Thursday, October 19, 2017

The United States Can Afford a Higher Minimum Wage

There is evidence that the United States can stomach a raise in the federal minimum wage. Even some of the U.S. states which require higher minimum wages may have room for some more.
The minimum wage remains a contentious issue in the United States. The verdict is out on whether a raise as mandated by some larger U.S. cities will do more harm through lost jobs than good through increased income.
However, there is some consensus among economists about a tipping point, that is at what level does an increase of the minimum wage have a negative impact. Research suggests that once the minimum wage creeps up on 50% of the average wage, small businesses in particular will reduce staff.
If that is true, it’s time to check how much room some countries have as they play around with the minimum wage. Based on figures for 31 OECD members, the club’s average minimum wage is an adjusted 51% of the average wages of full time workers. The ratio ranges from 35% for the United States to 76% in Turkey. This excludes the two outliers Costa Rica with 79% and Colombia with 86%. Interestingly, half of the examined 31 OECD countries seem to follow the economists’ suggestion to keep that ratio at or below 50%.
There are several factors that may suggest the United States in particular has room to maneuver when it comes to minimum wage increases. First, at 35%, the share could theoretically rise by 15 points, which would mean, the federal minimum wage could rise from the current $9 to $12.87.
Various states or cities require higher minimum rates with Massachusetts and Washington state requiring $11. The capital Washington, DC requires the highest minimum wage of $11.50. If the $12.87 are indication for wiggle room then even Washington, DC can raise the minimum.
There is additional evidence that the United States could currently stomach a rise. How does the United States compare to the biggest OECD economies for which consistent data are available? Germany introduced a minimum wage only in 2015 which is why it was excluded from the analysis.
In fact, between 2000 and 2016, the U.S. ratio of the minimum wage as a share of the average hourly wage decreased by 2.5% from 36% to 35%. Over the period, it was as low as 31% in 2007. This compares to an increase of almost 18% for the adjusted OECD average.

Interestingly, the United States is not only the country with the lowest ratio. It is also the only large economy whose ratio dropped over the reviewed period.
There are other countries with a decreasing ratio including Ireland, The Netherlands, Australia and Belgium. However, as of 2016, their average ratio of 48% is close to the 50% ceiling and thus significantly above the U.S. ratio.

So, room to grow? Well, if the 50% ratio indeed represents a tipping point and compared to the other large OECD economies then yes.

OECD, The Economist, U.S. Labor Department 

Monday, September 25, 2017

What Scares Me about the Election Results – Beyond the Extreme Right

Yes, the AfD scares me. What scares me more is whether the future German governing coalition — in whatever shape and form it will finally materialize — will manage to suck the air out of the extremists, left and right, be delivering instead of stagnating. It can only do so by investing into the future.
This is exactly what worries me when I look at some recent McKinsey figures on venture capitalism investment in technologies of the future. The consulting company reviewed how much money flew into six different industries and created a ranking based on VC dollars spent in 2016 in the top countries. It does not look pretty for Germany.
McKinsey reviewed the following industries:
  1. Fintech 
  2. Virtual Reality 
  3. Robotics and DronesArtificial Intelligence
  4. Education Technology
  5. Autonomous Driving

Germany pops up once in these rankings. We are talking about Europe’s largest economy, the fourth largest on the planet. On the other hand, tiny Singapore and Australia outgun Germany on two rankings.
The top players are the United States and China, both maintaining the number one or two slot in each industry reviewed, except two where China ranks three.
Let’s dive into the numbers.

This is the only one of the six industries reviewed here where Germany even shows up in the ranking and that at four. Given the importance of the German banking industry, German VC spending on Fintech companies may not be surprising. However, it would be interesting to know whether the VC dollars really originated from venture capitalist companies – or from the bank’s own independent subsidiaries which are re-branded as VC companies and then decked out with the cash and left alone to find the next best investment. 
During the mind-numbingly boring TV debate between Merkel and Schulz, two industries were mentioned: automotive and education. The talk even got a little lively when Germany’s car industry was discussed. And yet, German VC spending in 2016 was not high enough to get Germany into the top five.

