Time to Cut Off the Chains?
Sometimes forgotten amid the news of stimulus packages, bailouts, mortgage meltdown, and market crash are the series of bankruptcies that have left big-box stores around the country vacant. In any other year, the failure of Circuit City, Linens n Things, and a number of other brands would be the top story of the day. These stories aren't getting the coverage they deserve, and the question of whether big retail chains can survive isnt being asked. Is it time we reconsider whether the dominance of Wal-Mart, Best Buy, Home Depot, Lowe's, and their big-box cousins should come to an end and be replaced by smaller, locally-owned stores that existed in decades past?
Entire industries are failing, and because large conglomerates have scooped up dozens of smaller companies under one corporate umbrella, the impact is devastating. It's analogous to the mortgage crisis, which was partly caused by huge banks over-extending themselves and creating a domino effect across the country when they ran out of credit. The term "too big to fail" has been thrown around by politicians and economists to describe these corporations, but should they have ever gotten that big? When Circuit City declared bankruptcy, tens of thousands of people lost their jobs, and hundreds of storefronts were left vacant. If there was no Circuit City, and instead thousands of small electronics stores scattered across the country, could the problem have been avoided?
The same goes for the newspaper industry, which is facing declining revenue and increased costs. Not every newspaper is losing money, but all are affected. Why? Over the last few decades, a handful of news conglomerates bought up local papers so that when a few have financial difficulties, they all feel the pinch. I'm sure at some point the papers enjoyed savings by sharing employees and costs, but was it worth the risk?
Huge companies need huge lines of credit to survive. When those lines of credit dry up (as they have), companies fail. A corner hardware store may only need a small business loan from a locally-owned bank to survive an economic downturn. If one goes under, there are always a few others to take its place. If Home Depot and Lowe's go under, we're in trouble.
Another advantage of smaller, locally-owned stores? The money isn't all funneled up to the corporate headquarters. Yes, the owner makes more than hourly workers, but there isn't the same wage disparity that exists today between frontline workers and CEO's. Ninety-five percent of workers make minimum wage with no healthcare, and the executives take home tens of millions of dollars. That isn't the spirit of American entrepreneurship.
Maybe more bankruptcies will pave the way for a new surge in small business development. Families will run newspapers again instead of faceless board members, city downtowns will be renewed by local restaurants and shops, and Main Street will overtake Wall Street in power, not just popularity in the latest polls. If there ever was a time it could happen, it's now.
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One way, Ted, is by using combined buying power. Co-operatives, if you like. Have a look at Euronics. I don't know how successful it is, but I've bought from local, independent traders at highly competitive prices and enjoyed good aftercare.
I had written one of my very infrequent blogs on the same topic, from a different angle, on March 12th. http://pssiusa.blogspot.com
I agree that bigger is not always better (look at the Federal Government, for a glaring example), but I don't believe we will be able to change the situation. To eliminate the big box stores, the manufacturers would need to charge equal prices to all customers. If Higley Appliances (one small, local store) pays $200 for a washing machine, they need to sell it at a reasonable margin (margin generates profits). Mr. Higley prices the machine at $275. Menards buys the same machine for $125 because they “buy in volume” and have the muscle to demand those types of pricing.
The day after Mr. Higley advertises his machine at $275, Menards runs an ad for the same washer, selling it at $200. Both companies deliver and set up the machines at no additional charge. With the same machine, from the same manufacturer, carrying the same warranty, and with service provided by the same dealer (Mr. Higley honors all warranties from the manufacturers he represents), where will the consumer make his purchase? I would guess that 90% of the buying population, as well as you and I, would buy from Menards (Unless Mr. Higley is your uncle, in which case he may forego his margin on that one sale).
If both stores paid $200 for their washers, the margins could be much closer. The big store could still sell at a slightly lower price since they sell many more units, but they may now price their washer at $175 – much closer to Mr. Higley’s selling price – with just enough of a price differential to make the price less important in the consumer’s decision.
If any of you can figure out how to make this fantasy become real, you will definitely be a hero to the small business person. If you can figure out how to bring back the locally owned financial institutions, you might even save the country a few trillion dollars of bail-out money!
At present we have a recession. In the last one, in the nineties, I went from a great job in a multinational corporation to working as a temp. I'd have taken anyjob in order to feed and clothe my family.
I think the Obama message was more a case of "The jerk Bush and his cronies suck, and suck badly, it's time for a change" not really "go out and contribute to society" because no-one gets paid, not even your president, unless and until someone sells something.
No-one has said "large is bad" nor even "small is good". What they seem to be saying is that boardrooms run by morons should suffer.
True socialism works just fine, except for the people who operate it. So does true capitalism except for the people who operate it. And in the middle of this we have survival.
