive advantage over the other conventional motels out there.
So because the Patel’s treated the Motel like their own house and also had low costs they provided great customer quality as well.
So now with such an amazing business model they could easily beat their competitors and as the business was so cash rich they could buy more motels. They ran these the same way as families were big. Over time Patel’s dominated this industry and they became big. The second generation decided to branch out into different businesses such as franchising, petrol pumps, etc. and even those businesses are well run. Now the third generation is moving on to education but the motels are still there and are still mainly owned by the Patels.
What are the conclusions we can take from this?
Most Patels have the ‘gene’ of business:
Not to say that I have any but even back in the day when we had kings. Patel’s used to be landlords and as time went on wherever they went they created good businesses it can be in Africa or USA or Uk. Kunal Shah, also I think spoke about how Gujaratis are inherently better businessmen because their whole line of generation has been businessmen. Now, this is not to say that non-Gujarati or non-Patels are good businessmen or that all Patels and Gujaratis are good businessmen. This is just an observation, not a rule.
You can lose everything and rebuild it:
The Patel’s were wealthy in East Africa but there was a Black Swan event that happened and they got kicked out of the country due to a leader. Now even after such an unpredictable and huge loss the Patel’s found a way to grow in a different area and in a different way. As investors you want a person like a Patel to run it. Who even after going to 0 can handle it and make the best out of the situation. Black swan events like covid happen all the time but a manager who could maintain relationships with all stakeholders and also keep the company stable is what we want.
Power of Family:
This is one I think is underrated. In the western world, there are families but the structure is entirely different. Here in this case with Patel’s they had a large joint family with many cousins coming together and pooling their money together to afford a motel and as the businesses get bigger the family tends to handle different motels. The joint family system is beneficial here. If there was only one Patel family of 6 they would not be able to create this motel business as they would not be able to buy it in the first place. As they wanted to expand the business they simply let the two families separate and run the two motels individually. Even after separation, the two families stay extremely close to each other. This is the power of family in times of need they help each other. Also, in a financial sense when a family pooled its money or you borrow from family members it is a cheap cost of capital where you don’t pay any interest like you usually do with the bank.
You don’t need to take too much risk to succeed:
All businesses have risks. But many believe that you need to take extraordinary risks to make the business good. Many people are very conservative and don’t take any risks at all. This can be explained really well with the help of this diagram.
So what you want is someone who takes risks but not too much of it and I think the Patels are a bit gravitated to the right side of the line. The risks they took also in probability terms made a lot of sense. Buying a motel when prices were down due to the recession and also knowing they have no operational cost made the business very risk averse. Yes, they had debt but that debt was coverable with the earnings of the motel.
Role of Luck:
The Patels were very unlucky that they got kicked out of East Africa but when they came to the USA I would say they are very lucky. They entered the USA during a period of recession when the prices were down and they could buy a motel for cheap. Now it is also a skill that they identified this is the right business to start but to be at the right place at the right time to me seems like a role of luck.
This was a very interesting case study as to how Patel’s came up to or why they own so many motels and what makes them successful. This was a very interesting case study done by Mohnish Pabrai and I learned a lot. He also wrote about a few more ‘Dhandhos’ and I will write about them on a different day.
That’s it! Thank you if you read the whole thing hope it was helpful.