Collateral Damage
The declining value of real estate is making it harder for businesses to borrow money and expand.
Good Morning!
Here are today’s highlights:
The threatened UPS strike is likely to present supply-chain issues for businesses.
As the labor market stabilizes, fewer businesses are offering employee raises.
Mark Zandi couldn’t be happier with the latest jobs report.
The founder of Shake Shack says you should not feel obligated to tip for takeout.
THE 21 HATS PODCAST: DASHBOARD
This week’s Dashboard will be published later this morning: In it, Gene Marks talks about why he thinks ungrateful employees are taking advantage of their employers, why he believes artificial intelligence has an Achilles heel, and why businesses should refrain from discriminating against groups of people—despite the recent Supreme Court decision.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
GROWTH
The lack of collateral is making it harder for rural businesses to expand: “Amber Lambke launched Maine Grains in the rural town of Skowhegan, Maine, a decade ago, aiming to help revitalize the local economy. Expanding the grain-milling business could have been easier if she had picked a different place. Lambke wants to construct a new building on the empty lot next door but has run into a problem impeding economic development in rural communities across the U.S.: The new building would cost $7.4 million to erect. When completed, it would be worth $2.4 million, according to an appraiser brought in from Boston by a local bank. ‘The proposed development is not financially feasible at this time,’ the appraiser said in an 81-page report with dozens of pages of appendices. The best use of the property would be to hold it for future development, the appraiser said.”
“‘It’s disheartening,’ said Anne Ball, program director of the Maine Development Foundation, a nonprofit working on rural economic development in the state. ‘Amber is the poster child of a really successful businesswoman with a successful business solving important food issues.’”
“The challenges facing rural entrepreneurs such as Lambke will only increase as inflation and rising wages widen the gap between the cost of new projects and the value of existing properties, Ball said.”
“Low valuations and a lack of recent comparable sales affect both commercial and residential appraisals, with spillover effects for local businesses. They make it tough for rural entrepreneurs to tap home equity, a common form of startup financing, or use their homes as collateral for a small-business loan.”
“The lack of collateral ‘is the number one barrier to any rural business,’ said Ines Polonius, chief executive of Communities Unlimited, a nonprofit lender and development organization in the rural South. ‘There are no comparables, so the bank doesn’t know what to do,’ she said. ‘They are not going to fund that startup.’” READ MORE
LOGISTICS
The looming UPS strike is bringing businesses more supply-chain headaches: “Kathryn Keeler and her husband, Stuart de Haaff, own an olive oil company in the hills of central California. The couple spend their days harvesting olives, bottling the oil, labeling the glass bottles and shipping them out, relying primarily on UPS to get their product to kitchens throughout the United States. They are far from alone. UPS handles about a fourth of packages shipped each day in the United States, according to the Pitney Bowes Parcel Shipping Index, many of them for small businesses like Ms. Keeler’s company, Rancho Azul y Oro. But with the labor contract between UPS and 325,000 of its workers expiring at the end of the month and a potential strike looming, business owners around the country are facing what could be the latest in a series of supply-chain disruptions they have confronted since the start of the pandemic.”
“‘Maybe a larger business can withstand those types of situations,’ Ms. Keeler said. But as small-business owners, she and her husband ‘don’t have a lot of extra time in our day to be on the phone with the post office or FedEx.’”
“Ryan Culver, the chief executive of Platterful, a monthly charcuterie board subscription service, also uses UPS. Switching over to FedEx Express — necessary to ensure that the meats in his packages reach consumers in time — would cost about $5 to $10 more per delivery.”
“The union announced on Wednesday that negotiations had broken down, after previously saying the sides had reached a tentative agreement. If an agreement is not reached, a strike could happen as early as Aug. 1. If that occurs, ‘we would be collateral damage,’ Ms. Keeler said.” READ MORE
HUMAN RESOURCES
Fewer small businesses are increasing wages: “Just over a third of U.S. small-business owners said they raised worker compensation in June on net, the smallest share in more than two years, the National Federation of Independent Business said Thursday. The net percentage of small firms boosting worker pay fell five points to 36 percent last month, the least since May 2021. That’s down substantially from a record high of 50 percent at the start of last year. Just under a quarter of owners said they plan to raise compensation in the next three months.”
“While that suggests some easing in the labor market, small businesses continue to struggle to fill vacancies. Some 42 percent of owners reported job openings they could not fill in the period, the lowest share this year but still elevated compared to pre-pandemic levels. Overall, 59 percent of owners reported hiring or trying to hire in June.” READ MORE
The percentage of immigrants in the workforce is approaching record highs: “It’s a bit after five o’clock on a Thursday afternoon, and things are getting busy for 46-year-old Tisheeka Wallace. Wallace is assistant manager at Pacci’s Trattoria, an Italian restaurant in the Washington suburb of Silver Spring, Maryland. Wallace is an immigrant — she came to the U.S. from Jamaica when she was seven. In fact, she said, about a fifth of the workers here are immigrants. They take hard-to-fill jobs, like cooks and dishwashers. ‘You gotta work long hours, it’s hot sometimes … you know you deal with all the tickets coming out, all the food orders. It’s stressful,’ Wallace said. Spiro Gioldasis owns this restaurant and another in downtown Washington. He said immigrants used to make up just a sliver of his workforce. ‘Five, ten years ago it was probably 5 percent — literally — 5, 7, 8 percent. Very little,’ Gioldasis said. But now he said it’s closer to 20 percent.”
