It’s Getting Harder to Raise Prices
Pricing power is evaporating as customers push back and big retailers respond to their concerns.
Good Morning!
Here are today’s highlights:
As more businesses experiment with AI platforms, the security of company data becomes an issue.
Last year, Amazon released “Buy with Prime,” which was supposed to help merchants sell through their own sites. It’s been slow going.
HR leaders say wellness programs can return $2 for every $1 companies spend.
There are some good things about employee turnover.
PRICING
It’s getting harder to raise prices: “U.S. consumers, fatigued by a three-year bout of inflation, want lower prices. And large retailers that have increased prices, partly to contend with their own rising costs, appear to be responding to customer concerns — to an extent. Walgreens said last week that it was lowering prices on over 1,000 items. Target recently announced modest price cuts on 5,000 food products and household goods. Craft and furniture stores like Michael’s and Ikea have also said they will drop prices on popular items.”
“Recent economic data and corporate earnings, however, show that this leverage over buyers — known as ‘pricing power’ — is abating. Coca-Cola, for instance, reported that although its overall revenue grew in the first quarter, largely because of past price increases, its sales volume in North America was flat.”
“Julia Coronado, a former Federal Reserve economist and the president of MacroPolicy Perspectives, has argued that ‘fading pandemic distortions mean consumers have returned to their price-sensitive ways, and pricing power has evaporated.’ Overall goods prices have risen by only 0.1 percent over the past year, according to the Fed’s preferred gauge of inflation.” READ MORE
ARTIFICIAL INTELLIGENCE
Are you and your employees using ChatGPT? Gene Marks has a warning: “According to a survey recently released from Cox Communications (a client of my firm), two-thirds of small business owners invested in AI for their company last year and 53 percent plan to invest in AI even more in 2024. No, most of these businesses are not operating robots or developing their own large language models … yet. What’s meant by ‘invested in AI’ means — in 2024 — that small businesses and their employees are mostly using generative AI platforms like ChatGPT, Google Gemini, Microsoft Copilot and Anthropic for a number of back office tasks like helping to analyze spreadsheets, attend and record meetings, craft emails, perform research, create policies and analyze contracts. But there’s a concern here.”
“Using these platforms requires employees to share and upload data. And, given the enormous advances in AI assistants, it’s safe to assume that over the next few years businesses will be leaning on cloud-based AI platforms like these to help them run their businesses more efficiently. Already ChatGPT 4o can ‘see’ and ‘hear’ conversations.”
“Google’s Gemini recognizes everything in an office, including where a lost pair of glasses is or recognizing software code displaying on an open monitor. All of this information is going somewhere to be processed, right? It is. It’s going right into the hands of those big technology companies. Should we be concerned? Damn right we should.”
“Your company’s data is not completely private nor is it completely safe, whether it’s with OpenAI, Google, Microsoft, or any AI platform. Sure, these companies all have policies, but they’re written to favor their own interests and can be easily defended against any small organization who dares to question.”
“So how are my smartest clients addressing these concerns? The same way they address all issues impacting their decisions. By weighing risks and rewards.” READ MORE
ECOMMERCE
Amazon’s supposed Shopify killer is off to a slow start: “Nearly a year and a half since Amazon launched Buy with Prime, users are seeing mixed results, according to sellers who spoke with Business Insider. That jibes with internal Amazon emails from last year that discussed ‘dissatisfaction’ with unit sales off target ‘by a wide margin.’ Still, executives are sticking with the initiative and are confident in its long-term outlook. ‘The original adoption from a consumer standpoint is slow,’ said Craig Leslie, who sells coffee beans through The Bean Coffee Company. Buy with Prime accounts for about 3 percent to 5 percent of his sales, though he expects it to eventually grow as more customers become familiar with the tool.”
“Amazon made Buy with Prime available to all sellers in January 2023. It's aimed at bringing Prime benefits, such as fast shipping, free delivery, and customer reviews, to websites beyond Amazon.com. By adding the Buy with Prime checkout tool, merchants can sell Prime-eligible products on their own websites directly to customers. Shoppers can check out using the payment and shipping information stored in their Amazon accounts.”
“The launch was partly motivated by Shopify's explosive growth. Amazon leaders worried about Shopify's rise, which had made it one of the most popular platforms for online merchants. Buy with Prime was a ‘defensive’ move against Amazon's new rival intruding on its turf.”
“More brands are choosing to sell through their own websites. With Amazon's online-retail business hovering around single-digit growth rates, Buy with Prime could help Amazon reach a wider audience and find new growth opportunities.” READ MORE
FINANCE
The SBA plans to introduce new credit lines of up to $5 million for small businesses: “The SBA’s new working capital lines will have an annual fee and maximum interest rates based on the prime rate plus 3 percent to 6.5 percent, which would be roughly 12 percent to 15 percent today, according to the agency. They will allow small business owners to either fund specific projects or borrow against their assets. Loans larger than $150,000 will have a 75 percent guaranty by the SBA, limiting the losses that lenders face if customers can’t repay their debts. Loans smaller than $150,000 have an 85 percent guaranty, the agency said.”
“‘This product is our aim to increase access to a simpler working capital line,’ [SBA administrator Isabel] Guzman said. ‘It basically takes the best of our various options to create a pilot program to see if we can get more borrowers an affordable working capital line, versus just a pure reliance on credit cards’ or other capital sources.” READ MORE
HUMAN RESOURCES
Turnover can have a bright side: “Over the past few years, as companies in every industry have fought the war for talent, turnover rate has taken on renewed importance. Specifically, companies have spent a lot of time, money, and energy on reducing employee turnover. After all, if you're struggling because you don't have enough people to get the work done, you probably want to do everything you can to keep the employees you already have. While turnover is an important statistic, it might not alone tell you everything you need to know about the health of your culture, how long people stay, and how all of that aligns with your business's future vision. There may even be circumstances when your turnover rate might be too low to support a healthy culture.”
