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Guest Post: The American Model Of "Growth": Overbuilding And Poaching
Submitted by Charles Hugh-Smith of OfTwoMinds blog,
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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this fascination with meretricious trinkets is truly an American phenomena.
I felt this was apropos:
http://www.youtube.com/watch?v=1dVnm4o-8z4
Every gas station should have SBUX and every SBUX should have a small pharmacy selling antidepressants and pot ... and bitcoin ATM
You're saying that I should be able to get some overpriced coffee at SBUX while I fill my 6000 SUX with gas?
Why not? I'm pretty sure it would be more fun watching all those commercials on the pump while I'm filling up my lcar if I had a coffee and maybe even a dunking donut!
WHERE'S THE FREAKING SERVICE AROUND HERE GODDAMNED!!!! WHERE'S MY LATTE FRAPO MOCHACHINO BITCHEZ!!!
I ORDERED IT LIKE 20 SECONDS AGO!!!! I'M NOT MADE OUT OF TIME YOU KNOW!! FFfuuuuuUUUccccKKKK!!!!
We have legislated our selves into a house of cards, people are constructing new building when there are plenty of empty built ones right close down the street. More evidence of the insanity of todays laws.
But I really like there being a liquor store along side the gun shop in the general store I also get the best beef jerky in the world from!
I kid you not.
Finally a post on the Waste Based Economy.
Turning the worlds resources into a massive waste stream is the best we can come up with?
We are only marginally better than the monkeys at the zoo who defecate in their hand and fling it about.
AGREED. Free bitcoins: http://freebitco.in/?r=25727
please, not SBUX....
Lewis Black always makes me :-)!!!! But what is the big deal with 2 Starbucks. That's amateur hour. On Lincoln Rd in Miami Beach, I think that there are 8 +/- on the same 6 block linear stretch. Then again, Miami Beach truly has a lot more dementia than Houston, I am sure! ;-)
In the late 90's as the digital boom was heating up, there was a lot of discussion as to which would become dominant, the pipe or content. in retail anything, with overproduction of everything now possible, the pipe has won by a mile. manufacturers now pay for shelf space in stores, when it used to be stores competing to get the best stuff in their stores. monopoly is the only business model that counts nowadays. under clinton, it was decided that monopoly wasn't bad as long as prices declined. we are past that point. we will never have a robust economy or a good employment situation until this changes. america and walmart (as currently run) cannot both thrive at the same time.
So competition is bad?
Dude, i love House of Crud. There is one between the two Starbucks on Main St. Yes, you know...right between the Starbucks one street south of Main and the Starbucks one street north of Main...
You mean there WAS a House of Crud.
The lease at that particular location was taken over to make way for a new Starbucks last week. The good news is that Starbucks is now diversifying by selling Crud...
Is that the one down the street from Office Depot and across from the Home Depot and next to Lowes?
You got it - just down from the Office Max and kitty-corner to the two Hallmark stores.
Blobbing up after gluttonizing The Big ZIRP Candy Mountain is not competition.
No, malinvestment is bad, just like buying overpriced stocks. When it fails it offers short term gains for those BTFD, but in the long run, most are losers.
You got that right Oldwood, you too CHS.
PEAK WASTED SUNK "CAPITAL" EVERYWHERE.
SUNK as ILLIQUID WTSHTF.
Gonna be a bitch as our gen says.
When your competitor has access to almost free money, yes it is.
If interest rates were +5% above price inflation, this nonsense could not go on.
I hate to break it to you, but competition isn't always a good thing and it is best described by the economic yardstick of Utility.
Interestingly, we use utility companies every day without a second thought as to why they have no competition. It is because competition does not lead to product differentiation in these industries. Therefore, competition is not very useful.
Utilities are a special case in that the government knows it is best to let a corporation run them to maximize efficiency, yet it has to be heavily regulated or the consumer would be screwed. Example: OH GUESS WHAT, water is $120/100 gallons this month, please call our 1800 number if you need to change your service. There is now a $600 disconnect fee. Etc...
I agree that utilities must be regulated to prevent the pricing inefficiencies of a monopoly, but I think the article very much is about the concept of Utility and the associated diminishing value of additional investment.
I live in Texas and it has been a long time since there have been any job "poaching" articles on ZH. Diminishing returns with increasing expenses never ends well in any type of marketplace, whether companies, states or countries.
Excellent analysis!
The telecom revolution showed how introducing competition to a monopoly industry can lead to product differentiation. In Texas, retail competition has created innovation in the power market to the extent that ERCOT permits it. The only thing that constrains cable companies is satellite TV. Competition is plenty useful.
Malinvestment is bad.
To put it another way, would Megaretailer A and Megaretailer B build competiting, gigantic stores next door to each other that over-serve the market by 80%... with their own money? No, they wouldn't. But they're getting nearly free money from the Fed, so they can afford to do it.
The interest rate environment is triggering all sorts of strange behavior. There are Fortune 500 companies that opened lines of credit a couple years ago just to lock in 2% interest rates and then used them to park the money as cash on their balance sheet. It's the sane thing to do because they're investing the borrowed money in stawks just like everyone else and getting > 2% returns and/or if the interest rate environment ever goes up (ha) they've got cash at below-market rates locked in. And if they go under? Someone else's problem, likely a TBTF that will get bailed out (again) by the Fed.
Artificially low interest rates = artificially low risk = really bad investment decisions.
My neighborhood is jammed with houses For Sale and some For Rent, yet THEY are building ovwer 8,000 houses just north of here.....that does NOT include dozens of Mega Apartment Complexes in the area.
Malinvestment, take your profits now and then passing any losses onto the other guy. It's the new Business Model.
Are you in China?
No, China stack their empty houses neatly into empty cities. The US tends to spread their empty houses all over the place.
CheapBastard: Whatever you do, don't let the fuckers rip them houses down again. I know TPTB are hoping that the empty houses will "naturally disintegrate" (hello you "grafitti artists" and "copper miners"), but what kind of world is it where we can afford to build stuff but no-one can afford to buy it? The houses are there. They are built. FFS, at least give them to some homeless people or Walmart employees. Oh, the new house is better than yours? You move into the new house and give yours to the homeless. Whatever.
I once had a top-of-the-range set of spotlights sitting in my cupboard for 17 years. 17 bloody years! Those spotties did no-one any good. They just sat their in the cupboard, getting old. Then I finally realised that I wasn't going to use them in a hurry and gave them to a friend that had an old car. Now at last, someone is getting enjoyment from them. And that is just a set of spotties. We're looking at houses. An absolutely huge investment of time and material. And yet they are allowed to deteriorate while others go homeless. Fuck free markets. Fuck rule of law. The houses are there. Let someone use them.
Sorry, I started dreaming again.
no, competition is great. but it's not really competition when you can borrow unlimited money for virtually nothing, not pay labor, not pay taxes, and have your lobbyists lay down a gauntlet of spike strips in front of my tires. think of it like football. we're going to play some ball. but i get NFL pro bowlers and you get 8 year olds. we can have a game, but is it really competition?
What competition? This is a MNC monopoly we are forced to live in.
It would be a clearing effect and good but those fucking reits never drop the rent...so fuck em and the banks that float them
For some reason, I'm in the mood for a poached egg.
I'm going after the kings deer with a long bow.
I love the smell of poached trout in the morning.
It smells like victory!
Just hunt the right "king" - and you shall earn a lifetime pass.
A Blessing if you will.
http://www.johnpratt.com/items/docs/lds/meridian/2003/throne.html#2
http://www.ensignmessage.com/archives/liaphail.html
Barf.
Everything is a fucking bubble. Everyone seeking to sell someone something has to hope the buyers are all fools willing to buy shit they don't need and ultimately can't afford. How the hell are empty stores and countless bankruptcy filing good for any society? Cheap credit drives foolish choices like every other action that lacks accountability.
Annnnnd it's all the FEDs fault. Again.
So who knows the difference between a entrepreneur and a opportunist? And why this is important?
Tax deductions for builders and failed small businesses.
Banks hiding bad loans off balance sheet while getting money from the FED.
It's a pyramid scheme, a Ponzi scheme, on a nationwide scale with generational consequences.
Jeeze that almost seems personal....
Now riddle me this, say the Fed is abolished, we all take our medicine, and make it put to the other side. Do you really believe any of us will be better off at that point? That some how we are all going to end up on a level playing field, bankers, über wealthy, and the rest of us alike?
When the highest value of any individual is to profit, no matter the cicumstance, it can only serve to remove value from the surrounding infrastructure. This has been a problem long before the fed rolled into town.
Man, I used to rail against posts like yours, but I dunno anymore.
Yeah, we as a culture got conned, but really, any good con relies on the basic greed of the mark to work.
If there's going to be a revolution, it needs to be a revolution that begins within each individual.
I don't want to get religious, God knows I've done bad shit, and I'm kind of an asshole, but blaming the guys that conned us is getting tiresome and fruitless.
I like your honesty.
There are people who curse the darkness and there are people who light a candle.
I'm in the first variety. I will continue to curse the bloody darkness for it is an essential gift to society.
You are welcome!
ZP-Thank you, I appreciate the honest response. I also happen to agree that the only time meaningful change transpires in any group of people is when it occurs in the hearts and minds of each individual.
That being said, which is the more fruitless endeavour? To sit back at point fingers at an entities such as the fed or political system? Or to identify the real nature of the issue?
In my opinion the only way forward from this monetary oppression is though education. People need to understand that money is, at this very moment, held to a higher value then individuals, cities, and even countries. The idea that weath should be held hostage as some form of measure of an individual is not only unhealthy, but is very destructive in the long term dynamics of any society.
It's not about a revolution. It's about a solution, and it is impossible to create a solution if you do not understand the problem to begin with.
Unfortunately your resignation will be readily accepted by the con-men themselves
I have no problem with any of this. If retailers want to over-build, be my guest. If the HUNDREDS OF SQUARE MILES of unfilled retail floor space finds a home, so be it. If they want to tear it down and build something else, so be it. If they want to put up a new strip mall in the middle of nowhere, so be it. As a believer in the market system (what's left of it, anway), none of this causes me the slightest distress, nor is it any of my business.
Just don't come looking to me for a hand-out when it goes all pear-shaped on you. It's YOUR choice and YOUR business plan. Not mine.
While I agree with the overwll idea, I frown on the tremendous waste of resources this sort of misallocation produces, both human resources and natural resources. We're reaching a point where physical resouces are not infinite any longer, and the sort of unbrilded stupidity you propose runs afoul of prudent resource managment.
So, who wreaks more havoc on the economy???
Free marketers?
or...statists?
Which one has huge armies to destroy lots of shit? Which one is the 800 pound gorilla in any room?
I know which of the two I'd take my chances on, but you should make your own decision. Some of us believe in that kind of silliness. You know, it's a free market of ideas and stuff...
Then let the market price those resources and let the chips fall where they may. I fear only government intervention designed to artificially distort the pricing and therefore distort resource allocation.
The market will use up those cheap resrouces as long as they are available, the price of them will spike and that will be the end of it.
That's a pretty old school idea, but compared to the fucked up way we're doing it now with one government program existing only to try to correct the distortions of an earlier government program, I'll take it. And best of all, the market works almost free of charge and without any effort on the part of it's participants or it's beneficiaries.
So you are saying that even if their bad business model costs you more money, (because their bad models have cost everyone else more money and I don't see where you shold be excluded here) you have no prob. You must also be easily trusted?
The only answer IS personal responsibility. Responsibility for ourselves as well as demanding others take responsibility for themselves.
"As a believer in the market system (what's left of it, anway)"
You believe in the market system? Perhaps you will be happier posting in a religious forum.
It's impossible to help free market blievers understand the relationship between the invisible hand and the hand of god offered up by religions...
these empty retail outlets will make excellent FEMA camps when the time comes......
Excuse me, i ordered my economy poached, not scrambled. Can you please take it back?
I'm going to open my own House of Crud franchise. I am trying to interest Starbucks in setting up a counter inside.
My new retail brand is HUS.
House Of Useless Shit.
We'll serve Nigerian Grown coffee and cigars rolled on the thighs of 12 year old Dominican grrls....
Just the tip...
Mattress Firm is a good example of over expansion and shit management.
Stupid fuckers got caught selling used mattresses as new!
Several Times!
http://www.youtube.com/watch?v=1vfs7T1aRvw
JUST BUY LOCAL!!
Tempurpedic is the best....and then there is the rest....
;)
My dad had a doctor's appointment a week or two ago, and at the end, the doc asked him if there was anything that he needed. He said "money." So, the doc, having a sense of humor, took out his prescription pad and wrote my dad a prescription, which my dad took home and hung up on his fridge. It says:
"Withdraw $1,000 monthly from the FED."
As far as I can recall, both Bernanke and Greenspan have stated that much of the economic challenges in the last one or two decades [but, especially since early 2007, in this author's opinion] have been due to "fiscal policies" -- or, "fiscal in nature", or things like that.
These are just fancy academic ways of saying, "the politicians have screwed this one up, not the Fed".
But, will any of them ever admit that if the "fiscal policies" are bad enough, no amount of "monetary policy" changes [printing more or less money] can possibly fix things [assuming printing even moar doesn't make things even worse, again]?
What good is a low-interest loan, if you can't figure out a decent business model to justify borrowing the money for the business expansion?
What good is a criminal and civil law system that offers decent protection from being damaged by others, but only if the "others" are NOT TBTF NOR a substantial contribution-bundler for the party in power; while simultaneously allowing anyone to be sued for just about anything [apparently even NOT making enough BAD loans in BAD neighborhoods], all in the name of eliminating discrimination? (And, how could the Fed possibly address any of that?)
What good is a rocketing stock market, if no fundamentally-sound businesses can be identified to invest in?
What good is done by putting more money in the primary dealers' excess reserve accounts, at the Fed, if loan-making goes down every month except for the government-sponsored student loan and car loan sectors [pre-default]?
The Fed is just pushing on a string! ['When, the politicians need to be pulling on their end, instead of getting in the way, by constantly creating new constraints on how business in the US -- and probably elsewhere in the world (if not everywhere else) -- can be conducted (in order to more-completely, fundamentally transform the US, into a place where only highly-connected politically-complicit crony elites are allowed to compete [if anyone else can even navigate the regulatory complexity], and the Fed covers it all up by "papering" over the damages)! Oh wait, I forgot, that is the whole purpose of what the politicians are doing, in order to more thoroughly empower themselves, so I guess that's going to be an uphill battle, isn't it.]
Isn't all this over-expansion and poaching just due to exactly what this article suggests? 'Somewhat -- if not totally -- vain attempts of large quantities of "capital" [enabled by easy money] to seek out the last few remaining viable investment opportunities, from a sea of less-attractive options, made less-attractive by the "fiscal issues".
15 - 18 years ago (mid 90's) I considered residential real estate a viable long term retirement asset. I've been waiting since 2004 for another opportunity to invest for the longterm in real estate. Now, I would not touch it, don't recommend it and look forward to getting rid of it.
Fuck you Greenspan, Bernanke, Yellin
Interesting coincidence; but, I think about 15 to 18 years ago, I read a fascinating book about real estate finance and investment [which I wish I could find or remember the name of] which put forth, I think, the following notion: real estate which does not actively generate income will generally maintain its value, but not appreciate substantially [excluding inflationary effects] (after taxes, upgrades, and other maintenance).
It also said the one exception was if the specific area of real estate, in question, was in a boom economy for some locally-related reason which mandated additional investments in the local area -- such as during an expansion of growth within a certain area.
The first case is an example of an 'alligator' - no income but you have taxes and other risks/opportunity costs that eat you up.
The second case - the boom, is more predictable, and the good opportunities don't have to be driven by declining interest rates. Changing patterns of development, transportation, factories and jobs - even increasing fuel costs driving a return to the urban center from the sub-sub-urban hinterlands, create increased value for well chosen properties. But, government regulations have destroyed the incentive and raised the risk premium beyond the achieveable payback in today's economy. I think many of the hedge funds that bought up big portfolios of single family homes are going to get stuck.
Near here, Chase builds a strip mall, occupies the big corner unit, and leases out the other three units to a payday loan store, a cash for gold store and a Starbucks.
So basically Anger, Denial, Guilt and Acceptance.
Also known as the other 4 horse masterbaters of the financial apocalypse.
I don't know about you but I'm rushing out to buy that new thingamagig from Sony. It's incredible: http://www.theonion.com/video/sony-releases-new-stupid-piece-of-shit-tha....
"Junk Glistens Under ‘Bernankecare’ as Worst Stocks Win"
http://www.bloomberg.com/news/2013-11-19/junk-glistens-under-bernankecare-as-worst-win-in-stocks-bonds.html
Macys is considered high end?!? Since when? When I go to my local Macys, it's packed with illegal aliens and the same crap I see at Wallyworld. Their clothes are high-priced Chinese junk. Maybe it's some strange knockoff Macys? I'll check this evening when my bus home stops there to see is the sign says Maceys or Maicys.
I used to think Macys was classy, but actually shopping there is another story. Then again, with all the welfare, maybe that's how the illegals can afford to pack the place.
I still ask cashiers how many customers pay with EBT/SNAP and the answers are generally in the 75-95% area, even at my suburban grocery store. Last week, one cashier told me you can tell who is on the welfare because they buy tons of junk food, lobster and steak she can't afford, and they drive really nice cars.
So that book I read years ago called, "Deflation" is coming true? I may have to dig it up and read it again. Basically he said too much cheap production will cause deflation. I didn't believe him because I thought TPTB would just print more money to create inflation. He said that wouldn't work because there is too much production everywhere. And now I see that all the excess money printing has gone into inflating real estate, stock prices, essentials, but it looks like the guy and his book were right.