Good morning!
Here are today’s highlights:
Still struggling to get fully staffed? It might have something to do with immigration.
If the economy is so bad, why are corporate profits still strong?
How do you know it’s time to quit the day job?
The Cake Girl prepares to franchise.
PRICING
Clate Mask says these red flags may indicate that you need to raise your prices: “Many entrepreneurs undervalue their skill set and experience, especially when it comes to putting a price on knowledge and expertise; other owners don’t know enough about the market landscape and what customers are willing to pay; and still others fail to consider all the costs associated with delivering a product or service, or want to accelerate their volume of work in an effort to generate more revenue.”
“You can’t keep up with all the work: On the surface this can seem like a good problem to have, but dig deeper. ... There’s a delicate balance when it comes to pricing, so if you’re struggling to keep up with an influx of business, it’s time to re-evaluate your price structure.”
“You’re struggling financially despite having lots of customers: If you’re a professional-services business, you’re likely the victim of ‘scope creep’—that is, the scope of the work you do for clients often changes beyond what is initially agreed upon. ... If you produce goods, it’s likely that your costs are cutting into your profit margins. Ensure you’re factoring all hard and soft costs into pricing, or you will likely set your pricing too low.”
“You’re giving your knowledge away free: Your expertise and counsel are valuable and are something that your customers will pay for—so let them.” READ MORE
HUMAN RESOURCES
The U.S. is facing an immigration crisis, but not the one you’re hearing about: “Another crisis of the opposite sort is brewing: a broader decline in immigration. The resulting shortfall in the population is already making it harder for companies to find workers and threatens to do more damage to the economy. But whereas unauthorized border crossings are a perennial controversy, the drop in overall immigration has barely registered in Congress. Net international migration—that is, accounting for both arrivals, whether authorized or not, and departures—added 247,000 to America’s population between July 2020 and July 2021. That was the smallest increase in the past three decades, and less than a third of the annual average during that time.”
“Giovanni Peri and Reem Zaiour of the University of California, Davis, estimate that by February America was missing roughly 1.8 million working-age foreign migrants relative to its post-2010 trend.”
“Employers in the restaurant and accommodation sector, which draws a quarter of its employees from the foreign-born population, could not fill about 15 percent of job openings last year.”
“In professional and business services, where the foreign-born make up a fifth of workers, doing everything from architectural sketches to tax preparation, roughly 10 percent of jobs went unfilled last year.” READ MORE
THE ECONOMY
If the economy is doing so badly, why are corporate profits strong? “So far, with roughly half of all large companies having reported their numbers, this earnings season has not provided much evidence that the economy is entering a big crack-up, and almost no chief executives talked about doing mass layoffs on earnings calls. The lack of really bad news in earnings in part explains why the S&P 500 stock index has bounced about 12 percent from its low point in June, and why Wall Street analysts still predict that earnings for the companies in the S&P 500 will grow 10 percent this year, according to data from FactSet. Though much of that growth is expected to come from energy companies, which have benefited from higher oil and gas prices, analysts expect profits to rise in eight of the 11 industries represented in the index.”
“Banks earnings are a good place to get an early read on how consumers are faring. Overall, there are few signs at lenders that borrowers are having trouble repaying their loans, analysts say.”
“Michael Burry, the investor who foresaw the 2008 mortgage meltdown, wrote on Twitter on Tuesday that the earnings reports coming in felt like a ‘last hurrah.’”
“While well-off consumers show few signs of cutting back, the second-quarter earnings contain plenty of evidence that some households are getting squeezed as inflation pushes up their bills.” READ MORE
Meanwhile, these are busy days for liquidators: “Once upon a time, when parents were scrambling to occupy their children during pandemic lockdowns, bicycles were hard to find. But today, in a giant warehouse in northeastern Pennsylvania, there are shiny new Huffys and Schwinns available at big discounts. The same goes for patio furniture, garden hoses and portable pizza ovens. There are home spas, Rachael Ray’s non-stick pans and a backyard fire pit, which promises to make ‘memories every day.’ The warehouse is run by Liquidity Services, a company that collects surplus and returned goods from major retailers like Target and Amazon and resells them, often for cents on the dollar. The facility opened last November and is operating at exceptionally high volumes for this time of year.”
“Last year’s returns, which retailers are not always able to resell themselves, totaled $761 billion in lost sales. That, the retail federation noted, is more than the annual budget for the U.S. Department of Defense.”
“‘It is surprising to me on some level that we saw all that surge of buying activity and we weren’t collectively able to see that it was going to end at some point,’ J.D. Daunt, chief commercial officer at Liquidity Services, said.”
“‘It’s unprecedented,’ said Chuck Johnston, a former Walmart executive, who is now chief strategy officer at goTRG, a firm which helps retailers manage returns. ‘I have never seen the pressure in terms of excess inventory as I am seeing right now.’” READ MORE
So far, consumer spending has held up, but there are indications that could be changing: “Data last week revealed new evidence from companies and the government that household spending is increasingly strained. Families are paring back purchases of items such as electronics and furniture as prices for essentials like food and gasoline have become more expensive. Inflation drove consumer spending in June to a new four-decade high while personal incomes fell when adjusting for inflation and taxes.”
“Many consumers who weathered the pandemic with the help of government stimulus and fewer expenses of their own are running out of steam. Some of them now face the return of commuting costs, a need for new work clothes and steeper child-care expenses.”
“A July survey of consumer sentiment from the University of Michigan showed little change from June, when it hit historic lows.”
“‘There’s all kinds of disconnects in this economy, but there’s a very strong disconnect between how people say they feel and how they’re behaving,’ [economist Mark] Zandi said. ‘This gap between sentiment and behavior is the widest I’ve ever seen.’” READ MORE
POLICY
The climate bill could be transformative for the energy and auto industries: “The proposal aims to simultaneously fight climate change and energize domestic manufacturing. For the most part, it would do so through tax breaks and other incentives — a carrot, rather than stick, approach that is likely to go down easier in corporate boardrooms and with voters. Democrats are proposing to expand cash incentives for buyers of electric vehicles, along with billions of dollars for automakers, battery manufacturers, and suppliers to build or retool factories in the United States.”
“There is money to help consumers pay for rooftop solar panels, for electric vehicle chargers and for fuel-efficient heat pumps.”
“For the auto industry, one of the most important provisions in the climate bill would eliminate a cap on how many cars from each manufacturer are eligible for a $7,500 tax credit that taxpayers get for buying electric vehicles.”
“For the first time, used cars that are battery powered would qualify for a tax break of up to $4,000. That is important because most people buy second-hand, not new, cars.”
“There is a 10-year extension of tax credits for wind, solar, and other renewable energy and tax credits for carbon capture technology that companies like Exxon Mobil have invested in.” READ MORE
The corporate tax increase in the bill would affect large, profitable manufacturers making capital investments: “The 15 percent minimum tax would take effect next year and apply to U.S.-based companies that report financial-statement profits averaging at least $1 billion over three years, according to legislation released this week that mirrors a House-passed bill from last year. The proposal, if it becomes law, would raise companies’ tax bills until they hit that minimum rate. It would affect some companies that generate income in low-taxed foreign jurisdictions or use aggressive tax planning to drive their global tax rates far below the 21 percent U.S. corporate tax rate.”
“But much of the money would likely come from companies that report low tax rates now because their capital investments—in factories and machines, for example—are treated differently in tax and financial accounting.”
“Overall, the plan would affect about 150 companies annually and raise about $313 billion over a decade, according to a report this week from the congressional Joint Committee on Taxation.” READ MORE
ENTREPRENEURSHIP
How do you know it’s time to quit the day job? “[Harley Finkelstein, president of the e-commerce company Shopify] recommended every founder define their timeline for leaving a full-time job based on their risk tolerance. For example, some might feel comfortable quitting their 9-to-5 once they hit $50,000 in annual sales, while others might not want to give up a stable salary until their business is generating $100,000 per month.”
“Before you consider quitting your job to scale up, your business should have a clear proof of concept.”
“Ed Cornell and Pat Griffith founded the novelty ice cream brand Milk Cult in 2013 and worked full-time jobs and part-time gigs for six years while they developed their recipes and business.”
“Whole Foods began carrying their products in 2015, and the founders knew they had something special on their hands when grocers kept asking for more.” READ MORE
PROFILE
Early in her career, Kristina Lavallee, founder and CEO of The Cake Girl, was told not to speak Spanish at work—so she started her own bakery: “Lavallee worked at a bakery where she would help out an elderly colleague. The woman only spoke Spanish, so Lavallee would translate requests they received from customers into Spanish for her. Lavallee recalls receiving strict orders from a then-supervisor: ‘You can't speak Spanish here. You need to speak in English at all times.’ Lavallee was floored. ‘Suddenly, I was prohibited from speaking in my first language and helping a colleague, or for that matter, communicating with customers in Spanish,’ she says. ‘From that moment, I knew I would never treat my employees the way we were treated.’"
“‘I learned first-hand what many say: Word of mouth is your strongest marketing tool. Friends would refer friends, and I couldn't keep up with all of the orders people were requesting. That's when I knew we had to scale The Cake Girl.’”
“‘We kept experimenting before launching a food truck, and then ultimately a brick and mortar store,’ she says. ‘My advice to entrepreneurs is to build a strong community of fans before you scale too fast.’”
“The Cake Girl has tripled its business over the past three years despite the pandemic. As Lavallee looks to the future, she's interested in finding a strategic partner that can help her grow and scale the business across the U.S. in the form of franchises.” READ MORE
THE 21 HATS PODCAST: DASHBOARD
Welcome to the Pre-Recession! This week, Gene Marks tries to make sense of where the economy is headed and what it means for business owners. Plus, Gene explains why he thinks some business owners may be fooling themselves about whether their business is growing. He also talks about a CRM tool that Google is giving away for free as well as what you need to know to start a business.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren