Category: Business

Business, Prediction

Why I Was Wrong: Used Car Prices

pollywannamath

In March, I told someone to wait before buying a used car. COVID-19 was starting to cause lockdowns and promised to cause layoffs. In April, I gave the same advice. I gave the advice in May and in June. Now into July both wholesale and retail used car prices have spiked.

To examine why I was wrong, it’s important to examine the underpinnings of my advice. I assumed that COVID and COVID policies would cause a spike in unemployment and result in fewer people able to purchase vehicles of all kinds (new and used). I anticipated that defaults and repositions would spike in the summer and that supply would boom. Each month would bring worse COVID news, and each month would bring fewer people to car lots. With people working from home and potentially selling vehicles to stay afloat, increased repossessions, and depressed demand car prices had to sink with each subsequent month of the pandemic. It was calloused thinking, but I couldn’t think of an alternative model for car prices.

There was an alternative model. In this model prices of used cars rose as a result of COVID. There were a few elements that I was (sadly) correct about in March, unemployment rose and each month brought worse COVID news. My projection was proving to be prescient in April as used car prices plummeted. In May, it was clear that my projections were proving false in the medium-term.

My projection did not account for many of the reasons that used car prices jumped this summer. Those reasons include:

  • Public transit became unattractive during the pandemic for those who needed to commute throughout the pandemic. (Positive demand shock)
  • The CARES Act provided the unemployed with an $600 dollars per week enabling many to buy affordable used cars even while unemployed. (positive demand shock)
  • Trade-ins slowed because dealers incentivized lease renewals. (negative supply shock)
  • Car manufacturers closed factories leading dealers to prioritize used-car sales. (negative supply shock on new and used cars)
  • Lenders initially offered relief on auto loans at the start of the pandemic (although this slowed in May-July) which prevented the spike of repossessions I anticipated. (negative supply shock)

This series of unanticipated shocks, along with others of which I am still not aware, led to an increase in the price of used cars. To prevent missing the mark to the same extent in the future, what will I incorporate?

The government did not allow citizens to fail economically in the way that I anticipated that it would. I should know, especially in an election year, that the government will keep people (and businesses) afloat when it is politically beneficial. I also should have accounted for those who bought cars to escape public transit, in retrospect that was a pretty obvious component of a pandemic that requires social distancing.

What do I project for the next six months? Will I improve my projection based on the learnings above?

I anticipate that the price of affordable used cars (older than 2010ish sedan) will remain stable through the year. These prices will remain high because people will continue to avoid public transit and there will be some bolster to unemployment benefits though November at minimum. More expensive used cars will suffer. Dealers are offering irresponsible financing offers that include an 84-month option, as an example. Buyers will see lower monthly prices and agree to loans that will last longer than the vehicle they purchase. When its time for a new vehicle they will be trapped with negative equity and require a similarly predatory loan. Rinse and repeat.

Long-term I have concerns about the new and used auto market. People who bought vehicles to escape public transit will return to public transit and sell the vehicles. The increased unemployment will end. Millions of car loans are in deferral programs already, those period will end (and some are). I doubt the repossessions will come this year, but I think they will come. The rise in Americans trading in vehicles with negative equity is not an indicator of a strong market. The current COVID-related financing offers will not improve the scenario three years from now. Hopefully, I will write another post of why I was wrong in a few years.

Business, Innovation, Observations

GoodRX? BadRX? How to think about prescription Discount Cards

pollywannamath

When I first saw an advertisement for GoodRx, I assumed it would be a fad for 6 months and then I would never hear about it again. It has been over a year and I still watch their bad Monte Hall commercial before every fifth YouTube video.

Before I describe GoodRx and pass judgement on it, I should describe a little of the prescription market. Major pharmaceutical companies manufacture drugs and determine a list price that will allow them to hit a target profit margin. Much like for clothing or vehicles, the MSRP is not the amount that an average person will pay; the cost to consumer depends on many downstream factors. The pharmaceutical company will sell to a wholesaler, who, in turn, sells to a pharmacy. Pharmacies have relationships with third-party payer and their wholesalers that cause price variance of the same drug between pharmacies. At each level, a little profit is taken. On the demand side of the market, consumers often have two options:

  • purchase the prescription in cash without insurance.
  • purchase the prescription using insurance.

Insurers don’t determine which drugs will be covered under their plans, nor do they determine the price of the drug for their members. Insurers contract that work to a Pharmacy Benefit Manager (PBM). Pharmacy Benefit Managers determine which drugs will be covered by a plan and what a member will owe for the drug, the PBM does not need to disclose the real price of the drug. Insurers pay the PBM a fee for administering the drug plan, and the PBM keeps any rebate or discount that they receive from the pharmaceutical manufacturer. I could write at length on PBMs, but for the purpose of this article, I’ll only note that the position of PBMs are controversial. Some claim that PBMs save consumers money, others note that PBM profits continue to grow at an alarming rate.

GoodRx, and other prescription discount cards, can be thought of as a self-serve Pharmacy Benefit Manager for the uninsured. GoodRx identifies the lowest cost location for a drug in the consumer’s area and negotiates rebates and discounts with pharmaceutical companies for further discounts.

Does that mean that my initial skepticism about GoodRx was unwarranted? Mostly yes. The business model is sound and prescription discount cards are legitimate. However, GoodRx is not a panacea and I have two primary concerns about its use:

The second point deserves some clarification. In 2018, over 43% of Americans were enrolled in a high-deductible health plan. In these plans, a member will generally pay for 100% of their care (either out of pocket or using an HSA/FSA) up to a predetermined dollar amount or deductible. The health insurance industry has a lot of nuance that I can’t begin to cover in this format, but understanding the concept of a deductible is the piece relevant to GoodRx. Deductibles can include or exempt pharmacy costs based on the member’s plan design.

GoodRx cannot be combined with insurance. For many on high-deductible health plans, GoodRx can appear to offer lower cost drugs than even the copay offered by the pharmacy benefit manager. These apparent savings are not as they appear. Over a year, because insurance will often pay for the drug once a deductible is met, members in the scenario described above will often be better off using their insurance and paying a little more early in the year. GoodRx does not make that evident.

GoodRx is a good option for those who are uninsured, or know their current insurance offering and can account for anticipated yearly cost of their drugs. It is not likely a good solution for all. Especially those who would save a little in the short-term and, as a result, spend more over a year by forgoing their insurance.

Business, Innovation

The Commercial Furniture Market is Shifting pt.2

pollywannamath

I encourage you to start with part one, before reading this post, to get the full picture of the shifting landscape of commercial office furniture.

I started part one by praising office furniture manufacturers, Haworth, Steelcase, and Herman Miller, for creating ergonomic furniture that remains comfortable for hours. Furniture designed with ergonomics in mind is incredibly beneficial. Not only will a bad working set-up lead to soft-tissue injuries and musculoskeletal disorders, it will lead to productivity loss.

When my employer announced that they were going to shift to work-from-home for the duration of the COVID pandemic, I went to a local office furniture reseller and bought a Leap v2 chair (highly recommended) and a sit-to-stand desk riser. With an external keyboard/mouse, a second (and third) monitor, and a few books to ensure everything is the correct height, I am currently writing from a home office that passes even the most stringent ergonomic standards.

I live with my significant other. She works from home, and did prior to the COVID outbreak. When I started work from home, it was clear to both of us that it was time for her to have a home office set-up that works for her, at least as well as mine does for me.

Should be easy, we could go to the same store and pick up a similar home office set-up. My set-up works well for me. It should work for her as well.

There is a small, but important, difference between my significant other and I. Size. She is petite. As it turns out, the furniture that is so well designed for me and makes it possible for me to work all day, is not suitable for her.

If I have any female readers, what I said probably came as no surprise to you. It shouldn’t have been a surprise to me. When women are more likely to be hurt in car accidents, have worse medical outcomes due to lack of research, and work in offices that are too cold for them, because of a series of design biases that favors men, why should I be surprised that it was difficult to piece together a home office built for a petite woman?

The standard office desk is between 28 and 30 inches tall. We needed a work surface about 24-25 inches tall when seated to accommodate her frame. When she wanted to work standing, we needed a desk between 37-39 inches tall. The office furniture store that sold me my work-from-home set-up did not carry desks that short. We checked Wayfair for options, and most computer desks had a worktop about 30 inches high. After weeks of searching online and in-person, we could not find a regular desk that fit her needs and our budget. Even sit-to-stand desks did not meet her requirements. All but the highest end options had minimum heights greater than 25 inches.

Chairs were hard to find as well. My Leap wasn’t as comfortable for her because the lumbar support in the back isn’t height adjustable. Other chairs did not lower far enough to fit under a 25 inch desk; those that did had a seat depth that was too big for her to touch the back of the chair and keep her knees at a 90 degree angle.

No, putting a footrest down does not magically solve ergonomic issues with a chair.

I’m pleased to report that we found a workable solution. Although we could not find one for purchase locally, the Aeron Chair deserves special commendation for serving all heights and weights. We ended up purchasing an activity table for a desk, added some small drawers below, and the sit-to-stand riser above. This set-up meets her needs and allows her to work comfortably through the day.

But why was it so hard? And why did we need to think outside of the box to find furniture?

  1. The three Office Furniture suppliers I mentioned above do not make enough office furniture that accommodates smaller, and traditionally female, bodies.
  2. Offices buy furniture suited to the average male frame and assume that bigger is better.

The office landscape is changing. Women outperform men in college education, the gender pay gap is shrinking for women who are below the average age of women that take maternity leave. There are good reasons to believe that women will overtake men as the most successful office workers within my lifetime. Both the furniture suppliers and office managers should take note and purchase furniture that will work for all parties. Not doing so will eventually lead to an inability to attract top-talent.

When buying sitting desks, offices should demand that the desks are height-adjustable from 22-32 inches. Standing desks should start at 22 inches and offer the ability to raise to meet the needs of someone who is 6’6″. Chairs should either fit all frames, or offices should buy a selection of sizes. Monitor arms should be employed to allow workers to adjust their screens to meet their eyes. If employers demand that furniture meets the needs of their employees, the furniture manufacturers will respond with better selection.

To learn more about your specific needs review an ergonomic calculator.

Business, Innovation

The Commercial Furniture Market is Shifting

pollywannamath

I grew up loving Herman Miller, Haworth, and Steelcase. These three companies brought us the Eames Lounger, Wanders’ Tulip, and that one steel desk that we all know. I am sitting on a Steelcase Leap v2 chair as I write this post.

I like these firms because I know how it feels to work with bad office furniture. I’ve sat in task chairs that left me with aches after only a few hours of work. I’ve used desks that wobble or don’t comfortably accommodate computer peripherals. Ergonomic design is front and center for all of these firms. When you buy a Herman Miller task chair, you are buying years of research and expertise on the human body and how it must be supported during extended periods of office work. A good office chair and desk should be added between shoes and sheets on the list of things to spend money on.

The importance of ergonomics cannot be overstated. Although sitting might not really be the new smoking, there is no shortage of research the promotes good ergonomic habits in the workplace. Offices responded to this research by improving proactive ergonomic improvements throughout the 2000s. Now, many offices provide sit-to-stand desks, monitor risers, and the ability to move during the day. The workplace is improving and commercial furniture manufacturers drove many of those improvements.

A few months ago, many employees had to leave their ergonomic offices and start to work from home. In many places in the US, there is no end in sight to the new normal of work from home. The improvements in office furniture and employee ergonomics are no longer relevant to much of the US office workforce.

I started this post with a lot of praise for a few companies: Herman Miller, Haworth, and Steelcase. I could have included Knoll, All-Steel and others, but I’m not as familiar with their business model and future vision. Here comes the criticism.

Herman Miller, Haworth, and Steelcase fail to understand the market where they will need to compete in the Post-COVID landscape. Let me summarize their positions:

  • Herman Miller probably does not deserve to be criticized in this post. Herman Miller sells furniture online and does not require a dealer network. Herman Miller has a work from home section of their website. I won’t give Herman Miller undue credit, they are best positioned to succeed in a work from home environment because they have the strongest position in residential furniture.
  • Haworth does not appear to have changed their corporate strategy in the face of COVID. When I asked for information on how to create an ergonomic home office (more on that in pt.2) I was told to visit a dealer (closed due to COVID) for more information on how to create a home office due to COVID.
  • Steelcase, who continues to champion open offices, is publishing material aimed at reassuring the public that work from home will remain a marginal mode of work. Steelcase, a furniture company, points to the lack of ergonomic furniture available to individual contributors as a reason that employees will need to go back to their open office to be productive. Steelcase, like Haworth, uses a dealer network to sell their furniture to the general public.

Although the “reopening” date remains unclear for many US workers, there will be a time after COVID-19. I don’t think there will be a wholesale change from office work to work from home as the default, but I think we will see a shift at more than just the margins (and urban parking will become much more expensive). In a world with more workplace flexibility, commercial furniture giants will need to become more flexible as well. Offices will shrink a little and require less furniture.

All three will need to compete with less expensive residential options for office furniture found on Wayfair, Overstock, IKEA, and Amazon to retain market share and profits. I don’t advocate that any of the three attempt to compete on price with their current offerings. I described their differentiator above (ergonomics and durability).

That said, convincing a person to spend more on office furniture will be tough when there are myriad cheaper options (food is a perfect analogy for something with a similar cost+ health scale in the US). I advocate a few strategies to improve their competitive odds in the residential business market:

  • Remove the reliance on the dealer network for specific work-from-home product lines (Steelcase and Haworth). I know dealers will denounce the move and demand exclusive access to furniture sales, but purchasing must be easy for the consumer.
  • Create frequent partnerships with large employers to encourage employees to use their office furniture at home. This strategy should be natural for all three and retains the returns to scale of the current model. Employees would either need to place an order through their employer or have an employer-specific login to receive a discount. These partnerships should be advertised as a benefit by the furniture manufacturers as well as the companies involved in the program.
  • Spin-off home office design studios that compete on price and meet the consumers where they are. Leverage older technologies and cheaper materials to build smaller pieces designed for home use at a price point that is competitive in the Wayfair marketplace. Limit the number of products and colors available to keep costs down.

Without these strategies, all three companies will remain industry leaders in the commercial market. Retaining the same percentage of a shrinking pie is not good for business, however.

View part two here.

Business, Innovation, Technology

Battery Drama Remains

pollywannamath

In 2004, Demetri Martin observed that batteries are “the most dramatic object.”

They’re either working or they’re dead.

Looking back, I wish this joke did not age as well as it has. Why, when I go to the the store, do I still see disposable batteries as the primary option?

In 2004, we were using a mix of rechargeable AA and regular alkaline AA batteries to power our household accessories. Now, my devices either have an internal lithium-ion battery that I can recharge, or I pick up a disposable AA battery at the store and replace the battery when needed.

In 2004, my family and I were not trying to reduce our use of single-use plastics. My body wash had microbeads that polluted the great lakes. Telling people that you recycle was a liberal status indicator. Our lights were incandescent. But in 2004, we had rechargeable alkaline batteries to power our digital camera and TV remote control. These rechargeable batteries were easy to find, they were sold along with single-use batteries at our local grocery store.

When I go to the stores near my home, I see only single-use alkaline batteries on the shelves. Ideally I would have an analysis of the cost differences per milliampere hour and the environmental impacts of the primary battery technologies available:

Unfortunately, I cant find consistent data that would make that analysis possible for me, and I don’t know enough about battery technology to create a model for the environmental and cost outcomes that would be necessary without the observed data.

Without that model, I’m forced to make an assumption. At least one of the rechargeable battery options above are cheaper to use and better for the environment than disposable alkaline batteries. The New York Times agrees with this assumption as well. So why am I not buying AA lithium-ion batteries?

My inability to escape alkaline batteries isn’t unique to me. An analysis from 2006 (nearest to the 2004 date above) projected that Alkaline batteries would retain market dominance through 2015 at minimum and that the battery market would continue to grow. That analysis proved correct. An analysis that covers 2018-2023 (gated) appears to forecast continued market dominance of disposable alkaline batteries over rechargeables.

I think there are a few likely causes, convenience and market concentration being the two primary.

  • When I need a battery, I need it urgently. I probably am not willing to wait for overnight or two-day shipping from Amazon to find lithium-ion AAs. I may not even be willing to wait through the charging period (I know, I’ll work on it). Disposables are more convenient.
  • I would not be shocked to learn that the best and most innovative brands in lithium-ion batteries are not the household battery companies. It might also be true that none of the best lithium-ion (or similar) companies would be strategic acquisitions for the known battery companies. If either of these things prove true, I should expect that it will be hard to find good rechargeable batteries at the store.

Hopefully, by 2025, batteries will have caught up with other household good, or that all new household accessories will have long-lasting internal batteries that recharge. But in 2004, I would not have assumed that AA batteries would have regressed by 2020.