Wednesday, October 8, 2014

Customized Service at Commoditized Prices

“All of us as consumers have gotten spoiled... We expect customized goods and services at commodity prices.  -Robert Rubin

This sums up modern retail quite well. We want things now, we want them exceptional, and we want them cheap. For the most part, you can have that. It comes in two flavors. The first flavor is mega corporation, because the only way to get this result is economies of scale, cutting out fat, as Robert Rubin goes on to say.

This is your Wal Mart, Target and Amazon. We expect these companies to be cheap, and they are. They can do this by squeezing their suppliers, paying their staff less, buying in bulk at reduced prices, using technology to increase efficiency, or in the case of Amazon, not making any money at all, much to the chagrin of their shareholders.

The second way retail addresses this is specialty retail. That's me! Specialty retail is about taking a small niche and hand serving a tiny customer base with customized goods and services. Customized goods and services means you can come to me needing a board game for an eight year old boy who likes trains and I can hand pick you a suitable game at a satisfactory price point in no time. Eight people can come to a miniatures event and pay $5 for store credit and we'll call that a win because of a complex ancillary micro sales model.

That's a niche I can fill that the mega corporation won't touch because of its fiddly complex nature and impossible to scale efficiencies. I do it by being small and nimble and having no fat whatsoever. We also have some big box characteristics, and despite the low tech nature of what we sell, we're extremely dependent on technology and sophisticated inventory processes.

There are reasons for more for less, but it would be wrong to claim it's all tech or pressuring suppliers. The way we've all been able to get customized goods and services and commoditized prices is almost entirely worker productivity. Our employees are pretty amazing, expected to master five times the tasks of a McDonald's employee for not a lot more money. That's been the trend over the years, expecting massive productivity increases, bit by bit, often a fraction of a percent in a quarter, but over many years.

The demand for more, better, right now at a low price has resulted in staggeringly high employee productivity. With unemployment falling, there's a concern in some quarters about increased inflation. However, the concern comes from an outdated concept that doesn't take into account the levels we've squeezed out productivity from today's workers. When employees are 50% more productive than they were just a short while ago, you can pay them more without feeling the pinch to the bottom line, which means inflation shouldn't rise. So we demand more with less, while we complain about income inequality, the shrinking middle class, and stagnant wages.

I am no exception here. One thing I tell my managers is if they can get through school, with the experience they're getting working for us, they'll be golden. Why? Because they work really damn hard, smart, and fast. Anyone who can master that in my employ is destined for success with a degree in hand.


  1. The wage problem will only ever get fixed when the business community as a whole gets off the "pay as little as possible to my workers" schtick. It used to be that part of the point of running a business was to make sure your employees were well taken care of - and every time the business community has embraced this mentality, the country has prospered greatly.

    And then people like Milton Friedman come along and whisper lies into the ear of the consultant community and those lies begin to infect the business community like a disease.

    Here's hoping 2008 was enough of a fever to teach people to fight the disease.

  2. Reminds me of the triangle my dad used to have on the wall of his print shop: "Fast, Good, Cheap: pick two"

    The only thing I dispute in your post is that you can somehow get past this by going with a mega-corporation.

    What the mega-corporations are good at is either hiding the fact that they are missing one of the three points of the triangle, or convincing you that you don't really need it, or a combination of the two.

    With Wal-Mart you are usually sacrificing "good" to get "fast" and "cheap." Companies often produce new lines of product that are made with cheaper components specifically to meet Wal-Mart's low cost demands. The result is predictable: you get what you pay for.

    Amazon gives up the "fast" point of the triangle, but is very good at convincing people that it's "fast enough."

    The fact that sometimes it is actually "good enough" or "fast enough" doesn't mean that you aren't giving something up.

  3. Even in the Wal Mart case, there are cheap, nearly loss leading products that distract you from the everyday normal priced items.

  4. There are a couple reasons I would raise wages:

    1. I can't hire or retain good employees at the rate I'm paying. This is where lower unemployment rates drive higher wages.

    2. I want to retain higher skilled employees and embed them in my organization. This is an example of employee insurance. For example, I want to transition some part time employees to full time, which is more expensive, but results in more committed employees.

    Margins in retail, and that's what we're talking about, are razor thin. We're taking 1% at the lowest, gas station level of retail, to 9% at the jewelry stores. The game trade is about half way between the two extremes. Labor is about a third of the costs in such an operation (after factoring out inventory). Paying based on altruism isn't a likely outcome when many owners are barely getting by.

  5. I would like to point out that the current issue of inequality in san francisco likely did not stem from "paying employees as little as possible." The wage problem is caused by productivity gains and automation. Low and medium skilled workers are needed less and less these days. But we need high skilled individuals even more because they can be so productive. Everyone is paid according to business' need for their labor, so you end up with random workers being paid very little and engineers, programmers, etc. being paid huge wages. It's definitely not as simple as "greedy corporations" or any such nonsense....and the financial crisis of 2008 had nothing to do with any of this, don't conflate issues.

  6. That's all well and good, but if your business can't exist while paying the lower skilled labor enough to prosper, then the greater question of whether your business is making acceptable use of our laborers becomes a problem.

    I understand that retailers have a hard time paying workers more. However, that will eventually mean that retailers don't have workers, not that workers shouldn't be paid more.

    And the financial crisis of 2008 had plenty to do with this - Employee wages stagnating for 20 years is what made the housing bubble inevitable. People couldn't afford basic living needs, and went into debt to obtain them.

  7. It's all interconnected. It's why I don't oppose a higher minimum wage. A higher minimum wage increases my costs, but it also increases the wages of my customer pool.

    When retailers don't have workers, they'll pay more to attract workers. But they won't do it before they have to.

  8. What I'm worried about is that the system doesn't really care if owners are barely getting by.

    The economic system cares that workers make enough to pay other people to solve their problems. If the working class can't do so, the entire economy collapses, as the vast majority of actors in the economy simply drop out of the economy altogether.

    And I have made it clear that BDG is not a retailer I perceive as a problem - BDG appears to be one of the few that actually tries to pay its employees the best it can.

    It's not altruism. It's survival. Basically, the minimum wage floor needs to increase, because if businesses won't do it all together, the brave few who stick their neck out will get hurt drastically more.

  9. I agree. It's not like I think BDG can solve this problem on their own. Only a company the size of Wal-mart deciding to pay its workers a higher minimum wage would shift the game enough to matter. BDG already does a lot better job treating its employees fairly - it's a huge reason why the community goes out of its way to support BDG. You're a useful and productive part of the local economy.

  10. Also, the mentality of paying employees as little as possible is why the minimum wage was unchained from inflation - which is actually the reason all of these problems exist. It's not a single owner's fault, but rather a collective shift in our society which turned workers from a protected group into a group under siege by the truly wealthy.

  11. Yep, and there's no "nearly" about it. They regularly use loss leaders, or at least they have in the past, but it's only a handful of items in each department.

  12. I want to play out this scenario. The minimum wage goes up, so your costs go up. The wages of your customers have (theoretically) gone up as well, at least for all the ones that were making minimum wage. Since you were operating on pretty slim margins before, do you respond by:
    1. Raising prices to keep margins where they are,
    2. accepting lower margins and hoping to get by on higher volume of business
    3. Lower costs by cutting employee hours slightly, or working more hours yourself.

  13. There is no price elasticity, so there's no easy to raise prices.

    The response will depend on the amount of the wage hike. If it's a modest hike, it would be absorbed with hopes customer wages rise all boats. If the response was large, it could be more disruptive, which could mean fewer employee hours and more owner hours or less coverage. We're already very lean, leaner than we should be, so that would harder for us.

    If you raise the minimum from $9 to say $12, that's a 33% rate hike, but since wages are only a third of my expenses, it only raises my costs by 11%. If you raise it to something nuts like $15/hour, that's a 67% wage hike, which would require some structural changes for us.

    This assumes it happens instantaneously. If it's like the frog in a pot of slowly heating water, it might be something we quietly absorb.

  14. So you could survive a minimum wage hike to $12, likely because a larger than average number of your customers make between $9 and $11/hour.

    If you think that $15 is crazy, you should listen to Elizabeth Warren. According to her, the minimum wage would be $22 if it had kept up with worker productivity. I imagine unemployment would also be around 22% were that the case.

  15. If you did it over time AND the rising tides argument holds, it's possibly to go higher. I just don't know. I just know I could absorb $12 with no rising ride and couldn't absorb $15.

  16. Bills are real. People pay as little as possible not because of some ideology, but because there's a lot of competing priorities and usually very finite funds and thin margins.

    Yeah, sure, pay more for quality when you can, but out of control costs can and will eat a business alive.

  17. There's a subtle but important difference between paying your employees based on what you can afford to pay them, and paying them as little as possible. In the former case a prospering company has prospering workers. In the latter case the worker does not see any benefit from hard work, only from complaining. Which makes for whiny employees and poor workers.

  18. It's interesting at the theory level, but harder to implement at the practical level. Expenses are enemies that need pounding. Stepping back and seeing compensation as a nebulous good is kinda tough. So most just pay what they have to to get the quality of employee necessary. It's why a CEO salary is millions of dollars and a greeter is making minimum wage.