What We Learned This Year
We reviewed all of the stories we highlighted in the Morning Report this year to find the 24 most important lessons of 2021 for business owners.
Good morning!
This is a special year-end, bonus wrap-up of the Morning Report. It’s been another wildly unpredictable year, and we’ve sought to capture the most important takeaways from the year’s most important stories. Some of the lessons are completely new. Some are concepts we were anticipating, but the pandemic accelerated their arrival. And some are things we should have been doing all along but never quite got around to confronting. There’s a silver lining in there.
The next edition of the Morning Report will be published on Monday. Here’s to a happy and safe new year with lots of promising new lessons. -- Loren
RETAIL
It’s almost always a good idea to own the real estate: The last chain of video rental stores, a family-owned business called Family Video, finally succumbed to Netflix and Covid in 2021, but the real question is how the business managed to last as long as it did: “‘The impact of Covid-19, not only in foot traffic but also in the lack of movie releases, pushed us to the end of an era,’ wrote Keith Hoogland, the company’s CEO, in a statement announcing the closures. But the Hooglands don’t appear to be fully out of business. They own the real estate that underpins the Family Video stores, which Forbes estimated was worth about $400 million when we profiled Hoogland in 2017. ‘We will remain tied to our communities through our Legacy Commercial Property division, owning and managing buildings in the community,’ he confirmed in Tuesday’s statement.”
“For years, Family Video operated as a way to quickly pay off the mortgages on those properties, which Hoogland knew would be much more valuable in the long run.” READ MORE
FINANCE
The big banks really don’t care about smaller businesses—a lesson even prominent loan broker Ami Kassar had to re-learn: “I always try to steer my clients away from the big banks, cautioning them that if something goes wrong in the loan process and we run into a problem somewhere along the way, we could end up lost in a maze between multiple states, and everything could steer out of control quickly. Over the last 24 hours, I have learned that I should practice what I preach. An inbound wire to my account (yes I confess, I bank at one of the big banks) miraculously has not shown up for a week. Done being patient, I grew determined to tackle the mammoth monster and find my money.”
“Here is my status over the last 24 hours. I have spent 199 minutes (that’s three hours and nineteen minutes of my life) on 14 phone calls to seven different departments and spent another hour at my local branch.”
“The furthest I have gotten is that a researcher will be assigned to my claim, and I can expect a response within 10 business days. And the managers and supervisors are in ‘a meeting.’ After I have found my money, I am committing to a change.” READ MORE
Taking on investors to finance fast growth is a dangerous game, a lesson we re-learned in this story about Ample Hills, a Brooklyn-based ice cream company that attracted the attention of Oprah and Disney: “It had nothing to do with the pandemic: Even as annual sales had grown, reaching nearly $10.7 million at their peak, so had the losses. Over 2018 and 2019, the company lost about $13 million. ... What happened to the ice cream company the New York Times dubbed ‘Brooklyn’s Most Beloved’?”
“Interviews with [founders] Smith and Cuscuna, along with more than a dozen employees, from scoopers to executives, reveal the perils of what can happen when a hot startup puts growth ahead of business fundamentals.”
“Disney’s interest also helped the company attract investors, he says, which created ‘a runaway train of raising and raising and growth and growth.’”
“‘It was a fairytale,’ says Greg O’Connell, one of Ample Hills’ biggest investors. ‘They were kind of living in a dream world because their marketing was so great.’” READ MORE
The pandemic forced many businesses to do things they could have been doing all along, including spending capital cautiously and prioritizing profit: “Businesses worldwide began closing their doors [last March] and everyone in the entrepreneurial community started predicting the Great Startup Apocalypse. Many seasoned startup observers — from venture capitalists to economists — were expecting destruction of cataclysmic proportions, bigger than that of the dot-com boom and bust of the early 2000s or the financial crisis of 2008. ‘We suggest you question every assumption about your business,’ Sequoia Capital wrote in the aforementioned letter that would soon go viral in the wider business-tech community. ... In other words: hunker down, get lean, and prepare to weather the storm.”
“Every startup immediately trimmed the excess fat from their budgets in ways they couldn’t have all possibly done pre-Covid-19.”
“The second shift spurred by the pandemic was — as you surely already know — a shift to remote work. ... Nobody has to commute, employees that work from home are more likely to engage in work activities during nontraditional work hours, and office small talk is eliminated.”
“In the Covid-19 world, sales teams can close big deals via Zoom. Better yet, the same salesperson can target two enterprise deals on opposite sides of the world in ways that could never have been done previously.”
“You’ve no longer got a recipe for a startup apocalypse. You’ve got yourself the perfect scenario for massive growth ...” READ MORE
SUCCESSION
Business owners who fail to plan for succession are seeding chaos: “Ivo Puidak, who cooked for Presidents Jimmy Carter and Ronald Reagan as the head chef at the Federal Reserve Bank in Chicago, built the Galena Canning Company into a thriving specialty food business, selling premium barbecue sauces, salsas and seasonings around the country. But Mr. Puidak, who based his business in Galena, Ill., a resort town about 160 miles west of Chicago, never put a succession plan in place, not even after he learned he had cancer in 2017 and was given only a few months to live. Neither his wife, Shelly, nor their only child, Max, wanted to take over the business, so the family decided to sell. The sale was set to close on March 30, 2020. But two weeks before it could go through, Mr. Puidak died.”
“‘We can tell them they should do something for 1,000 years, but business owners hate to be told what to do,’ said Brian Baum, managing director at Interchange Capital Partners in Pittsburgh.” READ MORE
MANAGEMENT
Unsexy businesses can deliver sexy returns: “This is a decidedly unpolished, unglamorous approach to startup culture that [Nick] Huber, who owns a self-storage company, evangelizes. As Silicon Valley-size fantasies have punctured the imaginations of culture at large over the past decade, his message is practically heresy. Huber suggests entrepreneurs choose a dramatically different, but perhaps more lucrative, path: low-risk, uncompetitive businesses, rather than passionate, world-changing ideas. He’s coined his approach ‘The Sweaty Startup’ — now a podcast, a blog, an online course, and potentially a book — which gives it a ring of one of the many commercial philosophies of entrepreneurialism pedaled over the decades.”
“‘The Sweaty Startup’ ... is all about achievability: Create a service business. Do it better than competitors. Make a couple hundred thousand a year, work 40 hours a week or so, and leave plenty of time for family, friends, and hobbies.”
“His list of money-making ‘Businesses I Love’ includes plumbing, firewood delivery, and maid services, while ‘Businesses I Hate’ includes everything most entrepreneurs dream of: app development, bakeries, apparel.”
“His point: there’s too much competition for the fun stuff — so go for the scut work. ‘People don’t want to hear this stuff,’ Huber says.” READ MORE
Twenty years later, Jim Collins’ Good to Great doesn’t seem as great as it once did: “Collins isn’t the first management thinker to imagine a company as a machine; it remains the dominant metaphor in business books perhaps because that means all the messy human stuff can be left out. Collins doesn’t care much about markets, competition, the shifting sands of cultural mores. In his quest for timeless truths, context cannot matter. But it does matter. Winston Churchill — who Collins loves to cite as an example to follow — was a great leader in wartime but not before or afterward. He saved lives in Europe but lost millions in Bengal.”
“Collins’ definition of greatness is bewilderingly arbitrary: Fortune 500 companies between 1964 and 1999 that achieved returns 6.9 times the stock market over 15 years. Out of 1,435 companies, just 11 meet these criteria.”
“Why consider only publicly traded companies and ignore private, family-, or employee-owned businesses? Would a 14-year run or returns 6.8 times the market make a business merely good?”
“The belief on which the book relies, that stock price alone anoints the great, makes reading it today feel inadequate, ideological, and naive. Good in parts perhaps, but not great.” READ MORE
Despite widespread acceptance, some business models just don’t work—take restaurants, for example: “We learned that chefs can run rotten kitchens even as they preach the virtues of kindness to the public. That, even during a global health crisis, owners will flagrantly jeopardize workers’ safety if it means more money. That diners still see servers as objects in their periphery, and that the toll of catering to every entitled customer can become unmanageable. That being labeled ‘essential’ is not the honor it sounds like. We learned that, even in death, the crucial contributions of a talented-but-unknown career cook can go unrecognized by the famous chef whose name is on the restaurant. We learned, in short, that there is too much suffering, at every level.”
“The overworked dish crews who are forced to close restaurants at night before opening them the next morning, often with no sleep in between.”
“The line cooks and servers who silently endure verbal attacks from racist customers and abusive managers.”
“The owners whose very livelihoods are at risk because of the cruel financial realities of this past year unable to find meaningful government support when it mattered most, even as those same leaders demanded that dining rooms remain dark.” READ MORE
Diners have to be convinced to pay more: “Operating on the thinnest of margins, restaurants often engage in a race to the bottom to offer diners ‘value’ and keep them coming back. They buy cheap ingredients, pay low wages and stretch people to their limits. In many restaurants, immigrants and people of color are marginalized, and reports of sexual harassment and assault are widespread. And restaurant culture more broadly shames employees for taking care of themselves, valorizes abuse as ‘tough love’ and shows little regard for work-life balance. This can be especially true in high-end, prestigious restaurants. They’re often worse places to work because they capitalize on the résumé-building value of their reputations, extracting even greater sacrifices from employees.”
“Restaurants’ staffing crises were not created by former employees opting to collect unemployment benefits rather than return to work, as some people have argued.”
“They have reflected on the abuse, exploitation and lack of safety they endured in kitchens and dining rooms, and questioned whether or not to return.”
“If restaurants are to raise their wages, grow their staffing rosters and improve their cultures, diners will have to pay more to dine out and should embrace those increases as expressions of their own values.” READ MORE
PRICING
Dollar stores have low price points but surprisingly high margins: “Dollar stores count on customers either not being able to afford buying larger sizes elsewhere, or simply not doing the math. One of Dollar Tree’s founders, Macon Brock, admitted as much in his 2018 autobiography. ‘When a customer walked into our store, she could shut off her brain. She didn’t have to think, didn’t have to calculate how much she was spending. All she had to do was count: one, two, three, four, five, six. I have six items, and I have $6. I can buy this.”
“For every $1 in sales, Dollar General and Dollar Tree earn an average gross profit of $.30. That’s higher than rivals like Target ($.28) and Walmart ($.24).”
“That $1 Old Spice deodorant might seem like a good deal. But at .8 ounces, it’s less than one-third the size of the standard 3-ounce stick—and on a per-unit basis, it’s significantly more expensive than the larger-sized offerings at other retailers.” READ MORE
It’s a good idea to test new pricing schemes before implementing them: “For $20 during the week—$25 on weekend evenings and other peak times—adults received a movie ticket plus a wristband entitling them to unlimited popcorn, pizza, chicken tenders, soda, candy and other special menu items. Tickets for the show alone sold for $12. ‘I have wanted to redo the business model since I got into the business,’ said [Jon] Goldstein, who built his first movie theater, in Meadville, Pa.,15 years ago. ‘Without the pandemic, I might have been too busy to try this.’”
“The goal of his all-inclusive package was to drive traffic to the Woodhaven theater, which had been struggling to attract people even before it closed for 15 months during the pandemic.”
“But getting customers in the door proved challenging. On Labor Day weekend, the 1,500 tickets sold were half of Mr. Goldstein’s target, and he said the theater has lost roughly $15,000 a week since reopening in July.”
“Some customers didn’t like the new pricing concept, either. ‘If you opt for ticket only, NO CONCESSIONS allowed. Nothing to drink, or eat,’ one customer wrote on Yelp. ‘Not sure what brainiac thought that one up, but we all almost walked out.’”
“‘I take full credit for being the brainiac that thought it up,’ Mr. Goldstein said.” READ MORE
MARKETING
Sales really don’t have to be made face-to-face: “In some ways, real-estate YouTubers like [Enes] Yilmazer are providing today’s answer to the MTV Cribs phenomenon of the early 2000s, offering the masses a rare glimpse at how the 0.1 percent really live. But rather than getting a peak through the eyes of a movie star or a suave celebrity real-estate agent, like on shows such as Bravo’s ‘Million Dollar Listing,’ they’re seeing these houses through the eyes of a regular guy just like them. Two years ago, Mr. Yilmazer and his longtime friend Michael Ayers started the channel with just a handheld camera, filming any house a high-end real-estate agent would let them into, he said. Now, as they grow more sophisticated with their production, YouTubers like Mr. Yilmazer are shaking up how high-end real estate is sold in cities like Los Angeles, New York and Miami.”
