Learning from Warren Buffett

Lou Mosca listened to the Oracle of Omaha’s latest annual report and found plenty of takeaways for business owners.

Good Morning!

Here are today’s highlights:            

• With rates high, more owners are borrowing money from friends and family—but those loans come with risks, too.

• Would you manage an employee through public critiques on LinkedIn?

• You could go to jail if you have anything to do with selling lab-grown meat in Alabama.

MANAGEMENT

Lou Mosca looks for business lessons in the comments and experiences of Warren Buffett: “This past weekend was the Berkshire Hathaway annual meeting, where Buffett shared insights that struck a chord with me. Reflecting on the company's beginnings, Buffett highlighted their initial failures and the disciplined pursuit of their goals. In this week's video, I discuss my four key takeaways and how you can put them into practice for your organization.” CONNECT WITH LOU

What kind of management example is Howard Schultz setting? “Howard Schultz, the legendary entrepreneur who turned a local coffee chain into a global icon, was meeting with the man who would succeed him as Starbucks chief executive in a month’s time. He’d recently had the opportunity to watch a New York Giants practice and had come away inspired by how football teams manage their time and structure their work by unit—offense, defense and special teams. The same principle, he told his handpicked successor Laxman Narasimhan, could be applied to Starbucks’s systems, which Schultz had spent nearly a year analyzing in search of ways to improve service. Narasimhan, set to take over as CEO in March 2023, wasn’t buying it. ‘That’s a football team. We are a company,’ he said. ‘You don’t like it, fine, it’s your company,’ Schultz said, laughing, as Narasimhan chuckled.”

• “That lasted barely a year. It all exploded into public view Sunday night when Schultz wrote a LinkedIn post that read like an open letter to shareholders criticizing how Narasimhan and his senior leaders were running the business. On the heels of the company’s weak earnings report, the 70-year-old declared that Starbucks had to improve service to its U.S. customers. He challenged executives to tie on one of the chain’s signature green aprons and better root themselves in the coffee giant’s history and culture.” 

• “Schultz got more than 9,600 likes, hearts, and clapping-hand emojis and 1,200 comments on his post, many of them from Starbucks’s powerful alumni who agreed with their former leader. Other alumni thought Schultz should keep his views private.”

• “Narasimhan was left to wade through the fallout and brace for questions on who’s the boss. A Starbucks spokeswoman said: ‘We always appreciate Howard’s perspective.’” READ MORE

FINANCE

Business owners are turning to friends and family as alternative sources of cash: “Cherise Schwartz dreaded approaching her uncle for a $15,000 loan. Her cleaning business in Bethel Park, Pa., faced a payroll crisis as the Christmas holiday season approached. With double-digit interest rates on personal loans and a Small Business Administration loan taking more time than she had, she called her uncle John Dickey. Dickey, a tech entrepreneur, agreed to loan Schwartz the money if they used Namma, a platform that structures loan agreements and sends repayment notifications. ‘This way, it’s Namma sending reminders to pay, and I don’t have to nag for it,’ Dickey said.”

• “Turning to a relative or friend can be less financially painful for borrowers, and, in some cases, profitable for the lender. A $10,000 or larger loan from a relative has to charge a minimum interest rate of 4.97 percent, under Internal Revenue Service guidelines. The average rate on a 24-month personal loan from a bank was 12.49 percent in February, according to Fed data.”

• “Still, relationship-based loans come with inherent risks, and financial advisers generally recommend avoiding them. Roughly a third of Americans have had a falling-out over money, and the most common reason was because a loan was never paid back, according to a November survey from price-comparison platform Finder.”

• “‘Lending money puts your relationship as collateral for the loan, which is risky and can lead to resentment,’ said Chris Hostetler, a financial adviser at Hilltop Wealth Advisors in Durham, N.C.” READ MORE

MEDIA

The podcast Acquired has become a phenomenon by explaining how big businesses got to be big through episodes that can last for hours: “It’s a wonky podcast about business history and strategy with four-hour episodes that drop once a month. And people from Silicon Valley to Wall Street are completely obsessed with it. Acquired is the unlikely hit show hosted by Ben Gilbert and David Rosenthal, whose ability to understand companies deeply enough to describe them simply makes listeners want to spend time with them. Lots and lots of time.”

• “To get a sense of the show’s range, just look at the last five episodes: Visa, Novo Nordisk, Hermès, Renaissance Technologies and Microsoft. The only thing that companies making credit cards, Ozempic, scarves, algorithmic trades and enterprise software have in common is that two earnest hosts wanted to know every nuance, complexity, and nitty-gritty detail of how they do it.”

• “‘I have a theory on this,’ Rosenthal says. ‘I think corporations are the biggest and best nonfiction stories of our day. There’s no Roman Empire anymore. If you’re looking for a story like the legends of old, it’s Apple and Microsoft and LVMH. That is the arena in which people pursue greatness.’”

• “‘How something started with nothing in obscurity and turned into the most important or valuable institution in our modern world,’ Gilbert says. ‘That’s a hell of a hook, and that’s our hook basically every time.’” READ MORE

REGULATION

Here are 10 big environmental rules the Biden administration has implemented: “The Biden administration has been racing this spring to finalize a slew of major environmental regulations, including rules to combat climate change, a first-ever ban on asbestos and new limits on toxic chemicals in tap water. Many of the rules had been in the works since President Biden’s first day in office, when he ordered federal agencies to reinstate or strengthen more than 100 environmental regulations that President Donald J. Trump had weakened or removed.”

• “Electrifying Cars: The federal government’s most significant climate regulation, this rule by the Environmental Protection Agency is designed to slash tailpipe pollution. Transportation is the segment of the American economy that generates the most greenhouse gasses. The rule does not ban sales of gasoline-powered cars or mandate sales of all-electric vehicles, but it increasingly limits the amount of pollution allowed from auto tailpipes over time so that, by 2032, more than half the new cars sold in the United States would most likely be zero-emissions vehicles, up from just 7.6 percent last year.”

• “Slashing Power Plant Pollution: This E.P.A. regulation cuts pollution from power plants, the nation’s second-largest source of planet-warming emissions. It requires existing coal plants in the United States to reduce 90 percent of their greenhouse pollution by 2039. It also requires future high-capacity power plants that burn natural gas to reduce their emissions 90 percent by 2032. The rule is widely seen as a death knell for American coal plants.”

• “Ending ‘Forever’ Chemicals in Tap Water: The E.P.A. for the first time is requiring municipal water systems to remove six synthetic chemicals linked to cancers, metabolic disorders and other health problems that are present in the tap water of hundreds of millions of Americans. The perfluoroalkyl and polyfluoroalkyl substances, known collectively as PFAS, are found in everything from dental floss to firefighting foams to children’s toys.” READ MORE

You can go to jail for selling lab-grown meat in Alabama: “Alabama has become the second U.S. state to ban the sale of cultivated meat. The bill, signed into law by Governor Kay Ivey on May 7, will make it illegal for anyone to manufacture, sell, or distribute cultivated meat in Alabama. Anyone found guilty of violating the law will have committed a class C misdemeanor, which in Alabama carries the possibility of up to a three-month jail sentence and a fine of $500. Earlier this May, Florida governor Ron DeSantis signed a similar bill banning cultivated meat in his state.”

• “U.S. senator John Fetterman posted his support of the Florida bill on X, writing that ‘as some dude who would never serve that slop to my kids, I stand with our American ranchers and farmers.’”

• “These two bans mean that approximately 28 million Americans now live in states that have banned cultivated meat—meat that comes from real animal cells grown by bioreactors instead of requiring the slaughter of animals. Only two companies have approval to sell cultivated meat in the U.S., and it is not currently on sale in any restaurants.”

• “The laws have been greeted with disappointment from supporters of the cultivated meat industry. ‘With these shortsighted laws, Alabama and Florida politicians are trampling on consumer choice and criminalizing agricultural innovation,’ says Pepin Andrew Tuma, legislative director at the Good Food Institute, a nonprofit that works to accelerate adoption of alternatives to animal protein.” READ MORE

TAXES

San Francisco will vote on a new business tax structure that supporters say will help small businesses: “The proposed measure, filed on Monday by two business leaders, would cut taxes and fees for small companies and shift the city’s main business tax away from payroll expenses and toward sales, which backers say would encourage job creation and even encourage employers to have more workers in the office. Supporters hope the city will become less reliant on its biggest employers, with the five biggest currently paying nearly a quarter of all business taxes. But some sectors such as retailers and biotech could see their taxes rise.”

• “Business leaders say the changes are critical as San Francisco has both the highest taxes of any California city and one of the slowest pandemic recoveries. Remote work cost the city $484 million in lost tax revenue in 2021, and a record-high office vacancy rate is expected to hurt property tax revenue further, raising fears of a ‘doom loop’ and budget deficit that could swell to $1 billion.”

• “Companies are expected to receive tax cuts in the short term, resulting in the city losing $50 to $60 million in tax revenue by the 2026-2027 fiscal year, but those will be offset by tax increases of 4 percent in 2027 and 3 percent in 2028, resulting in flat tax revenue compared with today, barring major changes in the economy. If the measure doesn’t pass, business taxes will increase next year because of a different measure voters approved in 2020.” READ MORE

COMMERCIAL REAL ESTATE

Business owners continue to reassess their space needs: “For many small businesses, whether retailers, restaurateurs or office users, the post-pandemic location strategy to be close to clients and customers — not to mention cost conscious — has changed significantly. Mike Brey, the owner of Hobby Works in the Washington, D.C., area, has spent decades juggling the need for space to display his merchandise and fulfill orders with the shrinking margins of a retail segment continually pressured by online shopping. Brey took over Hobby Works in 1993, when it had five locations.It now has two. During the pandemic, online sales took off as people searched for things to do during lockdown and items to buy with stimulus money. But since then, consumers now also like areas to play with their new toys or assemble their new purchases, Brey said — a tall order at his roughly 4,000-square-foot locations.”

• “While Brey got a break from his landlord during the pandemic after having to physically close his store for more than two months, his rent is set to go up by $5,000 a month — and that comes after ending 2023 at a slight loss, and every cost associated with running his business has grown. That includes wages, as the state of Maryland’s minimum wage recently increased, and it’s harder to get part-time help at the store.”

• “Suburban offices in some markets are faring better due to their proximity to local communities and, in some cases, shorter commute times. And while suburban retail also took a hit during the pandemic, the vacancy rate there stayed flat toward the end of 2023, and businesses have shifted from catering to commuters to providing the services customers want closer to home.”

• “The shift to spaces outside of the central business district may be especially pronounced for small businesses. Research from payroll and benefits provider Gusto found small businesses and new businesses were far more likely to hire remote workers and, thus, require less office space. And a Clarify Capital survey of small businesses found only a quarter of small businesses rent space at all, choosing digital-only operations.” READ MORE

CLOSINGS

Pinched by low reimbursement rates that are often set by competitors, independent pharmacies are closing: “Last Monday, Friendly Pharmacy [in Philadelphia] filled 318 prescriptions. For about 100 of them, insurance companies paid the pharmacy less than $3. In 22 instances that day, the reimbursement was less than the cost of the medication. And that’s just among the prescriptions that were actually filled. Managing pharmacist Brad Tabaac said he has to turn away some patients because their prescriptions will cause too much of a loss for his business. One recent patient, for instance, came in hoping to transfer his inhaler prescription to Friendly after his local Rite Aid closed. Filling the medication would have cost Friendly $22 more than the insurance reimbursement. ‘I just can’t afford to serve him,’ Tabaac said. And now he can no longer afford to serve anyone.”

• “Independent pharmacies like Friendly, as well as some chains, have been pinched by pricing and fees set by pharmacy benefit managers — the companies that handle prescription drug plans for health insurance. The three biggest pharmacy benefit managers are CVS Health, Optum Rx, and Express Scripts.”

• “They control nearly 90 percent of the market, according to the National Community Pharmacists Association, and some of their parent companies also own pharmacies. In other words, NCPA has said, ‘what community pharmacies charge patients and are reimbursed is often determined by a competitor.’”

• “This challenge has caused more than 80 community pharmacies in Pennsylvania to close just in 2024, said Rob Frankil, executive director of the Philadelphia Association of Retail Druggists.” READ MORE

THE 21 HATS PODCAST

I Don’t Hate Regulation, But …This week, in episode 194, Shawn Busse, Jay Goltz, and Jaci Russo talk about the new rules that may—or may not—ban non-compete clauses, increase the number of employees who must be paid overtime, and eliminate TikTok in the U.S. How much would those changes matter to each of their businesses? What might the owners do differently? Do the changes make sense? And why does it so often seem as if it’s small businesses that get caught in the cross-fire when the government tries to rein in abusive big businesses? On the question of non-competes, Shawn says he thinks they are often used by lazy businesses that haven’t done the real work of building loyalty with employees and customers.

• Plus: Do Shawn, Jay, and Jaci ever regret starting a business? Have there been times when they’ve thought about packing it in and trying something else? And also, are the terms “business owner” and “entrepreneur” interchangeable? Or do they carry different connotations? Might there be a better term? Jay thinks there is.

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

Thanks for reading, everyone. — Loren