Marketplace Podcast Summary: "Private Equity’s Appetite for Restaurants" Hosted by Kai Ryssdal, Marketplace
Release Date: November 20, 2024

Introduction

In this episode of Marketplace, host Kai Ryssdal navigates through a diverse range of topics, from the complexities of the housing market and the surge of private equity in the restaurant industry to insights on energy policy, autonomous vehicles in China, global inflation concerns, the resurgence of physical buttons in technology design, and the latest retail earnings influenced by impending tariffs.

1. Housing Market Overview

[01:20 – 04:32]

Kai Ryssdal opens the discussion with an update on the U.S. housing market, highlighting mixed signals. The Census Bureau reported a 3% decline in housing starts in October, primarily due to hurricanes in the Southeast, and an 8% year-over-year drop in permits. Despite these setbacks, the National Association of Home Builders (NAHB) reported a three-month streak of rising confidence.

Matt Levin provides deeper insights:

• Interest Rates Impact: "The Federal Reserve's recent rate cuts have helped Portland Oregon home builder Justin Wood. The construction loans he takes out from banks to build townhomes and cottages are cheaper." ([02:52])
• Mortgage Market Challenges: "A lot of us were really hoping... they've gone the opposite direction." ([03:56])

Rob Dietz, NAHB economist, projects optimism for 2025, expecting mortgage rates to stabilize and new construction to increase. However, rising costs for key materials like lumber—up from $380 to $440 per thousand board feet—as well as increased construction wages, pose challenges. Dan Dunmoyer from the California Building Industry Association expresses concerns over potential immigration policy changes escalating labor costs.

2. Private Equity Investments in Restaurants

[04:40 – 07:19]

Marketplace's Kristen Schwab explores the burgeoning interest of private equity firms in the restaurant sector, exemplified by Blackstone's acquisition of a majority stake in Jersey Mike's. This trend continues despite the industry's historically thin profit margins and high failure rates.

• Tim Powell, Food Service IP consultant, emphasizes the appeal of established brands with unique characteristics: "It had such a loyal customer base and had old wood paneling and just sort of the lighting that reminded you of like a 60s steakhouse." ([05:45])

• Sean Dunlop from Morningstar notes that struggling restaurant brands are lucrative for acquisitions due to valuable hard assets like property.

Andrew Charles, TD Cowan analyst, counters the high failure rates by stating, "there's no Amazon of food," highlighting the constant demand for dining despite market fluctuations. The shift towards fast-casual brands like Panera and Chipotle further attracts investor interest.

Kristen Schwab concludes that while private equity sees potential in both small, beloved establishments and larger chains requiring operational efficiencies, the overarching goal remains to scale and eventually take these investments public.

3. Interview on Energy Policy with Gene Gobolis

[07:44 – 12:18]

In an in-depth interview, Gene Gobolis, founder and CEO of World Energy—a biofuels company—discusses the implications of the incoming Trump administration on clean energy initiatives.

• Kai Ryssdal questions the potential repeal of the Inflation Reduction Act and other clean energy provisions. Gobolis responds optimistically: "I fully expect [public and private investment in clean energy] will continue." ([09:39])

• Addressing concerns about political shifts, Gobolis asserts that clean energy growth transcends partisan lines: "The work we end up doing has actually more growth in red states than in blue states." ([10:34])

• When asked about interactions with the newly appointed Chris Wright, Trump’s pick for Secretary of Energy, Gobolis acknowledges the need to adapt: "We’re going to have to just find our way around him." ([11:52])

Gobolis remains hopeful that despite political uncertainties, both public and private sectors will sustain momentum in the clean energy landscape, pivotal for his company's sustainable aviation fuel (SAF) initiatives.

4. Tech Sector News

[12:41 – 19:12]

Kai Ryssdal provides a brief overview of the day's tech news, focusing on major movements in the stock market and significant corporate developments.

• The Department of Justice has filed a lawsuit against Google's parent company, Alphabet, seeking to force the sale of its Chrome browser to address monopoly concerns in the search and browser markets. Despite this, Alphabet's stock rose by 1⅙% ([12:48]).

• Other tech giants saw varied performances: Apple increased by about 0.1%, and Meta climbed by 1.2%.

Ryssdal notes the resilience of companies despite regulatory pressures, underscoring the dynamic interplay between tech innovation and antitrust regulations.

5. Autonomous Robot Taxis in China

[19:12 – 24:20]

Jennifer Pack reports on the advancements and challenges of autonomous robot taxis in China, particularly focusing on Baidu's fleet in Wuhan.

• Driver Skepticism: A human taxi driver expressed reluctance to switch to autonomous vehicles, citing safety concerns: "He said that he would never get in an autonomous vehicle." ([20:25])

• Operational Realities: While Baidu operates around 400 robot taxis in Wuhan, they are currently confined to suburban areas with human drivers onboard for safety. Xiao Weiguo, a taxi driver, experiences mixed feelings—recognizing cost benefits but apprehensive about job security and vehicle handling.

• Technological Integration: The Chinese government's investment in infrastructure, equipping roads and traffic signals with sensors to aid autonomous navigation, presents both safety enhancements and logistical hurdles.

• User Experience: Passengers enjoy lower fares ($5 compared to $14) but face longer wait times and less smooth navigation. Xiao Weiguo remarks on the robot taxi's abrupt stopping: "The car just stopped. If this was during morning rush hour and it stopped like this, that would cause a traffic jam." ([23:17])

Despite current limitations, the technology is evolving, and drivers like Lin Zhijun remain optimistic about coexistence, especially given the intricate urban layouts that challenge autonomous vehicle efficiency.

6. Global Inflation and Central Bank Perspectives

[16:00 – 19:12]

Henry Epp delves into the global inflation landscape, outlining the cautious stance of central bankers despite progress in reducing inflation rates.

• Current State: Canada’s Consumer Price Index (CPI) hits exactly 2%, slightly above expectations ([16:00]). Upcoming reports from the UK are anticipated to reflect similar trends.

• Inflation Drivers: Supply-side factors, including energy pressures and ongoing conflicts in Ukraine and the Middle East, pose risks of price hikes. Jonathan Welborne, a senior researcher at RAND, highlights, "Take the wars going on in Ukraine and in the Middle east, which could flare up in ways that disrupt energy supplies and agricultural commodities." ([17:19])

• Trade Dynamics: Potential tariffs under the Trump administration could trigger trade wars, affecting import costs and currency valuations. Bill Emmons from Washington University emphasizes the cascading effects: "They could [...] make some items more expensive in the US."

• Climate Impacts: Increased frequency of climate-related disasters exacerbates supply chain disruptions and rebuilding costs, as noted by Christian Thiu from the University at Buffalo.

• Central Bank Caution: Central bankers are wary of repeating past mistakes where early optimism led to underestimating inflation. Anne Owen from Hamilton College warns against prematurely declaring victory over inflation, which could undermine their credibility.

Overall, while inflation has receded to manageable levels, external factors keep central banks vigilant to prevent a resurgence.

7. The Return of Physical Buttons in Tech Design

[24:20 – 28:09]

Rachel Plotnik, an associate professor at Indiana University Bloomington, explores the cyclical resurgence of physical buttons in modern technology design.

• Historical Shift: The transition from physical buttons to touchscreens and digital controls marked a significant design evolution, epitomized by devices like the iPhone. Plotnik observed: "There was a moment when I thought we might be doing away with the concept of the button... but I do see this kind of cyclical effect." ([25:04])

• Design Motivations: Companies initially aimed to minimize physical buttons for a sleek aesthetic but found that buttons offer tactile feedback and a sense of control. Plotnik notes, "buttons are often that kind of go to interface, that give us that feeling of agency and control."

• Complexity Behind Simplicity: While buttons appear simple, their functionality can be complex, especially in critical applications like aviation or DJ setups. Plotnik asserts, "behind every button there are all of these social choices."

• Social Implications: The decision to include or exclude buttons reflects broader societal and organizational decisions, influencing how users interact with technology and exercise control. Plotnik emphasizes the importance of understanding these connections to grasp the full impact of design choices.

In conclusion, despite the trend towards digital interfaces, physical buttons retain their relevance due to their intuitive use and the agency they afford users.

8. Retail Earnings and Tariff Implications

[28:09 – 29:21]

In the final segment, Kai Ryssdal touches upon the latest retail earnings reports and the potential impact of tariffs.

• Retail Performance: Most retailers reported strong earnings, indicating robust consumer spending. However, Lowe's CFO highlighted concerns over Trump's proposed tariffs, stating they would "add to product costs." ([28:09])

• Tariff Pass-Through: Ryssdal underscores the economic principle that tariffs are ultimately borne by consumers, emphasizing the irony in corporate financial strategizing: "Remember who pays the tariffs peeps."

This segment underscores the delicate balance retailers must maintain between leveraging consumer spending and navigating increasing operational costs due to external economic policies.

Conclusion

This episode of Marketplace provides a comprehensive examination of current economic and business trends, ranging from housing and private equity to energy policy, autonomous technology, inflation, design evolution, and retail dynamics. Through insightful interviews and expert analysis, host Kai Ryssdal equips listeners with a nuanced understanding of the forces shaping today's marketplace.

Notable Quotes:

• Matt Levin: "A lot of us were really hoping for that, the light of the end of the tunnel for starting to see rates come down for mortgages and if anything, they've gone the opposite direction." ([03:56])

• Gene Gobolis: "I fully expect [public and private investment in clean energy] will continue." ([09:39])
  "There's no Republican or Democratic climate. The work we end up doing has actually more growth in red states than in blue states." ([10:34])

• Rachel Plotnik: "Behind every button there are all of these social choices." ([25:04])

• Lowe's CFO: "Tariffs [...] would add to product costs." ([28:09])

This summary encapsulates the key discussions, insights, and conclusions from the Marketplace episode, providing a detailed overview for those who haven't listened to the full broadcast.