A Case Study in Pricing
How does a bathing suit made in Brooklyn end up costing $250?
Good morning!
Here are today’s highlights:
What happened at Eleven Madison Park, once ranked the world’s best restaurant?
Consumers pulled back on their spending in May.
The rise in producer prices signals future increases in consumer prices.
The big banks don’t agree on where the economy is headed.
PRICING
Case study: What makes a bathing suit so expensive? “There is a machine in South Brooklyn that looks like a transparent coffin and whirs like an industrial fan. Its metallic innards flit and glide until, within an hour, it releases a swimsuit, dropped from the machine’s underbelly like an egg. It is a high-tech process that seems simple: Click a button, get a very nearly finished swimsuit. In a way, it mirrors the automated, on-demand, two-day-shipping experience that defines shopping for many people in 2022. Yet dozens of decisions were made before the idea of that swimsuit became a tangible thing — decisions that ultimately led to its being priced around $250 ...”
“What makes a swimsuit, in this economy, worth that much? Fabric, for one. In this case, a soft yarn sourced from Japan after years of trial and error by the designer Anna Berger of Deta.”
“Then there are labor and manufacturing costs. Last fall, after the knitwear factory Ms. Berger worked with in Los Angeles abruptly closed, a friend recommended that she bring her designs to Tailored Industry, a company in the Sunset Park neighborhood of Brooklyn that produces whole pieces of made-to-order clothing on computerized knitting machines — those egg-laying coffins.”
“According to Ms. Berger, having a swimsuit manufactured at Tailored Industry costs about $65, not including the yarn she provides — comparable to the price she paid for production in Los Angeles.”
“But compare that with the much lower cost of production outside the United States. While very few companies disclose their pricing structure, Everlane, the multimillion-dollar basics brand, says it pays $3.90 for labor on a single one-piece swimsuit made in Sri Lanka.”
“To set their wholesale prices, designers typically double (or more) the total cost of making the garment, including, for example, sewing, materials, and transport, which is how they make a profit.” READ MORE
PROFILE
Once ranked the best restaurant in the world, Eleven Madison Park went vegan, and it’s been a chaotic, understaffed mess: “When $62,500 in PPP loans and rent forgiveness put reopening back on the table, [owner Daniel] Humm decided to relaunch it as a 100 percent vegan restaurant in June 2021. He said he wanted to ‘redefine luxury as an experience that serves a higher purpose.’ The reviews were brutal from the start. In September, Ryan Sutton wrote in Eater that Humm ‘doesn't yet appear to fully possess the palate, acumen, or cultural awareness’ to pull off the vegetable-centric meal, while the New York Post declared that veganism ‘might be ruining’ Humm's career. Perhaps most scathing was the New York Times restaurant critic Pete Wells' review in September, in which he wrote the vegetables were ‘so obviously standing in for meat or fish that you almost feel sorry for them.’”
“It's been one year since Eleven Madison Park's vegan relaunch. And while the reopening prompted a 50,000-person waiting list, the online-reservation site Tock now shows open tables almost every night.”
“The restaurant where it was once nearly impossible to get hired has been trying to recruit workers on Instagram, where it recently listed 16 open positions.”
“In the tight labor market of 2021, most New York City restaurants were forced to raise wages to try to retain talent; Eleven Madison Park stubbornly kept its starting pay at $15 an hour.”
“Even with overtime, employees said this was less than at other fine-dining restaurants, especially because tipping was banned at EMP.” READ MORE
THE ECONOMY
Consumers pulled back on retail spending in May: “Retail sales—a measure of spending at stores, online and in restaurants—fell a seasonally adjusted 0.3 percent in May from the previous month, dropping from April’s revised 0.7 percent increase, the Commerce Department said Wednesday. A sharp drop in vehicle sales—due to high prices, low inventory, and rising interest on car loans—played an outsize role in the decline in month-over-month retail spending. Excluding autos, retail sales rose 0.5 percent last month.”
“Excluding gasoline station sales, retail spending fell 0.7 percent in May from April—a sign that high gas prices are taking up a greater share of consumers’ spending. Receipts at gas stations jumped 4 percent in May from the prior month.” READ MORE
A key gauge of wholesale prices rose again in May: “U.S. suppliers’ prices rose in May amid higher food and energy costs, adding to pressure on inflation. The producer-price index, which measures what suppliers are charging businesses and other customers, rose a seasonally adjusted 0.8 percent in May from the prior month, up from a 0.4 percent monthly gain in April, the Labor Department said Tuesday. Producer prices had moderated somewhat in April, after the March gain had been the highest since records began in 2010, pushed up by surging energy prices after Russia invaded Ukraine.”
“On an annualized basis, the PPI rose 10.8 percent in May from a year ago, down slightly from a revised 10.9 percent in April. May marked the sixth consecutive month of double-digit annual gains for producer prices.”
“Continued pressure on producer prices often signals future rises in consumer inflation as costs pass through supply chains.” READ MORE
The big banks and their economists are offering economic outlooks that vary greatly: “Bank executives have better insights regarding the economy than most. They don’t agree on what they see. The state of the U.S. economy is a hodgepodge of strong data and alarming signals.”
“‘I think this is among—if not the most—complex, dynamic environment I’ve ever seen in my career,’ Goldman Sachs Group President John Waldron said this month at an investor conference.”
“‘That hurricane is right out there down the road coming our way,’ [JP Morgan Chase & Co. CEO Jamie] Dimon said. “We just don’t know if it’s a minor one or superstorm Sandy. You have to brace yourself.”
“‘It’s going to be hard to avoid some kind of recession,’ Wells Fargo & Co. CEO Charlie Scharf said last month at The Wall Street Journal’s Future of Everything Festival.”
“‘Bank of America CEO Brian Moynihan said this month that spending is growing faster than inflation in all categories besides gasoline. He added that his customers still aren’t talking about a possible recession.” READ MORE
MANUFACTURING
Caterpillar’s headquarters move from Illinois to Texas highlights a big shift in manufacturing: “Manufacturers have increasingly turned to the Southwest as a destination for new factories, drawn by available space, appealing tax policies, and an expanding technology workforce. Arizona, New Mexico, Texas, Oklahoma and Nevada added more than 100,000 manufacturing jobs from January 2017 to January 2020, representing 30 percent of U.S. job growth in that sector and at roughly triple the national growth rate, according to data from the Bureau of Labor Statistics.” READ MORE
CYBERSECURITY
Your periodic reminder: “Ransomware attacks on businesses have increased by one-third in the past year, according to a recent report by the Boston-based cybersecurity company Cybereason. Most (73 percent of businesses) were hit by at least one ransomware attack in the past year, and 68 percent of businesses that paid a ransom were hit again in less than a month for a higher ransom.”
“Hackers are getting better at phishing emails, so it's important to regularly train employees on cybersecurity best practices. Help them understand what to look out for, and create a culture where, if an employee does accidentally click a link that they shouldn't have, they'll have the confidence to flag their mistake as soon as possible.”
“A good rule of thumb is to set aside 10 percent of your tech budget for cybersecurity, Jaya Baloo, chief information security officer at antivirus software maker Avast, has told Inc. Spending on cybersecurity and training is expensive—but when you compare the investment with the potential cost of a ransomware attack, the price is relative.” READ MORE
FINANCE
Early in the pandemic, the SBA approved loans despite signs of fraud: “The Small Business Administration barely reviewed many applications for emergency relief early in the pandemic and directed employees to approve applications with obvious signs of fraud, according to a report released Tuesday by a congressional oversight committee. The report, which examined the agency’s actions during the Trump administration, also found that the contractor hired by the SBA to handle the relief applications, called RER Solutions Inc., was a small business that could not handle the flood of applications during the worst days of the economic crisis caused by the pandemic, even though it was ultimately paid $738 million in a 2020 no-bid contract to do so.”
“Government watchdogs have repeatedly raised concerns about fraud in the EIDL program, and federal investigators have found instances of identity theft, fictitious businesses, fake or exaggerated employee counts, and misuse of program funds.”
“Between March 2020 and May 2021, the EIDL program provided about $230 billion in loans and grants to businesses and nonprofits, according to the Government Accountability Office. This represented an astronomical increase in workload for the SBA.” READ MORE
THE 21 HATS PODCAST
I Think You Need to Hire a PR Firm: This week, we welcome a new regular to the 21 Hats Podcast crew: Sarah Segal, founder and CEO of Segal Communications, a public relations firm based in San Francisco. First, Sarah tells Jay Goltz and Liz Picarazzi how she built her firm. Then, Jay and Liz ask Sarah all of their questions about public relations: What can they do themselves? Should they hire a PR specialist or a full-service agency? Should they approach journalists directly or through a publicist? And most important, how much should it all cost? Plus: Why Sarah’s still figuring out how to attract new business.
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