The High Cost of Low Quality
Yvon Chouinard says that people don’t stop spending during economic downturns: “In our experience, instead of wanting more, they value better.”
Good Morning!
Here are today’s highlights:
The biggest buffet in America, a family-owned business in Pennsylvania, can go through 600 pounds of bacon on a Saturday.
More small retailers are trying fee-based membership plans like Costco’s.
The IRS is again delaying enforcement of a 2021 tax policy requiring ecommerce businesses to report small transactions.
Chris Campbell, a friend of 21 Hats, has a suggestion for the cross-state, payroll-tax problem.
PROGRAMMING NOTE
There will be no Dashboard podcast episode published today. It will return next week.
MANUFACTURING
Patagonia founder Yvon Chouinard warns about the high cost of low-quality products: “I know firsthand the high stakes of low quality. When I started forging climbing equipment and selling it out of the back of my car in the 1950s, I was my own best customer. My dirtbag climber buddies and I wanted stronger pitons and sturdier carabiners to support us as we hung thousands of feet above the Yosemite Valley floor. If the metal were too soft or a joint too weak, the resulting fall would have killed me or one of my friends.”
“Countless skeptics told me we’d never turn a profit. They thought we were crazy for repairing our own gear and urging our customers to buy less. They said our focus on quality would drive up prices and put our products out of reach.”
“But the naysayers were wrong. Some of our most loyal customers still live out of vans and save up for one of our coats, knowing they may not need to replace it for a decade or more. And long-lasting goods create secondhand markets for discounted clothes and gear that have many years of good use left in them.”
“Quality is smart business. Even during economic downturns, people don’t stop spending. In our experience, instead of wanting more, they value better. Consumers should demand — and companies should deliver — products that are more durable, multifunctional and, crucially, socially and environmentally responsible.” READ MORE
BUSINESS MODELS
Shady Maple Smorgasbord, a family-owned buffet in Pennsylvania. has a business model that is clearly working: “Saturdays are the busiest days, so hectic that [Phil] Weaver offers an extra $3 per hour for anyone who works them. The smorgasbord has 350 employees and another 20 on Saturdays. ‘On an average Saturday, we’ll serve about 7,000 people,’ Weaver said. On a recent Saturday morning, lines were stretched out the multiple front doors but moving quickly for the $14.99 breakfast. Inside, Shady Maple was humming like a bee’s nest, with diners and employees buzzing around a buffet that’s as long as an ice hockey rink (200 feet). They scooped up the famous cornmeal mush and other Pennsylvania Dutch favorites like scrapple and shoofly pie. Shady Maple can go through 600 pounds of bacon on a Saturday.”
“Shady Maple Smorgasbord looks more like a megachurch than a buffet, a beacon for the hungry coming in by bus and horse-drawn buggy for brisket and bacon. The Weaver family didn’t set out to create the largest buffet in America, according to Food & Wine, let alone in Lancaster County. They just kept building and adding seats over the decades and the lines got longer.”
“Tourism has long been an economic driver for Lancaster County, with families and bus trips coming in from Philly, New York City, and Baltimore every weekend for shopping, Amish heritage tours, amusements like Dutch Wonderland, and entertainment. ... ‘During the last two months of the year, we get pounded,’ Weaver said. ‘We don’t even take bus trip reservations on Saturdays because it’s just too busy.’”
“Weaver said his father told him not to sweat the big eaters. ‘My dad said for every big guy who can eat a lot, there’s a skinny fella that eats like a bird.’” READ MORE
TAXES
In a win for small businesses, users of digital wallets get another reprieve from the IRS: “For the second time in a year, the Internal Revenue Service is delaying enforcement of a contentious tax policy that would require users of digital wallets and e-commerce platforms to start reporting small transactions to the tax-collection agency. The IRS said on Tuesday that it would slowly phase in the new policy, which would require individuals and small businesses to report digital transactions of as little as $600 to the federal government. The new reporting requirement was supposed to take effect late last year, but the Biden administration abruptly postponed it following pressure from lobbyists and backlash from users of services such as Venmo, PayPal, Cash App, StubHub, and Etsy.”
“The rule, which was included in the 2021 American Rescue Plan, was intended to help narrow a $7 trillion ‘tax gap’ that is owed to the United States but has gone uncollected. Before the new law, services like Venmo were required to supply users only with a snapshot of their income, called a 1099-K form, if they had received more than $20,000 and had more than 200 transactions in a year.”
“The 2021 law lowered that threshold to $600 for the entire year, regardless of the number of transactions, significantly broadening the number of people who were likely to be required to report more income and pay more taxes.”
“In its announcement on Tuesday, the I.R.S. said that it would keep the old policy in place for the current tax year. And in 2024, it plans to require only taxpayers with more than $5,000 of business transactions to report that income.” READ MORE
The 2022 climate law created a market that is proving useful to smaller businesses: “The law, signed by President Biden, effectively created a financial trading marketplace that helps smaller companies gain access to funding, with Wall Street taking a cut. Analysts said it could soon facilitate as much as $80 billion a year in transactions that drive investments in technologies meant to reduce fossil fuel emissions and fight climate change. The law created a wide range of tax incentives to encourage companies to produce and install solar, wind, and other low-emission energy technologies.”
“Lawmakers have invented a workaround that has rarely been employed in federal tax policy: They have allowed the companies making clean-energy investments to sell their tax credits to companies that do have a big tax liability.”
“The prospect of a booming market and the chance to snag a piece of those transaction costs have raised excitement for the Inflation Reduction Act, or I.R.A., in finance circles. A new cottage industry of online start-up platforms that seeks to link buyers and sellers of the tax credits has quickly blossomed.”
“Biden administration officials say many clean-tech companies will save money by selling their tax credits to raise capital, instead of borrowing at high interest rates. ‘The alternative for many of these companies was to take a loan, and taking that loan was going to be far more costly’ than using the credit marketplace, Wally Adeyemo, the deputy Treasury secretary, said in an interview.” READ MORE
THE ECONOMY
Black Friday spending came in strong: “U.S. retail sales on Black Friday rose 2.5 percent from last year, according to Mastercard SpendingPulse, which measures sales in stores and online. The result was helped by gains in purchases of jewelry and apparel as well as spending on sporting events and at restaurants. Foot traffic at U.S. retailers rose 2.1 percent, with health and beauty brands seeing double-digit-percentage increases from last year, according to store traffic analytics provider RetailNext. About 182 million people are expected to shop online and in stores between Thanksgiving and Cyber Monday, according to the National Retail Federation, a trade group.” READ MORE
RETAIL
More small retail brands are trying fee-based memberships: “To increase customer lifetime value and create a pipeline for more consistent sales, retail brands are rolling out paid membership programs, which give consumers discounts and rewards in exchange for an annual or monthly fee. There's strong evidence that this offering works: Members of paid loyalty programs are 60 percent more likely to spend on a brand, compared with members of free loyalty programs, who are 30 percent more likely to increase their purchase order sizes or frequencies, according to research by McKinsey.”
“Outdoor Vitals, a Cedar City, Utah-based outdoor gear brand, has even employed the program, which launched in 2020, to help fund product development. For $10 a month, members get a 10 percent discount year-round, free priority shipping, access to limited edition gear, and a $10 store credit with no expiration date.”
“Outdoor Vitals is bootstrapped and, in the past, relied on Kickstarter to raise the capital necessary for expensive new product launches, such as an insulated jacket and a hammock sleeping bag. With an exceptionally high adoption rate of the membership--more than half of its customers are paying members--Outdoor Vitals can invest in product development without being overly reliant on crowdsourcing.”
“Paid membership programs can also lead to more consistent sales--as the Los Angeles-based lifestyle brand Jenni Kayne has found with its own program, launched in April 2022. For $150 annually, customers get 20 percent off every furniture and home decor purchase. Each quarter, members can also get perks from partner brands: Currently, Jenni Kayne Home members can claim $300 off their first flight with the semi-private jet company, Aero.”
“Jenni Kayne COO Lauren Holmes says about 70 percent of furniture purchases are made by members; the average order value for members is about three times that of non-members. ‘With the $150 fee and a 20-percent discount, the membership pays for itself, especially if people are buying furniture,’ she says. ‘I think it's a no-brainer.’ The brand has about 1,300 existing JKH members, and has seen high renewal rates, even though the membership doesn't automatically renew.” READ MORE
HUMAN RESOURCES
Unnecessarily high turnover may explain the dearth of truck drivers: “I learned that these schools have an important role in bringing up the next cohort of truck drivers. But it’s unclear where the leaders of America’s $875 billion trucking industry should direct resources. Should they focus their attention on bringing in new drivers — or rethink how those drivers are treated once they’re employed?”
“There are public safety reasons for figuring out how to boost driver retention. A federal study from 2017 showed that less experienced drivers are more likely to cause a serious accident. A truck driver with less than three years of experience, for example, is 47 percent more likely to cause an accident than one with more than three years on the road, according to the analysis.”
“Improving retention rather than increasing the potential number of drivers might seem to be the obvious answer to an outside observer. But under the current conditions of the trucking industry, fleets aren’t incentivized to do that. It’s just not as profitable — and trucking is ruled by what University of Pennsylvania sociologist Steve Viscelli calls ‘destructive competition.’”
“As a group of researchers led by Stephen Burks of the University of Minnesota Morris found in a 2023 paper, high turnover among truckload carriers is ‘likely structural.’ They found that paying drivers more in an effort to reduce costly turnover was ultimately less profitable than paying drivers less and having higher turnover. That likely means trucking will be caught in a toxic pattern of training, hiring, and losing people for the foreseeable future.” READ MORE
OFFICE SPACE
Can Instagrammable design bring workers back to the office? “It’s what might be called the Envy Office — what happens when companies try to combine the comforts of a living room and the glamor of a vacation. These spaces — often characterized by colorful walls, upholstered furniture and carefully curated coffee table books — lure workers in with plenty of opportunities to fill their social feeds with photos taken at the workplace. ‘It’s taking cues from home, from hospitality, from Pinterest,’ said Jordan Goldstein, a co-managing principal at Gensler, one of the world’s largest architecture firms, where clients have lately been asking for greenery and soft seating. He cited, as an example, the new headquarters of Marriott, which Gensler redesigned to incorporate banquettes, library nooks and a tree growing through the middle of the lobby. Gensler has also recently redone offices for Barclays, Pinterest, and LinkedIn in this style.”
“When Magic Spoon’s team moved into the new office earlier this year, Sarah Bourlakas, 26, who was the senior social and community manager, snapped a photo to post on her personal Instagram story with the text: ‘Live from HQ.’ That Instagrammability isn’t accidental.”
“Companies now want their office design to be visible not just to employees, but also to everyone on social media, which Ms. Duffy said was about ‘retaining employees by hyping this fun, enjoyable, hyper-social workplace.’”
“To some employees, though, all the fake plants, accent walls, and stylish dog beds sometimes seem designed to mask the inconvenience of space-conserving arrangements like hot desks, where workers no longer have their own assigned work spaces.” READ MORE
PROFILE
Early in the pandemic, Mikey Kim started a candle business from his home—even though Amazon told him there were over 5,000 candle sellers on the platform and that it would be hard to break through: “I started off with $500, making candles using all-natural coconut wax and selling them on Amazon and Etsy. With everyone staying home, I thought many people would be thinking about buying home decor and splurging on things like aromatherapy. The business grew steadily. In the first year, I just broke even. But then I received offers from both Amazon Lending and Goldman Sachs' Marcus lending program, which really helped me to grow the business. I also started using Faire, the online wholesale marketplace, which allowed me to sell my candles in independent retailers' stores. Hemlock Park's candles are now stocked in more than 2,000 stores in the U.S., Canada, Europe, and Asia.”
“I launched a Shopify store in the first month of being in business as well. That has taken a bit longer to develop because it doesn't have the traffic and exposure that Amazon has. I also decided to shut down the Etsy store so I could focus on our best-performing channels.”
“Soon enough, I was in need of more workspace to make candles. Real estate in L.A. is really expensive, so I started looking in northern Nevada, near where I grew up. I now have two warehouses there and a team of six pouring and packaging candles. We do about 20,000 candles a month, all by hand.”
“More recently I've found other ways to save myself some work, like making use of Amazon's strategic account services, which gives you access to an account manager who can pull reports and make suggestions about where to put more of our efforts.” READ MORE
STARTUP
Zach Reitano botched an internship and walked away from a venture-backed company he’d founded, before starting telehealth company Ro: “After Reitano closed Shout, he ran so short on money that he started selling burritos out of his ground-floor window in New York City’s Chelsea neighborhood. His friend Greg Rosen, who worked at BoxGroup, a Shout investor, offered Reitano his couch. Eventually they got a bigger place together. Soon, their girlfriends moved in, too. Reitano had his dad’s work as a doctor in mind when he convinced Rosen he should back him on a direct-to-consumer healthcare startup. Other companies had grown rapidly after focusing initially on hair loss. When Reitano said he wanted to start with drugs for erectile dysfunction, Rosen tried to talk him out of it. ‘No one is ever going to fund this,’ Rosen said.”
“Reitano showed him research saying erectile dysfunction was a leading indicator for other health problems. He talked about the stigma men feel in talking about it with doctors and his own experience with erectile dysfunction. BoxGroup, the early stage investment fund where Rosen was a principal, led the initial round of funding with a $400,000 investment.”
“Reitano bought prominent advertisements for Ro’s erectile dysfunction treatments on New York’s subways. Reitano’s then-girlfriend, Abram, agreed to appear in an ad talking about Reitano’s erectile dysfunction, which stems from a heart condition and the medications that manage it. Sales went from zero to $1 million in a month, Rosen said.” READ MORE
THE 21 HATS PODCAST
Clients and Taxes and Bears, Oh My! This week, Jaci Russo explains how she put an end to her eight-month drought of new clients. Jennifer Kerhin takes us through the bureaucratic nightmare of managing remote workers based out of state (“That is a headache that I don't wish on my worst enemy,” says Jaci, who has found a way to sidestep the problem). And Liz Picarazzi brings us up to date on her ongoing struggle to get her trash enclosures certified as bear-resistant. The common thread to these challenges may lie in these two questions: When is continuing to fight the good fight the definition of entrepreneurship?
On the cross-state payroll tax problem, Chris Campbell has a suggestion. He says he’s had success plugging a service called Middesk into Rippling at the cost of about $12,000.
“Twelve thousand dollars sounds expensive,” says Chris, “until you have to set up a state, country and / or city tax registration for a remote employee. Then you think it’s a bargain. We had a person on our finance team spending 10 to 20 hours a week navigating this process until we found this company.”
If you’ve had experience automating cross-state payroll, please let us know in the comment section.
Thanks for reading, everyone. — Loren