Rethinking Strategy at Cracker Barrel

Julie Felss Masino was recruited to become the new CEO of Cracker Barrel in 2003 to reinvigorate the brand. Should strategy focus on growing demand by increasing attractiveness to new customers or should it focus on keeping existing customers comfortable? As the WSJ reports that it opted for the former:

The goal was to modernize its stores, menu and design to help bring new customers to the vintage chain. The company had seen some promising results from food updates and marketing tie-ins when, as part of a fall marketing campaign in 2025, it unveiled a new, simplified logo.

And then Cracker Barrel became an unexpected flashpoint in the culture wars. The new logo was described as "going woke" and the changes alienated many of its more traditional patrons. Visits plummeted and the company lost $100 million in market capitalization in a week.

Well that didn't work. To her credit, Masino quickly reversed course.

She cut ties with the marketing firm behind the chain’s rebranding campaign and revamped the company’s leadership structure, bringing back a former vice president for menu strategy and elevating a veteran field operator to oversee store operations. 

They doubled-down on the traditional experience. Even the old logo has returned. The pivot seems to be working. Customers are beginning to return and the share price is rebounding, though not to the $60-$70 range prior to these events.

A strategic decision is a sunk cost. Abandon it when new information indicates a mistake.

Hidden Cost of Environmental Protection

 REASON:

Greenpeace and its activists allies have blocked for more than two decades the adoption of Golden Rice, which is genetically enhanced to produce the vitamin A precursor beta-carotene. The result, according to new calculations by DC Abundance founder and research director at the Golden Gate Institute for AI Abi Olvera, is that "delay has killed about 106,000 children and left another 210,000 to 425,000 blind."

What Set-Asides Cost: A Lesson from Timber Auctions.

California's Public Utilities Commission is pressuring utilities to steer about 1.5% of procurement toward state-certified "LGBT-owned" firms.  Setting aside the certification debate, what will this cost the state? 

In every auction, the winner has to outbid the second-best bidder, so the second-best bidder sets the price. Weaken the field and you weaken that price-setter. But which way the price moves depends on whether the government is buying or selling.

When the government buys, it runs a procurement auction: bidders compete to sell to the government, and the lowest-cost bidder wins, while second-lowest-cost bidder sets the price. Restrict who can bid and the price the government pays goes up.

When the government sells, bidders compete to buy, and the highest-value bidder wins, while the second-highest-value bidder sets the price. Restrict who can bid and the price the government receives goes down.

A set-aside moves price through two separate channels, and they push the same direction. 

• First, it shrinks the number of bidders, so the second-lowest cost is higher (or the second-highest value is lower). 
• Second, the set-aside bidders themselves may be higher-cost or lower-value than the bidders they replace. 

Both channels move price against the government.  An article by a pair of middling economists shows by how much.  Prices in Forest Service small-business set-aside auctions—where only small businesses may bid—run about 15% lower than in open auctions. 

The lesson applies to California. Fewer, weaker bidders mean a worse deal for the government. 

AI and the Shrinking Firm

The way that Artificial intelligence (AI) is changing worker productivity may also be changing the optimal scale of the firm itself. According to a recent Axios report, AI-powered tools are enabling entrepreneurs to launch and operate businesses with little or no staff. Tasks that once required specialists in coding, graphic design, marketing, customer support, and bookkeeping can increasingly be performed by a single entrepreneur assisted by AI. The result is a growing number of "one-person firms" capable of generating revenue levels that previously required a small team. This contrasts with the trend since the industrial revolution in which ever more mechanization generated ever greater economies of scale and ever larger enterprises.

Some aspects of AI fit nicely into theories of the firm.

•          Transactions costs can be reduced by engaging with AI rather than an employee.
• AIs eliminate employee principal/agent issues.
• However, a more personalized AI may represent a relationship-specific sunk cost that can lead to holdup.

Has the risk premium for owning stocks disappeared?

Axios reported that the equity risk premium (ERP) — the extra return investors expect for holding risky stocks instead of safe Treasuries — has shrunk to almost nothing. A safe 10-year Treasury bond pays about 4.5%. Stocks, measured against the companies' current earnings, return only about 3.7%. So right now the safe bond actually pays more than risky stocks, even though stocks have historically paid 3–5% extra. It looks as if you'd be taking on the risk without the usual reward.

HOWEVER: That 3.7% is based on what companies earn today. Stock prices are high because investors expect much bigger earnings in the future, driven by AI. If those bigger earnings actually arrive, then the price you pay today is reasonable, and stocks aren't really overpriced after all.

BOTTOM LINE: The risk premium you calculate depends on which earnings you use — today's or the future's. The historical rule assumes today's earnings are a good guide to the future. If AI changes how much companies earn, that assumption breaks, and the real risk premium is unknowable until we see whether the growth shows up.

Did incapacitation, deterrence, or rehabilitation reduce crime in Baltimore?

The Free Press:

Bates, ``a new tough-on-crime prosecutor, ... replaced a scandal-plagued `progressive.'” '' 

Incapacitation (selection): sometimes referred to as ``specific deterrence.''

Bates said that his office has identified about about 6,000 frequent, violent offenders and put between 3,000 and 3,500 of them in prison. The cooperation of federal law enforcement has helped take a number of these offenders off the streets.

Deterrence (incentives):

...more willingness to process felons in possession of a gun, and a more credible threat of punishment.

Rehabilitation:

“If you’re seeing your friends all going to prison, you’re going to go: ‘What? I don’t want to go to prison,’ ” Bates said. “Now all of a sudden, that job or that program someone’s offered you before that you didn’t want to talk about—now it looks pretty appealing.”

Wheelchair Fraud

WSJ: They Get Wheeled on Flights and Miraculously Walk Off. Praise ‘Jetway Jesus.’ 

One viral account had 30 travelers needing wheelchairs to board a Southwest flight — and all but two walking off on their own at arrival.  Another traveler, Carlos Gomez, described a flight delayed by 25 wheelchair passengers and said he sees more "wheelchair fraud" every trip. A flight attendant reportedly told him many able-bodied passengers request wheelchairs for "the VIP experience" — skipping lines, first crack at overhead bins — and that the "healing begins" once they learn they'd have to wait for assistance to get off.

More Test-Taking Accommodations in Wealthy Areas

WSJ: 

The share of SAT takers getting extra time has increased from 2% to 6.7% in the last decade; on the ACT, it rose from 4.1% to 7%. Qualifying students typically receive 50% more time — and on longer accommodations, up to double the standard limit. The surge is concentrated in wealthy areas, where federal data show that students at affluent schools receive accommodations at more than twice the rate of those at high-poverty schools. 

Why? The payoff is huge (a few points can swing an admission), colleges aren't told who got extra time, and the qualifying bar is easy to clear — a diagnosis you can pay a neuropsychologist thousands to obtain. Same incentive for everyone; different ability to act on it.

(Lack of) Economies of Scale in Home Building

Brian Potter at Construction Physics takes a deep dive into economies of scale in construction. There are enough homes being built to observe economies of scale ... if they existed. But even manufactured homes don't seem to exhibit economies of scale. He marshals a lot of evidence to document where costs are incurred and how these compare to other industries. The lack of scale economies imply that the industry is rather unconcentrated. There are thousands of home builders with the five largest nationally having less than 25% of the market.

He concludes by trying to answer why there appears to be almost no economies of scale. One answer seems to be that that materials and labor home building costs represent 97% of costs with equipment costs being only 3%. Auto manufacturing, in contrast, is extremely capital intensive and hence firms are large. Home construction Fixed Costs (FC) are just not big enough for declining Average Fixed Costs (AFC) with scale to be too important. In contrast, high rise construction might require high cost excavators, cranes, pavers, pile drivers, etc. driving up the equipment cost share. Consequently, the five largest contractors for these projects have closer to 45% market share. The cost structure determines the market structure.

Hat tip: Marginal Revolution 

Is Business More Charitable than Charity?

“If I do my job right, the value to society and civilization from my for-profit companies will be much, much larger than the good that I do with my charitable giving.” - Jeff Bezos

A new opinion piece in the WSJ by Marian L. Tupy tries to calculate the value of the time saved by Amazon customers. I may quibble with some of his assumptions, but his point is that the cumulative value of the amount of time saved by Amazon customers likely exceeds the size of Bezos's fortune. This is on top of savings from lower prices and better product matching from a greater selection. Nordhaus famously estimated that entrepreneurs appropriate only 2.2% of the value of technological advances. Or Bezos likely got just a sliver of the pie that was created. Nordhaus's estimate could be off by a factor of forty and value appropriation by entrepreneurs would still be less than 100%. The amount of consumer surplus enjoyed typically rises when profit is earned. No one needs to get poorer just because someone else got richer.

I am reminded by a video clip of John Stossel interviewing Ted Turner from 1998 (I am that old). Ted Turner made his fortune creating a media conglomerate but had recently announced he would be giving away $1 billion in charity. Stossel's video makes the point that Turner could "do more good" by investing the $1 billion than giving it away. Charity divides the pie, investment grows the pie.