Podcast Summary
Identifying Opportunities Amidst Challenges in the Service Industry: Principal Asset Management's expertise in public and private equity and debt, along with a 360-degree perspective, can help navigate business operations in the service industry amidst pandemic-related challenges. Restaurants and bowling alleys face unique hurdles and require creative solutions and a strong understanding of the economic landscape to thrive.
Navigating business operations, especially in the service industry, has become incredibly challenging due to the constant changes and regulations brought about by the ongoing pandemic. Principal Asset Management, with their 360-degree perspective and expertise in public and private equity and debt, can help identify compelling investing opportunities despite these challenges. Meanwhile, in the real world, businesses like restaurants and bowling alleys face unique hurdles. For instance, restaurants must adapt to changing regulations, while bowling alleys struggle with the inability to maintain social distancing and the sharing of equipment. These businesses require creative solutions and a strong understanding of the economic landscape to thrive. Adam Mozamec, the cofounder of a bowling alley arcade bar and restaurant, and chief economist at Upwork, can provide valuable insights into both the macroeconomic trends and the microbusiness challenges of these uncertain times.
Maintaining a Clean Environment with Different Operating Margins: Decades, a multi-area business, offers discounts on high-margin areas to attract customers while maintaining a clean environment through disinfection practices. Different areas have varying operating margins, with the restaurant and bar having high cost of goods sold and bowling and arcade having high margins due to massive fixed costs.
Decades, a bowling alley, arcade, and restaurant, maintains a clean environment with a long-standing practice of disinfecting shoes and stations of hand sanitizers. The business model consists of four overlapping areas: restaurant, bar, arcade, and bowling alley. While there are significant fixed costs in each area, they offer different operating margins. The restaurant and bar have high cost of goods sold, while bowling and arcade have high margins due to their massive fixed costs. The business can afford to offer discounts on high-margin areas to attract customers, making them loss leaders. The best deal for a customer depends on the specific discounts and promotions offered throughout the week. Decades' upscale atmosphere, complete with chandeliers and leather couches, provides a comfortable experience for customers looking to enjoy a cocktail while bowling or playing arcade games. The pandemic has led to additional disinfection measures for the arcade games and bowling balls, ensuring a safe and clean environment for customers.
The Value of Arcade Experience with Friends: Arcades offer more than just cheap weekday deals; they provide a valuable social experience. Businesses can use tokens as a loss leader to boost food sales and mint their own to avoid coin shortages.
While it may be cost-effective to bowl or visit an arcade on a weekday during specials, the true value comes from the overall experience and spending time with friends. From a business perspective, arcades can use tokens as a loss leader to drive food sales, but they've learned from past experiences with coin shortages and now mint their own tokens to avoid such issues. The cost of producing tokens is less than a quarter, and even if customers throw coins away, the business still makes a profit. However, proper token usage and management are crucial to avoid constant emptying of arcade games.
Challenges in the Arcade Business during the Pandemic: During crises, real estate industries including arcades must balance public safety and economic viability, adapt quickly, and maintain a 360-degree perspective to make informed decisions.
During the initial stages of the coronavirus crisis, the arcade business faced a challenging decision between keeping operations running and ensuring public safety. The speaker, a real estate manager, described how they saw a significant drop-off in demand before the government-mandated shutdown, with business down around 50% during the weekend preceding the closure. The arcade eventually shut down and waited for the state order, and when they reopened, they adapted by focusing on takeout and converting their front lawn into outdoor seating. The experience highlighted the importance of a 360-degree perspective in managing assets and making decisions, especially during crises. The real estate industry, including arcade businesses, needs to be agile and responsive to changing circumstances, balancing public safety and economic viability.
Navigating Early Pandemic Challenges for Restaurant Takeout: Despite challenges acquiring PPE and securing PPP loans, restaurants prioritized safety and communication to reopen for takeout successfully.
During the early stages of the pandemic, safety concerns were a major impediment for restaurants looking to reopen for takeout business. The anxiety was not just about having employees work in a commercial kitchen but also about the public feeling safe. Acquiring PPE was a challenge, but the restaurant was able to secure masks from their in-laws' shoe factory. Applying for a PPP loan was straightforward due to their relationship with a local bank, but they chose to delay closing the loan to maximize the forgiveness period. However, the initial structure of the PPP policy created a paradox, as businesses risked running at a loss if they brought back their staff too early and then had to maintain them on their own dime during the gap between the end of the 8-week forgiveness period and June 30th. Ultimately, the restaurant decided to forego the PPP loan. The process of reopening safely took time and required constant communication and comfort levels among staff and customers.
Uncertainty and regulations made it risky for businesses to accept initial PPP loans: Businesses faced uncertainty and strict regulations during the initial stages of the PPP loan program. Negotiations with landlords and banks led to rent reductions and loan forgiveness, but significant fixed costs remained a challenge.
During the initial stages of the PPP loan program, there was a lot of uncertainty and strict regulations, making it risky for businesses to accept the loan without knowing if they could use it effectively. The rules were later loosened, allowing businesses to reapply when they were ready to put the funds to good use. In the case of our interviewee, they gave up their first PPP loan and waited to reapply when they could cover salaries for takeout staff. In terms of rent, the interviewee acknowledged that landlords are also facing financial challenges and cannot simply waive rent payments. Instead, negotiations led to a three-month loan forgiveness from their bank and a rent reduction from their landlord. However, the high costs of renting a large commercial space meant that even with rent reductions, there were still significant fixed costs to cover.
Focusing on small businesses' fixed costs: The speaker proposes long-term, 0% interest loans to help small businesses lower their operating costs and become more viable during uncertain economic times
During the pandemic, small businesses faced significant economic challenges despite some initial help, such as PPP loans. To effectively address these issues, the speaker suggests focusing on businesses' fixed costs instead of just providing short-term cash assistance to workers. He proposes a program with long-term, 0% interest loans to help businesses lower their operating costs and become more viable during uncertain times. This approach would give businesses the ability to weather longer challenges and potentially prevent a wave of failures. The speaker's policy proposal, which is now part of the Rubio Collins bill, aims to make a significant, long-term impact on businesses' financial situations.
Expanded Unemployment Insurance in Hospitality Industry: Some economists argue expanded UI maintains demand and keeps households afloat, while others see it as a disincentive. Employers face varying challenges rehiring staff, but unemployment spending can help alleviate macro demand issues. A full industry recovery is expected, and authorities could boost demand with targeted stimulus or infrastructure spending.
The expanded unemployment insurance is a contentious issue in the hospitality industry, with some economists arguing it's necessary to maintain demand and keep households afloat, while others see it as a disincentive to work. Employers have reported varying levels of difficulty bringing back workers, with a divide between back-of-house and front-of-house staff. While acknowledging the reality of the situation, it's important to remember that this is not a binding constraint for businesses currently facing demand issues. The macro demand problem is the primary constraint, and unemployment spending can help alleviate it by putting cash in consumers' hands. Looking ahead, there's a belief that the hospitality industry may face structural changes post-pandemic, but a full recovery is expected once the virus is under control. The authorities could also take measures to boost demand, such as infrastructure spending or targeted stimulus packages.
Global manufacturing realignment accelerated by recession: The demand side of the economy is expected to bounce back strongly, but the recovery could be slow without sufficient business support. Preserve businesses to prevent a prolonged and painful recovery.
The global manufacturing realignment, driven by the ongoing trend of people spending more on leisure and hospitality as they get richer, was accelerated by the recession. This trend is unlikely to change even after the vaccine is widely distributed. The demand side of the economy is expected to bounce back strongly, but the recovery could be slow if sufficient support is not given to businesses in the sector to ensure they are ready to rehire when demand returns. The loss of intangible capital, such as entrepreneurship and knowledge, could lead to a prolonged and painful recovery. To prevent this, lawmakers need to consider policies that help preserve businesses in the sector and prevent a generation of entrepreneurs from being wiped out. Other areas of economic concern include the trend towards working from home. Regarding the speaker's business specifically, they do not expect a return to normal until the virus is gone, and the recovery could take a long time. In addition to supporting small businesses, lawmakers should consider other measures to mitigate the economic impact of the crisis.
Economic recovery from pandemic requires multiple approaches: Continued expanded unemployment insurance, relief money to states, supporting small businesses, and remote work's success leading to future hiring plans impact the economy
The economic recovery from the pandemic requires a multi-faceted approach. This includes continuing expanded unemployment insurance, providing relief money to state and local governments, and supporting small businesses. The bullish trend towards remote work, which was already on the rise before the pandemic, has accelerated due to the forced experimentation brought on by the crisis. Companies are finding that remote work is more successful than they anticipated, leading to increased hiring plans for the future. This structural change in the workforce could make a significant impact, even if only a portion of the workforce continues to work remotely. Adam Ozimek, the Chief Economist at Upwork, provided valuable insights into these topics during a recent podcast interview.
Uncertainty caused by PPP's finite funding: The pandemic highlighted the need for long-term solutions beyond short-term PPP aid, with potential use of tokens and creative business models for restaurants.
The capped Paycheck Protection Program (PPP) during the pandemic created unnecessary stress and timing issues for businesses, as it made the funding seem finite. If the program had been unlimited, businesses wouldn't have had to worry about the timing of applications. Additionally, there's a call for more long-term solutions instead of short-term interventions, like the PPP, which only provides aid for a limited time. Another intriguing idea discussed was the potential use of tokens and low-cost loss leaders, such as arcade games and bowling, to attract customers to restaurants. Looking ahead, the restaurant business model may see long-term changes as a result of the pandemic, with creative tweaks to existing models becoming more common. Overall, the conversation emphasized the importance of considering long-term solutions and adaptations to the business landscape in response to the pandemic.
Bloomberg's Money Stuff Newsletter Becomes a Podcast: Bloomberg's popular Money Stuff newsletter is now a weekly podcast, hosted by Matt Levine and Katie Greifelt, available on major podcast platforms.
Bloomberg is bringing their popular Money Stuff newsletter to life as a new podcast. Hosted by Matt Levine and Katie Greifelt, Money Stuff will air every Friday and cover Wall Street finance and other related topics. Listeners can tune in on Apple Podcasts, Spotify, or any other podcast platform. The podcast is an extension of Matt's successful newsletter, which has gained a large following for its insightful and entertaining take on the world of money and finance. With Matt's expertise and Katie's engaging style, Money Stuff is sure to be an informative and enjoyable listen for anyone interested in money matters.
