Focus or Diversify?

Do you focus on what you do best? Or do you expand your offerings to avoid being a one-trick pony? Ami Kassar is asking for a friend.

Good Morning!

Here are today’s highlights:            

• Jason Fried thinks we’re doing idea meetings all wrong.

• Small banks are losing to big banks, which could bring a credit crunch.

• Commercial property may be the next shoe to drop.

• Howard Schultz argues with Congress over unions, benefits, and fathers.

MANAGEMENT

Ami Kassar asks if now is the time to focus or to expand: “I typically write my column about the struggles and decisions other entrepreneurs I meet are facing. However, I have decided to mix things up in today’s column and write about one of my own challenges. The question I am facing is where and how I should expend my company’s next burst of energy. More specifically, do we continue to focus on building our expertise in SBA lending, the area where we have already had success? Or do we work hard to diversify and add another leg to our business?”

• “Our small team decided to become SBA experts a few years ago, which has worked well for us. Our business is profitable and thriving, and we are doing right by our clients. Should we keep trying to grow in this area and maximize what we are good at?”

• “How are you thinking about your diversification? I would love to know your thoughts.” READ MORE

• Ami will host a webinar on how to have a healthy relationship with your bank on April 5 at 12 ET. REGISTER HERE

Jason Fried thinks there’s a better way to pitch ideas: “At most companies, people put together a deck, reserve a room (physical or virtual), and call a meeting to pitch a new idea. If they're lucky, no one interrupts them while they're presenting. When it's over, people react. This is precisely the problem. The person making the pitch has presumably put a lot of time, thought, and energy into gathering their thoughts and presenting them clearly to an audience. But the rest of the people in the room are asked to react. Not absorb, not think it over, not consider — just react. Knee-jerk it. That's no way to treat fragile, new ideas. At 37signals we flip the script.”

• “When we present work, it's almost always written up first. In long form. A few hundred words, maybe a thousand. A complete idea in the form of a carefully composed document. Complete with rough sketches where visual communication shines a brighter light. And then it's posted to Basecamp, which lets everyone involved know there's a complete idea waiting to be considered.”

• “We don't want reactions. We don't want first impressions. We don't want knee-jerks. We want considered feedback. Read it over. Read it twice, three times even. Ponder. Sleep on it. Take your time to gather and present your thoughts — just like the person who pitched the original idea took their time to gather and present theirs. That's how you go deep on an idea.” READ MORE

BANKING

Small banks are losing deposits to big banks, and the likely result is a credit crunch: “Those banks are the heart and soul of small-business lending, said Rebel Cole, a professor of finance at Florida Atlantic University. Banks with less than $10 billion in assets accounted for nearly 43 percent of small loans to businesses outstanding at the end of 2022, according to Prof. Cole’s analysis of federal banking data. The 13 largest banks, by contrast, accounted for less than 23 percent of small-business loans, much of which represents credit-card balances, he said. Small-business lending never really recovered after the 2008 financial crisis, said Prof. Cole, adding that loans of less than $100,000 have been particularly hard to come by. ‘If we start to see businesses pulling their deposits from the actual community banks with less than $10 billion in assets, that will directly and adversely affect small-business lending,’ he said.”

• “‘If we lose that deposit base to the money-center banks, we can’t grow and lend out future dollars,’ said Brian Johnson, chief executive of North Dakota’s Choice Bank. ‘Communities can’t grow, and businesses can’t profit.’”

• “Mr. Johnson said that Choice’s bankers and products hold their own against those of the megabanks, but that the lender will never have the too-big-to-fail status that promises to shield depositors from losses. ‘How can I compete for new business with that big enchilada out there?’ he said.”

• “Lenders were already pulling back before the recent turmoil. In a Fed survey of senior loan officers in January, nearly 44 percent of banks reported tightening small-business lending standards in the prior three months.”

• “The number of smaller banks has declined by more than 9,000 over the past three decades, largely through mergers. When the local bank disappears, people and businesses in their communities often find credit goes away too.” READ MORE

THE ECONOMY

Will commercial property be the next shoe to drop? “Ask an investor to describe the outlook for commercial property and you will get a colorful response. ‘Office is a dumpster fire,’ says Daniel McNamara of Polpo, an investment fund. His view of the wider market, which includes shops and warehouses, is only a little less grim: ‘It really is the perfect storm.’ Tom Capasse of Waterfall Asset Management, an investment firm, has nicknamed places where the tech bubble has burst, including San Francisco and Seattle, ‘office hell.’”

• “No commercial-property sector looks insulated. ‘Even in warehousing you have seen firms like Amazon admit they overspent and overbuilt,’ says Mr McNamara. But the real concern is office space, which makes up around a quarter of total commercial property (and its debts) in America, because ‘it is not a cyclical issue.’”

• “There remains the question of what happens to buildings no one wants to work in anymore. Many offices already need sprucing up. And building costs are sky-high, thanks to material and labor shortages, as well as new laws around the world which seek to make buildings greener. Energy-efficiency rules in England and Wales, for example, will make it unlawful to let one in twelve buildings in London from April 1st, unless landlords upgrade them.”

• “Ryan Williams of Cadre, a property-investment platform, foresees two paths. The first is a ‘fundamental repricing, where the banks take back the keys and sell assets at a huge discount.’ This might allow new buyers to adapt, upgrading or maintaining buildings so that they suit lower occupancies. In the second, local officials step in: ‘It is not in the interest of [many cities] to see a whole street of lower-tier office buildings become blighted, so governments may start to offer incentives to renovate or convert.’” READ MORE

Two major retail chains are closing a combined 800 stores: “Retailers are already lining up to take over the approximately 400 shuttering Bed Bath & Beyond stores in strip malls, where customers can easily park in front. But 400 Foot Locker stores set to close in middle and lower-tier regional enclosed malls around the country will stay vacant for much longer, say retail landlords and real estate experts. The diverging outlooks for Foot Locker and Bed Bath & Beyond real estate reflect shopping trends and the troubled state of the retail property market in the United States. The future of these spaces matters because they impact local tax bases, jobs, and the economic conditions of communities across America.”

• “The vacancy rate for class B and C malls during the first quarter of this year was 10.8 percent, an all- time high, according to real estate data firm CoStar Group. This compares to a 6.6 percent vacancy rate for class A malls. ‘We’re seeing the continued slow death of underperforming malls in areas that are no longer prime shopping corridors,’ said Brandon Svec, the national director of U.S. retail analytics at CoStar.”

• “Finding tenants for the 400 Foot Locker spaces will be challenging as big retailers look to stay away from weaker malls. ‘It’s going to be really hard for these mall owners to attract national brands,’ Svec said. ‘There’s a reason they’re choosing these 400.’” READ MORE

Business confidence is falling: “Small-business owners' outlook on the national economy weakened during the first quarter of 2023, according to the latest Small Business Index, a recent survey of small businesses from the MetLife and the U.S. Chamber of Commerce. While overall confidence dropped slightly—from 60 from 62.1—roughly 20 percent of small-business owners believe the U.S. economy is in good health, down from 27 percent saying so in the fourth quarter of 2022. Barriers to securing financing have been a growing problem. While around half of the small-business owners surveyed say they have access to the capital they need, that's slightly lower than those who said so in the second quarter of 2022 (54 percent). It's significantly lower than those who said so during the second quarter of 2017 (67 percent).”

• “And small businesses are engaging in belt-tightening, evidenced by their intention to curb investment. Fewer small businesses say they plan to increase investment over the next year (38 percent compared with 47 percent last quarter).”

• “Their biggest concern? Inflation tops the list for the fifth consecutive quarter. A record high of 54 percent of small businesses now say inflation is a top challenge. Secondary concerns include having enough revenue (22 percent), supply chain issues (21 percent), and rising interest rates (16 percent).”

• “Still, more than half of small-business owners say their companies are in good health and that cash flow is stable. Just over two thirds of those surveyed said they have retained the same number of employees over the past year, a sign of security across the sector in the wake of pervasive layoffs across the technology sector.” READ MORE

HUMAN RESOURCES

Howard Schultz argued with Congress yesterday about unions, benefits, and fathers: “When Schultz was a child, his father slipped on ice and broke his foot while working as a driver, he said. Afterward, Schultz's father was dismissed from his job — a setback that affected the whole family. That experience informed Schultz's approach to business, including reinvesting some of Starbucks' profits in benefits for its employees, he said. Schultz relayed the story during a hearing to discuss Starbucks's treatment of unionizing workers before the Senate Committee on Health, Education, Labor and Pensions. ‘We've done all these things because, not because of the union, because of the compassion, the empathy, and in many ways, my own story of understanding what happened to my father in trying to build the kind of company that my father never got a chance to work for,’ Schultz said.”

