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 ● A love letter to the Fed 8

ve
● Banned from talking Covid-19 48

r
● Heroin, via U.S. companies 42

e y
August 31, 2020

n
e

d
ay
y
is

g
a
d
ame
The video game business is booming—
and the success is magnifying the
industry’s problems 15
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 August 31, 2020

◀ A soldier holds heroin

seized during a 2010
drug raid in Guerrero. In
front of him are bottles
of acetic anhydride, a
key heroin ingredient
that’s produced in
Mexico by the U.S.
company Avantor

FEATURES 42 The American Fuel for Made-in-Mexico Drugs

OSCAR ALVARADO/CUARTOSCURO.COM

To make heroin and meth, cartels exploit chemicals made by U.S. companies

48 Shut Up and Work

Employees say top U.S. businesses are banning talk about Covid-19 outbreaks

54 Where Billions of the OxyContin Fortune Flowed

How the Sacklers moved cash in the years before their company’s bankruptcy
 ◼ CONTENTS Bloomberg Businessweek August 31, 2020

◼ IN BRIEF 6 Exxon exits the Dow ● TikTok sues Trump ◼ COVER TRAIL
◼ OPINION 7 The U.S. needs a coherent strategy to face Putin’s Russia How the cover
◼ AGENDA 7 India’s first-quarter GDP ● A new Mercedes S-Class gets made

①
“This week we’re
◼ REMARKS 8 Dear Fed, it’s me, the stock market. Thanks! writing about the
gaming industry’s
pandemic boom.”
BUSINESS 10 Convenience stores go online to counter the Covid slump
1 12 Chinese factories wish for a very merry Christmas “So much to play,
so little time! Yesterday
13 Blue Apron’s CEO says the home-cooking boom will last I woke up, pulled down
the blackout curtain,
and decided to do a
TECHNOLOGY/ 15 The video game biz is hot, but issues of fairness remain little market research.
2 VIDEO GAMES 17 Lockdown boredom fuels big spending by players I started off with some
Animal Crossing—
18 All work and no perks for the game industry’s permatemps checked out the turnip
prices, did a little fishing.
19 Microsoft brings the Netflix subscription model to gaming By late morning, I was in
21 Why Minecraft and Roblox are on your kid’s syllabus the mood for something
vintage and opted for
22 ▼ E-sports teams get serious about training Zelda over Mario. It
was a really nice palate
cleanser. I turned it up
after lunch. Hopped
into Call of Duty then
switched to Fortnite.
Eventually I got sick of
dying, so I lay down to
play Candy Crush on
my phone. Rounded it
all out with Last of Us
Part II. By then it was
midnight, and I was in a
24 Sony’s The Last of Us Part II ups gaming’s cinematic game state of deep existential
fragility. So, you’re
4 welcome.”
FINANCE 26 No revenue, no business, and plenty of willing IPO buyers
3 28 Inflation-wary investors turn to gold, Bitcoin—and whisky
“Guess there really is a
game for every hour.”
29 Investing in racial diversity is hobbled by a lack of data “And an hour for every
gamer.”
ECONOMICS 30 Suburban home sales are going through the roof
32 Covid sends India’s migrants home to caste discrimination

POLITICS 34 Federal small-biz aid, $1 billion of it, may have gone astray
36 Once solidly red, Georgia could flip the Senate to blue

SOLUTIONS/ 38 How to replenish Social Security’s dwindling trust fund

RETIREMENT 40 Low bond yields may put the 60/40 strategy out to pasture

PRO GAMER CALANDRELLI: PHOTOGRAPH BY BENEDETTA RISTORI FOR BLOOMBERG BUSINESSWEEK

◼ PURSUITS 59 Virgil Abloh predicts the clouds over fashion will soon clear
62 This fall, make like a fisherman and stay warm in these knits
64 High-end tailors take measures to keep suitmaking alive
66 Brand-name quality without the brand-name price
67 Bulgari’s Barocko jewelry collection will turn heads

◼ LAST THING 68 Honeybees bounce back, but they’re still vulnerable

CORRECTION The Apple entry in the Tech Antitrust Scorecard (Business, Aug. 17) misplaced Democratic
Representative Val Demings. Ms. Demings represents Florida’s 10th congressional district.

How to Contact Bloomberg Businessweek

EDITORIAL 212 617-8120 ● AD SALES 212 617-2900, 731 Lexington Ave. New York, NY 10022 ● EMAIL bwreader@bloomberg.net
● FAX 212 617-9065 ● SUBSCRIPTION CUSTOMER SERVICE URL businessweekmag.com/service ● REPRINTS/PERMISSIONS Cover:
800 290-5460 x100 or email businessweekreprints@theygsgroup.com ● Letters to the Editor can be sent by email, fax, or regular mail. Photographs by
They should include the sender’s address, phone number(s), and email address if available. Connections with the subject of the letter Christina Poku
should be disclosed. We reserve the right to edit for sense, style, and space ● Follow us on social media ▶ FACEBOOK facebook.com/ for Bloomberg
bloombergbusinessweek/ ▶TWITTER @BW ▶ INSTAGRAM @businessweek Businessweek
 Bloomberg Businessweek By Benedikt Kammel
 IN BRIEF
○ Global Covid-19 cases ○ Alexei Navalny, a
have now topped longtime critic of
Vladimir Putin,

24m
and deaths have surpassed
was evacuated
to Berlin on Aug. 22 after
falling ill from suspected
822,000. President Trump poisoning on a flight to
said he would expand Moscow. Doctors treating
access to a treatment the dissident said they
using blood plasma from found evidence of a toxin
people who’ve recovered in his body and warned
from the virus, but that he may suffer long-
researchers warned that term damage.  7
the therapy’s benefits
haven’t been proven. ○ A demonstrator in Kenosha, Wis., holds a makeshift shield on Aug. 25. Police on
Aug. 26 arrested a counterprotester who they say killed two people on the third
night of unrest in the city after officers shot Jacob Blake, 29, an unarmed black man,
in the back. Blake, who’s undergone several surgeries, remains paralyzed.

○ Delegates at ○ TikTok sued the U.S. ○ Exxon Mobil ○ Chinese billionaire

government after President Jack Ma is considering
the Republican Trump issued an executive was ejected from an IPO for Ant Group, his
National order blocking the app the Dow Jones payment platform. A sale
Convention from operating in the U.S., Industrial Average, could raise about
citing national security

6
renominated
President Trump.
concerns. The Chinese
social networking service
accused his administration
more evidence
of the decline of
U.S. commodity
$30b
if markets are favorable,
of failing to follow due making it the world’s

NAVALNY: SEFA KARACAN/GETTY IMAGES. KENOSHA: BRANDON BELL/GETTY IMAGES. MA: CHESNOT/GETTY IMAGES. LOUGHLIN: JOHN TLUMACKI/GETTY IMAGES
process and providing no companies. largest
g public offering.
p
evidence or justification
MSNBC anchor Chuck Todd described
for the ban.
Trump’s opening-night speech as
“a grievance-filled informal acceptance
speech that was filled with so many
made-up problems about mail-in voting Pfizer and Raytheon Technologies
that if we were to air just the truthful were also removed, to make
parts, we probably could only air maybe way for Amgen, Honeywell, and
a sentence, if that much.” Salesforce.com.

○“With the data that we

○ The annual World ○ Full House actress Lori
Economic Forum in Davos Loughlin was sentenced

are presenting today, the

will be postponed until on Aug. 21 to two months in
the middle of 2021. The prison for conspiring with

case for mRNA-1273 to

gathering of government her husband to pay
leaders, executives, and

be one of the best or the

financiers is normally
held each January in the $500k
best-in-class vaccines
Swiss ski town. in bribes to get their
daughters into the

has gotten stronger.”

University of Southern
California as phony
c recruits.
athletic

Moderna CEO Stéphane Bancel, after the company presented new safety
data from an early trial providing the first evidence that its coronavirus vaccine
stimulates the immune systems of older people.
 ◼ BLOOMBERG OPINION August 31, 2020

As during the Cold War, the U.S. should look for ways to
The U.S. Needs manage tensions and reduce the risks of catastrophic esca-
lation. Russia lacks the economic power to compete with
A Realistic the U.S., but it possesses the world’s biggest nuclear arsenal
and a larger military budget than any European coun-
Russia Strategy try. Extending and strengthening the New START treaty, a
bilateral arms-control agreement that’s due to expire next
February, is critical for the security of both countries.
The suspected poisoning of Russian opposition leader Alexei Seeking collaboration in areas of shared concern—on climate
Navalny underscores the dangers Russians face for speak- change, say, or space policy—would also make sense.
ing out against President Vladimir Putin. It’s also a warning Engaging with Putin, however, should not mean placating
to those protesting for democratic change in neighboring him. Consistent messaging, tougher deterrence measures, and
Belarus. So long as Putin remains at the helm, Russia will resolute support for allies are essential to a successful strategy.
continue to pose a serious threat to democratic values, in its Continued drift will only embolden Putin and his operatives,
periphery and beyond. to the detriment of America’s security and the world’s. <BW>
A coherent strategy to confront this challenge will be For more commentary, go to bloomberg.com/opinion
essential for the next U.S. administration. It should include
responding more directly to Putin’s provocations, raising the
costs for Russian misconduct, and strengthening America’s ◼ AGENDA
relationships with its NATO allies. The U.S. shouldn’t rule out
cooperation with Moscow in areas of mutual interest, but
only when doing so demonstrably advances its own security.
Above all, Washington must send clear signals to Putin
about the kinds of behavior the U.S. deems unaccept-
able. The Trump administration’s policies have instead
been characterized by inconstancy. Since 2017 the U.S. has 7
imposed sanctions against Russian individuals and some
government entities for a range of actions, from conducting
cyberattacks to meddling in Ukraine to poisoning a former
Russian spy living in the U.K. Yet the impact of these mea-
sures has been blunted by Trump’s resistance to tougher
penalties, his acceptance of Putin’s denial of interference in
the 2016 election, and his push to welcome Russia back into
the Group of Seven club of industrial nations.
More recently, Trump has refused to respond to intelli-
gence assessments that Russian operatives paid bounties
to Taliban fighters to kill U.S. troops. The U.S. should avoid
▶ An Economic Tumble
a rush to judgment, but the president’s willingness to side India releases its fiscal first-quarter GDP figures on Aug. 31.
with the Kremlin’s version of events, rather than that of his Economists predict a contraction of about 20%, and the
own intelligence agencies, is disturbing. At a minimum, the central bank has warned of a severe shock to consumption
White House should suspend high-level communication with that will take a long time to recover from. ▷ 32
Moscow while it conducts a thorough investigation. If the
deaths of American troops are traced to Russian operatives, ▶ Daimler unveils its ▶ Delegates from ▶ The Central Bank
new S-Class in Stuttgart, China, France, Germany, Research Association,
the U.S. should impose a cost that will make Putin regret Germany, on Sept. 2. Russia, and the U.K. based in Switzerland,
those actions. The flagship Mercedes meet with Iranians in holds its virtual annual
sedan has long been a Vienna on Sept. 1 to meeting on Sept. 1-3.
Meanwhile, Washington needs to push back against top seller, but SUVs in review Iran’s nuclear Discussions will focus
Putin’s efforts to divide NATO and subvert the U.S. politi- the line have become accord, which the U.S. on digital currencies and
popular in recent years. has abandoned. payment systems.
cal system. Military and diplomatic officials should remind
their counterparts of America’s capacity to retaliate if
ILLUSTRATION BY SIMONE NORONHA

Russia attempts to meddle in November’s election. The next ▶ New York Federal ▶ Zoom Video reports ▶ The annual Ambrosetti
Reserve President second-quarter earnings forum takes place on
administration should repair relationships with NATO part- and CEO John on Aug. 31. With much of Sept. 4-6 in Cernobbio,
ners and work with them to modernize weapons systems. Williams speaks with the working population Italy. Nobel laureates,
the Bretton Woods still connecting with policymakers, and others
The U.S. should also reverse Trump’s decision to remove Committee in a Sept. 2 colleagues from home, will discuss challenges
some 9,000 troops from Germany, which has cheered webinar on the fallout the company’s revenue such as Brexit, Covid,
from the pandemic. is set to more than triple. and climate change.
Russia at the expense of allies’ security.
  REMARKS

ey there! It’s me, the stock market. I know

it’’s weird to write you like this, but I felt like I
nee eded to drop a quick thank-you note for every-
thinng you’ve done for me this year. I mean, your
big ol’ balance sheet is almost $3 trillion larger since
early March! You’re backing up the truck and loading
8
it with Tre suries and corporate bonds and bond ETFs,
all to keep ththe competition to stocks from fixed-income
yields as limited as Jim Cramer’s understanding of me. It’s
been a dream come true, honestly. I mean, fess up: Have
you been reading my diary?!
Maybe you’ve noticed, but everything else is a royal mess.
Covid-19 is still killing people. Parents are dreading the
beginning of “school.” U.S. unemployment is still above 10%,
higher than it’s been since the 1980s. The country is facing
the biggest economic contraction in its history. Corporate
profits are plunging. The recession is forecast to continue
at least through the first quarter of next year. And me? I’m
soaring! Have you seen these record highs I’ve been setting?
To be honest with you, it’s getting kind of wild—and
I’ve seen plenty of weirdness before. I’m more popular
with sports fans than March Madness! Of course, there
was no March Madness this year, so that’s not really a fair
comparison, kind of like comparing my dividend payouts to
PHOTO ILLUSTRATION BY 731

yields in the bond market. Amirite, or amirite? LOL!

But I’m not kidding when I say things are getting REALLY
weird. Have you heard of Dave Portnoy, aka Davey Day
Trader, yet? He was just some middling internet celebrity
◼ REMARKS Bloomberg Businessweek August 31, 2020

until suddenly he’s going viral for using Scrabble tiles to pick
stock ticker symbols. The Robinhood set thinks he’s smarter
than Warren Buffett! This probably isn’t going to end well,
I’ll tell you that much.
Speaking of Robinhood, that whole Hertz saga was about
as weird as it gets. A rental car company was trying to sell
new shares while in bankruptcy court, because its stock
price was on a tear? Let me repeat that: Hertz. Sold. Shares.
While. In. Bankruptcy. I can’t even! You’re sure keeping your
pals over at the SEC busy! I mean, it’s so weird out there,
Bloomberg Businessweek is resorting to cringeworthy satire
to make sense of it all.
Speaking of cringey, what was up with the minutes from
your last meeting? Don’t get me wrong, I didn’t actually read
them. If I had the attention span for that type of stuff, you’d
call me the bond market. Of course, the bond market did
read the minutes, and it thinks you’re being a little rude for
not wanting to keep the party going. Look, I learned this
lesson the hard way—and I sort of thought you did, too—so
it bears repeating: Just do whatever the bond market says, 9

OK? It’s bigger, better educated, and a sharper dresser than

the both of us.
So please do me a solid and keep this thank-you note in
mind when you host your virtual Jackson Hole summit. No
cowboy stuff, OK? If I hear anybody mutter something about
“irrational exuberance,” I swear I’m gonna blow my top and
hurt a few of these Robinhood types, you got that? The Lord
giveth, and the Lord taketh away. It’s what I do—and I’m
good at it! But right now, this is still a lot of fun for me. And
when I do end up burning folks, do you really want to be
the one who gets thrown under the bus? I mean, you know
you’re going to catch all the blame, right?
C’mon, Fed. We both know you’re smarter than that.
What’s another few trillion?

With sincere and deepest gratitude,

The Stock Market

Michael P. Regan is a senior editor at Bloomberg News

 B
U
S
I Can Direct-to-Door
N Slushees Beat Amazon?

E
S
10

S
● Covid pushed convenience
stores online. But delivery costs
and new rivals could hit profits
America’s 152,000 convenience stores survived—
even thrived—during the Amazon era by being
the quickest way to buy things like ice cream and
cigarettes. They mostly ignored the web because
they could, thanks to their ubiquitous presence on
urban street corners and suburban roadways.
The coronavirus is quickly challenging that
business model. Since the pandemic hit the U.S. in
Edited by
March, drastically reducing in-store shopping, big
James E. Ellis players like 7-Eleven, Circle K, and Casey’s General
Stores have accelerated the rollout of delivery from
thousands of locations via third-party platforms
such as DoorDash, Postmates, and Uber Eats.
“What Covid really did is it gave the industry
a peek into the future,” says Frank Beard, a retail
consultant. Convenience stores were eventually
going to face the same challenges from e-commerce
specialists that have already crushed department
stores and apparel chains. The pandemic sped up
that timeline, however, as Americans grew wary of
going to public places and spent less time driving
because they’re working more from home. “Covid
disrupted some of these routines,” Beard says, “and
there’s going to be a lot of lingering effects.”
The industry has been a rare success story in
brick-and-mortar retailing by improving its food
 ◼ BUSINESS
and beverage offerings—especially coffee—thereby
increasing sales and customer visits. Regional chains
such as Wawa, Sheetz, and Casey’s elevated the
convenience-store menu from being a punchline
on The Simpsons into a dining destination for many
time-pressed consumers. Selling higher-margin beer
and slushees also evens out the volatility of selling
gasoline, which accounts for about two-thirds of the
industry’s revenue but just 40% of its gross profit,
according to Convenience Store News.
Even before the pandemic, the volume of gaso-
line sold at the stores annually had been declining
slightly in recent years. Now the reduced demand
for fuel, induced by Covid, means boosting sales
of on-the-go food and general merchandise is
even more important for the industry, which saw
annual nonfuel revenue grow 10% over the past
four years, to $235 billion in 2019. But the corona-
virus has pushed other types of retailers to dive into
e-commerce, promising the quick service that had
always been the raison d’être of convenience stores.
Grocery stores have ramped up Instacart offer-
ings, mom and pop stores signed up with delivery
apps, and restaurant chains poured money into
online takeout menus. Amazon.com Inc. mean-
while is expanding one-hour delivery, which in
some markets includes convenience items like soda
and razors. And in August, DoorDash Inc. debuted
an online convenience store called DashMart that
promises to offer thousands of items for delivery
in less than 30 minutes from its own distribution
centers. The delivery giant has started the service
in eight cities, including Chicago and Phoenix, and
plans to add more locales soon.
Convenience-store operators are offering a wide
range of home-delivery items, everything from
milk, eggs, and Ding Dongs to Tylenol and coffee
PHOTOGRAPH BY SEAN DAVIDSON FOR BLOOMBERG BUSINESSWEEK. DATA: CONVENIENCE STORE NEWS
filters. But serving customers online brings its own
challenges—especially if it narrows stores’ already
thin margins because of the added cost of getting
goods to shoppers’ doorsteps. “There is this growing
pressure to explore delivery, but delivery is tough,”
says Jennifer Bartashus, an analyst for Bloomberg
Intelligence. “In the short term, it meets a need for
customers who don’t want to come into stores, but
there are questions about long-term profitability.”
John Nelson, who founded Vroom Delivery,
which offers stores an e-commerce platform, says
outsourcing delivery will eventually become too
expensive or it will lead to price increases to make
up for the cost. Plus, many states forbid third par-
ties from delivering lucrative items like tobacco
and alcohol; that could push convenience stores
to hire their own employees to make deliveries to
homes. “Even the big chains are going to have to
Bloomberg Businessweek August 31, 2020
reevaluate their distribution models,” Nelson says.
There’s also the dilemma that the better a store’s
online offerings become, the more customers may
skip the shopping trip to a brick-and-mortar out-
let. That often causes a hit to sales, because it
eliminates impulse purchases that in-store mer-
chandising is still very good at generating.
To improve results, e-commerce veterans use
data science and algorithms to increase online
order size. But convenience stores start at a disad-
vantage, having an average total purchase of just
$9, according to Convenience Store News, and now
they have to give a cut to delivery apps. Delivery
services charge 15% to 30% of a convenience pur-
chase’s bill—plus fees paid by the customer, which
can double the price of a small order. But if stores
are going to remain convenient in the eyes of shop-
pers, they don’t have much choice. “Consumers are ▼ U.S. convenience-
store sales in 2019
being trained for instant gratification,” Bartashus
says. “It’s hard to see that changing anytime soon.” Fuel
Convenience-store chains have tried to ease $414b
investor concerns by pointing to early signs that
online customers are spending more per purchase,
especially after 9 p.m., when few people want to
venture out. Some have said delivery expansion
hasn’t cannibalized in-store revenue, but is instead 11
generating a net sales boost that, even at a smaller
profit margin, will make them more money.
In the Midwest, Casey’s had been using its
own drivers to mostly deliver pizza, its most pop-
ular food offering. When the crisis hit, it was test-
ing DoorDash in 30 stores to offer longer hours and
more items, according to Chris Jones, chief mar-
keting officer. Within weeks, the pilot expanded to
600 stores. The company said it isn’t worried about
Amazon, because half its locations are in towns of
fewer than 5,000 people—parts of the U.S. where the
e-commerce giant doesn’t yet offer speedy delivery. Tobacco
“We’ve got a real advantage based on our physical 83
locations,” which allow Casey’s to make the vast
majority of deliveries within 45 minutes, Jones says.
7-Eleven, the largest U.S. chain, which will have Packaged beverages
and snacks
more than 13,000 stores in America after complet- 53
ing its acquisition of Speedway convenience outlets Food service
from Marathon Oil Corp., is going all-in on home 40
delivery. A year ago it offered the service in 200 U.S. Alcohol 25
cities. By mid-August, it was scheduled to have deliv- Other
ery in 1,300. “The definition of convenience has 35
rapidly evolved during this pandemic,” says Chris
Tanco, 7-Eleven’s chief operating officer. “Delivery
expansion is here to stay.” �Sandrine Rastello, with
Nic Querolo and Edward Ludlow
THE BOTTOM LINE Convenience shops were retail’s last big
e-commerce holdouts. Now that the pandemic has cooled their
gasoline sales, they’re rushing to expand their delivery offerings.
 ◼ BUSINESS
China’s Factories Need
A Little Christmas
In January toymaker Dave Cave was feeling good
about the year ahead. Orders were coming in for
Mighty Megasaur, and he was readying a racing
game to coincide with the release of the latest
installment in the Fast & Furious franchise. Then
the coronavirus shut down the world economy, and
Vin Diesel announced the flick would be pushed
back a year. Cave saw demand collapse. His Hong
Kong-based company, Dragon-I Toys, which makes
its goods in China and sells them to 240 retailers in
53 countries, including Walmart Inc., was forced to
cut costs as it waited for the crisis to pass.
Now, as global retailers start to stock up before
the crucial yearend holiday-shopping season, a
hopeful Cave says Dragon-I Toys’ order book is at
its best level in years.
“Nobody has canceled any orders in the last six
12 to eight weeks, so everybody is being very optimis-
tic that Christmas will happen,” says Cave, whose
company is one of the world’s biggest manufactur-
ers of toy dinosaurs and the maker of the popu-
lar Chatimal the Talking Hamster. “The only worry
that everybody has now is if this pandemic does
get worse, and we get into a situation where the
governments in these countries really go back to a
phase where everything is closed down.”
How the holiday season plays out will reveal a
lot about how consumers worldwide are recover-
ing from the pandemic shock. Exports are a declin-
ing share of China’s overall economic growth, and
not all industries benefit from Christmas demand,
but shipments of consumer goods are still a crucial
indicator of confidence globally.
China’s exports rose 7.2% in dollar terms in
July vs. a year earlier, mostly on the back of strong
demand for electronics, but they were also helped
by purchases of anti-coronavirus products and
orders for furniture and toys. Exports to the U.S.
rose 12.5% in July from a year ago, the fastest rise
since 2018 despite tensions between the two nations.
Other gauges are also improving. The Port of Los
Angeles, the busiest in the U.S., said July was its
strongest month of the year so far—and the second-
best July in its history—helped by factors includ-
ing retailers stocking up on inventory. While U.S.
retail sales growth slowed in July, sales have already
made up the ground lost in the spring.
Bloomberg Businessweek August 31, 2020
● Now that the global reopening boom is fading,
they’re counting on holiday cheer to boost sales
Justin Yu, a sales manager at Zhejiang-based ▼ U.S. monthly imports
of consumer goods,
Pinghu Mijia Child Product Co., which makes seasonally adjusted
toy scooters and electronic vehicles sold by U.S.
retailers, has already seen orders rebound to pre- $56b
pandemic levels. Since early July the factory has
been running at capacity, and it’s fully booked
until mid-October. Traditionally, July to mid-
October is its busiest period, as the holiday sea- 50
son accounts for 60% to 70% of the company’s
full-year sales.
“Our factory is running overtime,” says Yu,
adding that even his office workers are going onto 44
the factory floor to help. “We are very busy, as 7/2019 6/2020
much as we were the past years at this time.” Still,
he estimates that sales in the first half were down
▼ Chinese industrial
20% to 30% and that second-half sales will be flat, capacity utilization
resulting in a full-year drop of 10% to 20%.
While China remains the only major economy 80%
forecast to grow this year, unemployment is still
high, and the recovery is patchy. Producer prices
fell 2.4% in July from a year earlier, with knock-on 75
effects for profits, hiring, and investment. That’s
why many are looking closely at holiday demand.
“Although the pandemic is very serious, people 70
still look forward to Christmas,” Yu says. “It’s a
kind of revenge spending after a long depression
of sentiment. The difference could be fewer par- 65
ILLUSTRATION BY HUNTER FRENCH FOR BLOOMBERG BUSINESSWEEK. KOZLOWSKI: JEROD HARRIS/GETTY IMAGES.
ties this year, but those who celebrate Christmas Q3 ’19 Q2 ’20
DATA: U.S. CENSUS BUREAU, NATIONAL BUREAU OF STATISTICS OF CHINA
 BUSINESS

BW Talks Linda Kozlowski

will go ahead celebrating it, and those who
shop for Christmas will go ahead shopping for it.” Long-ailing Blue Apron had almost been
Other Chinese executives caution that the easy given up for dead. Then came Covid and
gains from an initial reopening phase are over and
say further growth will depend on the virus being a rush of homebound customers for its
contained. Large holiday gatherings, for example, meal kits. Its CEO is counting on some of
may not be on the agenda this year, says Andi Feng, that kitchen love outlasting the pandemic.
whose company, Bigger Tang, based in Dongyang
city in Zhejiang province, makes festive decorations —Carol Massar and Jason Kelly
including snowflakes and neon lights.
“Even looking ahead to Christmas, many people ○ Blue Apron Holdings Inc. added 20,000 customers in the second
still don’t feel comfortable enough to attend large quarter, and its average revenue per customer rose 25% ○ The company
events or parties,” she says. “That could be the reported a $1.1 million second-quarter profit vs. a $7.7 million loss a year
reason why gifts are selling well, while a company earlier ○ Its shares have plunged about 95% since its IPO in June 2017
like us that makes decorations is still struggling.”
Feng says that before the pandemic, about 70%
of her company’s revenue came from exports, with What have you learned about your environments. So early
business during the pandemic?
Europe accounting for the biggest share. The crisis on, we did make some
has forced her to focus more on domestic demand. That no matter what modifications to our menu,
She’s cut staff from 100 to fewer than 30 and has happens as restaurants to streamline some of the
needed government loans to stay afloat. “Our cli- open, people have gotten recipe availability to make
ents are afraid of ordering too many goods because a lot more confident in the it faster and easier to pack
everyone is afraid the products will end up stuck in kitchen, and they plan on and manage logistics. Over
their hands,” she says. continuing to cook at home. time, we’ve reintroduced that
Mark Ma, who owns Seabay International And they want interesting complexity. We’re already
Freight Forwarding Ltd. in Shenzhen, is seeing solutions to help them think back up to full service on 13
catch-up demand in the U.S. and Europe that’s driv- about how to make that our family menu, and very
ing orders for goods, particularly bicycles as con- time more connected to close to full variety on our
sumers look to avoid public transportation. About family and less focused on two-person menu. We’re
a third of the goods his company handles are sold preparation and planning. going to continue that, along
on Amazon.com, he says. “Traditionally our peak with introducing the new
season starts in May and June,” he says. “This year products and variety.
Have you had problems with your
our peak season was delayed by the pandemic dis- supply chain and logistics?
ruptions, but we’re seeing it here now.” Let’s talk about the gorilla in the room:
Willie Tan, chief executive officer of family- Oftentimes, we’re sourcing Amazon. Are you worried about it
from the same places that coming into your business?
owned Topchoice in Hong Kong, which uses
Chinese manufacturers to produce ceramic table- restaurants source from. So
I’m less focused on whether
ware, hopes he can see a similar later-than-normal we’re able to get really high-
big players that might focus
sales bump this year. To make up for lost revenue quality ingredients and had
on multiple things are going
from the pandemic-plagued spring, his employees minimal disruption. When
to come into the space,
are multitasking to keep costs down, with sales we have had a disruption,
and more on how can we
agents pitching in to pack their own boxes of sam- we can just swap recipes
actually make the best
ples. While Tan has seen strengthening demand between weeks to make
product, because this is all
from around Asia, the picture is more subdued in sure we’re getting the
we do—and we’re experts at
his other key markets including Europe, the Middle freshest possible products.
it. Our culinary authority and
East, and South America.
[ability] to create restaurant-
“We are hoping that during September and Have you had to tweak your product? quality experiences on an
October people need immediate deliveries, and
individual basis in every
we will have an opportunity to fill spaces on Simplicity is key when
person’s home, that’s really
their shelves for Christmas,” he says. If those faced with rapidly changing
most important to me.
orders don’t transpire “it will be a big problem.”
—Enda Curran and Jinshan Hong
○ Interviews are edited for clarity and length. Listen to Bloomberg Businessweek With
THE BOTTOM LINE Although exports are a declining share of Carol Massar and Jason Kelly, weekdays from 2 p.m. to 6 p.m. ET on Bloomberg Radio.
China’s economy, its factories still rely heavily on global consumer
demand. So holiday season orders are being closely watched.
 The global

standard

for
business

reporting.

Follow it all.

bloomberg.com/subscriptions
 Bloomberg Businessweek August 31, 2020

Video
Games

T
E
C
H
N 15

O
L
O
G
Y
ILLUSTRATION BY SOPHI GULLBRANTS

Boom Times in a
Troubled Neighborhood Edited by
David Rocks
  TECHNOLOGY
○ The video game industry
has prospered in the pandemic.
The fun comes at a cost
The pandemic has sent Hollywood into a tailspin,
plunged travel into its deepest funk in memory,
and left restaurant owners on the brink of starva-
tion. And video game makers? They’re thriving.
People stuck at home for months picked up con-
trollers and consoles to ease the lockdown blues
by stealing cars, hunting zombies, and planting
trees in villages full of talking animals. The indus-
try’s second-quarter U.S. sales jumped 30% from
the previous year, to $11.6 billion, according to
researcher NPD Group Inc. Shares of Activision
Blizzard Inc. are up 46% this year, Nintendo Co.’s
profits quintupled from April through June, and
Roblox—a game platform where kids hang out and
teachers sneak lessons into the mix (page 21)—
climbed from 115  million users in February to
150 million in July. Electronic Arts Inc., maker of
games such as Madden NFL and FIFA soccer, says
it added “tens of millions” of new players during
16 the outbreak. “This is an unprecedented time, and
it was an unprecedented first quarter for our busi-
ness,” Andrew Wilson, EA’s chief executive officer,
told investors on July 30.
The boom has supercharged what was already
an extremely lucrative business. Gaming compa-
nies are developing franchises along the lines of
Hollywood’s endless streams of sequels, but games
can rake in far greater sales than even the biggest
films—with no need to fret about bruising actors’
tender egos. “The biggest video games are much
more profitable over time than any movie that’s
ever been made,” says Matthew Kanterman, an ana-
lyst with Bloomberg Intelligence.
In the lockdown, at least one player has been
emboldened to take on the behemoths of tech.
Epic Games Inc. is battling Apple Inc. and Google
over the 30% cut the companies take from game
sales on their platforms. Epic says the fee—which
has its roots in 1980s Japan and the era of chunky
cartridges and primitive consoles—is outdated and
unfair. Epic’s Fortnite, estimated to generate more
than $1 billion a year from in-game sales of cosmetic
extras, has given players the option to buy add-ons
directly. That cut out Apple and Google, prompt-
ing them to remove Fortnite from their app stores.
Even before the pandemic, 2020 was primed to
be a blockbuster year, with a host of top-line titles
teed up. And this fall, Sony Corp. and Microsoft
Corp. will release their powerful next-generation
Bloomberg Businessweek August 31, 2020
consoles, the PlayStation  5 and Xbox Series  X,
heralding richer graphics. For gamers that’s a big
deal, as these generational leaps come around only
about once every seven or eight years, so they’ll
shape the gaming landscape for the next decade.
Sony will continue its strategy of exclusive games
such as The Last of Us Part II, a post-apocalyptic
action thriller with cinematic production values that
has filled the gap left by shuttered movie theaters
(page 24). Microsoft is going all-in on Xbox Game
Pass, a subscription service that’s like the Netflix
of gaming, offering access to hundreds of titles for
$5 to $15 per month (page 19). That’s good for the
software giant, because the next installment of its
Halo franchise has been delayed, leaving the new
Xbox without a flagship attraction. “Microsoft is
aware that the most effective weapon in their arse-
nal is the Xbox Game Pass,” says George Jijiashvili,
an analyst at research company Omdia, who
expects Sony’s new console to outsell the Microsoft
machine. “If they can’t compete on hardware sales,
they need to compete in other areas.”
Yet while the industry is among the most
sought-after places to work these days, many peo-
ple who make games feel exploited and discrim-
inated against. Across the industry, coders and
designers describe a frat-house mentality and “The biggest
hostility toward women. So-called crunch—toiling video games
nights and weekends with little or no extra com- are much more
pensation for weeks or months—remains a sys- profitable over
temic problem. And the industry still embraces time than any
employing “permatemps,” who work alongside movie that’s
full-time colleagues but lack benefits and job secu- ever been
rity (page 18). made”
Although video game makers have undeniably
prospered in the pandemic, it has taken its toll on
productivity and will slow the arrival of titles due
this fall and into 2021. With the shift to working
from home, almost half of developers say they’ve
been spending more time in front of their screens
but getting less done, according to a July survey by
the Game Developers Conference. And a third of
participants said the outbreak had delayed some
titles: In addition to Halo Infinite, dozens of releases
have been postponed. If the delays keep getting
extended and the recession eats into consumer
spending, the buoyant mood might grow more
somber. “The uncertainties and unknowns could
give a Tolstoy novel a run for its money,” says NPD
analyst Mat Piscatella. “We have the pandemic, the
election, unemployment—the list goes on and on.”
—Jason Schreier, with Dina Bass
THE BOTTOM LINE Things have never been better for video game
makers, with U.S. second-quarter sales up 30%, but the industry
must address persistent concerns about sexism and fairness.
 ◼ TECHNOLOGY Bloomberg Businessweek August 31, 2020

Breaking Out in
The Outbreak U.S. video game consumer spending
Year-over-year change Value,
March through July
Gaming stock prices
Year-to-date change
Video game peer group* S&P 500
The lockdown is looking like the best year ever
for video game makers as people worldwide 30% Accessories 40%
$1.0b
blast away the boredom with their controllers
and screens. Time and money spent on games— 0 0
Hardware
whether on consoles, computers, phones, or $1.5b

tablets—have soared, as have the share prices -30 -40

Content
of gaming companies. �Mark Glassman 7/2019 7/2020 $17.5b 12/31/19 8/21/20

As spending surged, three game publishers dominated the title wars.

Bestselling games in the U.S., ranked by dollar sales**
Nintendo Activision Blizzard Sony Other

January February March April May June July

Dragon Ball Z: Animal Crossing: Final Fantasy VII The Last of Us Ghost of
#1 Kakarot New Horizons† Remake Part II Tsushima

Call of Duty:
#2 Modern Warfare
17

Mario Kart 8 MLB Mortal Paper Mario: The

#3 Madden NFL 20
Deluxe† The Show 20 Kombat 11 Origami King†

Star Wars Jedi: Ring Fit

#4 Fallen Order Adventure
Resident Evil 3

Call of Duty:
Super Smash Assassin’s Creed Ring Fit
#5 Bros. Ultimate†
The Division 2 Doom Eternal† MW 2 Campaign
Odyssey Adventure
Remastered

Online gaming activity spiked: Fans are playing— U.S. mobile gaming grew,
and watching others play—more often. as did in-game spending.

Peak users of Steam gaming service†† Top Twitch game Time spent Revenue from in-
categories, June in apps‡ app purchases‡
Sundays 25m Change since Change since January Change since January
January
Games Games
① League of ▲44% Other Other
Legends
② Grand Theft ▲134
20 10% 10%
Auto V
③ Fortnite ▲102
Before the pandemic, Steam 0 0
regularly posted higher user ④ Call of Duty: ▲986
numbers on weekends Modern
Warfare
COURTESY NINTENDO

15 -10 -10
⑤ Escape ▲7
12/31/19 8/24/20 from Tarkov 1/2020 7/2020 1/2020 7/2020

*BLOOMBERG INTELLIGENCE GLOBAL VIDEO GAMES VALUATION PEERS. **PHYSICAL AND DIGITAL SALES ON THE XBOX, NINTENDO ESHOP, PLAYSTATION, AND STEAM PLATFORMS FOR PARTICIPATING MEMBERS OF THE NPD GROUP’S DIGITAL LEADER
PANEL. †EXCLUDES DIGITAL SALES. ††HIGHEST NUMBER OF USERS AT ANY TIME DURING THE DAY. ‡IOS AND ANDROID. DATA: NPD GROUP, SENSOR TOWER, STEAMDB.INFO, STREAMELEMENTS ANALYSIS OF ARSENAL.GG DATA, APPTOPIA, BLOOMBERG
 ◼ TECHNOLOGY Bloomberg Businessweek August 31, 2020

Second-Class E-Citizens
● Making games is sexy—unless you’re one of the permatemps doing much of the work

As Christmas 2018 approached, workers at Activision

Blizzard Inc. were busy doing what they always do—
writing code, modeling characters, and designing
landscapes for the next Call of Duty games. At the
company’s campus in Santa Monica, Calif., everyone
got hand-delivered invitations to the annual holi-
day bash, where staff could drink, unwind, and cel-
ebrate the year. Some recipients, though, were soon
told they’d received the invitations by mistake and
wouldn’t be welcome at the party, according to three
people familiar with the incident. The reason: They
were temporary contractors officially employed by
a staffing agency, Volt Workforce Solutions.
That treatment isn’t unusual in the gaming
industry. While executives rake in millions of dollars
and some full-time employees can expect Porsche-
18 size bonuses when a hot new title drops, many peo-
ple working alongside them get nothing but a salary
that barely keeps them above the poverty line.
Their employee badges typically come in a dif-
ferent color. They rarely get paid vacations. Their
names sometimes aren’t included in the credits.
And when full-time co-workers get pricey swag such
as statuettes of game characters, they’re often left
out. At one studio, a contractor says they were given
cheaper, less comfortable chairs. “Temps will be told
that there will be opportunities to prove themselves
and possibly transition to full time,” says Emma
Kinema, a Communications Workers of America with more than a dozen contractors, none of whom ● Number of people
employed by the video
organizer seeking to unionize video game makers. wanted to be identified for fear of retribution by game industry
“In reality, the vast majority of people in ‘temp’ roles employers, suggest they’re often essential members
in the game industry get trapped there forever with
terrible conditions, no benefits, low pay, and no lad-
of game development teams. These skilled artists,
designers, and producers maintain the same long
220k
der for career progression.” hours as staffers. Sometimes their employment has
The video game industry employs more than a specific end date, but their contracts are frequently
220,000 people worldwide, according to the extended, allowing them to keep their jobs but offer-
Entertainment Software Association. These are ing no path to full-time employment. “There are
backed up by thousands of freelancers who write many roles applicable only during a certain point
scripts or draw concept art for studios when of a project, so contracts are well-suited for these
needed. Somewhere in the middle are contractors positions,” says Renee Gittins, executive director
employed by agencies such as Volt, Keywords, and of the nonprofit International Game Developers
Yoh, who work full-time hours but are frequently Association. “But contracting should not be used as
treated as lesser employees. a method to avoid employment expenses.”
The industry’s prestige—what kid doesn’t grow Legally, these permatemps occupy a murky
up wanting to make games for a living?—makes it space. In 2000, Microsoft Corp. settled a class-
particularly ripe for labor exploitation. Interviews action lawsuit brought by contractors for failing
 ◼ TECHNOLOGY
to provide them with benefits, but the case didn’t
result in a clear precedent. “This is the Wild West,”
says William Gould IV, an emeritus law professor
at Stanford Law School and a former chairman of
the National Labor Relations Board. A pair of con-
gressmen in July introduced a bill to boost protec-
tions for contractors, but the measure hasn’t yet
made it out of committee.
The path from the headline owner of a title to the
people who write the code and draw the characters
can be convoluted. The next Call of Duty, expected
this fall, will likely break sales records; the 2018 ver-
sion, Call of Duty: Black Ops 4, grossed more than
$500 million in its first three days alone, according
to Activision. Most of the work on the game is done
by separate studios owned by Activision, including a
Santa Monica company called Treyarch, which hires
contractors from Volt. Several current and former
Volt employees with Treyarch say their pay is below
$20 per hour, forcing them to work nights and week-
ends to make ends meet.
Their Volt contracts stipulate that they have no
right to their host company’s perks. “I acknowl-
edge and agree that I am not eligible to participate
in or receive any benefits under the terms of the
Company Group’s retirement plans, health plans,
vision plans, disability plans, life insurance plans,
stock option plans, or any other employee benefit
plan, policy, or procedure sponsored or maintained
by any member of the Company Group,” reads one
contract, reviewed by Bloomberg Businessweek.
Volt didn’t respond to requests for comment.
Activision says that its staffing needs fluctuate as
games are developed and that it does its best to
include agency workers in as many studio activi-
ties as it can. (After dismay over the 2018 holiday
party, Activision contractors were invited to the
2019 event, according to people familiar with the
incident.) The company says that it investigates all
complaints about unfair treatment and that fewer
than 10% of the 10,000 workers at Activision’s stu-
dios come from contracting agencies.
Efforts to shrink the role of temps have had
mixed results. In 2014, as Microsoft sought to
reduce its reliance on contractors, it instituted
an 18-month limit for contract workers to “bet-
ter protect our Microsoft IP and confidential
information,” the company said in a memo at the
time. Because it can take years to develop a video
ILLUSTRATION BY SOPHI GULLBRANTS
game—the latest installment of Microsoft’s Halo
franchise has been in the works for more than four
years—progress has been disrupted by the depar-
ture of contractors at the end of their 18 months,
according to people familiar with development.
Microsoft says that it encourages external staffers
Bloomberg Businessweek August 31, 2020
to raise any concerns about their treatment and “Contracting
that it will take action as needed. should not
The industry’s structure makes it difficult to be used as
break out of contractor status. To get a job with a a method
top company requires a portfolio of contributions to avoid
to finished games, but in Japan some workers say employment
their agencies keep their names out of the credits expenses”
so other companies can’t poach them. One contrac-
tor who’s served as a lead for a major console game
says his agency forced him to use a different pseud-
onym in the credits of every game he worked on.
And while there are nascent efforts to forge a sense
of solidarity among workers, there are no unions
in the U.S. or Japanese video game industry—and
legions of eager people are waiting in the wings.
For Chet Faliszek, a founder of independent stu-
dio Stray Bombay Co., which is working on coop-
erative shooter games, there’s a simple solution:
Don’t use temps. As Stray Bombay has grown, he’s
resisted hiring via agencies even though it would’ve
saved him time and money. “While staffers work for
middling pay and long hours, they have the prom-
ise of bonuses and perks, many of which don’t go to
contractors,” Faliszek says. “They get a raw deal.”
�Jason Schreier, with Takashi Mochizuki
19
THE BOTTOM LINE Video game industry contractors frequently
work full-time hours but are denied perks such as paid holidays,
parties, and company swag offered to permanent staffers.
A Bottomless
Pool of Games
● The success of Microsoft’s Game Pass subscription service
heralds a big change in the way the industry sells its wares
On Aug. 11, Microsoft Corp. posted an alert on the
Twitter account of its Halo franchise: The game’s
next installment wouldn’t be ready this fall as orig-
inally planned, with its release delayed until 2021.
A few years ago, that would have been devastat-
ing news for the team that makes the company’s
Xbox game console, which had been planning to
roll out a new model in tandem with Halo Infinite.
But the Xbox will arrive as scheduled in November,
and Microsoft is bullish about its prospects—even
though Sony Corp.’s rival PlayStation 5 will also make
its debut in the coming months, with what many

players say is a stronger slate of games. Central
to Microsoft’s optimism is a service called Game
Pass, which offers a vast selection of titles for a flat
monthly fee. “We’re confident,” says Sarah Bond,
the vice president who oversees relations with game
creators. “We will launch with thousands of games.”
Game Pass and similar offerings from Apple,
Google, Sony, and other software houses are
20 changing the dynamics of the video game busi-
ness. After spending hundreds of dollars on a game
machine, users would typically have to lay out an
additional $60 or so for any newly released A-list
title they wanted to play. Now a subscription cost-
ing $5 to $15 per month will get them scores, or
even hundreds, of games—including, in Microsoft’s
case, hot titles on the day they’re released. Since
Game Pass was introduced three years ago,
Microsoft has signed up 10 million subscribers.
Sony, which started its PlayStation Now service in
2014, has some 2.2 million customers, more than
triple the number a year earlier after the price was
cut in half, to $10 per month. “Subscriptions will
play a big role in driving engagement,” says George
Jijiashvili, an analyst at researcher Omdia.
Subscriptions can keep revenue flowing even
when a company has no new console or block-
buster title. Game Pass is available in 41 coun-
tries, and Microsoft is adding the ability to stream
games to Android devices. This fall it’s tripling the
number of countries where it sells what it calls All
Access, which gives customers a new console and
a Game Pass subscription for a monthly fee that’s
currently $20 to $25, similar to cellphone con-
tracts that periodically give you a new handset.
The company says deals with Walmart Inc. and
Target Corp. will help boost sales of All Access.
Contrary to expectations, Bond says, monthly
plans get customers to spend more. A Game Pass
Bloomberg Businessweek August 31, 2020
subscription leads to about 20% more playing ◀ Bond
time. Users sample a wider variety of genres, and
they generate 20% more in sales, both on titles not
included in the plan and on extras such as down-
loadable content. Game Pass helped increase rev-
enue for Xbox content and services by 65% in the
most recent quarter. “People make this assump-
tion that if you have a subscription, you stop buy-
ing games,” Bond says, but the opposite is true.
The risk for subscription providers is that game
fans may tire of paying multiple monthly fees,
much as TV fans are starting to wonder whether
they really need Netflix and Hulu and Disney+
and HBO Max. But industry watchers say there’s
plenty of room for growth because the games busi-
ness lags video and music in converting buyers to
subscribers. While subscriptions make up almost
90% of premium video revenue, Omdia says, they
account for less than a fifth of the $53 billion in
annual sales of console and PC games.
Although Microsoft offers game makers an
upfront payment and bonuses based on how well
a title does, producers aren’t entirely enthusias-
tic. Many, particularly makers of smash-hit games,
fret that subscription services will shake up the
industry in the same way platforms such as Apple,
Pandora, and Spotify changed music, taking the
biggest slice of revenue. A survey by the Game
Developers Conference found that almost three-
fourths of developers fear subscriptions might hurt
the value of individual games. Still, it’s a hit-driven
business with myriad titles jockeying for attention,
and even successful studios often worry about cov-
ering costs. For them, Game Pass can seem like a
sure thing. “You get a good influx of cash as an
advance,” says Dan Da Rocha, studio chief at Jaw
Drop Games. “It’s a very good helping hand.”
Simon Byron, publishing director of Curve
Digital, a software house in London, says Game
Pass has helped win new fans for his puzzle games,
which aren’t typical console fare. Microsoft says
60% of people who played Curve’s Human: Fall Flat
on Game Pass had never done puzzles before, and
two-fifths of those bought a similar title after play-
ing. While individual sales of the $15 game are com-
parable on Xbox and PlayStation, five times more
customers have tried it on Game Pass, according to
Byron. “We were genuinely nervous, but so far we’ve
been really pleased,” he says. “Selfishly, the service
is becoming so popular with other publishers that
it’s become harder to put our titles there, but that’s
a sign they’re doing something right.” �Dina Bass
THE BOTTOM LINE Where users once had to lay out $60 for the
latest games, they can now get access to hundreds for $5 to $15 per
month—including hot titles on the day they’re released.
 ◼ TECHNOLOGY
Readin’, Writin’ & Roblox
● As the outbreak continues, teachers are turning to games that sneak lessons into play
When Ruth C. Kinney Elementary in Islip Terrace,
N.Y., went into lockdown in March, librarian
Bianca Rivera feared she wouldn’t be able to con-
nect with students who’d typically come in for
activities. But she soon thought of a place where
she might find them: the virtual worlds of Roblox,
a website where kids chat, play games, and learn
new skills. Several times a week, Rivera and doz-
ens of 8- to 11-year-olds logged on to play games
such as Piggy But It’s 100 Players (the point is to
fend off a petulant porker) and Adopt Me! (they
care for virtual pets). Rivera fretted that parents
would rebel against yet more time spent online,
but they were grateful, and this fall she’s planning
to use Roblox to teach animation. “It was a way to
talk to the kids,” she says. “It just helped us con-
nect and stay together.”
With the pandemic continuing to rage and
many schools likely to remain closed or operate
PHOTOGRAPH BY KYLE JOHNSON FOR BLOOMBERG BUSINESSWEEK. ILLUSTRATION BY SOPHI GULLBRANTS. DATA: MOJANG STUDIOS, ROBLOX
Bloomberg Businessweek August 31, 2020
on reduced schedules, more teachers are turning
to Roblox and Minecraft, a rival offering from
Microsoft Corp. Yes, they’re computer games, but
they’re also serious learning tools, teachers and
education theorists say. Roblox offers millions of
games, some designed to surreptitiously teach
the three R’s. In Minecraft, players construct and
explore virtual worlds out of blocks that look
something like Legos. Within those environments,
they can engage in more than 600 learning sessions,
with activities such as visiting a low-def version of
Florence, Italy; hanging out in a “decimal/fraction
garden”; or honing language skills while exploring
a shipwreck. “Being able to connect a classroom
of 20 to 25 students remotely—gaming works really
well,” says Deirdre Quarnstrom, the Microsoft
executive who oversees a school-focused edition 21
of Minecraft, which lets teachers limit who’s playing
and what the kids do.
● Monthly active users
in July
Minecraft
132m
Roblox
150m
 ◼ TECHNOLOGY
Both platforms have been used for years in
classes, after-school clubs, and summer camps
built around computer-oriented content. In the
Covid era, they’re being adapted to teach every-
thing from physics to politics. Roblox Corp. says it
now has 150 million monthly active users, up from
100 million a year ago. And use of the school ver-
sion of Minecraft, which costs as much as $5 per
student per year, more than doubled this spring
and summer. Research firm Loup Ventures predicts
Roblox will see sales of $1 billion this year, dou-
ble what it made in 2019, and Minecraft will gener-
ate more than $600 million, up at least a quarter.
“Teachers are saying now is a good time to inte-
grate those tools,” says Brett Shelton, head of the
department of educational technology at Boise
State University in Idaho.
Video workshops that Roblox released during
lockdown on using the games to teach remotely
have racked up more than 1 million views. And the
company is creating content to increase under-
standing of digital safety, such as the appropriate
response to cyberbullying and a scavenger hunt
where students search a city for questionable or
potentially harmful information.
22 One of the biggest sources for Roblox content
is players themselves. The site’s games are mostly
developed by teens and young adults, who get a
quarter of the revenue from selling their creations
on the platform. Authors of those games are on
track to bank more than $250 million this year—
double what they did in 2019—as Roblox aims to
ensure a steady pipeline of new offerings. “We did
a lot of work at the beginning of Covid to make
sure we packaged up beginner classes to make it
super simple for kids to make games,” says Roblox
Chief Business Officer Craig Donato. “They can
totally do this by themselves.”
Some educators caution against overreliance
on gaming. Both Roblox and the mainstream ver-
sion of Minecraft are open social platforms, so
parents and teachers must keep their guard up
to protect students from predators, says Tanner
Higgin, a director at Common Sense Media, which
reviews educational software. And millions of stu-
dents lack the devices or internet access needed
for remote learning. “Minecraft, Roblox—they have
all this massive potential,” Higgin says. “But they
have the same potential pitfalls as anything else
on the internet.”
Still, schools are embracing the concept. In
Atlanta, where kids have been given computers or
tablets and will study online until at least October,
the school district has almost 12,000 licenses for
the education version of Minecraft, up from 5,000 a
Bloomberg Businessweek August 31, 2020
year ago. More than half the teachers have used the
game, and students have created activities such as
a virtual amusement park and a biome, says Felisa
Ford, a digital-learning specialist at Atlanta Public
Schools. “You name it, we’re doing it in Minecraft,”
Ford says. “We don’t want static lessons. Everything
is about active engagement.” �Olga Kharif
THE BOTTOM LINE As schools embrace games, Roblox is on
track to book sales of $1 billion in 2020, double last year’s total, and
Minecraft will jump at least 25%, to more than $600 million.
Pro E-Gamers
Hit the Gym
● As the stakes get higher, teams are becoming
more serious about mental and physical health
Doug Gardner spent two decades helping athletes
at the Boston Red Sox, the NFL Players Association,
and various university teams cope with their
inner demons and overcome the mental blocks
that impede peak performance. Then in 2017, he
shifted from football fields and baseball diamonds
to an emerging and less understood competitive
arena: the ergonomic chairs and big-screen moni-
tors of e-sports, in which teams wield video game ▼ E-sports industry
revenue
controllers to zap rivals into oblivion.
2018
Gardner and a growing cohort of athletic train-
2020 estimate
ers say e-sports can be every bit as taxing as more
2022 projection
physical endeavors such as basketball, baseball,
or boxing. While e-sports squads typically lack the
resources of big-league pro teams, they’re catch-
ing up fast. Top squads are hiring dietitians and $0.8b
chefs, personal trainers, sleep specialists, and psy-
chologists to support players. And they’re build-
ing training facilities with gym equipment and
$1.0b
wellness rooms alongside the gaming comput-
$1.4b
ers. “These players are getting paid to perform,”
Gardner says. They need “the discipline that’s
required of an athlete.”
E-sports have become big business, with prizes
worth millions of dollars and scores of teams com-
peting in global tournaments of games such as
Fortnite, League of Legends, Dota 2, and Counter-
Strike. The biggest matches are played in arenas
with 50,000 or more spectators and streamed
around the world. Pro gamers will generate more
 than $1 billion in revenue this year, according to
researcher Newzoo. In some tournaments, about
100 players fight it out until there’s only one
contestant or team left standing. Others pit two
groups of five battling their way through a virtual
world in matches lasting anywhere from a few
minutes to several hours, with teams eliminated
or advancing until the final.
With so much at stake, it’s not uncommon for
competitors to spend more than 12 hours a day
at their computers, engaging in so-called scrims
against teammates to work out strategies and
hone skills. Just as stressful for players, psycholo-
gists say, is the growing trend of streaming prac-
tice sessions. Giorgio Calandrelli, an Italian with
the Fnatic team who’s better known as “POW3R,”
has more than 3 million followers on YouTube,
Instagram, and Twitch. Most afternoons he
PHOTOGRAPH BY BENEDETTA RISTORI FOR BLOOMBERG BUSINESSWEEK. DATA: NEWZOO
streams his gaming sessions for several hours
before grabbing a pizza, often eating in front of
the camera while chatting with admirers. Then in
the evenings he’ll stream again—sometimes spar-
ring with fans just for kicks—until 2 a.m. or later,
when it’s hard to fall sleep after so many intense
hours staring at a screen. “I don’t take breaks,
because my following is insane,” the 27-year-old
says. “I have to give something back to my audi-
ence and make some sacrifices.”
Ingo Froböse says those sacrifices exact a heavy
toll. The professor at the German Sport University
in Cologne studies gamers’ pulses and levels of cor-
tisol, a stress hormone. The heart rates of e-athletes
can reach 140 to 150 beats per minute—similar to
those of pro marathon runners—and their cortisol ▲ Calandrelli, aka
“POW3R”
levels are comparable to those of many traditional
athletes. If not properly managed, Froböse says, this
can lead to serious stress and burnout. “Slowly but 23
steadily, e-sports are recognizing the importance of
physical as well as mental health,” he says.
Sam Mathews, chief executive officer of Fnatic—a
team founded in 2004 that’s competed in hundreds
of tournaments in dozens of different games—has
built a new headquarters to help players better
cope with the stress. Spread across two floors, the
airy open-plan site in East London’s Shoreditch
neighborhood resembles the countless tech start-
ups nearby. Worktops and desks made from wood
and steel are married to mismatched chairs, and
the floors and ceilings are made of polished con-
crete. There’s gym equipment, a bar with fresh fruit
and energy drinks, and an on-site chef who pre-
pares nutritious meals.
To help players get accustomed to the rigors of
competition, Mathews built a room configured with
bright lights, banks of gaming PCs, and cameras
to mimic the conditions onstage at a big tourna-
ment. The catalyst for the facility, Mathews says,
was the 2018 loss of a $2.4 million grand prize in
South Korea, which made him better appreciate the
pressure players face in big matches. “We under-
estimated the team that we needed around them,”
he says. “They should have had the best sports psy-
chologists money could buy.” �Nate Lanxon
THE BOTTOM LINE E-sports generate more than $1 billion in
annual sales, and top matches are played in arenas with 50,000-
plus spectators, with tens of millions more watching worldwide.
 ◼ TECHNOLOGY
The Summer’s Best
Movie Was a Game
● Sony’s The Last of Us Part II augurs a rising
tide of cinematic, narrative-driven gaming titles
At least six years in the making, with a crew of
thousands and a budget likely in the neighbor-
hood of $100 million, Sony’s The Last of Us Part II
could easily be confused with a big-screen action
epic. In fact, although it’s a video game, TLOU2—
as fans have dubbed it—has served as a stand-in
for multiplex megahits in the weirdest summer
in Hollywood history. The game shattered sales
records, and videos of the action quickly racked
up tens of millions of views on YouTube as fans
binged on the 30-plus hours of gameplay much
as they might do with a top-tier Netflix series.
“Video games have reached a level of realism
where in-game cinematics can now rival block-
buster films,” says Matthew Kanterman, an ana-
24 lyst with Bloomberg Intelligence. “Big studios are
even using game development tools to make mov-
ies these days.”
Video games have long included snippets of
prerecorded video or animation to advance the
story, but TLOU2 raises the bar by crafting a cin-
ematic experience from start to finish. The plot
unspools in the time after, yes, a pandemic, which
has turned most of Earth’s population into zom-
bies. The characters make their way through
richly detailed landscapes of Wyoming’s Grand
Teton mountains and across fields and forests to a
post-apocalyptic Seattle where buildings, bridges,
and highways are rendered as lushly overgrown
ruins. The movement is on par with the best ani-
mated features, the characters are nuanced, and
the dialogue is mature and compelling, says game
critic David Milner.
Just as important, TLOU2 goes beyond typi-
cal run-and-gun button-mashing to address gen-
der roles, tribalism, and the true toll of violence
in ways that other games avoid. The main pro-
tagonist, Ellie—a teenage secondary character in
the game’s first installment, released in 2013—has
matured into a badass lesbian who leads a racially
and sexually diverse cast, including a transgender
youth. Although TLOU2 triggered intense criticism
among some gamers, who accused the creators
of courting controversy to goose sales, it earned
critical acclaim in a deeply conservative industry
Bloomberg Businessweek August 31, 2020
that tends to eschew heroes who stray too far
from a certain macho male stereotype. Fans have
embraced the characters, snapping up merch such
as the coffee mugs they drink from ($25), the can-
vas jackets they wear ($150), and even a $2,300
guitar modeled after the one Ellie plays. “It’s a
testament to Sony that they’ve backed such an
uncomfortable megabudget game,” Milner says.
TLOU2 offers a preview of what’s to come as
game consoles and computers grow ever more
capable. This fall, Sony Corp. and Microsoft Corp.
will introduce a new generation of their game
machines, the PlayStation 5 and Xbox Series X,
which will allow even richer graphics and more
realistic movement. Just as significant, says Kantan
Games analyst Serkan Toto, TLOU2 heralds what
promises to be a wave of titles that break down
race and gender barriers, mirroring the way
Hollywood is slowly opening up to nontraditional
leads—as in the latest Star Wars trilogy, which
proved sci-fi adventures can find commercial suc-
cess even when focused on a female protagonist.
In June, Sony introduced its initial slate of ▲ A scene from
The Last of Us Part II
games for the PS5. In an effort to extend the con-
sole’s appeal to a broader demographic, they high-
lighted far greater diversity. There’s a Spider-Man
game where the lead character is Black; Kena:
Bridge of the Spirits features a girl followed by a
legion of diminutive companions; and in Stray,
the player inhabits the body of a homeless cat.
“If TLOU2 were a small indie title, nobody would
care,” Toto says. “But this is a marquee archetype,
making it a groundbreaking experience that will
surely encourage other studios to come up with
storylines that go against what users have been
served in recent decades.” �Vlad Savov
THE BOTTOM LINE With its diverse cast, TLOU2 goes beyond
typical run-and-gun button-mashing to address gender roles,
tribalism, and the true toll of violence in ways other games avoid.
 Circles drawn in the grass promote responsible social distancing
at a waterfront park in Brooklyn, New York.

Discover how: Bloomberg.com/CityLab Brought to you in partnership with:

@CityLab
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26

The Big Business

Of Nothing
Blank check IPOs raise cash for corporations with no operations—
just a plan to buy another company

The new big-money status symbol of 2020 is run-
ning your own blank check company. Hedge fund
billionaire Bill Ackman has a new one. Oakland A’s
executive Billy Beane, who was played by Brad Pitt
in the film Moneyball, got into the game with an
initial public offering in August. Even former U.S.
Speaker of the House Paul Ryan is getting one going.
So what’s a blank check? Formally known as
a special purpose acquisition company, or SPAC,
it’s an investment vehicle that goes public despite
having no real business. The plan is to raise money
from investors and use it to buy into another com-
Edited by
pany, typically a private one that’s yet to be chosen.
Pat Regnier More than 40% of 2020’s IPOs by volume have been
SPACs, raising $31.6 billion, more than double all
of last year’s volume of $12.4 billion. And last year
was a record breaker, too. “Three to four years ago,
SPACs were just a curiosity,” says Niccolo de Masi,
chief executive officer of two blank checks, DMY
Technology Group Inc. and DMY Technology Group
Inc. II, that together raised more than $500 mil-
lion. “Now it’s an option for everybody.”
The blank check boom—or maybe fad—stems
from the collision of two big trends. The first is
historically low interest rates. With safe bonds
paying less than 1% and stocks trading at high val-
uations, more investors are willing to park their
money with a SPAC in hopes of getting lucky with
  FINANCE
an acquisition that pays off big. Second is the
long-running boom in private equity and venture
capital. Investors who poured money into buy-
ing companies over the past decade want to cash
in by selling them. So there are plenty of compa-
nies for SPACs to buy. Add to these an old con-
stant: financiers looking for new ways to earn a
fee from a transaction.
The pandemic-induced market volatility in March,
which made it difficult for conventional companies
to go public, helped bring SPACs into the spotlight.
Being bought by a SPAC can be an easier way for a
private company to go public: It can skip the usual
roadshow for pitching investors and avoid some of
the scrutiny that goes with an IPO. Online sports bet-
ting company DraftKings Inc. became a public stock
in April after completing a merger with Diamond
Eagle Acquisition Corp. in a $3.3 billion deal. As is
customary in such “reverse mergers,” the SPAC took
the name of the business it bought. When the stock
price popped from around $10 a share for Diamond
Eagle before it announced the deal in December to
a peak of $43 in June as DraftKings, it helped add
to the buzz around blank check deals.
You may not be surprised to learn that there’s a
Reddit board devoted to SPACs. The boom has at
least one veteran of the industry concerned. “We’re
in silly season in SPAC-land,” says Martin Franklin,
who’s raised six SPACs in the U.S. and the U.K.
since 2006 and has another in the works. “This is
going to end badly.”
Investors seem particularly fascinated with
the latest blank checks because they’re getting
into futuristic businesses. Luminar Technologies
Inc., a Peter Thiel-backed company that devel-
ops the sensor technology behind driverless cars,
announced plans to merge with a SPAC on Aug. 24.
The Richard Branson-founded space tourism com-
pany Virgin Galactic Holdings Inc. went public via
a blank check in 2019.
But the investors who fund SPACs when they
first go public aren’t necessarily counting on
DE MASI: DMY TECHNOLOGY GROUP. ACKMAN: CHRIS RATCLIFFE/BLOOMBERG
moonshots. They’re typically institutions such as
hedge funds, and the companies offer them the
combination of a relatively small downside with a
chance to make a tidy profit down the road. Blank
checks typically go public at $10 a share and have
24 months to find a target. If the company fails to
identify one, it liquidates, and investors get their
money back. Investors also get to vote on a deal
and have a chance to redeem their shares what-
ever the result. For that reason, SPACs tend to trade
around their $10 price until a deal is announced (or
sometimes rumored). In addition, the initial inves-
tors in a SPAC get warrants, which entitle them to
Bloomberg Businessweek August 31, 2020
buy more shares at a set price after the company
makes an acquisition.
SPACs aren’t riskless, though—particularly if
you buy after a deal is announced and the stock
has soared above $10. And once a deal is finalized,
the shares can fall below that price as easily as any
other stock’s. Of the 18 companies that went pub-
lic via SPAC mergers in the past year, 11 are trading
for less than $10 a share. SPACs are partly a bet on
the skills of the sponsors who lead the companies
while hunting for a target—often money managers
or well-known executives.
Even the most prominent sponsors can have
flops. As with private equity and hedge funds,
one of the best ways to make money on a SPAC
is to start one. As part of their compensation for
finding a company, sponsors are generally able to
purchase 20% of the SPAC’s stock for a very small
amount, typically $25,000. They are also offered
warrants. That means they end up getting a chunk
of the shares of the company the SPAC acquires
for very little money. Because their compensation
dilutes the value of shares, it’s part of the cost to
a company of going public through a SPAC deal,
offsetting some of the fees it saves by not doing a
conventional IPO. 27
Ackman is taking a different route with his new-
est SPAC, Pershing Square Tontine Holdings Ltd. In
essence, his compensation will kick in only when
the merged company trades 20% above the offer
price. Pershing Square Tontine is the biggest SPAC
to date, having raised about $4 billion. Ackman
says he wants to buy a minority stake in a “mature
unicorn”—a private company with a valuation of
$10 billion or more.
Currently there are 120 SPACs with $40 billion ○ De Masi
to spend, according to data from SPAC Research.
DMY Technology’s de Masi predicts that the
market will soon split into two categories: a few
top sponsors able to make attractive mergers and
everyone else.
That doesn’t mean the stars won’t have
competition. On Aug. 24 four software compa-
nies announced plans for traditional IPOs, and
another, Asana Inc., said it would do a direct list-
ing—that is, go public by making existing private ○ Ackman
shares available to trade on exchanges rather than
selling new shares. Thiel’s Palantir Technologies
Inc. filed for a direct listing the next day. Investors
may soon find out whether SPACs are a new way
of doing business or just the latest shiny object in
a bull market. —Crystal Tse
THE BOTTOM LINE Low interest rates, combined with a lot of
private companies looking for a fast way to go public, have turned
SPACs into the stocks of the moment.
 ◼ FINANCE
Send Gold,
Bitcoin, and
Whisky
● Inflation may be low, but some investors are
still hoarding stuff just in case it hits the fan
One lunchtime in 2009, as the U.S. Federal Reserve
started purchasing Treasuries in the aftermath of
the global financial crisis, Richard Hodges stepped
out of his office to buy his first gold bar in the City of
London. Over the next decade, he built up his per-
sonal collection to several kilograms’ worth, stored in
his “own little Bank of England basement.” Hodges,
who also works as a money manager at Nomura
Asset Management, thinks central banks’ stimulus
has ushered in an “age of currency and asset price
28 manipulation.” He’s betting that physical, tangible
gold could retain its value if all of that goes wrong
and paper assets crumple. “I even stack these little
bars like they do in the movies,” he says.
Ever since the financial crisis, a chorus of investors
and pundits has warned that near-zero interest rates
and the Fed’s bond buying would flood the economy
with dollars, drive up consumer prices, and create
market bubbles that were bound to burst. Yet infla-
tion has been tame for the past decade, global equi-
ties have returned more than 150% with dividends,
and long-term bonds doubled investors’ money. Not
even the pandemic and its recession have wiped out
those gains. The spot price of gold has risen a total of
less than 60% in 10 years. If the precious metal was
a hedge, it was against a disaster that didn’t come.
Still, gold has seen a surge in demand lately.
Hodges bought his most recent bar in May, and his
timing could hardly have been better. Three months
later, the metal hit a record $2,064 an ounce, up from
$1,700 at the start of May. It’s currently around $1,920.
Anxiety about inflation is once again in the air, par-
ticularly among individual investors. Even if the past
decade of stimulus wasn’t enough to conjure higher
prices, the thinking goes, the Fed’s additional moves
since the pandemic began may do the trick. Along
with gold, people are stashing away Bitcoin and even
whisky as they search for hedges.
It’s not necessarily that investors think inflation
will spike dramatically. Consumer prices in the U.S.
Bloomberg Businessweek August 31, 2020
rose just 1% for the 12 months ended in July, and bond
prices imply that fixed-income investors are looking
for only a 1.7% annual rate over the next decade. One
case for hedging is that inflation would only have to
overshoot expectations a bit to shock the system. “A
rate of inflation at 3% is hardly hyperinflation, but
3% inflation per annum can erode your wealth by ▼ Gold, price per
troy ounce
half in under 25 years,” says Nikhil Chandra, invest-
ment director of real assets at Aviva Investors. He $2.0k
argues for income-producing investments such as
real estate as a way to stay ahead of prices.
Whether gold would provide the protection inves-
ILLUSTRATION BY XAVIER LALANNE-TAUZIA. DATA: WHISKEYSTATS WHISKEY INDEX, AN AGGREGATE MEASURE OF THE PRICES OF THE 500 MOST
1.5
tors hope for is a more complicated question. “Gold is
an unreliable inflation hedge,” says Campbell Harvey,
a finance professor at Duke University. Harvey and 1.0
his research colleagues have found that gold has held
its value remarkably well since Roman times, yet
▼ Bitcoin price
it’s prone to manias and crashes over shorter peri-
ods. Right now, on an inflation-adjusted basis, gold $14k
is expensive relative to its past prices. If it reverts to
its long-term average, investors who joined the rally
late could lose a lot of money. 7
Cryptocurrency investors are driven by some of
the same thinking as gold buyers. The way some
digital tokens are designed to be limited in supply 0
TRADED WHISKIES, BLOOMBERG. ALL PRICES AS OF MONTH’S END
leads investors to hope they could hold their value
if paper currencies fall. The price of one Bitcoin, the
▼ Whiskey price index
best-known cryptocurrency, is up roughly 60% this
year, to about $11,500. “Gold, Bitcoin—both of them, 250
I think, are protections just against this uncertainty
that’s out there,” says Michael Novogratz, founder and
chief executive officer of Galaxy Investment Partners. 175
He has about a quarter of his net worth tied up in
cryptocurrencies and related businesses.
Similar to gold, says Novogratz, Bitcoin derives 100
much of its value simply from people believing it’s 1/2009 7/2020
◼ FINANCE
worth something. (Neither asset produces income
or earnings.) What makes Bitcoin relatively more
attractive to him is that it’s still in its early adoption
stages. But Bitcoin’s more speculative than gold:
Even after its price rise this year, it’s down roughly
40% from its peak in 2017.
Commercial property investor James Scott’s new
favorite asset is a lot more liquid: at least 4,000 liters
of whisky in a warehouse in Scotland. He started col-
lecting bottles five or six years ago but has switched
to casks. He recently sold a 28-year-old cask of
Bunnahabhain, from the island of Islay, after it appre-
ciated 10% in 11 months. “Whisky certainly outper-
forms inflation in casks,” Scott says. And a good tipple
has one edge over purely financial assets. “Whisky’s
got more soul,” he says. “And at the end of the day, if
it doesn’t work out as an investment, you can have
a great party.” �John Ainger, Vildana Hajric, Adeloa
Eribake, and Eddie van der Walt
THE BOTTOM LINE Investors who are nervous about stimulus see
it as a shelter, but gold is an unreliable inflation hedge in the short
term—and looking expensive by some measures.
Diversity Is Hard to
Put on an Index
● More investors want to know if companies are
making progress on race, but data are lacking
Calls for racial diversity at every level of the corporate
world have inspired socially conscious investors. It’s a
powerful group, with more than $30 trillion in global
assets backing companies that prioritize environmen-
tal stewardship, social impact, and good governance,
known by the shorthand ESG. But when it comes to
how integrated companies are—or aren’t—the data are
painfully limited. “I would be surprised if we have
full transparency on this topic,” says Remy Briand,
head of ESG at index provider MSCI Inc.
The reason? “Companies don’t want to disclose,
because the data we are asking for is unflattering,”
especially when it comes to the best-paying jobs,
says Natasha Lamb, a managing partner at Arjuna
Capital LLC. The firm pushes U.S. companies to dis-
close racial and gender pay gaps. Alphabet, Bank
of America, and Facebook have opposed Arjuna’s
proposals, while a handful of companies including
Citigroup and Starbucks have agreed to provide data.
The collection of racial diversity information can
Bloomberg Businessweek August 31, 2020
be a particularly big hurdle for companies operating
in Europe, which is usually a hotbed for ESG cam-
paigning. Some governments have made it illegal
to collect racial and ethnic data for most purposes,
in part because of the legacy of the Holocaust and
World War II. In Asia there’s only a budding recogni-
tion that social factors may be of concern to investors.
Most companies in China, the world’s second-largest
economy, don’t report enough data to show they
qualify for ESG funds, and the category accounts “I would be
for less than 1% of equity assets under management surprised if
in India, according to data compiled by Bloomberg. we have full
“Generally, we’ve seen less disclosure of racial diver- transparency
sity,” says David Smith, head of corporate governance on this topic”
for Asia at Aberdeen Standard Investments Ltd. He
says he continues to engage companies on the topic.
Discussions among far-flung money managers in
the U.S. or Europe and companies in Asia can also be
marred by the historical experience of colonialism.
Conversations about racial differences remain “some-
what taboo in many Asian countries,” says Stephanie
Creary, an assistant professor at the Wharton School
of the University of Pennsylvania, making it “difficult
to garner precise insights into the racial and ethnic
dynamics that contribute to equity.”
Investors in U.S. companies don’t face the same
obstacles. Most companies are required to provide a
29
breakdown of racial and ethnic data about their work-
force to the federal Equal Employment Opportunity
Commission. But they don’t have to publicly disclose
that data. Many that do share demographic informa-
tion use percentages instead of absolute numbers,
which can make it harder to see the full picture.
There’s also a lack of uniformity in definitions and
disclosure formats, says MSCI’s Briand.
S&P Global, a data and index provider, says only
about a third of the companies it’s assessed globally
provided it or the public with breakdowns of their
workforce by race and ethnicity. Some big players are
giving diversity more attention, however. Institutional
Shareholder Services Inc., which advises funds on
how to vote in shareholder elections, in July sent a
letter to U.S. companies asking them to disclose the
self-identified race or ethnicity of directors. Each
director could choose as many as three ethnicities.
Index fund giants are talking more about the issue.
BlackRock Inc. Chairman Larry Fink said in an open
letter the firm will assess racial equality issues at port-
folio companies. A spokeswoman for Vanguard Group
Inc. says it discussed diversity with most of the 686
companies it engaged in the topic of board compo-
sition in the 2019 proxy season. �Ishika Mookerjee
THE BOTTOM LINE U.S. employers collect plenty of information
on race and ethnicity but aren’t quick to share it with their investors.
In other countries, the very topic is often taboo.
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O ● An exodus from big U.S. cities
could push up prices in some
M suburbs to unsustainable highs
Homebuilder Jimmy Previti’s sales haven’t been
I
30
this strong since the last decade’s housing boom.
And that makes him nervous.
His home turf, the Inland Empire, 45 miles from
Los Angeles, is at the center of a suburban land rush.
C In the Covid-19 era, the single-family houses that are
the stock in trade for Previti’s Frontier Communities
are a hot commodity. Abetted by the lowest mort-
gage rates in history, buyers are increasingly shun-
S ning more densely populated areas, settling instead
where they can live at a safe distance from their
neighbors. “Is this the little runup before everything
runs off the rails?” asks Previti, chief executive offi-
cer of Frontier. “Nobody can tell.”
The suburban buying frenzy, driven by urban
exiles hunting for home offices and space to quaran-
tine in comfort, comes on the heels of the U.S. econ-
omy contracting at its fastest rate ever in the second
quarter and the unemployment rate almost tripling
from a year earlier. U.S. policymakers have kept the
housing market afloat by freezing foreclosures, cut-
ting borrowing costs, and flooding the economy with
stimulus cash. Nationwide, sales of new single family
homes soared 36% in July from the same month last
year, reaching their highest level since 2006.
How long the surge in demand lasts will depend
on the path of the virus and what happens once the
rescue plans expire. “We’ve delayed the crash, but
Edited by
at the same time we’re inflating the boom,” says Ed
Cristina Lindblad Pinto, director of the housing center at the American
From
Enterprise Institute, a think tank in Washington, D.C.
The exodus to sparser landscapes is happen-
ing across the U.S., but it’s most dramatic out-
side pricey, crowded New York, Los Angeles, and
San Francisco. In Manhattan, signed sales con-
tracts for condos and co-ops in July fell 60% from a
year earlier. Meanwhile, in the northern bedroom
communities of Westchester County and Fairfield
County, Conn., deals for single-family homes dou-
bled, according to appraiser Miller Samuel Inc. and
brokerage Douglas Elliman Real Estate. The num-
ber of sales in San Francisco last month inched up
1.4%, but they leapt 36% in the upscale suburbs of
Marin County and 15% in the more affordable ones
in Contra Costa County, according to the California
Association of Realtors.
DATA: CALIFORNIA ASSOCIATION OF REALTORS; PHOTOGRAPHS BY MOLLY PETERS FOR BLOOMBERG BUSINESSWEEK
Price growth slowed from pre-lockdown levels in
urban sections of Boston, Detroit, and Washington,
D.C., but they accelerated in their suburbs, accord-
ing to an analysis by Zillow. Home prices in Boston,
for example, rose 2.1% in July while they climbed 5%
in the suburbs. In Washington, they rose 3.6% and
increased 4.4% farther out.
Land of Boom and Bust
Median price of existing single-family homes in the Inland Empire
$400k
250
100
7/2000 7/2020

m L.A.
The Inland Empire area in Riverside and San
Bernardino counties, home to 4.5  million, has
long been a land of booms and busts. Previti lived
through that roller coaster, when a bubble inflated
by loose lending, speculation, and overbuilding
burst, unleashing a massive wave of foreclosures.
The price for a typical single-family home in the
area plummeted 60% in last decade’s crash. But it
jumped 10.5% in July, to $420,000, which is almost
10% above the 2006 peak. Previti’s sales pace last
month was three times as high as in July 2019.
Bidding wars are breaking out again in the
region, which has long been the affordable alter-
native to the coast, a place where buyers put up
with desert temperatures and hellish commutes for
a home that costs a fraction of similar real estate in
Los Angeles, Orange, or San Diego counties.
The orange groves and dairies that once blan-
keted the Inland Empire are being supplanted by
sprawling red-tile-roof subdivisions. People started
lining up at noon on Friday, Aug. 14, as the ther-
mometer climbed to 104F, 22 hours before 40 lots
were released at ShadeTree, a community in San
Bernardino County just launched by Chinese builder
Landsea Homes. The line swelled to more than 30
buyers, who camped overnight and shielded them-
selves from the sun with umbrellas. The demand
seems “unprecedented to me, especially in light of
the fact that it is the middle of August—traditionally
a dormant time period for sales,” says Mike Forsum,
Landsea’s chief operating officer.
Simultaneously, however, the U.S. property
market is facing another test. The federal govern-
ment’s $600 weekly supplement to unemployment
insurance, which helped millions of homeown-
ers weather job losses and pay mortgages and
Bloomberg Businessweek August 31, 2020
household bills, came to an end last month, and ◀ Prospective buyers
line up at ShadeTree,
Congress can’t agree on a replacement. President a new subdivision in
Trump signed executive orders earlier this month Ontario, Calif.
that may deliver as much as $400 in supplemen-
tal benefits for those still out of work, but the relief
may not last more than a month, analysts say.
Unless the economy comes roaring back to
life soon, the unemployed may be forced to sell
their homes for a loss or face foreclosure. They’re
allowed to delay mortgage payments under a for-
bearance plan for up to a year. Six of the biggest
U.S. banks, including JPMorgan Chase & Co. and
Wells Fargo & Co., have already boosted reserves
to $35 billion, bracing for a tsunami of soured loans.
Buyers who purchased recently and have little
equity in their homes are the most vulnerable if
housing crashes again. In the Inland Empire, many
stretched into homeownership using programs such
as Federal Housing Administration loans, which
require small down payments and allow borrow-
ers to take on more debt with less income. Almost
16% of borrowers with FHA loans in the U.S. were
delinquent in the second quarter, more than twice
the rate for conventional loans, according to the
Mortgage Bankers Association.
The migration away from cities will last until 31
the virus is gone, and longer if employers get com-
fortable with having a remote workforce, says
◀ Jason Alonzo and his
wife, Rebecca, snagged
a five-bedroom,
$680,000 house at
ShadeTree
Ralph McLaughlin, chief economist for Haus, a
co-investment platform for homebuyers. “We’re
seeing a very radical change in where people want
to live—if it’s temporary, the fortunes of suburban
areas may not be as rosy as some people think,” he
says. “If it’s permanent, we may see a new wave of
suburbanization like we haven’t seen in decades.”
At ShadeTree, many of the shoppers are first-time
buyers leaving high-cost rentals in coastal towns
such as Irvine or Newport Beach and who lack cash
for a big down payment, but can afford FHA loans
to finance homes that start at around $500,000,
according to Landsea’s Forsum. “It feels counterin-
tuitive that our industry is experiencing the kind
 ◼ ECONOMICS Bloomberg Businessweek August 31, 2020

of success that it is right now, but I believe it’s a
confluence of events that’s leading people in our
direction,” he says. “There’s a sense of urgency that
I need to get to safety and space while I take advan-
tage of this situation with the mortgage rates.”
As a firefighter and former Marine, Jason
Alonzo, 34, has learned to sleep practically any-
where. So camping overnight on a lawn chair in
the heat outside ShadeTree’s sales office wasn’t
all that bad, he said. He couldn’t take a chance—
his wife, Rebecca, was nine months pregnant with
their first child, and they need space. A month ago
they missed out on the lot they wanted at the same
432-lot master-planned subdivision near the town
of Ontario, because they arrived too late.
This time, Alonzo was seventh in line. The cou-
ple secured a five-bedroom house for $680,000,
which they’ll finance with a zero-down Veterans
Affairs mortgage. “I know things will never go back
to normal after the pandemic,” Alonzo said. “But I
feel safer knowing I have room now to take in my
extended family if things get bad.” �Prashant Gopal
and John Gittelsohn
THE BOTTOM LINE Home prices in bedroom communities
outside big U.S. cities are rising faster than in metro areas, as virus-
wary buyers take advantage of low interest rates.

Undoing India’s Gains in

Fighting Poverty ● Millions escaped caste discrimination.
Covid-19 brought it back

Millions of migrant workers in India made arduous to define how many earn their living and whom
journeys back to their villages after the government they marry.
imposed the world’s largest lockdown in March. Nearly a third of Dalits, members of the low-
32 Many say caste discrimination they face in rural est caste who now number more than 200 million,
hinterlands is reversing even the small economic earn less than $2 a day, and often lack access to
and social gains they eked out in cities. running water or education. “I have no land, so
In the village of Aston, in the central state of had left my village some 12 years ago in search of
Madhya Pradesh, Raju Banskar, 33, says the dou- work and to escape this system where I am con-
ble stigma of coming from a lower caste and having sidered untouchable,” Banskar says. “I have come
traveled from New Delhi, where the coronavirus back to the same situation that I left, in fact it has
is spreading, has made it impossible to find a job. only become worse.”
In the capital, construction work brought him as The headman of Banskar’s village couldn’t
much as 300 rupees ($4) a day, and few paid atten- be reached for comment. Chandrasen Singh, an
tion to his caste. official at the Tikamgarh district office, which
But building sites shut down when Prime administers Banskar’s village, says the region’s
Minister Narendra Modi imposed the nationwide job program is active and he hasn’t received any
lockdown. Back home, Banskar says jobs created complaints about caste discrimination. “All these
through government programs are mostly allo- allegations have no substance,” he says. Some peo-
cated by the village headman to upper caste work- ple have refused work because wages under the
ers. Nine migrants interviewed by Bloomberg News government’s job program are lower than what
in several Indian states had stories that were sim-
ilar to Banskar’s, showing how the pandemic is
widening one of the nation’s sharpest inequities, Determined at Birth
the social hierarchy determined by India’s ancient Caste still shapes economic prospects in India, despite laws that prohibit discrimination
caste system. Average per Females Male workers
The founders of postcolonial India attempted to Population capita income with some defined as
Caste share* (in rupees) education professionals
do away with caste discrimination, enshrining affir-
mative action into the constitution. India’s so-called Brahmin 04.9% 35,303 84.6% 43.8%
DHIRAJ SINGH/BLOOMBERG

backward classes—a group that includes the lower Other upper castes 14.9 36,060 80.6 34.8

castes as well as tribal peoples—are the beneficiaries Dalit 21.8 19,032 49.4 18.1

of a quota system that allots them seats at universi- Other “backward” castes 42.8 21,546 59.1 19.0

ties, in government offices, and in Parliament. Yet

the ancient code of social stratification continues
*BALANCE OF THE POPULATION INCLUDES MUSLIMS, CHRISTIANS, AND OTHER MINORITY GROUPS. DATA IS FOR 2011;
DATA: NITIN KUMAR BHARTI, PARIS SCHOOL OF ECONOMICS (2018 PAPER “WEALTH INEQUALITY, CLASS AND CASTE IN INDIA, 1951-2012”)
◼ ECONOMICS
they were earning in the cities, Singh says.
A decades-long economic boom propelled mil-
lions of Indians out of the countryside and into the
cities, in an attempt to escape the economic depri-
vation and social oppression that would have oth-
erwise been their lot. Now the pandemic threatens
to undo their progress. The World Bank estimates
measures to contain the spread of the virus will
push 12 million Indians into abject poverty.
In a country that cannot really be said to have
a safety net, many may never manage to regain
their previous standard of living. “This will have
an impact that you will see for many years,” says
Niranjan Sahoo, a senior fellow at the New Delhi-
based Observer Research Foundation. “Whatever
gains we made in the last so many years,” he says,
referring to social advances as well as growth in
incomes, “we might just lose.”
In recent months, India’s government has
boosted spending to revive the economy, allocat-
ing more funds to existing rural jobs programs
and launching ones for migrants returning to their
home villages. The benefits aren’t always trickling
down to the lowest castes, villagers in the states of
Madhya Pradesh, Bihar, Gujarat, and Uttar Pradesh
said in interviews. A representative for the ministry
of rural development, which administers the jobs
program, didn’t respond to calls seeking comment.
Manish Kumar, 24, who returned to Tevar vil-
lage, in Uttar Pradesh, says caste-based discrim-
ination restarted the moment he entered the
quarantine center in his village, where upper castes
separated themselves from Dalits, who have tradi-
tionally been branded as impure. “When I go to
shop, the shopkeeper asks people from my caste
to wait, they first cater to the upper caste people,”
he says. Kumar says he hasn’t received any work
under the government jobs scheme or received
food aid even though he has the requisite docu-
ments. The head of his village couldn’t be reached.
According to a 2010 study on social discrim-
ination by Oxfam India, a New Delhi-based
nongovernmental organization, Dalits, members of
tribal groups, and Muslims are highly underrepre-
sented in better paid and higher status jobs, while
they are disproportionately concentrated among
those in the informal economy, where wages are
lower. That’s the area that’s been hit the worst
during the pandemic, making those from lower
castes more likely to fall back into severe poverty.
Sunil Kumar Chaurasia, a program officer with
Sahbhagi Shikshan Kendra, a nonprofit headquar-
tered in Uttar Pradesh, says it’s mostly Dalits who
suffer as they don’t have the connections upper
caste people have. Also, most are uneducated and
Bloomberg Businessweek August 31, 2020
unaware of their rights, and hence can’t access
government programs, he says.
Women returnees also complain of ill treat-
ment. Some say they must line up for hours at the
village tap because upper caste families get access
first. Krishna Ahirwar traveled from New Delhi
to Aston with her husband and toddler in April,
where they were forced to stay in an area where
Dalits have historically lived. Landless and with no
ration card—the government document required to
get food aid—she’s found it hard to feed her fam-
ily. “We are thinking about whether to go back to
the city,” she says.
That’s not an attractive option. India has logged
3.1 million coronavirus cases, and the risk of conta-
gion is higher in crowded areas. Also, jobs remain
scarce even in cities. Although lockdown restrictions
33
have eased, business sentiment in India turned ▲ Bablu Ahirwar
negative in June for the first time in more than
a decade, according to an IHS Markit survey.
Bloomberg’s economists estimate gross domes-
tic product shrank 20.5% in the quarter ended in
June, the biggest contraction on record.
Bablu Ahirwar, a 32-year-old Dalit from
Lakheri, a village in Madhya Pradesh state, worked
as a laborer at construction sites in New Delhi. In
March he and his family moved into their ances-
tral mud house in the village. When he went to
seek work from the village headman, he says he
was told there were no projects. The headman of
his village couldn’t be reached for comment. “The
village headman is giving jobs to people from his
caste,” Ahirwar says. “Nobody has anything for
people like me.” �Shruti Srivastava
THE BOTTOM LINE Measures to limit Covid-19 infections will
push 12 million Indians into abject poverty, according to estimates
by the World Bank.
 Bloomberg Businessweek August 31, 2020

P A $1 Billion Bonanza for

Phantom Companies
O The Small Business Administration handed out more $10,000

L grants than there were eligible applicants in many places

A federal program meant to help small businesses $10,000 grants exceeded the number of eligible

I
hurt by the coronavirus pandemic may have sent
more than $1 billion to places it shouldn’t have
gone, according to a Bloomberg Businessweek
analysis of Small Business Administration data.
small businesses, for a total of $1.3 billion in suspect
payments. Illinois’s 2nd District, which includes a
swath of Chicago and its suburbs, had the great-
est excess, with 24,278 grants going to businesses

T In some parts of the country the SBA approved

far more $10,000 Economic Injury Disaster Loan
(EIDL) grants than the number of eligible busi-
nesses, the analysis found. The epicenter was six
that listed addresses there. But the most recent U.S.
Census Bureau data show that only 1,925 small busi-
nesses in the district have at least 10 employees,
the number required to qualify for the maximum

I adjacent congressional districts in the Chicago area,

where 81,000 grants were approved even though
there are only 19,000 eligible recipients. That’s more
than $600 million going to phantom entrepreneurs.
$10,000 grant. Districts in Georgia, Texas, Florida,
and other states also showed payments to more
than the number of eligible companies. The Census
data are from 2017, and the number of businesses in

C
34
The SBA declined to comment on the discrep-
ancies, saying in a statement it had “stringent
fraud-protection safeguards” and noting that it had
been under pressure to move the money quickly.
each district may have changed since then. But the
discrepancies uncovered in Bloomberg’s analysis
are so large that potential increases in business
activity alone can’t explain them.

S Bloomberg identified 52 congressional dis-

tricts across the nation where the number of
The suspect payments far exceed the
$47.8 million that SBA Inspector General Hannibal

ILLUSTRATION BY WOSHIBAI

Edited by
Amanda Kolson Hurley
◼ POLITICS
“Mike” Ware identified in a preliminary report in
July that warned of “potentially rampant fraud”
in the $20 billion grant program. Ware declined
to comment on Bloomberg’s findings about the
full program until his staff had a chance to review
them. But in an interview, he didn’t sound sur-
prised. “The level of fraud we’ve seen in this has
been pretty pervasive,” he said.
The SBA said in its statement that its anti-fraud
safeguards had “prevented the processing of thou-
sands of invalid applications.” It also said it was
“balancing the agency’s fiduciary duties against the
urgent need to provide the small-business sector
with more than $207 billion—including $20 billion
in EIDL Advances—needed to weather the precipi-
tous challenges created by this pandemic.”
The EIDL grant program inspired several types
of scams, Ware said. In one, criminals recruit
people by offering to help obtain a $10,000 gov-
ernment grant in exchange for a fee. Each recruit
provides personal ID and bank account informa-
tion, often without understanding that the arrange-
ment is illegal. The scammers use the information
to submit a phony application.
Ware said he and his law enforcement partners
shut websites and call centers that were set up to
troll for recruits. “It’s organized,” he said, “to the
point where—you know what, I’ll leave it at that,
because I don’t believe I can say it publicly at this
point.” The FBI, the Secret Service, and other agen-
cies are probing fraud across the SBA’s programs,
Ware said.
The Washington Post, citing an unnamed source,
reported in July that SBA officials had noticed so
much fraud coming from Chicago that they asked
front-line workers to subject those applications to
extra scrutiny. Separately, the Illinois Credit Union
League warned members in a notice on July 3 that
it had received reports of “money-mule” fraud in
the program. The SBA began dispensing grants
in April and handed out the last of the $20 billion in
July. Ware’s report says allegations of fraud sky-
rocketed around mid-June, when the SBA resumed
processing applications after a two-month hiatus.
The Bloomberg analysis shows a surge in grant
approvals on June 15 in areas with the most fraud.
Created as part of the $2 trillion coronavirus
stimulus bill passed in March, the grants are an
add-on to the agency’s decades-old disaster-loan
program, which distributed $184 billion through
Aug. 15 to small businesses adversely affected by the
coronavirus pandemic. The disaster loan and grant
programs are separate from the SBA’s Paycheck
Protection Program, which dispensed $525 billion
in forgivable loans before it ended on Aug. 8.
Bloomberg Businessweek August 31, 2020
It can take months to get approved for a disaster
loan, and lawmakers conceived of the grant
program as a way to get cash to businesses quickly
while applications were pending. Barring fraud,
the grants don’t have to be repaid, even if the loan
application is rejected. To speed money to strug-
gling businesses, lawmakers required the SBA to
take applicants’ word that they were eligible for
the money—a requirement that SBA Administrator
Jovita Carranza has called “lowered guardrails”
against fraud.
In a letter responding to Ware’s findings,
Carranza said the SBA had caught billions of dollars
of attempted fraud. An automated system rejected
$8.8 billion in grants because they were identified
Top Districts Receiving Suspect Grants
Number of eligible businesses ◼ Number of $10,000 grants Excess value
Illinois 2nd 24k $223.5m
Illinois 1st 20k 178.2  
Illinois 7th 20k 132.2  
Georgia 13th 9k 69.3  
Georgia 4th 8k 60.5
DATA: U.S. SBA, U.S. CENSUS BUREAU STATISTICS OF U.S. BUSINESSES 2017
35
as duplicates, and it denied an additional $9 billion
because applicants’ identities didn’t check out or
didn’t match bank information, Carranza wrote.
Those figures refer to rejected applications. But
Ware was able to identify the $47.8 million in fraud-
ulent grants approved through June 19 by examin-
ing the employer tax ID numbers on applications.
Businesses are supposed to have been in opera-
tion as of Jan. 31 to qualify, yet Ware found that
20,962 successful recipients got ID numbers after
that date. He used the same method to identify
$208 million of loans that were wrongly disbursed.
In some cases, according to Ware, banks alerted
the SBA to suspected fraud, and it’s unclear
whether all of the dubious approved grants identi-
fied by Bloomberg were actually collected by appli-
cants. But the number of suspect approvals may be
even higher than Bloomberg estimates. It doesn’t
include potential fraud involving grants of $1,000 to
$9,000, which represent more than half the total.
And it counts only $10,000 grants that exceed the
number of eligible businesses in a congressional
district, even though some legitimate businesses
probably didn’t apply. Across the nation, about
57% of eligible small businesses got $10,000 grants.
�Zachary R. Mider and Jason Grotto
THE BOTTOM LINE A comparison of SBA grants and eligible
companies shows that more than $1 billion in federal aid may have
gone astray.
 ◼ POLITICS
Battleground
Georgia
● Both of the state’s Senate races this fall are
competitive, thanks to changing demographics
The residents of the once reliably Republican
Atlanta suburb of Johns Creek signaled in 2018 that
their politics were changing, along with the world
beyond their manor homes and undulating country
club fairways. In an excruciatingly close guberna-
torial race between Democrat Stacey Abrams and
Republican Brian Kemp, voters in Johns Creek pre-
cincts favored Abrams by 51% to 48% (she lost the
election). This came two years after Johns Creek had
voted for Donald Trump, and it chose John McCain
over Barack Obama by a margin of 2 to 1 in 2008.
Now, President Trump’s bid to rile up suburban
voters with warnings about crime and low-income
housing that critics have called racial dog whistles
doesn’t seem to be resonating in Johns Creek and
36 places like it. “I’m afraid he’s a little too late,” says
Brian Weaver, a Black 62-year-old elected last year
to the city council. Johns Creek, he says, is “one of
the most diverse cities in the country.” The town is
still majority White, but barely, at 53%. Earlier this
month, the city’s White police chief was forced to
resign for criticizing the Black Lives Matter move-
ment on social media.
Places such as Johns Creek, says Mark Rountree,
a Republican political consultant in Georgia, are
leading a shift in the state’s politics. “That was a lily
White suburb in the far north,” he says. “It’s gone
very Democratic.”
Georgia is the only state with two U.S. Senate
seats up for grabs in November, and both contests
are competitive. One of the races is a special elec-
tion that pits all candidates against each other;
20-odd candidates are vying for the seat vacated
by Republican Johnny Isakson when he retired
last year. The seat has been held since January by
Kemp appointee Kelly Loeffler, who is running to
keep it. Because of state election rules, at least one
seat, and possibly both, could remain undecided
until a runoff next January, raising the possibility
of Georgia belatedly deciding control of the Senate.
Two Republican victories would have been a
given a few cycles ago, but that no longer holds.
“The demographics are changing so quickly,”
says Seth Bringman, a spokesman for Fair Fight,
a Georgia-based voting rights organization that
Bloomberg Businessweek August 31, 2020
Abrams leads. “A very red state is rapidly becoming
more and more blue.”
Georgia has been one of the main arenas for the
social and cultural struggles that have played out
nationally in 2020, with huge street protests demand-
ing police reform and racial justice, the frightening
spread of Covid-19, and a fierce debate over reopen-
ing schools and businesses. The killings of two Black
Georgians, Rayshard Brooks and Ahmaud Arbery,
in separate incidents earlier this year sparked out-
rage, with videos of their death going viral. And
the pandemic has twisted itself around state poli-
tics, pitting the mayor of Atlanta, Democrat Keisha
Lance Bottoms, against Governor Kemp in battles
over mask mandates and reopenings.
“There are all these scenarios out there now
that just make Georgia more competitive,” says
Jessica Taylor, a Senate analyst at the Cook Political
Report, which rates the special election as “Lean
Republican” and the other race as a toss-up. There’s
“the whole Ahmaud Arbery story, the Rayshard
Brooks story, the suburbs that have become so
diverse, and Trump,” Taylor says.
“I think there’s going to be record turnout in
Georgia this fall,” says Matt Lieberman, a candi-
date in the special election and the son of the for-
mer Connecticut senator and presidential candidate
Joe Lieberman. The Harvard-educated 48-year-old
former elementary school principal is a Democrat
running on gun control, protecting Roe v. Wade, and
cleaning up Washington. He has faced calls to drop
out following allegations of a racist character por-
trayal in a novel he published in 2018. He’s said criti-
cism of the book is political and he won’t withdraw.
Also vying for Isakson’s former seat is Raphael
Warnock, 50, the senior pastor of Atlanta’s famed
Ebenezer Baptist Church, where Martin Luther King
Jr. once served as co-pastor. Warnock is the choice of
Georgia Voting
Winners of the 2012
presidential election
and 2018 gubernatorial
Counties that voted for
Romney, then Abrams
election, by county
840k
Atlanta
◼ Both Democrats
◼ Both Republicans
votes
◼ Republican,
then Democrat
(Mitt Romney,
Counties that voted for
Obama, then Kemp
Stacey Abrams)
◼ Democrat, then
Republican
(Barack Obama,
85k
votes
Brian Kemp)
DATA: GEORGIA SECRETARY OF STATE; MIT ELECTION DATA; SCIENCE LAB
 ◼ POLITICS
state Democratic Party leaders, including Abrams.
His platform includes expanding Medicaid and pro-
tecting the right to vote, and he has almost $3 mil-
lion in his war chest, according to the Center for
Responsive Politics. But Warnock has received neg-
ative press for his recent separation from his wife,
who accused him of running over her foot with a car
during an argument, an allegation Warnock denies.
In addition to competing against each other,
Lieberman and Warnock are trying to best their
Republican rivals, Loeffler and U.S. Representative
Doug Collins. Loeffler has been the front-runner in
polls, with Collins and Warnock contending for sec-
ond place. A candidate would have to top 50% to
avoid a runoff, so the special election will almost
certainly go to a two-way runoff on Jan. 5.
Loeffler, 49, is co-owner of the Atlanta Dream,
the city’s Women’s NBA team, and also married to
Jeffrey Sprecher, the owner of the New York Stock
Exchange. Loeffler and her husband drew scru-
tiny this spring for stock trades made after she was
privy to a confidential Senate pandemic briefing.
She denied wrongdoing, and an ethics watchdog
cleared her of alleged insider trading, but it was
catnip to her critics, especially Collins.
Kemp appointed Loeffler with the idea of
appealing to more moderate suburban women.
But that strategy collapsed when Trump stal-
wart Collins, 54, got into the race, prompting the
Loeffler campaign to move further to the right.
After Loeffler criticized the WNBA’s support of
Black Lives Matter (which she’s called “Marxist”),
her own players called for her removal as owner.
They also donned T-shirts emblazoned with “Vote
Warnock.” (Loeffler and Warnock didn’t respond
to requests for comment.)
Collins is running as Trump’s favorite, though
ILLUSTRATION BY JOEL PLOSZ
the president has yet to endorse anyone. In the
same July week that Warnock presided over a
memorial service for Brooks, who was fatally
shot by an Atlanta police officer, Collins accused
the longtime Fulton County district attorney of
Bloomberg Businessweek August 31, 2020
charging his killer for political reasons. The DA, who
was also implicated in an ethics controversy, lost a
runoff on Aug. 11. Voters “are tired of the attacks on
police,” Collins says. Supporting law enforcement
and veterans is a plank of his campaign.
Loeffler has amassed and spent far more money
than any of her rivals, but Trump’s supporters are
behind Collins, says Debbie Dooley, an early orga-
nizer for the Tea Party movement in Atlanta. “The
grassroots doesn’t like Kelly,” Dooley says. “She was
supposed to appeal to moderates. Now that’s out
the window.”
In the other, less crowded race, Republican
first-term senator David Perdue Jr., 70, is being
challenged by Democrat Jon Ossoff, a 33-year-old
documentary filmmaker who gained national atten-
tion a few years ago for a close but unsuccessful
bid to claim a long-held Republican congressional
seat. Perdue is running to protect conservative val-
ues and small business and opposes defunding the
police; Ossoff ’s priorities include adding a public
option to the Affordable Care Act, investing in clean
energy, and reforming the criminal justice system.
Recent polls have Perdue and Ossoff neck and neck.
In July, Perdue drew a swift rebuke from
Democrats when his campaign ran a social media 37
ad with a doctored photo showing Ossoff ’s nose
enlarged. Ossoff, who is Jewish, called the ad
the “least original anti-Semitic trope in history.”
Perdue’s campaign removed the ad and blamed
an outside vendor for altering the photo. “A very red
The political shift in Georgia is largely limited state is rapidly
to cities and their outskirts. Incorporated in becoming
2006, Johns Creek is one of a number of affluent, more and more
once overwhelmingly White and conservative blue”
municipalities that broke away from the region’s
majority-Black counties in the 2000s in the name
of local control. The years since have brought an
influx of young and professional Asian, Black, and
Hispanic residents. A third of the population is now
foreign-born, a shift that is even changing the city’s
recreation options: In its newest public park, Johns
Creek is installing cricket facilities.
Democrats “have been predicting an imminent
blue wave since 2014,” says Charles Bullock, a politi-
cal science professor at the University of Georgia. It
hasn’t arrived yet and may not this year, but it even-
tually will, he says. “It reminds me of 20 to 25 years
ago, but in reverse: Back then the Republicans were
always saying they were about to take the legisla-
ture, year after year,” Bullock says. “And finally they
did.” �Brett Pulley and Margaret Newkirk
THE BOTTOM LINE Demographic trends are turning Georgia into
a swing state, and with two closely fought U.S. Senate races this fall,
the state’s voters could decide which party controls that chamber.
 America’s
S Vanishing Trust
O Fund
L
U
Social Security hits its peak this year. To replenish,
it may need to take out loans

T A monthly check from Social Security is the only

thing keeping millions of older Americans out of
poverty. Half of married senior citizens and 70%
of unmarried seniors get at least half of their
Should Social Security stop depending just on
payroll taxes and the trust fund to pay bene-
fits and start supplementing those sources with
general tax revenue? The debate came to a boil

I income from it, according to the Social Security

Administration. It’s the indispensable retirement
solution. But the trust fund that pays old age and
survivor benefits is going to run out of money
in August, when President Trump floated the
idea of a permanent cut in payroll taxes, which
would presumably necessitate a big infusion of
general tax revenue to keep beneficiaries whole.

O
38
sometime in the 2030s. A lot of advocates for Social Security worry
Those hard facts have raised a question: that tapping general revenue will make people

N
S

August 31, 2020

Edited by Joel Weber

and Howard Chua-Eoan
 ◼ SOLUTIONS Bloomberg Businessweek
perceive the program as welfare rather than a mutual insur-
ance compact among workers. Democratic Representative
Richard Neal of Massachusetts, chairman of the Ways and
Means Committee, responded to Trump’s gambit with an
Aug. 14 statement saying, “Make no mistake: This is an
attempt to undermine Social Security entirely.”
On the other hand, drawing on general funds would
make it easier to pay scheduled benefits to the Baby Boom
generation without big hikes in payroll taxes. It could also
lessen inequality, since the IRS’s tax code is more progres-
sive—that is, with higher rates for higher incomes—than the
Social Security Administration’s. “The most likely scenario”
as the path of least resistance “is somehow general rev-
enues will be tapped” to help pay benefits when the trust
funds run dry roughly a dozen years from now, says John
Shoven, an emeritus professor of economics at Stanford.
Benefits are paid out of two trust funds, a big one for
old age and survivor benefits and a small one for disabil-
ity insurance. Since a formula change in 1983, the funds
have grown because receipts and interest have exceeded
expenses. Sometime this year—it’s not clear when—their
combined value is peaking at $2.9 trillion. Then it will be all
downhill, because benefits have begun to exceed the com-
bination of receipts and interest. The trustees’ report this
spring predicted the main fund would run out of money in
2034 and the disability fund in 2065. The Covid-19 pan-
demic is likely to accelerate the depletion of the main fund
by two or three years by reducing payroll tax receipts and
pushing people into earlier retirement, Shoven estimates.
Exhaustion of the funds doesn’t cause benefits to go
to zero, because fresh money will still arrive in the form of
payroll taxes on current workers. But that will cover only
76% of old age and survivor benefits, the Social Security
trustees estimated this spring.
Faced with this scenario, the usual response is to
choose from an unpalatable menu for fixing Social
Security’s finances, such as raising the retirement age,
choosing a stingier cost-of-living adjustment, or increas-
ing the payroll tax rate. Democratic Representative John
Larson of Connecticut, chairman of the Social Security
subcommittee of the House Ways and Means Committee,
is sponsoring the Social Security 2100 Act, which raises
benefits slightly while gradually lifting the payroll tax rate
for workers and employers from 6.2% to 7.4% and subject-
ing wages over $400,000 a year to payroll taxation.
But none of the choices on the menu undo the core
problem, which is that American society has aged. The
number of beneficiaries per 100 covered workers has
risen from 25 in 1965 to 29 in 2000 to 36 this year, and it’s
ILLUSTRATION BY THOMAS COLLIGAN
expected to reach 45 by 2040. And wages—the source of
Social Security financing—have shrunk as a share of the
economy. Labor’s share of the costs of the private, non-
farm business sector fell to 62% in 2018 from 68% in 2000,
according to the Bureau of Labor Statistics.
August 31, 2020
Using general revenue would allow Social Security to
tap into sources of money that have grown as a share of
the economy, such as business profits. Capital’s share of
the costs of private, nonfarm businesses has risen to 38%
from 32% over the 18 years since 2000, the BLS calcu-
lates. That trend could continue if automation wipes out
more jobs while raising income from investments.
Trump’s intentions on the financing of Social Security
have been unclear. On Aug.  8 he ordered Treasury
Secretary Steven Mnuchin to defer some payroll taxes for
the period from Sept. 1 through Dec. 31 as a way to com-
bat the Covid-19 slump by leaving more money in work-
ers’ pockets. Trump went much further in spoken remarks
that day in Bedminster, N.J., while signing the directive,
saying, “If I’m victorious on Nov. 3, I plan to forgive these
taxes and make permanent cuts to the payroll tax.” On
The Safety Net Frays
Share of annual Social Security costs that could be paid solely
with the trust fund’s reserves at the beginning of the year
Actual High-cost projection* Intermediate-cost Low-cost
400%
39
200
2020
Maximum dollar
value of trust fund 0
1975 2043
*COST SCENARIOS BASED ON ECONOMIC GROWTH, INFLATION, AND DEMOGRAPHIC FACTORS.
DATA: SOCIAL SECURITY TRUSTEES’ 2020 REPORT
Aug. 12 he told reporters at the White House, “We’ll be ter-
minating the payroll tax after I hopefully get elected.” But
aides to Trump said that wasn’t actually the plan. White
House Press Secretary Kayleigh McEnany said on Aug. 13
that Trump wanted nothing more than “a permanent for-
giveness” of the four months’ worth of payroll taxes. “The
president’s very clear on this matter,” she said.
Connecticut’s Larson says there’s an “esprit de corps”
among Social Security recipients that would be strained
if the system relied on general revenue. But that sense of
togetherness, assuming it exists, will get more strained
if the system’s finances are fixed on the backs of high
earners, either by raising their taxes or cutting their ben-
efits. (Fixing it on the backs of low earners is, for good
reason, a political nonstarter.) Making Social Security
more progressive by changing the tax and benefit for-
mulas to help lower-income families is probably the right
move economically, but it will inevitably make the pro-
gram seem more like a means-tested transfer program.
In which case, why not go ahead and truly make it a
 ◼ SOLUTIONS Bloomberg Businessweek
means-tested transfer program that draws on all of the
nation’s financial wherewithal, not just on payroll taxes?
The justification in the 1980s for bulking up the trust
fund for old age and survivors was that the huge Baby
Boom generation would prefund its own retirement.
It would pay into the fund while working and then draw
the money down in retirement. The flaw in the logic was
the false assumption that the rest of government would
run a more or less balanced budget. That didn’t happen.
Instead, the “off-budget” surplus in Social Security offset—
or essentially hid—a growing “on-budget” deficit in the rest
of government. “Competition between two political par-
ties exploits the ignorance of voters” who don’t under-
stand federal budgeting, Kent Smetters of the University
of Pennsylvania’s Wharton School wrote in a 2004 paper,
“Is the Social Security Trust Fund a Store Of Value?”
“Ignorance” is a bit strong, but it’s fair to say Social
Security’s role in the federal budget balance is confusing.
The trust fund isn’t invested in gold bars or ranchland. Its
only holding is special securities issued by the Treasury.
In other words, Social Security has lent $2.9 trillion to the
Treasury, which spent it all. Now Social Security wants
its money back to cover benefits. So starting this year,
it’s redeeming some of those special Treasury securities.
To raise the money to pay Social Security, the Treasury
40 draws on general revenue. Ten years ago, Social Security
Chief Actuary Stephen Goss correctly stated in the Social
Security Bulletin that redemption of the trust fund would
require the Treasury to “collect additional taxes, lower other
federal spending, or borrow additionally from the public.”
Looking Beyond
The 60/40 Rule
It’s an investing strategy that many trace back almost a
century, when a young accountant named Walter Morgan
started to become alarmed at the rampant speculation in
the booming 1920s stock market.
His solution was what became known as the
Wellington Fund, the first “balanced” mutual fund that
invested in both stocks and bonds. In the early 1950s,
economist Harry Markowitz laid out the math that
showed mixing stocks and bonds delivered ideal diver-
sified portfolios for those worried as much about risk
as much as return. Eventually the blend of 60% stocks
and 40% bonds became close to gospel in the industry,
August 31, 2020
What happens when the trust fund runs out will depend
on Congress. If it does nothing, old age and survivor ben-
efits will drop overnight by 24%. That’s unlikely. It’s more
likely that sometime between now and then a blue-ribbon
commission will recommend, and Congress will pass, some
package of tax hikes and benefit cuts.
But Congress has another option. It could allow Social
Security to issue bonds—in other words, to borrow from the
Treasury. Over a period of decades, the borrowing would
likely grow into the trillions of dollars. But this would be one
arm of the federal government owing money to another, the
equivalent of your left pocket owing money to your right. In
other words, sustainable.
If Social Security borrowed from the Treasury, the
Treasury would have to raise the money to lend to Social
Security by raising taxes, cutting other spending, or bor-
rowing. But of course, that’s what the Treasury is already
doing as Social Security redeems some of the special
Treasury securities in its trust fund. From the Treasury’s
viewpoint, there is zero difference between giving cash to
Social Security for new bonds it issues and giving cash
to Social Security for old Treasury bonds that it redeems.
It’s not Plan A, but a solution along those lines is likely
to become part of the conversation over the next decade
as the Social Security trust fund plummets toward zero.
�Peter Coy
THE BOTTOM LINE The Social Security trust fund will run out in a dozen
years or so if nothing is done. Some experts say the government should tap
general revenue to pay beneficiaries.
The pandemic is making
some investors rethink a
classic approach
with a wide variety of regular savers and professional
investors anchoring retirement plans somewhere around
“60/40,” or at least using it as a benchmark against
which to compare other strategies.
And it’s had a heck of a run, even in a year as crazy as
2020. A basic 60/40 strategy is up about 8% this year,
and was down much less than the stock market at the
depths of the pandemic-induced sell-off in March. That’s
after earning an annual compounded rate of return of
almost 10% since the 1980s.
Yet many on Wall Street are trying to send this
time-tested retirement scheme into retirement itself.
 ◼ SOLUTIONS Bloomberg Businessweek
The reason is that with bond yields so low and equity
valuations so high, the strategy’s reputation for solid,
steady returns is in serious doubt. Investors in this type
of market environment will need to get more creative, or
so the oft-repeated advice goes.
For the pros with large sums of money to put to work,
the options beyond the 60/40 framework are bountiful—
from private equity to venture capital to exotic securities
backed by a wide variety of debt. It’s a different story for
individuals trying to include those options in their own
path to retirement. For one thing, investors may have to
pay a premium in fees, and those costs can erode returns.
Products available for investing in alternative assets, as
well as “go anywhere” funds that aren’t locked into spe-
cific regions of the world or tied to a fixed mix of stocks
and bonds, often come with higher yearly fees—say 2.5%
to 3% of assets, compared with mutual and exchange-
traded funds that track stock and bond indexes and
charge fees measured in the tenths of 1% or less.
“We have gone around and around with these through
the years looking at different options out there,” says
John Ritter, managing partner of Ritter Daniher Financial
Advisory LLC, based in Cincinnati. The firm manages
about $450 million, has about 325 mostly retail clients,
and runs one 401(k) plan. “We have really found, for the
retail investors, there aren’t a lot of good alternative invest-
ment options for them.”
Still, the expansion of ETFs into the alternative space
is a big reason why there’s a growing array of cheaper
options, including funds that invest in real estate and
commercial mortgage-backed securities or that track
leveraged loans. With inflation-adjusted Treasury yields
below zero, investors are on the hunt for alternative
sources of income, such as real estate and leveraged
loans, according to Daniel Tenengauzer, head of markets
strategy at Bank of New York Mellon Corp.
Of course, branching out often comes with a greater
risk of losses. “We do see individuals and clients who have
memories of yields being higher, and they will push for
higher yield,” says Robert Williams, vice president of finan-
cial planning at Charles Schwab Corp. “With Treasuries
too low, they want a corporate bond or a junk bond or a
limited partnership oil pipeline because it’s going to get
them a 6% or 7% yield. But that’s not a free lunch. The
yield is there because the risk is there.”
Some managers don’t advise abandoning the 60/40
framework entirely. Instead, they suggest investors be
more creative when deciding what goes into their stock
and bond buckets. Sixty-forty “isn’t necessarily broken,”
ILLUSTRATION BY THOMAS COLLIGAN
says Brandon Pizzurro, a portfolio manager at GuideStone
Financial Resources. “There’s still a lot you can do with
how things are allocated within bonds and stocks,” he
says, such as switching up geographies, sectors, and the
size of companies considered.
August 31, 2020
To Kerrie Debbs, a certified financial planner at Main
Street Financial Solutions, who has about 53 clients and
manages about $70 million, the new environment involves
doing something she’s never done before: recommending
clients consider Treasury inflation-protected securities,
known as TIPS, whose principal rises with consumer
prices. “I had a while ago decided I wasn’t going to use
TIPS, given they are more complicated than many think,”
she says. “But I’ve come to a point where I think it is good
to add them to a slice of a portfolio.” For those in the
60/40 camp, she advises making TIPS about a quarter
of their bond holdings. “All the printing of money has now
gotten beyond academically inflationary, so these secu-
rities are likely good to buy.”
This year’s drama in markets has led many individual
investors to reassess their approach to investing. Financial
planning discussions with clients at Fidelity Investments
were up 24% in the second quarter compared with the
previous year, says Jennifer Kruger, a CFP who’s branch
leader of Fidelity’s Bryant Park Investor Center in New
York. Fidelity clients showed a tendency to buy the dip
in stocks during the bear market earlier this year, with
buy orders outnumbering sell orders by a ratio of 1.7 to 1
from February to April and peaking at 2.3 on April 21. The
historical average is about 1.2.
The holdings of all clients at Fidelity skew a little more 41
aggressively than 60/40. About 65% of their assets are
in equities, either individual stocks or ETFs, while 15% is
in fixed income and 20% is in cash, according to Kruger.
Since leaning more heavily on equities for returns will
likely be the route many investors take in an environment
where the safest bonds pay next to nothing, extra care
may be needed when crafting the stocks portion of any
portfolio—at least for investors with an appetite for trying
to beat passive index-tracking funds.
Vineer Bhansali has some advice that’s easy for an
individual investor. He’s the founder of LongTail Alpha,
based in Newport Beach, Calif., a fund designed to
thrive in times of increased volatility, such as in March
when it gained tenfold as the S&P 500 slid 12.5%. An
ideal way to diversify equity exposure is through the
stocks themselves, he says; investors can hedge lofty
technology-driven gains in the Nasdaq and S&P 500
indexes with purchases of mid- to small-cap shares in
the Russell 2000.
Debbs has an even simpler, though not necessarily
easy-to-follow, tip that most individual investors would
be wise to heed in all kinds of markets. “You really also
have to save more,” she says. �Liz Capo McCormick,
Anchalee Worrachate, and Vivien Lou Chen
THE BOTTOM LINE A 60/40 split between equities and bonds, long
a staple of portfolio theory, may face serious challenges, leading some
investors to experiment.
An 18-liter jug of
J.T. Baker acetic
anhydride bought
online, no questions
asked, by a Bloomberg
Businessweek reporter
Bloomberg Businessweek August 31, 2020

NarcoticsCrisis
MADE IN MEXICO
WITH I E N T S
U. S . INGRED

aking their way down a narrow country road in the

M Mexican state of Sinaloa one morning in May 2019, 43
members of a counter-narcotics squad were struck
The cartels by a strong chemical smell. They pulled over, and a small
reconnaissance team climbed out of their vehicles, then
make heroin and stalked down a trail. Behind a thicket of trees, tucked in a
clearing, they found an open-air drug factory—not a huge sur-
methamphetamine prise in Sinaloa, the capital of the global narcotics empire built

using chemicals
produced in Mexico
by U.S. companies,
and then send
the drugs to America
by Joaquín “El Chapo” Guzmán. Five cauldrons for cooking
heroin stood exposed to the sky, flaked with rust. In the camp’s
makeshift living quarters, bags of tortilla chips and a cooler of
unopened Pepsis suggested the cooks had left in haste.
The soldiers discovered the source of the smell: acetic
anhydride, a clear liquid that reeks like vinegar. Except for
the sap drained from opium flowers, it’s the only thing truly
required to make heroin, and it doesn’t take much of the stuff
to do the job. Soldiers found some inside four 18-liter jugs that,
when full, could have produced 80 pounds of high-quality
“China white,” with a U.S. street value of at least $3.6 million.
Acetic anhydride has legal uses in laboratories and

By Cam Simpson, factories—the most common use is in the production of ciga-

rette filters. But under international drug laws it’s one of the
Michael Smith, most strictly controlled “precursor and essential chemicals”
for the production of illegal narcotics. For 30 years the U.S.
and Nacha Cattan government has aggressively pushed almost every nation in
the world to sign on to global treaties and pass domestic laws
to keep potential drugmaking chemicals away from narcotics
syndicates. Acetic anhydride was placed in the highest cate-
Photograph by gory of control in 2001. Yet the acetic anhydride seized that
morning in Sinaloa was bottled, branded, and sold in Mexico
Jake Naughton by a $12.3 billion publicly traded U.S. company, Avantor Inc.
 Bloomberg Businessweek August 31, 2020

During the decade-long U.S. heroin epidemic, Avantor has n 1874 an English chemist named Charles Alder
cultivated a remarkable line of business: selling acetic anhy- I Wright wanted to make morphine less addictive. He
dride across Mexico in containers that are big enough to make tried boiling it in acetic anhydride, which was used
lucrative quantities of illegal narcotics but small enough to load to process flavoring from vanilla beans and would later become
into the trunk of a car. Sales come via a network of distributors, critical to making aspirin and cigarette filters. Instead of weak-
online sellers, and stores spread across the country. ening morphine’s grip, Alder Wright’s process yielded a narcotic
Without the right chemicals, it’s impossible for cartels to several times more potent. Chemists at the German company
make two drugs that are plaguing America: heroin and metham- Bayer AG developed the drug; one who tried it said he felt her-
phetamine. Avantor is one of a handful of U.S. companies that oisch, or heroic, so Bayer branded it heroin. The name has
supply the legal market for those chemicals in Mexico—a mar- never changed, and neither has the chemistry.
ket the cartels have had little trouble tapping to make narcotics “Without acetic anhydride, well, all you have is this crude
on a massive scale, a Bloomberg Businessweek investigation has opium,” says Gildardo Cruz, director of the Mexican attorney
found. Mexico is the source of the vast majority of the heroin general’s forensic chemicals laboratory. He makes his own
and meth sold in the U.S., where more than 142,000 people died heroin to study opium seized by the military from poppy fields.
from overdoses involving the drugs from 2010 through 2018. “It’s so easy,” Cruz says. “All we need is a little acetic anhydride
Easy access to drugmaking chemicals for narcos in Mexico and a little tub or bucket.” It takes only 2 to 2.5 liters to make
appears to be facilitated, in part, by a lack of outside oversight. a kilogram (2.2 pounds) of China white, and just one liter can
International and U.S. drug laws regulate the trade worldwide, yield a kilogram of lower-grade heroin.
but their reach often ends at the Mexican border for local Acetic anhydride’s critical role in heroin production has
subsidiaries of American companies. International narcot- made it one of the top chemical targets of the International
ics authorities can interdict sales between nations, but not Narcotics Control Board, or INCB, the United Nations agency
within them. In the U.S. the companies operate under tough that polices drugmaking chemicals. Inside Mexico, however,
U.S. drug laws, which charge them with ensuring their chem- it’s been effectively unregulated. And heroin isn’t its only yield.
icals aren’t being diverted to make narcotics. If they fail, the Cartels make meth with acetic anhydride, too.
U.S. Department of Justice has broad authority to shut down While heroin is made in small tubs and vats, cartel chemists
44 their American operations or charge them criminally. But that produce meth in industrial superlabs. It’s a purely chemical
oversight doesn’t apply when the companies make and sell concoction, involving myriad compounds, and the cartels often
those chemicals in Mexico rather than shipping them there tweak their recipes depending on the availability of key ingre-
from the U.S. dients. After U.S. authorities in 2010 choked off the supply of
The ability to operate beyond U.S. oversight may never have one critical chemical, phenylacetone, or P2P, the cartels started
been more consequential than during a roughly two-year period using acetic anhydride, along with other easy-to-get chemicals,
leading up to August 2016. In that window, the Mexican subsidi- to make P2P themselves.
ary of Dallas-based Celanese Corp. lost tanker trucks of another How much acetic anhydride has gone to feed the supply of
critical drugmaking chemical, monomethylamine, in three sep- the two drugs to the U.S.? For heroin, as much as 1.2 million
arate hijackings, according to sources with detailed knowledge liters, or about 1,300 metric tons, from 2011 through 2018. That’s
of the thefts. The company acknowledged the hijackings but according to U.S. government estimates of heroin production,
wouldn’t say how many trucks were lost, or how much of the drawn in part from poppy crop data. It’s enough to fill a tanker
chemical. Thieves got a total of at least 30,000 liters, the sources train the length of two and a half football fields. The amount
say. The thefts have not been previously reported. used to make meth is much harder to estimate, but testing and
Monomethylamine, or MMA, is so
vital to methamphetamine production
that for a company selling the chemi-
The amount of methylamine sources said had been
cal from U.S. soil, failing to immediately lost could have produced 60,000 pounds of meth
report a supply-chain loss to the Justice
Department is a federal crime. Because Celanese made it in seizure data show that demand has been exponentially greater;
Mexico, however, none of that applied, even as executives con- 2011 seizures alone suggest at least 1 million liters of acetic anhy-
tinued sending tankers out onto Mexico’s bandit-plagued high- dride were used for meth just that year.
ways. Without publicly disclosing the hijackings, the company The supply comes from within Mexico. The INCB recently
ceased Mexican production of MMA in late 2016. By that point, analyzed every suspect acetic anhydride transaction and traf-
the amount sources said had been lost could have produced at ficking case worldwide, from 2016 through 2018, a period of
least 60,000 pounds of meth. That’s more than all the meth U.S. intense activity. They didn’t find a single one involving Mexico.
border agents seized in 2015 and 2016 combined. Investigators say that means the acetic anhydride used to make
The systematic failure to keep drugmaking chemicals away Mexico’s drugs is diverted from within the country’s legal trade.
from Mexican cartels has many causes. The most surprising Businessweek requested data from the Mexican government
one might be the role of American commerce. on the size of the country’s legal market for acetic anhydride,
Bloomberg Businessweek
which would provide insight on how much has gone into
making drugs. The government declined to release it. But pro-
prietary data collected from producers, distributors, and the
government by Mexico’s national chemical industry associa-
tion, known by its Spanish acronym, ANIQ, shows huge spikes
in the country’s market for the chemical during the past decade,
including a 17-fold increase in 2011.
It didn’t have to be so easy for the cartels. The INCB made
acetic anhydride one of its top targets in 2001, but Mexico
resisted pressure to do the same. Until December 2018, when
Mexico finally moved it onto its list of the most strictly regulated
chemicals, anyone selling more than a metric ton needed to do
little more than file a report with the government once a year.
Below that level, there was nothing. Now a seller is supposed to
ensure buyers are legitimate—factories and labs with a proven
need, for example—down to every liter sold.
In two interviews earlier this year, Elvira Espinosa, who
heads the regulation of drugmaking chemicals in Mexico,
defended the record of her agency, the Federal Commission
for Protection Against Sanitary Risk, or Cofepris. She said
regulators waited almost 18 years to tighten control of acetic
anhydride because they viewed the more stringent international
regulations as unnecessary and too costly for companies. The
change came after regulators realized small quantities were
being sold widely in Mexico and that very little was needed to
make drugs, she said.
But by then, Mexican heroin production had already peaked,
according to U.S. government estimates. Since the change it’s
been harder to get, but not too hard.
cetic anhydride is legally sold two ways in Mexico.
A First, factories, including those that use it to make cig-
arette filters, aspirin, and fragrances, buy industrial
quantities in tanker trucks or 1,000-liter containers. Second,
there’s a thriving retail market for far smaller containers at
medical supply shops, online, and from distributors.
In terms of volume, the retail market is dwarfed by indus-
trial sales, but its small containers are well-suited to the
cottage-industry nature of heroin production. Retailers and
distributors say Avantor’s jugs and large glass bottles of acetic
anhydride, ostensibly sold for use in clinical labs, are popular
with narcos and easy to get. It’s one of Avantor’s most heav-
ily stocked retail products in Mexico, according to a company
inventory seen by Bloomberg.
Thousands of impoverished campesinos in Guerrero grow
opium poppies along the southern leg of the Sierra Madre
mountain range. They began doing so in the past decade at
the urging of the Sinaloa cartel and others based farther north,
says Jorge Hernández Tinajero, who surveyed growers for a
2018 study published by the nonprofit Transnational Institute.
The heroin is usually manufactured in small, makeshift labs
close to the fields. Sure enough, Hernández found that shop-
keepers in Guerrero, Mexico’s second leading heroin produc-
ing region, routinely stock acetic anhydride. Speaking on the
condition of anonymity, one Guerrero retailer who sells it says
August 31, 2020
narcos especially like Avantor’s J.T. Baker brand because of
its reputation for purity. Distributors say the same is true in
Sinaloa, the top growing region.
Avantor, based in suburban Radnor, Pa., outside
Philadelphia, bought the century-old J.T. Baker brand in 2010.
It’s hard to know how long narcos have been using it, but three
months after the purchase, photos from an Army raid on three
Guerrero drug labs showed a masked soldier holding a melon-
size ball of wet heroin above a 4-liter bottle of J.T. Baker acetic
anhydride. It’s continued to turn up since the 2018 regulations
went into effect, including at the May 2019 raid in Sinaloa—the
four jugs left behind by the heroin cooks bore J.T. Baker labels,
according to photos police took at the scene.
On the first anniversary of Mexico’s tighter regulations,
a Bloomberg reporter purchased a 1-liter bottle of J.T. Baker
acetic anhydride over the counter at Química Barley, a medical-
supply store in Chilpancingo, Guerrero’s capital, where nurse
uniforms hang from clotheslines above customers’ heads. The
manager volunteered that he could get an 18-liter jug in three
days. His only requirement was advance payment. His shop
advertised J.T. Baker on its Facebook page. The sale violated
the new Mexican regulations, which require sellers to record
proof, such as tax ID numbers, that buyers are legitimate users.
But enforcement is so weak, distributors say, the regulations
are largely meaningless.
Days later, the reporter arranged the purchase of an 18-liter 45
jug of J.T. Baker via the Mexican operation of MercadoLibre Inc.,
the leading e-commerce site in Latin America. Each jug can
make 90,000 hits of pure white heroin. Químicos IsaaQuim, a
Mexico City distributor, sold and delivered it in the reporter’s
name, no questions asked, to a FedEx pickup site in Iguala.
The Guerrero city is synonymous with drug corruption; 43 stu-
dents disappeared there in 2014, suspected victims of a narco
massacre. Hector Renedo, the owner of Químicos IsaaQuim,
said he didn’t know the regulations had changed and that he’s
had no difficulty obtaining jugs of J.T. Baker to sell. Others sell-
ing them also have appeared on MercadoLibre.
Avantor has close relationships with select distributors and
retailers, companies it calls “channel partners,” including about
two dozen in Mexico. The biggest is El Crisol, a nationwide chain
of nine laboratory supply stores. Francisco Cervantes, then-
sales director at El Crisol’s flagship store in Mexico City, said
in an interview earlier this year that the company follows the
regulations for selling Avantor’s jugs, but that there are “thou-
sands of small outfits that don’t follow the rules, which might
sell to anyone. It’s an open secret.” One such seller, Científica
Vela Quin, appears to be another Avantor partner in the capital.
During a February visit to the store, an account manager said
he would sell anyone as much as they wanted. “You can have
one liter, 18 liters, or 100 liters,” the account manager said, add-
ing that no identification was necessary. He provided a written
quote for 1-, 4-, and 18-liter containers of J.T. Baker acetic anhy-
dride. The company supplies other distributors nationwide. In
a subsequent statement, Científica Vela Quin said it complies
with Mexican law and sells only to licensed buyers.
 Bloomberg Businessweek
At the end of last year, Avantor had more than 8 metric
tons of acetic anhydride in stock in Mexico ready to ship. More
than 86% of it was in 18-liter jugs, an inventory report showed.
Company sales literature has touted the jug as the largest con-
tainer that’s still “light enough for one operator to carry.” There
appear to be no permanent markings to make them trace-
able, only an easily removed label. Sales figures shared with
Bloomberg show the company’s Mexican subsidiary sold at least
21 tons last year, enough to fill more than 1,200 jugs. Avantor
said some of that went to other markets in Latin America, but
it declined to say how much. Total sales were about $300,000.
Avantor acknowledged that its acetic anhydride business in
Mexico is organized in a way that effectively leaves it subject
solely to Mexican jurisdiction. It said it procures the chemi-
cal and “all related materials” inside Mexico, and “no acetic
anhydride is imported into Mexico from any other Avantor facil-
ities.” It also said the 18-liter jug that dominates Mexican sales
is a common packaging size for lab chemicals.
Avantor said it was “committed to preventing diversion or
misuse of our products” and that it complies “fully with licens-
ing and reporting requirements of all relevant regulatory bod-
ies. We regularly review our policies and procedures to maintain
the security of our supply chain and are subject to compliance
audits, including by Cofepris in Mexico.” Mexican law doesn’t
require Avantor to take responsibility for the final users of its
46 products, which the company said rests solely on its distrib-
utors and retailers, or others further down the sales chain. It
said its sales contracts contain an anti-diversion clause. It also
said Mexican officials hadn’t raised concerns about diversions,
and that it doesn’t facilitate unauthorized
e-commerce sales.
Listed in 2019 on the New York Stock
Exchange by majority owners New
Mountain Capital, a private equity firm,
and Goldman Sachs Group Inc., Avantor
sells chemicals for use in labs, by the
pharmaceutical industry, and for special-
ized manufacturers. Its motto: “Setting
science in motion to create a better
world.” A former executive, speaking
on the condition of anonymity, said U.S.
managers pushed for increased Mexican
sales in 2018 before the stock sale—the
second-largest initial public offering on
Wall Street last year. Avantor gave distributors incentives,
including discounts for advance payment, which helped boost
sales in Mexico more than 20%, the former executive said.
Before the runup to the IPO, Avantor also became the only
U.S. company to have international sales of its acetic anhydride
blocked by authorities from 2016 through 2018, according to offi-
cials involved and INCB records. The attempted sales, in 2017,
were to a suspicious buyer in the United Arab Emirates, iden-
tified by U.S. officials as a hub for Afghan heroin traffickers.
Price is perhaps the best indicator of how readily available
the chemical remains in Mexico. In Afghanistan, the world’s
August 31, 2020
leading heroin producer, possessing any amount of it is a crime,
and it’s available only on the black market. Prices there have
reached about $400 per liter, according to the UN. In Mexico,
Avantor’s jug cost the Bloomberg reporter less than $18 a liter.
ugs and bottles never could have been enough to
J slake the cartels’ thirst for acetic anhydride, espe-
cially after methamphetamine cooks discovered it.
They’ve needed to tap Mexico’s industrial supply.
Because there haven’t been any public prosecutions stem-
ming from diversions of the chemical, it’s difficult to know
precisely how the cartels have purchased such vast quantities.
But the same two U.S. chemical companies that dominate the
industrial sale of acetic anhydride globally also dominate it
in Mexico, according to distributors, the INCB, and private
market data. They are Celanese and Eastman Chemical Co.,
based in Kingsport, Tenn.
Celanese has singlehandedly made Mexico one of the world’s
major producers of acetic anhydride. It accounted for the vast
majority of the 285 million liters the country exported last
year. Its plant in the state of Veracruz holds at least 97% of
Mexico’s production capacity, according to consultant Tecnon
OrbiChem Ltd. Celanese and Mexican regulators declined to
say how much the company sold in Mexico. Celanese also
declined to discuss its sales practices or customers in Mexico,
but said it “exercises the same care and prudence around ace-
tic anhydride that we do with all of our regulated products.”
Celanese said it follows all applicable laws. It uses the bulk of its
acetic anhydride in-house to make cigarette filters, which have
Police photos from a May 2019 bust
of an open-air drug lab in Sinaloa
COURTESY SECRETARÍA DE SEGURIDAD PÚBLICA OF SINALOA (2)
been its top source of global revenue through sales to virtually
all of the world’s major tobacco companies.
Eastman dominates exports into Mexico for industrial
customers. Clark Jordan, an Eastman vice president who
heads compliance, says the company takes extra care with
drugmaking chemical sales in Mexico, including know-your-
customer practices. A Mexican distributor who sells Eastman’s
acetic anhydride says his background checks are limited to
seeing a buyer’s license from the government regulator. To his
knowledge, he says, his company has never been inspected
or audited by the agency.
Bloomberg Businessweek August 31, 2020

Rolando Hernandez, who chairs a committee of the nation’s MMA was lost, but said the narcos left an unspecified portion
top distributors for ANIQ, the Mexican trade group, says his in one truck that was recovered.
industry is rife with disreputable companies that don’t do Celanese announced the shutdown of Mexican MMA pro-
enough to stop chemicals from reaching narcos. Opening a duction in a July 2016 statement, but made no mention of the
chemicals distributorship in Mexico takes little more than fill- hijackings. In response to questions for this story, the company
ing out a form and having a physical address, he says, and said executives in Mexico and the U.S. “carefully evaluated the
the government does little to police the businesses. ANIQ has situation throughout this time and determined that in light of
pushed for years for tougher oversight, fearing a scandal could the escalating developments, it was not consistent with our
turn Mexico’s chemical industry into a
global pariah.
ANIQ has tried to get distributors to
It’s difficult to find two places harder hit than the
commit to a code of conduct consistent communities Celanese and Avantor call home
with international drug laws, but just a
dozen have signed on. To determine how many distributors corporate values to be associated with the situation or to put
are in business, ANIQ had to conduct a study; it identified 350. our employees or reputation in harm’s way.” It also said it fol-
Subscription-based directories list about 40 specifically adver- lowed all applicable laws and regulations.
tising acetic anhydride sales. One told a reporter that phoning Celanese’s security advisers believed the chemical went to
them was a bad idea. “If you’re looking into these types of the Jalisco New Generation cartel, two knowledgeable sources
things, and you call the wrong company, they’re going to ask say. In 2016 the cartel, known in Spanish as CJNG, built a meth
around about who you are—and why you’re looking into things distribution hub in Dallas, according to prosecutors and a fed-
that are none of your business,” he said. eral indictment. The hub operated out of a used car dealer-
ship in Oak Cliff, an impoverished neighborhood about 14 miles
ethylamine is strictly regulated in Mexico, at least south of Celanese’s headquarters. Liquefied meth was smug-
M on paper. It’s a highly specialized pharmaceutical gled over the border and crystallized in homes converted into
chemical used as a building block for other com- labs. The group trafficked thousands of pounds of the drug in
pounds. Toxic, and reeking like dead fish, it can be used to one year. Nine defendants have pleaded guilty, one is awaiting 47
make pesticides. Celanese was its only manufacturer in Mexico. trial, and two are fugitives.
The hijackers who seized Celanese’s tankers overcame The year CJNG moved to Dallas, meth use in the city, and
unarmed escorts and other security measures, according Texas overall, reached what Jane Maxwell, a public-health
to several former employees and others familiar with the expert and professor at the University of Texas at Austin, called
thefts, who spoke on the condition of anonymity. At least one a “silent epidemic.” It eclipsed opioids and all other narcot-
employee was feeding shipment details to narcos, according to ics in key abuse indicators, including overdoses and treatment
a source familiar with an internal investigation. Armed gangs admissions. Increased cartel production in the past decade has
in SUVs cut off the tankers, often in roughly the same loca- fueled a fivefold increase in U.S. overdose deaths involving her-
tion, and jammed cellphone and tracking-device signals, the oin, and a fourfold increase in meth deaths, from 2010 to 2017.
sources said. The hijackers used compressed gas to pump out It’s hard to imagine what impact the Covid-19 pandemic might
the chemical, just as factories do. be having, given that key chemicals are in abundance inside
For MMA made in America, federal drug laws make it the Mexico. Police seized 65 tons of meth-making chemicals at an
chief duty of a U.S. company to effectively safeguard the illegal lab in August. America’s drug problem isn’t going away.
chemical from theft or other diversions, and to immediately It’s difficult to find two places harder hit than the com-
report losses to the Justice Department. It’s not just a threat. munities Celanese and Avantor call home. Dallas, Celanese’s
In 2015 one of Celanese’s competitors, Taminco Inc., pleaded base, is still flooded with Mexican methamphetamine, even
guilty to federal criminal charges for failing to report barrels after authorities broke up the CJNG network in 2017. The
filled with MMA made at a plant in Florida that were diverted Drug Enforcement Administration has declared meth the
by suspected narcos after being exported into Mexico in No. 1 drug threat in Dallas and Houston. The problem is also
March 2010, according to court records. growing nationwide.
Celanese responded to questions about the hijackings by Avantor’s headquarters are about 15 miles northwest of
giving Bloomberg two statements, one on Aug. 6 and one on the Kensington neighborhood in Philadelphia, which authori-
Aug. 20. In the first statement, the company said tanker trucks ties have called the largest open-air heroin market on the East
of MMA were stolen in three separate hijacking incidents— Coast. The city is said to be suffering America’s worst urban opi-
which matched what sources with detailed knowledge of the oid crisis. Overdose deaths in Philadelphia reached an all-time
hijackings told Bloomberg. In the second statement two weeks high of more than 1,200 in 2017; that year, heroin was seized in
later, Celanese said there were only two hijackings, with a 97% of counties statewide. The DEA says heroin sold on Philly’s
third thwarted by enhanced security measures. streets is the purest and cheapest it’s tested nationwide. <BW>
The company declined to say how many trucks or how much ——With Isabella Cota and Lorena Rios
 Bloomberg Businessweek

48

Lindsay Ruck says

her boss ordered
her not to tell anyone
when a colleague
tested positive for the
coronavirus. She’s
still at work. She needs
the paycheck.
 August 31, 2020

Employees say the

biggest names in U.S.
business have
banned them from
alerting others to
49

Covid-19 outbreaks.
That’s going to get
people killed
By Josh Eidelson
 Bloomberg Businessweek August 31, 2020

Lindsay Ruck was just starting her Father’s Day brunch shift at
the Cheesecake Factory in Chandler, Ariz., when her boss
told her a co-worker had Covid-19. In between making bloody
marys, Ruck shared the news with several of her colleagues,
who’d been worrying about such a moment since the restau-
rant reopened the month before. At the end of Ruck’s shift,
when she went to the back office to count her cash, her boss
and another supervisor were waiting.
Her boss, the general manager, told her she wasn’t
allowed to mention the coronavirus case to anyone, includ-
ing fellow staff. The company was informing only the peo-
ple who’d worked during the sick employee’s last shift, and,
per Cheesecake higher-ups, even the information that any
worker had tested positive was deemed private, Ruck recalls.
Realizing she could be among those kept in the dark about the
next sick colleague, she filed a complaint with the National
Labor Relations Board and took a couple of weeks off while
awaiting the results of a Covid test and weighing whether to
keep working there. After getting a negative test result, she
returned to the restaurant, in need of the paycheck.
“I don’t know what kind of risk I’m putting on my family,”
says Ruck, who has young kids, plus an elderly mom nearby.
She’s worked for the Cheesecake Factory for about 13 years but
says it suddenly feels a lot tougher to trust that the company,
which promises its staff “unlimited smiles,” will keep her safe.
50 Cheesecake Factory Inc. said in a statement that it was
“balancing its obligation to protect private and confidential
health information” while allowing discussion of Covid issues.
for, raising concerns or discussing their own health. General
Electric Co. says it hasn’t threatened employees for discuss-
ing Covid-related concerns, and Delta says it hasn’t punished
staff for sharing diagnoses. Smithfield Foods Inc. says its pol-
icy “is the opposite of the allegations in the complaint.” Urban
Outfitters Inc. says it encourages employees to report con-
cerns and that OSHA has found no wrongdoing on its part.
Cargill Inc. says it considers health information private.
One complaint says trailer manufacturer Great Dane LP set
as its policy “Don’t ask, don’t tell.” According to another com-
plaint, plastics company Jeans Extrusions Inc. told workers
not to discuss infections, because “they cannot afford to quar-
antine us all.” According to another, beverage store LiqGo told
employees anyone who revealed they had Covid-19 would be
fired. Jeans Extrusions says the complaint was untrue. “We
are very, very friendly, family-oriented,” says plant manager
Vince Lewandowski, “not slave drivers at all.” Great Dane and
LiqGo didn’t respond to requests for comment.
Teachers say they’re getting gag orders, too. At the end of
July, as Florida prepared to resume in-person classroom teach-
ing, the school district in Jacksonville’s home county of Duval
emailed a warning to employees. Any social media posting that
would “reflect badly” on the district’s reputation “may lead to
disciplinary actions,” according to the email, later viewed by

PREVIOUS SPREAD: PHOTOGRAPH BY CAITLIN O’HARA FOR BLOOMBERG BUSINESSWEEK; PHOTOGRAPH BY GABRIELA HASBUN FOR BLOOMBERG BUSINESSWEEK
A Cheesecake lawyer asked Ruck to withdraw her NLRB com-
plaint in exchange for the company posting a notice at her
restaurant affirming that employees have the right to discuss
health and safety issues, she says. She agreed after learning
that the labor board can’t levy punitive damages. “It doesn’t
feel like it has a lot of teeth,” Ruck says. “I’m not convinced it
will ultimately change their behavior, or any other company’s.”
In the past few months, U.S. businesses have been on a
silencing spree. Hundreds of U.S. employers across a wide
range of industries have told workers not to share information
about Covid-19 cases or even raise concerns about the virus,
or have retaliated against workers for doing those things,
according to workplace complaints filed with the NLRB and
the Occupational Safety and Health Administration (OSHA).
Workers at Amazon.com, Cargill, McDonald’s, and Target
say they were told to keep Covid cases quiet. The same sort
of gagging has been alleged in OSHA complaints against
Smithfield Foods, Urban Outfitters, and General Electric. In
an email viewed by Bloomberg Businessweek, Delta Air Lines
told its 25,000 flight attendants to “please refrain from noti-
fying other crew members on your own” about any Covid
symptoms or diagnoses. At Recreational Equipment Inc., an
employee texted colleagues to say he’d tested positive and
that “I was told not to tell anybody” and “to not post or say
anything on social media.”
Amazon, McDonald’s, and Target dispute the allegations. Irma Cruz says a boss at McDonald’s berated
REI says it doesn’t prohibit employees from, or punish them her for telling co-workers she had Covid.
Bloomberg Businessweek
Businessweek. The school district says the email wasn’t meant
to prevent employees from expressing views on reopening.
In many cases, workers say their bosses have cited employee
privacy to justify the gags, including federal privacy laws such
as the Health Insurance Portability and Accountability Act of
1996. But such laws don’t require companies to silence employ-
ees on safety matters. On the contrary, federal laws, including
those that created OSHA and the NLRB, guarantee employees
the right to communicate about and protest their job condi-
tions. The federal bodies have failed to make companies obey
the law. Many thousands of OSHA complaints about coro-
navirus safety issues have yielded citations against just two
companies—a health-care company and a nursing home—total-
ing about $47,000. “The agency continues to field and respond
to complaints, and will take the steps needed to address unsafe
workplaces,” the U.S. Department of Labor, OSHA’s parent,
said in a statement. The NLRB declined to comment.
Employer crackdowns on free speech threaten to mask
another wave of Covid infections and make the end of the
year far deadlier than it otherwise might be. “In many places,
workplace exposures are driving the pandemic,” says epide-
miologist David Michaels, who ran OSHA under President
Obama and is now a professor at George Washington
University. “To stop this pandemic, workers need to be lis-
tened to rather than silenced.”
In mid-July, Irma Cruz returned to work at a McDonald’s in
Gilroy, Calif., a couple of days after she’d called in sick with a
cough and breathing trouble. Cruz, a single mother of three,
says she would have stayed home longer except that her boss
was refusing to pay for her sick days. When she got a head-
ache, a co-worker gave her an Advil and a manager told her
to stay on the job. The next day she learned she’d tested
positive for Covid-19.
Cruz says she asked a supervisor to inform her co-workers,
but the supervisor said not to worry, that the virus wasn’t con-
tagious unless you spent more than 10 minutes with someone.
The supervisor also said the news was “confidential,” Cruz
recalls. Alarmed, she started calling and alerting co-workers
herself. Then, she says, the supervisor called back, angrily
berating her for disclosing her diagnosis.
Staffing was the problem, says Cruz, who filed a com-
plaint with the county health department. Previously,
when a co-worker had reported contracting the virus, other
employees refused to come to work. “I don’t want anyone else
to get sick,” she says. “I don’t want that on my conscience.”
In a statement relayed by McDonald’s Corp., the franchise
owner of Cruz’s restaurant said her allegations “completely
mischaracterize the extensive steps we have taken to create
a safe experience for everyone who enters our restaurants.”
He said his restaurant provides paid sick leave and notifies
staff when they may have been exposed to a sick co-worker,
while being sure to protect sick workers’ privacy. Cruz says
she hasn’t been paid for her time in quarantine.
Health confidentiality is a common refrain when ordering
August 31, 2020
“I don’t want
anyone else
to get sick.
I don’t want
that on my
conscience”
workers not to discuss Covid. In a recording that Target Corp.
employee Milo Wright made of a conversation with a manager
in Shreveport, La., which Wright shared with Businessweek, 51
the manager says someone at the store has tested positive for
Covid, then says workers are “prohibited” from talking about
the matter on social media. “We want to make sure we get the
right information out, and you know how once people start
talking amongst themselves, the right information gets dis-
torted, and the wrong information is coming out,” the man-
ager can be heard saying on the recording.
Wright, who was terminated in June, has filed complaints
against Target with the NLRB and the U.S. Equal Employment
Opportunity Commission and says the company made staff
sign a document agreeing not to disclose Covid cases to the
public. “While we are considered essential, we are also con-
sidered expendable,” says Wright. Target says the firing was
unrelated to the coronavirus and that it doesn’t ask staff to
sign documents prohibiting Covid discussion. “We provide
as much information as possible, while also keeping medical
information confidential,” the company says.
So far, companies have had little to fear from federal over-
sight. Trump-era NLRB rulings have expanded companies’
discretion to restrict activist workers’ speech on subjective
grounds such as offensiveness. And the scant number of
inspectors under OSHA’s purview—862 as of January, enough
to inspect each workplace once every 165 years—has left it at a
nadir. OSHA hasn’t issued any regulations to address the pan-
demic. It’s received over 8,000 related health and safety com-
plaints, while state agencies have received more than 24,000.
The Labor Department says OSHA is recruiting inspectors.
OSHA is supposed to protect whistleblowers against
retaliation by their employers. The agency has a separate
 Bloomberg Businessweek August 31, 2020

process for complaints in this vein,
but it’s tough to win restitution that
way. Workers have only 30 days to file
and must rely on OSHA to decide to sue
the companies on their behalf, which
it rarely does. OSHA released data in
August showing it’s closed more than
600 Covid-related whistleblower com-
plaints against companies including
Burger King, FedEx, General Motors,
Halliburton, 7-Eleven, Tufts University,
Walmart, and Warby Parker Retail.
Burger King Corp. says it hasn’t cre- Amazon warehouse in Staten
ated or sanctioned any policy restrict-
ing staff from raising Covid-19 concerns.
General Motors Co. and Halliburton Co.
deny retaliating. Walmart Inc. says it has
a strict nonretaliation policy. FedEx
Corp. says safety is its top priority. Tufts
and Warby Parker Retail Inc. say they
were never informed of any complaint.
7-Eleven Inc. didn’t respond to requests
for comment.
On Aug. 14, the inspector general
overseeing OSHA issued a report that
52 found the agency had trouble finishing
whistleblower investigations in a timely
manner even before the pandemic,
with the average investigation running
A May demonstration at an
Island, N.Y.
A driver for Uber, Lyft, and
Amazon Flex protests in
Richmond, Calif.
By then, several employees had filed
OSHA complaints about the Dunmore,
Pa., plant, which supplies frozen
meat products to military bases, nurs-
ing homes, and schools. One was the
mechanic, who in April told the agency
he didn’t feel safe because the company
wasn’t telling them about Covid cases
there. “About half the plant is out sick,”
another worker wrote in April. “I’m
scared to go to work every day.”
The mechanic says OSHA called him
to say it would be sending Maid-Rite a
letter instead of coming to inspect the
plant, and that was the last he ever
heard from the agency about his com-
plaint. Letters between OSHA and
Maid-Rite show OSHA told Maid-Rite
in April to investigate worker allega-
tions itself, and Maid-Rite wrote back
saying that it was providing and man-
dating masks and that 6-foot distancing
sometimes wasn’t feasible.
The next month, other employees
at the plant filed a fresh OSHA com-
plaint, alleging they were in harm’s
way because of insufficient masks,
excessive line speeds, and “elbow-
to-elbow” close quarters. Later, in a

LEFT FROM TOP: LUCAS JACKSON/REUTERS; PHOTOGRAPH BY RACHEL BUJALSKI FOR BLOOMBERG BUSINESSWEEK; PHOTOGRAPH BY JULIE DERMANSKY
for more than nine months. By the end sworn affidavit, another worker said
of May, OSHA had received more than he told the human resources depart-
1,600 whistleblower complaints related ment he’d tested positive for Covid,
to Covid-19, and the report warned but HR told co-workers he hadn’t.
that worse delays would have conse- Seven weeks after the May complaint,
quences: “When OSHA fails to respond OSHA sent an inspector to Maid-Rite—
in a timely manner, it could leave work- but in a break from typical protocol, it

FOR BLOOMBERG BUSINESSWEEK. RIGHT: PHOTOGRAPH BY SEAN PRESSLEY FOR BLOOMBERG BUSINESSWEEK
ers to suffer.” gave the company a heads-up. “OSHA
The Labor Department said in a is here, so do everything right!” a
statement that 86 Covid-related com- supervisor told staff during the inspec-
plaints have been settled and that tion, the mechanic later wrote in an
OSHA is evaluating others for possible affidavit. Fifteen minutes later, the
litigation. “OSHA will continue working supervisor returned to say “Never
around the clock to find ways to pro- New Orleans hospitality mind,” because the visit was over, the
tect whistleblowers,” according to the workers protest early mechanic wrote: “As soon as OSHA
department. reopening. left, everything went exactly back to
the way it was.”
In early July, a supervisor at Maid-Rite Specialty Foods LLC A couple weeks later, three workers filed a rare lawsuit
told workers OSHA would be visiting the plant because some against OSHA to try to force action by the agency, which had
staff had complained, according to one of the employees. rejected their plea to designate their case an “imminent dan-
If they had concerns, they should instead raise them with ger.” In a July 31 hearing on the suit, an OSHA compliance
management, the supervisor said, according to the worker, officer, who’d worked for Amazon.com Inc. the year before,
a mechanic who spoke on condition of anonymity for fear acknowledged that she alerted Maid-Rite the day before the
of retaliation. Then the supervisor added, as though he was inspection. Higher-ups had told her to do so, she said, to
joking, that once the company figured out who’d gone to make arrangements to ensure she’d be safe. The workers say
OSHA, “you won’t see them anymore.” they still aren’t.
Bloomberg Businessweek
Barbara Chandler says Amazon HR told
her about her Covid diagnosis: “Don’t say
nothing to nobody.” She’s suing for safety
upgrades and back pay.
Maid-Rite denies the allegations. “We run a clean, safe
plant,” Executive Vice President Michael Bernstein said in
a statement. “I am confident that the truth will prevail.”
The Labor Department says OSHA began investigating the
company on June 2, a process that can take six months. The
government said in a filing that the inspector “reasonably
determined that no imminent danger exists” at the plant.
Suing OSHA is one of a few Hail Marys labor activists are try-
ing to employ. Another one is nuisance laws: Workers in fast
food, meatpacking, and retail businesses have used the kinds
of laws typically invoked against noisy concerts to sue their
employers for mishandling the pandemic in ways that have
harmed the public. Amazon employee Barbara Chandler, a
plaintiff in one such lawsuit, alleges she contracted Covid at
the company’s warehouse in Staten Island, N.Y., and brought
it home to her cousin, who developed coronavirus symptoms
and died in April. When Chandler told an HR rep on March 26
that she’d tested positive, she says, “he just told me, ‘Don’t say
nothing to nobody—just keep it confidential.’” She says Amazon
claimed it would alert workers who’d been in contact with her,
but didn’t ask who those people were and took another four
days to pass the news along via text message. Chandler’s suit
August 31, 2020
seeks compensation for employees’ unpaid Covid-19 sick leave,
as well as a court order requiring improved safety measures.
Amazon said in a statement that it tells everyone at its
facilities when a co-worker tests positive for the coronavi-
rus and that it’s spent more than $800 million on pandem-
ic-related safety measures through June. In legal filings, the
company has said that Chandler’s lawsuit is an attempt to
“exploit the pandemic” and that the law requires workers
to take such claims to OSHA.
The NLRB’s and OSHA’s authorities limit local govern-
ments’ discretion to act on workers’ behalf, but there are
steps they can take. In June, Philadelphia’s mayor signed an
ordinance that bans firing or otherwise punishing workers
who disclose Covid hazards. The new law puts the burden
of proof on employers to establish that such firings weren’t
illegal retaliations and allows the workers to seek penalties
in court on behalf of the city.
In July, Colorado’s governor signed a similar law, making
it illegal for companies to require workers to keep health
concerns private or retaliate against workers who raise
them. A few days after the Colorado bill signing, Virginia’s
state safety board passed its own binding Covid regulations,
including a ban on retaliation against workers who raise rea-
sonable concerns at work or on social media and a require-
ment that companies notify co-workers and the state about
coronavirus cases. 53
Other states should adopt such standards and could go
further by alerting the public about companies with clus-
ters of cases, says Terri Gerstein, a former labor bureau chief
for New York’s attorney general’s office and now a fellow at
Harvard Law School. “It’s a matter of public health,” she says,
“and of opening the economy in a long-term way instead of
start-and-stop sputtering.”
For now, data-sharing has been among employees’ best
defenses. While Amazon workers around the country pro-
test the firings of colleagues who’d organized to demand
safer practices, including Chandler’s former shiftmate Chris
Smalls, they’re also taking steps to better inform one another
of safety risks. Amazon, which has denied retaliating against
the organizers, has declined to release statistics about its
Covid problem, despite pressure from state attorneys gen-
eral. So Jana Jumpp, a former worker at an Amazon ware-
house in Indiana, has spent the past several months sharing
and updating her own Google spreadsheet of confirmed cases
across the company’s U.S. network.
Jumpp left Amazon in July. Now she’s cleaning offices and
Airbnbs instead. Still, she’s continued to spend her spare time
on the phone and Facebook, collecting notifications Amazon
has issued to individual warehouses and sharing the tally of
sick workers with other Amazon employees and reporters.
Besides informing people about the risks of Amazon’s facilities,
she says, she’s trying to remind workers in its warehouses that
they aren’t invisible and they don’t have to be silent. “I want
them to know that there’s somebody counting,” Jumpp says.
“There’s somebody keeping score for them.” <BW>
 Bloomberg Businessweek August 31, 2020

The Sacklers made a

fortune from OxyContin.

54

The Drug
Money Where did billions of it go?
By Emma Vickers
 A s the U.S. bumbles its way through the coronavirus pandemic, it can be easy
to overlook the opioid epidemic that’s shattered so many lives. But a trove of
documents that Bloomberg Businessweek has spent months analyzing helps explain
how the company at the center of the crisis moved money around in the years prior to
declaring bankruptcy.
Purdue Pharma LP faced its first court challenge in 2007, pleading guilty to
misleading the public about the addictive potential of its flagship painkiller,
OxyContin. By 2019 more than 130 people were dying daily from opioid overdoses
in the U.S., and Purdue faced thousands of lawsuits for its role in the epidemic. The
company, owned by the Sackler
family, declared bankruptcy in
September of that year to short-
The Family Business
RICHARD & BEVERLY: TACO VAN DER EB/HOLLANDSE HOOGTE/REDUX. MORTIMER SR: ALAN DAVIDSON/SHUTTERSTOCK. THERESA & MORTIMER JR: DAVID M. BENETT/GETTY IMAGES. JONATHAN: SYLVAIN GABOURY/PATRICK MCMULLAN/

circuit the lawsuits.

But in the years prior to the From 2007 to 2019,
bankruptcy, Purdue and its 10 Sacklers were Purdue directors.
subsidiaries moved billions
to companies ultimately
registered in Luxembourg, THE PARENTS
the British Virgin Islands, and 55
Delaware. The trail that traces
those billions is labyrinthine,
GETTY IMAGES. RICHARD: PURDUE PHARMA. ILENE & KATHE: BILL CUNNINGHAM/THE NEW YORK TIMES/REDUX. IZZY: RONDA CHURCHILL/BLOOMBERG

but here’s what we know Raymond Beverly

B l Mortimer Theresa
Sackler Sackler Sackler Sackler
about their maneuvering Co-owner, Board member Co-owner, Board member
board member board member
based on hundreds of
pages of publicly available THE CHILDREN
information. (In a statement,
Purdue said it had “provided
the company’s stakeholders
and the American public with
an extraordinary amount of
Jonathan Richard Mortimer Ilene Kathe
detailed financial information.” Sackler
Board member
Sackler
President,
D.A. Sackler
Board member
Sackler
Lefcourt
Sackler
Board member
A spokesperson for the family (died in June) board member Board
member

said in a statement, “All of

the Sackler family members,
including those who served
on Purdue’s board, have David Alex
Sackler
always conducted themselves Board member

properly.”)
 56
From 2008 through 2017, $10.8 billion flowed out repaid by an affiliated company.) After tax bills
of Purdue in hundreds of transactions through were settled, the bulk of the cash landed in two
numerous subsidiaries. (A small percentage of this Delaware companies, Rosebay Medical Co. and
sum was reinvested in Purdue or lent to and fully Beacon Co. The Family Offices
Here’s what’s known about the Sacklers’
$10.8b holdings, according to SEC filings.
Taken out of Purdue
Despite the scandal around the Sacklers’ role in marketing opioids,
$4.6b $4.4b $1.7b the family has continued to earn returns through investments
across the U.S. economy. Kokino LLC, which manages the wealth of
Tax payments Two U.S. Other Jonathan’s family, made up about 20% of investor funds managed
by hedge fund Sunriver and holds smaller stakes in tech and oil
companies registered companies companies. Richard’s family office, Summer Road, is calculated to
have made $60 million last year through its client Cap 1 LLC from the
Money from the
in Delaware sale of a stake in ski company Peak Resorts. Below are the values of
companies moves their known holdings.
through trusts
to the two sides
of the family.
Richard and the $141.0m $46.8m
late Jonathan’s
Trusts for
estate benefit Rosebay Kokino Jonathan Summer
the benefit of Beacon
from Rosebay; Holdings
Jonathan Richard Medical the Sackler Mortimer Road Richard
Mortimer D.A. include:
family D.A.
and Mortimer Sr.’s Holdings
other family Hill International Inc. $0.9m include:
members benefit
from Beacon. New York State Attorney General Letitia James’s office has said the Ocular $46.8m
Sacklers hid billions of dollars. She’s subpoenaed at least 10 financial StoneX Group Inc. $0.9m Therapeutix Inc.
institutions connected to the family “in an effort to establish the
Sacklers’ fraud,” according to a filing. The subpoenas allege that a
portion of the $4.4 billion was used for multimillion-dollar real estate Evolving Systems Inc. $1.1m
transactions. In one example, Beacon made:
Argan Inc. $1.2m
137 transfers totaling almost
$20m via … AutoWeb Inc. $3.0m
$26.3m
Gulf Island $8.0m
Stillwater
Fabrication Inc. Holdings Mortimer
an unnamed include: D.A.
to
bank Amtech Systems Inc. $11.9m
EMagin Corp. $26.3m
“institution A,” Mortimer
per James D.A.
Sunriver Mgmt. LLC $114.0m

… who redirected this money and more from unknown

sources through the same bank to two LLCs …

477 wire and 272 wire

transfers worth transfers worth
$40m to  … $4m to  …
 Central Cherry
Eight Tree What Happens Next
Realty LLC Holdings LLC
Forty-eight states are suing for damages.
… which, on behalf of Mortimer, bought …
They’re about split between accepting and
rejecting the proposed settlement.
A $3m house in
Amagansett, N.Y. A $16m Upper
East Side townhouse
$2.3b $2b (in 2004) and sold it
in January for The Sackler family and Purdue have proposed a settlement worth
Federal Beacon’s and more than $10 billion with the states and cities that are suing for
$38m damages. Under the plan, the family would hand over the company
taxes Rosebay’s to a trust controlled by the states and sell Mundipharma; the Sacklers
themselves would foot $3 billion, though they continue to deny
tax bills responsibility for the opioid crisis. Two dozen states have rejected
the offer, including New York, Massachusetts, and Connecticut.
$306m James said New York would oppose “any deal that cheats Americans
out of billions of dollars” and “allows the Sacklers to evade
State and local taxes responsibility.” (“A critical mass of plaintiffs representing more than
half of the U.S. population support the settlement framework,”
Purdue said.) The bankruptcy judge in the case has paused other
More than $1 billion ended
lawsuits against Purdue and the Sacklers until October while
up in Purdue-associated
negotiations continue. �With Anders Melin and Jeremy Hill
companies registered in
Luxembourg and the British
Virgin Islands. An additional
$570 million was sent to
Mundipharma International
Ltd., the Sacklers’ global $893m $572m $140m $88m
pharmaceutical arm. The METHODOLOGY
family is weighing the sale Luxembourg Mundipharma BVI Companies
of the business, which could ○ The $10.8 billion figure is drawn from an audit report prepared by
fetch as much as $5 billion. companies International companies registered AlixPartners LLP and Purdue. According to the report, $247 million
went to loans that were repaid in full.
Ltd. in unknown ○ The information on cash transfers—from Purdue into Rosebay, Beacon,
locations Perthlite, Linarite, and Banela—and on tax payments is drawn from the
Rosebay and Beacon received the bulk of the Purdue cash, but even some of the smallest AlixPartners and Purdue report (pages 27, 66).
transactions made by the company can be traced back to the family. Three companies—Linarite, ○ Details on the ownership of Rosebay and Beacon, as described by the
Perthlite, and Banela—were paid dividends of a few million each from Purdue in 2012. attorneys general of Arizona and New York, come from a July 31, 2019,
filing to the Arizona Supreme Court in State of Arizona v. Purdue and
Trust for affiliates (page 5); and from a Sept. 13, 2019, filing to the Supreme Court
Jonathan’s of the State of New York, Suffolk County, in The People of the State of
Linarite Cornice New York v. Purdue Pharma (page 6).
Holdings Fiduciary children ○ Particulars on the transfers from Beacon to Mortimer D.A., and the
$3m purchase of New York real estate as described by the New York state
LLC Mgmt. LLC attorney general, can be found on page 7 of the Sept. 13 filing, in New York
property records, and in Suffolk County property records.
… and Cornice,
Linarite, Perthlite, ○ The figures for the Luxembourg and BVI companies are derived from the
Data, and Trust for
Perthlite and Banela are each AlixPartners and Purdue report (page 66) and Bloomberg News reporting.
Data Millborne are
partially owned by ○ Specifics on the ownership of Banela, Perthlite, and Linarite as described
$3m Holdings trustees of Richard’s
Cornice, Data, and LLC by the New York state attorney general is on page 4 of the Sept. 13 filing.
trusts tied to
LLC Millborne … children ○ Information on Kokino LLC’s holdings come from a November 2019 filing to
the Sacklers.
the U.S. Securities and Exchange Commission. The Sunriver Management
LLC figure is based on Bloomberg News reporting that 20% of assets
managed by Sunriver are held by Kokino.
Banela Millborne ○ Details on Summer Road LLC’s holdings can be found in an August 2020 
$6m Corp. Trust Co. Hercules Trust filing to the SEC.
(Beneficiaries unknown) ○ Particulars on Stillwater Holdings LLC’s holdings are in an April 2020 filing to
the SEC. The stake is valued as of Aug. 19.
57
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 FALL STYLE SPECIAL
P
FUTURE’S U
SO BRIGHT R
S
U
I
T
After a season like
S 59

no other, Virgil Abloh

remains fashion’s
resident optimist
By Kim Bhasin and
Annmarie Hordern
Photograph by
Nolis Anderson

