Oil Prices Soar, Farmers Find an Alternative for Corn, and Building the ‘Nike of Sleep’

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THE ECONOMY

The Saudi attacks could send oil prices soaring: “The oil market will rally by $5-10 per barrel when it opens on Monday and may spike to as high as $100 per barrel if Saudi Arabia fails to quickly resume oil supply lost after attacks over the weekend, traders and analysts said. Attacks on two plants at the heart of the kingdom’s oil industry on Saturday knocked out more than half of Saudi crude output, or five percent of global supply. Industry sources have said it may take weeks to bring production fully online.”

So far, the impact of the Trump tariffs on consumer prices has been uneven: “In August 2018, NPR began tracking how those tariffs might trickle down to shoppers at the world’s largest retail store chain—Walmart. Since then, every few months, we’ve checked prices of about 80 products at one Walmart in Liberty County, Ga., with tariffs in mind. After one year, some prices in NPR’s basket of goods have climbed significantly, at least in part because of the tariffs. The price of a dog leash has climbed 35 percent. A screwdriver costs seven percent more. But prices are complicated. They don’t automatically rise with tariffs.

“In fact, shoppers are only starting to feel tariffs. Last year, the Trump administration specifically targeted industrial materials and parts rather than consumer products, to avoid shocking Americans with price hikes. The new rounds kicking in this month and in December will more directly affect a lot more of things people buy every day, like shoes, clothes and electronics.”

TAXES

Here’s why this summer’s White Claw craze was really all about tax policy: “What people like about a vodka soda is what it doesn’t contain. All it has is alcohol, water, and carbonation—no extra flavorings, no caffeine, and no calorie content other than from alcohol. It’s the chicken breast of mixed drinks: broadly acceptable, gets the job done, nothing fancy. So, why did it take so long for it to come ready-to-drink in a can? Part of the answer lies in the fact White Claw, which markets itself as ‘hard seltzer’ and ‘spiked sparkling water,’ is not precisely a vodka soda in a can. It doesn’t contain vodka or any other distilled spirits. Instead it is made through fermentation, like beer, but starting from a base of sugar instead of cereal grains like barley. Then, carbonated water and flavoring are added.

“Because White Claw is brewed like beer, it’s taxed like beer, which is important because beer is taxed in the US at a much lower rate than spirits. If you made a product similar to White Claw by mixing vodka with seltzer and putting it in a can, a six-pack would be subject to almost $2 in additional taxes when sold in New York City. Because of this tax quirk, beverage companies have long sought ways to make flavored cocktail-like beverages for the US market by brewing instead of distilling. … The key advancement with White Claw and its competitors in the ‘spiked seltzer’ market is the use of sugar base for fermentation, which leads to a more neutral flavor than you can get by fermenting barley or other grains. This makes it possible to mix a palatable beverage with little or no added sugar and only subtle flavorings.”

SELLING THE BUSINESS

Cynthia Gerdes and Steve Meyer, owners of a well known Minneapolis restaurant, Hell’s Kitchen, have decided to sell the business to their employees: “ESOPs have become an increasingly popular form of ownership for some types of mid- and large-sized businesses because of tax breaks that Congress created nearly 20 years ago. Most ESOP businesses pay no federal or state income taxes. But they are rare in the restaurant business because the benefits of an ESOP occur when a firm has a long record of profitability, something that’s difficult for restaurants to build. … 

“Two years ago, when the restaurant’s profitability fell sharply, Gerdes took the unusual step of opening its books to a group of employees and asking them to plot a turnaround. She spent the past year researching ESOPs on her own after several bankers and accountants told her she shouldn’t do it. ‘Most of them said no because they don’t know enough about them,’ she said. … The risk? If the restaurant’s profits evaporate, the value of the employee’s shares will decline. And if those profits evaporate before Gerdes and Meyer are fully paid, they will have to deal with the loss of value that a third-party buyer would have given them today. ‘Our payments could be cut, delayed or gone,’ Gerdes said.”

AGRICULTURE

There farmers have found an alternative way to make money from cornby shooting it from a cannon: “Farmers across the US have stumbled onto a fertile side hustle at a time when prices for their crops are low: cramming produce into an air gun and charging people to fire it into the sky.

Growers of corn, apples and even pumpkins place the agricultural ammo at the base of a long tube, sometimes with the help of a ramrod. Then they use an air compressor to build up enough pressure to send the fruits or vegetables flying hundreds of feet, where they land with a satisfying splat. ‘Why not shoot it?’ says Fred Howell, owner of Howell’s Pumpkin Patch in Cumming, Iowa. ‘We’re fat Americans and we play with our food.’

“It’s a way to keep jaded teens and bored adults coming back to spend time and money on the farms while the youngest members of the family are happy petting sheep. Food cannons alone can’t protect farms from depressed prices. But they are part of the growing field of agritainment—which also includes corn mazes, hayrides and goat yoga—that can serve as a hedge for farmers during tough times. Farm-linked recreation was a nearly $1 billion business in 2017, according to Claudia Schmidt, an assistant professor of agricultural economics at Penn State University.”

STARTUPS

Casper wants to be the Nike of sleep”: “Five years ago, the startup started slinging compressed mattresses in cardboard boxes straight to buyers’ homes—an alternative to cluttered mattress chains that tried to baffle consumers with jargon. Casper’s basic proposition, that going to a mattress store is a drag and no one should have to do it, made sense to fans of other retail startups trying to cut out middlemen, such as Warby Parker. 

“But in the years since, Casper has had to shift positions. Dozens of mattress-in-a-box competitors crowded the market. Realizing the limitations of an entirely virtual business model, Casper began opening storefronts and selling products like pillows and sheets. All the while, the wellness industry rose up, with companies attaching their wares to a sense of higher, healthful purpose. While businesses devoted to optimizing most of the core bodily functions abound—startups that promise more healthful eating, more holistic hydration, etc.—no company has yet established itself as the clear leader of the sleep space.

“It’s a slightly absurd concept, until you consider that humans spend about one-third of their lives sleeping, and that the potential market is enormous. CB Insights, a research firm, estimates that the size of the so-called sleep health economy will reach $85 billion by 2021. ‘Buying a mattress is not a recurring purchase,’ said Jacob Matthews, an analyst with the research firm CB Insights. ‘As Casper thinks about expanding, opportunities to bring the customer back into the brand ecosystem, whether it’s for an experience or a product, are going to be key.’”

Neighborhood Goods is a brick-and-mortar department store that sells direct-to-consumer online brands: “As the company expands its geographic footprint, it’s also experimenting with different online features, like online browsing of in-store collections and the option for physical, in-store pickup of digital orders. Neighborhood Goods also said it will begin offering an analytics back-end for brand partners to provide data on activations and branded events at the company’s stores.”

Portugal-based 3D Modelling Studio has created a system that will curb maritime waste “by automatically and remotely calculating the volumes of solid waste held in a container. Its system, called Clever-Volume, enables the authorities to certify that what ships say they want to dispose of corresponds to the volume ascertained by Marpol inspectors on the pier. This volume might or might not be the same as was indicated at the time of docking. … In Barcelona, the system will let the port authorities actively collect waste data through sensors located on weighing systems and then automatically and remotely calculate garbage volumes in waste containers using the system’s algorithm. The system also generates online reports in formats adapted to the end user’s device.”

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FAILURE

It was a long time coming for MoviePass to finally shut its doors: “The company, which became a cultural phenomenon for its all-you-can-eat movie buffet but struggled with investors to find a functioning business model, said in a letter to subscribers that it would close down Saturday morning because efforts to recapitalize the business ‘have not been successful to date.’ In many ways, MoviePass was a victim of its own success. Founded in 2011, the company didn’t take off until 2017, led by Mitch Lowe, a former executive with Netflix and Redbox, and Theodore Farnsworth, the chief executive of Helios + Matheson, the publicly traded entity that acquired MoviePass that year.

“MoviePass’s model paid movie theaters full price for every admission, with expectations of making money because in traditional subscription economics, more people sign up for a service than use it. But that model blew up in 2017 when the new leaders, Mr. Lowe and Mr. Farnsworth, slashed the fee to $10 a month.”

OXFORD STRATEGIC ADVISORY DEALS OF THE DAY  

Fair, a smartphone-based car leasing platform, has acquired Canvas, a car leasing platform.

Platform One Media, an operator of a global television and production studio, was acquired by Boat Rocker Media, an operator of an entertainment content production company.

RETAIL

While brick-and-mortar stores are shutting down, Old Navy plans to open 800 new locations: “As Old Navy—the star of Gap Inc’s brand portfolio—plans to split off into its own separate company, Old Navy CEO Sonia Syngal outlined the company’s expansion strategy. She said the openings will happen predominantly in ‘underserved small markets.’ Over the past few years, Old Navy has opened about 35 stores in these smaller markets, which typically have fewer than 200,000 people, and learned a tremendous amount, Syngal said. … The brand has focused on increasing its size range too, making it a destination for the many American women who go underserved by the narrow ranges at other labels. (Most of Old Navy’s business in larger extended sizes remains online, but it has been testing more in its stores.)”

SPOTLIGHT

Introducing 21 Hats: We have some exciting news to share. In November, we will introduce a brand new community of businesses called 21 Hats: What It Takes to Run a Business. The goal of 21 Hats will be to inform, inspire and connect entrepreneurs through articles, case studies, reader forums, podcasts, events, and the SiriusXM 132 radio show Mind Your Business.

The Oxford Morning Report will soon be rebranded the 21 Hats Morning Report (and everyone who has been part of the Oxford Center will get a one-year subscription to 21 Hats). Our goal is to make 21 Hats the preeminent community for business owners. While we expect the site’s content to be second to none, the most important element of 21 Hats will be youa community of actual business owners who will have the opportunity to create a profile page, participate in reader forums, connect with other members, and attend special events. 

The 21 Hats website is still under construction, but you can keep tabs on our progress through this newsletter (getthemorningreport.com), by following us on Twitter (@21_hats and @lfeldman), and by listening to Mind Your Business (Thursdays at 1:00 p.m. ET on SiriusXM 132). Please let us know if you have any questions (lfeldman@oxfordcenter.com). And see you soon at 21hats.com! 

Loren Feldman, chief content officer, 21 Hats.

And that’s what’s ahead.

Please send comments and suggestions to mattg@oxfordcenter.com and lfeldman@oxfordcenter.com.