(Written in 2016) You don’t have to be a genius to spot the latest, economic trend that is shifting the American economy. Retail is making a generational shift that is unprecedented. Salaries will go up as big businesses abandon the “big box” model. Retail businesses are going to become “localized” and labor costs will have to rise in order to compete with other companies for skilled workers. The very best workers will be setting up their own businesses and shopping at larger stores for employees, not product. The balance sheet without the CEO suite can be realigned easily by most District level employees with 10 years of experience. Along with this transition will be the collapse of the large cap executive suite corporate bonus structure. It very well may be that our largest corporations may not only be too large to manage effectively, but will soon have to downsize by large amounts so they can be managed for profit and ethical incentives. As they downsize market share will be released for competitors or new businesses.
Most wholesalers would be happy to service a new small or mid sized location and although they might not give the same volume discount, there will still be margin money on the table. The current trend is a race to the bottom on price and if a local business has the right price mix, overhead expense and employee cost they will be able to make money- even against Amazon. Why- they will offer speed, service easy return and local finance re circulation. The price can usually be matched and add on sales will complete the total ticket. What is missing is the cost of a national home office and the executive suite. Retail isn’t that hard and supply chain and seasonality are not the hardest concepts to master especially if you are a student of razor management at the big box stores.
Obviously, if you need an excellent employee for your new mid margin business you just go to your local big box retailer and pick the supervisor who has been there five years, and is in their twenties or early thirties. This individual had been background checked, drug tested, trained in customer service and is in all likelihood underpaid. A signing bonus and a reasonable raise gets them on board faster than one might imagine. In all honesty the real life changing money begins at the store manager level and poor succession planning and career stagnation make poaching employees a competitive sport. Two visits about a month apart will help target the best employees. The condition of the employees in the parking lot and the age of their vehicles, during shift change will help you highlight people suitable for an offer.
There will be an enormous amount of wealth generated as this failing empire segment disintegrates and their energy and resources are redistributed around America. Many malls are already having occupancy issues. Who really needs a company who pays local employees as little as possible while transferring profits and executive salaries to locations thousands of miles away or perhaps overseas? Might be time for the clever business owner to revisit Prigogone’s theory of dissipitive structures. Many people are now pooling resources to outsource the foreign manufacture of goods and sometimes services from foreign vendors and seeing their local businesses start to thrive. They are already turning a profit because their overhead is lower.
Macy’s recently announced the closing of over 100 stores. Kmart has announced store closings in excess of 15%. This is going to be replicated by dozen’s of other mall anchor store companies as they try to consolidate revenues and margin into amalgams of their former footprints trying to preserve the the executive bonus structure of their general offices. Their party is over, they are polishing the brass of an unsinkable cruise flagship as it goes down by the bow. Politically, shoppers have started avoiding the stigma of supporting retailers that pay low wages, have no serious retirement effort and export profits to distant areas. Stockholders can see that executives are getting paid huge amounts and the dividend is either at risk or dropping. The game is afoot. It is possible to maintain high profit margin at the expense of surrendering gross revenue flow and market share. That declining market share is the target of the investor. America is the land of opportunity and self motivated opportunity.
Over the past decade millennials have learned that if there is going to be any place for them in the future economy they will have to make it themselves. Baby boomers robbed of a secure retirement in 2008 learned after they were forced out of the workplace, during the Great recession, that if they ever worked again it would be for less than half of what they were previously paid. The current workforce knows all too well that their children will not be going to college, and they will be working well into their seventies. Everyone knows banks only loan money to people who don’t need to borrow it and they have learned nothing from the mistakes made 10 years ago. Wells Fargo is a dynamic example of margin, incentive and ethics. Many of the same executives are running the same banks that crashed the economy. This is not news and currently the economy is flat and traveling sideways or trending down. What will be news is the changes that are about to happen “overnight”. No one in their fifties likes to hear that now, since they have lost their employment, they will never work again. The recovering economy does not include their employment aspirations- but it does require their knowledge, capital and ability to re energize their risk profile. Millennials are natural partners of boomers in this solution and such an alliance will emerge just because of the margin value of the bond. i.e. technology/experience
Shopping patterns have shifted dramatically. Margin leader’s sales have slowed for most retailers as new shopping sources are picking off customers locally. They have lower costs and basically anyone can do the elementary math and provide better service. Amazon is eating everyone’s lunch and retail revenues and gross margins show the shift. Thousands of big box stores will be closing and many thousands of people will be taking what they know locally and starting businesses that keep the money local. Shareholders and boards of directors won’t accept dividend losses and gigantic CEO salaries. The math no longer will work. Malls with empty stores are going to aggressively pursue solutions as will the city planners of towns where they are located.
A great many millennials and baby boomers are pairing up to capture the opportunities that are being exposed as the big boxes collapse. They are getting their financing from on line startups in the new financial industry. Big banks won’t even give them the most basic of loans because they have forgotten that taking risk is what makes America great. They will start to shrink too. Why? Their customers are forming and starting businesses all over America where people want to shop- where people work because they are treated fairly and have a financial future that works. The profits will be deposited into banks where loans were looked upon favorably. The big banks are in the process not of expanding with customer loans, but with techniques that secure the bonus structure. This will be fatal over time.
For example let’s look at the music industry. Even as you read this musicians are changing the model in their industries. They are selling their music directly to their fans and in some cases being financially supported by their loyal followers who do so only because they want to be art patrons. This whole blog post can be condensed into one sentence. People want to get value for what they pay for and they want to feel good about supporting the people they patronize. CEO’s by definition are excluded, across the board.
For people who follow the stock market there are going to be many opportunities that will suddenly present themselves. New companies in old locations will rise from the ashes of the multi billion dollar retailers and they will be nimble, educated and adept at fiscal change. Local shoppers- newly emerging home buyers- downsizing boomers and others will shift from old brand loyalty to a new kind of loyalty that is locally and ethically based. The fundamentals of price, service and quality, blended with earning a sustainable ethical living will make the difference. The people who succeed will do so- because their future depends upon it- not the wealth of a distant CEO or the dividends of some hedge fund no one has ever heard of. Livelihood and execution will become a tangible direct result of effort and not a leveraged, extracted byproduct of exploited local workers and destructive products extorted from third world, oppressed societies.
The engine of the internet and the sophistication of the generation that has been raised digitally will move rapidly into the gap left by big box retailers who don’t understand the gap that has just emerged between them, and the cash flow that drives the executive suite. Macy’s is just the first to make the move adjusting the size of their store fleet. The problem they have adjusted to is that America is- “overstored” . We have more retail square footage than any other country in the world and Amazon has just increased their expansion into the pantry of million of American homes!
The engine of growth will be local businesses who can respond to customer demands for service, pleasant experiences, friendly genuine employees and a financially secure model that will stabilize their communities. This is already happening in Detroit, in New York and in many outlying suburbs. What is driving the retail shrink is the need for balance sheets that can justify the gigantic bonus structure currently in place. They will abandon markets that cannot produce stores with yearly growth. They are expecting sales to adjust to their business model rather than the other way around. They have become too big to adapt to local needs. Their sales growth and margin expansion are overlayed against exactly the same business model as other giant retailers. The issue is execution and customer affinity in a climate that leaves nothing on the table locally. It doesn’t take a genius to understand that big box oversaturation of the same retail market is just like overfishing. Soon even the best boat with the wisest captain cannot afford the fuel to leave the dock- let alone pay the crew and the owners. They continued to fish and as the resources became depleted the crews they counted on defected with their knowledge to the new model.
So how can you benefit? First of all lighten up on any equity holding that relies on retail sales. If you are smart that includes the mall centric anchor stores, financial institutions, and restaurants. Measure the slowdown locally and look for a large national company to begin to close down locations. Landlords will get nervous as the rental signs fade in the bright sun. Work up a balance sheets and know how the rent works toward your success. Network with friends who might have capital, credit or equity that can become liquid. Identify a market share that becomes fluid and move in on that opportunity.
If you coalesce your human, financial and management resources you may soon be the part owner of a new business. That business may have the identical product and services previously provided by the national tenant, minus the higher cost. In short order you or your partners may be able to sell the business as the economy steadily improves. You aren’t launching rockets, you are just trying to earn a living by filling a need. What is holding you back is your willingness to shift your risk profile in a way that allows you to face the change that everyone is facing. Most small businesses are bought by people who are recently unemployed and are sold for 1 to 3 times annual free cash flow profit. Starting a small business can produce money, selling a small business can also produce money. Every successful new business model created before 2020 will be replicated within 6 months by astute new business originators. Big box stores are going into this knife fight empty handed. Amazon is selling tickets to oblivion, at a discount.
Bonus thought- the next wave of growth will probably be leveraged small business loan packages. These will be financial instruments that are traunched, seeded, diced and sliced to spread the risk and credit ratings throughout the package offering. It will be lauded as the new financing model that will create jobs and streamline the economy. It will actually be a way for REITS and financial institutions to keep their rent checks flowing on their investment malls. The central target right now for financial predators is the 401K balance of a worker in their late fifties who has recently been forced out of the workplace and does not have enough money to retire yet. A juicy financing worm, well hooked will land those fish easily. In small business the first round of financing is always easy- the second round takes equity and cash flow off the table and occurs between 18-24 months after launch. Try to buy in on the second round! Once the first trend becomes close to self actualizing the second trend will reach self awareness in the blink of an eye. This time it will be different! 😉