August 31, 2020

Edited by
James Gaddy
Abloh at his home
outside Chicago Businessweek.com
 FALL STYLE Bloomberg Pursuits
W
hen Louis Vuitton unveiled its latest
menswear collection, fashion felt nor-
mal for the first time in months: Models
walked the runway in front of a chic audi-
ence, attendees cooled off with paper fans in between air kisses,
and a surprise guest star—Lauryn Hill—serenaded the crowd.
Well, almost normal. The show was held in August, weeks
before the standard time for next year’s spring-summer col-
lection. It was also in Shanghai, thousands of miles from Paris,
the typical location. Virgil Abloh, the designer, couldn’t make
it to his own show because of travel restrictions between the
U.S. and China.
“What we’ve learned through this year is that there’s subtle
things that need to change about how we interface with the
customer and interface with the world,” Abloh says a week
after the show from his home outside Chicago, where he’s
spent the past several months running his creative teams in
Paris and Milan.
These days, Abloh’s designs are inescapable. He has a reg-
ular parade of collaborations, such as a February collection of
wood-capped water bottles with Evian and, through his label
Off-White, an upcoming pair of zigzag-laced white Nike Dunk
Low sneakers. He’s also working with Mercedes-Benz AG to
reinterpret the automaker’s G-Class luxury SUV.
Abloh has always been a busy guy, and the lockdown ver-
60 sion of him isn’t much different. Before our interview, he’d just
spoken with Marc Jacobs, his predecessor as Louis Vuitton’s
head menswear designer and a mentor he can bank on to
spark, as he puts it, explosive creativity.
Nonetheless, this summer has been a roller coaster for
Abloh. He’s been expanding his Off-White business, not to
mention holding down his duties at Louis Vuitton, while the
economic fallout wrought by the coronavirus pandemic has
devastated the fashion industry and government-mandated
shutdowns kept stores around the world closed for months.
The $380 billion luxury goods sector could see sales fall as
much as 45% this year and not fully recover until 2023, accord-
ing to an analysis by Boston Consulting Group.
“I’M TAKING
ON THE TASK OF
RAISING BLACK
VOICES, AND THAT
TO ME IS A NEW
CHAPTER OF MY
CAREER”
August 31, 2020
Several household names have gone bankrupt, including
Brooks Brothers, J.Crew, and Neiman Marcus. LVMH, the par-
ent company of Louis Vuitton as well as Céline, Christian Dior,
Givenchy, Loro Piana, and others, saw a 38% drop in revenue
last quarter, from roughly €12.5 billion in the second quarter
of 2019 to less than €8 billion over the same period in 2020.
It expects Covid-19 to stifle sales and earnings for some time.
“We can but hope that the recovery will occur gradually,”
Chairman and Chief Executive Officer Bernard Arnault told
investors in June.
The summer protests that have roiled the nation follow-
ing the police killing of George Floyd have also presented
challenges. When Abloh said he was disgusted by the looting
of two Los Angeles luxury shops, the backlash on social media
was swift and predictable.
Abloh says the criticism doesn’t bother him. “It moti-
vates me,” he says. “It shows me that there’s room to grow.”
He apologized on his Instagram account (and Twitter) and
announced the creation of a scholarship fund for Black
students that’s focused on career development for those
entering the fashion industry.
The Post-Modern Scholarship Fund raised $1 million upon
its inception, financed by Louis Vuitton, Farfetch, Evian, and
Abloh’s own money. He says he’s entering a new phase of his
career, one that gives all his fashion projects a greater purpose.
“What’s next for me is eradicating systemic racism,” he says.
“I’m taking on the task of raising Black voices, and that to me
is a new chapter of my career.”
Abloh considers himself an optimist, and the joyful clothes
he showed in Shanghai were a marked contrast from the grief
that other designers have displayed in 2020. (In Alessandro
Michele’s fall show for Gucci, the models’ mascara was applied
in a way that made it look like they’d been crying.)
Another pleasant surprise from the Louis Vuitton show
was a lot of tailored suits, which in itself felt like an objec-
tion to giving up on how life used to be before people began
to work from home. The jackets had bright pops of red and
yellow or jaunty checked patterns. The stars, though, were
Abloh’s pandemic-era “Zoooom With Friends” stuffed toys,
which clung to clothes and bags and filled the presentation
with childlike cheerfulness.
Abloh grew up in Rockford, Ill., in a Rust Belt neighbor-
hood outside Chicago known more for bolt and screw factories
than couture shirts and crossbody bags. Watching Michael
Jordan as a kid taught him perseverance and excellence, he
says. He attended the University of Wisconsin at Madison and
the Illinois Institute of Technology, and got an internship at
Fendi in Rome, where he first met Michael Burke, now the
CEO of Louis Vuitton.
The son of Ghanaian immigrants, Abloh has positioned him-
self as a champion of granting access to those who’ve been shut
out. He often talks about unlocking and opening doors—for
both designers and consumers. Fashion has always been done
clandestinely, within studios hidden from prying eyes. But
Abloh chronicles what goes on behind the scenes and teases
LVMH
August 31, 2020

-37.8% sketches of upcoming projects to give his fans a window into

the design. Last week he posted a detail of a wheel from that
Mercedes SUV. Shoppers, he says, need to be close to the cre-
ative process. “That’s the modern attribute of fashion. Maybe
TOTAL REVENUE if it’s no longer mysterious, the consumer can understand the
ethos of the designer.”
Home base remains Off-White, the fashion label he started
2ND QUARTER 2019 in 2012. Last year, U.K.-based Farfetch Ltd. acquired the
€12.54B brand’s parent, Milanese licensing company New Guards
Group, for $675 million in a deal that also netted the publicly
traded luxury retailer companies such as Palm Angels and
2ND QUARTER 2020 Heron Preston. Farfetch CEO José Neves said at the time that
€7.80B he’d scored a “creative tastemaker.”
Off-White’s top executive, Andrea Grilli, who’s known
Abloh since 2012, says the designer has an aura of unpredict-
ability that lures people into perpetually wondering what he’s
up to next.

KERING
That’s not to say that Abloh is unstable or kooky. Rather,
Grilli sees him as feverishly data-driven, trying to bridge a

-43.5%
long-held divide between creative and business. “Virgil talks to
every single level of seniority,” Grilli says. “He likes to absorb.”
He’ll need to. Off-White is looking to expand into a billion-
dollar revenue brand over the next 10 years, says Grilli, who
declined to share current revenue numbers. To do this, Abloh
will need to alter the business model, and his designs will have
TOTAL REVENUE to stretch into new product categories. 61
Over the next three years, management wants Off-White
to expand its e-commerce revenue to be 30% of the busi-
2ND QUARTER 2019 ness, while also skewing more female, and have women’s
€3.85B clothing account for 40% of sales.
While Abloh is helping Louis Vuitton maintain its domi-
nance, he’s also positioning his Off-White label to enter the
2ND QUARTER 2020 hallmark areas a typical fashion brand such as Louis Vuitton
€2.18B would play in. “Handbags, shoes, fragrance,” Abloh says.
“Those are all segments that I will grow into.”
The brand has been selling more handbags lately, but it’s
plates, towels, and other home goods that are seen as the
next big revenue generator. Grilli says there’s a new collec-

HERMES
tion on the way, set to be introduced this fall. There’s also
talk of getting into cosmetics.

-41.3%
It’s an old formula for such a visionary mind, and all
these products face a long road back to normalcy—a sudden
reality that Louis Vuitton and its boss know too well. But for
LVMH, there’s reason for hope as the business remains fun-
damentally sound. Executives saw nascent signs of a luxury
revival in June, just in time to seal a $16 billion deal to buy
TOTAL REVENUE U.S. jeweler Tiffany & Co.
Ever hopeful, Abloh hasn’t given up on the retail
experience either. One week after the Shanghai show, he
2ND QUARTER 2019 opened a new Off-White flagship store in the Miami Design
€1.67B District. (He hasn’t seen it in person yet.) He’s also open-
ing a new female-focused Off-White store in London this
fall. And he’ll put on another Louis Vuitton show in Tokyo
2ND QUARTER 2020 on Sept. 2. “To me, as a creative,” he says, “it’s a time to
€982.51M show resilience.” <BW>
 FALL STYLE Bloomberg Pursuits August 31, 2020

Knit Pickers
This autumn you’ll have an
abundance of cozy choices in
the classic fisherman style
By Harriet Mays Powell
Photographs by Hannah Whitaker

The chunky fisherman sweater—knit on North Atlantic shores

from Norway to Nova Scotia—is distinguished by its varying
textures and symmetrical patterns. Traditionally it was made
from untreated wool, which is naturally waterproof.
This fall, longtime L.L.Bean fan Todd Snyder is releasing a
40-piece collection with the Maine-based outfitter that includes L.L.BEAN MEN’S SIGNATURE COTTON
an update of the company’s classic pullovers. And ever since FISHERMAN SWEATER
Chris Evans wore a lookalike in last year’s Knives Out, Orvis’s Inspired by your grandfather’s Irish woolens, this
62 Irish fisherman sweater has repeatedly sold out. But any of garment is knit with interlocking patterns, making it an ideal
these seven versions will make a statement, at sea or on land. cool-weather choice. $99; llbean.com

L.L.BEAN X TODD SNYDER WOOL PULLOVER ORVIS BLACK SHEEP

COLOR-BLOCK SWEATER IRISH FISHERMAN SWEATER
Snyder has updated this perennial preppy favorite This cable-knit is almost identical to the cream one Evans sported
with a slimmer silhouette and reversed the bird’s-eye in Knives Out—but darker and less worn-in. It’s crafted from
pattern for the sleeves. $179; toddsnyder.com 100% Irish wool in a classic Aran Islands weave. $129; orvis.com
FALL STYLE Bloomberg Pursuits
PATAGONIA MEN’S RECYCLED WOOL SWEATER
A blend of reclaimed nylon and wool accentuates the hand-linked
finishing on the hem and cuffs, to create a modern take
on the traditional pullover. The company donates 1% of revenue
to environmental nonprofits. $139; patagonia.com
POLO RALPH LAUREN WOOL-BLEND
SWEATER IN OATMEAL HEATHER
True to the brand’s DNA, which incorporates Ivy League prep
and all-American sporting looks, this traditional Aran fisherman
sweater has a timeless appeal. $398; ralphlauren.com
August 31, 2020
HERMES OVERSIZE PULLOVER IN COTTON AND CASHMERE
In keeping with the collection’s relaxed, sporty vibe, this
sweater’s generous silhouette and asymmetrical stitching with
embroidered lambskin spin an imaginative version of the 63
usual look. $2,050; hermes.com
FJALLRAVEN OVIK KNIT SWEATER
The print and jacquard pattern used here is found
throughout Scandinavia. A sustainable merino wool knit
wicks away moisture, and elbow patches provide
a buffer against wear and tear. $150; fjallraven.com
 FALL STYLE Bloomberg Pursuits August 31, 2020

Mueser takes a client’s

measurements in
his Manhattan shop
64

Not Dead Yet

At the top of the made-to-measure market, suitmakers are finding
creative ways to survive—and, sometimes, thrive. By David Coggins

The onset of a global pandemic has hastened the most dire
predictions for the suit. After all, the power brokers and their
power suits can no longer power-lunch. Instead, they’re
working from home in Greenwich, Conn., the Hamptons, or
wherever they’ve moored their yacht. Even among nonexecu-
tives, the tailored suit’s currency as job interview or wedding
day requirement has disappeared, seemingly overnight.
Plus, a suit requires expertise to make—and Italy, where
more sartorial knowledge exists than anywhere else, was
forced to shutter some of its finest clothing factories and
ateliers early in the outbreak.
Now that these craftsmen have reopened, the day-to-day
The storied Florence tailor Liverano & Liverano had to
slow production but found a silver lining. “We had a lot of
time to focus on strengthening other aspects of the busi-
ness,” says creative director Takahiro Osaki. “We built a new
website and saw record growth in online sales.”
Jake Mueser’s shop is open in New York’s West Village on
a very limited basis; to conduct fittings over Zoom, he sends
a sample jacket to a client in the correct size. “At first, I was
very skeptical we could do that effectively,” he says. It turns
out to have been a great success. “By having the client try on
the garment and take a few basic measurements, we can work
with our pattern maker to achieve the desired fit.”
COURTESY CHASE WINFREY

measuring, fitting, and consulting work they do is back on
as well. So how are they managing this while face-to-face
interaction is still curtailed? And when trunk shows, where
tailors from London and Italy visit their clients abroad for
sales and fittings, have been canceled?
Paolo Martorano, who also makes bespoke suits in
New York, sanitizes his showroom before each client visit,
and he accepts only one appointment a day. But the results
have been good. “We’ve been able to maintain enough
business to keep our entire staff—from our master tailor on
FALL STYLE Bloomberg Pursuits August 31, 2020

THE VIEW FROM ENGLAND THE VIEW FROM ITALY THE VIEW FROM NEW YORK
Dressing up for fun Personal expression rules The symbol of power

Even before Covid-19, tailors on Savile Row
were seeing a migration away from the suit
in favor of other types of attire. “The trend
has been toward separates and clothing
that can be worn in different ways for
different occasions,” says Anda Rowland,
vice chairman of Anderson & Sheppard,
which was founded in 1906. “The tendency
now is to dress down for business but more
formally out of work—in the customer’s
leisure and social time. This is obviously
good news for bespoke tailoring, as we offer
a wide choice of cloth and style details.”
Hill at Drake’s echoes this idea. “Most
men these days didn’t have to wear suits
even when offices were open,” he says.
“Our style strikes that balance between
casual and formal, so it can be worn
almost anywhere, even if you’re working
from home.”
But the British three-piece isn’t going
the way of the typewriter anytime soon.
“The well-tailored Savile Row suit will
become more of a status symbol now that
it’s decreasing as an office staple,” says
Martin Nicholls, managing director of Norton
& Sons Ltd. “For establishment boardroom
battles, it will still be de rigueur as a
minimum entry requirement.”
Michele Am Russo, chief executive officer
of womenswear-focused Bomba Srl in
Rome, says customers during lockdown
have ordered some of the usual pieces—
trenchcoats, classic capri-style pants, and
the company’s beloved CN dress—as well
as chiffon dresses and silk-tulle lingerie. He
notes that connecting with clients virtually
has gone better than expected. “We’ve been
more available than ever over email, phone,
and Instagram,” he says. “We send fabric
samples via post [so they can] feel the fibers
and see the colors. This isn’t an alternative
to meeting and working in the atelier, but
within certain limits it’s undeniably a way of
creating beautiful pieces.”
Gerardo Cavaliere, creative director
of Sartoria Giuliva, also in Rome, says his
space, with masks and gloves, is “more
similar to an operating room than an atelier.”
But those who gravitate to his clothes
have postponed their appointments, not
canceled them. “Generally my clients wear
suits even if they are not in their office,” he
says. (Yes, Italians and tailoring obsessives
wear trousers and a sport coat in their daily
life.) “Luckily, there are people that, like me,
think the suit is not just a formal uniform to
wear for work.”
“During lockdown we’ve written some
of the largest orders we’ve ever taken,”
says Martorano, who runs a bespoke
shop on West 57th Street. “Some clients
have ordered as many as a dozen suits in
one shot.” The majority are C-suite-level
executives. “No matter where they are or
what the circumstance may be—Zoom call
or whatever—they want to be appropriately
dressed for the simple reason that they’re in
charge,” he says. “I’ve been asked, especially
by high-profile individuals, how they can
project individuality and gravitas and not
appear foppish. Many of the men and women
we dress are people in the public eye, making
it imperative that, during these difficult times,
they don’t look the least bit frivolous.” 65
Downtown, Mueser is known for
unstructured clothing—a more lightweight,
breathable, and slimmer design. His best
clients appreciate luxurious fabrics they can’t
get anywhere else. “Clients have been leaning
into softer and easier clothes as opposed to
more formal business suits,” he says. “We’ve
been making a lot of unlined, deconstructed
sport jackets from cottons and jerseys and
more luxury cloth like cashmere—things
people can comfortably wear while working
from home and still feel put-together.”

down,” Martorano says. He’s even hired two tailors who’d
lost positions elsewhere.
In many ways we were in a golden age of tailoring in New
York before Covid-19, which makes this conundrum all the
more frustrating for everyone involved. It had never been
easier to get a bespoke two-piece: Manhattan has many
expert suitmakers, and the leading houses on Savile Row
and in Italy would set up trunk shows here twice a year, elim-
inating the need to hop a plane for a new purchase. Other
New York retailers such as the Armoury would host less well-
known masters who otherwise had never been able to visit.
Lately, tailoring hasn’t always meant a suit, either.
Customers have been commissioning clothing on their own
terms, according to Michael Hill, creative director of British
menswear brand Drake’s. Most “are looking for something
that they really want to wear,” he says. “It’s a far more joyous
thing, rather than a corporate uniform.”
The result is something handmade but not dressy.
“Customers are ordering fewer classic white and blue
shirts,” especially during the pandemic, says Varvara Jain,
who owns the Amsterdam-based shirt brand 100Hands
with her husband, Akshat. The most popular, she says, “are
denims, indigos, and jerseys.” Mueser has seen an increase
in orders for boldly patterned sport coats and colorful trou-
sers in cotton twills and linen. “These are more playful, less
conservative designs,” he says.
Even James Bond, once a symbol of Savile Row tailor-
ing, is embracing unstructured suits and softer materials.
In the forthcoming film No Time to Die, he wears a casual
pinwale corduroy suit by designer Massimo Alba of Milan.
“A significant portion of professionals now feel the need to
represent themselves in a freer, more informal manner,”
Alba says. “But the suit will remain one of the most iconic
codes for elegance.” <BW>
 CRITIC Bloomberg Pursuits
Luxury
Without the
Logo
66
Shopping site Italic makes a bold
move in fashion and tests the
Costco model. By Stephen Milioti
Dedicated followers of fashion tend to fall into two groups:
those who favor a heavily branded look that’s as subtle as a
football jersey, and those who favor a discreet, under-the-
radar style that announces itself only to a select few.
E-commerce site Italic caters to the latter set—and those
who never before could afford either. It began in 2018 with
$13 million in venture funding as yet another millennial-
targeting, direct-to-consumer disrupter. The site offers
unbranded women’s and men’s clothes, shoes, bags, and
home decor produced by the same factories that Burberry,
Fendi, Mackage, and other bona fide luxury brands use. And
all sold at cost.
I first came across Italic when a fellow fashion-obsessed
friend told me the prices were incredible for what you get. A
slim briefcase with the design and quality similar to a $2,500
Prada version runs just $200; a $55 poplin pajama set is made
by the same craftspeople who sew Vilebrequin’s $280 swim
trunks. By aligning itself with establishment brands, Italic
Inc. doesn’t have to spend what other DTC startups have had
to shell out to build consumer trust: A $36 hoodie feels less
cheap once you read—in large type under the picture—that
it’s made in the same place as a $375 Armani version.
August 31, 2020
If the fashion brands are concerned about being undercut,
Italic’s founder, Chief Executive Officer Jeremy Cai, hasn’t
heard. “It’s not a big problem,” he says. “We’re a small upstart
and not eating into the market share of the big luxury houses.”
Despite that winning blend of product, price, and cachet,
the company hasn’t been fully immune to the challenges
retail brands have faced this year. In July the site moved
to a members-only model: Italic customers must now pay
$100 a year simply to shop the 800 products on the site. Cai
says it was a necessary step to lessen reliance on investors,
noting the “crash in venture-funded capital for DTC brands.”
A few luxury retailers have been testing a similar Costco-light
model: Restoration Hardware’s Grey Card costs $100 and
offers exclusive access, flash sales, and a variety of discounts.
Yearly memberships tend to make me nervous, though.
I made peace with Fresh Direct LLC’s DeliveryPass by
routinely ordering once a week—more often now during social
distancing. But I’d buy groceries anyway. I’m less jazzed about
paying a fee simply to shop for little luxuries, whether Public
Goods ($59 a year for the right to buy toothpaste and olive
oil) or Thrive Market ($60 a year to purchase all-natural bar-
becue sauce and coconut powdered keto creamer).
But with all this time at home, I bit. I’d planned to start
with an order of Italic’s Serene towel set and a recycled jer-
sey vintage-wash short-sleeve tee, which have some of the
best reviews on the site. But both were sold out—the towels in
every color—with no estimate of when they’d be back, though
the site restocks daily.
Because I was set on a T-shirt, I up-leveled to the Pulse
performance, made from a 95% bamboo blend. At $25, it was
$10 more than the recycled version but still less than half the
price of my treasured $70 James Perse tees. The box arrived
within three days. (Shipping is free if your order exceeds $50.)
The neckline was a little tight, but that may relax with wear,
and overall the T-shirt had a quality feel. Even if the Pulse tee
winds up being only half as good as my Perse shirts, that’s
still a win in my book because of the price.
I also picked up a Dopp kit, something I’d been mulling
getting for a while. Italic’s $80 contender in black came in
high-quality leather, with even stitching and a smooth zipper—
my personal mark of a quality bag. The Dopp kit crystallized
how Italic can fit in the unbranded luxury ecosystem: Most
fashion consumers don’t want a head-to-toe logo look. I cer-
tainly don’t. I have a Louis Vuitton Keepall 55 in monogram
that’s been a trusty travel companion for more than a decade,
but an LV Dopp kit can cost $1,000, and that’s a steep price
to pay for something that lives near a toilet. Even if it’s a
Ritz-Carlton toilet.
Style is about mastering a mix, not blindly following trends
ILLUSTRATION BY PATRICIA DORIA
or piling on labels. I can carry my Vuitton bag (with my new
Italic Dopp kit inside) and wear a pair of Veja sneakers and
an Italic tee. And I’m not the only one. More than ever, mod-
ern shoppers thoughtfully blend great basics with investment
pieces. It’s a more conscious way to get dressed and, in these
times, much less conspicuous. <BW>
THE ONE Bloomberg Pursuits August 31, 2020

Barocko, the
new high jewelry
collection from
Bulgari SpA, takes
its name and

All Ears
inspiration from the
Baroque sculptures
and monuments
of Rome, where
the company was
founded in 1884. The A graphic update of the chandelier style
diamonds—there
are 26 in different pays glamorous tribute to Baroque Rome
configurations Photograph by Frank Frances
across this pair
of earrings—are
framed by hexagons,
a geometric shape
found throughout
the Eternal City’s
decorative motifs.
And in a bold break
from symmetry, one
earring is made of
rubies, the other of
sapphires.
THE CASE
More than 13 carats
of precious gems,
67
selected by
creative director
THE COMPETITION Lucia Silvestri,
• A more delicate make Bulgari’s
look comes in Van homage to Rome
Cleef & Arpels’s the showstopper
ombré $127,000 you’d expect. But
Brume de saphir it’s the refined way
chandeliers. Four the design updates
strands of diamonds history that leaves a
and gradated lasting impression.
sapphires add up to Striking use of color
23 carats, bezel-set has been a defining
in white gold. Bulgari characteristic
• In Pomellato’s for several decades;
$15,600 Sabbia here the use of
earrings, disks different-colored
of rose gold are gems for each
covered in almost earring creates a
4 carats of brown, playful option in
white, and black either formal or
diamonds. casual situations.
• Vram’s one-of- With almost 5 carats
a-kind Chrona of jawbone-grazing
chandeliers pear diamonds on
($25,230) combine the tassels, this bit of
white diamonds, ear candy announces
zircons in autumnal the presence of
hues, and two a sophisticated
Montana agates taste—and no small
of more than amount of chutzpah.
11 carats each into Price on request;
otherworldly shapes. bulgari.com
 ◼ LAST THING With Bloomberg Opinion

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Don’t Call It a Honeybee
Comeback Yet
By Justin Fox

Since hitting a low point in 2008, beset by the ● SOUR TASTE

The USDA counted
68 apocalyptic-sounding colony collapse disorder, America’s a record 5.9 million
honeybees have been on the comeback trail. The num- honeybee colonies
in 1947, with that
ber of colonies the U.S. Department of Agriculture counts number falling to
is back up to almost 3 million, a level last seen in the a little more than
3 million by the
early 1990s. mid-1980s in the
Beekeepers in the U.S. continue to lose about 40% of face of competition
from imported
their colonies annually, though, according to the nonprofit honey and other
Bee Informed Partnership. Its surveys, which date to 2006, sweeteners.

don’t show a clear trend, but researchers have estimated

that yearly losses before 2000 were much lower. Colony
numbers can still rise in the face of such losses, because it
takes only a couple of months to get one up and running,
but all does not seem well with the bees.
Most losses last winter were attributed not to colony ● LIFE CYCLE ● U.S. honeybee colonies
U.S. beekeepers
collapse disorder but to more mundane causes such as reported revenue of
starvation and pests. Honeybees seem to have become 3.6m

generally more vulnerable, with two oft-fingered culprits $309.6m

ILLUSTRATION BY GEORGE WYLESOL. DATA: U.S. DEPARTMENT OF AGRICULTURE

from pollination
being the varroa mite, a parasite originally from Asia that services in 2019, and
first appeared in the U.S. in the late 1980s, and the wide- $309.1 million from
honey, a big change
spread use of neonicotinoid pesticides by U.S. farmers from past decades,
3.0

starting in the late 1990s. when honey was the

2008
chief moneymaker.
The troubles of the honeybee, a domesticated species
● BAD NEWS
not native to the U.S., have been linked to concerns BUMBLE
about dropping insect numbers worldwide. But it’s not A 2013 study found 2.4
that most native bee
clear that insects in general are on the decline in North species in the U.S.
1987 2020
America. A just-published survey of data gathered at had experienced
only modest
25 monitoring stations around the U.S. starting as long ago declines over the
as 1976 found insect population changes to be “generally previous 140 years, ● NUTS
but that bumblebee Most pollination revenue—79% in 2017—comes
indistinguishable from zero.” <BW> Fox is a columnist for populations had in February and March, when bee-dependent
Bloomberg Opinion declined steeply. almond trees bloom in California’s Central Valley.
 Could you

predict a new

price shock?

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