Could AI Run a Business?
Front-line workers aren’t the only ones who could be rendered obsolete. It turns out that even executives believe executives could be superfluous in the late digital age.
Good Morning!
Here are today’s highlights:
Michael Girdley looks at a profitable day-care business and wonders why expenses are so low.
The SBA says it will not sell its EIDL loans, which is good news for many business owners.
How you ask for online reviews can influence how positive those reviews are.
A couple in Philadelphia demonstrates a smart way to bootstrap a business.
ARTIFICIAL INTELLIGENCE
We all know AI threatens to eliminate certain jobs. How about the top job? “These employees analyze new markets and discern trends, both tasks a computer could do more efficiently. They spend much of their time communicating with colleagues, a laborious activity that is being automated with voice and image generators. Sometimes they must make difficult decisions — and who is better at being dispassionate than a machine? Finally, these jobs are very well paid, which means the cost savings of eliminating them is considerable. The chief executive is increasingly imperiled by A.I., just like the writer of news releases and the customer service representative. Dark factories, which are entirely automated, may soon have a counterpart at the top of the corporation: dark suites.”
“EdX, the online learning platform created by administrators at Harvard and M.I.T. that is now a part of publicly traded 2U Inc., surveyed hundreds of chief executives and other executives last summer about the issue. Respondents were invited to take part and given what edX called ‘a small monetary incentive’ to do so.”
“The response was striking. Nearly half — 47 percent — of the executives surveyed said they believed ‘most’ or ‘all’ of the chief executive role should be completely automated or replaced by A.I. Even executives believe executives are superfluous in the late digital age.” READ MORE
BUSINESS FOR SALE
This week, Michael Girdley takes a look at a daycare and preschool business with $256,000 in cash flow and a $1.4 million asking price: “People want only the best for their kids. So it’s great that they’ve already got a history of good reviews. The knock-on effect from that is that you’ll probably never hurt for customers. In most places, daycares and preschools have crazy waitlists. So you’re probably at full capacity pretty much all the time. Then there’s the fact they’re growing revenue every year. That’s a good sign, but I want to know how they do that. Finally: a business like this is location-dependent, and you never want to be a tenant. So it’s good you get the real estate, otherwise that would be a deal breaker.”
“Red flags: But let’s look a little closer at that land. $435,000 for property in Los Angeles is really cheap — so this is probably a lower-income area. You’d want to check out the neighborhood.”
“There’s also something weird about the numbers. They list cash flow at $256,000, with gross revenue at $322,000. That’s less than $70,000 in expenses. How does that pay for three employees, let alone anything else?”
“What I’d ask: “It’s great that revenue keeps growing — but how? The building can only hold so many kids, so does that mean the prices are going up? If that’s the case, I’d want to know if there’s a price ceiling in the market that will make growth harder.” SEE THE LISTING
FINANCE
In part to protect small businesses, the SBA says it will not sell its portfolio of EIDL loans: “After years of deliberation, the Small Business Administration has decided that it will not sell one of its pandemic-era loan portfolios--one that has an estimated default rate in the double-digits. It's a long-awaited decision that arrives after Republican lawmakers have long-called for a sale: Representative Roger Williams (R-Texas), who chairs the House Committee on Small Business, has argued that the SBA has bitten off more than it can chew. But the SBA on Wednesday told Williams that selling its Economic Injury Disaster Loan portfolio would cost taxpayers upward of $121 billion, require Congress to appropriate up to $124 billion, and likely hurt small businesses currently paying down their Covid-EIDL loans.”
“Given the extraordinary default rate, estimated at 37 percent, of the EIDL portfolio, anyone in the private market who would buy it would demand a steep discount on the loan values. And if that happened, the federal government's accounting principles require that Congress appropriate funding to cover any taxpayer or government loss.”
“The agency says holding the portfolio will better serve small businesses. ‘If SBA sold the Covid-EIDL portfolio to private sector debt collectors, the millions of small businesses who have these loans would likely lose many of the core protections that an SBA loan offers,’ SBA associate administrator George Holman wrote in a letter to Williams.”
