It’s Like Planning Your Own Funeral

In our latest podcast episode, the owners dig deeper into employee stock ownership plans. Why, for example, do they produce so much anxiety?

Good Morning!

Here are today’s highlights:            

• In retail, there’s an important new metric: “the cheesecake factor.”

• Even in unexpected places like Detroit, luxury brands are investing in real stores.

• Tougher return-to-office policies do not seem to be working.

• Amazon plans to introduce an AI search feature that will serve as a deeply knowledgeable in-store salesperson who's familiar with each shopper's individual taste.

THE 21 HATS PODCAST

This week, Jay Goltz tells Shawn Busse about the latest stop on his journey to figuring out whether an employee stock ownership plan is right for his business. Jay’s latest adventure includes waking up at 4:30 in the morning in Minneapolis too anxious to sleep—“Oh my God, what am I getting myself into here?”—and deciding to leave the seminar and drive back to Chicago. But on that six-hour return trip, Jay says his anxiety turned into clarity. In fact, he thinks he’s pretty sure he knows now what he wants to do. Of course, he has said that before. And we continue to learn more about ESOPs, this week hitting upon an interesting issue: ESOP enthusiasts love to tout the benefits of turning employees into owners. But are they really owners? And is that the right message to send them? “If you bought 10 shares of General Motors stock,” Jay asks, “would you tell your neighbors that you're an owner of General Motors?”

• Plus: We also talk about when business owners should ignore their accountants and whether Shawn and Jay expect their employees to come forward and tell them if they see another employee doing something they shouldn’t be doing.

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

RETAIL

There’s an easy way to tell if a shopping mall is healthy: “Call it the cheesecake factor — the presence of a Cheesecake Factory restaurant in a mall is an indicator of the mall's financial health, a new paper all about malls from Moody's Analytics finds. About 93 percent of loans backed by malls with a Cheesecake Factory are current on their payments; compare that to around 72 percent of those without the restaurant. The presence of certain stores within a mall — like a Lululemon or an Apple store — can be ‘an unscientific measuring stick for the prospects of one mall over another,’ writes Matt Reidy, director of CRE economics at Moody's.”

• “People go to the mall to go to Apple. They don't go to a mall and end up at Apple,’ Reidy said. He noticed the same pattern for Cheesecake Factory, the chain restaurant known for its enormous menu and, well, all the cheesecakes.” READ MORE

Luxury brands are investing big on bricks and mortar: “French jeweler Van Cleef & Arpels is opening a new Manhattan location on Madison Avenue. Chanel recently reopened its Beverly Hills flagship after more than doubling its footprint to 30,000 square feet. Gucci is expanding throughout the U.S., and now counts eight Texas locations and a boutique in downtown Detroit. These operators are part of a wave of European and other high-end brands that are expanding more aggressively in the U.S. They are signing leases for bigger space, offering more food and drink, and venturing beyond their traditional high-street addresses into new markets.”

• “Luxury retailers have leased 650,000 square feet of new space in the U.S. over the past 12 months, up from roughly 250,000 square feet the prior year, according to real-estate investment firm JLL.

• “North of Miami Beach, Fla., the owner of luxury shopping center Bal Harbour Shops has already fully leased a new $500 million wing that it hopes to open in late 2025. The expansion, which will add 40 stores, was motivated by demand from existing tenants for more space, said Carolyn Travis, head of marketing and media for Whitman Family Development.”

• “And while luxury retailers are less vulnerable to e-commerce than middle-market brands, they still need to draw customers into their stores to maintain market share and sales growth, said Luca Solca, senior research analyst, global luxury goods, at brokerage Bernstein. Brands are spending big to add hospitality components such as cafes and bars, as well as penthouses. They are also hosting more lavish events and opening temporary stores in a bid to attract new customers.”

• “Unlike most other retailers, luxury brands have been less affected by the sizable decline in tourists and office workers that some cities, San Francisco in particular, have faced during the pandemic. ‘Look at the price point of Rolex,’ said Alex Sagues, a San Francisco-based broker with CBRE. ‘You don’t need to sell that many watches a day to have a successful store.’” READ MORE

OFFICE SPACE

Tougher return-to-office policies do not seem to be working: “Indeed, a number of forces—from the prospect of more Covid-19 cases in the fall to a weakening economy—could push the return rate into reverse, property owners and city officials say. More than before, chief executives at blue-chip companies are stepping up efforts to fill their workspace. Facebook parent Meta Platforms, Amazon, and JPMorgan Chase are among the companies that have recently vowed to get tougher on employees who don’t show up. In August, Meta told employees they could face disciplinary action if they regularly violate new workplace rules. But these actions haven’t yet moved the national return rate needle much, and a majority of companies remain content to allow employees to work at least part-time remotely despite the tough talk.”

• “Most employees go into offices during the middle of the week, but floors are sparsely populated on Mondays and Fridays. In Chicago, some September days had a return rate of over 66 percent. But it was below 30 percent on Fridays. In New York, it ranges from about 25 percent to 65 percent, according to Kastle Systems, which tracks security-card swipes.”

• “Lax enforcement of return-to-office rules is one reason employees feel they can still work from home. At a roundtable business discussion in Houston last week, only one of the 12 companies that attended said it would enforce a return-to-office policy in performance reviews.”

• “Many cities are contending with an increase in homelessness and crime. San Francisco, Philadelphia and Washington, D.C., which are struggling with these problems, are among the lowest return-to-office cities in the Kastle System index.” READ MORE

THE ECONOMY

Federal Reserve chair Jerome Powell got an earful from business owners on a walking tour in Pennsylvania: “Powell was accompanied by Philadelphia Fed President Patrick Harker on a one-mile walk across York’s downtown, with stops at a local market, a planned development along a creek and a coffee shop. The visit was part of an effort to highlight York’s successes with economic and community development, and to learn about obstacles business people are facing, similar to those reported in the Beige Book report of regional business conditions compiled by the 12 Fed banks. ‘I think our biggest problem for vendors right now is staffing,’ said Cindy Steele, chief operating officer at Central Market, a facility for smaller retail vendors. ‘So they can’t find staff. And if they do find staff, they don’t last, you know, a day or two,’ Steele told the Fed officials.”

• “Sweet Mama’s Mambo Sauce owner Jennifer Heasley said in an interview high interest rates were a problem for her business, which she started partly on credit cards, now that she’s paying 8 percent on a loan. She said profit margins have dropped on her sauces and she expects to raise prices next year.”

• “Lacresha Drayden, co-owner of Our Sons and Daughters, which makes bath and body products, said her plans to expand from the market to a full-time brick-and-mortar location have been held up by rising costs of real estate — a storefront would cost at least $1,200 a month.”

• “At a roundtable with Powell and Harker before the walking tour, local businesspeople highlighted a lack of child care as being a barrier to hiring workers.” READ MORE

HUMAN RESOURCES

More businesses of all sizes are looking to hire abroad: “Three-quarters of small and medium-size businesses plan to increase international headcounts, according to a recent survey of nearly 500 small and medium-size businesses from Gusto, the San Francisco-based payroll, benefits, and HR management software company. Fifty-four percent plan to do so in the next one to three years, in addition to increasing their U.S. headcounts. ‘You traditionally think of big companies having lots of international presence,’ says Liz Wilke, principal economist at Gusto. ‘These are growing companies that are looking for talent wherever it can be found.’”

• “Eighty-six percent of small and medium-size businesses are hiring these workers to better manage costs, according to the report: ‘Workers in the United States have seen significant pay increases over the last two years, and smaller companies are looking for ways to attract needed talent on budgets that are smaller than larger companies’.’”

• “Still, there are challenges. Nearly three-quarters of small and medium-size businesses report issues navigating foreign employment and tax laws. There are also the costs, which, according to the report, include ‘setting up a local entity, paying an employer of record or professional employer organization, filing paperwork, or paying local advisors.’” 

• “The report shows that companies that pay a candidate what they would have in the U.S.--adjusted for the cost of living in that local market--are 1.4 times more likely to ‘report being far above average at attracting high-quality international talent.’" READ MORE

ARTIFICIAL INTELLIGENCE

ChatGPT may actually be harming employee performance: “A group of researchers from BCG, Harvard, Wharton, and MIT conducted an experiment to see how access to AI impacts white-collar workers' productivity and quality of work. To test this, researchers randomly assigned 758 consultants at BCG across one of three groups: one with no access to AI; one with access to ChatGPT powered by GPT-4; and one with access to ChatGPT, as well as instructional videos and documents on prompt engineering strategies. After establishing performance baselines, consultants in each group were assigned one of two categories of tasks.”

• “One category included 18 tasks that exist ‘inside the frontier’ of what the AI can do, like brainstorming innovative beverage concepts or coming up with a thorough business plan for a new footwear concept.”

• “The other category contained more open-ended tasks that exist ‘outside the frontier’ of AI's capabilities. While ‘consultants would excel’ at these tasks, ‘AI would struggle without extensive guidance,’ the study said. For example, consultants assigned this set of tasks were asked to offer recommendations to the CEO of a hypothetical company by using internal financial data and interviews with company insiders — information the AI didn't have access to.”

• “For tasks ‘inside the frontier,’ consultants using AI were ‘significantly more productive’ and ‘produced significantly higher quality results’ than those who weren't using the chatbot. However, consultants using AI to complete tasks ‘outside the frontier’ were ‘19 percentage points less likely to produce correct solutions compared to those without AI.’ That's because the consultants with AI were found to indiscriminately listen to its output — even if the answers were wrong.” READ MORE

Amazon has a plan to change the way we shop online: “The giant retailer is revamping the search experience on its website and app to weave in generative AI capabilities that are more conversational, in-depth, and personalized. Codenamed Project Nile, the initiative aims to add a layer of artificial intelligence on top of the existing search bar on Amazon, enabling instant product comparisons, requests for more details and reviews, as well as recommendations based on search context and personal shopping data. The new search was supposed to launch in September, but got delayed, one of the people said. It's being tested internally, and could launch in January, starting with the U.S., another person said, though those plans could change again.”

• “For example, if a shopper asks Amazon's new search bar, ‘What kind of coffee maker should I get?’ it will give multiple options for a drip, pod, or espresso coffee machine, eliminating the need to visit each product page one at a time. If the shopper follows up by asking for the best pod machines, it will show the top choices based on different metrics, like the number of positive reviews.”

• “The shopper can then compare other features, like brew times or cup sizes, or ask for more details about specific products, such as Keurig pods. It can also provide summarized reviews and personalized recommendations, based on individual order history and wish lists.”

• “Sirosh compared the new AI feature to a deeply knowledgeable in-store salesperson who's familiar with each shopper's individual taste.” READ MORE

HEALTH INSURANCE

Gene Marks says he envies British business owners because the National Health Service means owners are not responsible for their employees health insurance: “They don’t have to worry about the privacy of their workers, the fiduciary responsibility over their health care plans, and the annual negotiations with the big insurance companies that make up the beloved U.S. quasi-monopoly. They don’t have to deal with the mind-numbing complexity of calculating the impact of premiums under various plans with different deductibles and coverages and ‘in-network’ and ‘out-of-network’ doctors. They’re not lectured to provide more ‘wellness’ programs. They don’t have to deal with volatile premium increases, the intricacies of different state and local rules, and all the flex’ and ‘savings’ and ‘reimbursement’ tax schemes designed to mitigate employee costs or those confusing ‘self’ and ‘captive’ insurance programs which (may) reduce their risk.”

• “More importantly, in the U.K. the playing field—sorry, pitch—is level. A high street shopkeeper is basically providing the same health benefits to their employees and at the same cost as the CEO of a Fortune 100 corporation. I think it’s safe to say that there are zero Main Street U.S. shopkeepers that can say the same.”

• “Life for U.K. business owners isn’t easy. They have more rules and regulations, higher inflation and interest and tax rates, and Brexit and Piers Morgan. But they should be grateful for their health care. The system is simple: just pay the tax and that’s it.”

• “And then you can spend your time worrying about finding new customers, motivating your employees, managing your inventories, creating new products and services. You know ... the actual business stuff. I envy that. I really do.” READ MORE

Thanks for reading, everyone. — Loren