Category Archives: Retailing

Payless: A Brief Obituary

Back in 1956, there were a couple of events that helped shape the course of globalization. One, about which I wrote in my book The Box, was the first modern containership voyage. This would eventually lead to the behemoths, some carrying more cargo than 10,000 full-size trucks, that move much of the world’s trade today. The other was the most prosaic development one could imagine, the opening of a shoe store in Topeka, Kansas, by two entrepreneurial cousins, Louis and Shaol Pozez. Sixty-three years later, that company is about to go out of business, the victim of the globalization it played a small role in bringing about.

My family knew both Pozez families and we shopped in their store. Payless-National, as they ambitiously called it, aimed to offer quality shoes at discounted prices. It did so by keeping costs low. The floor was covered with linoleum, not carpet, and the wooden shelves weren’t even painted. Payless laid out its merchandise in shoeboxes. Sales clerks were few; customers were expected to find their size and try on the shoes themselves. In return for putting up with these rather austere conditions, shoppers could buy two pairs of shoes for five dollars.

The Pozez cousins were able to undercut their competitors thanks to a series of court decisions in the early 1950s that effectively prohibited manufacturers from fixing retail prices. Importing was not part of their strategy: the United States imported very little footwear in 1956. Although shoes cost far less to make in many other countries, the United States still had a vibrant shoemaking industry, with 1,900 factories employing more than a quarter-million people in places like Endicott, New York, and St. Louis, Missouri. Thousands more people were employed in tanneries and in factories that made synthetic shoe materials.

But while making footwear provided plenty of jobs, those jobs came at a cost. By today’s standards, shoes were expensive. Men’s dress shoes from Florsheim started at $18.95 a pair. That’s about $170 in today’s prices—which is far more than an equivalent shoe from Florsheim costs today. A pair of men’s loafers from Sears for went for $8.65, or about $77 in today’s money—nearly twice the price of the loafers available right now on Sears’ website. StepMaster children’s shoes cost $5.50 a pair. No wonder Payless’s offer of two pairs of shoes for five dollars seemed like a good deal to a bus driver or factory worker earning two bucks an hour. Payless became a huge success, operating thousands of stores. It was purchased by a big department store chain in the 1970s, then spun off as a publicly traded company, and  eventually ended up in the hands of private equity funds.

Footwear manufacturing has proven difficult to automate, making labor costs the single most important factor in choosing production locations. As factories in low-wage Asian countries filled millions of containers with cheap plastic and synthetic shoes and shipped them across the pacific at only a few cents per pair, the U.S. shoe industry couldn’t come close on price; today, about 98 percent of the shoes sold in the United States are imported, mainly from China. To keep its lead in the discount shoe business, Payless became one of the largest shoe importers. For it, as for many other companies, globalization was not a choice, but the only alternative.

What killed it, at the end, was the same thing that made it a success–the constant quest for lower prices. According to the Bureau of Labor Statistics, the average consumer price of footwear has gone up all of 8 percent over the past 25 years. Rent and workers’ wages, meager though those may be, have been rising much faster, squeezing shoe retailers’ margins. In that environment, even globalizers can end up as road kill.

Of Sears and the Great A&P

The death of a major retailer rarely comes as a surprise. You can usually see the signs years ahead: the half-empty shelves, the dreary displays, the dim lighting, the odd combinations of merchandise as store managers struggle to fill space on the floor. The impending demise of Sears is no different. While the courts may have to decide whether Eddie Lampert, its chairman, has looted the company, as some investors claim, the truth is that by the time he took Sears over, in 2004, even a merchandising genius couldn’t have turned the chain around. Lampert made a bad situation worse when he combined Sears with Kmart, but he would have been hard-pressed to make it better.

Lampert is a financial guy, and like most financial guys he keeps his eye on the balance sheet. When it comes to retailing, though, the balance sheet doesn’t reveal the whole story. It will tell you about cash on hand — a valuable piece of information, to be sure — and about leases and credit card receivables, but it doesn’t capture the worth of a retailer’s most valuable asset, its brand.