Remember that the word is in recession because a few really smart people decided to securitise mortgages granted to people who had no hope of making the repayments. Idiots turned the secure into alleged securities and other idiots bought them!
Mortgage companies sold their mortgage books to other people and made money. I took out two mortgages with a decent financial institution only to have them both sold on about five minutes after I bought then to Lehman Brothers in the sub-prime market! I moved from being a copper bottomed risk to a bad risk by the stroke of some idiot's pen.
This isn't about socialism or capitalism. It's about the legacy of the UK's Thatcher Years of greed and the USA's penchant for electing less than appropriate presidents, and in Shrub;s case doing it twice! I wonder how Halliburton is doing now?
Don, Tim-
I think this may be a generational difference of opinion. I agree that there are cost savings associated with larger stores, but I think only focusing on that misses the point. If the end result is that these chains suppress wages and reduce opportunities for everyone, then are the lower prices really lower?
There's a great episode of South Park about Wal-Mart where everyone ends up working at the Wal-Mart because their small businesses can't compete, so they pay less for products but they also make minimum wage.
I don't want to use the feared term "socialism," but it seems to me that the wealth should be spread around to as many people as possible, rather than concentrated in the board rooms of these massive companies. I'd rather pay an extra $50 for a television if it means I'm not destined to be a slave to one of these companies and have the opportunity to start my own business and realistically compete.
This is the same reason many young people are choosing to work in the nonprofit sector and take a lower paying job; they aren't motivated simply by greed and their own self-interests, but by a desire to contribute to society. That's the Obama message, and it appeals to people under 30.
I'm right with you, Don, on agility. Large and small dinosaurs are extinct, yet the animals that were able to handle whatever conditions killed the others off survived and many thrived. They either found or exploited niches and they won. And many died out.
Small is not inherently beautiful. Agile is beautiful. A mom and pop shop has no right of survival unless it creates that right by showing me how any price differential will be worth my while. And nor does a giant operation either. Each has to make me want to spend my money with them.
Over here we just lost Woolworths. I'm really sorry for the thousands of loyal staff who were let down by poor management decisions, but I can;t be sorry that the stores have gone because they were hidebound and were beaten by good competition. The staff didn't deserve it, but the senior management did.
Just to throw a bit of cold water on this whole argument, the real reason we have all these big store chains is cost efficiency. People want lower prices, which requires lower costs, which requires volume and process standardization, which are difficult qualities for most small businesses.
And while it's nice to buy from a mom-and-pop store when you can, I'd rather buy a new TV from Best Buy or Wal-Mart at $300 than pay $350 to a small proprietor -- UNLESS the small proprietor can give me better service that's worth the price difference.
And the small proprietor really ought to be able to do this. Local stores will always be "closer" to their customers, and this would give them a natural advantage in delivering better service, if they choose to do so. Small stores should be able to run circles around the big guys when it comes to knowing their customers personally, offering more tailored services, and accommodating individually different needs.
We see a smattering of examples of this kind of agility (Zane's Cycles in CT, for instance), but for the most part these small proprietors haven't bothered to exploit their natural advantage by offering better, more personalized service, and now they cry and moan that the big guys are taking unfair advantage? Grow up.
If you're a small store getting your lunch eaten by a big competitor, well you had your chance and you blew it. You're just as ossified and rigid as they are, only smaller.
And don't blame the economy, either. That's like blaming the weather.
I think you pose a huge and interesting question. The challenge seems to be that we all have to be driven by ambition.
When I was an employee I had to display ambition in annual appraisals. It wasn't optional. Lack of ambition, lack if wanting the top job, meant you were likely to be out. It didn;t matter if tyou were comfy where you were and enjoyed your job, you had to want to be thrown raw meat every Friday.
I think there are great similarities with the corporate acquisitions. Years ago in the IT industry there was good old DEC (Digital Equipment). When I worked at Wang Labs (also defunct!) we joked that we'd all like to retire to DEC because there seemed to be no pressure. Now DEC, the sleepy giant, is part of HP. And there have been swathes of redundancies as usual.
Your point about mom and pop shops which ought to have survived the huge failure of Circuit City is well made. Mom and pop shops are agile and can change their market. Circuit City was hamstrung by its structure and could not.
The message is about agility, isn't it? Adapt and survive. Non agile local stores go bust too, agile ones survive.
But big bosses want big responsibility and so big salaries. And shareholders can be rather stupid and back them into acquiring really poor businesses without enough local trade to make them viable. And then the entire house of cards comes crashing down. What hurts is that the big boss has a contract that guarantees his bonus. He walks off with a yacht and the workers are lucky to get paid at all.