“To better understand your turnover rate, consider its inverse: your longevity rate, which is how long people remain working for the company. If you have a 10-percent turnover rate, for example, that will mean that, on average, the typical employee stays with the company for 10 years. Some will stay longer, some shorter. With a 20-percent turnover rate, the longevity rate would fall to five years. Interestingly, that is the average reported by the Employee Benefit Research Institute.”
“Obsessing about lowering your turnover rate can sometimes even have the unintended consequence of hurting the health of your business. Before you toss stones at me for corporate blasphemy, consider some of the positive aspects of bringing new talent into the organization (above and beyond the costs associated with attracting new talent). New people bring new ideas and fresh perspectives to problem-solving that can fuel future growth while ensuring you are pruning underperformers who could hurt your culture.” READ MORE
Can you measure the ROI of a wellness program? “At a time when employers have become more mindful of workers' mental health and well-being, companies that track those care efforts are reporting financial benefits from the initiatives. Nearly two-thirds of human-resources leaders who measure return on investment report at least $2 in return for every $1 spent on wellness programs, according to a new report from corporate-wellness platform Wellhub (formerly known as Gympass). For its study, Wellhub surveyed 2,000 HR directors, managers, vice presidents, and C-suite leaders.”
“The findings revealed that 95 percent of companies that measure the ROI of corporate-wellness programs see positive returns from those initiatives, up from 90 percent in 2023. The report also found that 91 percent of the HR leaders reported the cost of health-care benefits decreased as a result of their wellness programs — up from 78 percent in 2023.”
“What's fueling the ROI? Respondents pointed to reduced sick days and lower health-care and recruiting costs. They also noted higher retention rates, increased productivity and overall employee satisfaction.” READ MORE
POLICY
D.C.’s restaurants have been roiled by a new law that gradually raises the minimum wage for tipped workers until it aligns with the rate for non-tipped workers: “The idea behind the 2022 law was to give tipped workers, such as restaurant servers and bartenders, more stability in their pay and make them less reliant on tips. In practice, I-82 spurred many restaurants to implement service charges that they say will enable them to pay the higher wage. The law has left customers and owners at odds: Diners have expressed feeling perplexed and exhausted by the additional fees tacked on to their bills and the rising cost of eating out. Many say they don’t understand how the charges are being used and are unsure how to adjust their tips. Some restaurant and bar owners, meanwhile, have stressed that if they need to give workers a higher base wage, someone needs to pay for that — and it is usually going to be the customers.”
“As the owner of two restaurants with different business models, Chris Svetlik, 36, has one foot in something resembling the pre-Initiative 82 world and the other outside it. Republic Cantina, his Tex-Mex concept restaurant in Truxton Circle, has maintained the same structure since the law took effect: There’s no service fee, and tipping is expected. Svetlik decided to absorb the increased cost from I-82 for now. His profits have decreased slightly, but he felt it was worth it to avoid the potential backlash of instituting a service fee.”
“He’s trying a different approach at Hill East Burger, which opened a month before I-82 passed. The business charges a 20 percent service fee, half of which goes to front-of-house and kitchen staff and half of which goes to the business. Tips are not expected. This system enables Svetlik to pay more than the tipped minimum wage and offer staff ‘take-home guarantees’ of $25 or $30 per hour by contributing to their pay if tips, base pay and their share of the service fee don’t get them there, he said.”
“The biggest remaining problem, Svetlik said, is it’s hard to explain all this to customers. ‘I think what we did is very well intentioned,’ he said. He admits, though, that his solution is complicated and not easily understood by diners who are ‘pretty exhausted by the whole situation.’” READ MORE
ENERGY
A British electricity provider, Octopus Energy, wants to help Texas figure out how to keep its lights on: “Octopus signed up 1.4 million customers for a program that sends them a message three hours before an expected peak in power demand, urging them to cut usage and earn three times their average power price for the electricity they didn't use. It works. Last year, says [CEO Greg] Jackson, Octopus paid customers $10 million to prevent the U.K. grid from having to burn up $200 million of coal and diesel.”
“Since its founding eight years ago Octopus has already grown to 8 million accounts, becoming the largest electricity provider in the U.K. and second biggest in Europe. Jackson credits their popularity in part to their gamification of energy consumption — think a combination of Shopify, Robinhood and Uber, he says.”
“And now they've launched in the United States, specifically Texas, one of the few states where electric market regulations allow location-specific variable power pricing.”
“‘Even if you don’t have solar or batteries we can connect to your smart thermostat. You get paid the real time price of electricity, to cut your usage when the power is needed most,” says Jackson. The so-called virtual plant isn’t actually making any additional electrons to send to the grid, but by shaving demand at peak times, it serves the same purpose.” READ MORE
THE 21 HATS PODCAST
The Year So Far? It’s Difficult Out There: This week, in episode 198, we get updates from Laura Zander, Sarah Segal, and Jay Goltz. Laura wonders whether the time she’s put into integrating her latest acquisition might have been better spent focusing on her core businesses. Sarah, who has shifted to pursuing smaller clients, asks Laura and Jay to articulate the PR pitch that would interest them. But how do you evaluate the effectiveness of a PR campaign? Does it have to generate sales? Plus: Jay explains why he views confronting his current business challenges as a matter of triage. He also says that if he could write a check for $200,000 and solve his technology problems, he would do it in a heartbeat. Any takers out there?
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren