Why Small Businesses Are Starting to Win Again | Hacker News Reader

Why Small Businesses Are Starting to Win Again

newyorker.com

93 pointsohjeez40 comments

If anyone is interested in a start-up[1] that works with beer, shoot me an email[2]! My company builds flavor profiling and quality control tools for craft beverage producers using machine learning, sensory science, and analytical chemistry.

[1] www.gastrograph.com

[2] JasonCEC [at] gastrograph [dot] com

-------- edit / follow-up -------

I believe that the growth in artisan firms is part of the trend towards affordable luxury goods, where individuals who find products that better match their preferences at nearly the same cost (not price^), become brand or product loyalists - they'll continue purchasing and consuming that product until it fails them (quality control) or their preferences change (which happens quite often, usually as a result of experience - we build flavor profiling tools to track and re-target these individuals).

^ example: the average craft beer may cost ~2x as much as Bud or Natural Light, but contains >2x alcohol by volume.

Minor nitpick that doesn't dispute your point: Bud is 5% abv and Natural Light is 4.2. Most craft beers aren't rocking 8+% alcohol, unless you're a big fan of imperial stouts and skullsplitter =).

Those alcohol contents are quite reasonable for the NZ craft beer scene. If you look at Garage project, recently named NZ's best brewery in certain circles(and I can attest they are fantastic), the 7-8% range is well represented: http://garageproject.co.nz/ .

"Small" businesses win when transaction costs between corps get smaller, when supply chains get more efficient, when more available capital is fills out choices in the supply chain, and when more corps can focus more on competitive advantage. A "small" business (with some exception to service-based businesses) is a just a "head" of a long, long supply chain. And, it only looks small if you look at the head.

I have been hoping for years that this type of economy would emerge. This type of transformation will allow for more small entrepreneurs to survive and thrive. Large corporations tend to focus on optimization, and that optimization narrows the types of products that they can produce. With small businesses, customers can get more tailored products, more individualization, more personalized service.

Although it's easier than ever to start a small business, I don't think we're quite there yet. Large corporations still have economies of scale to their advantage. But, I'm hopeful that we're trending in the right direction. I'm hopeful that soon, small entrepreneurs with a good business ideas can make reasonable profits staying small and fitting in somewhere in that massive, global supply chain. In that type of world, we all benefit.

This was a frustrating article, because I think it's almost right, but not quite.

It's not that mass-production kills quality or "intangibles". We don't have to assume boutique products have a quality advantage. It's just that scale is most effective on price, and price sensitivity is not linear. Once products are cheap enough, price discrimination stops being decisive.

> The true-differentiation strategy seems to work best when scale, despite its efficiencies, also introduces blind spots in areas such as ... intangibles not entirely consistent with mass production and standardization.

That isn't really what's going on. Even if the big business is good, and scale is quite useful, there are many, many small competitors. All of the competitors are making products, and some of them are likely to be exceptional. So for the big business to stay on top, scale has to be helping a lot.

If there are 100 beers on the shelf, and one of them is a mass-produced, and the mass produced one is not #1 in quality, you don't have to assume mass-production hurts quality. It just that it didn't help enough.

Craft beers are "mass produced", just not in the quantities of Budweiser. They still use huge kettles, precisely controlled quantities of ingredients, etc. They also tend to use higher quantities of good, natural ingredients and the like. SO yes, mass production in and of itself doesn't necessarily drive quality.

BUT. The size of the company can. Very large companies, particularly public but not limited to such, start drifting toward the cheapest product they can get away with while maximizing profit. That's their obligation to share holders after all. I think the food industry(including beer) is particularly sensitive to this from a quality standpoint.

> Very large companies, particularly public but not limited to such, start drifting toward the cheapest product they can get away with while maximizing profit. That's their obligation to share holders after all.

This is largely a myth. Corporate executives have an obligation to shareholders, but that obligation is not to maximize quarterly profits. Short term profit maximization at all costs is generally not in the interests of shareholders. If you have a reputation for selling a quality product you can capitalize on it in the short term by selling a junk product at quality prices and huge profit margins, but in any kind of a competitive market that opens you up to exactly what you would expect. Someone else comes in with a real quality product at the same price and you lose all your business to them.

The reason corporate executives do things like that isn't because they're satisfying their obligation to the shareholders -- they're doing quite the opposite. But they do it anyway because of how they're compensated. Big bonus at the end of the year if profits are up; no repercussions if it tanks the company by the end of the decade because by then you're working somewhere else.

It's important to make the distinction because the shareholders are the ones who have the power to do something about it. "Obligation to the shareholders" makes it sound like the shareholders are the beneficiaries, but they're just as much victims as the customers. Making that mistake is how they become the victims.

I wonder why they are so common though.

My theory is that we have too much diffusion of ownership. When Foo Corp is majority owned by four dozen mutual funds which are in turn owned by ten million different people, there is nobody minding the store. The mutual fund managers are picking a stock to make up ~1% of their fund, and they have the same perverse incentives as the executives. The individuals who are the real parties in interest don't even know what companies their money is invested in.

Does the mutual funds actually push for such people or is it caused by the culture or something like that?

Don't think of it as a problem with specific people. It's systemic. You tell a CEO that he gets paid primarily based on how much profit the company makes this quarter and he's going to start slashing long-term R&D and burning the office furniture for heat.

But you're asking why funds invest in companies like that or prefer that method of compensation. Part of it is just laziness. Investing in a company or rewarding a CEO who posts big profits seems intuitively sensible and is easy to measure. It's a lot more work to do the investigation it takes to realize they're going to crash and burn and you could be the one holding the bag.

Another factor is that fund managers are often compensated using the same methods. If the fund does well in the short term then they're rewarded. The companies dedicated to short-term profits do exactly that, as long as the market doesn't factor in the long-term value before you divest. But the bonus if it works goes to the fund manager whereas the risk is to other peoples' money.

oh, so that's why they lay off staff during record profits.. to not maximize short term profit to share holders?

Craft beers are mass produced but sourcing ingredients that meet their requirements may or may not be scalable.

Massproduction guarantees that there is no variation in quality. Whether the product is of low or high quality depends on other factors.

I attribute the change to the influx and return of a strong middle class in cities. It's easier to create "mom and pop" shops when you have affluent buyers who live a block away.

Suburban lifestyle meant your nearest supermarket became the obvious decision when the 5 mile drive was no shorter than a 45 minute drive.

It will be interesting when services such as Postmates, Curbside, and Instacart evolve to extend these small businesses' reach.

I think the big part is affluence full stop. “Discretionary” spending tends to go to go to small businesses in larger proportions while big corporations get the non discretionary stuff. Niche products like those mentioned. Services (cleaning restaurants). Entertainments services. Those all lend well to smaller businesses.

More rich people. More niche products and fun services.

A middle class family spend most of their money on low cost brands at the supermarket supermarket, department store clothes and furniture, transport, accommodation, etc. Housing employs a lot of small businesses but apart from that, most of it goes to the big boys. Add 50% to their income and you’ll probably see more restaurants, craft products and such.

Mass production, mass appeal is the domain of large company.

> I think the big part is affluence full stop.

I don't know about that. Most luxury spending I see goes towards huge brands (fashion labels, air travel, etc.), whereas necessities can go to small businesses.

I'd probably never buy my clothes at a random boutique, but I might pick up a lightbulb at the corner hardware store.

I think you misunderstand what a small business is. A corner hardware store is a micro company. For most intents and purposes a small business is between 10 and 50 employees and/or between 10 and 50 million in annual revenue. In the US the Small Business Administration will classify most of the companies under 500 employees as a small business.

I think you're being needlessly pedantic.

A corner hardware store is absolutely 100% a small business. What possible argument do you have for claiming it is not?

The way it is treated by tax authorities and the administration. If that's not enough for you, I don't know what is.

I'm going by what nearly every normal person in the world considers a small business.

For example, Wikipedia: "Typical examples include: convenience stores, other small shops (such as a bakery or delicatessen), hairdressers, tradesmen, lawyers, accountants, restaurants, guest houses, photographers, small-scale manufacturing, and online businesses, such as web design and programming, etc."

If you truly believe that a corner hardware store is not a small business, please go ahead and tell that to the store. See how much they laugh at you.

Why should I enter a store and tell them something like that? And even if I do such a bizzarity why should I care that a clerk laughs at me?

Are you talking about an independantly owned corner hardware store? I can see your point if you're talking about a chain of stores.

The definition you used does not specify minimum employee levels and I'm a bit confused why you added those minimum levels.

Yes, a chain of such stores sounds like a small business. A single location sounds like self employment. Micro business is the legal term, at least in the EU.

>return of a strong middle class in cities

Where are these cities where a strong middle class has returned? Surely not in SF, where one of the area's highest paid professions (software engineer) cannot afford family housing? Certainly not elsewhere in California, where incomes among middle class Californian households fell by nearly 7% between 2009 and 2013, while income among the state’s top 20% earners grew by 1.3% [1].

Certainly not small cities in the Midwest or South. Having traveled through those extensively the past few years, I can assure you there is no middle class returning to those cities. Quite the opposite.

I'm not one of those who gloats about SV "privilege" and scolds people for making the money they deserve to get paid, but the extent to which the typical educated SVer is getting out of touch with the economic reality of this country does have me concerned.

If software really is eating the world, and the industry's best and brightest are blithely unaware of the dire condition of the country's middle class, then we are good and truly fucked.

1. http://www.huffingtonpost.com/2015/01/24/states-middle-class... (not usually one to cite the Huffington Post, but this article clearly outlines the data sources and methods at the bottom, and they seem solid)

I think they meant the return of the middle class to city centres. That doesn't mean there's more middle class people in a metro area, just that they now live downtown rather than spread out in suburbs.

Basically, anywhere with gentrification. The unaffordability of housing in city centers is a sign it's now "in" to live there. Businesses follow.

I do agree with you about how out of touch people on here are about North American economic reality.

> Where are these cities where a strong middle class has returned?

When I was growing up in the suburbs of DC, not only would nobody middle class ever live there, you'd only ever go there to visit the monuments. Now, large swaths of the city are being redeveloped into areas for people who can afford to patronize mom & pop establishments.

I'm from Greenville, SC (a small city in the South) and it is BOOMING. Population has grown by a third or so in the last 10 years. There are new residential and commercial developments everywhere.

It is argued that one implication of Coase's Theorem[1] is that firm size is inversely proportional to transaction costs. If transaction costs are falling due to Internet enabled communication, this may contribute to reversing the tide of centralization.

[1] https://en.wikipedia.org/wiki/Coase_theorem

One overlooked factor is the modern consumer being desensitized to advertising. This created huge advantages in the last 50 years but modern consumers see so much advertising that they are largely immune to it.

Good point! Having been exposed to a bombardment of advertisements since early in life, personally I don't think I'm influenced very much by them now (although that's up for debate).

Also, the TV is largely being replaced by Netflix and such, so the exposure to TV advertising is also falling in absolute numbers.

Part of this might be because of social media and consumer-oriented websites (such as Yelp, Beer Advocate, Urban Spoon).

A big problem trying a new product or restaurant is fearing a possible bad experience. With McDonald's you know what you're getting. It might not be great, but it's consistent. Rating systems and recommendations from peers help give confidence to consumers trying new things.

I think some of it also comes from a lower barrier to entry in many cases - the cost of supplying a small business (such as a coffee shop) has been lowered dramatically in recent years by technological advances in the supply chain, i.e. better tracking of coffee beans, more efficient delivery, etc.

I think it is this, precisely. And I think legislatively we should clear the way for small business by reducing the burden of regulation and oppressive bureaucracy.

I hear people talk about the "burden of regulation" a lot, but outside of breweries and distilleries, what are the regulations that are so burdensome? Things like building codes and inspections or are you think of things at the federal level?

Voting this up. Too often this is political code for "handouts to big business" by the way of environmental sundry exemptions, tax exemptions, immigration exemptions (hello H1B issue) and the like, none of which actual small business can take any advantage of (and which the people running said businesses would probably be close enough to the immediate effects of to find distasteful in a lot of cases).

I would like to hear some concrete examples of what people think needs to be changed.

Ironically in the paragraph about "true differentiation" the author mentioned Lamborghini cars, a brand of the ninth biggest company on earth with 600k employees. Other niche brands they own are Bentley, Bugatti, and Ducati.

I would argue that these are indeed differentiated. It does not matter whether production processes or internals are unified or not as long as the consumer experience of the end product is.

Small businesses profit from mass production as they can build a consumer ending frontend around standard technologies and products they can leverage for all their internals.

I think small business is difficult to start in current competitive market,as too many people try to start their businesses, and most of the survived businesses have their difficitation products or services comparing with others. I admit that big giants have their adventages, such as resrouces and capital. But small businesses are more flexible, and they could keep more focus on consumers, and provide better services to customs. In this approach, small businesses would aviod blind spot.

And small businesses will continue to do well. Small businesses have the advantage of agility - they can react to market changes quicker, they have more freedom to experiment, and they can tailor the experience of whatever they're offering to local markets.

Small businesses are also important for job creation: http://www.ic.gc.ca/eic/site/061.nsf/eng/02806.html

Perhaps small scale production is becoming cheaper and more feasible. The cost of equipment continues to drop, as even expensive things are made by someone looking to increase their market.

What if the additive manufacturing fans are right? What if 3d printers that can actually make good stuff get cheap but remain slow? Fused titanium parts are awesome, but I don't expect that in my living room any time soon.

Reply on news.ycombinator.com