Saturday, June 21, 2008

Random Thoughts: Coffee and Tips

I had an interesting week. I stayed up late writing motions on a case where a public company is suing some ex-employees. The company is "pink-listed," or traded OTC (over the counter), at three cents a share. The company claims that my clients took their trade secrets. California case law requires "trade secrets" to have independent economic value, and this fabless semiconductor company's IC chips appear antiquated. (They have plenty of money to pay lawyers rather than R&D, apparently.) One line in my brief compared their product to the Gutenberg Press and how it couldn't be a "trade secret," even if a company makes its employees sign an agreement promising not to disclose the Gutenberg Press. The other side had no response to that line in their reply brief. As scintillating as all this might sound, the lawsuit is one example of how the big guys can crush or bankrupt small guys because it's usually more cost-effective for individuals to settle even frivolous cases than to pay for all the motions and depositions that come with any case (only 5 to 10% of civil cases actually get to trial, at least in Santa Clara County). In this case, my clients have decided to fight the good fight...and I guess I'll see how much debt I have to write off this year. Anyway, we'll get back to how my case is relevant to the economy.

First, I discovered this great foot massage place in San Jose, along Story Road (Little Vietnam/Saigon area). I talked with the owner, and we discussed how different cities deal with massage places. The vice squad of the local PD always vets these businesses--I represented some acupunture places before, so I am somewhat familiar with the licensing process. This San Jose owner has a great operation. He partnered with an educated Chinese immigrant who's been in California for many years. I am guessing she's the hard worker and connections, and he's the capital (he was perusing some bylaws as we spoke). They hire grads from massage schools in S.F. and L.A., probably pay them minimum wage, and the workers get to keep their tips. All of the workers are professional and appear to be Chinese immigrants. Customers are around each other in a relaxing, open area. Massages are only 20 dollars for an hour, an incredible bargain (massages are usually $40 to $60 an hour here, but those massages allow full body contact).

The massuers and massueses rely on tips in this business structure. After my massage, I gave my massuese a 4 dollar tip. I don't usually carry cash and use my credit cards to rack up points (paying off the balance each month). Realizing a 4 dollar tip was not enough, I asked my friend to provide me with two more dollars, thinking a 30% tip was sufficient. But in between receiving the additional dollars and giving it to my masseuese, I saw that she was clearly upset over receiving just a four dollars (20%) tip. When she received the 6 dollars, she appeared to be fine, or at least not insulted. Two thoughts came to mind:

1. There might be some relationship between how much it costs to buy one cup of coffee and tips. Coffee is ubiqitous and an everyday product. Everyone, rich, poor and even homeless, expects to be able to buy it. Pre-Starbucks, a cup of joe cost about a buck. In those days, a 2 dollar tip when the underlying service cost 20 dollars or less (e.g., bellhops, a few drinks) was sufficient. Now, even when the underlying cost for a service is 20 dollars or less, people expect more than just a few dollars as a tip. Psychologically, times have changed. A reasonable minimum tip might be calculated by how much it costs to buy two cups of coffee (in this case, around six dollars). Coffee prices might be a good indicator of inflation.

2. There's a greater lesson here than just how much to tip. A service economy relies on workers getting adequate tips, which shifts salary costs from businesses to customers. I did a service this week, too. I didn't get paid a tip, but I got paid $190/hr (a discounted rate, and I "no-charged" several hours also). The American economy has catapulted certain service professions from tip status into non-tip status. The non-tip jobs are usually the better ones, because the lack of tip means that the full price of the service is included, and the price is less elastic due to the greater bargaining power of the seller. I had to wonder, as I received my massage--who was contributing more to the economy and wellness? Me, with my motions and oppositions in a frivolous case filed by a three-cents-a-share company, or the masseuse?

I came to the conclusion that American society has arbitrarily vaulted my job into the non-tip column because theoretically, my job requires the use of other positions--paralegal, court clerk, judge, process server, and even a law school professor. The masseuse, while offering a more benign skill, gets paid less in the American economy because her job does not create other jobs. That appears to be the benchmark for getting paid in a capitalist system--make sure your job theoretically requires several other jobs, or is interlinked with a diverse set of jobs.

In reality, my job, at least this week, was less important or useful than the masseuse's. That's the problem with having a service-based economy--it arbitrarily makes certain positions better than others not based on output, but on expected total consumption. Other countries appear to be positioning their economies on output, i.e. paying persons who produce things more money. (Neither the masseuse nor I produce anything in the classical sense.) So in China, the jobs go to people who produce clothing, shoes, motorcycles, etc. People can make a living producing things. In India, the jobs go to people who produce generic drugs, steel, and computer products. Of course, all countries have a service and manufacturing sector, but until recently, most service-based jobs paid similarly, regardless of status. Doctors in Russia many years ago did not make much money. Lawyers certainly don't make as much money anywhere else in the world as they can in America. In Singapore, I interned in a firm's corporate legal division--almost all the lawyers in that division were women making about 45,000 U.S. annually. Looking at the American economy in this way, it appears to be based on pure air, just like our money post-Bretton Woods. Meanwhile, other countries are basing their service jobs on selling products to Americans. I don't have the time now or the mental energy to think these ideas through, but there is something dangerous lurking in the shadows (and no, I did not deliberately try to make that sound as ambiguous as possible).

I am off to Reno in eight hours for a short three day trip. I got a great deal on Southwest Airlines. The key to getting their cheaper internet fares seems to be buying a flight at least two weeks in advance. Speaking of Reno, there are two public companies in Reno that might be decent investments: 1) IGT, in which I own shares; and 2) SRP, or Sierra Pacific Resources.

SRP sells electricity and also natural gas. Once I get more funds available in my retirement accounts, I will look more closely at SRP and its dividend.

IGT sells gaming systems, better known as slot machines or electronic games, to casinos and Indian reservations. It's got a wide moat. No one is going to risk going with a newer, cheaper competitor in this area.

Due to my trip, I won't be posting anything new until at least June 24, 2008. I will update readers on the NVDIA shareholder meeting when I return. Good night, and wish me luck.


Slovebunny said...

Good Luck!
Win Big! So you can invest in another electric & gas co :)

Rebecca Mauldin said...

Wow, as a massage therapist, I'm noticing I feel a bit appalled by your story. I'm thinking of being a massage therapist at this massage place. I can't imagine trying to support myself (not to mention a family) on that type of money. Tuition alone at massage school is in the thousands and many people take out loans to get that education. It's interesting to compare myself as the consumer who loves great deals to the wage earner who is concerned with my standard of living. Have Americans always been so concerned with finding things as cheap as possible? It certainly is an amoral approach to purchasing goods. As I empathize with the massage therapists in this story, I realize I am interested in a more moral approach to my purchasing decisions. I appreciate your post because it's prompting me to ponder how my desire for bargains comes at a cost to someone out there.

K_Yew said...

Thanks for your post. I hope your school/business is going well.

Like you said, people always want bargains. They will complain about Walmart and "exploitation" in front of their friends, but still clip coupons and go after the best deal possible.

I am not sure that paying less for a product is "amoral." Most poor(er) people charge less for certain services, because they work out of their home, or just don't have the resources to offer a more professional-looking experience. At the end of the day, Walmart and other cost-conscious companies have lifted many people out of poverty abroad, and going for the cheaper option usually means some poor person, somewhere, gets to have a job.

You are correct that when a consumer chooses a cheaper product of service, someone down the chain makes less money. But this person needs to differentiate his or her business or go extinct, and that "creative destruction" is one major source of innovation and promotes superior customer service. In any scenario, someone gets hurt. Consumers who choose to pay more help support the upper-middle-class lifestyle but hurt the chance of lifting someone out of poverty, even if it's not in the U.S. Liberals oftentimes don't understand that by advocating more laws and more expensive products, they hurt the poor and help the rich.

Most important, a little shop in San Jose won't hurt your massage business. Your business appears to be more upscale, so you won't be after the same clients that the downtown San Jose shop attracts. Therefore, both stores can co-exist. In the Bay Area, there are several upscale spas in Saratoga and Los Gatos offering the same basic services as the cheaper shops in downtown San Jose. But some people won't be seen in the "lower-price" shop, because they equate low-cost with being "lower-class." For example, I have a good friend who spends $1000/wk on clothing. When I suggested she try a Vietnamese-immigrant-owned place for her pedicures so she could save 80 dollars on what looks to me to be the exact same service, she scoffed. She wouldn't be seen dead in that place and said it might not be clean. In any business, you have to decide who you want as your customers and then proceed based on that goal. There is nothing "amoral" about buying services from lower-income groups or immigrants who offer cheaper services with very little reduced quality.