Retail, Technology, Consolidation, and Unintended Consequences

This morning, the Seattle Times featured this article telling us that REI wage hikes for store employee announced last summer will be costing the company $24 to $25 million.  The company’s net income for its last complete year was $38.3 million.

Meanwhile, my oldest son sent me this article from Investor’s Business Daily, telling us that fast food purveyor Wendy’s will have self-service ordering kiosks in 6,000 restaurants in the second half of this year due to rising minimum wages and tight labor conditions.

I’ve been writing about the potential impact of 3D printing and other kinds of manufacturing technology for a while.  Here’s my article on the apparel manufacturing system Intel plans to introduce.

Other companies in our space have specifically talked about the impact of higher wages on their bottom lines and how they operate.

To be clear, this is not an article about the minimum wage and whether increases in it are “good” or “bad.” But I’m hoping you understand the only way to increase the economic well-being of this country (or any country) overall is to grow per capita Gross Domestic Product.  Increasing the minimum wage does not do that.  Like so many social/political decisions in this country that are cloaked in economic justification, what it does is reallocate a certain amount of income from one group to another.  That this reallocation is what happens should be non-controversial, if inconvenient to some.

Whenever you mess with a complex system, there are unintended consequences.  Our economy qualifies as complex.  So, to continue with the current example, when you increase the minimum wage, the people who get the raise are better off.  And for sure they need it.  However, among the unintended consequences may be that some people don’t get hired.  Others may lose their jobs.  Companies, like Wendy’s, may be more likely to use technology to cut labor costs.  REI will have less to invest in growing its business.  People who buy the company’s product may not have as much to spend on other things as (if) Wendy’s prices go up.  Assuming they still choose to shop there. Etcetera.

When costs and business conditions change, it ripples through the economy in ways we may never be aware of.  As individuals, as well as companies, we change our behaviors in response.

Historically, jobs lost in one sector have been replaced by jobs in another sector.  Typically, where the new jobs came from has been a surprise to everybody, but they have shown up over time.

People knowledgeable about labor markets are concerned that this time will be different.  They seem to think that the loss of jobs from automation is going to happen faster than the appearance of new jobs, with potentially difficult economic and social consequences.

When somebody talks about economic and political change and tells me, “This time is different!” I am always skeptical.  Over longer time periods, it has not been different.  “History does not repeat itself, but it does rhyme,” Mark Twain is supposed to have said.

Turns out there’s no proof he said that.  But he did say, “History never repeats itself, but the kaleidoscopic combinations of the pictured present often seem to be constructed out of the broken fragments of antique legends.”  That sounds way better.

Sorry about the digression.

Anyway, this time I’m worried it might be different.  So let’s talk about why and what that looks like.

But first, since this article seems fated to wander all over the place anyway, you might want to read “When Robots Take All of Our Jobs, Remember the Luddites” in Smithsonian Magazine.  Gives you some perspective on what we might expect and how little human behavior has changed.

If you saw this post of mine, you know that people are projecting a load of retail closings this year- more than 8,000 stores.  In the opinion of some, this may be the year Sears/Kmart goes out.  Amazing how easy it has become to say that, and it means a lot of job losses.

Why’s this happening?  Let me remind you or a few things you should already know.

We had way too many stores because of the debt and demographic fueled growth we enjoyed in the decades up to the beginning of the Great Recession in 2008.  Way, way too many.

Online has taken a chunk of retail sales.

The consumer has more knowledge, choice and power.

Debt and demographics are now a drag on the economy.  One and a half to two percent GDP growth will be a good result for the foreseeable future.  If you look back, you’ll find that the three plus percent growth we got used to is a historical aberration.

In our industry, products are not very differentiable.

Our target customers are being particularly impacted by a slower growth economy and job automation.

The cost of living (housing, medical care, education especially) has gone up way more than is reported.  That is my opinion but I’m not alone in believing it.  If you want to see something interesting, go search and see what current inflation would be if they hadn’t changed the way it’s calculated in 1980.

To summarize, I guess I can say we don’t need all these stores and people can’t afford to buy all the stuff they used to be able to afford.

But wait!  There’s more!

No matter what the Federal Reserve says, the business cycle has not been repealed and there will be a recession.  I don’t know when and I don’t know how bad.  I will project that it’s going to be our current president’s problem.  It won’t be his fault, but he’ll get blamed.

Since I know it’s going to happen I wish we’d get on with it.  The longer it’s delayed the worse it will probably be.  And a good old fashioned recession might finally get us through the store closing cycle.

The culling of stores and brands a recession entails might have other benefits.  The generation and proliferation of brands in an often futile attempt to create differentiation where there really isn’t any could slow.  Retailers might find themselves with some products and brands with staying power that allow them to profit from longer term trends from fewer brands and their products.

Current economic conditions favor the large players.  That doesn’t mean it’s easy or cheap for them to compete (it isn’t), but meeting the consumers’ requirements in this customer centric market is hard and expensive.  The data, inventory management, and supply/logistics skills you need just to compete are simply beyond the capabilities of most new brands and small retailers.

Which brings us, somehow, amazingly, back to technology.  There’s a lot going on (serious understatement).  Take a look at “Create your own clothing using digital knitting machine Kniterate.”

Thanks to my friend who sent me that link.  He also told me about a machine into which you can put a blank sneaker and it will come out with a color/print/design on it.  Then there’s the Intel system, and 3D printing, etc.

Yes, yes, I know.  It’s too expensive, it doesn’t work right, it’s too slow, it’s too complicated, my customers won’t care, if I use it I’m out of business (Or, maybe, if you DON’T use it you’re out of business), nobody else is doing this (Yet?), it’s just a pain in the ass and I want to avoid dealing with it as long as I can.

Listen up all you potential Luddites.  All your objections may currently be valid, but they won’t stay that way.    How long before there’s a room in the mall where these machines print the product people ordered online?  And what if that room is a store not connected to any brand that will print for a customer an exact duplicate of a brand’s product but without the logo after the customer sends a picture of the brand’s product from its web site to the printer?  And why does that room have to be in the mall at all?

Size?  No problem.  There will be an app on your phone that will use your camera to take a picture of you and it will figure out your measurements.  Want to submit your own design?  No problem.

Does this all exist yet?  Nope.  Well, not as far as I know.  Okay, not extensively.  But five years ago did you think you’d be looking at a Kickstarter campaign for a home knitting machine?

This is all horribly inconvenient, isn’t it?  Build your balance sheet and, as a brand, manage your distribution carefully.  As a retailer, don’t buy from anybody who isn’t doing both of those.  As either a brand or a retailer, take lots of small chances.  Don’t bet the farm (most of the time) but things are changing so fast and in ways we can’t see clearly that you just need to be trying stuff.  Small failures glean knowledge, and maybe are good marketing.

Look closely at your products.  Differentiate between those that can be “printed” and those that can’t.  I doubt, for example, that there will ever be a machine that make a parka; too complex.  Not right away anyway.

Instead of seeing this as a threat, consider the savings you’ll have if you can do some of your own “just in time” manufacturing.  How can you do colabs with each individual customer?  Maybe their friends would like to buy something that has their name and your brand on it.  Maybe your customers can be your design department.

If all this happens, what does it mean to be a brand?  Damned if I know.

Looks, we’re in the middle of a rough patch, and some of the conditions that make it rough aren’t going away any time soon.  But can’t you be just a little excited about the possibilities all this change represents?   Those of you who are will do just fine.  And I can’t wait to see where the new jobs come from.