New Year’s Resolution? Make. Some. Money.

In our latest podcast episode, the owners talk about how tough last year was and what they’re going to do differently this year.

Good Morning!

Here are today’s highlights:            

• As of today, there’s a new rule governing the classification of contract workers.

• As office vacancies set a new record, a study finds RTO does not improve performance.

• Businesses are still trying to retain workers by paying significant raises.

• Evidence continues to mount that the old business model for restaurants no longer works.

THE 21 HATS PODCAST

‘Last year was just a mess’: This week, Shawn Busse, Paul Downs, and Laura Zander talk about why 2023 was so challenging for them and what they plan to do differently in 2024. “Last year was a year when I knew I was going to be making a bunch of investments and didn't expect to show much or any of a profit,” says Paul. “And I absolutely nailed that goal.” Shawn, meanwhile, thinks his new marketing scheme is working, and Laura is addressing her issues by going shopping — shopping, that is, for businesses. She’s now bought a total of six, and she offers a step-by-step guide to how even a relatively small business can grow through acquisition, including what she’s looking for (mostly companies in distress), how she sets a price (she aims to recoup her cash outlay pretty quickly), how she finances the deals (not with a bank!), and how she integrates her old and new operations (that can be a bear).

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

REGULATION

The Biden administration issued a new rule designed to turn gig workers into employees: “The rule, which will go into effect in March, would impose a stricter test to determine whether companies can classify their workers as independent contractors. It would replace a 2021 rule finalized by the Trump administration. The new regulation could affect millions of workers across a range of industries, including healthcare, restaurants, construction, and transportation, though affected businesses could seek to pursue legal action to block the rule. Some of the companies that appear to be in the crosshairs of the Biden administration rule believe that it won’t immediately change their underlying business models and that the policy would be subject to interpretation by courts.”

• “Under the new rule, if a worker can be counted as a contractor would depend on factors such as whether the job is primarily permanent or temporary, how much control an employer has over work performance, or how integral a worker’s job is to the overall business. ‘This rule provides greater clarity and consistency in determining a worker’s status,’ said acting Labor Secretary Julie Su.”

• “Business groups have generally opposed the Labor Department rule. Flex, a trade group that represents several app-based companies such as Grubhub, Instacart, and Lyft, said the Labor Department move could ‘generate significant uncertainty for millions of small business owners and entrepreneurs.’”

• “‘This rule does not materially change the law under which we operate, and won’t impact the classification of the over one million Americans who turn to Uber to make money flexibly,’ Uber said in a statement.”

• “The full effect of the rule won’t likely be known until it has been interpreted by the court system, said Peter Norlander, a management professor at Loyola University Chicago who studies the gig economy.” READ MORE

HUMAN RESOURCES

Companies are still giving raises—but not quite as big: “On average, companies are planning for salary increases of 4 percent in 2024, according to a December survey of more than 1,800 employers by advisory firm Willis Towers Watson. That is down from the 4.4 percent raises that businesses handed out in 2023, yet significantly higher than the average 3 percent increases that marked pre-pandemic years. A cooling job market and easing inflation are giving companies cover to moderate pay increases as they try to lure and retain workers. Businesses have already cut or slowed hiring for many professional, white-collar jobs.”

• “In a December survey of 666 companies with revenue between $1 million and $20 million, three-quarters of chief executives said they planned to maintain or increase pay raises in 2024. Some 21 percent said they would give smaller raises and 4 percent said they planned no raises at all, according to Vistage Worldwide.”

• “Ben Laverty IV, chief operating officer at California Safety Training, a Bakersfield, Calif., consulting business, says his company is planning to give raises of about 10 percent to its salaried and hourly workers, roughly the same as last year.”

• “Losing staff to a competitor can cost more than a pay raise, he says. ‘It’s not like I can hire someone and have them ready to do what we do in a week,’ he says. ‘The right person is reticent to leave just for pay, but I don’t want that to even be a consideration.’” READ MORE

A study finds that bringing workers back to the office is not paying off for companies: “Mark Ma, an associate professor of business administration from Pitt's Katz Graduate School of Business, who led the study, told BI he started the research hoping to understand why some S&P 500 firms want employees to return to the office while other firms avoid calling them back. Analyzing firms that had publicly announced their RTO policies, Ma examined whether the mandates actually affected financial performance and how such policies impacted employee well-being. ‘One of the most common arguments management suggests is that they want to return to office because employee productivity is low at home, and they believe returns to office would help firms improve performance and ultimately improve the firm's value,’ Ma told BI. ‘That's the reason they give — but our results actually do not support these arguments.’”

• “Ma compared each firm's financial performance on the stock market before and after implementing return-to-office mandates and found no significant change in either the financial performance or the stock market value. One potentially contributing factor as to why firm performance has not improved, Ma said, could be due to higher expenses caused by bringing employees back to the office.”

• “Even if employee productivity is better in the office, he said, the firm also needs to spend a lot of expenses to accommodate them — parking, office space, catering, or other in-house costs — which he says mitigates the positive benefits of enhanced productivity.”

• “He added: ‘It is my personal belief that, as prior research suggests, most CEOs are very narcissistic. That means they are used to being in the center of everything and issuing orders for employees to follow. But after the pandemic, they feel kind of like they're losing power because employees became more and more aware of their rights during the great resignation. ... And as a result, they want to grab their power back in this relationship.’” READ MORE

OFFICE SPACE

Office vacancies around the country have set a new record: “America’s offices are emptier than at any point in at least four decades, reflecting years of overbuilding and shifting work habits that were accelerated by the pandemic. A staggering 19.6 percent of office space in major U.S. cities wasn’t leased as of the fourth quarter, according to Moody’s Analytics, up from 18.8 percent a year earlier. That is slightly above the previous records of 19.3 percent set in 1986 and 1991 and the highest number since at least 1979, which is as far back as Moody’s data go. The new record shows how remote work has upended the office market. But that is only part of the story. Much of the market’s current malaise traces its roots to the office-market downturn of the ’80s and ’90s.”

• “And just as in the early ’90s, it is the overbuilt South that is hit hardest. Today, the three major U.S. cities with the country’s highest office-vacancy rates are Houston, Dallas and Austin, Texas, according to Moody’s. In 1991, Palm Beach and Fort Lauderdale in Florida and San Antonio held those positions.”

• “Today, [West Palm Beach] is once again in the middle of an office-construction boom. Developers are building high-end, hurricane-proof offices with landscaped outdoor terraces and pickleball courts. But unlike the 1980s, West Palm Beach is now a destination for major finance companies seeking low taxes and warm weather.” READ MORE 

BUSINESS MODELS

The pre-pandemic business model for restaurants continues to show its limits: “The Boston chef Barbara Lynch, who more than 20 employees accused of multiple forms of workplace abuse in a New York Times report last year, announced Friday that most of her restaurants had closed at the end of 2023. Those include her fine-dining restaurant Menton, one of the city’s most prestigious destinations since it opened in 2010, and two others in the same building in the Fort Point neighborhood: the stylish trattoria Sportello and sophisticated cocktail bar Drink. The Butcher Shop and Stir, both in the South End, have also closed.”

• “In [a] statement, Ms. Lynch attributed the closings to ‘post-pandemic realities,’ financial mismanagement by her previous employees and ‘an uncooperative landlord.’”

• “‘Boston is no longer the same place where I opened seven restaurants over the last 25 years,’ she wrote. ‘Properties have been flipped and flipped and the landlords just want the rents that only national chains can sustain.’”

• “Ms. Lynch’s statement did not mention the longtime problems created by her alcohol abuse and verbal and physical aggressions against employees, which led to high staff turnover and were an open secret among Boston’s hospitality workers.” READ MORE

MARKETING

Led by founder Karissa Bodnar, Thrive Causemetics, a direct-to-consumer beauty brand, is trying to compete with the big players by emphasizing its good works: “For the April debut of Bigger Than Beauty, a set of skin-care products, Ms. Bodnar chose the headquarters of Bottomless Closet, a nonprofit that helps New York-area women in need enter the workforce. ‘We found out about them through our community,’ Ms. Bodnar said. We post on social media all the time and ask, What charities are moving you?’ Thrive donated a million dollars of product but the real windfall for the nonprofit may have been the fairy godmother who chose to wave her wand over them. ‘She’s the star,’ Melissa Norden, the executive director of Bottomless Closet, said, gesturing at Ms. Bodnar. ‘People won’t show up for us. They’ll show up for her.’”

• “‘I’ve always thought of her as the ultimate unicorn,’ said Blythe Jack, a Thrive investor and a former partner at TSG Consumer, a private equity firm in San Francisco. ‘She built a wildly profitable business on almost no capital.’ Ms. Jack invested $100,000 in Thrive in 2017.”

• “Employee-generated content fuels Thrive’s social media feeds as well as ire. An April, Instagram post of a male employee applying concealer, eyebrow gel, and pressed powder generated a slew of hateful comments and disavowals like, ‘If this is turning into a woke company, I’ll stop buying.’ ‘People get very upset about the L.G.B.T.Q.-plus and reproductive rights stances we take,’ Ms. Bodnar said.”

• “Combined, Ms. Bodnar and Thrive have more than 830,000 Instagram followers; by comparison, L’Oréal U.S.A. has just over 150,000. ... ‘The conglomerates are always looking to update their portfolios,’ said [Priya Rao, the executive editor of the Business of Beauty, which chronicles the industry], ‘and they’re desperate to connect with millennial and Gen Z consumers in the way that Thrive has.’” READ MORE

PROFILE

Even legends can find themselves at the mercy of landlords: “Lawrence Tolliver wasn’t ready to say goodbye, but circumstances were beyond his control, and the timing was downright cruel. The South Los Angeles building that housed Tolliver’s Barber Shop was being sold, and the new owner had different plans for the space. Early in December, the same month a documentary on his legendary shop was set to premiere, Tolliver found out he’d have to move out by Christmas. ‘On to the next,’ he said one day, trying to stay positive. He told me he had read a column of mine in which the late Norman Lear said life is a series of transitions from what’s over to what’s next. But Tolliver, approaching 80, wasn’t sure what was next, and he was hurting.”

• “Tolliver has been a barber for more than half a century at three locations, the last 12 years on the south side of Florence Avenue near Western, where the walls were plastered with images of the Rev. Martin Luther King Jr., Nelson Mandela, Muhammad Ali and the Obamas, among other Tolliver heroes.”

• “He was always great with the shears, whatever the generational style shifts, and his regulars included women. Children followed their fathers and grandfathers into the shop and into adulthood. But that was only half the story. By the force of his personality and the breadth of his humanity, Tolliver built a gathering place for people who dropped by, through the decades, whether they needed a haircut or not.”

• “His shop has been a place where kids were in the company of role models including doctors, lawyers, cops, ministers, teachers, principals, engineers, merchants, and laborers. And Tolliver threw his support to community causes, promoting public and mental health initiatives, backing youth sports, and giving free haircuts to homeless people.”

• “‘This is a safe space,’ [Mayor] Karen Bass said during an October 2022 visit as a candidate for mayor of Los Angeles, joining a long line of politicians and public officials who have dropped by the shop to listen and to be heard.” READ MORE

21 HATS PODCAST: DASHBOARD

The State of Small Business, 2024: This week, John Arensmeyer, founder and CEO of the advocacy group Small Business Majority, tells us that he senses considerable optimism among the many business owners in his network notwithstanding some concern for looming policy and economic issues. Among those issues: access to capital, the cost of health care and health insurance, relations between franchisors and franchisees, price discrimination against smaller businesses, the burden of the new Corporate Transparency Act, and the upcoming battle over the sunsetting of the Trump tax cuts.

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

Thanks for reading, everyone. — Loren