Economic principles and today's realities
By Furniture Today Staff -- Furniture Today, January 4, 2004
I enjoyed the letter from Jim Desautels (Furniture/Today, Dec. 1, page 32) but am not sure I agree with all his points. First, I am not certain that his economic principles are supported by reality:
1. Riley's Retail Law says there is a geographic circle for the vast majority of retailers. Yet, we see our industry moving towards oligopoly; the Top 100 are gaining in market share every year.
When Nebraska Furniture Mart opens in Kansas City, is their geographic circle not substantially larger than the smaller stores already there? When Jake Jabs opened in Colorado Springs, he pulled clients from areas where they previously shopped in a more local store. Is there a geographic circle? Probably, but with the possibility of purchasing merchandise over the Internet from almost anywhere, how do you describe the limits of the circle? I purchased some synthetic wicker from Orvis in Vermont last summer and I live in Colorado! How do you define their circle?
2. His theory of "diminishing marginal utility" is easily debunked by looking at the effect of technological innovation. How many perfectly usable conventional cameras do many people have? Probably four, but they also bought a digital camera because of the functionality it offered. How many VCRs do I have? Three, but I also bought two DVD players because the local Blockbuster doesn't handle that many VCR tapes any more, Netflix is convenient, and TIVO is next.
Consumer needs are only satisfied until they are made aware of needs they didn't know they had. This is called marketing. Ten years ago, who would have thought Onstar and in-car DVDs would be available?
Why stores get bigger
3. The law of diminishing returns? More and more retailers are building bigger stores, propelling the move towards oligopoly. Why shop at four stores when you can shop at one, with a greater selection than the smaller four combined? Who wants to shop at the local 2000 Soundshop when Circuit City has everything you want and more?
Further, what does he feel is the relationship between promoting and GMROI? The factors influencing GMROI are gross margin dollars and inventory dollars, or gross margin percentage and turn rate.
Both formulas work. Promotional costs influence profit, but one can promote in the Robb Report or the local paper and enjoy a great GMROI or a lousy one, depending on the effectiveness of the promotion.
Promoting low price/low margin can be very successful with high turn rates, and may actually expand the market by making furniture more affordable for young people with little disposable income and leftover college furniture. Low prices/low margins do not have to hurt margin dollars, which is what we get to spend, and can actually expand the market for furniture.
Saturation points
4. "Every market has a saturation level for durable goods in a given time frame."
Consider the following quotes:
"I think there is a world market for maybe five computers." — Thomas Watson, chairman of IBM, 1943
"There is no reason anyone would want a computer in their home." — Ken Olson, chairman of Digital Equipment, 1977
"This 'telephone' has too many shortcomings to be seriously considered as a means of communication. The device is inherently of no value to us." — Western Union internal memo, 1876
"Who wants to hear actors talk?" — H.M. Warner, Warner Bros., 1927
5. Finally, "bigger is not always better"? Then why is this business moving towards oligopoly? Why are the companies going out of business (for the most part) small family businesses that have not been able to proactively deal with today's business realities?
The reality is, the R.C. Willeys, the Jordan's and the Nebraska Furniture Marts grow at the expense of the smaller, less-sophisticated businesses. That's why Warren Buffett buys them.
And if you want more proof, just look at what the Wanek family is accomplishing with Ashley. They are doing everything right and they are winning in every aspect of their operation.
I rest my case.
Brian D. McCarthy, president ProfitSystems
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