A blog about business and economics.

June 19 2015 1:43 PM

This Social Network Once Challenged Facebook. Now It’s Trying to Make a Comeback on Mobile.

This post originally appeared in Inc.

It's a hot afternoon in early June in downtown Denver, but Paul Budnitz is cool as a cucumber in the dog- and bike-filled headquarters of Ello as he preps his company to make its proper public debut. Again. The launch of its first mobile app in the Apple Store on Thursday would be, effectively, Ello's second chance to make a first impression. And, many would say, its last chance to prove its relevance. 

The 47-year-old CEO, who has just flown in from his home in Vermont, declares himself "one step above don't-give-a-shit" about anyone else's expectations.

Launched in beta last August by a small team of designers and programmers based in Boulder, Colorado, and Burlington, Vermont, Ello got its 15 minutes of fame a lot faster than anyone expected, thanks, in part, to Facebook's crackdown, last September, on users with made-up profile names. Among other things, the rule change prompted a vocal contingent of Facebook's LGBTQ community to seek out an online home more supportive of people who, for reasons of personal safety or self-identity, choose not to use their real names online—and they found Ello. The exodus attracted a swarm of media coverage and set off a flurry of desperate messages among other disgruntled Facebook users looking for an invite to still-in-beta service. (Yes, this actually happened.)

At the height of the September frenzy, Ello was getting 40,000 to 50,000 invite requests per hour. In October, Budnitz—who founded the collectible art-toy company Kidrobot in 2002, sold a majority stake to animation studio WildBrain in 2006, and got out of the business completely in 2012—claimed the site had more than 1 million users, and another three million on a waiting list. "I've had, like, every VC in the nation in my inbox trying to invest in Ello," Budnitz told the tech site ReCode at that time.

And whatever Silicon Valley haters said about Ello's lack of a business model, or the incompatibility of venture capital with Ello's high-minded ethics, the company was quickly funded. Before the end of October, Ello announced a $5.5 million Series A round, led by Boulder-based Foundry Group, and its formal registration as a "Benefit Corp." that would never make money from selling ads or user data.

By Christmastime 2014, Ello was a ghost town by social media standards. Data from shows a steady decline from a peak of 2.2 million unique visitors last October to fewer than half that three months later. These days, Ello itself does not disclose any internal user statistics, but shows about 500,000 unique visitors in April 2015. (And ComScore doesn't currently track Ello's number because it hasn't met the minimum reporting standards for the past several months, according to an analyst there.) Compare that with Facebook's 210 million or LinkedIn's 114 million monthly unique visitors.

But as Budnitz and a skeleton crew of about 20 programmers, community moderators, and others here in Denver prep for the launch of Ello's best last chance to make a first impression, his nonchalance seems real. "The app is fucking amazing—it's beautiful," he says. When pressed, he says, "I'm nervous for the release, because it's big."

It's big because people now use social media almost entirely  on their devices, and not on their desktops. According to ComScore's 2015 Digital Future in Focus report, in 2014, 74 percent of social media use (by users 18 and older) was on a mobile device. And mobile-first platforms like Snapchat and Vine were among the fastest-growing digital properties in 2014. Until right now, would-be Ello users could get there only via the Web—a shockingly retrograde state of affairs these days.

Patient investors—which also include Techstars' Bullet Time Ventures and Vermont-based FreshTracks Capital—have helped Budnitz keep his mellow as he's consolidated almost all of Ello's employees in Denver and Boulder, and kept them focused on building the app and adding such features as a "Love" button and bookmarking to the Web version. "Ello blew up and we had the challenge of trying to fix it slightly with all these people on the network," Budnitz says. "We took the time to do this right." (Budnitz still lives in Vermont and flies in to Ello HQ almost weekly; at home he runs the boutique bike-maker Budnitz Bicycles.)

Budnitz doesn't really acknowledge the obvious decline in activity since Ello's all-too-brief heyday, but points to notably engaged Ello communities—artists and designers, D&D fans—and small businesses ranging from indie record labels and Etsy-style makers to the Chicago Tribune (with nearly 1,700 followers) using the site. "Social networks are the hardest thing to start," says Budnitz. "There's a chicken-and-egg problem. But in the next six months we're going to see a real cultural movement around the real-name Facebook stuff—you're safe online when you can control what you put on the Web."

It's not hard to find Ello doubters. "The key question about any social network is, what type of personal expression do they offer that others do not?" says David Pakman, a partner in the New York City offices of venture firm Venrock. "I don't understand what Ello provides on that measure. Without that, I don't believe there is a strong enough reason for users to adopt it, and create the network effects that power success."

Will the mobile app solve that problem? A demo version updated over the past week is clean and uncluttered, carrying Ello's trademark black and white palette, sans serif typeface, and ample use of white space to smaller devices. But the user interface remains somewhat cryptic. Think Facebook remixed by design students.

Whether $5 million and change will get the company to a profitable business model is another question. Budnitz and his investors have suggested that users might eventually pay for premium features. For now, Budnitz is insulating himself from naysayers, avoiding Denver's many new accelerators, where "everyone thinks the same" and steering clear of Silicon Valley, where "people just repeat the same wisdom over and over." Going his own way has worked so far, Budnitz insists. "I'm just not a freaking-out kind of guy, and I'm good at what I do, whatever that is."

In Denver, Budnitz says goodbye and points me to a stack of Ello stickers and some bags of Ello pins, and turns back to doing whatever he does, bopping from one workstation to another—a couple minutes here, a couple minutes there—leaving me to wander freely, chatting up employees, petting dogs, looking at people's screens. Can you imagine this happening at a certain massive social network?

Still it's one thing to put on a convincing demonstration of the idea that "Ello is not Facebook." Is that, and a new app, enough to build a business on?

We'll have to get back to you on that. 

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June 19 2015 12:33 PM

McDonald’s Can’t Win Back America’s Love, So It’s Closing Restaurants Instead

The Golden Arches were already creaking—now some are starting to crumble. For the first time since at least 1970, McDonald’s will close more U.S. restaurants in 2015 than it will open. That’s from the Associated Press, which reviewed McDonald’s regulatory filings from the last several decades:

McDonald's Corp. has not reported an annual reduction in U.S. locations since at least 1970, according to archived filings with the Securities and Exchange Commission. For 1969, McDonald's did not include a U.S. store count in its annual report.
The company declined to comment on the last time it reduced its U.S. store base. But given the rapid expansion that characterized its early years, it's likely McDonald's hadn't pulled back since Ray Kroc founded the company in 1955.

McDonald’s said in April that it planned to close about 700 underperforming restaurants worldwide this year. In the U.S., the closures will involve both company-owned stores and franchise locations. Becca Hary, a spokeswoman for McDonald’s, told the AP that the overall reduction to the company’s more than 14,000 locations would be “minimal.”

Still, that McDonald’s is downsizing at all is another stark indication of just how far the graying king of fast food has fallen. McDonald’s same-stores sales (those at restaurants open at least 13 months) have declined for 10 of the past 12 months in the U.S., and every month for the past year globally. In the latest month, U.S. sales slipped a worse-than-expected 2.2 percent. McDonald’s will report monthly sales figures once more for June before ending the practice altogether.


Data from McDonald’s. Chart by Alison Griswold.

Other than shutting down restaurants and same-store sales data, McDonald’s ongoing effort to get America lovin’ it again includes testing all-day breakfast, customizing burgers, offering delivery, and giving some employees a raise. Many of those changes have come in just the past few months since Steve Easterbrook took the CEO reins from his failed predecessor, Don Thompson. Presumably there’s a unifying strategy behind the hodge-podge of ideas. That, or the company is simply assuming that sooner or later, something’s got to work.

June 17 2015 11:47 AM

A California Labor Ruling Just Said an Uber Driver Is an Employee. That’s Uber’s Worst Nightmare.

In what could be an explosive decision, the California Labor Commission has found that a driver for Uber in San Francisco is an employee of the company. That’s from a ruling filed in state court on Tuesday and first reported by Reuters. It’s pretty damning. “Defendants hold themselves out as nothing more than a neutral technological platform, designed simply to enable drivers and passengers to transact the business of transportation,” the commission writes. “The reality, however, is that Defendants are involved in every aspect of the operation.”

The driver, Barbara Berwick, has been awarded roughly $4,000 in unpaid expenses, plus interest. Uber is appealing the ruling. Uber spokeswoman Kristin Carvell stressed in a statement that the labor commission’s decision is “non-binding” and applies only to a single driver.

The threat that Uber’s drivers could be deemed employees in the eyes of the law has loomed over the ride-hailing company for a while now—and it’s a big one. Uber’s vast business and multi-multibillion dollar valuation fundamentally depends on its assumption that drivers are independent contractors, and not employees. When drivers are treated as contractors, they carry the bulk of the company’s operating costs. Uber drivers are required to pay out of pocket for everything from gas to insurance to routine car cleanings and maintenance. It adds up fast. While Uber has boasted that drivers in certain markets like New York City can earn as much as $90,000 driving on its platform, after expenses are added into the mix, that take-home figure gets much lower.

Just as importantly, drivers who are contractors, and not employees, also aren’t required to get benefits and other labor protections that employees are traditionally awarded. For Uber and all its peers in the so-called 1099 economy, this is another key thing that helps to keep costs low, rides cheap, and thin margins viable.

Determining whether workers should be classified as contractors or employees is rarely a simple matter. Uber points to its drivers’ abilities to set their own schedules as evidence that they operate independently and shouldn’t be considered traditional employees. Drivers, on the other hand, argue that Uber sets strict standards for how many rides they need to accept while on the road, and how they ought to interact with passengers—and reserves the right to deactivate their accounts (basically, the equivalent of firing) if they don’t comply. In California, where the issue of whether drivers for Uber and its main rival Lyft are employees is headed to trial, U.S. district judges have in two separate rulings declined to make a final decision. “The test the California courts have developed over the 20th Century for classifying workers isn’t very helpful in addressing this 21st Century problem,” one wrote.

So until now, the big, scary question—the one that could decimate Uber, and Lyft, and all the 1099 companies like them—has basically remained a hypothetical. Which is why it’s so important that the California Labor Commission has finally stepped in to say, Yes, this Uber driver is an employee, and she’s owed $4,000 in expenses. Imagine if Uber suddenly had to pay $4,000 back to all of its drivers in California, much less across the U.S. Even its $5.9 billion in funding would presumably wilt at the thought. It’s undeniable that Uber drivers becoming employees would be a huge blow to Uber’s business model. What we still don’t know is: How huge?

This article has been updated to include a statement from Uber.

Correction, June 17, 2015: Due to an editing error, the original headline of the article misstated that the labor ruling said Uber drivers are employees. The ruling applies only to one driver.

June 16 2015 5:06 PM

The Gap Needs a Miracle. It Just Might Be Named Old Navy.

Gap, that most wholesome of American clothing brands, has fallen on hard times. After 13 straight months of declining same-store sales, the company said Monday that it will close 175 of its 675 name-brand stores in North America and cut about 250 corporate jobs. Most of the closures will take place in the U.S., with about 140 shutting their doors by January. So far, Gap hasn’t commented on how many store employees may also lose their jobs (a sobering thought after it boosted hourly pay in 2014). “We never want to close stores, but we felt this was the right decision,” Art Peck, Gap’s chief executive since February, told the New York Times. When all’s said and done, Gap will retain about 500 specialty stores and 300 outlet stores.

By shuttering nearly a quarter of its North American stores, Gap is hoping to pare down a real estate portfolio that has become bloated and costly as more shoppers head online. What’s left will be “smaller, more vibrant,” Gap’s global president Jeff Kirwan said. But it will take more than that to turn Gap’s sales around. Fashion-wise, the brand has stumbled, with baggy cuts, bland colors, an overload of chambray, and wildly inconsistent sizing. In February, a few weeks after January’s same-store sales came in down 9 percent, Gap announced it was bringing back company veteran Wendi Goldman to jump-start growth as executive vice president for product design. And at the company’s annual investor day on Tuesday, Kirwan said Gap needed to do more to be a “trusted source” for its core consumers (25- to 35-year-old men and women with slightly above-average spending).

Gap Inc., the parent corporation behind the Gap brand, also owns Banana Republic and Old Navy, as well as Athleta and Intermix. So while people tend to fixate on the flagship Gap label, the story of the company is bigger than that. Here’s a quick summary of Gap Inc.’s last 13 months in three charts:


Data from Gap Inc. filings. All charts by Alison Griswold.

As you can see, the star of Gap Inc. is no longer Gap, but rather Old Navy. Over the past few years, it’s been transformed by Stefan Larsson, a longtime H&M employee and global president of Old Navy since 2012. Larsson, who loves to use the word “aspirational” and talk about “the democratization of fashion,” has championed the notion that low-cost clothes can be both cheap and style-savvy. “I saw a lot of untapped potential in the Old Navy brand,” he told investors on Tuesday. That vision has paid off. In 2014, Old Navy’s nearly $6 billion in U.S. sales almost equaled the combined sales volume of Gap and Banana Republic.

Gap, Banana Republic, and Old Navy are all aimed at different consumer audiences, of course—and lately the value-conscious segment has outperformed the others. With economic growth still somewhat plodding, many U.S. consumers have been opting for cheap, value-conscious purchases over slightly more upscale brands. As Business Insider pointed out in April, the Gap–Old Navy dichotomy is one example of how disparities in price (they cite men’s jeans retailing for $69.95 at Gap versus $29.94 at Old Navy) can translate to big differences in sales.

So, this isn’t to say that the solution for Gap and Banana Republic is to copy Old Navy’s marketing and styles. Again, their consumers are fundamentally different. But as Larsson might say, it couldn’t hurt for Old Navy’s counterparts to be a bit more aspirational, too.

June 16 2015 3:53 PM

Donald Trump Thinks His Name Alone Is Worth $3 Billion

"I'm really rich," tragically coiffed carnival barker Donald Trump said today during the press conference announcing his run for the presidency. And indeed, he spoke truth. Most everyone agrees that the man has made a fortune in real estate, though its precise size has always been a bit of a mystery. While Trump has long claimed to be a multibillionaire, and offered various degrees of documentation, his numbers have been challenged by ex-wives, journalists, and skeptical fellow real estate developers, with some pegging his net worth in the mere nine digits.

Nonetheless, Trump's success as a businessman, and whatever wealth it may have brought him, are the main justifications for his campaign, which if we are all lucky will at least add a touch of absurdist entertainment to the first couple of GOP primary debates. So today, Trump offered the world another update about his finances. He says he is presently worth $8.7 billion. Forbes, which has tracked the man's affairs obsessively for three decades, thinks he's exaggerating the value of his assets “by 100 percent.” And while, ultimately, it doesn't matter a great deal how many billions the "short-fingered vulgarian," as Spy magazine once dubbed him, actually possesses, it is sort of interesting how Trump may be overstating his riches.

Specifically, Trump claims his name alone is worth about $3.3 billion. The braying reality show host makes a decent amount of money licensing his brand for use on an array of different merchandise—think ties at Macy's—as well as to developers around the world, who pay for the right to plaster the Trump logo on their condos and hotels. Trump does not actually build or own these properties, though his company does have contracts to manage some of the hotels that bear his name. On his financial statement, this line of business shows up as "Real Estate Licensing Deals, Brand and Branded Developments" at a precise value of $3,320,020,000, more precious supposedly than all of the golf clubs and resorts he actually owns in full, or his portfolio of commercial properties.

This is fanciful. Trump is suggesting that his name is more valuable than startups such as Lyft, Slack, Blue Apron, or Warby Parker. Whatever revenue his branding deals are generating these days, it almost certainly isn't enough to justify that sort of megalomaniacal assertion. Moreover, it seems unlikely that anybody would actually buy Trump's naming rights outright, since their value is entirely dependent on his personal reputation. Bloomberg puts the point politely: “It’s unclear what sum, if any, these licensing rights could capture on the open market.” Forbes, which thinks his brand is worth closer to $128 million thanks to his hotel management agreements, is a bit blunter: "Trump apparently thinks that if he spun-out these kind of deals and his good name into a separate company, he’d net over $3 billion for it. Good luck with that."

And yet, delusional as it may be, the $3.3 billion price tag Trump puts on his public persona may actually be a sign of modesty on his part. Just two years ago, Trump's representatives claimed his brand was worth a full $4 billion. Even he seems to realize his name isn't quite what it once was.

June 15 2015 8:38 PM

Jeb Bush Is Already Talking Straight-Up Nonsense About the Economy

Jeb Bush announced that he is running for president today. You know, officially. Not just in a dining room with some donors. He gave a big public speech and everything. And for a man who is supposed to be the sober, policy-minded establishment candidate, it didn't take long before he detoured into economic nonsense:

So many challenges could be overcome if we just get this economy growing at full strength. There is not a reason in the world why we cannot grow at a rate of four percent a year.
And that will be my goal as president—four percent growth, and the 19 million new jobs that come with it.

See, the thing is, there are lots of reasons that the economy is probably not going to grow at 4 percent per year in the near future. The fact that Bush suggests otherwise doesn't bode well for anybody hoping that his economic vision will be any more tethered to reality than his competitors'. 

But before we get into all that, you may be wondering: Why 4 percent? “It's a nice round number,” Bush explained to Reuters last month. “It's double the growth that we are growing at. It's not just an aspiration. It's doable.” To get a little more specific, the figure apparently originated during a conference call several years ago, during which Bush and several other advisers were brainstorming potential economic programs for the George W. Bush Institute, the Texas think tank named for Jeb's famously cerebral older brother. During the talk, Jeb casually tossed out the idea of 4 percent growth, which everybody loved, even though it was kind of arbitrary. The center now has a "4% Growth Project." It does stuff like publish fact sheets about all the wonderful things that would happen to our country if we could ever manage 4 percent growth year after year.

To be fair, it's not as if 4 percent growth is impossible, at least intermittently. The U.S. pulled it off a few times during the Reagan era and in the heat of the dot-com boom. The U.S. averaged 4.3 percent growth during most of its post–World War II economic expansions. But then the 21st century arrived. Between 2001 and the end of 2007, gross domestic product grew at an average rate of 2.8 percent per year. (Which makes the presence of a 4% Growth Project at the George W. Bush Institute more than a bit ironic, even if you forget that whole financial crash.) During the Obama years, the economy has expanded even more slowly.  

And nobody really expects growth to rapidly shoot back up, at least unless we experience a technological revolution even more impressive than what the Internet delivered. Here's why. In the end, potential economic growth boils down to a pretty basic formula. It's productivity growth plus workforce growth. You can certainly break it down into smaller components if you want to get granular about things, but that's the big picture: productivity plus labor supply. And right now, neither of those forces is working in America's favor. Because the Baby Boomers are aging into retirement, the Bureau of Labor Statistics expects the labor force to grow by 0.5 percent per year in the near future, down from the 0.7 rate we enjoyed from 2002 to 2012. To simplify a bit1, that means productivity is going to have to jump up by 3.5 percent per year if we want to hit the magic 4.0.

That just doesn't really happen. Even during the prime years of the tech boom, workers only became about 2.5 percent more productive each year, on average. Unless artificial intelligence is about to catapult us into the Player Piano–esque future economists and tech types love to theorize about, it seems pretty unlikely that the United States is about to match that sort of progress in the coming years.

In Bush's defense, he is willing to do certain things that would have salubrious effects on growth. Namely, he's pro-immigration reform. If nothing else, bringing more young workers into the country would help boost our labor supply. But any reform that Bush could realistically achieve with a (presumably) Republican Congress isn't going to increase our annual immigration flows enough to overcome the demographic headwinds we're facing today.

So Bush is too optimistic about our economic prospects. What's the big deal? My guess is that the overconfidence will be baked into his policy proposals. Don't be surprised to see white papers promising that with the right mix of tax cuts, deregulation, and tweaks to immigration, we'll suddenly be riding high on a new period of growth, which will allow for all sorts of heroic predictions about tax revenue and the future of the deficit. Sober and serious won't be on the menu.  

1Slightly more nuanced version: Economic growth = increase in output per hour of work (aka productivity growth) x increase in total hours worked. So, theoretically, even if we're not adding a lot more workers to the economy, growth could rise quickly if everybody started pulling longer hours on the job. But as Northwestern University economist Robert Gordon has noted, hours per worker have typically been on the decline in recent decades.

June 15 2015 5:07 PM

Uber Tried to Suppress Its Chinese Drivers’ Political Activities. It Got Caught.

Uber has landed in hot water before for tracking the movements of passengers without their permission. But what about tracking its own drivers? Obviously, the company needs to do that in order to know where drivers are in real time so that it can supply rides. According to the Wall Street Journal, though, this past weekend in Hangzhou, Uber found another use for that GPS data: scaring drivers into staying away from a protest over its service:

In two short messages sent to Uber drivers in Hangzhou and circulated online—verified with Uber in China by The Wall Street Journal—Uber urged its drivers not to go the scene and instructed those already there to leave immediately. Uber said it would use GPS to identify drivers that had refused to leave the location and cancel its contracts with them.
The messages said Uber’s actions were designed to “maintain social order.”

Uber has made expanding in China a top priority for 2015. As if the company doesn’t already have enough money, it’s reportedly raising $1 billion to spend solely on breaking into 50 cities there. That might explain why Uber seems determined to avoid any sort of trouble with the Chinese government and has adopted such an anti-protest stance. A few days before the Hangzhou incident, Uber warned drivers in China that it did not condone protests, telling Quartz in a statement, “we firmly oppose any form of gathering or protest, and we encourage a more rational form of communication for solving problems.” (I contacted Uber for comment earlier on Monday and will update this post if anyone responds.)

There are a couple problems here. First, as Quartz’s Josh Horwitz notes, it’s kind of crazy that a company condemning public displays in China is the same one that in the U.S. has repeatedly and successfully mobilized riders to push for Uber-friendly changes in legislation. Uber has now gotten “ride-sharing” laws on the books in multiple states and more than a dozen cities. Quite often, it’s accomplished that by encouraging riders to flood public officials’ offices with calls and emails. This very process is currently playing out in East Hampton, New York, where Uber was effectively banned earlier in June.

Second, there’s the question of whether Uber drivers should be considered independent contractors or traditional employees. In the U.S., where the issue is headed to trial, the analysis hinges heavily on how much control Uber is perceived as exerting over the people who work for it. So, for example, Uber would say that because drivers get to set their own schedules, they’re independent contractors. But drivers might point out that they can be suspended from the platform if they accept less than 90 percent of rides, which suggests Uber is acting like an employer. Had Uber used GPS data to threaten drivers in the U.S. the way it did in China, it would be “compelling evidence that Uber exerts sufficient control over its drivers to be classified as their legal employer,” says Brishen Rogers, a professor at Temple University’s Beasley School of Law and the author of a paper on the social costs of Uber.

Finally, to state the obvious, Uber’s tactic in China looks horrible—not to mention extra-authoritarian in its dealings within an authoritarian country. Essentially, the company was using the geo-tracking information from its app to not only monitor the whereabouts of drivers, but to intimidate them into staying away from a particular area. This time it was a protest in Hangzhou, but who knows what it might be in the future? Uber’s ethics are questionable enough as a ride-hailing company. It doesn’t need to be in the business of maintaining “social order” as well.

June 15 2015 3:32 PM

Bobby Jindal Found a Mind-Bendingly Stupid Way to Pretend He Isn’t Raising Taxes

While Kansas has become a strictly tragic cautionary tale about what happens when a politician actually tries to govern in line with radical conservative tax dogma, Louisiana is turning into more of a dark comedy. Coming into this year, the state was facing a $1.6 billion budget shortfall. Unfortunately, Gov. Bobby Jindal—America's spirit of hopeless presidential ambition incarnate—had signed Grover Norquist's pledge not to raise any taxes. This left lawmakers in a bit of a bind, since cutting their way to fiscal health would have meant decimating public health or higher education funding.

Last week, however, legislators ultimately passed a budget that raised hundreds of millions of dollars in new revenue, sparing hospitals and colleges. Better yet, Jindal says he'll sign it. So, how'd they square this circle?

With a mind-numbing budget gimmick, of course. Here's how the Advocate describes what's become known as the "SAVE" program.

It would assess a fee of about $1,500 per higher education student and raise about $350 million total, but only on paper. Students wouldn’t have to pay anything because an offsetting tax credit for the $1,500. Nor would universities receive any new money.
However, the SAVE fund would create a tax credit for the $350 million that Jindal could use to offset $350 million of the new revenue that legislators are proposing to raise.

So, to repeat, Jindal created a fake fee for students, and a fake tax credit to balance it out, which ultimately leads to no money changing hands, but apparently satisfies whatever agreement Jindal struck with Norquist to preserve the illusion that he didn't raise taxes. “It’s an embarrassing bill to vote for," one Republican state representative told the New York Times, demonstrating the sort of candor that only becomes possible once your own party's governor has alienated the vast majority of his state and abandoned all pretense of rational policymaking in pursuit of an inevitable also-ran performance in the GOP primary.

Anyway, because the budget bill relies on a number of short-term fixes, Louisiana could end up in another hole soon enough. At some point, that joke won't be funny anymore.

June 12 2015 4:51 PM

A Sign That Washington Might Be Charging Grad Students Too Much Interest on Their Student Loans

I've argued before that the federal government should charge graduate students as much as it can get away with for their student loans, because people with advanced degrees tend to be very well off. In practice, that means setting interest rates a bit below whatever the private sector can offer, so that banks don't swoop in and steal the Department of Education's customers.

Well, there are some signs that Washington might (possibly, potentially) need to think about giving America's aspiring highly paid professionals a price break. As Bloomberg reports, a number well-funded startups are beginning to target grad students for loan refinancing, offering rates far below the feds'. Here's how the piece kicks off:

Chris Winiarz, a 31-year-old money manager with a Northwestern MBA, jumped at a student-loan deal of a lifetime.
A startup called SoFi offered to refinance his $45,000 in federal debt, slashing his interest rate to 2.69 percent from 6.55 percent. Winiarz will pay off his obligation three years early, saving about $9,500 and helping pay for an engagement ring for his girlfriend. The company even threw in a free bottle of artisan olive oil.
“I really should have done this a lot sooner,” said Winiarz, who helps oversee the University of California’s endowment and pension investments.

(A little bit of further context: Right now, new PLUS loans for grad students are carrying a 6.84 percent interest rate.)

Companies like SoFi are a potential problem for the government because the Department of Education makes the vast majority of its student loan profits from graduate students (the rest, on net, come from lending to the parents of undergraduates). That's because, while there are certainly plenty of horror stories out there from underemployed and overindebted law grads and Ph.D.s, advanced degree holders are generally high earners who rarely default. Their reliable payments help subsidize lending to low-income undergrads, who are generally far less of a solid bet for the government.

