Are You Playing Offense or Defense?

In the latest 21 Hats Podcast, the owners talk about what they learned this year and what their expectations are for next year.

Good morning!

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Here are today’s highlights:

• States are letting business owners evade the cap on state and local taxes.

• New York City’s mayor says he will require all private-company employees to be vaccinated.

• Those pandemic-era excess savings are dwindling.

• And Dollar General plans to open a thousand Popshelf stores. 

THE 21 HATS PODCAST

 Are You Playing Offense or Defense? This week, Paul Downs, Dana White, and Laura Zander talk about the lessons they’ll take from 2021 and what they’re hoping to accomplish in 2022. Paul thinks he’s found an alternative sales channel that will lessen his dependency on Google. Laura, who built Jimmy Beans Wool on ecommerce, is planning a renewed emphasis on brick-and-mortar retail. And Dana White is working on building the team that will help her pursue her remarkable opportunities with franchising and the military. Plus, we talk about how comfortable the owners feel showing up at work in a brand new car.

• You can subscribe to The 21 Hats Podcast wherever you get podcasts.

TAXES

States are giving business owners a workaround to avoid the federal cap on deducting state and local taxes: “Here’s how it works. Normally, so-called pass-through businesses such as partnerships and S corporations don’t pay taxes themselves. Instead, they pass earnings through to their owners, who report income on individual tax returns. That subjects them to state individual income taxes—and the federal limit on deducting more than $10,000, created in the 2017 tax law. Details vary by state, but the workaround flips that concept. The states impose taxes—often optional—on pass-through entities that are roughly equal to their owners’ state income taxes. Those taxes then get deducted before income flows to the business owners. The laws then use tax credits or other mechanisms to absolve owners of their individual income-tax liabilities from business income.”

• “In these systems, state revenue is virtually unchanged, because the entity-level tax replaces personal income taxes. Business owners win, because every $100,000 of state taxes that go from nondeductible to deductible yields up to $37,000 in net gain on federal income-tax returns. The federal government loses money.”

• “‘This is becoming the thing the cool kids are doing, if you’re a state,’ said Howard Gleckman, senior fellow at the Tax Policy Center. ‘With state assistance, this is a classic case of business self-help in figuring out a way around this.’”

• “‘It’s really a slam dunk,’ said Phil London, an accountant and partner emeritus at Wiss & Co. in New York, who said he has seen the owners of one business save $1.5 million and expects law and accounting firms to use the workaround.”

• “So far, about 20 states have enacted versions of it, including New York, California, Connecticut, New Jersey, and Illinois.” READ MORE

POLICY

New York City says it will require all private-sector workers to be vaccinated later this month: “The surprise announcement Monday drew immediate pushback from some business leaders, as employment experts predicted the rule would face legal challenges. The mandate, which applies to employees working in person, will go into effect Dec. 27—days before a new mayor takes office and as a federal vaccine requirement for many private-sector employees remains entangled in a court battle. About 184,000 businesses in the city will be affected, according to New York City Health Commissioner Dave Chokshi.”

• “‘We in New York City have decided to use a pre-emptive strike to really do something bold to stop the further growth of Covid,’ [mayor Bill] de Blasio said on MSNBC’s Morning Joe, where he announced the new mandate.”

• “Employment lawyers say the mandate is bound to face legal challenges from business groups, though much will depend on how details of the rules are written.”

• “Mr. de Blasio said Monday he was confident the city’s new mandate would survive any legal challenges ‘because it’s universal.’” READ MORE

THE COVID ECONOMY

Those pandemic-era “excess savings” are dwindling: “Infusions of government cash that warded off an economic calamity have left millions of households with bigger bank balances than before the pandemic — savings that have driven a torrent of consumer spending, helped pay off debts and, at times, reduced the urgency of job hunts. But many low-income Americans find their savings dwindling or even depleted. And for them, the economic recovery is looking less buoyant.”

• “According to Moody’s Analytics, an economic research firm, these excess savings among many working- and middle-class households could be exhausted as soon as early next year — not only reducing their financial cushions but also potentially affecting the economy, since consumer spending is such a large share of activity.”

• “By October, the U.S. personal saving rate, which had peaked above 30 percent, had reverted to its December 2019 level of 7.3 percent.” READ MORE

RETAIL

Dollar General says it plans to open a thousand Popshelf stores over the next four years: “The retailer is fashioning a higher-end discount store that uses a treasure hunt format and higher price points to target value shoppers of higher incomes than the traditional dollar store. Dollar General launched the format last year amid the pandemic. Annualized sales have so far proven higher than first-year sales of a traditional Dollar General, according to executives. Margins at the stores are also higher, thanks likely to the higher prices (which typically run up to $5) and assortment, which is more focused on home and seasonal goods, versus consumables and essentials, of a typical Dollar General.”

• “A comparison to Five Below is perhaps unavoidable, though Popshelf targets an older customer — specifically, suburban women with household annual income ranging from $50,000 to $125,000.”

• “But analysts, even as they invoke Five Below, have said in interviews it is an imperfect analogy. ‘There's nothing like it out there,’ Scott Mushkin, CEO of R5 Capital, told Retail Dive earlier this year. ‘It's very much on trend. The merchandise is insane. It's just a really fun format." READ MORE

Wayfair is the latest online retailer to go bricks-and-mortar: “Wayfair began experimenting with bricks-and-mortar stores in 2018, when it opened several pop-up shops followed by a Wayfair store in Natick, Mass., a city about 20 miles west of Boston, where Wayfair is based. That Wayfair store closed permanently in December 2020. At the moment, Wayfair has no bricks-and-mortar stores open. Its outlet center, near its distribution center in Florence, Ky., is temporarily closed because of Covid-19, and the company is in the process of evaluating a reopening date, according to a spokeswoman.”

• “The new stores will showcase furniture, bedding, plates and silverware as well as other items for the home. Shoppers will be able to have their purchases delivered to their homes, the company said.”

• “More retailers that got their start online are realizing the benefits of having physical stores. Many shoppers like to touch and feel items before they buy them. Shipping online orders from a store is often less expensive than doing the same task from a warehouse.”

• “And physical sites can be a less expensive way to acquire new customers than traditional digital marketing, analysts said.” READ MORE

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• “What’s changed in the Covid-induced work-from-home environment is we’re now more reluctant to give up our home addresses to someone we don’t know.”

• “In fact LinkedIn is essentially a self-contained account-based marketing platform if you learn how to use it properly.” READ MORE

COMMERCIAL REAL ESTATE

As multiyear warehouse leases expire, the cost to replace them is rising sharply: “Prices to lease industrial properties are up an average of 25 percent over the rates at the end of five-year contracts that expired this year, according to a report real-estate firm CBRE Group released Monday. The increases, which come as strong consumer demand and a surge in e-commerce business have triggered a rush on distribution space, are extending higher supply-chain costs to customers that had long-term contracts that insulated them from the rising warehouse expenses.”

• “The U.S. national average vacancy rate fell to 3.6 percent in the third quarter, down from 4.3 percent the year before, and the lowest level in data going back to 2002, CBRE said in an earlier report.”

• “CBRE says leasing rates in the third quarter were up 10.4 percent year-over-year.”

• “Warehousing typically takes up 4 percent to 6 percent of a company’s overall logistics costs, CBRE’s Mr. Morris said, and is far outweighed by labor and transportation expenses.”

• “‘But strategically, there’s very little an occupier can do’ to cut expenses for warehouses, he said, ‘when their business depends on them.’” READ MORE

HUMAN RESOURCES

Portugal has banned after-hours emails: “Last month, Portugal made it illegal for employers to contact employees after work, with fines in place for anyone breaking the rule. It was one of several new directives aimed at improving remote workers’ welfare, with employers also having to pay for extra expenses incurred through home working such as higher electricity bills and faster broadband. This is part of Portugal’s strategy to reform its labour practices, following the shift to the unregulated world of remote work.”

• “One could imagine that these new employee-friendly laws could be frustrating for startup founders, who often want to cultivate an intense work-all-hours culture — or indeed just occasionally ping their employees on a weekend if they have to.”

• “But far from stifling the startup ecosystem, Portuguese founders and operators told Sifted that they believe these new directives could help improve startups’ productivity and attract more talent to the country — all by making people work less, not more.” READ MORE

STARTUPS

With business travel rebounding, Hotel Engine has raised $65 million and claims to be profitable: “Hotel Engine describes itself as a ‘lodging performance network.’ Or in other words, the startup is a B2B members-only, global booking platform that aims to provide companies access to better lodging rates as well as tools and insights designed to ‘optimize their travel programs.’ Meanwhile, it partners with lodging providers (better known as hotels), who benefit from gaining access to more ‘high-value’ business travelers, according to founder and CEO Elia Wallen.”

• “Between the third quarter of 2020 and the third quarter of 2021, Hotel Engine experienced a 201 percent increase in core bookings revenue and increased its customer base by 60 percent to over 40,000 companies.”

• “It also added 100,000 people to its membership base, bringing the total to more than 550,000.” READ MORE

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