“They are making YouTube, the Google-owned video website, an increasingly important marketing channel for even the most privacy-obsessed home sellers and their real-estate agents.”
“The success of these real-estate channels has led to a rush of new copycat channels, some of which merge real-estate content with videos about designer cars, watches and get-rich schemes.” READ MORE
Even the most basic blue-collar businesses can be promoted on social media: “The videos are remarkably soothing: the dulcet tones of a man narrating his day-to-day as a carpet repairman, all the while repairing a piece of rug besmirched by stains or torn up by a kitty bored with its scratching post. At first glance, this probably sounds a bit drab, watching some guy chronicle his work servicing homes and businesses across the Bay Area. Carpet Repair Guys, a Santa Clara-based carpet repair shop, has more than 540,000 followers on TikTok — and 13 million likes across all his videos. Many of owner Josh Nolan's videos are tagged #oddlysatisfying, the honorific given to videos of slime being plopped on a table or random folks scooping ice cream or paint from buckets.”
“His most popular video doesn’t even have any jokes. In it, he speaks about the virtues of word-of-mouth referrals for his business; boosted by TikTok’s cryptic algorithm, it has 16 million views.” READ MORE
Businesses that used to fight for shelf space at Whole Foods or Walmart are now selling through startup delivery services like Gopuff: “These startups have created an opportunity for up-and-coming food brands to get exposure to new customers as they join the platforms. Rather than sitting on the shelf at a grocery store along with about 40,000 items, these products are competing with about 2,000 items on startups' apps. And many of the delivery startups highlight small and local businesses.”
“Farmer's Fridge has used Gopuff to break into new markets, selling its products on the platform in Detroit and Cincinnati before establishing relationships at local Target locations or setting up its vending machines ...”
“Pure Green, a smoothie brand that started out operating its own stores but has expanded into selling at retailers, has struggled to make shipping directly to consumers through UPS and FedEx financially viable ...”
“Selling through Gopuff, by contrast, gets the product to customers in less than an hour. ‘That's a game changer for CPG companies.’”
“Gopuff's advertising options have a better return than more established options, such as Google and Facebook, Pure Green's Franklin said. ‘Our ad guy's like, Wow, don't put your money into Facebook ads.’” READ MORE
The privacy restrictions affecting digital marketing are prompting companies to collect their own customer data, which they should have been doing all along: “Across nearly every sector, from brewers to fast-food chains to makers of consumer products, marketers are rushing to collect their own information on consumers, seeking to build millions of detailed customer profiles. Gathering such data has long been a priority, but there is newfound urgency. Until now, most advertisers have depended heavily on data from business partners, including tech giants and ad-technology firms, to determine how to focus their ads. But all of the traditional tactics are under assault.”
“Brands are deploying an array of tactics to persuade users to surrender data to the brand itself—loyalty programs, sweepstakes, newsletters, quizzes, polls and QR codes ...” READ MORE
Discounting can be a very good way to destroy a brand, as we were reminded by Subway’s $5 footlong promo: “Within a year [of the promotion’s introduction in 2008], foot traffic skyrocketed across the franchise’s thousands of locations. Revenue from $5 footlongs alone topped $3.8 billion. It was, according to many industry analysts, one of the most successful promotions in the history of American cuisine. But the deal wasn’t so hot for Subway’s franchisees. Eager to grow at all costs, Subway refused to let the promotion die. As inflation drove up the cost of doing business, the $5 footlong became financially unsustainable for many of the independent entrepreneurs who owned the company’s eateries.”
“In the face of opposition, Subway discontinued the offer in 2018. But less than 2 years later, it was back on tap again.”
“During a time when many franchisees saw a 40-80 percent decrease in sales due to COVID-19, the promo was reinvented again — this time, as a $10 deal for 2 footlongs.”
“Though Subway didn’t force its franchisees to participate, many felt pressured to do so, since the chain’s contract stipulates that an agreement can be terminated for nearly any reason.”
“Just two weeks into the planned 11-week promotion, the $5 footlong was laid to rest for a third time.” READ MORE
ECOMMERCE
Shopify is a far more supportive environment for businesses than Amazon: “For $30 to $2,000 a month, Shopify offers sellers more than a dozen services to run an online store, from the actual e-commerce website to inventory management to payment processing. Its technology now undergirds the websites of giant retail chains such as Staples and Chipotle Mexican Grill; recently ordained public companies that grew up on the platform, including shoemaker Allbirds and medical scrubs maker Figs; and the retail side-hustles of Kylie Jenner, Taylor Swift, Lady Gaga, and other celebrities. But the company’s biggest impact has been at the smaller end of the scale, in the vast constellation of mom and pops, venture-capital-backed startups, influencer mini-moguls, twee entrepreneurs, merch heads, and more obscure outfits, like Offlimits—a two-person New York City startup trying to reinvent, of all things, breakfast cereal.”
“When businesses everywhere had to close en masse, Shopify armed them with the tools to become instantaneous online stores. While Amazon’s reputation as a vampiric partner to merchants was reinforced in 2020 by sellers’ testimony in front of a congressional subcommittee investigating Big Tech, Shopify suddenly emerged as their biggest ally.”
“[Amazon] will happily risk alienating small businesses by knocking off their products or soliciting new competition, if it means lowering prices and accelerating shipping times. Shopify, on the other hand, has a romantic view of the merchant—its executives rapturously extol the virtues of ‘democratizing commerce’ and ‘making entrepreneurship cool.’”
“Bezos and his colleagues believed that supporting small retailers and their online shops was never going to be a large, profitable business. They were wrong—small online retailers generated about $153 billion in sales in 2020, according to AMI Partners. ‘Shopify made us look like fools,’ says the former Amazon executive.” READ MORE
MANUFACTURING
Just-in-time manufacturing has a serious flaw: “From fashion to food processing to pharmaceuticals, companies have embraced Just In Time to stay nimble, allowing them to adapt to changing market demands, while cutting costs. But the tumultuous events of the past year have challenged the merits of paring inventories, while reinvigorating concerns that some industries have gone too far, leaving them vulnerable to disruption. As the pandemic has hampered factory operations and sown chaos in global shipping, many economies around the world have been bedeviled by shortages of a vast range of goods — from electronics to lumber to clothing.”
“The most prominent manifestation of too much reliance on Just In Time is found in the very industry that invented it: Automakers have been crippled by a shortage of computer chips — vital car components produced mostly in Asia.” READ MORE
And yet, the lack of inventory has worked out surprisingly well for car dealers, who have enjoyed lower costs and higher prices: “Rick Ricart, president of Ricart Automotive Group in Columbus, Ohio, told Morning Brew that a recent sale that would have taken four hours to make before the chip shortage was closed in 52 minutes. Customers no longer wait for a model with an additional feature to come along, because no one knows for sure when that will be. ‘I like this world,’ said Brian Miller, president of Manhattan Motorcars and owner of luxury car dealerships in New York. Sales are down 20 percent, he said, and depending on the model, customers are waiting anywhere from six-to-18 months for their new car due to the semiconductor shortage. Still, 95 percent of everything coming in sells almost immediately, so Miller is pleased.”
“Auto retailers benefit from lower operating costs with less inventory, and the supply-and-demand imbalance means buyers pay more for new and used vehicles, sometimes thousands of dollars above the manufacturer’s suggested retail price.” READ MORE
HUMAN RESOURCES
Higher wages can benefit the business as well as the employees: “[Charlie Braun, owner of a rubber parts manufacturer in Cleveland] raised wages for some employees three times this year. Starting pay for machine operators, the toughest position to fill, jumped by $4.55 to $18.25 an hour, and to $19 for the night shift. The early signs appear favorable, if initially bumpy. Custom Rubber Corp.’s headcount climbed to 124 in July from 91 at the end of January. Profit margins hovered between 5 percent and 6 percent in recent months, roughly double the 3 percent the company had come to expect in a good year. Labor costs, including taxes and benefits, now account for about 17 percent of sales, up from 12 percent eight years ago. But the extra labor has helped CRC to fill more orders, and sales rose nearly 50 percent in the first seven months of 2021 versus a year earlier.”
“[Braun] blames himself, and the manufacturing industry, for not raising wages sooner and helping fuel the current labor shortage.”
“‘I milked the recession for all it was worth in terms of suppressing wages and not increasing wages,’ he said. ‘In hindsight, I probably leaned on that one or two years longer than I should have.’” READ MORE
Unlimited time-off policies don’t work, but mandatory time off might: “One 2018 study found that employees at companies with unlimited PTO policies took fewer vacation days on average than employees at companies with traditional PTO policies. Without guidelines around how much time off to take, employees are unsure how many days is ‘too many,’ and norms end up being set by individual managers, who might not be taking enough themselves. So what's the big deal if people don't max out their vacation days? For some executives, the problem is burnout.”
“The simplest solution: Set a minimum number of vacation days. That's exactly what they did at Lessonly by Seismic, a software startup based in Indianapolis, which recommends that employees take a minimum of 20 days off a year.”
“That's on top of the two weeks off that everyone gets yearly — the week between Christmas and New Year's, as well as the week of July 4th — and the other observed company holidays.” READ MORE
There can be real advantages to hiring people who need a second chance, especially during a labor shortage: “Down North Pizza has quickly made national best-of lists for its Detroit-style square pies. The buzz is so big that the bestseller often changes depending on what was recently featured in the press, said executive chef [and co-founder] Michael Carter. ‘Because of The New York Times, it's been the Uptown Vibe,’ he said. That's the shop's vegetarian pie, laden with julienned peppers, sauteed mushrooms, kale, red onions, and their spin on tomato sauce, called ‘norf’ sauce: A secret recipe that is sweet, spicy and smoky. But that runaway success is built on a mission: to hire formerly incarcerated people, and convince other employers to do the same.”
“‘We have over 60 years of jail time in the kitchen,’ said owner Muhammad Abdul-Hadi. ‘We are all living proof that you can build a business around the formerly incarcerated.’”
“Down North Pizza is in a neighborhood that sees 1,000 people return from prison annually, according to the Philadelphia Reentry Coalition.” READ MORE
Amazon has emerged as a de facto setter of wages and benefits for a large pool of low-skilled workers: “[Paul] Verst recently gave employees a $3-an-hour raise to compete with Amazon. Starting pay now ranges from $16 to $19 an hour. He said his [Kentucky-based] family-owned company aims to retain employees by connecting with them personally. He signs a birthday card for each worker. Tenures for many workers have averaged 10 to 15 years, he said. Still, the company has lost a handful of employees to Amazon, which has advertised pay of $20 or more an hour and $1,000 sign-on bonuses in the area. ‘It was for economic reasons that they left,’ he said.”
“[Amazon] is planning mock fulfillment centers in high schools to plant the seeds of future careers, sending recruiters to local fairgrounds and bombarding job boards with promises of large sign-on bonuses and pay—in some cases nearly triple the federal minimum wage.”
“‘Amazon is the standard-bearer,’ said Zach Pasquariello, a former Chewy area manager in the region. ‘Chewy was always following in Amazon’s footsteps and trying to do what Amazon does, but we were always a little bit behind.’”
“‘If they are not leading [a wage increase], they are reinforcing it,’ said Lynn Reaser, a professor at Point Loma Nazarene University and longtime economist at financial institutions that include Bank of America Corp. ‘Everyone is comparing job offers, and they always have Amazon as a benchmark.’” READ MORE
And if you’re looking for still more lessons, check out the final 21 Hats Podcast episode of 2021: We take a look back at the conversations we’ve had this year, including what it’s like to sell your business, to fire an employee, to use your own home as collateral, to make a bet-the-company decision, and to deal with mental health issues. These are some of our happiest, smartest, funniest, and most difficult exchanges from the past year.
You can subscribe to The 21 Hats Podcast wherever you get podcasts.