Friday, August 31, 2012

Hours Down, Work Up: What's With Canadian Retail, Doc?

So. Like a lot of my friends, I work in retail. And Canadian retail is a pretty scary place right now. From company to company and sector to sector, you may or may not be hearing about how competition, "the economy," cross-border shopping, or bad management is hurting sales and forcing labour cuts.

So there you are, looking at the endless lineups at your cash register, and the heaps of work to be done in the backroom, and you're wondering what's going on.

First, the problem isn't just where you work. It's everywhere. Sales were down 0.4% in June, or 1% in B.C. By the way, June is which is the latest date we have, because apparently StatsCan is a month behind the rest of the world. Don't worry, Statistics Canada. Canadian business wouldn't use the numbers anyway!

Second, don't put much faith in the explanations people keep giving you. The gigantic (2150 stores) American chain, Supervalu (not to be confused with the Canadian Supervalu chain) is a good example of a grocery chain that's in real trouble.

Here's a quote from that link, which is to an article by  David Welch, Leslie Patton and Cristina Alesci. “The No. 1 problem is, everything in Supervalu costs too much” and is more expensive than Kroger and the discounters, said David Dietze, president and chief investment strategist at Summit, New Jersey-based Point View Wealth Management."

Where have I heard that one before? Well, stop for a moment. Grocery stores are in the business of selling staples. If you can get your milk at one grocery store for less than at another, you don't buy more milk. You spend less money on groceries. So grocery stores try not to compete on staples like milk, bread, or mayonnaise. What they try to do is sell you "impulse buys." If you walk into a grocery store intending to spend $25, and you spend $30, whether it's because you buy a more expensive brand of ketchup or add a bag of chips to your basket, you just turned from an average shopper to a super shopper. If everyone who walked into an urban supermarket spent $30, the industry would be rolling in money. Conversely, if you walk in intending to spend $25 and walk out with $20 in groceries, you are a retail sales disaster. If every customer did that, the grocery store you're shopping at would have to close. 

So while you might be able to shop economically at a store that has lots of expensive stuff in it, just by buying the inexpensive staples that you really need, we're betting that you won't, and the margin is incredibly thin. We're not trying to rip off poor people. We're trying to sell you a bag of chips. You would have to be a pretty price conscious shopper to care about this. 

Of course, some people are extremely price-sensitive shoppers for various reasons, but mainly because they just don't have much money. For various reasons, it is cheaper to run a store that just stocks the staples, but the business model isn't about just selling the staples. How do you make money off of people like that? In the tricky range between a staple and a luxury. Take ketchup. Is it a staple or a luxury? The answer is that it is somewhere in between. So, at an upscale grocery store like Supervalu, you have a big bottle of generic ketchup at one price, and a small bottle of brand-name organic ketchup at another, much higher price. Or you can run a store that just stocks the big bottle of generic ketchup (along with milk, bread, eggs and such.)  A store like that will sell everything cheaper, probably even including the ketchup, and still make money.

Good news for Supervalu. It has exactly that kind of store in its inventory: the Save-a-Lot chain. Bad news for Supevalu: it's hurting, too.  And not just a little bit: same sale stores are down 3.4%! Ouch. So what's going on there? Mike Hughlett reports for the Minnesota Star-Tribune. "Jimmie Gipson, head of the largest Save-A-Lot licensee, agreed on the pricing issue. Supervalu, as wholesaler to Save-A-Lot stores, "had kept its costs pretty much in line for several years, but I think they've lost a little of that focus."

Price comparison. It's hard. Save-a-Lot management has forgotten how to do it, and its core clientele of extremely poor people have noticed and are driving down to Wal-Mart instead. Fortunately, Save-a-Lot has a brilliant strategy. It's going to drive the milk and the egg deliveries right out onto the sales floor and let people help themselves, instead of stocking them.

Yeah, I don't think so. Even Walmart has problems keeping its prices down, and milk and eggs are already very time-efficient to work. I wouldn't be surprised if it took longer to drive a skid of milk into a walk-in display on the sales floor than it does to work liquid milk to the shelf from a back-loading cooler.

Excuses. That's what we're seeing here. What is going on? Well, my argument hinges on the idea that it doesn't take much time to work the liquid milk, so this plan won't save very much. That doesn't have to be how you manage the place, though. You could decree that it takes 2 hours, and chop that much time off the store labour budget. Chances are that won't lead to the store exploding and burning to the ground. Instead, it will lead to lineups and out-of-stocks at dinner time, and neither of those things leaves, like, a big greasy mark on the floor or anything. They happen, they end, and the next day, everything is back to normal except for the sales report, which shows that customers spent an average of $20 at the store last night.

Okay, I don't have to lecture you on why this is bad. It's not like the idea that you can underinvest in a business is news. I think that might be what's going on at Save-a-Lot. I don't think  that it is what is going on in Canada. It's just an example.

So what is happening? Well, it's not the economy. Canadians made more money in June, even as retail sales went down. It's not discretionary spending. While stores were struggling, the Vancouver Fireworks, Calgary Stampede, Winnipeg Folk Festival, and Toronto Fan Expo all reported record crowds. Is it cross-border shopping, with the new, increased duty-free allowance?

Probably: to a point, but only to a point. Canada's total trade deficit with the US only went up 1.4% in June, and the trend well predates the change in the rules.

I'm just going to throw it right out there. Consumers' behaviour is changing. Why shouldn't it change? Our clientele looks different every year, because the composition of the population changes every year. In 1990, at the peak of the echo boom, 405,000 Canadians were born. Compare that with the least populous year ever (before --well, let's not get ahead of ourselves), 1973, when only 344,000 Canadians were born. Do you remember what retail was like in 1989, or 2006? I don't remember 1989. I was out of the job market, hiding in graduate school. Two years later, Douglas Coupland explained why in his Generation X, a book that explained that there were hardly any jobs, and they all sucked.

 I do remember 2006.  It was crazy. We were actually facing a labour shortage in downtown Vancouver.

So why did I pick 1989 and 2006? Because those came 16 years after. Sixteen isn't when you go to the grocery store by yourself for the first time, but it is when you get your first job. It's when you party all night and work all day on a buzz of Red Bull, keeping yourself fueled with Slim Jims and Tahiti Treat drunk through a Twizzler. (True story.)

Oh, oh, Doc, you ask. How many people were born in 1996? Good question, which I answered a few weeks ago, here: 365,000, and the birthrate just kept on going lower. Only 327,000 people were born in Canada in 2001. Cumulatively, in the ten years 1993--2003, 3.138 million Canadians were born. These are today's 9-19 year-olds. They're not the peak impulse-buying demographic, but they are an important one. In the 1987--97 period, it was 3.84 million.

The good news, such as it is, is that the birth rate has recovered quite a bit in the last few years. There are 3.6 million kids in the 0--10 bracket right now. This is the glimmer of hope I see on the horizon. The attendance numbers I just quoted might mean that the kids have all been away on summer vacation. The dip in the June retail sales might even be the first blip in that. (We'll see if the July-August numbers hold).

If so, then we should see a rebound in retail sales come September. Well, we expect that in the grocery business anyway, but perhaps it'll be healthier than we expect. I hope it will be.

As a final point, may I end this by politely requesting that the government maybe do something about this? Best estimates are that last year saw 376,000 births, or 10.28 births per thousand women. I'm not labouring under the delusion that women just want to be baby-making machines, but there's no way that that number isn't depressed by longstanding economic disincentives to baby having in Canada, and it's not just retail sale jobs that hang on turning that trend around.

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