The Bullwhip Effect

Supply chain issues and price increases are now rippling through the restaurant industry.

Good morning!

Today’s highlights: Could the Northeast become America’s energy capital? Companies that can’t find employees are raising prices instead. And be prepared for your PPP forgiveness application to be denied.

GOVERNMENT SUPPORT

The Paycheck Protection Program is ending in chaos: “Millions of applicants are seeking money from the scant handful of lenders still making the government-backed loans. Hundreds of thousands of people are stuck in limbo, waiting to find out if their approved loans — some of which have been stalled for months because of errors or glitches — will be funded. Lenders are overwhelmed, and borrowers are panicking. ‘Some of our lenders have been getting death threats,’ said Toby Scammell, the chief executive of Womply, a loan facilitator that has nearly 1.6 million applications awaiting funding. ‘There’s a lot of angry, scared people who were really counting on this program and are afraid of being shut out.’ ”

  • “Banks and other mainstream lenders are racing to finalize hundreds of thousands of applications that were still in progress when the Small Business Administration closed the program to new applications. Those loans could still be funded, the agency told them, but they would need to move fast.”

  • “That set off a panic, with anguished applicants besieging overwhelmed lenders — especially so-called fintechs, a group of online lenders that cranked out PPP loans at a blistering pace.” READ MORE

Of course, there’s more PPP chaos to come. Be prepared to appeal if your forgiveness application is denied: “Despite earlier interim rules released in 2020 that provided only a bare set of appeals guidance, the agency has yet to fully flesh out what the PPP forgiveness appeals process looks like, experts told me. The SBA has made a total of 11.2 million PPP loans for about $788.1 billion across two rounds of funding. So far, it has forgiven 3.1 million loans with 182,000 under review. ‘I guess this is not a top priority for SBA, but it should be because the denials are starting to happen. The small businesses really need to know what to do,’ said PPP expert and attorney Tenley Carp, from law firm Arnall Golden Gregory LLP. But Carp has begun handling PPP forgiveness denial appeals for clients, and said businesses should be prepared to quickly appeal an adverse decision. Here’s how it works:”

  • First, a PPP forgiveness denial can come from the lender. If that happens, businesses can appeal their lender’s decision with the SBA by asking the SBA to review the lender’s decision.”

  • “But if the SBA’s denial decision is final, small businesses have 30 days to file an appeal, this time with the SBA’s Office of Hearings and Appeals, which will involve gathering a host of financial documents and justifications for the PPP loan.”

  • “But it seems the SBA is giving some small businesses a chance to fix issues before rejecting PPP forgiveness applications, said Christina Moore, a partner at law firm Taylor English Duma LLP.”

  • “Moore said she drafted legal memos for these businesses to justify the PPP loan, something she now does for all her clients, justifying why the small business took the loan and why it met all the criteria.”

  • “I think that borrowers should consider having a third-party memo to support necessity,” Moore said.” READ MORE

HUMAN RESOURCES

Some companies that can’t find employees are raising prices instead: “As demand began to spike for John Manison's two education businesses, Sailfish Swim School and Apex Tutors, the L.A.-based founder couldn't find the talent to scale his business. At the swim school, many customers are currently on a wait list, and Manison says the business is bringing in 70 to 80 percent less revenue than it would if it were better staffed. The situation at the tutoring company, which brings in about $20,000 a month, isn't quite as bad; however, Manison and his general manager are spending more and more time tutoring students when they should be growing the business. In the short term, Manison had to find a way to capitalize on new business while also facing serious employee shortages. So the founder raised prices, to about 20 percent higher than his closest competitor. In the first five months of 2021, both companies more than doubled their 2020 income.”

  • “The change has allowed him to pay his employees $5 more per hour than his competitor, he says, but he's hesitant to go further.”

  • “Manison believes higher prices will turn customers away, and then word will spread and negatively affect the business.” READ MORE

RETAIL

Google plans to open its first permanent retail store: “The store, to be located in Manhattan’s Chelsea neighborhood, will open this summer and sell items such as Google’s Pixel phones, Nest smart thermostats and Fitbit wearable devices, the company said Thursday in a blog post. The store will also host workshops on using Google products and provide repair and troubleshooting services. The store will be part of Google’s existing campus in the neighborhood. In 2018, Google bought the 1.2-million-square-foot Chelsea Market building for more than $2 billion, across the street from its even larger office building at 111 Eighth Ave.” READ MORE

ENERGY

Could the Northeast become America’s new energy capital? “For decades, the strong winds blowing off the Massachusetts coast have beckoned developers with visions of wind turbines for clean, carbon-free energy, but the opposition could be just as fierce. One effortto build a wind farm five miles off the coast of Cape Cod, called Cape Wind, was scrapped after nearly 20 years of opposition from locals, including liberals such as the Kennedys. But since then, the price of wind energy has plummeted and the political climate has changed, opening the possibility that offshore-wind farms could turn the Northeast into America’s next energy boom land. In the next five years, offshore-wind-farm developers plan to bring online 9,100 megawatts from 13 offshore-wind projects along the East Coast.”

  • “The Department of Energy estimates there are about 2,000 gigawatts of potential wind energy on the country’s coasts, enough to meet the nation’s annual energy needs four times over — without emitting carbon dioxide that warms the planet.”

  • “When Vineyard Wind is operational two years from now, 62 turbines will generate about 800 megawatts of electricity, enough to power 400,000 homes, according to the company. The amount of carbon dioxide saved would be equivalent to taking 325,000 cars off the road in a year.” READ MORE

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LOGISTICS

As Americans return to restaurants, it’s now food supply chains that are stretched: “Suppliers and logistics providers say distributors are facing shortages of everyday products like chicken parts, as well as difficulty in finding workers and surging transportation costs as companies effectively try to reverse the big changes in food services that came as coronavirus lockdowns spread across the U.S. last year. ‘Over the last six weeks, we have seen the market come roaring back faster than anybody would have anticipated,’ said Mark Allen, chief executive of the International Foodservice Distributors Association. ‘The startup has been, in many ways, as difficult as the shutdown.’”

  • “The food sector is seeing a version of what supply-chain experts call the bullwhip effect, where companies that have pulled back their operations seek to rapidly scale up on signs of improving demand, leaving suppliers scrambling to keep up.”

  • “Food suppliers allocated more capacity to retail customers like grocery chains during the pandemic, Mr. Allen said, leaving distributors short of some products as restaurants and institutional food-service operations open back up.”

  • “The average price on the U.S. spot market for refrigerated truck transport reached $3.09 a mile in early May, up 20.7 percent from the average rate in February, according to DAT Solutions LLC, which runs a load board connecting trucks to shippers. It was the first time the company had seen the rate surpass $3.”

  • Supply-chain executives say the lack of available workers may be the biggest strain on the sector since the impact cascades from the production facilities to trucking to distribution centers.” READ MORE

Meanwhile, a severe drought has California farmers scrambling to find water: “The U.S. Bureau of Reclamation has cut the water allocations for many to zero this year. Last year, when the latest dry spell began, the same farmers were allocated 20 percent of what they are contracted to receive annually. Some are responding by letting fields go fallow. ‘We need 39 days and 39 nights of rain,’ said Steve Danley, water manager of the Zumwalt Mutual Water Co., whose 20 rice-grower customers are leaving all but 500 of their 6,000 acres unplanted after the provider lost its federal water.”

  • “Others are turning to the private market, where they pay as much as $400 per acre foot of water—325,851 gallons, or enough to cover an acre of land one foot deep—compared to the $100 typically charged by the federal government.”

  • “‘Everything is down,’ said Fred Ross, a salesman at Beeler Tractor Co. in nearby Colusa. He said his income from new almond-equipment sales is a quarter of what it was at the same time last year.”  READ MORE

Buy one and get three free! “Supermarkets are on a mission to get rid of hand sanitizers. Once nearly impossible to find, America is awash in it. Consumers rushed to buy sanitizers when the pandemic took hold, eager to clean their hands and help protect themselves from the new coronavirus. The surging demand resulted in shortages and purchase limits at retailers across the country. Hoping to fill their shelves, supermarkets bought inventory from overseas and turned to other businesses—including distilleries—that switched their production to make sanitizers for the first time. Manufacturers expanded capacity, at times overpaying for components like pumps.”

  • “‘We, at one point, cold-called 60 distilleries to see if they would make sanitizers for us,’ said Chris Testa, president of distributor United Natural Foods Inc.”

  • “Now, supermarkets are sitting on pallets of them. ... Sales of hand sanitizers are down 80 percent to $9.2 million for the week ended May 8 from the year prior, according to NielsenIQ. Weekly sales hit as high as $52 million in July.”

  • “Average unit prices are $2.10, about 40 percent lower than a year ago.” READ MORE

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THE 21 HATS PODCAST

Episode 62: We’re Raising Wages for Everybody: This week, Paul Downs, Jay Goltz, and Dana White talk about confronting inflation, raising their prices, what businesses owe their employees, and the venture-backed competitor who’s opening a store in Jay’s backyard. Among the questions they discuss: Would you take back a rebound employee? Are unemployment payments the main reason owners are struggling to fill jobs? Is there anything wrong with taking business from another business? How many companies are truly disruptive? And do owners take all of the risk? Or are there risks for employees, too?

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