“Selling would likely deal a blow to more than 169,000 entrepreneurs on hardship accommodation plans, Holman wrote, which allows these borrowers to submit lower payments ‘to help them stay current on their loans.’ While the agency said it would attempt to preserve such accommodations, there is no guarantee of doing so.” READ MORE
MARKETING
Here’s one way to get better online reviews: “On a site like OpenTable, a consumer not only gives an overall rating, but also rates the food, service, ambience, and value. Across several experiments, we found that consumers give, on average, a higher overall rating when asked to rate the overall experience and several attributes of the experience compared with when they are asked to rate the overall experience alone. In other words, when consumers can speak to what specifically they didn’t like about an experience, they weigh those negative aspects less heavily in their overall ranking. The pattern, though, was apparent only when the experience was mediocre or bad, but wasn’t seen when the experience was good.”
“As previous research shows, people prefer to be positive, instead of negative, when possible. They want to be seen as nice people. At the same time, though, consumers might also feel the need to disclose bad aspects of an experience.”
“Including attribute ratings allows consumers to achieve both of these desires: They can be positive by giving a higher overall rating, but still warn other consumers about the bad aspects of an experience by rating that attribute poorly.” READ MORE
RETAIL
Bankruptcies have left more stores vacant, but most don’t stay vacant for long: “Retailer bankruptcies rose to 26 last year, the highest number since 2020, according to Morgan Stanley. More than a dozen retailers have said they would close stores after entering bankruptcy proceedings so far in 2024, including Express, Rue21, and Ted Baker. The closures leave gaping holes in malls and shopping centers as more companies succumb to online competition, inflation and changing consumer tastes. Yet landlords are mostly unfazed. Years of little construction have helped push retail availability to near record lows, making it easier than ever to replace departing tenants—often with more successful ones who pay higher rent and draw more customers to the shopping center.”
“Even with the uptick in bankruptcies, U.S. retailers are still on track to open more stores than they shut this year. Announced store closures are about 23 percent higher in 2024 than they were at the same point last year, according to the data firm Coresight Research. Planned store openings, by contrast, are about 4 percent lower.”
“The slowdown in store openings isn’t because retailers don’t want to expand. Rather, it reflects how retail vacancy has fallen to a near-record low of 4.1 percent. ‘People aren’t announcing openings because there’s nowhere to open,’ said Coresight CEO Deborah Weinswig.” READ MORE
Wayfair tries bricks and mortar: “Boston-based furniture giant Wayfair stepped out of the online world and into the physical one Thursday with the grand opening of its first big-box store, based in the Chicago suburbs. The debut of the 150,000-square-foot location in Wilmette, Ill., attracted hundreds of Wayfair superfans, sporting purple sunglasses and handheld pinwheel fans under the springtime sun. They were greeted by a DJ, an archway of balloons, themed cookies, and free gift cards. ‘This is a dream,’ said Nancy Costalles, a resident of nearby Glenview who recently redecorated her home, largely with Wayfair products. ‘Nothing is better than seeing the actual things. I want to touch and feel it before I buy it.’”
“Rather than sectioning the store into faux rooms, a la IKEA, Wayfair broke up the Wilmette location in the style of its website, by topic. The first floor houses couches, dining tables, and office chairs alongside small goods customers can walk out with: color-coded cushions, candles, and drinkware.”
“Each item has a digital price tag and QR code that links back to the Wayfair website. Below it is a note indicating whether the product is available for same-day pickup or its estimated shipping time. (There’s free delivery within a nearby radius.) A number of handheld items are available to grab and go, but not everything available online can be purchased in-store.”
“Wayfair did well in the early pandemic, experiencing record profits as people clamored to renovate their homes, backyards, and remote work spaces. The demand pushed the company to expand rapidly, only for sales to drop off in subsequent years as customers largely returned to their previous habits. In January, Wayfair slashed 1,650 jobs.” READ MORE
DEVELOPMENT
The explosion of warehouse space brings jobs and complaints: “From Philadelphia to South Jersey to the Lehigh Valley, warehousing is booming. Tens of millions of square feet sprang up in recent years to meet the insatiable demand for online shopping. It is altering the workforce, reshaping communities by devouring farmland, channeling truck traffic to country roads, creating environmental worries, and, more recently, sparking pushback from neighbors who say they’ve had enough.”
“The average warehouse is about 300,000 square feet, and some are five times that, although industrial analysts say the strongest demand for new warehouses is below 200,000 square feet. The buildings contain everything from toothpaste and clothing to smartphones and appliances. Some of the inventory will eventually land on shoppers’ doorsteps, while other items will end up on store shelves.”
“For now, the recent construction boom has yielded thousands of jobs and millions in tax revenue from what are considered to be industrial facilities — albeit, industries in which nothing is made and everything is on its way to somewhere else. The warehouses also come with headaches, such as local roads constantly clogged with truck traffic and pollution flowing in area rivers.”
“Municipalities have authority over most land-use matters within their borders, while the state and county generally have advisory roles, he said. But some towns don’t have the resources or workforce to cope with the unprecedented demand from developers and landowners for large, complex projects.” READ MORE
STARTUPS
Here’s a smart way to bootstrap a business: “A seven-month-old Rittenhouse Square gelateria will expand into a full-service Italian restaurant later this month. Vita's dining room will open to customers on May 30, co-owner Massimo Boni told the Business Journal. Located [in Philadelphia], the restaurant and gelato shop sits in the former home of Branzino Italian Ristorante, a now-shuttered BYOB. The gelateria first opened in October. Occupying the front 375 square feet of the space, it serves several rotating flavors of gelato, Italian pastries, coffee and seasonally changing spiked sorbetto and gelato cocktails.”
“Boni, who created the concept with his wife Ana, said opening a restaurant was always a part of the duo's plans when they signed an 11-year lease on the space. Getting the gelateria up and running first allowed them to begin generating revenue and build a community following while work progressed on the restaurant portion.”
“‘[The response] was better than we expected, and it was cool because we developed the relationships for the people in the neighborhood, the people in the community, and then we were able to kind of plant a seed that it was more than just a little gelato shop,’ Boni said.” [Reservations are now booked through June.]
“Boni declined to share the cost of the buildout of the restaurant. The project was financed through a U.S. Small Business Administration loan.” READ MORE
THE ECONOMY
Americans continue to doubt the economy: “The poll, conducted earlier this month, found that perceptions of the U.S. economy are often at odds with reality. For instance, most Americans (55 percent) think the economy is shrinking, with about the same share saying we’re in a recession. In reality, the U.S. economy has been growing consistently for nearly two years, even after accounting for inflation. By virtually every benchmark, in fact, we’re exceeding growth expectations. The U.S. economy has been outperforming other advanced economies. We’re also doing better than pre-pandemic forecasts had situated us by now, both in terms of gross domestic product and the number of jobs out there. This generally isn’t true elsewhere in the world.”
“The poll also found that roughly half (49 percent) of Americans believe the unemployment rate is at a 50-year high. Reality is, again, nearly the opposite: Unemployment has been below 4 percent for more than two years now, the longest stretch of time it’s stayed that low since the Nixon administration.”
“Roughly half of respondents (49 percent) also said stock markets were down since the beginning of the year. Meanwhile, the S&P 500 is up more than 10 percent, and major equity-market indexes have recently touched all-time highs.” READ MORE
THE 21 HATS PODCAST
How to Sell a Business That Won’t Sell: We’re calling it a We-SOP. The term, coined by Jay Goltz, refers to a business transition that is something of a do-it-yourself ESOP, or employee stock ownership plan, but without the expense and complication and debt of a full ESOP. It’s a transition that lets owners get money out of what has been their life’s work. It’s a transition that lets loyal employees keep their jobs and preserve the company’s culture. And it’s a promising solution for the Silver Tsunami of retiring Baby Boomers because it can provide a sales path even for owners who have never managed to extricate themselves from their day-to-day operations.
And in this week’s episode, we take you through an example of how it can work. Jay introduces us to Jill and Paul Choma, co-owners of a business, Gilded Moon Framing, that Jay recently guided through the We-SOP process. As you’ll hear, all three believe that what has worked—at least so far—for Jill and Paul could also work for many other business owners.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren