Saturday, February 16, 2008

I suppose much of this new comfort level with economic realities comes from the removal of uncertainty. It's no longer of matter of trying to guess when (or if) there is going to be a drop off, but more a matter of managing it.

The stress of trying to not cut off growth too soon, or taking the risk of growing too much or too fast. I figured if I reached a level of sales 20% higher before cutting off growth, then I'd have that much more of a cushion. But if I guessed wrong by too much, I would be extended out too far. It was a close call.

All I knew was that there was a housing bubble. Followed by a commercial bubble. That's all I knew. So I guessed there would be slowdown through late 2006 (when I started blogging) and on through the spring, and then -- I guessed -- the psychology would change to the negative sometime around late 2007 or early 2008.

I was six months too optimistic.

I didn't see the credit crisis coming. I didn't know what the mechanism for the housing pop would be. Frankly, it could've been any number of things, and the credit crisis would have been the result, so I don't suppose it matters. A bubble is a bubble. They are bound to burst.

I probably pushed the store six months too long, but as I said, I can't really regret adding games and new books and all the other new product. Gambit Games, Anime Mt. and American Sports all went out of business last year: how could I not try to take advantage of that? And at the same time, my own observations of what I hope is the real world has been validated. When I first started talking about the housing bubble to customers 4 years ago, everyone looked at me as if I was crazy.

Frankly, people still haven't figured out that the commercial bubble is worse for Bend, and so much more dangerous. (See below....) That uncertainty is still out there, but the die is cast, and I'm making changes, so it's just a matter of degree.

The following is today's SLATE article on the retail bubble:

moneybox: Commentary about business and finance.
America Has Too Many Stores

Should anything be done about it?
By Daniel Gross
Posted Saturday, Feb. 16, 2008, at 7:12 AM ET
A shopping mallA shopping mall in Illinois

The carnage in retail hasn't been this bad since an anarchist bombed Chicago's Haymarket Square in 1886. In January, Liz Claiborne said it would shutter 54 Sigrid Olsen stores by mid-2008. Ann Taylor announced that 117 of its 921 stores would be closed over the next three years, and Talbots axed the Talbots Mens and Talbots Kids concepts and 22 Talbots stores. (Those muffled screams you hear are Connecticut preppies trying to suppress their rage.) Even Starbucks has scaled back its yearslong saturation-bombing campaign.

Blame that exhausted marathon run­ner, the American consumer. Fueled by cheap credit instead of PowerGel, she looked great at mile 16, but bonked at mile 23 and is now crawling to the finish line. Retail sales fell in December, putting the cap on a miserable Christmas season. Last week, the government reported that retail sales rose 3.9 percent between January 2007 and January 2008. But account for in­flation and sales of gasoline, and retail sales fell in real terms in the past year. Clearly, demand is down.

And supply is up. This decade's build­ing frenzy produced a bumper crop of new retail space—from McStrip malls built near new McMansions to hip new bou­tiques in the ground floors of hip new Mi­ami condo buildings. But the occupants for new retail space haven't ma­terialized. In the fourth quarter of 2007, the national retail-vacancy rate rose for the 11th straight quarter to 7.5 percent, the highest level since 1996, according to research firm Reis Inc. With new projects coming online—34 million square feet of retail space will be completed in 2008—the rate is expected to climb further to 8 percent. In the parlance of the trade, many chains are simply over-stored.

Developers opening new malls this year clearly timed the economic cycle poorly. And the cultural cycle isn't helping matters any. The extreme consumption of this current gilded age has inspired a backlash. In December, hedge-fund bil­lionaire Ray Dalio ran full-page advertise­ments in newspapers urging Americans to eschew Christmas gifts and instead make donations to charity. Maybe he's just run out of things to buy. Or maybe he's surfing the zeitgeist. "There's a glut of stores," says Judith Levine, author of Not Buying It: My Year Without Shopping. "Our physical, intellectual and emotional and psychological space is filled up with consumption." Levine laments the wholesale transformation of open spaces into enclosed retail environments (like, say, Barnes & Noble superstores, where you can buy Not Buying It). And the in­cessant bombardment of advertising may be inspiring a backlash that pushes people to consume less. The anti-con­sumer freegan movement—urbanites who try to get by through recycling, scrounging, and foraging—are taking it to the extreme. These modern Henry David Thoreaus have opted out of the whole rot­ten capitalist system. Working 60 hours per week and chasing job promotion "for the sake of buying the latest crap off the Sharper Image store shelf is no way to live," says Adam Weissman, spokesman for (Hey, dude, one might say the same about diving into Dumpsters in search of day-old bread and discarded futons.)

The cultural anti-retail moment will likely pass. Thoreau lasted only 26 months in his cabin by Walden Pond. The eleva­tion of frugality into a virtue seems likely to last about as long as modern recessions do—about eight months. Still, retailers should be worrying about a real long-term threat: the Internet. The 1990s-vintage boast that e-tailers would destroy brick-and-mortar retailers all but disappeared after the NASDAQ went bust in 2001. But e-com­merce has quietly been growing at a rate far higher than that of the overall econo­my. For the last four years, online retail sales have grown at an annual rate of more than 20 percent. In 2007, such sales, ex­cluding travel, rose 21 percent to $175 bil­lion, accounting for 7 percent of total retail sales. "Online retail is growing a heck of a lot faster than the rest of the pie," says Sucharita Mulpuru, an analyst at Forrester Research. Last year, online sales accounted for 45 percent of computer hardware, soft­ware, and peripheral sales; 19 percent of toys and videogames; and 19 percent of baby products. In the coming years, retailers, who are integrating online sales into their business models, simply won't need the same amount of acreage. The upshot: Demand for retail space is likely to grow at a pace far slower than that of the overall economy.

For 2008, Reis projects there will be 159 million square feet vacant—that's 5.5 square miles, or roughly six times the size of Monaco. But landlords shouldn't lose faith just yet. While vacancy rates are high in some depressed markets—15 percent in Syracuse, N.Y.—there's no imminent danger of America's malls turning into ghost towns. The minute the credit crunch breaks, consumers will surely hit the malls with a vengeance. Americans have always excelled at adaptive reuse. Judith Levine suggests that superannuated Sears and Kmarts could be turned into municipal swimming pools or community buildings. Some empty strip malls could be repurposed into warehouses for online retailers. I'll bet a few rogue freegans are already planning to monetize all the junk their colleagues collect by opening secondhand stores.


Bewert said...

Re: Last year, online sales accounted for 45 percent of computer hardware, soft­ware, and peripheral sales; 19 percent of toys and videogames; and 19 percent of baby products.

Dunc, all you have to do to extend your reach and capture this is post your inventory online. They will come to you.

On the comment about empty malls, the guy is an idiot. I've seen plenty of empty malls in my time.

Bewert said...

Dunc, you are the epitome of the "long tail". You've got a lot of cool shit that isn't available very many places, in abundance.

People google for that cool stuff. And some or many will gladly buy at full retail. It's scarce.

Just think of those band members all coming in last summer. Expand that thought from walking down the street to google. Hmmm...

Duncan McGeary said...

I find myself looking at options that I've always had on the back burner.

I had the "Anime Club" from COCC come in, looking for a deal. I offered him 10% dvd's with a card, which a year ago I probably wouldn't.

I've started thinking of having a buyer's club, like Barnes and Nobles, 20.00 to join, and then 10% off manga and anime.

I just haven't had to do these things over the last few years. Plenty to do within the store....