Lessons from the Trenches

In tomorrow’s 21 Hats webinar conversation, we hear from two successful investors who decided to buy and operate blue-collar businesses.

Good morning!

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Here are today’s highlights:

  • It really is infrastructure week.

  • You’re going to be hearing a lot about “proximity bias.”

  • Is it more dangerous to carry too much or too little inventory?

  • Aaron Feuerstein became a national hero when he refused to lay off workers after a 1995 fire. He later went bankrupt.

THE 21 HATS CONVERSATION

In their previous lives, Bob Schwartz was an investment banker with Salomon Brothers and Mills Snell reviewed acquisition targets with a private equity firm called Permanent Equity. Then they both decided to cash in their careers and buy blue-collar businesses. More than 20 years ago, Schwartz bought a chain of laundromats called SuperSuds. More recently, Snell bought a roofing contractor called Aqua Seal. In the next 21 Hats webinar conversation, we’ll ask Schwartz and Snell what they learned about buying businesses and about operating businesses. If they had it to do over, would they take the same leap? Bring your own questions! Tomorrow at 3 ET. REGISTER HERE

MARKETING

The cost of advertising on Amazon is soaring: “Ad prices skyrocketed on Amazon this year as advertisers' demand outpaces Amazon's available ad space. ‘The pandemic forced more businesses online in 2020 so there are more players online competing for ad space, and we continue to see elevated e-commerce demand from consumers,’ said Melissa Reilly, associate director of performance media and marketing communications at Merkle.” For example:

  • “CPC costs: $1.21, a 13 percent year over-year increase, according to retail advertising firm Pacvue.”

  • “Sponsored Product ads represent the bulk of Amazon's ad revenue that comes from search formats. Advertisers target these ads by terms that people use while shopping like ‘coffee’ or ‘dark red lipstick.’”

  • “Sixty-six percent of Amazon advertisers' spend in the third quarter went to Sponsored Products, according to Merkle.” READ MORE

HUMAN RESOURCES

As remote work becomes more ingrained, you’re going to hear a lot about “proximity bias:” “A third of U.K. senior leaders are worried that proximity bias will mean employees working remotely will feel left out of career and promotion decisions compared to those in the office, according to new LinkedIn data. LinkedIn's August survey of more than 250 C-level UK executives at large companies found 35 percent of execs fret about remote work's impact on career progression, and a similar proportion (32 percent) worry that employees who show up to the office will fare better on pay rises and promotions.”

  • “The issue is unlikely to go away soon, as employees' demands for hybrid working means 86 percent of U.K. businesses plan to offer flexible and remote work.”

  • “LinkedIn also found a 97-percent increase in remote jobs being promoted on the platform between September 2020 and September 2021.” READ MORE

POLICY

Yes, it really is infrastructure week: “Here’s a breakdown of what’s included in the bipartisan plan, which Biden is expected to sign into law soon.” For example: 

  • “$110 billion for roads, bridges, and other major projects. These funds will go toward rebuilding and repairing roads and bridges, with a focus on factoring in the effects of climate change and safety considerations for cyclists and pedestrians.”

  • “$7.5 billion for electric vehicle infrastructure. This funding will go toward the administration’s goal of building a nationwide network of chargers for electric vehicles, both along highways and within local communities.” READ MORE

Gene Marks says eminent domain is increasingly a problem for small businesses: “It’s supposed to be for the common good. It’s used so governments can build roads or expand its services to a community. But in many cases, individual property owners — and business owners — are forced out of their locations, which can cause irreparable harm. In Pennsylvania, for example, the owner of a diner for more than 35 years is now facing extinction, as the state plans to build a highway through his property. ‘I told them I’m begging to let me keep what I have,’ the owner, Bill Katsifis, told Penn Live.”

  • “According to an investigation by the Texas Tribune and ProPublica, it seems that Texas, because of its growth, has been ground zero for eminent domain cases — and abuses over the past decade.”

  • “So what to do? The answer is to be proactive, not reactive. I’ve found that eminent domain claims by a government usually don’t come completely out of the blue. There is often times some advance warning and time allowed to make alternative plans.” READ MORE

An appellate court temporarily blocked President Biden’s vaccine mandate: “The stay, issued by a three-judge panel from the U.S. Court of Appeals for the Fifth Circuit in Louisiana, doesn’t have an immediate impact. The first major deadline in the new rule is Dec. 5, when companies with at least 100 employees must require unvaccinated employees to wear masks indoors. Businesses have until Jan. 4 to mandate Covid vaccinations or start weekly testing of their workers. But Saturday’s move provided momentum for a wide coalition of opponents of the rule, who have argued that it is unconstitutional.”

  • “A group of businesses, religious groups, advocacy organizations and several states, including Louisiana and Texas, had filed a petition on Friday with the court, arguing that the administration had overstepped its authority.”

  • “It was unclear whether the stay would be a procedural blip for the Biden administration or the first step in the unwinding of the mandate.” READ MORE

LOGISTICS

In the supply-chain battle, it’s getting even harder for smaller businesses: “Small retailers and manufacturers, already crushed by large national brands during the pandemic, are being disproportionately walloped by delays, shortages and other supply chain disruptions ahead of the holidays. In many cases, they’re losing out to giants like Walmart and Amazon, which are spending millions to charter their own ships and planes to move merchandise.”

  • “‘In general, I’m buying things in quantities of 12, 24, maybe 36,’ she said. ‘But when I’m up against someone who’s ordering 3,600 toys — well, that’s going to be the priority.’”

  • “‘The factories are backed up and it’s a fight for capacity, with the bigger guys offering incentives and donations, saying I’ll give you an extra $5 apiece to put my orders in front,’ said Kimberley Smith, chief supply chain officer for Everlane, an apparel company in San Francisco. ‘The norms are very different than they were six or 12 months ago.’”

  • “Even after finished products are set to sail, Smith said, they sometimes get knocked if another retailer is willing to pay more to transport their products from Asia to the United States. ‘Every step is a bidding war,’ she said.”

  • “‘We hoped things would get back to normal this year, but if anything they’ve gotten worse,’ Mitchell said. ‘If some of these smaller manufacturers miss the holiday season, 2022 is when you’re going to start seeing people go out of business.’” READ MORE

MANAGEMENT

The pandemic has taught businesses not to carry too much—or too little—inventory: “When the pandemic first struck, and demand for many goods dived, some companies were left holding large, costly inventories. But closed borders, strained supply chains and rebounding demand meant bigger stock buffers can prove positive. Now, the question of whether to maintain costly extra stockpiles or risk getting caught out again by disruption has emerged among the host of dilemmas businesses face, from whether to reshore production to how to best transport goods.”

  • “Businesses from Nissan Motor to PepsiCo say the decadeslong trend of hyper-efficient supply chains, often referred to as ‘just in time’ manufacturing, could be ending.”

  • “However, many companies say they will likely return inventories to pre-Covid levels when trading conditions normalize.”

  • “Holding large inventories ties up capital, requires extra space and people to manage it and needs to be insured. It is also a problem for companies selling products with a sell-by date.” READ MORE

Retailers are trying to push substitutes for out-of-stock items: “Out-of-stock messages to online consumers have risen 32 percent since June, with August levels being highest for apparel, followed by sporting goods, baby products and electronics, according to the Adobe Digital Economy Index. ‘We are seeing more of an opportunity for substitutions,’ Jared Briskin, chief merchant of sporting goods and apparel chain Hibbett, said in August. ‘But at the same time, consumers frequently want what they want.’ ... Suggesting alternatives is more straightforward when shoppers are in a physical store and can interact with a salesperson. It is harder online, but retailers are using data science to try to divine what customers are really looking for when they type in search words.”

  • “‘When people search for latex gloves, they don’t literally need gloves made of latex,’ said Peter Curran, general manager of digital commerce at Lucidworks, which uses machine learning to help retailers identify substitutes. ‘They need something to protect their hands.’”

  • “Lucidworks will suggest alternatives such as nitrile gloves made of synthetic rubber, as opposed to the natural rubber used for latex.”

  • “He said suggesting substitutes can lift purchase rates to levels similar to those for in-stock items, but added that customers are less likely to accept them for more-expensive goods.”

  • “Some online retailers rely on personalization algorithms that scour browsing and purchase histories to suggest similar items to customers, said Faisal Masud, CEO of e-commerce platform Fabric Inc.” READ MORE

OBITUARY

Aaron Feuerstein became a national hero in 1995 when he refused to lay off workers at his textile plant after a catastrophic fire: “Mr. Feuerstein’s company, Malden Mills, was by the mid-1990s among the last large textile companies in Massachusetts, which had seen its manufacturing employment numbers crater from 225,000 in the 1980s to about 25,000 a decade later. Most other companies, faced with competition from lower-wage states and cheap imports, had either closed or moved production out of the state. Malden Mills, located just outside the old mill city of Lawrence, was a shining exception: Not only did Mr. Feuerstein refuse to move, but he and his company prospered, thanks to its proprietary fabric Polartec, which it sold to clothing brands like Patagonia and L.L. Bean.”

  • “The fire, and his bootstraps response, made Mr. Feuerstein a celebrity. The Boston Globe called him ‘the Mensch of Malden Mills.’”

  • “Three days later, most of the plant’s 1,400 workers lined up to receive their paychecks, figuring it might be their last from Malden Mills. Mr. Feuerstein joined them. He handed out holiday bonuses.”

  • “He would immediately reopen as much of the plant as he could, replace the buildings he had lost and continue to pay the idled workers for a month — a promise he later extended twice.”

  • “Mr. Feuerstein’s rebuilding efforts left Malden Mills saddled with debt, even as Polartec sales soared in the late 1990s.”

  • “In 2001 the company went into bankruptcy; it emerged, two years later, with a restructuring plan that stripped Mr. Feuerstein of his management roles.” READ MORE

The 21 Hats Dashboard

A Social Media Strategy for Business Owners: This week, Loren Feldman and Gene Marks talk about an entrepreneur who may have cracked the code on TikTok by simply telling the story of her business the way she would tell it to a friend – although Gene’s not really buying it. They also talk about the Biden administration’s vaccine mandate now that the rules have been released, some options for businesses trying to figure out health insurance, and whether — as the Wall Street Journal reported — entrepreneurs really are happier than other people.

  • You can find Dashboard in your 21 Hats Podcast feed.

Try It Here

If you see a story that business owners should know about, hit reply and send me the link. If you got something out of this email, you can click the heart symbol, you can click the comment icon below, and you can share it with a friend. Thanks for reading, everyone. — Loren