• “But later in the hearing, Sen. Ed Markey, a Democrat from Massachusetts, invoked that story to explain Starbucks' current struggle with workers trying to unionize and bargain for contracts. Markey told the story of his own father, whom he said lost a finger in an accident at work. ‘The boss said, 'See you next week, John, back on the job,’ Markey said. ‘That was before unions.’”

• “‘That is how your workers now feel,’ Markey said. ‘They don't want their families to have to pay the price for their children the way your father had to pay a price for his children. They're just looking to be someone who can protect themselves in the way your father could not,’ he added.”

• “Schultz responded: ‘You don't understand, sir. My father was a World War II veteran, fought for this country in the South Pacific.’ He also pointed to benefits that Starbucks offers all of its employees, including healthcare and college tuition reimbursement.’”  READ MORE

CUSTOMER SERVICE

The manager of a restaurant says diners have changed since the pandemic: “When restaurants reopened after the shutdown, and as diners have continued to come back to dining rooms with increasing regularity, I thought that everyone would return with a clearer sense of boundaries — people would be excited to dine again, and all of us would be grateful for some sense of normalcy. Anyone who works in a restaurant can tell you that is not what’s happened, and a strange power dynamic has emerged. Of course, some guests are still happy to come in and feel taken care of, but others treat our space as an opportunity to be in charge: A guest recently fought with my host about our wait time, while another sat himself and refused to move, even though we needed the seat for a reservation.”

• “Like it or not, tipping is a non-optional aspect of dining out in America, and the expectation is that diners will add a tip of around 20 percent to their bill. You can argue with the system, or point to its flaws, but by now, we all know the rules, and this money is our staff’s living wage. Anyone who is eating out in 2023 should recognize the work that goes into great hospitality.”

• “Instead, at least once a night and often more, I am put in a position where I have to speak to a guest who has decided to undertip. This wasn’t happening three years ago. It can be a very awkward thing to risk ruining somebody’s night, but part of my role is to have conversations with those guests to find out what happened.

• “Last week, it happened twice in one night. The first table was especially surprising because it was somebody in the industry, so they know how crucial tips are. My server flagged that this party had tipped a little under 12 percent on their bill. I have no problem going up to tables and making sure that their experience is okay, so I went over and asked. They told me, Oh my God, it was so great.”

• “They looked at me almost dumbfounded that I was even having this conversation with them: Oh, was it that low? I want to give everyone the benefit of the doubt, but it was very clear that this had been intentional.” READ MORE

FAILURE

It’s the “fall of Saigon” at the estate sale for a female-focused co-working space: “Most shoppers who flocked to the viral estate sale at the Wing in West Hollywood over the weekend were there simply to bear witness, as a brand built on the aspirations of Instagram was dismembered by the vultures of TikTok. ‘I used to take meetings here,’ said Caroline Wimberly, 29, who spotted the sale on the popular video app. ‘Even if things are out of budget, it’s a spectacle.’ With its millennial pink office furniture and $13 ‘Fork the Patriarchy’ grain bowl, the Wing was once a byword for women’s ascendant economic power, a femme-focused WeWork whose girl-boss aesthetic and skirt-friendly climate control defined corporate feminism.”

• “At its West Hollywood outpost — one of the company’s 11 clubs — members paid upward of $250 a month for frosé on the terrazzo-checkered terrace and tête-à-têtes with Hollywood stars.”

• “The Wing promised a heady mix of sun salutations, power lunches and drop-in daycare, with zippy Wi-Fi and a powder room stocked with Chanel perfume, organic tampons and Honest Co. diapers.”

• “But the COVID-19 pandemic decimated women’s professional progress, and the brand foundered amid damning allegations of discrimination, dysfunction, and a toxic work culture.”

• “Now, the club itself was being liquidated, its bespoke furniture, industrial kitchen equipment, and high-end ephemera luring bargain hunters from across Southern California.” READ MORE

21 HATS PODCAST

I Just Cut My Pay: This week, Paul Downs tells Shawn Busse and Jay Goltz that his year has not gotten off to a great start. This was supposed to be the year that Paul unleashed a bold, new marketing campaign that would put his business on an entirely new trajectory—and perhaps it still will be. But for the moment, his revenue has fallen considerably short of his expectations, which has presented him with an unwelcome choice: Should he hold-off on the marketing campaign? Or should he cut his own salary? Along with discussing Paul’s decision, we also talk about the process of rethinking a website, how best to make use of LinkedIn, and why Paul and Shawn continue to perform their own HR chores.

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

Thanks for reading, everyone. — Loren