Monday, November 18, 2013

The American Model of "Growth": Overbuilding and Poaching

Why has this doomed model of overbuilding and poaching sales become so dominant? Look no farther than the cheap-money policies of the Federal Reserve.

The rising Gross Domestic Product (GDP) and other simulacra of "growth" are masking the real model of growth in America: overbuilding and poaching, as in poaching customers and sales from competitors.

No matter how many outlets a company has, there's always room for a few hundred more somewhere. Now that there's a Starbucks on every corner, you might think the opportunities for expansion are limited. No way--now there are Starbucks in bookstores, Safeway supermarkets, subway stations (BART), etc.

Not only is there a coffee outlet of some sort everywhere you look (hey, how about a Starbucks in every Home Depot?), Starbucks is getting into everybody else's business as well--even occasionally hawking music CDs, for example, at least until CD sales plummeted to the point it wasn't worth poaching the declining sales.

Dollar stores are proliferating at a phenomenal rate, as are drug stores in various sizes and iterations--all aimed at poaching customers from WalMart and Target. There is a certain irony in this, as WalMart and Target expanded rapidly by poaching customers from the entire spectrum of retail competitors--supermarkets, department stores, drug stores, sporting goods, and so on.

Everybody's getting into everybody else's business. If there is a profit to be made, suddenly every gas station mini-mart is stocking the line of goods, as are dollar stores and drug stores coast-to-coast.

In the department store/luxury outlet space, the scrimmage for the top 10% and "aspirational" consumers is fierce. Macys, Nordstrom, et al. successfully poached the upper-middle class and "aspirational" consumers with credit (if they could buy luxury brands with discretionary cash, they wouldn't be aspiring to look wealthy, they would bewealthy) from mid-range retailers such as Sears and J.C. Penny.

Countless catalog retailers have opened discount outlets while still poaching customers from other bricks-and-mortar retailers with blizzards of catalogs pitching "crazy low prices" to the marginalized middle class who cannot afford luxury outlets but seek brands above the WalMart level.

Look no further than the enormous success of surf-watersports brands as evidence that an "active youth" brand can sell millions of units to paunchy shark-bait couch potatoes, effectively poaching customers from other sectors on the middle-class retail spectrum.

Specialty retailers are busy poaching customers from competitors, and if that fails then they merge. Witness the absurdly overcapacity office supply space. The fleeting success of BBQ World quickly spawns BBQ Galaxy and BBQ Universe, a manic cycle of overbuilding/poaching that ends in ruination of all three retailers, which then merge and close hundreds of (mostly empty) stores.

That is the operative model of "growth" in America: rapid expansion/overbuilding in pursuit of poaching customers from existing competitors, a strategy that leads to massive overcapacity/redundancy and declining profits that then leads to mergers and shuttering hundreds of redundant outlets.

This overbuilding is especially nonsensical given that the "Brown Truck Store" delivers virtually anything you want to your doorstep: The Inevitable Decline of Retail(September 19, 2012).

Why has this doomed model of overbuilding and poaching become so dominant?Look no farther than the cheap-money policies of the Federal Reserve: Take It To The Bank (The Burning Platform):

This is another classic case of mal-investment spurred by the Federal Reserve easy money policies, zero interest rates, and QEternity. Cheap money leads to bad investments. I’m all for competition between drug store chains and banks. I have my pick of multiple stores close to my house. There are clearly too many stores competing for a dwindling number of customers, with a dwindling supply of disposable income.
If this is the engine of "growth" in America, a period of degrowth will be needed to clear the system of unprofitable deadwood and Fed-incentivized malinvestment. 

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