Category Archives: Business and Economy

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.

Older workers left behind when companies move back to the city?

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As some companies choose to return to the big city, are older workers left behind?

After decades of big businesses leaving the city for the suburbs, U.S. firms have begun a new era of corporate urbanism. Nearly 200 Fortune 500 companies are currently headquartered in the top 50 cities. Many others are staying put in the suburbs but opening high-profile satellite offices in nearby cities, sometimes aided by tax breaks and a recession that tempered downtown rents. And upstart companies are following suit, according to urban planners. The bottom line: companies are under pressure to establish an urban presence that projects an image of dynamism and innovation…

For longtime employees, however, corporate moves to the city mean longer commutes and disrupted schedules and family life. And the corporate quest for youth and innovation can leave some workers feeling slightly unwelcome.

“We joked about the older suburbanites being excluded from the new [business] model,” said Jon Scherf, age 42, a marketing professional who left Hillshire shortly before its December 2012 move to downtown Chicago. “They would’ve been happy to have me but they’re also happy to bring in new blood.”…

For longtime employees, it has been a more complicated switch. Melissa Napier, treasurer and senior VP of investor relations at Hillshire, bought a house in Downers Grove in 2007 and lives there with her husband and two sons. While she now attends more social and networking events downtown, her commute, once a 10-minute drive, now gets her home at 7:30, an hour later than before…

But the employers that sought them out in the city are unlikely to follow them back to the suburbs, said Mr. Phillips of the Urban Land Institute.

Now that I think about it, I don’t remember Richard Florida, known for analyzing the young creative class that wants urban amenities, discussing the possible impact on older workers. I suppose the argument could be made that attracting young workers, wherever they might work, would help raise all boats. But, as long as the perception continues that suburbs are better places for raising families due to their schools and safer spaces, this divide between younger/urban workers and older/suburban workers may continue.

Don’t blame Black Friday and Thanksgiving shopping; they just expose the consumerist system

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As crowds gathered to shop on Thanksgiving and into Black Friday, there has been plenty of backlash from those who think this violates a sacred family holiday to those who don’t like that relatively low-paid retail workers have to work another day to those who bemoan the lengths Americans will go to fight over some doorbusters. All of this might be true but I think it misses the point: these two days simply lay bare American consumerism. In a similar way that Walmart and McDonald’s tend to take the brunt of complaints about big box stores and fast food restaurants, Black Friday and shopping on Thanksgiving share a similar fate: they simply make real what is true about Americans and what they want.

There is a whole system at work here. It involves buying single-family homes, talk about the American Dream (equated with acquiring certain items), dreams about scientific progress and mechanical abilities such that life will be easier, liking having choices more than enjoying the goods themselves, acquiring stuff, and an economy and financial system dependent on average citizens continuing to buy beyond subsistence items. This system involves some great advances put to interesting uses, things like the assembly line, the internal combustion engine, transistors and semiconductors, the mass production of houses, the rise of marketing, and mass media.

The lesson is that hardly any day all year long is sacrosanct any longer; more than family togetherness, more than patriotism, perhaps more than the Super Bowl (which combines all of these things in a different way), Americans enjoy shopping, good deals, and consumption. It is competitive and alluring and our collective retirement accounts may all very well depend on this behavior.

The best ROI in hipster neighborhoods

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If you are looking to make some money in real estate, check out these hipster zip codes:

Real estate data provider RealtyTrac conjured some numbers to support what everyone already knows or suspects— that, as a developer or landlord, investing in rental housing in “hipster” nabes is a solid idea. Chicago gets three hits on RealtyTrac’s just-published top 25 list of hip zips for high return on rental properties, in descending rank: 60625 (Ravenswood, Albany Park); 60647 (Logan Square, Bucktown); and 60642 (Noble Square, River West, Goose Island). Yup, they got all the usual suspects. The above chart, interactive and expandable at the source, shows the equation for investment success in “nascent hipster markets”: a high proportion of 25-34 year-olds; a ready stock of renters; a low vacancy rate; and a climbing but still low median home price relative to average rents. Wouldn’t you know it— these are the basic conditions for any successful rental investment, almost anywhere. Why all the fuss over hipsters? Probably because the “culture” that follows this trendy group around usually matches up closely to rapid gentrification. In other words, it’s the hipster as beacon. For the frugal renter trying to stay away from big money, there’s a different use for this list. Stay tuned for follow-up RealtyTrac analysis on “top hipster zips for fix-and-flip profits.”

While hipster may appear to be a lifestyle choice, this article is a reminder of the economic conditions involving hipsters. They also have money and are interested in moving into less-than-perfect neighborhoods that have the appropriate grittiness and authenticity. Thus, a savvy investor might find properties in neighborhoods on the rise and with the influx of hipsters make some money.

It would be interesting to then look at how these investment work out over time. Getting in at the right point is important but how does that investment then work out over a long period of time? What happens when hipsters stop moving in or the neighborhood is no longer the hot one? We need to see not only this data but a ROI curve.

Stores have cash registers, give receipts to prevent cashier theft

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Megan McArdle explains that businesses don’t have cash registers or receipts for the good of consumers; it is to prevent cashiers from taking money.

The great innovation of the National Cash Register company was to market registers not so much as adding machines but as devices for preventing theft. Here’s Walter Friedman’s “Birth of a Salesman” on how these machines were made ubiquitous:

Because of the high price of NCR cash registers, sales agents had to convince proprietors that the machine would eventually pay for itself. NCR’s early advertisements resembled the contemporary flyers of life-insurance. In both, the aim was to heighten customer fear and uncertainty. In the cash-register trade, the fear centered on stolen revenue. One of Patterson’s advertisements, proclaiming “Stop the Leaks,” depicted shop owners ruined by clerks who stole from their cash drawers. This marketing strategy posed problems for NCR, because clerks and bartenders resented the implication that a mechanical “thief-catcher” was a necessary coworker. Some even organized protective associations to keep the product out.

In instances of intense opposition by clerks to newly installed registers, Patterson sent detectives to supervise the machine’s operation. NCR for June 1888 printed a letter from a merchant in Detroit whose store had been watched by an NCR-hired detective. “Your operative’s report relative to my man not registering is at hand. I was very much surprised, as it caught a man, above all others, I have relied upon, not only in the bar but in other matters in the house.”That’s why cash registers ring loudly when the cash drawer opens — so that a clerk with decent mental arithmetic skills can’t pretend to register your sale and then pocket the cash. And that’s why you get a physical receipt — so that the clerk can’t ring up part of your sale, and then siphon the rest into his own pocket.

In other words, NCR helped create the market for their goods by playing up certain fears. Friedman’s link to life insurance is an interesting one; sociologist Viviana Zelizer has written about how life insurance was once viewed as morbid but came to be viewed in the 1800s as a necessary provision for one’s family. This is like the cash register as the good businessperson has to have a cash register. It also sets up an interesting new source of alienation between companies and workers: the basic retail employee can’t be trusted with money.

One reason to look at the social history of products is to note how they are not objects humans inherently need. They are social constructions.

Should new “Buy American” pushes be lauded if they occur because goods are now cheaper to make in the US?

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Walmart is purchasing and selling more goods made in America – primarily because making some things in America is now cheaper:

In many cases, Wal-Mart’s suppliers had already decided to produce in the United States, as rising wages in China and other emerging economies, along with increased labor productivity and flexibility back home, eroded the allure of offshore production.

Though wrapped in the stars and stripes, the world’s largest retailer’s push to bring jobs back to the United States also makes business sense both for suppliers and retailers.

Some manufacturers are finding they can profitably produce certain goods at home that they once made offshore. And retailers like Wal-Mart benefit from being able to buy those goods closer to distribution centers and stores with lower shipping costs, while gaining goodwill by selling more U.S.-made products.

“This is not a public relations effort. This is an economic, financial, mathematical-driven effort. The economics are substantially different than they were in the 80s and 90s,” Bill Simon, chief executive of the Walmart U.S. chain, told the Reuters Global Consumer and Retail Summit earlier this month.

To restate, this isn’t because of some commitment to the United States or patriotism or creating American jobs. This is because the goods can be made more cheaply in the US due low-wage workers in other countries now earning more and rising transportation costs. Thus, if items could once again be made and shipped more cheaply overseas, businesses would likely chase that again. Granted, profits of American companies might be good (shareholders, for example, might be happy) but is this the only way to assess manufacturing and sales decisions? Is selling products partly on the fact that they are made in America then somewhat deceptive?

Trader turned sociologist writes book about Goldman Sachs

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A new book on Goldman Sachs is written from an interesting perspective: a trader for the firm turned sociology PhD student.

After writing a paper about organizational change, a professor encouraged him to write about Wall Street.

“He said, ‘No one in sociology understands banks, so you can make a contribution in that area,’ ” Mr. Mandis said…

The essence of his argument is that Goldman came under a variety of pressures that resulted in slow, incremental changes to the firm’s culture and business practices, resulting in the place being much different from what it was in 1979, when the bank’s former co-head, John Whitehead, wrote its much-vaunted business principles.

These changes included the shift to a public company structure, a move that limited Goldman executives’ personal exposure to risk and shifted it to shareholders. The I.P.O. also put pressure on the bank to grow, causing trading to become a more dominant focus. And Goldman’s rapid growth led to more potential for conflicts of interest and not putting clients’ interests first, Mr. Mandis says.

More sociological analysis of the financial industry, particularly from the inside of important firms, is needed. Considering their outsized importance on the global economy as well as global cities, it is a little surprising such books aren’t more common.

The review is fairly favorable, calling the book “accessible” and “clearly written.” However, the review doesn’t hint at criticism of Goldman Sachs. Given the opinions of many sociologists, is that would many sociologists would expect when reading such a book?