Category Archives: Business and Economy

IKEA in China allowing all sorts of activities in addition to shopping

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IKEA in China is allowing patrons to hang out:

Sociologist Sangyoub Park forwarded us a fascinating account of Ikea’s business model … for China. In the U.S., there are rather strict rules about what one can do in a retail store. Primarily, one is supposed to shop, shop the whole time, and leave once one’s done shopping. Special parts of the store might be designated for other activities, like eating or entertaining kids, but the main floors are activity-restricted.

Not in China. Ikea has become a popular place to hang out. People go there to read their morning newspaper, socialize with friends, snuggle with a loved one, or take a nap. Older adults have turned it into a haunt for singles looking for love. Some even see it as a great place for a wedding.

This stands in contrast to efforts in some McDonald’s in the United States to limit how long patrons can stay. But, this stance might be ingenious for more companies:

1. It may raise the image of the company. It is a cool place to be. Oh yeah, you can buy stuff there as well.

2. In areas that lack public spaces, these retail locations can serve an important function.

3. It may just lead to more sales. Unfortunately, stories like this often don’t include this information.

To improve health and cut costs, UnitedHealth spending $150 million on affordable housing

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Having affordable housing is linked to better health outcomes so insurance company UnitedHealth is spending some money on affordable housing units:

The firm is taking an unusual step for an insurance company –investing $150 million to build low-income housing in a dozen states…

UnitedHealth’s big push into housing isn’t charity. The company derives benefits from it, too, including tax credits.

But Kate Rubin, vice president of social responsibility for UnitedHealth Group, says the real payoff is longer term.

“Studies show that without stable homes people are sick more often,” says Rubin. “There’s more undiagnosed illness and people are more likely to seek care in emergency rooms.”

That’s expensive for insurance companies, for patients and for the rest of us, who pay the price in higher premiums and taxes.

It will be interesting to see how many units UnitedHealth is able to construct for that kind of money. It seems like the biggest payoff would be if they are able to have sufficient economies of scale, enough units to see significant long-term returns.

This also hints at the need for affordable housing more broadly in the United States and the inability of others to construct it. Public housing in the United States is limited and has had a variety of issues for decades. Lower levels of government, whether states or metropolitan regions, or local government, have had either a hard time finding the right mix of regulation and incentives or haven’t paid any real attention to affordable housing. If few organizations are stepping up to provide or prompt public housing, perhaps insurance companies are a good bet.

How long should customers be able to stay at a McDonald’s?

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McDonald’s has been part of some recent controversy over how long customers should be able to stay:

In the past month, those tensions came to a boil in New York City. When management at a McDonald’s in Flushing, Queens, called the police on a group of older Koreans, prompting outrage at the company’s perceived rudeness, calls for a worldwide boycott and a truce mediated by a local politician, it became a famous case of a struggle that happens daily at McDonald’s outlets in the city and beyond…

McDonald’s is not alone in navigating this tricky territory. Last year, a group of deaf patrons sued Starbucks after a store on Astor Place in Lower Manhattan forbade their meet-up group to convene there, complaining they did not buy enough coffee. Spending the day nursing a latte is behavior reinforced by franchises like Starbucks and others that seem to actively cultivate it, offering free Wi-Fi that encourages customers to park themselves and their laptops for hours…

“As long as there have been cities, these are the kind of places people have met in,” said Don Mitchell, a professor of urban geography at Syracuse University and the author of “The Right to the City: Social Justice and the Fight for Public Space.”…

But the leisurely cafe culture and the business plan behind fast food are in opposition. Although signs hang in many McDonald’s stores instructing customers to spend half an hour or less at the tables, Ms. McComb said there was no national policy about discouraging longtime sitting. “The individual franchisees do what they feel is best for their community businesses,” she said. “In the case of Flushing, that franchisee welcomed those guests for years, and it was only when other customers felt they were no longer welcome that he attempted to adjust the visit time with the customers.”

Are these businesses solely for profit or do they also function as social spaces? Clearly the latter is true to some degree, particularly in a country that tends to lack many public spaces or a culture of cafes and pubs. When there are few other places to go, particularly for the economically disadvantaged who have less ability to carve out private spaces (whether big houses or their own cars), why not make a McDonald’s or a Starbucks into a third place between home and work? Going even further, could it be that McDonald’s is one of the few public places that will take you in if you have little?

Argument: businesses should use scientific method in studying big data

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Sociologist Duncan Watts explains how businesses should go about analyzing big data:

A scientific mind-set takes as its inspiration the scientific method, which at its core is a recipe for learning about the world in a systematic, replicable way: start with some general question based on your experience; form a hypothesis that would resolve the puzzle and that also generates a testable prediction; gather data to test your prediction; and finally, evaluate your hypothesis relative to competing hypotheses.

The scientific method is largely responsible for the astonishing increase in our understanding of the natural world over the past few centuries. Yet it has been slow to enter the worlds of politics, business, policy, and marketing, where our prodigious intuition for human behavior can always generate explanations for why people do what they do or how to make them do something different. Because these explanations are so plausible, our natural tendency is to want to act on them without further ado. But if we have learned one thing from science, it is that the most plausible explanation is not necessarily correct. Adopting a scientific approach to decision making requires us to test our hypotheses with data.

While data is essential for scientific decision making, theory, intuition, and imagination remain important as well—to generate hypotheses in the first place, to devise creative tests of the hypotheses that we have, and to interpret the data that we collect. Data and theory, in other words, are the yin and yang of the scientific method—theory frames the right questions, while data answers the questions that have been asked. Emphasizing either at the expense of the other can lead to serious mistakes…

Even here, though, the scientific method is instructive, not for eliciting answers but rather for highlighting the limits of what can be known. We can’t help asking why Apple became so successful, or what caused the last financial crisis, or why “Gangnam Style” was the most viral video of all time. Nor can we stop ourselves from coming up with plausible answers. But in cases where we cannot test our hypothesis many times, the scientific method teaches us not to infer too much from any one outcome. Sometimes the only true answer is that we just do not know.

To summarize: the scientific method provides ways to ask questions and receive data regarding answering these questions. It is not perfect – it doesn’t always produce the answer or the answers people are looking for, it may only be as good as the questions asked, it requires a rigorous methodology – but it can help push forward the development of knowledge.

While there are businesses and policymakers using such approaches, it strikes me that such an argument for the scientific method is especially needed in the midst of big data and gobs of information. In today’s world, getting information is not a problem. Individuals and companies can quickly find or measure lots of data. However, it still requires work, interpretation, and proper methodology to interpret that data.

Male British hedge fund employees worried about their appearance, link it to wealth

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Even as women are presented with pressure in regard to their appearance, some men face similar pressure. Take this case of male employees at a British hedge fund:

We got our hands on an academic paper published last week by the British Sociological Association, which muscles into the attitudes of male traders towards their bodies, ageing and fitness, as observed at one (thus far unidentified) City-based hedge fund…

According to the study, titled, “Built to last: ageing, class and the masculine body in a UK hedge fund,” people at the mystery fund admit they get teased for not keeping fit, think affluence is linked to physical activity and exercise to offset the negative perceptions of ageing … oh and er, lie about getting work done.

“Conversations on the floor suggested that traders explicitly rejected or mocked the idea of Botox or other forms of cosmetic treatment,” goes the report.

“Yet, during interviews some mentioned dyeing their hair, having regular massages or going on an intense boot camp holiday in order to ‘fix’ parts of their body.”

The acceptable masculine appearance in this setting is interesting. But, it would then be worthwhile to hear more about how appearance gets linked to success and status within the firm. Do fellow employees perceive fit workers to be more successful? Do they get earlier promotions? Did male traders always have to be fit or get benefits from being fit or is this a relatively new phenomenon? This may be another piece of evidence that economic trading is not just about the numbers. As a number of sociological studies have found, other factors other than individual talent or intuition affect abilities in the finance industry including emotion and social networks.

Starbucks looking to have more stores that match local design

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Starbucks is a global brand but the company is looking to have more stores that line up with local style after moving designers out of Seattle:

As the designers became more familiar with their surroundings, they began to incorporate the communities’ stories into the designs. There are thoughtful touches like furniture made from reclaimed basketball court wood at the Barclay’s Center in Brooklyn. And a brass-instrument chandelier hanging from the ceiling in the new Canal Street location in New Orleans. But even more interesting than that was the cultural observations the designers were able to make.

With more people on the ground, they began noticing things that might make a difference in not just the aesthetics, but how a particular customer might want to experience the shop. In metropolitan U.S. cities, for example, people tend to come in pairs or alone. They’ll saddle up to a long community table next to a stranger without giving it a second thought. In more urban settings, people will just sit right next to each other, alone but collectively together,” he explains.

While in places like China or Mexico City, the Starbucks experience is much more group-oriented. “People are in bigger groups, so you have think differently about the seating there.” he says. “They won’t crowd together in a banquet like they would in New York City.” This drove the designers to place more individual stools in the shops, so people could drag them around, creating impromptu group seating areas. The design in the Kerry Center location in Beijing, feels like a lounge, with a “coffee workshop” on the second level meant to teach a predominantly tea-focused culture about coffee…

Much of the mass customization comes in the form of colors and materials. For example, in Miami and Los Angeles, the design team is more likely to use a lighter palette of colors to reflect the abundance of sunlight. Southern cities need furniture that is cool to sit on, and beachy locations need durable furniture to account for the sand that gets tracked in. “We were looking at how the floor had worn over 10 years because people were walking in with sand on their feet,” Sleeth says about a store in Miami.

And for local design for all those Starbucks on the similar stroads of suburban America? The examples in the article are primarily from urban neighborhoods that have definable aesthetics.

Starbucks has long claimed to desire to be a “third place” between home and work. How much does local design help the company meet such goals? Do customers feel more at home (and happier and spend more money) in such stores?

Finally, does this sort of local design help people forget the fact that Starbucks is a major multinational corporation? Does it relieve guilt about patronizing Starbucks compared to a local establishment?

Who can predict job growth by sector in the next 10 years if the BLS can’t?

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Derek Thompson points out that 2002 predictions by the Bureau of Labor Statistics about job growth by sector for the next ten years turned out to be quite wrong:

What did BLS get right? At least two things: the unstoppable growth in health-care jobs (which it expects to continue) and the steady growth in leisure and hospitality.

What did it miss? Everything else, in particular (a) the boom in mining, led by the natural-gas revolution, (b) the utter collapse of the publishing industry, and (c) the Great Recession, which wiped out half-a-decade of economic growth. BLS thought we’d create 20 million non-farm jobs last decade. We created about six million. That’s a 13-million-job gap. 

Essentially, the BLS failed to anticipate the real-world surprises, which is another way of saying it is not psychic. It extrapolated the recent past (health care was expanding, housing was booming, the economy was recovering from a mild recession), baked in global and demographic trends, and voila, put out a plausible projection of the next ten years. This is a perfectly sensible way to predict the future. But then the real world intervened.

This isn’t supposed to be a post about how the BLS forecasting models are bad. It’s supposed to be a post about how predicting the future is impossible, even though predictions play a starring role in discussions about finance and government.

I think Thompson draws the right conclusions here: it isn’t necessarily about jobs but more about the difficulties governments and other organizations have in predicting even ten years into the future. The world is a complex place and this should push us to think about what we can know moving forward. This would be a great point to inject the writings of Nassim Taleb who has argued in several books that this is a huge problem: there are plenty of people, like on Wall Street or in Washington, who think the future is clear enough to risk a lot. Granted, the BLS isn’t going to lose much if their predictions are wrong but it could have a big effect on others. One example: students looking at what majors to select. In recent years, there are more and more articles that talk about the job fields expected to grow in the future. The argument is that students need to make sure they study for employable careers, particularly with rising college costs. But, they may pick a college or a major based on predictions that aren’t necessarily correct. Perhaps this lack of predictive ability is a good argument for liberal arts schools.

Knowing the difficulties of making long-term predictions, what can the average citizen do? Taleb would suggest hedging our bets, perhaps risking some when the negative effects won’t be that bad. (Taleb lays out this investing strategy in Antifragile: put a good amount of money in safe investments and then risk some in places where the payoff could be huge but you aren’t going to lose much if it doesn’t pan out.)

Experts suggest Illinois has no chance of landing Boeing plant

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The State of Illinois may be putting on a hopeful face but experts suggest Illinois has little to no chance of enticing Boeing to open a new plant in the state:

But Richard Aboulafia, a longtime aircraft industry analyst, is among industry watchers who don’t believe Illinois has a chance.

“Zero, zilch, nada. Worst (possible location) I’ve heard yet, apologies to Illinois,” he said.

The state, he said, has almost no aerospace production or workforce with industry experience and has a heavy, strong union presence unlikely to appeal to Boeing as it goes through tense labor negotiations in Washington.

Illinois is also short on several requirements Boeing wants any new home to provide, aerospace industry consultant Scott Hamilton of Leeham Co. said…

Those requirements include a site adjacent to a “major international airport,” one with a runway at least 9,000 feet long, according to a copy of the company’s site selection criteria obtained by The Associated Press…

The area around O’Hare has almost no available land, said Brent Pollina, vice president of Pollina Corporate Real Estate in suburban Chicago.

Boeing also wants 300-400 acres of land “at no cost, or very low cost,” and buildings totaling several million square feet under the same or similar terms.

Without offering details, the company says it would like its corporate income tax, property tax and other taxes to be “significantly reduced.”

While Boeing is asking a lot (leading to a very good question of how much states or local governments should give up to entice companies), it doesn’t sound like Illinois has much to offer for this new plant. In a global age, the headquarters of Boeing may be in Chicago but that doesn’t mean a new plant has to be anywhere near it.

This offer to Boeing should also lead to broader conversations about what Illinois does offer, not including tax breaks and financial deals, compared to other states. Chicago and the surrounding region is likely the biggest asset with a global city (particularly financially), plenty of educated employees, other important companies and organizations, and a central location in the United States with the necessary transportation infrastructure (airports, railroads, highways, and water access). Illinois has lots of space outside the Chicago area and some rich farmland. The whole state is centrally located and has access both to the Great Lakes and the Mississippi River. But, is Illinois perceived as good for business? How do its assets line up with those of other states?

Big companies buying up hundreds of Chicago area homes

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In a sign of the post-Great Recession real estate market, big firms are buying up Chicago area real estate:

The Chicago market is vast enough that even an invasion of this size won’t change home prices overnight. But the frenzied activity is a clear sign that professional investors believe two important trends are ripe for opportunity: housing values are recovering, and many Americans have given up on the dream of homeownership and will become renters…

Three years ago in an opinion piece for the Tribune, Matthew Desmond, then a sociology department fellow at the University of Wisconsin, voiced worries about what he predicted would be a concentration of housing stock among a few owners, causing big landlords to get bigger and smaller landlords to fall by the wayside. He called it the “Wal-Martization of urban housing.”

On one hand, this represents a change in the Chicago market as firms look to buy homes, rent them, and possibly make more money down the road when prices rise again. On the other hand, the percent of units these bigger firms are buying is not huge yet.

Desmond’s comments are interesting. Why shouldn’t real estate and housing operate in a market space where corporations can get involved? We have few problems with this in retail so what is the problem in housing? Desmond and others might argue that housing is a more basic need – though American residents do not have an explicit right to it. Also, there is a long-standing ideology in the United States that residents should have choices among places to live and homeownership, determining the fate of one’s own property, is the end goal rather than having to be subservient to a corporate landlord.

Amazon’s future might be less about drones and more about operating its own trucks

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The idea of Amazon using delivery drones attracted attention but one commentator thinks owning and operating its own trucks would be more feasible and important:

Ajay Agarwal knows Amazon. As a managing director with Bain Capital Ventures, he led a big investment in Kiva Systems, the warehouse robot company that Amazon paid $775 million for last year. Agarwal says that Amazon may be taking an ever-greater chunk out of the world’s brick-and-mortar retail sales, but physical stores still have Amazon beat in one key area. “What’s the biggest negative of Amazon? Returns,” he says. “It’s a royal pain…I feel like a daily, weekly exercise for me is breaking down boxes, doing returns, printing out return labels, etcetera, etcetera.”

But a dense network of Amazon delivery trucks could make returning unwanted items as easy as taking out the garbage. Unlike electronics or books, which most people shop for sporadically, grocery shopping takes place regularly and often. If Amazon Fresh takes off, that will mean frequent, predictable trips by Amazon trucks down residential streets. For every grocery order delivered, those trucks will have room for another return. “They take packages, and they take packages back,” Agarwal says, much like the milkman who in distant days not only delivered your milk but also picked up the empty bottles. “They control the entire infrastructure.”

That deep control has been a signature element of Amazon’s operations, from the first website visit to the moment an order leaves a warehouse. But that’s when Amazon hands off that order to a third-party carrier, typically UPS or FedEx. Such a concession must drive a control freak like Amazon CEO Jeff Bezos nuts — even if those companies have helped cement Amazon’s reputation for reliability by delivering on Amazon Prime’s promise of two-day shipping. With an army of its own trucks on city streets, Amazon cuts out the middle man. Meanwhile, returns could become as easy as handing a box back to the same Amazon driver who brought it in the first place…

But, he adds, Amazon must tread lightly. For now, the company depends intensely on UPS and FedEx to make its business work. At the moment, Amazon can’t make them angry. It’s telling that a day after Bezos revealed Amazon’s flying drone ambitions on 60 Minutes, which would also be a form of direct shipping, news leaked of UPS’ own drone plans, as if the delivery company was saying: “Don’t test us.”

Companies like Amazon like having control over the whole process for several reasons. One is that everything is then under their control. (Except the production of products which still have to be designed, made, and placed in Amazon distribution centers.) From beginning to end, they can set quality standards and track information. The other important part of this is cost and I’m a little surprised Agarwal doesn’t say anything about this. One appealing aspect of drones is that they remove the need to have people involved with the delivery of packages. In contrast, trucks require drivers and maintaining equipment. (This also doesn’t account for the need for Amazon, companies, and taxpayers to also support and pay for roads.) Could Amazon do trucking cheaper?

Maybe Amazon doesn’t care. Compared to other companies, Amazon seems relatively unconcerned about its profits. For example, see this opinion piece on “Why Amazon is a Lousy Business:”

Unfortunately, it’s not a great business.  According to Yahoo Finance, the company earned only a slim 1% operating margin during the last 2 years and a not particularly impressive 4% margin in 2010.  While there’s more to a business than just the bottom line, those are worrying numbers.

Jeff Bezos insists that he can turn on the earnings spigot any time he wants and is merely plowing money back in order to grow the business, but that seems thin to me.  Last year Amazon grew its top line 27%, very good, but not unusual for a technology company (Google, for comparison, grew 32%).

Drones, trucks, or otherwise, Amazon will have some choices about how to proceed with deliveries.