The Era of Cheap Is Over
Cheap money, cheap energy, and cheap labor are all gone. And that’s not all bad, especially if you live on Main Street as opposed to Wall Street.
Good Morning!
Here are today’s highlights:
In our latest podcast episode, Liz Picarazzi explains how she’s going after the bear market for trash enclosures.
Case study: Here’s what higher interest rates mean for a growing bakery.
Pricing software is teaching landlords that higher rent is better than higher occupancy.
There was a time when Americans had little interest in eating squid. Then they discovered calamari.
THE 21 HATS PODCAST
And Some Days the Bear Eats You: This week, Liz Picarazzi tells Jay Goltz and Sarah Segal that her trip to a bear sanctuary in Montana to get her trash enclosures certified as bear-resistant did not go precisely as planned. Because of a logistical snafu, she has not yet obtained either the certification or her real goal: a marketing video of the grizzlies attempting to crack open her baited enclosure. Fortunately, things went better for Liz in a more traditional marketing venue, a trade show in Chicago where she promoted her rat-resistant enclosures. Meanwhile, Sarah follows up on how things are going since losing two big clients and having to lay off three employees, and Jay explains his new catch phrase, “Let me not sleep on it.”
“Plus: we discuss the owner of a two-year-old construction business who wonders how long he should keep going if he doesn’t start to make a profit. He also asks why no one ever talks about how hard it is to run a business. While we can’t know for sure what’s happening inside his company, we can be pretty confident that he’s not listening to the right podcast.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
THE ECONOMY
OPINION: The era of cheap money, energy, and labor may be over. Plan accordingly: “The past five years — which have featured a pandemic, the war in Ukraine and the aftermath of both — signal the end to an economy that was based on cheap everything: cheap money, cheap energy, and cheap labor. All of that is going away or gone. A decade and a half of go-go speculation is finished. The era of cheap is kaput.”
“Years of easy money propped up everything. A higher cost of capital will be painful temporarily, but it will give markets what they’ve needed for years — a reason for investors to sort out risky investments (like more than a few consumer tech and meme stocks) from safer ones (industrials set to benefit from a manufacturing boom).”
“Cheap energy is over, too. One outcome of Russia’s invasion of Ukraine is the realization (especially in Europe) that getting crucial commodities from autocrats is never a good idea. The United States, Europe, and China are, in different ways, all speeding up the transition to a green economy.”
“Wages are rising, and we’ve seen more labor activity, including strikes, this year than in the past four decades. More will follow. This is an appropriate response to decades of wage stagnation amid record corporate profits.”
“The end of cheap is a huge shift. It means Main Street rather than Wall Street will drive the economy. It will make for a more balanced and resilient economy.” READ MORE
Here’s how high interest rates are affecting business owners: “On the other side of that equation are people like Liz Field, who started a bakery, the Cheesecakery, out of her home in Cincinnati, focusing on miniature cheesecakes, of which she has developed 200 flavors. She gradually built her business up through catering and mobile food trucks until 2019, when she borrowed $30,000 to open a cafe. In 2021, Ms. Field was ready for the next step: buying a property including a building to use as a commissary kitchen. She got a loan for $434,000, backed by the Small Business Administration, with an interest rate of 5.5 percent and a monthly payment of $2,400. But in the second half of 2022, the payments started increasing. Ms. Field realized that her interest was pegged to the ‘prime rate,’ which moves up and down with the rate the Fed controls.”
“Because of that, her monthly payments have climbed to $4,120. Along with slowing cheesecake orders, she has been forced to cut her 25 employees’ hours, and sell one food truck and a freezer van.”
“‘That really hurts, because I could have one to two shops for that price,’ Ms. Field said about her payments. ‘I’m not going to be able to open more stores until I get this big loan under control.’”
“According to analysts from Goldman Sachs, interest payments for small businesses will on average rise to about 7 percent of revenues next year, from 5.8 percent in 2021. No one is sure when businesses may get some relief — though if the economy slows sharply enough, rates are likely to sink on their own.” READ MORE
PRICING
Is big data the reason the rent’s high? “If you want to know why apartment rents got so high, some people say look to big data. Many landlords outsourced their pricing decisions to software that told them what rents to charge. These algorithmic pricing systems analyze giant troves of information about the rental market. Then they direct landlords on how much to increase rent for each lease renewal, or what to ask for newly vacated apartments. Algorithms and other big data have changed the way many landlords do business. In the past, landlords would often make deep cuts to rents when the market started to head south, but algorithms showed them that wasn’t always necessary.”
“Many building owners also once believed keeping their apartment buildings as full as possible was the best way to maximize profits. Algorithmic pricing systems, by contrast, calculated that some landlords could earn more money by pushing up rents, even if that brought about higher vacancy rates.”
“At least dozens of landlords across the U.S. rely on pricing systems from two companies—RealPage and Yardi Systems—to determine what they charge millions of renters. Now, these two firms face allegations that their rent-pricing systems facilitate collusion among some of the country’s biggest apartment owners.”
“In promotions for Yardi’s pricing system, formerly called RENTmaximizer, one landlord said it allowed the firm to ‘push rents more aggressively’ and ‘quickly.’ Another landlord said it enabled her firm to eliminate concessions for tenants.”
“Apartment owners are hardly alone in embracing sophisticated pricing systems. Student-housing operators also use rent-setting software, as do owners of single-family rental homes. More companies, from grocery stores to ride-sharing entities, rely on automated pricing to make sales.” READ MORE
MARKETING
The invention of calamari: “In the early 1970s, American stocks of traditionally targeted fish like cod and menhaden were plummeting. Alarmed by the looming crisis, politicians, universities and conservationists decided that one way to address the problem would be to encourage Americans to eat more squid, of which there was plenty. Collectively, they began a rebranding campaign designed to persuade Americans to eat more of the ubiquitous, eight-armed mollusk — no small task, given that most people considered the creature to be slimy and generally off-putting. That all changed in 1974, when a business school student at the Massachusetts Institute of Technology named Paul Kalikstein came up with an idea. American consumers would probably get over squid’s texture if, as with onion rings, chefs breaded and fried it.”
“Other experts also argued that restaurateurs should start referring to squid as calamari, from words for the animal in several Romance languages, which sounded more exotic. Restaurants tried it, and it worked: Americans started to order calamari.”
“Around 1980, the dish had become so popular that a restaurant in Santa Cruz, Calif., started the annual International Calamari Festival, drawing some 600 attendees. The festival grew more extravagant in the years that followed, with attendance ballooning to thousands of people. A 30-foot model squid was constructed for the event. Children dressed up in tentacles.”
“The appetizer’s meteoric rise in popularity eventually led The New York Times to create the Fried Calamari Index in 2014, a tool for tracking the historical emergence of trendy foods. Americans imported or caught at least 85,000 metric tons of squid in 2022.” READ MORE
OPPORTUNITIES
Food halls are exploding in the suburbs: “These collections of small restaurants typically have shared seating and offer a variety of gourmet and ethnically diverse cuisines. They target customers who are willing to spend $15 on an artisanal sandwich or want a meal from West Africa or one inspired by Asian open-air markets. In contrast to food courts in highway rest stops or older shopping malls, food-hall operators generally avoid national fast-food chains and waffle-chair seating. Food halls favor local restaurateurs, craft beer and modern décor. Their growth has been explosive. The U.S. has at least 364 food halls, and more than 120 are expected to open by the end of next year, according to real-estate firm Cushman & Wakefield’s Colicchio Consulting Group, which specializes in food-hall development.”
“Today, they are scattered everywhere. A food hall in Omaha, Neb., features Nepalese street cuisine and Syrian fare. Another in Grapevine, Texas, is designed to look like a rail station and sells arepas and brisket, as well as seafood and hummus dips. The Reno Public Market food hall in Nevada has vendors selling churros, crepes, and Salvadoran pupusas.”
“The pandemic has fueled food-hall expansion, said Trip Schneck, executive managing director at Cushman & Wakefield. These dining venues weathered the pandemic’s upheaval better than the broader restaurant industry, he said, with only a couple dozen closing since 2020. As people left major cities and spent more time working from home, demand for food halls picked up in the suburbs.”
“‘The suburban market always had the nighttime population,’ Schneck said. ‘Now they’ve got that daytime population.’” READ MORE
RETAIL
Are municipally owned supermarkets the answer to food deserts? “As Chicago studies whether to become the first big city to open a municipally owned grocery store, it will be looking to places like [Erie, Kansas] for tips on how to do it. At the moment, things aren’t going especially well. Erie Market, which the city took over in 2021, is losing money almost every month amid stiff competition from a Walmart 15 miles away and a Dollar General across the street. The store has slashed prices, cleared the shelves of expired items, and put in a salad bar to try to bring more people through the door. But leaders aren’t giving up.”
“Erie is among a handful of cities across the U.S. that have taken over or started up grocery stores as a way to stave off decline and make it easier for residents to get access to fresh foods. All of them are small, but that could soon change.”
“Chicago, which has lost six groceries on its South and West sides in the past two years alone, aims to take advantage of a new $20 million state fund designed to address what are known as food deserts across Illinois. Studies show that lack of access to fresh foods can have big impacts on health outcomes and rob neighborhoods and entire towns of economic vitality.”
“‘Communities and people in those communities deserve to survive and thrive. And, you know, that might mean accepting an operating loss for a grocery store,’ said [Ameya] Pawar, whose group will be working with the city on the economic feasibility study, including a planned trip to places like Erie to see how things work: ‘A grocery store is a high-volume, low-margin business. We understand that, but it isn’t rocket science.’” READ MORE.
CYBERSECURITY
Protecting small businesses has become a national security issue: “The Small Business Administration kicked off its cybersecurity summit last Wednesday with a suite of cybersecurity-focused programming to help small-business owners better navigate a burgeoning threat landscape. Between phishing attacks to getting hit with ransomware demands, hacks are on the rise: Almost half of small businesses fell victim to a cyberattack this year, a new survey from Sage, a payroll software platform, shows. And yet there's been a continuing disconnect between small businesses and cybersecurity resources.”
“Forty-six percent of businesses don't know where to turn to improve their cybersecurity best practices, according to Verizon's State of Small Business Survey that was released in mid-October.”
“One focus of the summit landed on a tool from the Department of Defense called Project Spectrum: a free training and education resiliency platform. The platform offers training modules to help entrepreneurs with compliance and governance, which includes threat monitoring features, risk assessments, and workforce development training.”
“Businesses can take a cyber-readiness test, which quizzes them on the state of their own defenses (for example, has your business identified who in an organization is an authorized user to access sensitive data?), to determine the strength of their security.” READ MORE
THE 21 HATS PODCAST: DASHBOARD
Gene Marks Predicts an A.I. Backlash: For months, Gene has been telling us about all of the cool things we’ll be able to do with Microsoft’s Office 365 and Google’s Workspace when those companies integrate artificial intelligence into their platforms. Gene’s still excited about the possibilities, but he’s also more than a little annoyed, because both Microsoft and Google are planning to charge us quite a bit more for their A.I. enhancements. Gene also talks about automated invoicing, which he believes is going to displace a lot of employees, and why he believes most business owners are doing a poor job managing their insurance needs.
You can subscribe to the 21 Hats Podcast wherever you get podcasts.
Thanks for reading, everyone. — Loren