August 30, 2004
by Irwin Stelzer
Throughout the start-and-stop growth that has characterized the American economy in the past year, all eyes have been on the nation's consumers. Accounting for about 70% of the economy, consumers have kept the American and, indeed, the world economies from slipping into a deep recession by splurging on all manner of goods and services.
So much for the buy-side of the market. Less noticed is the revolution in the sell-side, the sector of the economy that is supplying the needs and wants of consumers.
Let's start with cars. What were once seasonal price cuts designed to clear the lots at the end of the model year have become year-round price reductions of as much as $5,000 on some vehicles. Manufacturers' efforts to end the price wars have failed: consumers merely postpone purchases for the month or two that it takes for the truce to collapse -- which it does with the regularity of the phony truces promised to the Iraqi government by Moqtada al-Sadr, the firebrand Shi'ite cleric.
The reasons are simple. The internet gives consumers access to competitive price offerings, not only from their local dealers, but from around the country. Union contracts that require manufacturers to pay workers whether they are on the production line or at home watching the Olympics make it economic to keep plants operating even if the vehicles produced fetch prices that merely allow General Motors and others to break even. And competition between domestic and foreign manufacturers keeps prices at record low levels.
The motor trade is not the only sector in which the art of retailing has changed.
We are witnessing the in-your-wallet effect of globalization, the impact of the Wal-Martisation of several key product areas, and the final joining of the Internet with traditional stores - the merger of clicks and bricks.
The effect of globalization on the supply chain is now widely understood.
Retailers shop the world for bargains in everything from trainers to T-shirts to high-end jewelry, and are forced by competition to pass the savings on to consumers. Less well understood is the effect that globalization of retailing (some services, such as hair-cutting, are unaffected and therefore increasingly pricey) has had on the related property sector.
This is why the acquisition of the Rouse Company by General Growth Properties is so significant. General Growth operates some 150 shopping centers around America -- and has the financial clout to pay $12.6 billion for Rouse, itself the owner of some of the country's landmark retailing complexes.
Faced with increased competition from discounters, General Growth and other mall owners aim to resist what has come to be called the "de-malling of America" by offering large retailers an optimal mix of multi-store locations, and by turning their malls into the shoppers' equivalent of destination resorts -- food stalls, entertainment for the kids, and lounging areas for grown-ups and teen "mall rats."
In America, a mall in the Washington D.C. area allows pensioners to use it as a place for jogging -- well, walking -- in pre-opening hours. Just such a mix of amenities has enabled Bluewater, in Kent, to attract more than 27 million customers a year and obtain store rents of more than £400 a square foot.
The driving force behind the General Growth-Rouse deal, the largest property transaction ever attempted in America, is the fact that the retailer looking for one or two locations is no longer typical. Instead, retailers eager to exploit their brands and maximize returns from national fashion advertising, will open perhaps 50 stores simultaneously. General Growth will now be able to offer space in almost every significant market in the United States, from Boston to Las Vegas and Los Angeles -- an advantage that it has decided makes it worth the risk of the higher leverage resulting from the Rouse purchase.
Then there is the Wal-Mart phenomenon. Analysts like to point out that the discounter accounts for 8% of all non-car retail sales in America. That seriously understates the effect that Wal-Mart has on the market sectors it chooses to enter.
Consider toys, jewelry and food. Wal-Mart only recently started to sell toys, and its huge discounts have proved so attractive that Toys R Us is considering abandoning a market it once dominated. This was described to the press by retail consultant Burt Flickinger III as "the ultimate corporate capitulation."
In the jewelry business, Wal-Mart's decision to sell diamond rings and other such items is forcing high-toned Tiffany to resort to a "something besides diamonds" strategy to maintain its growth.
And Wal-Mart is also a leading player in food retailing. Food sales now account for more than 25% of the chain's almost $300 billion in sales, up from 14% in 1997.
To consumers' cheers, many supermarkets have had to reduce costs and prices to remain competitive. A&P, for example, has set up Food Basics, a chain of 25 stores that carry half the usual 35,000 items, charge for bags if customers don't bring their own, and have prices in line with those charged by Wal-Mart.
Then there is the final consummation of the at-times stormy courtship of clicks (the Internet) and bricks (traditional retail stores). Fashionistas with strong arms picked up this month's blockbuster, 832-page, Fall Fashion Spectacular issue of Vogue. Interested in an item from the Ralph Lauren collection, or a great-looking sable coat by Carolina Herrera? Just go to the Vogue website, click on the relevant page number, and it will be on its way to you -- the ultimate in satisfaction for the impulse buyer.
The one common characteristic of all of these revolutions is obvious: the consumer wins.
More choice, better prices, easier access to products and services. That's one of the reasons that the American consumer continues to find spending such a delightful pastime.
This article appeared in the August 29, 2004 Sunday Times (London).
Irwin Stelzer is a Senior Fellow and Director of Economic Policy Studies for the Hudson Institute. He is also the U.S. economist and political columnist for The Sunday Times (London) and The Courier Mail (Australia), a columnist for The New York Post, and an honorary fellow of the Centre for Socio-Legal Studies for Wolfson College at Oxford University. He is the founder and former president of National Economic Research Associates and a consultant to several U.S. and United Kingdom industries on a variety of commercial and policy issues. He has a doctorate in economics from Cornell University and has taught at institutions such as Cornell, the University of Connecticut, New York University, and Nuffield College, Oxford.
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