Which is why it probably shouldn't be surprising that some financial services firms are making a play for them. A New York company called CommonBond says its typical client is “a 32-year-old who makes $140,000 annually and has a near-perfect credit score of more than 760.” That's pretty much as close to a sure bet as one typically gets in consumer lending.

While Bloomberg suggests that these companies could soon blow a multibillion-dollar hole in the feds' student-lending balance sheet, I think it's a bit early for anybody to freak out. The little part of me that still believes in efficient markets feels like private student-loan giants like Sallie Mae and Wells Fargo would already be doing more in this space if it had vast untapped potential. Second, even if lenders manage to make money picking up a few aspiring 1 percenters, the government's budget math might still be better if it lets them go and keeps interest rates where they are. The trend only becomes really perilous if these lenders reach beyond truly elite grads, and start diverting average MBAs, J.D.s, and whatnot.

And of course, these are startups we're talking about here, which means this could all just be hype. Check back in three years. If they're still making money, then maybe it's time to worry.

(Hat tip to Seton Hall Law Professor Michael Simkovic).

June 12 2015 4:15 PM

Why Does Whole Foods Think Opening a Store Just for Millennials Is a Good Idea?

Whole Foods is on the hunt for millennials. To bring back younger shoppers and shake its sticky “whole paycheck” image, the troubled company last month said it would create a “hip, cool, technology-oriented store” specifically for the millennial demographic. And at an investor conference on Thursday, the company finally put a name on its new concept: “365 by Whole Foods Market.”

If you’ve ever shopped at Whole Foods, you‘ll probably recognize 365 as the store’s own “everyday value” label. That hints at what Whole Foods is thinking for its new stores, which a spokesman tells me will carry a broad selection of 365 products in addition to other brands. “It’s a very compelling brand, good growth, and we think it has potential to take this name and this number and reflect much further into the marketplace—beyond just around products, and actually around creating a format which is fun, which is exciting, which is modern, which is streamlined, which is cool,” Whole Foods co-CEO Walter Robb said Thursday. The inaugural 365 stores are expected to open in the first half of 2016 in the U.S.

Can Whole Foods woo millennial shoppers with a hip, cool, fun, modern, exciting, streamlined, technology-oriented store? Maybe. But the better question is whether it should even be trying in the first place.

It might surprise you to learn that making “X for Millennials” isn’t a business panacea. Take Pizza Hut, which last fall announced a slightly exotic, vegetable-heavy rebranding targeted toward younger consumers, and has since reported lackluster sales. A few weeks ago, Greg Creed, CEO of Pizza Hut’s parent company Yum Brands, admitted that overhaul was a miscalculation. “Unfortunately, we haven’t been as effective as we’ve liked with our marketing and need to balance its appeal to millennials with mainstream pizza customers,” he said. (In perhaps the greatest sign of defeat, Pizza Hut’s newest marketing stunt is a pizza with a hot-dog-stuffed crust.) When McDonald’s announced its restructuring at the start of May, chief executive Steve Easterbrook made a similar concession, noting that going forward, the chain would engage in “less sweeping talk of millennials.”

With Whole Foods, we still don’t really have any idea what these new 365 stores will look like. While executives are clearly big on buzzy adjectives, they haven’t said how many 365 stores Whole Foods is looking to open, what kind of markets they’ll be in, or how much cheaper—if at all—the merchandise will be. And then there’s the bigger existential question—what does it even mean to make a grocery store for millennials? Lots of kale and Soylent? Receipts that are Snapchatted to you? Venmo-enabled payments? I don’t know; I’m a millennial and I use coupons. The last time Whole Foods got a good response from customers, it was after it lowered prices. Maybe it should stop trying to make things “for millennials,” and focus on giving them some good deals instead.