Arguably, one of the next big things in the car industry will be autonomous driving, something the United States and China (rank one and two, respectively) understand. It is not surprising that Japan ranks three. After all, the car industry is huge in that country. The UK also has an established car industry, even if none of it is British anymore.
I don’t begrudge Australia the number four slot. After all, Japanese, U.S. and German car makers produce in the country for the Asian market at the country’s doorsteps. Yet, I do get worked up about Germany’s car industry for failing to show up in that top five. This is the country that invented the car. It created some of the best brands with wheels attached. About 150 years, the competition gears up for the next leap and German politicians and industry representatives focus on how to ensure the survival of technology that will change.
Next education. Here is the thing. Since 2015, survey after survey has underlined how ill-equipped the German school system is to prepare students for the digital world and technology. One could perhaps go as far as to say that it is not equipped at all. Too few laptops, iPads, sometimes not even a school Wi-Fi connection. That’s the state of education technology in Germany. You’d think this is fertile ground for VC dollars. Instead, the country is outranked in VC spending not just by the United States, China, Japan and the UK. India ranks five.

Venture capitalist go out there to identify the next winners. The next winners will be the ones who get new technologies right. These technologies will be crucial for the future well-being of societies. If VC spending is any indication for a country’s recognition of a ripe field for investment, I fear, the next German government will have a lot more on its plate than adjusting to the presence of extreme right-winged thugs in parliament.

Friday, August 11, 2017

The Decline of the U.S. Shopping Mall and Franchising

It was an Austrian architect who designed the first shopping mall which opened its doors in Edina, MN in 1956. By the 1990s, 140 new malls opened every year. Then came Amazon, Netflix, eBay and online shopping. After 50 years of constant growth, no new mall was built in 2007. Between 2010 and 2013, mall visits declined by 50%, a trend that is likely to continue.
For decades, malls have been an attractive site for franchised businesses. How can they prepare for inevitable changes in the brick and mortar retail space? There are four crucial steps for a franchisor to avoid royalty revenue losses and help their affected franchisees to survive.
  1. Identify “mall” franchisees
  2. Put “mall” franchisees on a watch list
  3. Learn from best practice
  4. Adapt site selection criteria

According to Credit Suisse, about 25% of the current 1,100 U.S. malls will close by 2022. With the faltering malls, a whole host of shops and jobs will go, too. Just in 2017, about 8,600 stores are projected to close due to the ongoing collapse of the U.S. shopping mall. Many of them will be franchised stores and not just retail locations for clothing, frames or beauty products.
Think food courts. Many franchisors offer customized franchise agreements for food court locations, often with different initial and ongoing fees. Food court locations are attractive since they often require a lower investment but can generate good profit margins from a limited menu due to limited competition and excellent foot traffic.
According to Bloomberg, the average U.S. mall includes about 130 stores. Assuming that 50% of current mall stores are franchised businesses, about 71,500 franchised stores are located in a mall. If Credit Suisse’s projections are correct, 25% of these franchised stores — about 18,000 — would be affected by mall closures through 2022. That would account for about 2% of current franchised businesses in the United States.
To illustrate what the impact for a franchisor could be, let’s look at two brands that are likely to have a location in pretty much every mall, McDonald’s and Subway. Let’s also assume that a McDonald’s mall location generates about $500,000 a year with a royalty rate of 4%. For Subway, let’s assume $300,000 with a royalty rate of 8%. If the 275 U.S. malls projected to close really shut their doors between 2017 and 2022, McDonald’s and Subway need to keep a close eye on a total of up to 550 combined locations. The financial risk for McDonald’s is over $5 million in royalty revenue alone for these locations. Similarly, Subway could be looking at over $6 million of annual royalty revenues at risk.
While not a crisis for franchising, it will affect franchise systems, particularly the ones with a high share of mall location businesses. So, what should a franchisor do? First, find out how many franchisees in their system could be affected by a mall closure. These would include the ones with stores in the mall and close by. While it sounds simple, not all franchisors track their franchisees by type of location.
Second, put these “mall” franchisees on a watch list and have them help you monitor their location. This should go beyond simply looking at P&L data. How is the mall’s foot traffic? Are stores closing without any new ones opening? Is the quality of the stores in the mall going down? This is where the franchisee can help the franchisor draft contingency plans. Quickly develop relocation plans if the mall shows signs of being at risk of closure.
Third, learn from best practice. Several franchisors allow the franchise agreement to be “put on hold” after a closure caused by lease agreement issues or events that have nothing to do with a franchisee’s ability to run the business. For such periods, franchisees don’t leave the system even though their business has shut down. Some franchisors may even offer lower royalty and marketing fees for the transition period to minimize the franchisee’s losses and to ensure that the lights get switched on again quickly in a different location.
Fourth, adjust your site selection criteria. Not every mall is at risk and neither is the concept of a shopping mall doomed. Several mall operators have succeeded in creating new mall experiences and manage to attract millennials to return to the mall. Other malls specialize in luxury brands. You won’t find a Macy’s in them. Rather, they go for Louis Vuitton, Prada and the likes. And while such malls won’t likely be an alternative for low end franchise retail brands, well-heeled consumers will have a craving for a coffee, a doughnut or a burger. Still, a franchise brand’s real estate team needs to understand that the mall space has ceased to be a default site and the site selection process should reflect this.
The closure of U.S. malls is probably not a huge risk for most franchise brands. The financial risks for the franchisor is likely manageable. However, for some franchisees, the risk can be very high. Both, the franchisor and the franchisee have a good chance to manage that risk and avert a permanent closure if they collaborate closely and plan ahead for the benefit of both parties.

Sources: Bloomberg, Credit Suisse, FRANdata, IFA, LeOS Franchise Consulting, Time

Monday, July 24, 2017

The EU - from the Bottom — What a crazy belt buckle taught me about the EU

Like Mayor Jahns in Hugh Howey’s “Wool”, EU leaders should take a trip down the silo to find out whether they are removed or not. They could be surprised how much hope there still is for the EU and its promises. But they are running out of time.

My family and I just returned from a vacation on the Italian island of Sardinia. Like most tourists we visited the markets and bought little gifts for the kids and friends, mostly handcrafted things. As I am writing this, I am getting more concerned about the bull head belt buckle my son chose causing severe injury.

As the trader adjusted the belt for my son, we got to talk about our families' respective histories. Her parents had left Sardinia for Argentina where she was born. Indeed, she was named Argentina after her parents' new country. They emigrated because they literally had nothing to eat after WWII. After several years, they returned to their island, a decision Argentina now regrets. As she punched holes into the belt we just purchased, she went through a litany of Italy's economic woes, which according to Argentina were even worse on her home island. 
Rising prices, no jobs, especially for the young, the tide of immigrants who in her own words had it even worse than the Italians. It turns out, her own situation mirrored what is going on in the country and especially in Sardinia. Argentina claimed she could give us a bit of a discount this time, but wholesale prices for the next batch of goods she expected had just been raised. Other than tourism, there were no opportunities for the people of Sardinia. She continued that the island’s economy could not compete against the mainland in anything. The farms were too small and inefficient and only some rich islanders were able to reap the benefits of what the tourist industry brought to Sardinia. At this point, she sort of stopped herself as if she feared anyone else was listening.
Argentina has two sons in their early 20s. The older had emigrated to Rome, as she put it. After dropping out of a computer programming program, he is now scraping by on a job with the fashion retailer H&M which only hires the very young on temporary jobs. These jobs don't require companies to pay any benefits it seems. The younger one sat somewhat listlessly next to her, guarding the cashier and helping out. I had the impression this was not because Argentina needed his help but wanted her son to have something, anything, to do.
"The EU is not a union", Argentina said at some point. It was interesting that she didn't necessarily blame the Italian state. Yes, she did complain about how badly it handled the current situation but I believe what Argentina expressed was something like lost hope in something bigger that didn't deliver what she - and presumably others - hoped for.
On the upside, people still expect something from the EU. I saw more EU flags flying from official buildings and hotels than in most other European countries I visited. The downside is that the EU is running out of credibility. While the attention is on Brexit, unless the EU manages to conjure up tangible improvement for people like Argentina and her family, it will become the victim of local politics.
Argentina is educated, she has been around and seen things. Based on her comment on immigrants she doesn't strike me as someone who would easily fall for an extremist party. However, if people like her see her family's efforts to simply make a living, if not to advance, thwarted by corruption, the establishment hoarding opportunities for themselves vis-a-vis the state's and the EU's inability to reform, then all it needs is a local champion with a simple message to bring down one institution after the other.
Since 2016, a lot of things happened that only in 2014 most pundits and politicians would have dismissed as impossible. If politicians spent a little more time down the silo, they would have heard from Argentina and others about long term trends that many pundits simply missed.