Discover more from The 21 Hats Morning Report
Car Dealers May Signal Where the Economy Is Headed
Will they relinquish their pandemic profit margins? Or will they force the Fed to push rates higher?
Here are today’s highlights:
High energy prices and government support are sending European manufacturers to the U.S.
What does Goldman Sachs get out of its 10,000 Small Businesses program?
Microsoft’s CEO has advice for hiring and onboarding remote workers.
The price of business-class travel is soaring.
European manufacturers are shifting operations to the U.S.: “Battered by skyrocketing gas prices, companies in Europe that make steel, fertilizer, and other feedstocks of economic activity are shifting operations to the U.S., attracted by more stable energy prices and muscular government support. As wild swings in energy prices and persistent supply-chain troubles threaten Europe with what some economists warn could be a new era of deindustrialization, Washington has unveiled a raft of incentives for manufacturing and green energy. The upshot is a playing field increasingly tilted in the U.S.’s favor, executives say, particularly for companies placing bets on projects to make chemicals, batteries, and other energy-intensive products.”
“‘It’s a no-brainer to go and do that in the United States,’ said Ahmed El-Hoshy, chief executive of Amsterdam-based chemical firm OCI NV, which this month announced an expansion of an ammonia plant in Texas.”
“While the U.S. economy is facing record inflation, supply-chain bottlenecks, and fears of a slowdown, analysts say, it has emerged relatively strong from the pandemic as China continues to enforce Covid lockdowns and Europe is destabilized by war.”
“New spending by Washington on infrastructure, microchips, and green-energy projects has heightened the U.S.’s business appeal.” READ MORE
What does Goldman Sachs get out of its 10,000 Small Businesses program? “Since 2009, Goldman has handpicked over a thousand business owners annually for a monthslong crash course in entrepreneurship. It helps them secure loans from community banks and meetings with lawmakers. Goldman says it hosted about 400 meetings with lawmakers at its summer confab. It is all part of the bank’s 10,000 Small Businesses program, an idea Goldman executives dreamed up in the depths of the financial crisis. Accusations that the bank misled investors to profit on the housing market’s collapse had badly tarnished its reputation. What better way to repair it, the thinking went, than to team up with America’s most-respected institutions: small businesses?”
“When Jessica Johnson-Cope took over her family’s 16-employee security-services business in Bronx, N.Y., from her father in 2008, revenue had dwindled to a fraction of its prior highs. She heard about the Goldman program from a friend, applied, and was accepted into its inaugural class.”
“The program gave her more confidence to negotiate effectively and successfully apply for government contracts, among other skills, Ms. Johnson-Cope said. Today, Johnson Security Bureau has more than 150 employees.”
“More than 70 percent of program graduates report an increase in their revenue 30 months after graduation, according to Goldman. More than half have hired additional employees over the same period. Nearly 40 percent of graduates are minorities, compared with 17 percent of business owners nationally, Goldman said.”
“‘Driving inclusive economic growth starts with supporting small businesses,’ Asahi Pompey, a Goldman partner who oversees the program, said in an interview. Small businesses, she noted, account for about half of total private-sector employment in the U.S.” READ MORE
Satya Nadella, CEO of Microsoft, which has hired 50,000 workers during pandemic, says the key to onboarding remote workers is hand-holding: “Previously, ‘people went for the onboarding week or day. And there were lots of other people who sort of helped you with many things. Whereas now the full service concierge is now your manager.’ Unless your manager takes responsibility for shepherding you through the entire process, trust, cultural understanding, and personal connections are hard to build. What does that mean in practice? Managers should hold new hires' hands though ‘everything from, Hey, are all the benefits provisioned? Are you having any challenges with any of the paperwork?, to making the introduction to all the people who are needed both inside the org, outside the org,’ insists Nadella.”
“He offers the example of one very successful leader at Microsoft who took care to introduce a new employee ‘to all the people personally. Like he would in fact, set up the Teams call and make the introduction and then leave the Teams call so that then she could actually have the one-on-one with the person,’ Nadella says.”
“That might sound like a lot of work to some leaders out there, but Nadella claims it's the only way to effectively create a strong bond between an existing team and a new member if you can't meet in person.” READ MORE
Car dealers may offer a clue as to how high the Fed will have to raise rates: “The Fed has been raising interest rates to make borrowing for big purchases — cars, houses, business expansions — more expensive. The goal is to cool demand and slow the fastest inflation in four decades. Whether it can pull that off without inflicting serious pain on the economy will hinge partly on how easily companies surrender their hefty profits. If companies begin to lower prices to compete for customers as demand abates, price increases might slow without costing a lot of jobs. But if they try to hold on to big profits, the transition could be bumpier as the Fed is forced to squeeze the economy more drastically and quash demand more severely.”
“The example of the auto industry offers reasons for hope but also caution. While there are signs that price increases for used cars are beginning to moderate as supply recovers, that process has been halting, and the new-car market illustrates why the path toward lower profits that help slow inflation could be a long one.”
“That’s because three big forces that are playing out across the broader economy are on particularly clear display in the car market. Supply chains have not completely healed. Demand may be slowing down, but it still has momentum. And companies that have grown used to charging high prices and raking in big profits are proving hesitant to give up.”
“Some early instances of discounting are showing up. At the Buick and GMC dealership that Beth Weaver runs in Erie, Pa., demand for used cars has begun to slow down, and the business has sold a few vehicles at a loss. ‘There are still models that we’ve been able to be profitable on — nothing like last year,’ Ms. Weaver said.”
“‘I’m hesitant to say that we won’t have discounting again,’ Mr. Smoke said. ‘But it’s going to take a while to get back to that world.’” READ MORE
OPINION: Economist Brad DeLong says inflation does offer some benefits: “DeLong argues that there is a major economic shift taking place that people should welcome. It all has to do with our strange but kind of wonderful post-pandemic economy. The new economy, DeLong says, is one with more time spent online, fewer jobs requiring in-person interactions, and a substantially higher rate of goods production. It’s like we have zoomed decades into the future in just a few years.”
“‘Fewer in-person workers in retail establishments, a lot more delivery orders, substantially more goods production, and also substantially more information, entertainment, and production as well,’ is how DeLong described his vision for the new economy ...”
“Inflation in the U.S. is currently serving two functions that could help the economy in the long run, according to DeLong: helping expand new economic sectors poised for big growth, and uncovering and optimizing supply chain snags that have been with us since the beginning of the pandemic.”
“With supply chain issues contributing to high prices and making people less likely to buy, it could be the impetus behind a revitalization and ultimately a strengthening of industry, according to DeLong, who says inflation is involving more people with figuring out either how to produce more of what we need, or less of what we don’t.” READ MORE
How a $3 lipstick brand defies inflation: “E.l.f. Beauty, known for selling cheap-but-trendy makeup in drugstores, raised prices and rolled out higher-end products this spring when fast-rising costs threatened profits. Left untouched: $3 lipstick. Chief Executive Tarang Amin said he made a bet amid escalating inflation to leave prices unchanged on e.l.f.’s cheapest items. ‘We didn’t touch a third of our items,’ Mr. Amin said in an interview, including bestsellers such as lipsticks, eyelash wands, and mascara that cost just a few dollars.”
“E.l.f., which stands for eyes, lips and face, generally sells cosmetics at prices below those of brands that are sold in department stores and specialty shops such as Sephora.”
“The low-price offerings draw in new buyers, Mr. Amin said. ‘We wanted to be sure there was an entry into e.l.f. if someone was on a budget constraint,’ he said.”
“The Oakland, Calif.-based company plans to stick with the strategy even if inflation doesn’t abate, Mr. Amin said. The company, which outsources manufacturing to China-based suppliers, says it makes money on even its lowest-priced items.” READ MORE
Business class tickets are soaring: “Business class airline seats are becoming more appealing to everyday travelers who want to splurge on a flight. This is driving up demand and prices. So corporate travel budgets may need a boost in 2023. The CEO of Air France said: ‘We see a strong new type of customer, which we call a luxury leisure customer,’ my colleague Vivienne Walt writes in a recent Fortune feature article. ‘The summer’s luxury leisure travelers complicated matters for those on genuine business trips,’ Walt writes. With the cushier seats suddenly the hottest tickets in travel, businesspeople were forced to reroute, reschedule meetings, or—horrors—fly economy.”
“‘It was like a Hunger Games scramble if you needed to make a last-minute trip,’ Henry Harteveldt, industry analyst for global travel market research firm Atmosphere Research Group in San Francisco, told Walt. ‘You could not get a last-minute ticket in business class, even if you were a businessperson and weren’t concerned about the fare. There were just no seats available.’”
“In North America, business travel airfare rates will surpass pre-pandemic levels by the end of 2022, according to a report by CWT, a travel management company, and the Global Business Travel Association. In 2022, premium class (business and first-class rates) will be up 45.2 percent globally.” READ MORE
And yes, there’s a beer shortage looming: “A carbon dioxide production shortage caused by natural contamination at the Jackson Dome—a Mississippi reservoir of CO2 from an extinct volcano—is forcing brewers to cut back. Brewers across the country are reporting production delays in getting beer to the market and drafting contingency plans to switch to nitrogen. Nightshift Brewery outside Boston shut down a facility after being told their carbon dioxide supply was ‘cut for the foreseeable future, possibly more than a year.’ Others are paying three to four times as much.’
“Beer makers — particularly small, independent craft brewers — are struggling with inflation and supply chain troubles. It's become a struggle to keep the doors open,’ one brewer recently told Bart Watson, an economist at the Colorado-based Brewers Association.”
“A handful of brewers are insulated from the shortage because they use innovative technology to capture natural carbon dioxide from the brewing process and store it for future use.”
“Denver Beer Co. in Colorado uses reclaimed CO2 and sells extra supply to a cannabis company for use in the grow houses.” READ MORE
The unpredictability of Trader Joe’s product offerings has led to hoarding: “Trader Joe’s, which operates more than 535 stores in the U.S., is known for quirky flavors and seasonal items ranging from pumpkin ice cream to flavored black tea. The catch? Not all products stick around. Some products are only sold in certain seasons, others disappear with little indication of when or if they will ever return. As a result, some shoppers said they buy as many of their favorites as possible when they hit shelves. Some now are scrambling to stock up on their favorite summer items before the retailer transitions to its fall and pumpkin-flavor products.”
“TikTok has added to the pressure, with its videos of people raving about items they have fallen in love with or unloading their hauls, causing some products to go viral and sell out.”
“The grocer said that each product cycle is unique and that customers vote on what they want with their dollars. The company discontinues products that don’t sell well. A Trader Joe’s spokeswoman didn’t respond to requests for comment on customers who bulk buy.”
“‘You get a product and you never see it again,’ said Ms. Fischer. ‘I call it getting Trader Joe’s-ed.’” READ MORE
THE 21 HATS PODCAST
This week, Karen Clark Cole, Jay Goltz, and Sarah Segal talk about hiring an HR person: At what size does a business need a full-time person? Do you hire someone who has experience but who might not be used to getting his or her hands dirty? Or do you hire someone you can mold to fit the culture of your business? Jay, who likes to say the entrepreneur is often the worst person to interview candidates, is currently interviewing candidates to be his head of HR, and he’s a little surprised at how few resumes he’s been getting. Plus: Sarah’s looking for office space and not finding much that would be acceptable. And how are Karen and Sarah doing now that, technically, they have been employees in their own businesses for a year?
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Thanks for reading, everyone. — Loren