The Federal Reserve has adapted a new stance on monetary policy: patience. With the federal funds rate at the zero lower bound since 2006, the Fed’s policy-setting committee, the FOMC, has delicately approached the idea of beginning to raise rates. Beginning in 2012, the Fed assured the markets that there would be a considerable time period of highly accommodative monetary policy to bolster the economy’s progression to the Fed’s dual mandate of maximum employment and stable prices.

During the last two FOMC meetings, the committee decided to exclude the language of “considerable time” from the statement and adopted a new vow to remain “patient in beginning to normalize the stance of monetary policy.” The statement assessed that labor market conditions were improving and that labor market slack, or underutilization, has continued to diminish. Following robust job gains at the end of 2014 and a significant drop in the headline unemployment rate, which is now down to 5.6 percent, a quick glance at the labor market looks more reassuring than reality.

There are still 6.8 million workers who are employed part time for economic reasons, 2.3 million workers who were marginally attached to the labor force, and 740,000 workers who were discouraged from looking for work since they did not believe there would be any employment opportunities. Over the past twelve months, there has been little change in underemployment. The U-6 alternative measure of broad labor market underutilization, which is at 11.2 percent, has remained twice the size of the headline U-3 unemployment rate. This is drastically above pre-recession norms, when there was a 3 percentage point differential in the rates compared to the 5.6 percentage point difference today.

In the past 35 years, the unemployment rate has generally been considered a good measure of labor market health (Barnes et al. 2007). However, the recent improvements in the headline (U-3) unemployment rate have overstated the health of the entire labor market. The FOMC learned this first hand. In 2012, the committee decided to target a 6-1/2 percent unemployment threshold to assure the market that rate rises would be delayed. Even with an unemployment rate nearing 5-1/2 percent, the FOMC has been forced to backtrack and recognize that this threshold was shortsighted. At the 2014 annual Jackson Hole conference, Janet Yellen claimed that the “decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions.”

In order to assess the amount of residual labor market slack, I created an aggregate distance function summing eight different labor market indicators from the distance of their pre-recession norms. Over the past year, Chair Yellen has mentioned that a variety of labor market indicators are on her “labor market dashboard.” Using speeches over the past year, I gathered eight different labor market indicators that Chair Yellen has highlighted when talking about labor market health. This includes: total unemployment, total underemployment (U-6), the labor force participation rate, percent of unemployed who have been out of work for over 27 weeks, employment-population ratio, hires rate, quits rate, and the job openings rate. For each indicator, I examined the pre-recession average (2005 – 2007), and then found the indicator’s proportional magnitude distance from current levels.

graph 3


As demonstrated by the indicator, there is still significant labor market slack, even though it is diminishing.  The indicator has no form of weighting between the components, and assumes no structural changes in the labor market when using the 2005 – 2007 pre-recession. However, it is interesting to determine the relationship between labor market underutilization and wage growth.  By plotting this labor market indicator against total private average hourly earnings growth, I drew a line of best-fit wage curve through the relationship of wage growth and labor market slack.

Capitalism has been lauded as the market system necessary for providing better prices and quality for consumers. Fast-forward to modern day and capitalism implies large “big box” discount retail stores buying real estate, in stark contrast to small, family owned businesses. Are these stores a sign of U.S. economy growth or evidence that commercialism has overcome the American Dream of immigrants starting their own businesses?

The importance of small business to the US economy 

Big stores and name brands may have the greatest visibility in the US economy, but approximately 99.7 percent of all US employer firms are small businesses. Small businesses employ nearly half of the private workforce and since 1995 have created nearly 2 out of the 3 new net jobs in the United States. These small businesses include local mom and pop stores as well as private, local brand labels. They tend to have much smaller operational scale and hire fewer people than retail stores, but since these stores are so plentiful in the local economy, their quantities aggregate to the largest employing sector in the US.

Aside from their role on the workforce, smaller businesses also do a better job stimulating local economies than do retail stores. Small businesses, on average, return nearly half of their revenues to the economy, whereas large chains only inject 14 percent of their revenues into the local economy. Local businesses tend to buy products that are sourced geographically closer to their business whereas larger retailers are able to ship in products and supplies from more distant locales. To scale out – spending $1,000,000 dollars at local stores leads to $500,000 going back into the economy, which could also include at least 10 jobs, as compared to the $14,000 that a large-scale retailer would generate. Include the multiplier effect- and it seems that smaller businesses can generate greater positive economic gains than do retail stores.

The importance of retail stores to the US economy 

Large corporations open up new local businesses. For instance, Apple in Cupertino, while employing 12,000 people, also created 60,000 additional jobs thanks to the creation of local businesses relating to Apple. In addition, the accompanying wealth created by corporations in an area has a multiplier effect in the economy, where each additional dollar of wealth can generate even greater sums of economic impact when people start spending it at gyms, grocery stores, local coffee shops, etc.

In addition, retail stores are signs of population growth and expansion in a city. For instance, the opening of a Heinen’s grocery in downtown Cleveland signaled that the retailers see potential in the revamp of the city’s population, even though Cleveland has not quite met the population threshold for major retailers to open branches in the city.

How they impact and interact

Because larger businesses can incur cost savings through economies of scale and vertical integration of their supply chain, they are able to provide lower prices than small businesses. Furthermore, they can deliver a greater variety and breadth of products. With the opening of the Heinen’s in downtown Cleveland, local small restaurant owners in the 5th Street Arcade, a popular lunch destination during the work week, are worried that they will start seeing decreased clientele as their customers stop by Heinen’s for lunch instead, due to Heinen’s greater selection of foods and cheaper prices.

On a net balance, large retailers also tend to decrease the amount of employment in a region when they open. While a large store, such as Walmart, can easily create 320 jobs, this could also lead to losing 510 jobs through closed businesses. This means that on average, for every job that a retail store contributes to the economy, approximately 1.4 jobs are lost.

However, while these statistics may paint a grim picture of retail, there could be potential upside. As explained, there are synergies that evolve from the opening of new retail stores in any given region, leading to perhaps the destruction of some jobs, but also the potential for new ones in the area. While the media and certain statistics may paint the image of big box retail taking over smaller businesses, there are also ways for both to coexist.


In today’s global economy, every million counts. American corporations spend, or “lose”, hundreds of millions of dollars due to taxation– in the United States, 35 percent of corporate income is taxed. The quick fix for U.S. companies seems to be tax inversions. A tax inversion involves a U.S. company buying a foreign company and using its newly acquired tax nationality to reduce tax costs globally. While such a procedure is legal, it has been deemed as unpatriotic by many in the American political sphere.

Burger King

Burger King may be one of the most famous American companies to seek corporate tax haven. Fast food chain Burger King is in the process of completing its buyout of Canadian coffee chain, Tim Hortons. Burger King’s headquarters would be relocated from Florida to Canada and the company would pay far less taxes to Uncle Sam.

According to a critical report by the non-profit “Americans for Tax Fairness”, Burger King’s estimated savings are $117 million from the merger. Both Burger King and Tim Hortons will continue their operations separately; both will continue to use their respective brand names and serve the same products. The inversion changes the nationality of Burger King for tax purposes, and nothing else. The merged company would also have a shared official name, but that is a mere symbolic change.


Tax inversion only works for companies that have significant revenues overseas. There are three main caveats to tax inversion as a quick fix. First, the United States has a policy of taxing foreign income, not just stateside profit. This is referred to as a “worldwide” system of taxation according to The Economist, and is a unique taxation system among the developed economies of the world. This worldwide tax essentially makes it so that U.S.-based companies pay 35 percent tax on money made anywhere in the world. Therefore, whatever Burger King makes from restaurants in Mexico, France, Lebanon or Bermuda would be under the same 35 percent tax rate. However, once Burger King finalizes the tax inversion process, it will be subject to the 35 percent rate for profit made within the US, 15 percent for the profit made in Canada, 0 percent for profit from Bermuda, and so on for any other country. For companies that make significant profit domestically, the tax inversion might not save much money.

Secondly, the Treasury Department has plans to make inversions less attractive going forward. Treasury Secretary, Jacob Lew, has added regulations to ensure that inversions are more difficult to accomplish. One example is preventing inverted companies from transferring cash or property from a controlled foreign corporation (CFC) to the new parent directly, in order to completely avoid U.S. tax. Another example is reinforcing the 80 percent rule, which requires that a U.S. company be worth less than 80 percent of the new company that will be merged abroad. The merger must happen between the U.S. company and a foreign company that owns at least 20 percent of the new total value. While the rule was in effect before the new regulations are set, companies with a different distribution of shares were usually able to change the proportions to meet the rule. This will become more difficult now. Of course, many on Capitol Hill have argued that the onerous tax code, and not the lack of regulations, is the source of the inversion phenomenon. While lawmakers are divided on how to improve the tax code, most have proposed to cut the highest corporate rate. Republicans have proposed changing the worldwide tax to a stateside tax, also known as territorial tax, which would mean that corporates have to pay the U.S. rate of 35 percent for domestic profit only.

Thirdly, and perhaps most importantly, is the public perception of tax inversion. Are U.S. companies unpatriotic for reducing some of the millions in taxes that go into the treasury? For some, the answer is clear. In 2014, Walgreens had plans to merge with a Swiss company; which would have saved Walgreens an estimated $783 million per year. However, this move was called off because of the controversy and backlash it created. Still, companies need to compete in the global market, and U.S. companies are at a disadvantage relative to overseas companies with significantly lower tax rates. But some companies may decide that the negative publicity that comes with the tax inversion may be more costly than the potential tax savings.

Some might say that 2004 was the end of the department store era. After a century of dominance, department stores were outpaced by online retail sales. Since then, the moat has widened even more as online sales continue to surpass department stores at an accelerating rate.

According to research from the St. Louis Federal Reserve, online e-commerce sales have increased 1,400 percent since 2000 and over 100 percent since 2010. The Census Bureau has further determined that online retail sales have tripled as a percent of total retail sales since 2005, and the current growth rate shows no signs of slowing down.

graph 1

With a 50 percent decline in oil and gas prices since the summer, the Wall Street Journal has predicted that lower gas prices will translate into over $50 a month in savings for consumers. Even though consumers have extra cash in their pockets, a quick view of the retail sector looks pretty dull. Retail sales have been lackluster over the past three months, and even declined 0.9 percent in December. Nevertheless, by examining the commerce report data in closer detail, online retail sales have averaged over 15 percent for the last five quarters (as a percent change from the same quarter a year ago).

In order to address the changing landscape, retailers have been forced to respond. Although this trend should have been expected back in 2004, the last four months have been a turning point. Chains across the nation have begun shutting down stores, firing workers, and restructuring their corporations to focus on an e-commerce presence.

On January 8th, Macy’s Inc. released a surprise press release announcing the closure of fourteen stores across the nation. Furthermore, they hope to decrease their payrolls by letting go of two to three associates in each of the 830 Macy’s and Bloomingdales stores they run across the nation. Macy’s predicts this will account for a staff reduction of around 2,200 sales associates. While Macy’s has continued to exceed analyst estimates in comparable sales and earnings, their business model is changing. The fourteen stores Macy’s is closing accounts for $130 million in annual sales but the restructuring program is expected to generate over $140 million in savings per year. Macy’s has announced that the savings will be reinvested into technology and growth initiatives focusing on an enhanced shopping experience for online and mobile customers.

The company explicitly mentioned how it hopes to reinvest savings from merchandising and store initiatives into digital retailing and an improvement in the customer experience on The chief executive officer of Macy’s, Terry Lundgren, explained that the retail business is “rapidly evolving in response to changes in the way customers are shopping across stores, desktops, tablets and smartphones. We must continue to invest in our business to focus on where the customer is headed – to prepare for what’s next.” In January, Macy’s told investors that it would increase its digital technology group by hiring more than 150 workers.

Macy’s is not alone in closing department stores. On the same day that Macy’s announced its restructuring program, J.C. Penney informed investors that it would be closing approximately 39 stores, which will decrease the company’s workforce by 2,250 employees. The cost-saving measures are expected to allow the company to focus on future growth, especially in online sales.

Target is in the same boat. Since November, Target has announced plans to close 144 stores by the end of 2015. Even though the majority of these store closures will occur in Canada, the company will let go of over 18,000 employees across Canada and the United States. The business picture is prettier online. Target’s online sales grew 30 percent in the third quarter and the company is projecting around 40 percent online sales growth for the fourth quarter of 2014. Even though online sales are a small portion of Target’s revenue, they are increasingly refocusing towards e-commerce.

Across the sector, more and more retailers are cutting jobs and closing stores. Sears announced a total of 235 store closings in 2014, and the layoffs are expected to be around 8,000 employees. Abercrombie announced plans to close 150 stores in 2015, and Aeropostale over the past two months has told investors that it will close 75 stores over the quarter. As the economy continues to recover from the depths of the recession, department stores are currently moving in the opposite direction, and the pace has picked up dramatically in the last four months. Although many executives have reorganized to focus on online growth, the real loser is the storefront.

Retail employment has still not recovered from its 2007 – 2008 peak, and its growth rate is slowing. The growth of the economy since 2007 might portray the retail sector labor market as recovering. However, when you graph the percent of the workforce composed of clothing and accessories retail workers as a percent of the total workforce, the proportion is dropping fast. Research from the Economic Policy Institute has also demonstrated that most retail workers have lower real earnings today than they did 35 years ago.

graph 2

The decline in retail sales associates can also be viewed from an efficiency standpoint. Dividing a company’s total sales by the number of employees, many department stores have a sales-per-employee ratio of around $100,000 to $200,000. Although Amazon has a different structure than department stores, the company’s sales-per-employee ratio is over $600,000. Amazon is not just the biggest e-retailer; its web revenues are larger than the next nine biggest companies’ sales combined.  Department store chains have revolved rapidly in the last four months by shrinking square footage, but companies still need to substantially improve their online presence.

Following the infamously grueling midterm weeks at Dartmouth College, I try to relax by spending time outside. However, when I invited my friend to come along, he insisted that he was going to celebrate instead by shopping. Yet, to do this my friend had no plans of leaving his bed. He was going to shop online, where he can search for anything he may be looking for without ever having to visit a department store.

This article was co-published by Seeking Alpha on Jan. 7, 2015.

Unlike many central banks, the Federal Reserve has a dual mandate to promote maximum sustainable employment with stable prices. This dual mandate has been a guide for the Fed to implement accommodative monetary policy, especially during the poor economic and financial conditions over the past six years. Unfortunately, after targeting the Federal Funds Rate at the zero lower bound, completing Operation Twist, introducing new methods of forward guidance, creating two new interest rate modification tools, and implementing three rounds of quantitative easing, America’s economy is still underperforming. In order to fulfill its mandate, the Fed needs to expand its labor market perception of underemployment, consider targeting wage growth, and look towards new measures of labor market slack.

Over the past five years, the economy has consistently undershot the Federal Reserve’s two percent targeted inflation goal. In the last 70 months, only three months have seen measures of inflation, or the Personal Consumption Expenditures (PCEPI) core price index, above the two percent mandated target. Furthermore, the Producers Price Index (PPI), a leading indicator for inflation, has remained well anchored under two percent. Even with the $3.5 trillion in large-scale asset purchases and maintaining the federal funds rate at the zero lower bound since 2008, inflationary pressures have remained absent. The Fed does not currently face a conflict in monetary policy goals between prices and the labor market.

With inflationary pressures out of the picture, the labor market has remained sluggish since the recession. In 2012, the December FOMC policy statement announced that the Committee decided that an exceptionally low range for the federal funds rate “will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent.” This new form of forward guidance was monumental; however, it became shortsighted when the unemployment threshold quickly became irrelevant when the unemployment rate plummeted below the 6-1/2 percent threshold in less than a year. While the improvements in unemployment are a positive factor, the rate fails to account for significant amount of labor underutilization remaining in the economy.

Back in 2009, the economy was losing over 700,000 jobs per month. This amounts to more jobs lost per month than the number of residents in Vermont. Since the end of the recession, the private sector has regained over nine million jobs and the unemployment rate has fallen from 10.1 percent to 5.9 percent. Despite the improvement in unemployment, further measures of underemployment suggest significant labor market slack. There are currently 7.1 million Americans who would prefer to work full-time, 2.2 million Americans who are marginally attached to the workforce, and 698,000 discouraged workers who are not searching for a job but would want work if the labor market were stronger. As Janet Yellen addressed during the September FOMC press conference, “there are still too many people who want jobs but cannot find them, too many who are working part time but would prefer full-time work, and too many who are not searching for a job.”

The Fed’s dual mandate does not only encapsulate the U-3 measure for unemployment. Instead, in order to stimulate maximum employment, the Fed needs to consider a large number of cyclical and structural factors to gauge maximum employment and labor market slack.

The Labor Force Participation rate is currently at a 36 year low at 62.7 percent. This is the lowest participation rate ever recorded for individuals between 25 – 29 years old and the lowest participation rate ever recorded for men. According to research from the Chicago Fed, the labor force participation rate is 3/4 of a percentage point below predictions based on historical projections (Aaronson et al., 2014). This disparity may indicate that there is likely an extra margin of slack in labor markets beyond the U-3 unemployment rate.

Another indicator for labor market slack is wages. Over the past few years, wage growth has remained stagnant around 2 to 2.25 percent for the private sector. This is well below pre-recession levels of 3 to 4 percent. Moreover, Aaronson and Jordan demonstrated that wages would have been almost a full percent higher in 2014 if pre-recession labor market conditions had been restored, indicating that wage stagnation is another factor contributing to labor market slack. Wage growth is a good tool to measure labor market slack since it applies to all workers, and captures both economic growth and inflationary pressures. For example, four percent nominal wage growth in an economy in the long run would account for two percent inflation along with additional economic growth upwards of two percent. Unlike unemployment, wage growth also includes pressures from underemployment, discouraged workers, and inactivity in the labor force, which influences labor supply.

Blanchflower and Posen (2014) propose that the FOMC could use wage growth as an intermediate target for the employment stabilization side of the Fed’s dual mandate. Unlike unemployment, the rate of wage inflation is subject to less distortion by such factors as inactivity and discouraged workers, while it encompasses influences of underemployment in the economy. This new perspective could be a more successful threshold the FOMC could implement in order to judge labor conditions.

However, wage targeting presents a variety of issues. For one, there are multiple measures of wage growth compiled by the Bureau of Labor Statistics. This includes average hourly earnings, the employment cost index, unit labor costs, and median weekly earnings. Furthermore, private companies like ADP also have their own measures of wage growth. The Fed would have to make a transparent and explicit definition of wage growth before considering the use of a wage benchmark. There are also concerns regarding sticky wages. Wage pressures have been demonstrated to be rigid, especially in America where employers often wait until the fourth quarter to raise wages. Olivei and Tenreyro have examined how wage rigidity in America plays a significant role in monetary policy transmission and the impacts of monetary policy shocks. Rigidity in wages poses an interesting dilemma for the FOMC if they wish to use wages as a benchmark. It would become difficult for the Fed to accurately examine wage pressures on a monthly basis, and could make monetary policy shocks more frequent if the Fed fails to interpret the appropriate level of wage pressures.

Targeting wages would be a useful tool, but continues to pose significant dilemmas in perfecting the labor market slack picture. At the Annual Jackson Hole monetary policy conference, Chair Yellen commented that the “decline in the unemployment rate over this period somewhat overstates the improvement in overall labor market conditions… our assessments of the degree of slack must be based on a wide range of variables.” In order to get a better sense of labor market underutilization, the Kansas City Federal Reserve has produced a Labor Markets Condition Index (LMCI). The Fed’s new index is a “dynamic factor model” that displays monthly changes in 19 labor market indicators. The Fed has just started to publish the LMCI on a monthly basis, and many economists have considered the weighted index to be a useful tool for assessing the change in labor market conditions.

In recent monthly FOMC policy statements, the Fed includes a section emphasizing that the Fed will not raise short-term interest rates “until the outlook for the labor market has improved substantially in a context of price stability.” Even though the Fed attests that LMCI captures a broader level of labor market activity than the unemployment rate, the index has a correlation of -0.96 to the unemployment rate. Basically, the index mimics movement of the unemployment rate. Although the index is designed to indicate broader measures of labor market slack, it is still highly correlated to the unemployment rate.

Recognizing these issues, I put together my own index measure of labor market slack. Looking at broad measures of labor underutilization, the index takes into account the movements of nine labor market indicators that Chair Yellen has voiced as her favorite indicators for inspecting labor market health. These indicators include the U-3 unemployment rate, U-6 underemployment rate, hires rate, quits rate, layoffs/discharges rate, job openings rate, long-term unemployment percent share of total unemployed, labor force participation rate, and average hourly earnings. Using these nine indicators of labor market conditions, I created an aggregate distance function.  For example, the equation is an accumulation of distance functions, seen below:

(ac – ap/ap)^2 + (bc – bp/bp)^2 + … (nc – np/np)^2

The subscript “c” indicates current conditions, and the subscript “p” represents pre-recession averages (2005 – 2007). By comparing these measures to their pre-recession norms, we can measure remaining labor market slack. Through this index, it is clear that there is still significant labor market slack (see below).


Using an index similar to this could be a method for assessing labor market slack in order to determine the proper time to raise short-term interest rates. Regardless of the Fed’s choice in labor market indexes, many indicators point towards excessive labor market slack remaining in the economy. With inflation undershooting the two percent target, the Fed faces no conflict in goals, and can continue its accommodative monetary policy stance in order to promote employment and economic growth.


Coffee has never really been my thing. Even when I came to Dartmouth where Keurigs ubiquitously nestle atop dorm room desks and KAF fuels a large portion of the undergraduate population, I was never addicted to that morning jolt of caffeine.

An offhanded remark in a relatively early season of Gossip Girl, haphazardly thrown into the script probably in attempt to breathe some Brooklyn authenticity into the character Dan Humphrey, was the first time I recall hearing about Stumptown. Over the course of 14X, I went to a single meeting of the Dartmouth Coffee Club solely because they were serving affogato, espresso poured over gelato for all the coffee greenhorns out there, and I have an understandable propensity toward Morano. Even there, I rejected the undistorted espresso until its creamy, dreamy companion melted fully into its chestnut depths.

My latte orders always featured some pumps of artificially-flavored syrups, vanillin usually, while sugar from multiple packets and milks perpetually permeated my iced coffees. Omnipresent Instagram and Pinterest posts of caramel and whipped cream-topped blended coffee drinks proved that I was anything but alone.

So when I decided to take my junior fall as my first off term (not counting the summer after freshman year), interning at a coffee startup wasn’t quite the obvious choice.

Upon entering the office, I learned about the twice to thrice-daily coffee tastings and ratings (for “bouquet,” “cleanness,” “charisma,” etc.) of beans sent in from roasters in the hopes that we would carry their products. These assessments took place without additional sweeteners, flavorings or dairy products. I was apprehensive, to say the least, but figured this was as good a chance as any to become a black coffee-drinking real adult.

So I quit enhancers cold turkey and, if Tom Hanks’ character in the Da Vinci Code realized the “biggest coverup in human history,” I unearthed the biggest coverup in the past century. Contrary to what coffee chain giants brainwash the masses to believe, unornamented coffee is not terrible. In fact, black coffee can be amazing. That is, to qualify the previous statement, good coffee can be amazing.

But the coffee giants with which we grew up and see on every street corner don’t have good coffee. Their inferiorly sourced beans are mechanically scorched by the truckload before mingling with sugars, flavorings and milks to feign quality. And yet, millions of people happily spend over four dollars per cup every day for these well-masked atrocities. Starbucks’ top line is a testament to the power of this deception. This fraud has similarly allowed Starbucks to remain the leading coffee chain even after competition intensified over the past decade and a half with McDonalds’ McCafe product line release and Dunkin’ Donuts’ slogan change to “America Runs On Dunkin’” to push harder into the coffee market. This battle of quick service coffee became known as the Coffee Wars.

When the 2008 recession hit, many analysts predicted Starbucks to finally succumb to their lower-price adversaries. McDonalds’ ad campaigns targeted the favorable price discrepancy between themselves and Starbucks. One franchise even posted a billboard adjacent to the Starbucks’ Seattle headquarters simply stating “four bucks is dumb.” Even with McDonalds and Dunkin’ Donuts’ economical pricing and extensive restaurant remodelings to more fit the café look (Wifi, comfy chairs, etc.), Starbucks is considered the current champion of the Coffee Wars. The continuation of their domination is attributed to the fact that McDonalds and Dunkin Donuts’, though successful in pulling away the price-conscious customers, have never paralleled the variety and quality of Starbucks’ offerings.

These quality-conscious patrons who indulge their daily Starbucks cravings, who have allowed their favorite chain to weather the storm of competition, are currently at risk of inducing its obsolescence. Fortunately for all of us with taste bud-covered tongues, the proliferation of Third Wave coffees is exposing Starbucks’ camouflaged mediocrity.

To back up a bit, the Third Wave refers to coffee’s artisanal revolution from commodity to gourmet item, much like the popularization of craft beers and single origin chocolates. This followed the Second Wave of coffee, referring to the propagation of players such as Starbucks, Dunkin’ Donuts and Keurig, characterized by the widespread popularization of espresso drinks and regionally labeled blends. Before that, the First Wave encompassed the mass adoption of coffee into daily routines and concurrent production industrialization and commercialization. Folgers and foul instant coffees of that ilk constituted the First Wave.

With personal relationships with individual farmers and growing regions, meticulous small-batch roasting methods and an emphasis on quality rather than quantity, Third Wave roasters like Stumptown, Blue Bottle and Counter Culture have confirmed that the third time’s the charm. Bags of beans from Third Wave roasters frequently highlight the coffee farm’s name, the growing region, the varietal, the roast date and sometimes the farmer’s name. It’s not even uncommon to see the altitude at which the coffee cherries grew, to the nearest 100 feet above sea level, labeled prominently. Third Wave coffee is meant for consumption within days to, at most, a couple weeks from the roast date. Keurig K-Cups and Starbucks beverages, on the other hand, contain coffee roasted weeks to many months prior to brewing. While establishing that good, freshly-roasted, black coffee eclipses pure functionality, Third Wave coffee threatens Starbucks by tempting their quality-conscious patrons who haven’t yet run off to lower-priced, quality-comparable competitors.

The current picture of the coffee industry is nebulous. For the benefit of coffee farmers’ livelihoods, growing countries’ economies and drinkers’ palates, hopefully Third Wave roasters will prevail over their frilly, quality-impersonating predecessors. The sheer omnipresence and brand power of Second Wave chains, however, could prove unshakeable in the end.


Could the meteoric rise in popularity of the Starbucks Pumpkin Spice Latte have catalyzed a “Pumpkin Boom”? The recent craze for everything pumpkin and a correlated rise in pumpkin sales begs the seductive question of whether a seasonal, brand-specific drink could have revitalized an entire industry.

Some of you may be hearing about the Pumpkin Spice Latte (PSL) for the first time, but others have eagerly been waiting for its reintroduction as the drink is offered exclusively in the fall. Since Starbucks first introduced the drink in 2003, to the dismissive predictions of many, the PSL has seen a phenomenal rise in popularity. Starbucks has now sold over 200 million cups of the PSL, making it Starbuck’s most popular seasonal drink. Each year, Twitter and Facebook statuses loudly clamor the arrival of the PSL. In fact, the Twitter account, @TheRealPSL, enjoys close to a million followers.

Following Starbuck’s success with PSL, there has been an explosion of pumpkin related beverages and foods. McDonalds launched its own pumpkin lattes in 2013, and Dunkin’ Donuts added pumpkin flavors to muffins, donuts and coffees. Baskin Robbins, Kraft, Oreo and even Pringles have introduced pumpkin flavors to their product. Pumpkins and pumpkin products have successfully been marketed as a comfort food that inspires warm image of Thanksgiving, home and the beauty of the fall. Nielson, a global information and measurement firm that enables companies to understand consumer behavior, reports that sales of pumpkin-flavored foods and beverages increased 14% from 2012 to 2013.

In conjunction with this “pumpkin craze” of sorts, pumpkin sales have risen 34% in the last five years, according to the US Department of Agriculture. Virginia, which had no pumpkin farms 15 years ago, now has over 4000 acres of pumpkins. Several commentators from CNN and NBC have thus suggested that the PSL was responsible. Individual farmers have reported that they have seen a significant rise in pumpkin sales since the PSL debuted. Jamie Jones of Jones Family Farms (Shelton, Conn) estimates that sales on his farm are up 25%. While the drink does not even include any real pumpkin in its ingredients, people have argued that PSL inspired a craze for pumpkin related foods that increased overall demand for pumpkins across the country.

While this is an appealing theory, it is debatable whether the PSL could have single handedly caused a boom in pumpkin sales. The link between the rise of a celebrity drink and an increase in pumpkin sales seems tenuous at best. Most of the pumpkins produced go into filling Thanksgiving pies and it is unlikely that seasonal drinks and pastries could significantly increase overall demand. Instead, experts point to the fact that increased sales could simply be due to increased production. In other words, they argue that there had always been latent demand for pumpkin but that limited production, along with bad agricultural conditions over the past years which prevented farmers from meeting demand. Second, some argue that the growth in pumpkin sales since 2009 could simply be attributed to the recovery from the 2008 recession. All things equal, increased spending power translates into a greater desire to spend on holiday-associated goods. Finally, experts point to the fact that overall value of US crop sales has been continually rising, implying that the rise in pumpkin sales isn’t such an exceptional phenomenon. The rise in pumpkin sales thus more likely reflects a market that is moving from a state of shortage in supply to one that is able to meet aggregate demand. To the extent that demand is increased, this is more likely dependent on factors like population and increased disposable income.

However, if the pumpkin craze has one definite lesson for the rest of us, it will be the sheer power of marketing force (or shall we even say, genius?) of Starbucks. Before deciding to launch the PSL, Starbucks invited customers to pick a theoretical latte (mostly variations of chocolate or caramel) that included a pumpkin pie latte option. The pumpkin pie latte fell near-bottom flat. As if to prove the survey’s point, Einstein Bros Bagels launched a pumpkin-flavored latte before Starbucks did, but quietly withdrew it from the menu. But where the Einstein experiment failed, Starbucks became sensational. With a widespread outreach via social media, and careful emphasis of the fall atmosphere, momentum rose slowly but surely. With a bit of cinnamon or nutmeg the drink could be made at any time of the year but Starbucks cleverly emphasized that that the drink was available for a limited time only, fuelling the instinct to get the PSL now before it disappears. Starbucks enjoyed such success that even Einstein Bros Bagels hopped back onto the wagon with its own slew of pumpkin-infused coffees and bagels.  The drink has  proved itself a heavenly concoction that combines homely comfort with freshly brewed coffee.


Passing on savings to the customer has always been a cornerstone of Walmart since its foundations. Walmart founder Sam Walton’s legendary thrift (even executives flew coach class and shared hotel rooms on business trips) was put to work in crafting this new business model. This model, first implemented in 1962, relied on volume of transactions rather than margins to get ahead of competitors. Now, over half a century later, the fact that Walmart has an annual revenue of around $421.8 billion worth of goods throughout the world is a testament to the viability of such a retail model.

Throughout its meteoric rise from Bentonville, Arkansas to the farthest reaches of the world, Walmart’s constant message has been for the customer to “save money” in order to “live better” and has provided unremittingly low costs in every market it penetrates. But while this tactic allowed the company to grow to a market cap of $245 billion, it has also made Walmart notorious for one of its primary cost-cutting measures: the maintenance of low employee wages. Walton once wrote, “No matter how you slice it in the retail business, payroll is one of the most important parts of overhead and overhead is one of the most crucial things you have to fight to maintain your profit margin.” In setting sales associate’s wages at 3% below market, Walmart is continuing on Walton’s legacy of cost-cutting.

Though this practice has led to over $15 billion in earnings for the current fiscal year, it has also led to several employee strikes and national media attention. While noted economist Ernek Basker and others have argued that the expansion of Walmart into any given community brings a net financial benefit to community members as gains from low prices outweighs the cost of slightly diminished local wages, the fact remains that to many Americans, the word “Walmart” is as associated as much with low wages as is low prices. Recent spates of bad press in the media, coupled with several largely unsuccessful attempts by Walmart employees to unionize, has garnered the corporate giant a negative societal reputation it cannot seem, despite its $2.1 billion advertising budget, to shirk. Once minor, these public relations problems can no longer be ignored as the United States’ economy continues its slow progress back to pre-crash normalcy and Walmart—which bases much of its business model on demand for inferior goods—will now have to compete against higher quality suppliers as well as online markets. In order to expand or simply maintain its existing market penetration in the developed world, Walmart will have to look to the past and imbibe two other maxims of Sam Walton.

Walmart was once the retail leader in supply chain management but has since lost that title to ecommerce giant Amazon. Although Amazon’s $74 billion in revenue for 2013 is dwarfed by Walmart’s revenue of $473 billion, the market caps of these two companies ($134 billion and $246 billion respectively) imply a much more bullish outlook for Amazon’s growth potential. But Walmart does not have to play the role of a sprawling, established retail giant—it should leverage its current resources towards the continued expansion and development of its ecommerce platform. In 2013, Walmart’s global online sales grew 30% to $10 billion and similarly spectacular growth is expected for 2014. Canadian markets have been an epicenter of online sales growth for Walmart, with a 145% increase in online revenue in 2013 alone. While Walmart has been pressing e-commerce throughout the developing world, this growth in Canada should be an indicator to Walmart executives that the company also has the ability to break into developed markets. Walmart’s position in American and Canadian markets has recently been less stable than it once was; demand for food and basic consumer goods continues to show a steady rise, but there has been a relative dropoff in sales in stores where merchandise is the primary offering. An emphasis on e-commerce could allow Walmart to reclaim former position as a market leader in merchandise sales.

Walmart still has the edge over Amazon as far as profitability goes. Gross annual profit margins for the online retail giant have been quite weak: -0.65% as of June 30, 2014. Walmart’s profit margin, by comparison, consistently hover around 3.5%. This profitability advantage, coupled with an advantage in sheer revenue, confirms that Walmart can leverage its cash to make strategic investments in areas such as ecommerce. Walmart, however, will have to act on this advantage now or risk losing it in the face of new economic developments. Just as Sam Walton once invested in the latest computing technology to maximize his corporation’s productive efficiency, so should today’s Walmart executives use their economic largess to become leaders in e-commerce.

Regardless of how much Walmart is willing to invest in the future of its online sales component, it will inevitably have to address worker satisfaction and wages—a flashpoint that has become an endemic public relations and employee retention issue. In finding a solution to the issues of low wages, Walmart could look at Costco Wholesale Corporation. Walmart’s business model is often compared to that of Costco’s, with pundits such as Forbes’ Rick Unger arguing that “the time has come for Wal-Mart to take a lesson from Costco and consider the potential upside of treating employees like human beings.” However, calls for higher wages and better employee benefits ignores the innate differences between how the two stores of the two companies are run. At Costco manpower is focused almost exclusively on checkout and security while Walmart distributes employees across the store to directly aid in the shopping process. As a result of Walmart’s policy, each store has to hire many employees. In fact, Sam’s Club, a Walmart subsidiary, has in fact tried this business model, operating on a membership payment model with far less employee-customer interactions. Today, the 632 Sam’s Clubs in the United States still lag behind Costco in a crucial metric: “Costco’s sales on a per-store basis were much higher as it generated nearly as much total revenue with one-third fewer employees. Consequently, profit per employee at Costco was $13,467 compared to only $11,039 at Sam’s Club.” It is clear from the relative failure of Sam’s Clubs that an alternative store and business model is not the optimal way forward for the company.

Instead of trying, at an enormous financial and restructuring cost, to remake itself into a second-rate Costco, Walmart should focus its efforts on incentivizing employees by giving them stake in the company. Sam Walton was known for his emphasis on promoting the idea of Walmart as a shared corporate venture throughout the chain of command. By giving employees equity options and stock benefits, Walmart executives would be welcoming its over 200 million employees into the veldt. Though unusual in the retail industry, shift towards an equity compensation plan would not be unprecedented; Starbucks has, since 1995, given all of its fulltime employees the option of purchasing company stock at a discount each fiscal quarter. This policy may be the reason that Starbucks has, as a corporation, managed to escape media and national scrutiny despite the fact that its average wage of $8.79 per hour is even lower than Walmart’s average of $8.89 per hour. Walmart has already adopted other employee incentivizing programs such as one that allows some fulltime employees the opportunity to obtain a discounted college degree at one of several online universities. However, if Walmart develops a comprehensive employee discount stock-purchase programs in a way that doesn’t hurt the bottom line, the morale and company image could be radically improved.

With 11,000 stores under 71 banners in over 25 countries, Walmart has an unprecedented tactical avantage over its competition. While some pundits see the business model Sam Walton created as outdated, exploitative and unworkable, the current successes of the company are largely the effects of Walton’s policies. Current Walmart executives can boost profit margins, relieve employee and media tensions, and expand into new e-commerce markets by following more closely the tenets of their founder. Walmart has the assets necessary for expansion into new markets, regions, and sectors. By looking back to the past, Walmart might find its path into the future.


This article was co-published by Seeking Alpha on Jan. 7, 2015.

Bankers at the world’s top investment banks closely monitor “league tables” with the same dedication as avid Premier League soccer fans.  The usual suspects lead the pack. At the top of the mergers and acquisitions (M&A) table are storied franchises such as Morgan Stanley, Goldman Sachs, JP Morgan, and Bank of America. Colloquially known as “bulge brackets,” these public financial institutions offer a full suite of financial services ranging from capital raises and asset management to advisory and market-making.

Closely on their heels, however, are drastically smaller, “boutique” firms. These specialized practices, known to few outside of Wall Street, offer a much more narrow range of services and often specialize in M&A advisory. This new crop of banks with streamlined business models, deep rolodexes, and niche focuses are giving traditional industry players a run for their money.

The Wall Street landscape, as we knew it a few years ago, has changed. In the aftermath of the recent financial crisis, new regulations, overall risk aversion, and operational inefficiencies are reining in once highly profitable practices such as fixed income and proprietary trading. The age-old model of being a financial jack-of-all-trades has proven to be a burden. If prominent banks are to regain their competitiveness, they will have to focus on their core strengths instead of striving to mimic market leaders. Market dynamics will force bulge brackets to shift resources away from low-margin, weak-demand services and product offerings and will ultimately lead to a more diverse industry landscape.

Boutique banking on the rise

Managing directors at leading boutiques such as Evercore, Centerview, Greenhill, and Moelis & Company are overwhelming ex-bulge bracket veterans who have chosen to set up their own shops in pursuit of higher compensation and career independence, among other factors. Given their wealth of experience and industry expertise, heads of elite boutiques have been well-positioned to capitalize on the wild ride in M&A over the past decade. According to the Financial Times, M&A volume tripled between 2003 and 2007, plummeted during the crisis, and has since strongly rebounded. During this volatile period, several boutiques went public and since then have seen sky-rocketing returns on their stock (see index). Wall Street has not been so fortunate. Over the past year, shares of bulge brackets experienced returns that can only be described as anemic, 4% year-over-year versus 17% for the leading boutiques. In the first quarter of 2014, boutiques advised on roughly a third of all announced M&A deals according to Dealogic estimates.

The beauty of these independent advisory firms lies in their simplicity. They typically earn their bread by closing deals and receiving a commission-based advisory fee. About half of the revenue goes towards employee compensation and a quarter towards overhead, leaving a wide operating margin. There’s no need to worry about Basel III, FASB 157, risk-weighted assets, or a long string of expensive lawsuits.

And boutiques will certainly have no problem competing with bulge brackets for the newest crop of young talent. According to Glassdoor figures, the leading boutique investment banks offer analysts compensation that’s on par with bulge brackets, and in certain cases are even higher. Though analysts may give up the opportunity to develop a broad network of industry professionals in a more structured work environment, they often play a more integral role in the actual transaction process than they would at a larger institution. With firms such as Centerview and Evercore directly competing with the likes of Goldman and Morgan Stanley for big name clients, top college graduates are increasingly making the switch to boutique banking.

Wall Street’s dilemma

The post-financial crisis economy has not been kind to big banks. On May 19th, Swiss bank Credit Suisse pleaded guilty to tax evasion in the United States and will incur a fine of $2.6 billion, in addition to increased regulatory oversight. These costly criminal charges come only a month after Bank of America reported critical accounting errors that led to a delay in a highly anticipated share buyback program, much to the dismay of shareholders and BoA employees.  Around the same time, Barclays, a British bank, saw several of its top rainmakers leave amidst poor compensation. It effectively renounced its ambitions of becoming a top global investment bank, announcing sweeping layoffs in its U.S. investment banking operations. Deutsche Bank, long recognized as an industry leader in fixed-income trading, stubbornly clings on to its foothold in fixed-income and currencies despite a sharp cyclical downturn, cumbersome regulations, and general risk aversion towards exotic, but profitable investments. The recent spate of negative press has not only sent share prices tumbling but has also battered credibility just as banks were beginning to rebuild confidence with clients.

However, the strong recovery in corporate finance has Wall Street excited. M&A revenue for 2014 is forecasted to reach $16 billion, up 5-10% from the previous year. Several factors are at play here. After years of hoarding cash, large corporations are ready to take advantage of the restabilization in the economy, strong equity markets, and relatively low interests rates to make strategic acquisitions. Private equity firms also have a record amount of “dry powder,” funds they raised but have yet to deploy, and are ready to take on unprecedented levels of leverage in the hunt for attractive acquisition targets. According to proprietary interviews with C-suite executives, banks are readily offering cheap credit lines and a host of amenities to solidify existing relationships with clients. With multiple banks lined up in the hopes of landing the next mega-merger, corporations will have plenty of advisors to choose from.

Despite the optimism, the latest research from strategy consultancy Oliver Wyman and Morgan Stanley suggests big banks will need to work more smartly to win a spot at the table. Bulge brackets are smothering their clients with excessive and ineffective coverage. Corporate executives have noted that most of these outreaches amounted to nothing more than generic pitches and product peddling. This inefficiency can be traced back to the siloed nature of many financial institutions. The research departments, product groups, and deal teams often operate independently with limited communication across the various functions. In order to provide truly effective client coverage, banks will need to internally employ multilateral efforts to gain a deeper understanding of client needs.

A more level playing field

Banking is ultimately an information-based profession. M&A advisors, therefore, are paid based on who they know, what they know, and how well they negotiate. The emergence of innovative technologies that effectively use the wealth of available online data have begun to chip away at the first two ways investment bankers add value. First, who you know does not really matter anymore. Simple LinkedIn searches and a few minutes on Google can get you the contact information of virtually any influential corporate decision-maker. Second, the infamous “pitch-book,” one of the first sets of presentation materials prepared in a transaction process, has become commoditized as financial analyses have become cheaper and the preparation process easily outsourced. While it does indeed take years of hard work to become an industry expert and a menace at the negotiation table, technology has undoubtedly leveled the playing field for bulge brackets and ambitious up-and-comers.

Where Wall Street still excels and will continue to dominate is actual financing. Regardless of how prestigious or talented the new crop of boutique firms become, they will not have the same level of access to capital markets or have such an enormous balance sheet to leverage. This is Wall Street’s value proposition. Bulge brackets will continue to excel at complex transactions that require access to significant financing or capital markets. However, it is difficult, though not impossible, to demonstrate that complex financial institutions with many moving parts and regulatory obligations can necessarily provide better advice than a lean boutique shop staffed with industry veterans. To borrow a concept frequently used in management consulting, banking incumbents must adopt an 80/20 mentality towards their offerings.

But perhaps we are only scratching the surface of a more fundamental issue with how investment banking is done today, one that is more philosophical than operational. What was once a straight-laced, buttoned-up industry has transformed into a high-flying, glamorous profession. While there are certainly many bankers on the Street who truly have the interests of the client at heart, it appears that the urge to one-up rivals in prestige and earnings has led to poor decision-making, irrational deal-making, and risky trades. This begs the question of who bankers really serve today: shareholders or clients? When J.P. Morgan stood before a U.S. Senate hearing, he spoke these famous words:

I should state that at all times the idea of doing only first-class business, and that in a first-class way, has been before our minds…The banker must be ready and willing at all times to give advice to his clients to the best of his ability. If he feels unable to give this advice without reference to his own interest he must frankly say so. The belief in the integrity of his advice is a great part of the credit of which I have spoken above, as being the best possession of any firm.

Though spoken nearly a century ago, J.P. Morgan’s words get at the heart of why independent advisory firms are beating out bulge brackets. Decades of consolidation, keeping-up-with-the-Joneses, and profit chasing has left many firms bloated and unable to live up to the mandate of “doing first class business in a first class way.” Unless broad structural changes are made, Wall Street will continue to lose market share to smaller, more nimble boutique shops.


China’s consumption rate has been growing at an exponential rate over the past decade and the country’s increasingly wealthy consumers have become brand-obsessed. The top five brands in 2011 for Chinese consumers were Louis Vuitton, Chanel, Gucci, Dior and Armani. Recent market research indicates this trend won’t show any signs of slowing. According to reports from leading consulting firms McKinsey and Bain, Chinese consumers will account for more than 20% of global luxury consumption by 2015 and have already surpassed Americans as the world’s biggest luxury spenders. And compared with the Japanese, who started luxury shopping sprees during the economic boom in the late ‘80s, the Chinese are consuming luxury on a greater scale and at a higher level of intensity.

Many Chinese consumers new to the luxury market choose to start their luxury shopping experiences by purchasing the most iconic items under the most famous brands (often completely bypassing lesser known labels). In fact when it comes to the actual selection of goods, Chinese consumers value the perceived enhancement of utility over the aesthetics. “For luxury consumption, it is mostly about the brand name. The design itself really does not matter much, as long as it is not viewed as ugly by the mass,” said one of the luxury shoppers during an interview.

“Sometimes you see those new bags in Vogue that are actually really ugly. But somehow celebrities all over the world favor them and your friends around you start to carry them. It somehow makes me end up buying them as well, even though I still think they are ugly,” another interviewee commented.

It appears that the more expensive an item it, the more desirable it becomes. “I do not like Prada or Gucci very much because they are often on sale, sometimes 50% off! In this way, they are not solid in value and are not good items for investment. Hermes and Chanel never have sales and their items are thus worth much more,” said one of the interviewees. Three other interviewees provided very similar comments against brands such as Coach, whose average prices are relatively lower compared with other luxury brands such as Chanel and Hermes. According to qualitative market research, many of the more accessible brands are often considered as entry points for the “beginners” among the luxury consumers and are thus avoided by the more sophisticated consumers, who would not purchase any goods except for the “It Bags” (globally popular brand-name bags) or “limited editions.”

While luxury consumption is a way to buy social capital through exclusivity, it is also a way for consumers to emulate public figures and just fit in with their more fashionable friends. The top Chinese celebrities are often the spokesperson for many high-end luxury fashion houses in China and many of them appear in public only in the latest fashion designs from top labels. For example, actress Bingbing Fan is one of the most prominent celebrity figures and is widely viewed as a trendsetter for women’s fashion. An interviewee noted, “I used to like Prada wallets a lot because their vibrant colors and girly design. But many girls around me started to use those simple and solid Hermes wallets, which are seen as the most prestigious and expensive. So I ended up using it as well in order not to feel left out.” The overriding concern here is a fear of being left out from the “ingroup.”

And it’s not just the super rich who are consuming these elite brands. Average consumers, under social competition and peer pressure, often feel urged to make luxury purchases in order to maintain a desirable social status and image even if they can’t exactly afford them. “I cannot afford any of the luxury stuff but I just want to look good when I am around people who are rich and powerful” says one of the interviewees. The Chinese also have a deep respect of reciprocity when it comes to gift exchanging. Receivers are encouraged to send gifts of a similar price tag to fully demonstrate their sincerity, even at an extraordinary financial cost.

On the other hand, not all luxury consumers are succumbing to the social pressures and expectations of contemporary China. From my research, it seems that the more experienced and sophisticated consumers show interest in a much broader range of brands, some of which have minimal brand visibility and recognition in the Chinese market. This group of consumers displays a relatively high level of confidence in their own tastes and stresses the importance of the actual design and aesthetics of the goods. Their confidence allows them the freedom to make purchasing choices based on personal preference instead of on a public one. However with an increasing group of wealthy, class-conscious, and fashion savvy consumers, don’t expect the Chinese fixation over Prada and Gucci to evaporate any time soon.

Note: This is an edited excerpt from Gabrielle Chen’s thesis on luxury consumption in China.