The Prof G Pod with Scott Galloway - Office Hours: The Kroger-Albertsons Merger, An Argument Against Seed-Stage Investing, and Taking Advantage of the “Silver Tsunami”

Episode Date: February 15, 2023

Scott discusses his thoughts on the Kroger-Albertsons merger and explains what needs to be done to restore dignity to work. He then advises against using a young family’s nest egg for seed-stage investing, and wraps up with his insight on the “Silver Tsunami.”  Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

Join Capital Group CEO Mike Gitlin on the Capital Ideas Podcast. In unscripted conversations with investment professionals, you'll hear real stories about successes and lessons learned, informed by decades of experience. It's your look inside one of the world's most experienced active investment managers. Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Support for PropG comes from NerdWallet.

Starting your credit card search with NerdWallet? Smart. Using their tools to finally find the card that works for you? Even smarter. You can filter for the features you care about. Access the latest deals and add your top cards to a comparison table to make smarter decisions. And it's all powered by the Nerd's expert reviews of over 400 credit cards. Head over to nerdwallet.com forward slash learn more to find smarter credit

cards, savings accounts, mortgage rates, and more. NerdWallet, finance smarter. NerdWallet Compare Incorporated. NMLS 1617539. Welcome to the PropG Pod's Office Hours. This is the part of the show where we answer questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehoursatprofgmedia.com. Again, that's officehoursatprofgmedia.com. First question. Hi, Scott. My name is Kenneth Juarez. I'm a grocery clerk from Southern California. I work for Ralph's, which is a division of Kroger.

Kroger is about to undergo a merger with Albertsons, which would further their monopoly on the grocery industry. As a union employee the last 27 years, I've felt us fall off that lower rung of the working middle-class ladder. And the things to blame for that are plentiful from a changing work market to an economic model that seems to benefit the top at each debt cycle to a degree that has made it untenable for employees at a company as great as Kroger to make a living wage. Our union is also to blame. Our union is supposed to represent the grown grocery worker. But there's a problem with that model too when the people entrusted with such tasks

make more than the people that they're representing. As a member of my union, I'd love to aid them in any way possible, making sure the merger doesn't go through. I'd love your thoughts and feedback. Thanks. Kenneth from Southern California. I appreciate the question. I was actually, we have a bit of a shared backstory here. In high school and in my first year in college, I was a box boy at San Vicente Foods on, wait for it, San Vicente.

And a big moment for me was when I was admitted into the union and I went from $4.25 an hour to $9.50. And then about two months later, I don't even know why, I didn't think to ask why, or three months later, they said, oh, you're not in the union, you're not eligible for the union. And I went back to $4 an hour and I quit. So a few things here. In October, Kroger said it was buying its rival Albertsons in a $25 billion deal, one of the biggest deals in U.S. grocery industry history. According to Reuters, 5,000 grocery stores would be under one umbrella if the deal goes through. Last week, a group of 25 consumers filed an antitrust suit to block the Kroger-Albertson merger. They're arguing that the merger will result in higher prices, lost jobs, and reduced

competition, which is essentially what antitrust is all about. Currently, the chief executives of Kroger and Albertson defend the deal, saying it will provide a more efficient distribution chain and that the combined company would still be significantly smaller than Walmart. They're now working with the U.S. Federal Trade Commission on its regulatory review. So there's a lot here to unpack. The first is antitrust. And that is, simply put, Kent, when an industry becomes too concentrated, they can abuse monopoly power, usually on consumers. But also, if they're the only employer in town, they can keep wages pretty low. And Walmart's been accused of that, and a lot of employers have been accused of that. If they're the only kind of job in town without workers' right to organize and form a union, the workers have very little currency on the negotiating table.

Now, having said that, this brings up unions. I think the intention, the motivations, and the net aim of unions is absolutely the right thing. America is about work. America is about dignity of work. And the marketplace on its own, the supply and demand dynamics of the marketplace will leave a lot of workers making less than a living wage. That's the bottom line. The economy does not function perfectly, and everyone who just defers to the marketplace doesn't realize there are externalities. And one of those externalities is on a variety of conditions. I would argue that unions have proven less and less effective over the last 50 years.

I think of the 47 Western countries that have unions, 46 have seen their membership decline. And in the U.S., membership in unions has been cut in half over the last 40 years. Now, why is that? I think they've been the perfect enemy or the perfect foe for capital. And that is, I sit on a lot of boards of directors of public companies, and we start talking about unions. And I find that generally speaking, they're super easy to defeat. A lot of times their management is disorganized, not that competent, and quite frankly, sometimes just corrupt. So I'm a huge fan of unions, but they need to be consolidated to one union, and that is the federal government. We should have one union in the United States, and it should be the United States federal government that imposes minimum wage standards of $15, then $18, then $21, and then wait for it, $25.

Oh, my God. What will happen to Walmart and McDonald's? Their stocks will go down substantially. What will happen to all of these small businesses that are totally dependent on low-wage labor? A lot of them will go out of business. And here's the thing, Ken. It'll be worth it. It'll be worth it.

Because the majority of those jobs will hold. And what will happen is there will be a retransfer back from the wealth of shareholders who are dependent upon companies that exploit low-wage supply and demand economics. And there's just no getting around it. We need a massive shift in power back to the worker. So, I believe that we need a minimum wage. I think we need to restore more dignity to work. Now, as it relates to antitrust in the grocery market, typically speaking, the measure of an industry being too concentrated is that prices have been increased on consumers. And I think what you have here, I don't see it in the grocery market. I think the

margins in grocery are actually really thin. I think the average margin on a grocery store is like 4%. I would argue that Amazon coming in, I mean, there's a certain monopoly effect going on here. And it's that the monopoly that is Amazon that comes in and starts Amazon Grocery can do predatory pricing. And that is until they get market share, they can price below the cost of what it is to deliver those groceries to your doorstep. And as a result, the traditional grocers are just getting hammered. So I think consolidation is one way to compete. So I'm not sure it makes sense to block this merger.

I don't know if this has what I call the typical dynamics of a merger you would want to block because I think Kroger and Albertson's bottom line is just need to compete. But anyways, there needs to be one union that dramatically increases minimum wage so that everyone who decides to work in America makes a living wage. I am not sure, however, having said that, this merger qualifies as something we should get in the way of. Again, a very thoughtful question, and I wish the best to you and your family. Question number two. Hello, professor. This is Luis from Virginia. I'm a Hispanic male in my mid-30s who grew up a poor Hispanic male back in New Jersey. After high

school, I joined the Navy where I had opportunities to travel the world and get an education basically for free. I've worked in cybersecurity for around 13 years and recently joined a tech company. I make a good living and I'm kind of hitting my stride career-wise. Recently, some former colleagues reached out, asked me if I'd be interested in investing in some startups they're involved with. Even though my good answer is yes, I have no clue how to determine whether what they're doing is a sound place to invest or whether I'd be wasting parts of my young family's small nest egg. What kinds of questions would you ask a group of hotshot cybersecurity engineers looking to build a company? Thanks for taking my question and for everything you do. Luis from Virginia, a really thoughtful question.

First off, I say this, it's a standard, it's a standard, I don't know, response, but thank you for your service. I'm generally appreciative of our young men and women in uniform. I believe that our investment and the sacrifice that young men and women make in terms of time away from family is directly correlated to our liberties. So first off, congratulations. It sounds like you've gotten a great career, served your country, saved a little money. So in response to your question around how you evaluate these investments, my short answer is don't. Seed stage investing, first off, is a really shitty asset class. Seed stage investing should be for wealthy people who get what I call different ROI. What's

that ROI? You get psychic ROI. The best angel investors are what I call FIPS, formerly important people. They made a lot of money. They were ballers. And now they want to give back to the community. They take a million bucks and they make 10 or 20 investments of 100 or 50 grand and mentor young people and help get these things off the ground. It's a terrible asset class. It's a terrible... There is so much infant mortality. Even VCs don't like to invest in seed stage. They've been forced to because it's so competitive. They have to go earlier and earlier. But the vast majority of seed stage investments do not work out. Even if the company works out, a VC comes in, they raise a shit ton of money, and they wash out the earlier investors. Or at some point, the company hits a speed bump. You

don't have the money to defend your position. They do a raise at a much lower valuation. It's just a shitty asset class. So even if you have good buddies, I understand your inclination, you want to help them out, you want to get on the ground floor or something cool. What I would suggest is if you really want to do this, ring fence it to 10% of your nest egg. What do you do? What do you do? Brother, you are doing exactly what you should be doing. You have a good career. It sounds like you have a really good head on your shoulders. It sounds like you are engaged in what is the key to building wealth. And that's not making a shit ton of money. It's spending less than you make, such that you have enough money to start investing early.

That's the shooting match right there, and it sounds like you get that. So what do you do? You put your money in low-cost ETFs, and you diversify, and you let time take over because you are still a young man, and you have a lot of time. I was making several hundred thousand dollars a year by the time I was 30. I didn't save a goddamn penny. I mean, I was making so much money on a relative basis, but because I was in startups and I thought I was exceptional, I'm like, well, I'll wait till Red Envelope goes public. I'll wait till I sell profit. I'm a baller between the 2000 dot-com implosion, the 2008 great financial recession, a divorce. I woke up at basically at 40 and was pretty much broke about the time I started having kids, which was not great for my own mental health. But guess what? You are on a better trajectory than me. So you do not take

that nest egg and put it in high-risk investments that could go to zero. By the way, anything that could go to zero is not investing. It's consumption. And I understand that. It's fun to trade stocks. It's fun to occasionally buy Bitcoin. It's fun probably to spend a little bit of money or invest a thousand, two thousand bucks in your friend's startup. But no more than that, boss. There is no way to evaluate investments in any sort of tried and trued way in something like cybersecurity. It's really all about the people. If you think the people are good, throw them a few dollars. But my brother, you are on the right trajectory. Stay focused. Stay the course. We have one quick break before our final question. Stay with us.

I just don't get it. Just wish someone could do the research on it. Can we figure this out? Hey, y'all. I'm John Blenhill, and I'm hosting a new podcast at Vox called Explain It To Me. Here's how it works. You call our hotline with questions you can't quite answer on your own. We'll investigate and call you back to tell you what we found. We'll bring you the answers you need every Wednesday starting September 18th. So follow Explain It To Me, presented by Klaviyo. Support for this show comes from Constant Contact.

You know what's not easy? Marketing. And when you're starting your small business, while you're so focused on the day-to-day, the personnel, and the finances, marketing is the last thing on your mind. But if customers don't know about you, the rest of it doesn't really matter. Luckily, there's Constant Contact. Constant Contact's award-winning marketing platform can help your businesses stand out, stay top of mind, and see big results. Sell more, raise more, and build more genuine relationships with your audience through a suite of digital marketing tools made to fast track your

growth. With Constant Contact, you can get email marketing that helps you create and send the perfect email to every customer, and create, promote, and manage your events with ease, all in one place. Get all the automation, integration, and reporting tools that get your marketing running seamlessly, all backed by Constant Contact's expert live customer support. Ready, set, grow. Go to ConstantContact.ca and start your free trial today. Go to ConstantContact.ca for your free trial. ConstantContact.ca. Welcome back. Question number three. consultant with a technical services firm out of Toronto. Good living, very secure retirement. Things are going really well. However, I'm a former small business owner and that itch to get back into entrepreneurship has never really gone away. So I've been hearing all recently about

the silver tsunami so-called, which is in case you haven't heard of it or your listeners haven't heard of it, like the baby boomers who have all had businesses and are now reaching that age of retirement and are looking to exit through acquisition. And so there's a massive opportunity, allegedly, for people to take over these small businesses that are already spitting off cash and maybe quite secure in their operations day to day. So funding and acquisition of this nature typically involves the SBA and loans backed by the SBA require a personal guarantee. In other words, if I was going to do this, I would have to essentially put up my house as collateral for this kind of loan, which presents no small amount of risk. So I'm just wondering what you think, or if you've heard of the silver tsunami,

what you think of entrepreneurship through acquisition, how you think through the level of risk involved with these kinds of things. And if you have any advice for how to get my wife on board with these cockamamie plans, that would be great. Thanks so much. Thanks so much for the question. This is getting a lot of attention, and it's something I need to understand better. Essentially, as you highlighted, the silver tsunami of retiring workers is bringing a wave of small businesses up for sale, which is great for younger business owners looking to expand. According to the Census Bureau data from 2018, 51% of business owners in the U.S. were 55 or older. According to the

Small Business Administration, SBA, small businesses employ 47% of the workforce, and that's about 62 million people. So small business, you could argue, is sort of the backbone of the American economy. The Millionaire Next Store owns two or three dry cleaners. They don't work at Google or maybe if you live in San Jose or Woodside. But in most neighborhoods, the people who are really killing it have some sort of small business. There's a surge in business acquisition financing. And the reason is the older generation is passing the baton to the next generation. The Census Bureau revealed that there were 72 million baby boomers in 2019. From 2012 through 2019, data from Pew Research shows that they've retired from the workforce at an average rate of 2 million per year. So you can see the supply is there. A lot of these

boomers have businesses. They want to either pass it on to their kids or they want to sell it. As for small business lending in the U.S., according to the latest data from the Federal Reserve, the average small business loan amount is $633,000. If you're thinking about a business, I would argue maybe find a business you like and try and open one yourself. There is nothing like the attention and the kind of parenting and obsessive compulsive behavior when it's your business. In terms of acquiring a business, a lot of networking, a lot of due diligence. As it relates to borrowing money from the SBA, I'm trying to think of a delicate way to say this. I have never nor will I ever sign a personal guarantee, which means that SBA loans are something I would never do. I'm not saying it's not a good idea. I'm not saying it's

not something you should investigate because they're lower interest rates, backed by the government. I just don't sign personal guarantees. When Red Envelope, my company, went through reorganization, which is a fancy way of saying bankruptcy in 2008, I mean, it went public on the NASDAQ in 2002. And so I'm like, oh, I'm a baller. I have millions of dollars in stock. Well, guess what? I kept doubling down and failed slowly. And then the thing, 2008 credit crisis and boom, we were out of business.

If I'd signed a personal guarantee, I would have had to come home and tell my wife that we were losing our house. I just don't think you want to put yourself in that kind of position, set yourself up for that kind of stress. 80% of divorce filings are filed by women. And the three primary causes of those filings are the dude has some sort of a mental health crisis, loses his business, or loses his job. And I don't think you want to subject yourself to that kind of risk. So I'm all for starting a business. I'm all for acquiring a small business if you think it makes a lot of sense. I'm not for a year age going all in because every loan makes sense at the beginning, but there are certain things that are beyond your control. You could acquire a business,

have it go really well, work really hard, and then the economy goes into the tank or there's some sort of exogenous shock or God forbid forbid, you have a health crisis, and boom, that personal guarantee kicks in and you lose a lot or lose everything. So what is my suggestion? Be measured, maybe start a business in a field that you're interested in. And then I think of all these small businesses coming up for sale as a great way to expand a business

as opposed to get into the business. The conversation you have to have with your wife is at what point would she feel economically secure taking that sort of risk? Does she make an income? Do you have dual sources of income? And also don't romanticize entrepreneurship. It sounds like you know what it's like, but we have a tendency to romanticize it. And look at the opportunity cost. How well are you doing now? How much money are you able to save? Do you like your job? You just don't love it? Do you have sponsorship? Are you able to put away money? And maybe just have a very open conversation around at what point would we have the economic security to try and take this risk? And also, something you have to model out

is that in 24 or 36 months after starting the business, you lose everything you've put into it and it hasn't worked out. One in five businesses are gone within the first 12 months. If you're going to buy a business, even if you, in order to avoid a personal loan, maybe raise money from some friends, try and get bank financing, you know what's a great way to buy a small business? Seller financing. And you say, you know what, you're retiring. I'm going to give you 8% or 10% on the money you're going to loan me against this thing,

and I'm going to pay it off over five years. And that way, if it doesn't work, if it doesn't work, you haven't signed a personal guarantee, you give the business back or you figure it out because he has a vested interest or she has a vested interest in ensuring that the business thrives. But don't romanticize small business. Have an open and honest conversation with your wife about the risks you can take. Network like crazy. And if you find a business owner and a business you're interested in, talk to them about seller financing. Thanks for the question.

Best of luck to you. This episode was produced by Caroline Shagrin. Our associate producer is Jennifer Sanchez. Drew Burrows is our technical director. If you like what you heard, please follow, download, and subscribe. Thank you for listening to the Prof G Pod from the Vox Media Podcast Network. We will catch you on Saturday with No Mercy, No Malice as read by George Hahn, and on Monday with our weekly market show. What software do you use at work? The answer to that question is probably more complicated than you want it to be.

The average U.S. company deploys more than 100 apps, and ideas about the work we do can be radically changed by the tools we use to do it. So what is enterprise software anyway? What is productivity software? How will AI affect both? And how are these tools changing the way we use our computers to make stuff, communicate, and plan for the future? In this three-part special series, Decoder is surveying the IT landscape presented by AWS. Check it out wherever you get your podcasts.

Hello, I'm Esther Perel, psychotherapist and host of the podcast Where Should We Begin, which delves into the multiple layers of relationships, mostly romantic. But in this special series, I focus on our relationships with our colleagues, business partners, and managers. Listen in as I talk to coworkers facing their own challenges with one another

and get the real work done. Tune into How's Work, a special series from Where Should We Begin, sponsored by Klaviyo.