There was a time when the Sears brand connoted reliability: whether you shopped in the store or ordered from the catalog, you expected quality merchandise at a reasonable price. It started to lose that reputation in the 1980s, when management was seduced by the glamour of selling stocks and real estate and lost interest in toys and underwear. By the time Wal-Mart began its nationwide expansion, in the 1990s, Sears had already forfeited much of its standing. Middle-class shoppers still went there for Craftsman tools and Kenmore appliances, but the rest of the business began to die.

The recovery plan involved buying Land’s End, the mail-order clothing retailer, in 2002. Land’s End, slightly trendy but definitely not haute couture, offered a plausible way to infuse a bit of excitement into Sears’s fashion offering without driving away long-time customers. But Sears couldn’t figure out what to do with it. Should Land’s End live alongside store apparel departments? Should it be the Sears apparel business? Management couldn’t decide, squandering an opportunity to restore a bit of the company’s diminished luster. All this occurred before Eddie Lampert loaded the company up with debt and Amazon induced consumers to do much of their shopping online. By the time of those events, Sears was already yesterday’s store.

To someone who has studied the rise and fall of the Great A&P, this story is familiar. Like Sears, A&P terrified its competitors for decades. Its stores were everywhere, and its commitment to low prices and its uncanny feel for changing consumer tastes made it the world’s largest retailer for more than 40 years. But in the 1950s, under managers who preferred to collect fat profits rather than investing in the business, A&P lost its edge. Customers complained that the stores were dowdy, and store brands like Ann Page and Jane Parker lacked the allure of the brands advertised prominently on national television. A&P became the place where grandma shopped, its name in such disrepute that the company tried to disguise its ownership of chains like Waldbaum’s and Food Emporium. No business strategy had a prayer of bringing A&P back.

Whatever the bankruptcy courts decide to do with Sears, I expect that the company will follow A&P to that great retail graveyard in the sky. A place where no one wants to be seen shopping doesn’t have much of a future in retailing.

Who Owns the Curb?

How we define a problem often affects how we think about it. Consider the question of how we deal with the demand for curb space in our urban areas. If one were to approach this question as an engineer, one might look for ways to redesign our streetscape and reallocate the curb to certain users. If one were to approach this question as an economist, however, one might ask whether there’s a pricing problem.

As discussed earlier this month at the annual meeting of the Transportation Research Board (TRB), a government-sponsored research organization, this is an engineering problem. The assertion is that new ways of doing business have left us with too many vehicles at the curb. The growth of online shopping means more trucks making deliveries, and the growth of ride-sharing services has brought Uber and Lyft drivers waiting to pick up customers. Therefore, the logic goes, we need to provide more unloading zones for trucks and more pick-up locations for ridesharing vehicles. The presentations at TRB suggested that other uses, such as bus lanes, bike lanes, and parking of passenger vehicles, may have to give way.

The underlying assumption, you may have noticed, is that because consumers want online shopping and ridesharing, our streets should accommodate these uses. But there’s another way to look at the problem. Curb space is obviously of great value in some urban areas. That value belongs to local taxpayers. Every time a UPS truck parks at the curb to provide “free delivery” from Amazon, those local taxpayers are subsidizing Amazon customers unless UPS is paying the full market value of that parking space. Every time an Uber driver idles at the curb in Midtown Manhattan, she is occupying valuable real estate without paying for the privilege, and that subsidy is reflected in the artificially low cost of the ride.

Can the demand for curb space be met with economic measures rather than engineering? There is enormous pressure not to find out; in 2014, when Washington, DC, imposed a $323 annual fee for a decal that permits a truck to park in a loading zone, the trucking industry howled–even though that fee, about 88 cents per day, is far less than automobile drivers would gladly pay for a space one-third that size in many parts of the city. But perhaps if trucks and ridesharing vehicles paid the full value of the public assets they use, consumers would make less use of their services and businesses would save money by accepting deliveries at times when the value of curb space is low. Such changes could help relieve traffic congestion without remaking urban streets. There’s something to be said for paying full freight.

Information and Competition

It seems that competition regulators at the European Union are looking into whether “Big Data” is a potential threat to competition. The concern, apparently, is that a company may be able to use a trove of proprietary data about consumers in ways that foreclose competition — and that the assets changing hands in a merger could include enough data to give the merged firm an insurmountable advantage over would-be competitors.

There’s no doubt that control over data can affect competition. But it’s not so obvious how to ensure that consumers benefit.

Consider the logistics business. Every containership line publishes a schedule with the rate for moving one container from, say, Shanghai to Los Angeles. In practice, though, almost all ocean freight moves under confidential contracts between shippers and carriers. These contracts may be filled with contingencies providing for bonuses and penalties if the parties exceed or fail to meet their respective commitments. A large retailer, manufacturer, or freight forwarder has many such contracts in force at any one time, and it is always negotiating new ones. This means that big shippers have lots of up-to-date information about current shipping rates.

Now, imagine a small shipper, a modest retail chain rather than a Walmart or a Carrefour. Because of its size, this firm has only a handful of contracts with ship lines, and it may go months without negotiating a new one. It therefore lacks the current rate information its bigger competitors possess, so it will have a tougher time bargaining for the best rates. It may use a freight forwarder to get better rates, but then must pay the forwarder for its trouble. Either way, the smaller company’s information deficit will force it to pay more to move its goods than its larger competitors do.

This information disadvantage is one reason smaller retailers and manufacturers have been having such a difficult time. Their supply chains are comparatively costly to operate, on a per-container basis, and their higher costs make it hard for them to match their competitors’ prices. I suspect this is one reason we’ve been seeing increased concentration in so many industries. The big benefit from their control of big data about shipping costs; the small are harmed by their lack of information.

Is there a solution to this problem? Of course there is: it could be made mandatory to publicly disclose information about shipping costs. We actually tried such a policy in the United States in the early days of railroad deregulation. What happened? Railroads were reluctant to offer discounts to individual shippers when they knew that publicity would lead other shippers to demand similar discounts. Little freight moved under contract and rates remained relatively high. Only after confidential agreements were permitted did railroads’ freight rates fall and their service improve.

I think there’s a lesson here. Control of information can be anti-competitive, no question. But public disclosure of information can be anti-competitive as well, potentially raising costs for consumers. The EU will face a challenge getting the balance right.


Amazon, Whole Foods, and The Great A&P

A lot of people are concerned that if’s purchase of Whole Foods Market goes through, Amazon will be able to use its might and technological savvy to monopolize the grocery business. I’m not concerned about that myself, because I think the grocery business is pretty difficult to monopolize. Even the Great A&P, the subject of one of my books, never managed to amass enough power to force up the price of food; indeed, when a federal court found it guilty of violating antitrust law in 1946, the charge was that it was using its size to sell food too cheaply, not to raise prices unfairly.

So when the New York Times asked me to write about Amazon and Whole Foods in mid-June, I used my space to wonder why Amazon, which reports precious little profit from all the goods it sells, wants to go into the low-profit grocery business.  Perhaps, I suggested, Amazon should take a portion of the space in Whole Foods’ stores, most of which are in affluent neighborhoods, and turn it into an exciting retail concept that sells exclusive merchandise at a high mark-up. I was thinking of something similar to the Apple Store, which is a far more profitable retail venture than hasn’t yet offered me a consulting contract, so it apparently didn’t think much of my idea. Jeff Bezos seems to be a pretty smart guy, so if he thinks his company can make billions shaking up the stodgy grocery industry, perhaps he’s right.  But the list of others who have thought the same thing is very long indeed.

Time for a Timely Demise

As a young journalist, I was taught never to refer to someone’s “untimely” death: those words carry the implication that someone else’s death might well be timely. But perhaps there are some deaths that truly are timely. One might be that of Sears Holdings, the company that owns Sears and Kmart.

A few days ago the company announced that there is “substantial doubt” that it can survive. That news surprised the many Americans who were unaware that Sears was still in existence. Anyone who has been in a Sears store in the last 10 or 15 years wasn’t surprised at all. Everything about the store, from the dim lighting to the hodgepodge of merchandise on display,   screamed “going out of business.” It was hard to tell who they thought they were selling to.

