Discover more from The 21 Hats Morning Report
Confidence Is Flagging
The share of business owners who expect conditions to improve in the next six months has plunged.
Here are today’s highlights:
If you’re looking for office space, this might be your moment.
Lululemon is introducing a “recommerce” program.
It’s never too early to start thinking about next year’s taxes.
Restaurants are learning not to make assumptions about their customers.
The number of small businesses raising prices hit a record high but confidence is down: “The National Federation of Independent Business optimism index declined to 93.2, the lowest since April 2020, from 95.6, the group said Tuesday. The March reading was weaker than all but one estimate in a Bloomberg survey of economists. The net share of owners expecting better business conditions in the next six months plunged to minus 49 percent, the lowest in monthly data back to 1986.”
“The report showed more firms are having greater success raising selling prices—72 percent in March after 68 percent in the prior month.”
“A net minus 18 percent of small firms, the worst since May 2020, said they anticipate stronger sales in coming months.”
“Plans for capital expenditures also deteriorated slightly, NFIB said. While small businesses had some success in hiring last month, the share with unfilled openings remains close to a record.” READ MORE
There’s some evidence that inflation may be easing: “A measure that strips out volatile food and fuel prices decelerated slightly from February as used car prices swooned. Economists and policymakers took that as a sign that inflation in goods might be starting to cool off after climbing at a breakneck pace for much of the past year. In fact, several economists said March may be a high-water mark for overall inflation. Price increases could begin abating in the coming months in part because gasoline prices have declined somewhat — the national average for a gallon was $4.10 on Tuesday, according to AAA, down from a $4.33 peak in March.” READ MORE
A giant 23-ounce can of AriZona Iced Tea still costs only 99 cents, which is what it cost when it was introduced 30 years ago: “How does AriZona pull this off while everything else goes up? The price of aluminum has doubled in the last 18 months. The price of high fructose corn syrup has tripled since 2000. Gas prices are pumping up delivery costs. One 1992 dollar, adjusted for inflation, is worth two 2022 dollars. But the 99-cent Big AZ Can, as the company calls it, persists.The short answer: the company is making less money. The big cans are still profitable, but for the moment, they’re much less so than a few years ago.”
“Don Vultaggio, the 70-year-old, 6-foot-8 founder and chairman of the company, is choosing to take a haircut in order to keep the price flat and cans moving.”
“‘I’m committed to that 99 cent price — when things go against you, you tighten your belt,’ Vultaggio said on a Zoom call in early April from his headquarters on Long Island, N.Y. Even though his costs are higher, ‘I don’t want to do what the bread guys and the gas guys and everybody else are doing.’”
“The company sells about 1 billion 99-cent cans each year, Vultaggio said, which makes up about 25 percent of its total revenue. Its fruit drinks, energy drinks, bottled teas, snacks, hard seltzer, and other offerings move less volume, but have higher prices and higher margins.”
“Vultaggio’s calculation is that raising prices and losing customers in the process just isn’t worth the short-term profit.” READ MORE
A record amount of office space is hitting the market: “Most office building owners have been able to ride out the pandemic because corporate tenants have been locked into long-term leases. They continued paying rent even when their employees stayed home. Now as more leases expire, a growing number of tenants are shrinking their offices because they need less space under hybrid strategies that blend office with remote work, brokers say. Leases for 243 million square feet of U.S. office space are set to expire in 2022, the most office space to hit the market in a single year since real-estate services firm JLL began tracking this data in 2015. The expiring leases represent about 11 percent of the nation’s overall leased office space.”
“‘I don’t think the landlords have felt the pain yet,’ said Jeffrey Peck, vice chairman at commercial real-estate brokerage Savills. ‘Now they’re going to start feeling the pain.’”
“Real-estate analytics firm Green Street estimates that hybrid work will cause a 15 percent drop in demand for office space. Because most building expenses are fixed, even a small drop in leasing revenue often leads to a big drop in profits and an even bigger drop in a building’s value.”
“New York-based law firm Herrick Feinstein LLP wants to reduce its office space by 30 percent to 40 percent when its lease expires in a few years, said Jonathan Adelsberg, co-chair of the firm’s real estate department.”
“He said he isn’t thrilled about giving up his private conference table, but spending less on office space means the firm’s lawyers can take home more pay. ‘You can have a bigger office or a bigger home,’ he said. ‘I mean, what would you prefer?’” READ MORE
Lululemon is rolling out a “recommerce” program: “Lululemon will debut a trade-in and resale option for its gently used leggings, tops and jackets later this month following a successful pilot program prompted by rising consumer prices and a commitment to sustainable purchasing. The rollout of Lululemon’s ‘Like New’ program comes after the retailer tested the so-called re-commerce platform for customers in Texas and California, which started last May. Under Like New — powered by resale technology provider Trove — customers will be able to trade in their previously worn Lululemon items in exchange for a gift card at any of the retailer’s U.S. stores.”
“The push into resale will help the premium brand within the athletic apparel sector attract customers who are looking for deals, according to Maureen Erickson, senior vice president of Global Guest Innovation at Lululemon.”
“Erickson added that a number of third-party resale sites, including ThredUp and Poshmark, are already showing up with gently used Lululemon merchandise.
“And while the secondhand merchandise will only initially be sold online, and not in Lululemon’s shops, Erickson didn’t rule out the possibility of a brick-and-mortar test of a resale section in store.” READ MORE
Gene Marks says it’s never too early to think about next year’s taxes: “March 15 was the deadline day for small businesses that filed ‘pass-through’ returns and next week (April 18) is the tax deadline for individuals and corporations, which means — unless you extended your returns until October — your, 2021 tax year is pretty much over. But instead of putting taxes out of your mind — the federal, state and city government can eat up from 20 percent to 40 percent of your income — we should all be thinking ahead.”
Meet with your accountant: “By sharing with your accountant how your business has been doing this year, and your projections for the rest of the year, better tax estimates can be made, which should help to avoid surprises.”
Leverage the work opportunity tax credit: “The credit — which can be as much as $9,600 and offsets the amount of taxes you owe — may be available to you if you hire someone out of prison, off welfare, leaving the military or who has been unemployed for more than six months.”
Invest in capital equipment: “This year, most small businesses can deduct as much as $1.08 million when capital equipment — including machinery, furniture and most technology products — is purchased. Investing in capital equipment is a great way to hedge against inflation.” READ MORE
THE RUSSIAN INVASION
From a Ukrainian entrepreneur:
More factories in Shanghai are shutting down: “Analysts said Shanghai-area manufacturers were having more trouble getting parts delivered because China’s restrictions on movement are making it difficult for trucks to enter the region. That means some factories can’t operate normally even if they manage to keep workers on the job. Pegatron, a major assembler of Apple products, said Tuesday it has temporarily suspended production at factories in Shanghai and nearby Jiangsu province in compliance with local government requirements.”
“China’s lockdowns were intended to stifle Covid-19 and pave the way for a resumption of economic activity. Instead, the disease keeps spreading and the hit to the local and global economies keeps getting bigger.”
“One component hit by the logistics mess is known as a multilayer ceramic capacitor, sometimes called the rice of electronics because it is a staple part in all kinds of products from smartphones to electric vehicles.” READ MORE
A shoe startup is ready to ship its first products—if it can get them from China: “Mise makes shoes specifically designed for the restaurant, bar, café and hospitality industry. It's been successful in generating buzz and getting products into the hands of more than 100 early adopters for testing. However, the continued pandemic impact has hampered that momentum. While restrictions ease in the U.S., in China, a huge center of gravity for footwear manufacturing, factories are shut down and production has been halted for weeks. And, there is no official indication when the country’s Covid lockdown might be lifted. ‘We have everything as dialed as possible with the product. Now, we have to wait for production and shipping,’ said Mise founder and CEO Erik Hernandez.”
“He noted his factory partner, with whom he's in contact every other day, has been shut down for three weeks. Rumor has it, he said, it might not be open for another 10 days.”
“Mise opened its preorders in mid-December and is still trying to hit its goal to ship this spring. The company plans to get preorders shipped by air freight as soon as possible once production starts again. Any regular orders will use ocean shipping.”
“However, he noted that shipping that usually takes 30 days can now take 45 to 70 days.” READ MORE
Some restaurants are learning not to make assumptions about customers: “In Los Angeles, the chef Sara Kramer has been working on redefining restaurant etiquette since she and Sarah Hymanson opened Kismet in 2017. She had seen diners recoil from a greeting like ‘Hello, ladies!’ At Kismet and Kismet Rotisserie, every staff member is trained to use gender-neutral language such as ‘Hey, folks’ or ‘Hey, everyone’ when greeting guests, and use the gender-neutral ‘they’ and ‘them’ when a customer’s pronouns aren’t known. Such protocols are part of the restaurant’s training handbook and are regularly discussed during staff meetings, Ms. Kramer said.”
“Yelp has signaled its support for inclusion by adding labels that highlight L.G.B.T.Q.-owned businesses on the platform, and last June — Pride Month — those businesses were highlighted on maps with rainbow pins.”
“Since its founding in Los Angeles in 2016, TransCanWork has provided 500 employers and 2,500 job-seekers around the country with training to make sure all guests feel welcome, and with tools to create comfortable work environments for gender-expansive workers.”
“TransCanWork was founded in 2016 by Michaela Mendelsohn, a transgender woman who owns and manages six El Pollo Loco franchises in Southern California. She transitioned while managing the restaurants and realized the need to help gender-expansive employees.” READ MORE
THE 21 HATS PODCAST
Do You Really Want That Shiny Object? This week, Laura Zander tells Shawn Busse and Jay Goltz about her eight-month roller coaster ride
, pursuing an acquisition. The deal would bring a new brand and profitable revenue at a reasonable price. To Laura, the creative challenge and opportunity are exciting—“really, really exciting”—but the financials are a concern. “Do I do this?” she asks. “Is it worth it?” And then there’s the broker, whose numbers don’t add up and who wants to collect his fee—including his piece of the earnout—immediately. Plus: Shawn explains how the rise of inexpensive design contractors forced his company to become a better business.
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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