“The Labor Department said the share of foreign-born employees in the U.S. workforce grew from 17.4 percent in 2021 to about 18 percent last year. The immigrant workforce is getting back to pre-pandemic levels and then some, said Brad Hershbein, a senior economist at the W.E. Upjohn Institute for Employment Research.”
“‘The share of immigrants in the workforce has actually reached a near record high. And that’s almost a couple percentage points above where it was during the pandemic,’ Hershbein said.” READ MORE
Houston leads the country in small business job growth: “The nation's red-hot labor market finally may be cooling a bit, but a new report finds that Houston continues to lead major U.S. metro areas in small-business job growth. The city's small-business job growth index of 101.89 in June was slightly higher than the national index of 99.21, according to a new report by Paychex and IHS Markit Small Business Employment Watch released this week. This marks the eighth consecutive month that Houston has topped the nation's Small Business Jobs Index, which measures the rate of small-business job growth in the United States. Miami ranked second among major metros in June, followed by Phoenix.”
“Houston also now ranks third for hourly earnings growth, Paychex found, with average wages rising 4.81 percent over the past twelve months to $31.12 an hour. Only Dallas and Riverside, Calif., saw wages rise more since June 2022, by 4.82 percent and 4.92 percent respectively.” READ MORE
THE ECONOMY
Mark Zandi was quite happy with the June jobs report:
CUSTOMER SERVICE
Danny Meyer says you should feel no obligation to tip for takeout: “Tipping has gotten out of control for many Americans. Even drive-thru coffee involves awkwardness and moral uncertainty as customers paying by credit card must decide—often as an employee looks on—how much to tip, if anything. Many have taken to social media to complain about ‘guilt-tipping.’ But there’s no need for the guilt trip, says Shake Shack founder Danny Meyer. ‘If you’re just taking out food, and it was just a transaction—I give you money, you give me a cup of coffee—I don’t think there’s any obligation to tip whatsoever,’ Meyer said today on CNBC’s Squawk Box. That might help some consumers feel a bit more justified when choosing not to tip for takeout, but it likely won’t remove the discomfort.”
“Meyer, who is also founder and executive chairman at Union Square Hospitality Group—an operator of New York restaurants—has a history with tipping. He eliminated tipping at the group’s restaurants in 2015, only to allow it again five years later amid uncertainty about the pandemic.”
“In a LinkedIn post, he wrote, ‘We’ve come to believe that it’s the inability to share tips that is the problem, not the tips themselves. Our ultimate goal is for your tips to be shared among our entire team, so both kitchen and dining room teams can benefit when a guest has a great experience.” READ MORE
OBITUARY
Evva Hanes, a North Carolina farm woman, took a centuries-old Moravian cookie tradition that she had learned by watching her mother and turned it into a family business: “By age 8, Evva could bake them on her own. By 20, she had taken over her mother’s business and slowly begun to expand it, selling the original sugar crisps as well as the traditional ginger version but eventually other flavors, too, like lemon and black walnut. By 2010, the cookies were so popular that Oprah Winfrey added them to her ‘favorite things’ list. ‘It wouldn’t be Christmas if Quincy Jones didn’t send me Mrs. Hanes cookies,’ she wrote in her magazine. The cookies are still rolled, cut and packed by hand. They sell more than $2 million worth a year — that’s about 10 million cookies — to both locals who swing by the company’s small factory next to the family’s home and to a robust list of national and international customers.”
“‘Debbie Moose, a North Carolina cookbook author who has written about Mrs. Hanes and other Moravian cookie bakers, remembered a time when you could find the cookie only in the Winston-Salem area. ‘It is so singular,’ she said in an interview. ‘You didn’t even see it in other parts of the state.’”
“The family cookie business was still a small kitchen enterprise when she married Travis Hanes, a salesman for a gum and candy company, on June 13, 1952. ... Together they grew the business, showing up at trade shows, the state fair and anywhere else they thought they might find customers. By 1970, the business had gotten so big that they built a bakery next to the family home.”
“All of her children and grandchildren live nearby. Many work or have worked for the family business, carrying on a philosophy that Mrs. Hanes repeated often: ‘We made all we could make and sold all we could make and every year we’d make a few more.’” READ MORE
THE 21 HATS PODCAST
Why Do You Pay What You Pay? This week, Paul Downs, Jay Goltz, and Sarah Segal talk about where the dust has settled after years of turmoil in the labor market. As you know all too well, we’ve been through Covid, supply-chain issues, inflation, labor shortages, the Great Resignation, minimum-wage hikes, new pay-transparency regulations, and countless rumors of recessions that have yet to come—all of which has had an impact on wages. And that’s why I decided to ask Paul, Jay, and Sarah where their thinking has landed. The consensus here is that leverage is shifting back to employers, but Paul, for one, remains committed to paying his people more than they can find elsewhere. “It's worth it to me to have the team I want,” he says. “And sure, it affects profitability, but turnover affects profitability, too. And I'd rather not have that.”
Plus: We also talk about whether Lululemon was right to fire two retail employees who tried to stop a robbery, and we answer the following listener question: If something’s not working, how do you know when it’s time to walk away?
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren