Category Archives: Commercial activity

On the pursuit of efficiency in different types of retailing

Many forms of retailing have experienced transformations aimed at increaising efficiency, especially increasing the size of stores and reducing customer service. As I thought about this, I realized that these changes happened at very different times for differnet types of retailing. I decided it would be interesting to look at the differences in timing.

For general merchandise, the department store came as the very early innovation in the mid–19th century, with large stores offering very broad ranges of goods. But it took a century before the self-service discount department store emerged with very limited assistance within the store and customers paying up front. I looked up some dates and found an amazing coincidence: Walmart, Kmart, and Target were all founded in 1962.

For groceries, the order of innovation was reversed. Piggly Wiggly was established as the first self-service grocery in 1916. But like other grocers at the time, it did not carry items such as meat and produce. The first “true” supermarket, King Kullen, did not arrive until 1930. (This was established by research conducted by the Food Marketing Institute and the Smithsonian!)

Looking at more specialized forms of retailing, Toys “R” Us was early, having been founded in 1957. Home Depot opened its first two home improvement superstores in 1979. Lowes, their largest competitor, was founded decades earlier but did not adopt the big-box format until forced to by the competition from Home Deport.

The coincidences of several large-format retailers being founded at about the same time was not limited to discount department stores. Office Depot and Staples were both established in 1984, with Office Max coming only two years later. Best Buy was originally formed as a specialty audio retailer. It changed to its current name, expanded into other types of consumer electronics, and opened its first superstore in 1983. Circuit City followed a similar evolution, changing its name and expanding to become a general consumer electronics retailer a year later. PetSmart was founded in 1985. Petco started much earlier as a mail-order business. I could not find when they first opened physical stores.

I find it fascinating that the big box stores in so many categories started around the same time in the 1980s. Why then? The efficiency of large self-service stores had been established far earlier with supermarkets and discount department stores. Toys “R” us started as a specialized “category killer” retailer over two decades earlier, and the example of Home Depot had been around for a number of years. And suddenly retailers in very different categories moved in that direction at about the same time.

Advertisements

Economies of scale in retailing

In the previous post, I discussed how economies of scale, enabled by improvements to transportation, led to the development of segregated land uses in the 19th century. Now I’d like to focus on the various economies of scale in retailing and their implications.

The obvious benefits of larger stores and the ability to take advantage of economies of scale accrue to the retailer, of course. The larger store will likely require fewer employees per volume of goods sold. There may also be other efficiency benefits relating to things like inventory. A wider range of goods can be stocked, making the store more appealing to customers.

Economies of scale can also benefit the customers. Wider selection is in most instances a plus. I don’t know how my daughter could have constructed her science fair project, a closed-circuit wind tunnel, without Lowes and Menards. And to the extent larger stores and the attendant economies of scale reduce costs and result in lower prices, customers benefit.

Larger stores selling more goods require a larger market and as a result they will be more widely spaced. It might have been possible to have neighborhood hardware stores, but there cannot be a comparable neighborhood Home Depot.

Beyond these internal economies of scale, external economies of scale or agglomeration economies are also very important for retail land use patterns. Some types of retailers choose to cluster with other similar outlets because customers are attracted by the opportunity to comparison shop. Other businesses locate near larger retailers to take advantage of the customer traffic they generate. This can be within a development, whether it is a large shopping center anchored by department stores or a smaller neighborhood center anchored by a supermarket. Or it can take place simply by locating in the vicinity of the larger, traffic generating businesses, whether in central business districts or outlying retail areas. In either case, the product is larger areas of segregated land uses.

Segregation of land uses is not new

A great deal of (negative) attention has been devoted to the segregation of land uses in newly developed suburban areas in recent decades. The critique is that the development of exclusively residential neighborhoods and the segregation of commercial activities reduces opportunities for walking, requiring increased automobile use. This is sometimes portrayed as a recent phenomenon, bought on by the widespread use of the automobile.

Some perspective is in order, however. Land use segregation is hardly a product of the latter part of the 20th century. The original cause was not the use of the automobile (though transportation was critical). Rather, the initial separation of land uses in American cities dates to the 19th century.

The pre-industrial walking city at the start of the 19th century had very limited separation of different land uses. Given that interaction was limited by reasonable walking distance, different activities just could not be located that far apart.

As the industrial city emerged in the 19th centure, this changed as enterprises sought to capture the advantages of economies of scale and was made possible by improvements in transportation within the city. First the omnibus, then the horsecar, and then electric streetcars and mass transit increased the distances people could travel to work and shop. Factories increased in size and formed increasingly large industrial areas. Larger enterprises required management by concentrations of office workers. The department store emerged to provide a previously unseen variety of goods to shoppers from throughout the urban area. The offices, department stores, and related retail formed the new central business districts, another area of largely segregated land uses.

Of course not all types of establishments saw these increases in scale in the 19th century. For grocery stores, the changes came later. But this was the start of increasing sizes of enterprises, made possible by improvements in transportation, forming areas of segregated land use.

Transportation and “catalog” retailing

The last post discussed the role of urban transportation improvements leading to the development of the department store in the late nineteenth century. And of course the role of the automobile in shaping retail developments in the twentieth century is obvious. This got me thinking about the role of transportation (and communication) improvements in the evolution of retailing where the customer orders goods from a remote vendor and those goods are delivered to the customer.

We tend to think of modern developments such as e-commerce as novel developments. However, I’m going to start again in the late nineteenth century. But first, a brief excursion into the pros and cons of this type of purchase from the standpoint of the consumer. The major advantage is the selection of goods available, the ability to purchase things that are not available in local retail establishments, along with the convenience of being able to purchase the merchandise without having to travel to a store. The major cons are the inability to physically view the items to be purchased and the delay associated with the need for delivery, the lack of the instant gratification associated with physical purchase. Both introduce some uncertainties into the transaction. I am not mentioning price. The vendor saves money by not having brick-and-mortar stores, but this will be offset at least to some extent by the costs of shipping. This could go either way.

The mail-order catalog business emerged in the late nineteenth century with the major vendors being Sears, Roebuck and Montgomery Ward. The retailers made available a variety of merchandise to residents of rural areas that they otherwise would have been unable to acquire. The development of the railroads along with express freight services and parcel post to deliver the merchandise was undoubtedly a prerequisite. On the communications side, regular reliable mail service had been available for some time. But this mail-order business also required the development of printing technology that enabled production of the catalogs at a reasonable cost. (I don’t know just when this threshold may have been crossed, but I seriously doubt that Ben Franklin could have printed large numbers of Sears catalogs economically.) Just as transportation improvements enabled the rise of the general mail-order catalog, widespread use of the automobile made physical stores accessible to rural residents and led to its decline.

Another wave of remote shopping expanded in the second half of the twentieth century with the growth of specialized catalog shopping with telphone ordering, ranging from clothing (Lands End, L.L. Bean, etc.) to gourmet foods (Dean & Deluca). The attraction to the consumer was access to a wider selection and to specialized goods they could not purchase locally. Some improvements to delivery services helped. UPS did far better than the very long delivery times the post office provided, especially in the past. The role of improvements in communication should not be discounted. Toll-free 800 numbers made the calls free. I imagine customers would not have relished the idea of paying the expensive long-distance charges of the past to make purchases. Again, I don’t know at what point the costs of high-quality color printing for catalogs became reasonable, especially since they send out huge numbers. But it does seem that I saw a lot less color printing in the mid-twentieth century. These catalog retailers also innovated to minimize the risks associated with remote purchasing, offering no-questions-asked returns if something didn’t fit or even if you just didn’t like it.

We finally get to today’s e-commerce. It is noteworthy that Amazon started with books, which have two features favoring this model. First, for any given author and title, all books are the same. There is not the guessing that would be involved in choosing among several green sweaters. And second, with books, the breadth of selection is everything. No brick-and-mortar bookstore can possibly approach the inventory of an online retailer. Amazon and the other online retailers also adopted the policies of the catalog retailers (now, of course, also online) with easy returns and high levels of customer service. Zappos has no problem with your ordering multiple pairs of shoes in order to pick the one pair you want and send the others back.

Obviously the World Wide Web was the innovation on the communications side, making both obtaining informtion on available items and ordering quick and easy. And on the transportation side, the expansion of e-commerce is driving improvements in delivery services, with 2-day and even 1-day delivery becoming commonplace without excessive charges. This, of course, reduces the penalty of having to wait for delivery. Indeed, considering the likelihood of a lag between wanting to purchase an item and having the time to go out to a store, online ordering may be quicker.

Given the rapid developments in e-commerce and speedy delivery, we may be seeing only the first stages in the effects on physical retailers and therefore our urban areas.

Transportation and economies of scale in retailing

The automobile may be blamed for the evolution of big-box retailers, but the effect of improvements to intraurban transportation on retailing began much earlier. This can be seen clearly with the development of the department store in the latter part of the nineteenth century.

In the walking city of the early nineteenth century, most urban residents could only move around on foot. This necessarily limited the distances they could travel and the amounts of goods they could carry. Stores tended to be small and rather limited.

Transportation improvements–horsecars, cable cars, electric streetcars, and more–dramatically increased mobility in urban areas. Cities greatly expanded as residents took advantage of the greater ease of travel. Going to the developing central business districts several miles away became feasible.

A larger number of potential customers could travel to a store located in the downtown area, creating a greater market. This allowed the emergence of the modern department store carrying a far larger range of goods with greater selections. More volume provided greater economies of scale to the store in the sale of its merchandise. But these were also economies of scale from the perspective of their customers, who benefited from the convenience, wider selection, and lower prices.

Coming to shop at the department stores via public transportation did have one limitation, however. Customers purchasing large numbers of items or very large items could find it difficult or impossible to carry their purchases back home with them. The stores recognized this problem and offered delivery of merchandise purchased in the various departments of the store.

This evolution depended solely on the transportation improvements made in the late nineteenth century. It had nothing to do with the automobile. Indeed, at least some department stores continued to assume that significant numbers of their customers would come to their downtown stores using public transportation at least into the 1950s. When growing up and shopping at the large downtown department stores in Milwaukee during that decade, the stores were continuing to offer their delivery services. Of course now, the assumption more often is that customers will be arriving by automobile and can take all but the largest items home themselves.

One (or maybe one and one-half) cheers for Walmart

I don’t particularly like Walmart. I find their stores crowded and unpleasant and I don’t shop there. They do not treat their employees well, a true failing given that a successful competitor, Costco, is able to do much better.

Urbanists have criticized Walmart for their negative effects on downtown areas in small and medium-sized cities. A Walmart opens, drawing customers away from the established shops. The result can be a shuttered main street.

Walmart attracts those customers, of course, with its low prices, significantly less than those that were being charged by the downtown merchants. It is able to do this because of its tremendous purchasing power, economies of scale, and highly efficient inventory and distribution systems.

Opponents have tried, sometimes successfully, to block the development of new Walmarts. They obviously believe that the preservation of the current merchants and the downtown is worth continuing to pay the higher prices that those merchants charge. That is, if those opponents would ever choose to shop at Walmart in any event.

The opponents may argue that Walmart’s prices are not that much lower than their competitors in any area, which may now be true. On the other hand, the price differences may have been greater when compared to those merchants who failed because of the competition from Walmart.

But whatever the magnitude of the price difference, being able to purchase the goods you buy at lower prices effectively raises your real income. And the effect will be greater for those with lower incomes, who spend a higher proportion of their income on goods sold at places like Walmart. (That is why a general sales tax is regressive.)

For a family with a very modest income, saving even a few percent on the things they buy might make it possible for the family to go out every few months to a movie or for a dinner at Olive Garden or wherever. It could make the difference between having a number of special gifts for each child at Christmas as opposed to providing one “real” gift and wrapping up packages of socks or underwear to have more presents under the tree.

For a very poor family, the savings could make it possible to buy a pair of new shoes for each child at the start of the school year. Or it might even mean having enough food for the last few days of the month.

I am not sure that keeping out Walmart and paying higher prices to maintain existing merchants in the downtown will look like such a good tradeoff to these families.

Changes in grocery retailing

The previous post on walking to the grocery store got me started thinking about grocery retailing and the changes that might affect urban areas and how we can get to the store.

First, the standard supermarket has been getting ever-larger. According to the Food Marketing Institute, the median store size has increased from 35,000 square feet in 1994 to 46,000 square feet in 2014. The types of offerings have expanded, including things ranging from flowers to pharmacies to prepared foods, and the variety of items in departments has expanded, with produce being a notable example. This offers more options and convenience for the consumer, but with the downside that the larger stores are less convenient when you want to run in to quickly purchase a few items. The larger size and inventory probably mean that these supermarkets require at least a somewhat larger market area, resulting in their being at least a bit more widely spaced.

The next big change has been the rise of Walmart to become by far the largest grocery retailer in the U.S. Most of those sales come from their Supercenters combining groceries with the discount stores selling everything else. These are of course huge stores, with large market areas and are necessarily widely spaced. The wholesale membership stores such as Costco are somewhat similar.

The large size of traditional supermarkets and the even larger size of the Walmart Supercenters have led some to see an opening for somewhat smaller markets that are more convient for picking up a few items. Such markets might require smaller market areas and could be located closer to consumers. Walmart developed their Neighborhood Markets but has had to close a significant number. British supermarket giant Tesco started a chain called Fresh and Easy and opened smaller stores across Southern California. The venture was not a success, and they were forced to completely pull out of the market. So I think the general viability of these smaller stores is still an open question.

Recent decades have seen the growth of grocery stores serving narrower, more specialized markets. Whole Foods caters to those interested in organic foods (and who are quite affluent, given their prices). The stores are large, though they are now opening versions that are somewhat smaller and supposedly will have more reasonable prices. Trader Joe’s is another example of a specialized grocery retailer. Their stores are smaller and carry a limited selection, emphasizing organic foods (though not to the same extent as Whole Foods), house brands, and unusual, sometimes even quirky products. But despite the difference in store size, both chains are serving smaller segments of the market and must draw customers from much larger catchment areas. For example, Whole Foods has only 31 stores (if I counted correctly) in the entire Los Angeles metropolitan area to serve a population of around 13 million people.

So numbers of significant trends in grocery retailing suggest that more stores have been requiring larger market areas and will necessarily be more widely spaced. It is certainly possible that someone can develop the formula to make the smaller neighborhood market concept work. Other changes ranging from new forms of urban development to changing lifestyle preferences can affect the demand side.

But perhaps the biggest wildcard in this, as I mentioned at the end of the last blog post, is the possible growth of online ordering and grocery delivery. If this takes off, it will necessarily reduce the size of the market for the brick-and-mortar grocery stores of all kinds. This will increase the market areas required for those stores, resulting in fewer stores of all types that will then be more widely spaced. Think bookstores.