Sears has been struggling for decades. Its encyclopedic catalog, offering everything from undershirts to mechanic’s tools, was last published in 1993, and many commentators have observed that competitors such as Home Depot, Target, Costco, and Bed, Bath and Beyond have been nibbling away at pieces of its business since the 1980s. Amazon’s transformation from a mere bookseller to an on-line emporium left Sears in the dust. Eddie Lampert, the hedge fund genius who took over Kmart in 2003 and used it to take control of Sears two years later, has had more success disassembling the two retailers–often in ways that benefit his hedge fund–than making them attractive places to shop. When a retailer tells its shareholders that  “Affiliates of our Chairman and Chief Executive Officer, whose interests may be different than your interests, exert substantial influence over our Company,” it’s a good bet that the story won’t end well.

Why might Sears’ demise be timely? Like The Great Atlantic and Pacific, which I wrote a book about several years ago, Sears used to have some of the most powerful brands in the world. A&P’s brands–Ann Page, Jane Parker, Eight O’Clock Coffee, and the A&P brand itself–went from world-beating to down-at-the-heels over the decades as the stores declined; by the early years of this century, A&P ran many of its stores under other names and went to great lengths to hide their connection with A&P. Sears is now in a similar situation. While its Kenmore appliances were once a safe choice for middle-class homeowners, the brand has been tarnished by its association with a failing chain. Much the same is true of Die Hard car batteries. The Sears name itself is likely a negative when it comes to attracting shoppers, save for a handful who still remember the chain’s glory days. The longer Sears hangs on before giving up the ghost, the less its storied brands are likely to be worth.


Supply Chain Insurance

As of this writing, 47 people have been killed and many more injured by the earthquakes that have struck the Japanese island of Kyushu since April 14. These tragic events have had economic ramifications as well, offering a reminder that business risks can be hard for outsiders to evaluate.

The complicated industrial supply chains that are routine today began to develop in the 1970s, in good part because the spread of container shipping drove down the cost of transporting parts and components from one place to another. As I discuss in The Box, low transport costs made it practical for big manufacturers to decentralize: instead of running vast factories that churned out all sorts of inputs and assembled them into finished goods, they could farm out much of the work to specialized factories far away. Large retailers have done much the same. These long supply chains were seen as having two main advantages. Companies were able to draw on low-wage labor in developing countries, and they could gain economies of scale because a supplier might make just one or two components in enormous volume instead of lots of different things in small quantities. The result was lower costs—or so it seemed.

Invariably, though, the beancounters who made these calculations were afflicted with a dangerous myopia. Supply chains can lower costs, but they can also create risks that aren’t always visible. Some of these risks are reputational: if a supplier is accused of being a bad actor by polluting the water or by running an unsafe workplace, consumers may blame the better-known company that contracted out the work. There may be legal risks if the supplier’s shoddy work results in unsafe goods. And then there is the risk of supply-chain interruption. Interruptions aren’t high-frequency events: in a well-organized supply chain, most goods get where they’re supposed to be almost all the time. But when goods aren’t delivered due to weather, labor unrest, electricity cutoffs, or earthquakes, the cost can suddenly become extremely high.

The Kyushu earthquakes have halted plants that supply critical parts for many other consumer goods. But from what is known so far, the costs of this interruption may be less than might have been expected. The reason is that, with little publicity, companies like Toyota, Sony, and Honda seem to have reduced their potential losses by making sure that Kyushu is not their only source of critical inputs. While some of their plants will be shuttered, in some cases for several weeks, many of the key components produced in the earthquake-hit region are also made elsewhere. Those supply chain links will continue to function normally.

After the Fukushima earthquake and tsunami in 2011, factories around the world shut down for lack of components made only in the devastated region. Major industrial companies appear to have drawn lessons from that experience. Some of them have protected themselves against earthquake-related disruptions by developing redundant supply chains, so that an event such as the Kyushu earthquake won’t cripple their operations. This undoubtedly reduces efficiency and raises the firms’ normal operating costs. But supply-chain redundancy is not a frivolous expense. Like most insurance, it seems wasteful only until you need it.

In Defense of Industrial Food

The other night I watched Michael Pollan’s new documentary, In Defense of Food. I’m a great fan of Pollan’s 2006 book, The Omnivore’s Dilemma, which is gorgeously written and extremely thoughtful. The documentary, I regret to report, is neither. On the contrary, it’s a scattershot attack on what Pollan refers to as “industrial food,” with far too much romantic nonsense about what a natural diet ought to be and far too little serious discussion of the challenges of feeding a populous, highly urbanized world. It’s an opportunity missed.

As I show in my book The Great A&P, an industrial food distribution system was a signal accomplishment of the twentieth century. Before it came along, most people’s diets were calorie-rich, nutrition-light, and boring. In the summer, sure, there were lots of fresh vegetables and fruits. In the winter, there were cabbage and potatoes and potatoes and cabbage. Protein mainly came from smoked or cured meats or from fish caught in polluted rivers. Lard was widely used in cooking and baking. Fresh milk, when it was available, was often unsafe to drink. It’s not as if people ate healthy.

This isn’t ancient history. Growing up in the Midwest, I never ate fresh fish, because the food industrial complex hadn’t yet figured out how to deliver it a thousand miles from the ocean. Frozen foods were a staggering success in the 1950s mainly because they offered consumers unprecedented variety at any time of year. Today we may look down our noses at frozen orange juice as inferior to “fresh” juice, but when it arrived in grocery stores around 1950 average families could obtain essential vitamins in the middle of winter. That was an enormous change for the better.

It should also be said—and Pollan doesn’t say it—that food used to be staggeringly expensive. As late as the 1930s, urban families in the United States routinely spent a third or more of their incomes on food, with much of that money going to keep inefficient wholesalers and retailers in business. Chains like The Great A&P in the 1920s and 1930s and Wal-Mart and Aldi more recently have made food consumers much better off by squeezing costs out of the distribution system. Much of this saving is achieved from economies of scale in production and distribution. Pollan, judging by the film, doesn’t much like economies of scale; he’d rather have us buying from farmers who are selling green beans they just picked by hand this morning. Nothing wrong with fresh-picked green beans, but there’s a trade-off that Pollan refuses to recognize. You can see it in the fact that those farmers’ market green beans cost three times as much as the green beans at Costco.

Pollan’s documentary muddles a lot of things. It’s absolutely true, as he shows, that manufacturers of processed foods make misleading claims about their products. There is no doubt that some processed foods are unsafe and that many of them are unhealthy. I agree with his attack on what he calls “nutritionism,” the idea that adding a drop of one or another nutrient to a food product magically makes it better for us to eat. But the industrial food system has brought us a lot of benefits along with Big Gulps, Twinkies, and gluten-free burritos fortified with antioxidants. Pretending otherwise is just pop nutritionism.

End of the Road for an American Icon

The July 20 bankruptcy filing by the Great Atlantic & Pacific Tea Company marks the end of the road for one of the icons of American business. The filing was in no sense a surprise: A&P has spent more than half a century driving itself out of business, shrinking over the years from a nationwide retailer to a small regional grocery chain. Few people, aside from its remaining employees, will grieve. Indeed, most people who think of A&P at all today remember it mainly as the dim and dowdy place where their Grandma used to shop.

But in its day, A&P transformed American retailing several times over. The company, then known as the Great American Tea Company, introduced mail-order shopping in the 1860s. In the 1890s, it developed the concept of handing out reward coupons with each purchase, an idea that soon had millions of housewives collecting trading stamps to exchange for lamps and crockery. Discount shopping as we know it today originated with A&P in 1912, despite the objections of Boston attorney Louis D. Brandeis, not yet on the Supreme Court, who thought consumers would be confused if a product did not sell at the same price everywhere. “The evil results of price-cutting are far-reaching,” Brandeis warned.

For more than four decades, from 1920 into the 1960s, A&P was the largest retailer in the world. It may also have been the most controversial. With stores in 3,800 towns, supplied by its own state-of-the-art bakeries and macaroni plants, dairies and salmon canneries, it squeezed costs out of the food distribution system and consistently undercut mom-and-pop grocers. A&P put fear into the hearts of small-town merchants. The earliest radio talk show hosts built their audiences by inveighing against it. State legislatures tried to tax it out of business. When that did not stop it from cutting prices, many states limited discounting by requiring minimum mark-ups on every single item in the store.

Washington got into the act, too. The literature lionizing Franklin Roosevelt as the first pro-consumer president ignores his support for a 1936 law intended to prohibit manufacturers from granting volume discounts, as well as the fact that his Justice Department sued A&P for selling food too cheaply—and won in court. As late as the 1950s, the federal government was still trying to break A&P into pieces, claiming that it was “impervious to competition.”

Washington needn’t have bothered. Competition carried the day. More aggressive grocers pushed A&P to the sidelines, but now they, too, are being pushed aside. The supermarket, a format A&P pioneered in the 1930s, is old hat. A host of innovators, from deep discounters to organic food chains to drug stores touting packaged foods to glitzy gourmet emporia, has the food retail industry in turmoil. If you shop for groceries, this is a wonderful development. If you’re trying to sell them, life won’t get any easier.

Chain Stores in Chains

Chain stores have a lot of advantages over mom and pop. By purchasing in enormous quantities, they can obtain volume discounts from manufacturers. By signing contracts to ship thousands of containers, they pay far less for freight than a retailer that ships only a handful. By maintaining strong credit ratings, they can lease better locations, at lower rents, than smaller competitors. All of this can help the chains keep customers coming through the door.

Yet chains face some disadvantages, too. Sheer size is foremost among them. When a chain does something wrong–which is to say, something that fails to satisfy customers–the problem can be very hard to fix, because it affects hundreds or even thousands of stores and may have irritated millions of shoppers.

There have been many recent examples of this challenge. Tesco, which only a few years ago fancied itself a challenger to Walmart for global retail leadership, still can’t figure out how to respond to British shoppers’ unexpected attraction to discount grocery stores. Wet Seal, which sells clothes to teenage girls, couldn’t cope with the fact that shopping malls are out of fashion; it has filed for bankruptcy and closed 338 stores. Target Stores, which marched noisily into Canada two years ago, is abruptly leaving with the admission that it failed to please Canadian shoppers. And then there is Walmart itself, which is struggling with U.S. consumers’ newfound preference for shopping close to home rather than in gigantic outlets miles away–a change of taste that presents an obvious problem for a company that has 606 million square feet of space tied up in “supercenters” across the United States.

Last week, at the annual meeting of the Transportation Research Board, a Walmart distribution executive, Douglas Estrada, provided some interesting color about how Walmart is trying to adjust to this trend. The company is opening smaller supercenters to fit in reviving urban neighborhoods, he said, but the company’s growth in the United States is likely to involve opening traditional grocery stores, small grocery stores with limited stock, and even convenience stores with gas pumps out front. Kiosks, now being tested, may compete with e-commerce, allowing a shopper to order anything available in a nearby supercenter and have it delivered to the small neighborhood store the same day.

This sort of innovation is a nightmare for Walmart’s distribution department. Walmart has more than 170 distribution centers across the United States. They are extraordinarily efficient at what they are designed to do: take in containers by the trainload, sort the contents, and pack merchandise into the 53-foot trucks that deliver full truckloads to each supercenter three or four times a day. But they are far less efficient when it comes to loading 28-foot trucks to deliver to urban grocery stores, and even less so in loading 16-foot trucks to replenish inventory at convenience stores. Walmart is trying to cope with this challenge, Mr. Estrada said, by using its supercenters for the purpose. The small-format stores will receive deliveries from a distribution center only once or twice a week; the rest of the time, they will be resupplied by vans coming from the nearest supercenter, often with merchandise picked directly from the supercenter’s shelves.

This means, of course, that goods headed for a smaller store will be handled more than goods going to a supercenter. Can Walmart do this and still offer the low prices its customers expect? Or will the small stores come to be treated as an inferior sort of Walmart, with higher prices and less selection than the real thing? Its distribution costs may determine whether the company succeeds in loosening the chains that bind its chains.