A Lesson in Pricing: The Philly Cheesesteak
What are we to make of the fact that the most expensive cheesesteak in Philadelphia now costs $140? One thing is clear: You probably should ask yourself if you’re charging enough for whatever you do.
Good Morning!
Here are today’s highlights:
Luxury retailers don’t know what to do with their excess inventory.
We now know the color of the year, which will shape product development and consumer decisions in fashion, industrial and interior design, and product packaging.
The biggest franchisor of fitness brands has turned a lot of suburban moms into bankrupt franchisees.
For some reason, the farmers of Solano County don’t want the billionaires of Silicon Valley moving in next door.
RETAIL
Luxury stores have a huge amount of inventory piling up, but they don’t want to discount it and they can’t burn it any more: “Luxury brands need to find ways to unload their growing pile of unsold stock without reeking of desperation. The luxury industry is slowing as shoppers sober up after their pandemic spending spree. In 2022, sales across the sector rose by 15 percent at constant exchange rates, according to Bain & Company estimates. But U.S. shoppers tightened their belts toward the end of last year, and Europeans followed this summer. The Chinese haven’t been spending as much as brands hoped either since Covid-19 restrictions were lifted in January. This year’s growth rate is expected to be around half what the industry managed in 2022.”
“The slowdown has left brands’ own stores, independent boutiques, and e-commerce retailers stuffed with unsold stock. The boss of online luxury goods seller MyTheresa said the company is experiencing ‘the worst market conditions since 2008,’ and had 44 percent more inventory by the end of its latest quarter than a year earlier.”
“Mainstream fashion chains have a ready answer to the problem of excess stock: deep discounts. But luxury brands will never pile it high and sell it cheap because they are protective of their reputations for exclusivity. Adding to the challenge, one of their old tricks for making leftover inventory vanish—burning it—has become taboo.”
“After such a tight clampdown on discounting, where are luxury companies with too much inventory to turn? Off-price outlets are an increasingly popular option. Today, 13 percent of all luxury goods by value are sold through them, according to Bain estimates. A decade ago, only 5 percent was sold off-price this way.”
“A network of unofficial resellers buys leftover goods and makes a profit by exploiting regional price gaps. The usual trade is to buy unsold stock from retailers in Europe, where luxury goods are cheapest, and sell in markets like Korea or Hong Kong where prices can be more than a third higher.” READ MORE
DESIGN
The suspense is over. We now know 2024’s color of the year: “To pick the color that will set the tone for the year ahead, Pantone considers emerging trends across a range of industries. Experts comb the entertainment industry and films in production, new artists, fashion, all areas of design, aspirational travel destinations, new lifestyles, socio-economic conditions, and other influences. ‘Influences may also stem from new technologies, materials, textures, and effects that impact color, relevant social media platforms, and even upcoming sporting events that capture worldwide attention,’ the company said.”
“Pantone's colors of the year end up shaping product development and consumer decisions in fashion, industrial and interior design, product packaging and other industry areas. Pantone previously picked Viva Magenta for 2023 and Very Peri for 2022.”
“The world's authority on color has spoken: 2024 is the year of Peach Fuzz.” READ MORE
FINANCE
The IRS is sending out tens of thousands of ERC disallowance letters: “The IRS is rejecting more than 20,000 Employee Retention Credit applications as part of an overhaul on how it oversees the Covid-19-era small-business tax credit. The so-called disallowance letters are going to those that claimed the credit for entities that did not exist or did not have paid employees during the eligibility period, in order to ensure ERC payments are not sent to those ineligible for it. And the agency made it clear more are on the way. ‘With the aggressive marketing we saw with this credit, it's not surprising that we're seeing claims that clearly fall outside of the legal requirements,’ said IRS Commissioner Danny Werfel.”
“This latest action comes after the IRS declared a moratorium on accepting any new claims for the ERC on September 14 through at least the end of this year, citing extensive issues with fraudulent applications.”
“And while IRS Commissioner Danny Werfel said during a recent conference the agency was revamping its approach to the ERC and intends to reopen it for fresh applications soon, business owners are still left with a ticking clock and no sure date for when the agency will once again take applications.” READ MORE
THE PERFECT GIFT
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PRICING
The most expensive cheesesteak in Philadelphia now costs $140: “When Stephen Starr opened Barclay Prime on Rittenhouse Square in 2004, everyone was talking about the plush, non-steak house surroundings, the wooden case bearing a choice of six gorgeous steak knives, and the $100 cheesesteak. ... David Letterman ate one on Late Night, and Inquirer critic Craig LaBan called it ‘as good as gimmicks come — a mouthful of firework flavors dimmed only by the sweetness of the brioche roll.’ But a hundred dollars! Who’d order one? Turns out, a lot of people. Management reports that the cheesesteak, which inflation forced the price first to $120 and then to $140, was and is a top-three seller.”
“Time marches on. So do chefs. Five years ago, chef Mark Twersky reworked the sandwich, subbing in Japanese A5 wagyu beef and a house-made truffled Whiz made of caciotta al tartufo and béchamel instead of the Taleggio. Still, though some of the parts were there in spirit, it was not a Philly cheesesteak.”
“Twersky has gotten with the Philly program. The cheese is now Cooper Sharp, the darling of better cheesesteak shops everywhere. Twersky now pan-roasts the foie and blends it into brandy-laced veal sauce, which glazes the beef and cheese. It’s finished with a drizzle of fried onion-truffle cream and a generous grating of fresh black truffle.”
“And at $140 (including a 375-mL bottle of bubbly), it’s a relative bargain, per the Bureau of Labor Statistics’ inflation calculator. That hundred bucks in 2004 is equivalent to $162 now.” READ MORE
THE ECONOMY
November was another month of robust job gains: “Job creation showed little signs of a let-up in November, as payrolls grew even faster than expected and the unemployment rate fell despite signs of a weakening economy. Nonfarm payrolls rose by a seasonally adjusted 199,000 for the month, slightly better than the 190,000 Dow Jones estimate and ahead of the October gain of 150,000, the Labor Department reported Friday. The unemployment rate declined to 3.7 percent, compared to the forecast for 3.9 percent, as the labor force participation rate edged higher to 62.8 percent.”
“‘What we wanted was a strong but moderating labor market, and that’s what we saw in the November report,’ said Robert Frick, corporate economist with Navy Federal Credit Union, noting ‘healthy job growth, lower unemployment, and decent wage increases. All this points to the labor market reaching a natural equilibrium around 150,000 jobs next year, which is plenty to continue the expansion, and not enough to trigger a Fed rate hike.’” READ MORE
HUMAN RESOURCES
This company went to a four-day workweek to avoid mass layoffs—and decided to keep it even after the economy improved: “When the aftermath of the pandemic threatened the stability of his company, Aman Mann, the co-founder and CEO of spending management solution Procurify, didn't know what he was going to do to keep costs low enough to stay afloat. But one thing he wouldn't do: massive layoffs. ‘We built Procurify for the worst of times, not the best of times,’ he says. ‘Our philosophy has always been, How do you help save jobs, protect your team and your company?’ At the time, Procurify was facing a potential 20-to-30-percent layoff margin in order to break even. Instead, Mann opted to cut the staff's salaries — including his own — by 20 percent in an effort to manage spending. But he didn't stop there: If employees were being paid less, Mann only thought it fair that employees' workload and expectations should be reflective of their new compensation, so he implemented a four-day workweek.”
“Not only did this strategy help avoid burnout during the stress of the transition, it was so successful they've kept it today, even after the economy settled and their normal salaries were reinstated. Mann says productivity increased so dramatically, there was no going back.” READ MORE
FRANCHISING
Xponential—whose fitness brands include Pure Barre, CycleBar, Club Pilates—is turning suburban moms into bankrupt franchisees: “There are about 3,000 of these fitness studios—sometimes several in the same suburban strip mall—and it’s no coincidence that they seem like different versions of the same thing. In 2015, California entrepreneur Anthony Geisler began acquiring these small studio chains. Between the time Equinox acquired SoulCycle in 2011 and Peloton fell back to Earth in 2022, Geisler quietly built the world’s biggest boutique workout empire, Xponential Fitness.”
“To expand Xponential’s franchise business, Geisler targeted what he calls ‘corporate refugees,’ people who were tired of working the traditional 9-to-5 or wanted to invest their 401(k) savings in something more lucrative. Persuading the studios’ die-hards to put their nest egg into opening a franchise wasn’t particularly hard.”
“Samantha, who often went with friends to her local CycleBar, fell hard for the company’s pitch: For a few hundred thousand dollars, she’d collect checks amounting to about $400,000 a year just by following the corporate playbook. But even as the pitch proved compelling to more and more Xponential customers, many found themselves trapped in a financial nightmare.”
“On Samantha’s due diligence calls with Xponential’s team, she says she was reassured that the business practically ran on autopilot and that she could keep her corporate day job. But in 2022, soon after buying the franchise, she attended Xponential’s annual conference in Las Vegas and learned many of her peers were bleeding money, just as she was. ‘That was my first big shock,’ Samantha says. ‘I realized I had been misled.’” READ MORE
SILICON VALLEY
The Silicon Valley titans who want to build their own utopian community are getting some pushback: “Former Wall Street investor Jan Sramek on Tuesday addressed about 150 ranchers and other locals at the American Legion hall in Rio Vista, a hamlet of 10,000 people on the Sacramento River near Antioch. His company, California Forever, billed the gathering as a town hall to inform the public and gather feedback about the plan to build a new city with tens of thousands of homes in the next 35 to 40 years.”
“California Forever, founded in 2017 and funded by billionaire venture capitalists Marc Andreessen and Michael Moritz and fellow billionaires LinkedIn co-founder Reid Hoffman and businesswoman Laurene Powell Jobs, raised hackles in rural Solano County by keeping their plan secret while buying up tens of thousands of acres, much of the land agricultural, then suing dozens of landowners in May for $510 million in damages over claims that through ‘endless greed’ they conspired to jack up the sale prices of their properties.”
“Sramek, who said before the meeting that he hoped to bring in offices of major technology companies along with other businesses, said the many new homes — with downpayment assistance offered — would keep prices down. California Forever, he said, plans ‘jobs across a whole range of skills and income levels.’”
“Toward the end of the public-question period, Maryn Anderson, a 34-year-old local teacher targeted along with her sister and rancher parents in the legal action, stood up. ‘Will you commit to dropping the lawsuit against the local farmers who are not aligned with your vision, in a goodwill attempt to change the way that you are interacting with our community?’ asked Anderson, a sixth-generation Solano County resident. Sramek was anything but conciliatory, calling the sued landowners’ alleged actions ‘illegal and criminal.’”
“Santa Clara University law professor Donald Polden said the lawsuit would be hard to win because evidence of price fixing appears weak. Still, the legal action could produce a ‘cautioning effect’ among landowners whose land the group wants to buy, he said, ‘so when Flannery comes calling with an offer, you shouldn’t pick up the phone and talk to three or four of your neighbors about what deals they got and what they think you should be doing.’” READ MORE
THE 21 HATS PODCAST
We Need to Go Back to Marketing for Humans: This week, Paul Downs tells Jay Goltz and Jaci Russo about the latest developments in his year-long campaign to stop relying so heavily on Google AdWords. At a specially arranged, two-day marketing event, Paul got to sit down with a series of architects and designers who had already been vetted and who he hopes will become repeat customers. So far, Paul says, the results look promising.
“Plus, we also discuss: Do you write your website copy to please Google or to please people? Is there any way around skyrocketing property insurance rates? Why has Jay decided he no longer needs a chief financial officer? How big a disadvantage to owners are the new laws forbidding employers from asking job candidates about their salary histories? And would you reject a candidate simply for trying to negotiate a starting salary? I know someone who would.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren