Man, I’m Glad We Didn’t Do an ESOP
In our latest podcast episode, special guest Matt Hoying explains how he created a new ownership structure for the business he runs.
Good Morning!
Here are today’s highlights:
The FTC is looking into new fees that Amazon is charging third-party sellers.
More businesses are going back to offering so-called dry promotions.
And more restaurants are charging cancellation fees, risking customer wrath.
Max Hardy, who could have built his restaurants in the suburbs, never forgot where he came from.
THE 21 HATS PODCAST
This week, Matt Hoying, president of Choice One Engineering, explains to Shawn Busse and Jay Goltz how he created a DIY employee-ownership plan for his firm. Some 10 years ago, Matt’s predecessor as president tasked him with selecting an ownership structure that would engage employees and help Choice One be as successful as possible. That sent Matt on a mission in which he researched the pluses and minuses of every structure he could find—including employee stock ownership plans—before ultimately creating his own structure. Matt’s plan doesn’t enjoy the tax advantages of an ESOP, but it’s open even to part-timers, and it requires employees who want to be owners to make a financial investment in the business. In other words, they aren’t given ownership; they have to buy into it. Shawn and Jay quiz Matt on the choices he made and how the plan has worked out.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
ECOMMERCE
The FTC is investigating Amazon’s controversial new seller fees: “The Federal Trade Commission has begun examining a new set of fees Amazon has recently levied on U.S. merchants selling goods through its online megastore, according to multiple sources familiar with the development. The agency’s interest comes in the wake of Fortune’s report last week that found many longtime Amazon sellers are furious about the fees. One new fee requires sellers to either pay for a new Amazon warehousing service or begin shipping goods to at least four different warehouses on their own dime to avoid the fee. Another penalizes sellers if their inventory in Amazon warehouses consistently runs too low, unless they sign up for the same new Amazon warehousing service.”
“A half dozen top Amazon sellers told Fortune last week that the new fees are overly complex and expensive, and may force them to cede more control of their supply chain to the tech giant or raise prices for consumers buying their goods on Amazon.”
“The new fees apply to the majority of the hundreds of thousands of small and midsize businesses that sell goods on Amazon in the U.S., and that already pay Amazon to store and ship goods on their behalf through a program known as FBA, or Fulfillment by Amazon.”
“Amazon sellers accounted for more than 60 percent of items sold on the company’s shopping sites during the holiday quarter, with the tech giant generating $140 billion in revenue from seller fees alone in 2023.” READ MORE
REAL ESTATE LITIGATION
A new wave of commission lawsuits, including a class-action suit filed in Nevada, is targeting smaller real estate brokers: “The lawsuit mirrors the more than 19 and counting other lawsuits that allege a conspiracy between the [National Association of Realtors], multiple listing services, and brokers to keep commissions high by largely requiring home sellers to pay buyer broker commissions. A similar, earlier lawsuit saw a $1.78 billion jury verdict in Missouri in November of 2023. Several real estate giants to date have paid to settle claims against them. And, as these lawsuits continue, experts say it’s only a matter of time before more and more midsize brokers and high-profile agent teams across the country see themselves hit with similar lawsuits — and have to decide whether to settle or risk a trial.”
“‘This is just the beginning, and this is just the tip of the iceberg,’ said Abbas Kazerounian, founding partner at Kazerouni Law Group, specializing in class-action law. ‘If these guys have sense, they are going to settle.’”
“Why? The plaintiffs in previous cases did much of the legwork when it came to expert research and testimony, Kazerounian said. The earlier verdict shows juries are sympathetic to the issue, and cases that go to trial could get similar verdicts, Kazerounian said.”
“‘If I am a middle-of-the-road brokerage, I am watching [the] companies that have top-end lawyers defending them — and they got hit with a crazy verdict. If I am a middle-of-the-road brokerage, what are my chances in this?’” READ MORE
ARTIFICIAL INTELLIGENCE
A.I. is helping robots learn skills much the way chatbots do: “Companies like OpenAI and Midjourney build chatbots, image generators and other artificial intelligence tools that operate in the digital world. Now, a start-up founded by three former OpenAI researchers is using the technology development methods behind chatbots to build A.I. technology that can navigate the physical world. Covariant, a robotics company headquartered in Emeryville, Calif., is creating ways for robots to pick up, move, and sort items as they are shuttled through warehouses and distribution centers.”
“Its goal is to help robots gain an understanding of what is going on around them and decide what they should do next. The technology also gives robots a broad understanding of the English language, letting people chat with them as if they were chatting with ChatGPT.”
“Covariant, backed by $222 million in funding, does not build robots. It builds the software that powers robots. The company aims to deploy its new technology with warehouse robots, providing a road map for others to do much the same in manufacturing plants and perhaps even on roadways with driverless cars.”
“The robot knows how to pick up a banana, even if it has never seen a banana before. It can also respond to plain English, much like a chatbot. If you tell it to ‘pick up a banana,’ it knows what that means. If you tell it to ‘pick up a yellow fruit,’ it understands that, too.” READ MORE
RETAIL
Is America’s oldest mall also the mall of the future? “To make that leap, mall giant Simon Property Group is spearheading a $400 million spending spree to make Southdale Center in suburban Minneapolis much more than just shopping. Over the past dozen years, Simon has built a growing list of amenities in remote corners of its parking lot: luxury apartments, an extended-stay hotel and a Shake Shack. It knocked down a JCPenney and replaced it with a high-end fitness center and co-working space. Another defunct department store made way for an upscale grocer and a high-tech minigolf operator. A cluster of luxury shops is under construction for retailers including Gucci, Burberry, and Moncler.”
“Its apartment building is full, and the hotel charges more than $200 a night during the peak summer season. There’s a waiting list to join the new fitness center at Southdale, and the mall recently poached super-tenant Lululemon from a nearby retail center, which the firm says has boosted foot traffic on the weekends.”
“While the rise of online shopping has challenged many retailers, luxury brands have seen less erosion than others from ecommerce. Browsing, customer service and touching a product before buying it is more important when it comes to a $10,000 handbag than it is for a $3 tube of toothpaste.”
“The trouble began in 1992, when a new mall opened about six miles away. Suddenly, Southdale Center was a stone’s throw from Mall of America, the biggest enclosed shopping center in the country, with 330 retail stores and an indoor amusement park that included a roller coaster and other rides.” READ MORE
RESTAURANTS
More restaurants are charging cancellation fees: “To celebrate his wife’s birthday in 2022, Brian Azara, a mechanical engineer in New York City, booked a table for two at a Michelin-starred restaurant in Brooklyn. But when their son was suddenly hospitalized with severe asthma, Mr. Azara had to cancel the reservation. A few minutes later, he checked his credit card account and saw a $200 fee. ‘It was probably 23 and a half hours before we were supposed to be there,’ Mr. Azara said, yet the restaurant refused to reverse the charge, citing its 24-hour cancellation deadline. While he sympathizes with the financial challenges restaurants are facing, he said the charge ‘really kind of stung.’”
“According to data from the reservation service Resy, 17 percent of the U.S. restaurants on the platform charged at least one cancellation fee in January, up from 13 percent a year earlier and 4 percent in January 2019. The practice was even more widespread in big metropolitan areas.”
“‘Cancellation fees bring people back to reality when they make a reservation,’ said Erica Hall, a general manager and co-owner of the Brooklyn restaurant and ‘karaoke saloon’ Chino Grande. ‘They remember it’s an agreement.’”
“Restaurant owners say they have to strike a delicate balance when setting fees, which can range from as little as $10 per diner to more than $50. Ed Thaw, the owner of the Michelin-starred restaurant Leroy in London, said finding the appropriate penalty was an exercise in calibration: too low and diner behavior remains the same; too high and reservations drop off.”
“The fees have provoked social media diatribes, like a heated dispute between a would-be diner and a restaurant in Boston that recently made national headlines, and negative reviews on Yelp or Google Reviews. ‘It’s hard to remove those one-star reviews,’ Mr. Thaw said.” READ MORE
THE ECONOMY
Consumer prices rose more than expected in February: “The consumer price index, a broad measure of goods and services costs, increased 0.4 percent for the month and 3.2 percent from a year ago, the Labor Department’s Bureau of Labor Statistics reported Tuesday. The monthly gain was in line with expectations, but the annual rate was slightly ahead of the 3.1 percent forecast from the Dow Jones consensus. Excluding volatile food and energy prices, core CPI increased 0.4 percent on the month and was up 3.8 percent on the year. Both were one-tenth of a percentage point higher than forecast.”
“While the 12-month pace is off the inflation peak in mid-2022, it remains well above the Fed’s 2-percent goal as the central bank approaches its two-day policy meeting in a week.”
“A 2.3 percent increase in energy costs helped boost the headline inflation number. Food costs were flat on the month, while shelter rose another 0.4 percent.” READ MORE
HUMAN RESOURCES
A judicial ruling that will make it harder to hold franchisers responsible for labor violations: “A federal judge, siding with business lobbying groups, has blocked a rule that would broaden the reach of federal labor law to make big franchisers like McDonald’s responsible for the conditions of workers they have not directly hired. The judge, J. Campbell Barker of the United States District Court for the Eastern District of Texas, on Friday vacated a rule issued by the National Labor Relations Board determining when a company is a joint employer, making it liable under labor law for the working conditions of those hired by a franchisee or provided by a staffing agency. He said the rule, which was to go into effect Monday, was too broad.”
“Nurses hired by a staffing agency, for example, may work at a hospital that determines their schedules but does not directly establish their pay. If those nurses seek to unionize, they may argue that the hospital indirectly determines their pay based on how much it pays to contract their work. Under the rule issued in October, the hospital would probably be considered a joint employer, but under the current standard, it would have an easier time arguing that the onus falls only on the staffing agency that signs the nurses’ paychecks.”
“The issue has big implications for companies like McDonald’s, which relies heavily on the franchise model in which most restaurants under its brand are operated by independent owners. Unions and businesses have for years disagreed on whether those chains should be required to come to the bargaining table and be held responsible for labor law violations.”
““The U.S. Chamber of Commerce, which led a group of business groups challenging the rule, applauded the ruling. ‘It will prevent businesses from facing new liabilities related to workplaces they don’t control, and workers they don’t actually employ,’ Suzanne P. Clark, chief executive of the chamber, said in a statement.” READ MORE
More companies are offering promotions without raises: “So-called dry promotions—the kind that bring bigger responsibilities without a pay increase—present a career dilemma. And some data suggest they’re becoming more common as companies manage their talent with tighter budgets. Businesses are devoting less of their 2024 salary budgets for raises tied to promotions than last year, according to benefits-advisory firm Mercer’s recent survey of more than 900 companies. Meanwhile, 13 percent of employers recently polled by compensation consultants Pearl Meyer said they are relying on new job titles to reward employees when money for raises was limited, up from 8 percent in 2018.”
“Consider no-raise promotions a sign of workers’ ebbing leverage now that labor shortages have eased and companies are cutting costs where they can. Dry promotions tend to climb in times of economic uncertainty, executives and pay consultants say.”
“Companies doled out hefty raises just to keep hold of workers when labor was in shorter supply. Now, some managers are shifting the duties of laid-off workers to remaining staff without a commensurate bump in pay.”
“‘Giving away titles is free, giving away money is not,’ said Tom McMullen, a senior client partner at global organizational consulting firm Korn Ferry.” READ MORE
OBITUARY
Max Hardy helped bring chef-driven cuisine to Detroit: “After more than a decade as the private chef for the basketball star Amar’e Stoudemire, followed by a few years working in New York City kitchens, he returned to Detroit in 2017 to open a string of high-profile restaurants, including River Bistro, Coop Caribbean Fusion and Jed’s Detroit, a pizza-and-wings shop. He worked constantly and with an entrepreneur’s energy. He had his own lines of chef clothing and dry spices. He partnered with Kellogg’s to bring plant-based items from the company’s Morningstar Farms brand to restaurants like his. And he appeared regularly on Food Network programs like ‘Chopped’ and ‘BBQ Brawl.’”
“He founded his own nonprofit, One Chef Can 86 Hunger, which spreads awareness about food insecurity and healthy eating, especially among young people. During a 2019 government shutdown, he offered free lunches to furloughed federal workers; during the pandemic, he opened pop-up food kitchens to feed at-risk Detroit residents.”
“‘My goal is to always open restaurants in the inner city to help employ the community while providing great food,’ Mr. Hardy told the website Eater Detroit in 2022. ‘I find that though it may be easier to open in a larger suburban area, it’s typical and would only serve myself.’” READ MORE
THE 21 HATS PODCAST: DASHBOARD
John Arensmeyer on What Business Owners Need Now: This week, the founder and CEO of Small Business Majority talks about whether he heard what he wanted to hear in Joe Biden’s State of the Union address, what he makes of recent court rulings asserting that the Minority Business Development Agency must support owners of all races and that the Corporate Transparency Act is unconstitutional, and what he makes of the growing demand from businesses for more immigration.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren