Canaries in the coal mine
More layoffs, more market turbulence, more unknowns - but! - more great Small Business insights into your inbox. So there is that.
Our top story today is about big tech layoffs, and you’d be entirely right to ask the question, “what do these huge billion dollar companies have to do with small business anyway?”. Hey, we get it. And, by the way, it’s a very valid question. It’s easy to roll our eyes at these crazy profit-making behemoths, and it’s also hard to find sympathy sometimes when we hear about high-paid layoffs that come with generous severance packages and golden parachutes.
But stop for a moment to consider that big businesses take a long time to change course - they’re oil tankers in choppy seas trying to navigate changing headwinds, and often the quickest solution available to them is to make themselves lighter and more agile by throwing things (people, projects…er…diversity) overboard.
The current suffering of big tech is the canary in the coal mine - it’s a sign of tougher markets in the coming year that will impact consumer profits - so use this to your advantage in your business planning and remember that while your business is smaller, you’re also more agile and flexible to change.
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Top story this week☝️
Big tech layoffs continue to mount
There’s been tech layoffs happening since last year, but the pace seems to be speeding up and the numbers increasing. Yes, it looks like it’s bad news for the economy, but it’s important to realize why these layoffs are happening. After all, these are businesses that have been posting record profits of late - Microsoft alone raked in record results for 2022 with $198 Billion USD (!) in revenue - and yet they are still laying off 10,000 of their workforce. The thing is, the majority of big tech companies are now owned by shareholders, and for example, Spotify, despite still being seen as a “cool startup”, are actually part-owned (via IPO) by normal traders, private equity and pension funds. Yup, big tech is now the domain of safe boomer investments, teachers’ union RSPs and traditional strip-mall investment banking. Why is that important? Well for the majority of these big tech firms, the past few years have seen record growth, but with rising costs predicted to continue rising in 2023, and with shareholders still demanding increasing year-on-year record growth to increase their wealth - ‘employee shedding’ is the quickest, easiest solution to guarantee even bigger numbers in 2023. It’s also worth noting that these things are cyclical, just like the broader markets. Some of us will be old enough to remember the dot-com crash in 2000 - this isn’t that, not by a long stretch (big tech is actually profitable, not just speculative these days) - but markets inevitably cycle, and we’re definitely in a cycle right now. Link
US debt ceiling nears, politics falls apart
We’ve spoken about how US and Canadian inflation is inter-linked before - it’s a complex relationship based on mutual trade and market dynamics. So it is important news when the US debt ceiling faces political wrangling, and the current political situation in the US is maybe more unusual than before. The Democrats lost control of the House, and House Speaker, Kevin McCarthy remains unpopular with both Democrats and Republicans alike. This means that the effort to find a cross-party brokered solution to prevent a federal shutdown rests squarely on someone who can’t confidently speak for their own party in budget negotiations. You’re probably thinking ‘so what?’ - but the political infighting within Republican ranks could force a self-imposed US recession for no reason other than ideological posturing. The US is close to recession but predicted to avoid it - that is unless a federal shutdown is forced, then all bets are off. Needless to say a US recession would certainly put strain on the current Canadian economic recovery. Link
Rates might go up - but they also might not
We made a prediction last year that we’d seen the last of rate increases from Bank of Canada. As of right now, we’re still thinking that rates will remain as they are, but the market has certainly become a bit more fractious in 2023 - the US debt ceiling, some things are more expensive than we thought, others are cheaper than we thought. This is the <SWING!> thing we spoke about last week, and the Bank of Canada is not immune to working out what those swings mean. Link
8 long years later and price-fixing is still unresolved
Some of you may remember the price-fixing scandal that pushed Loblaws to confess their involvement. That was made public in 2017, and despite the very public conversation around grocery prices and profits, there’s still no outcome from the Federal investigation. Why is this important? Well given that food costs have been the main driver in inflation, there is a clear need to work out how profiteering has influenced inflation values and therefore the Federal response. Link
Yes, the stuff you buy is actually worse now. Link
Non-competes are killing innovation. Link
‘Time-theft’ isn’t going away, sadly. Link
The Data Room 🤖
Each week, The Data Room provides some insight into Small Business data, and each month(ish) you’ll get a deeper dive in your inbox. Here’s this weeks insight:
The seatbelt light is now ‘on’
When it comes to personal wealth, Canadians are being asked to return to their seats, put on their seatbelts and prepare for a patch of bad weather with a recorded drop of 6.8% in asset wealth. Turbulence of course can cause both a fall and an uplift - so time will tell what the new cruising altitude, post-pandemic readjustment, will really be.
The latest reports on Canadian’s personal wealth shows that the vast majority of consumers are seeing some pretty heavy turbulence in their personal finances. On the whole, total debt and expenses outpaced income and asset earnings for the third quarter of 2022.
This is significant and can be attributed to the ‘covid-effect’ - Canadians were simply holding much more wealth then than they are now: think back to the early pandemic - household expenses dropped, mortgages and loans were deferred, covid benefits and general Federal stimulus provided an influx of cash, and investment income therefore broadly increased.
As of the third quarter of 2022, all those gains have essentially been erased as the post-pandemic reality begins to bite. Stimulus has ceased, banks are calling in their debts, that car loan needs to be paid again, your mortgage schedule is now extended. The training wheels are fully off, and we’re all having to quickly remember how to ride a bike in a straight line again.
It’s not unexpected that all this affected Canadians under 35 disproportionately with a 9.8% decrease in wealth. For young and lower income Canadians decreases in assets were brought about by increases in debt, whereas wealthier Canadians saw their net worth decline through losses in real estate value and financial assets. The top 20% earners’ disposable income remained about the same, with just a slight drop of 0.9%.
Of course, inflation has hit basic expenses the hardest, but basic expenses take up a much smaller proportion of a high wage earner’s total income and hammer lower income earners that much harder. Middle income Canadians meanwhile are dealing with their financial hardships by dipping into their pandemic emboldened savings - the amount they had to put away in 2022 had declined 14.8% compared to 2021.
The bottom line really is - we’ve all been hit by the end of stimulus and the increase in inflation, but those under 35 and in lower income brackets are experiencing the worst of it. No surprises there, I’m sure.
The Balance Sheet 💬
Last week we released the first monthly edition of The Balance Sheet, which should have popped into your inbox last Thursday. It was all about ChatGPT and the affect of Machine Learning on Small Business - we hoped you enjoyed it! We noticed some sending issues via Substack (sorry!), so if you didn’t get it, you can read it here.
How do we offset…carbon offsets?
Carbon neutral businesses are becoming increasingly common, but recent revelations around carbon offsets have revealed deeper problems around how we currently think about carbon neutrality.
Of course it’s a good thing to be concerned about the climate and the impact your business has. In many ways, given the new-normal-extreme climate shifts, green impact is becoming an important general business strategy, rather than a simple PR exercise. Carbon offsetting, which has become a Billion dollar industry in recent years, has seen some of the world’s biggest brands contributing to voluntary offsetting. Of course the ‘voluntary’ part of that is beneficial to brand and PR, but cynicism aside, there is a real need to work out how we can all reduce our impact on the environment, and for many businesses, carbon offsetting through Carbon Credits seems the simplest option. Here’s how it works - a Carbon Credit provider calculates your carbon output, and you then ‘offset’ that by paying money - that money is then invested in ‘green’ projects aimed at counteracting the carbon you produce. It’s this simple story that has made it a solid strategy for most businesses concerned with their emissions footprint who are actively looking for a quick climate solution. So far, so good.
The issue is, as The Guardian recently found out, that the world’s leading offset provider Verra have been issuing ‘phantom carbon offset credits’ which represent more than 90% of the carbon offsets they processed - that’s more than 90% of received carbon offset payments businesses were making not actually being used to reduce carbon. This is a scandal on its own right, but when a business now calls itself ‘carbon neutral’ by using carbon offsets - is it actually carbon neutral? And for those businesses that have chosen the carbon offset route, are they actually offsetting their carbon, are they a victim of green-fraud - or worse, are they also contributing to human rights violations?
As Barbara Haya, director of the Berkeley Carbon Trading Project (who has been researching the carbon offset market for 20 years) told The Guardian,
“Companies are using credits to make claims of reducing emissions when most of these credits don’t represent emissions reductions at all (…) We need an alternative process. The offset market is broken.”
So where does this leave businesses trying to reduce their environmental impact? It’s tough to see how this will all shake out for the carbon offset industry. But if it makes businesses scrutinize their current use of offsets, demand accountability and regulation from providers, and force a re-think on how we approach the concept of sustainability, then in the long run, the climate will benefit.
The bigger question is, even with the will for change, will it be too little too late?
Space Camp 🚀
Each week we highlight some news, insights or updates aimed specifically at those starting a new business, or considering a new startup venture. If that’s you, you should also check out our Startup and New Business Programme.
Know your model
The single biggest error new business owners tend to make is simply not researching and understanding their proposed business model enough. It’s always more tricky than you think, no matter your experience or background, but one of the best ways to avoid this pitfall is to use a Business Model Canvas, and learn the best way to use it for your new business idea. Link
Capital calls aren’t being answered
There’s a lot of news about the current tech-downturn, but the reason that early stage funding is struggling right now…is more nuanced. For many high-net-worth investors who typically want to see big returns, it’s just currently safer and easier to put your money in a high interest savings account with a guaranteed 5%+ return than invest in a risky new business idea. This is causing a knock-on effect with early-stage Venture funds, who are now struggling to get their fund investors (known as LPs) to honour their capital calls. Link
Confused by venture?
If you’re thinking of raising money for your business, it can seem like a minefield. That’s because it is. While investors typically want you to succeed and be happy (after all they rely on you to give them a good return on their investment) - they are also after a good deal, and that good deal will inevitably be a better deal for them the less you know about the deal-space you’re entering into. Don’t panic - defining your deal-space, while not simple, it achievable with the right advice. Link
Market at-a-glance 📈
BOC Indicators (Link):
BOC Prime Rate: 6.45%
BOC Unemployment Rate: 5.1%
BOC CPI Inflation Rate: 6.9%
BOC $USD Exchange Rate (Link):
Low: 1.3382 CAD [0.7473 USD]
Average: 1.3421 CAD [0.7451 USD]
High: 1.3472 CAD [0.7423 USD]
Best GIC Rates (Link):
1-year GIC: 5.28%
3-year GIC: 5.28%
5-year GIC: 5.28%
Best 5Y Mortgage Rates (Link):
Variable Closed: 5.200%
Variable Open: 6.600%
Prime Rates (Link):
TD Bank: 6.45%
National Bank: 6.45%
CRA Canadian Pension Plan Rate: 5.95%
CRA Employment Insurance Rate: 1.63%
CRA Minimum Wage per Province: Link
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