“Main Street [will] not . . . get crushed . . . . Main Street is where the national chains are.”

To generate a significant unique selling proposition that will suffice in a price competitive era in which people shop online is going to prove to be one of the great difficult tasks over the next 20 years.


In Dr. North’s “Big Losers in the Next Recession,” he points to the economic sectors that will do well and which ones will fail in this pending recession and why.  These insights alone are worth the price of admission.  He begins with this visual:

2012 American Budgets

It’s a good one.  You can see how and where Americans spend their money and where they spend their discretionary funds.  Dr. North points out that

For most families, the biggest expenditures are the mortgage, the car payment, utilities, groceries, and insurance.

This is important information.  For it tells us what industries might provide jobs and businesses.  I worked at a grocery store once, and the margins at the store are narrow.  It explains, in part, why the turnover at stores is pretty high.  Those who stick around for many years tend not to get rich.  North explains,

In the list above, groceries are local purchases. But, because supermarkets have very low profit margins per sale, the bulk of that money goes to producers in the supply chain. It does not go to the cashier who is checking out your food.

So the bulk of money generated by the sale of foods and groceries goes to operators in the supply chain.  Good to know.  Would be nice to see that delineated or where that information might be had, but that information alone is worth it.  Then he adds that . . .

Healthcare is local. It is a service industry. It is subsidized by the federal government. It is not going away. The growth of walk-in clinics is continuous. At some point, they will be in Wal-marts.

That healthcare was local I did not know, for I have had insurance, car and dental insurance, from out-of-state providers.

The more income you have, the less you spend as a percentage of your income in local retail stores.

Now that was telling.  Wealthier people tend to spend their money on goods outside of the local retail operators?  Hmm.  Oh, he explains how this works–

When you drive down the main drag in town, look at the retail outlets. You will see that they are national chains. Your money is spent in them, but the profits will go back to the national chains. They have purchased the real estate, constructed the buildings, taken on the debt, purchased the inventory, and they make it available to local consumers. They are highly price competitive, which is why they have driven out most local retail outlets. American consumers want a deal on price, and national chains provide this.

This was interesting.  So folks who love to attack Wal-Mart, take note–you should appreciate the low prices of goods for now.  No telling when that might change.

How many local hardware stores are in your community? Do you even notice them? My wife shops constantly at Lowe’s and Home Depot. She fixes things around the house. She does not go into a local hardware store.

That is a good question.  I can count one in my old neighborhood.

I spend most of my time in front of the computer screen. I rarely go out, and when I go, my choices are quite limited: at least once a week I take my grandsons to Subway. I go to Chick-fil-A once every couple of weeks, and I spend about two dollars. I buy gasoline locally, but I don’t buy much. I only went to one restaurant, and it recently went out of business.

I recall ten years ago when a local Wal-Mart was appealing to the local city council for building a store where it built it.  There was a ruckus.  “What about local businesses!”

“I like Wal-Mart prices!”

“It’ll ruin the neighborhood!”  That was impossible.  Actually, Wal-Mart architects did a beautiful job with the design of the building and its facade.  It is quite elegant.  And lo and behold up popped a few other businesses in the same retail lot that people loved and frequented.  The location is such that the Wal-Mart serves several local neighborhoods.  It was smart.  Not too close to freeways but it is situated in such a way that it is close for poorer communities.  Whether Wal-Mart consciously took that into consideration is hard to tell.  Is Wal-Mart an ethical corporation?

The amount of money that I spend in local retail outlets is quite small. From an economic standpoint, it is almost irrelevant to me whether local businesses stay open or not. The only local business that I really am dependent on is my barber, and I go about once every six weeks. My wife could cut my hair, but that would not be an efficient way of getting my haircut.

When we look around us, we see that there are a lot of retail outlets, but individually, we rarely go into any of them. Go into a local strip mall. How many of those stores have you ever spent money at? Almost none.

My point is this: local retail shops service a relatively small number of customers who have highly specific tastes. For some reason, whatever the local shop is selling is not easily available in a supermarket, a chain outlet, or on Amazon.

This is the plight of most commercial real estate in most communities. Local real estate is supported primarily by people who do not have much money. They are members of the lower middle class.

Restaurants cater to upper middle class people, but in a recession, these people can easily cut back on their expenditures at local restaurants. There is no need for anybody to go to a restaurant. It is strictly a discretionary income expenditure. In tight times, this expenditure is taken off the books of middle-class families. Lower middle-class families may still order a pizza as a treat, but pizzas are inexpensive as a way to feed your family.

This process has been going on since the 1950’s. This is nothing new. But it is accelerating today because of the tremendous cost advantages of going to the big box stores, or ordering from Amazon.

My wife recently decided to purchase a mattress. She found a website that specializes in evaluating mattresses. She was able to find a queen-size mattress that sells for $1,000. It has some of sort of high-tech foam as the basis of it. It is sold with a money-back guarantee. It is delivered to your door within about a week. She never went into a local mattress store. The local mattress store has to spend money on inventory, and it has to spend money on real estate. She never thought about walking into such a store.

This is what I could not believe either.  I do not own one of those fantastic big screen TVs, but I do like to see deals.  I saw a deal on a flat screen TV December (2015) from Target for $177.  $177!!  That seemed like a good price for a regular 19″ television.  But the sale from Target included shipping!!  That is incredible.  That means that people don’t have to drive, look for parking in a lot, fight other drivers and other pedestrians, worry about their car while in the mall, haul the TV to their car, or find their way home safely.  That whole expense of time and concern and a nominal amount of gas was taken care of now by Target.  What a deal.  So I get what North is highlighting here.

When you make your evaluation off the top of your head, you probably will not think of very many retail outlets that you go into on a regular basis. You probably have a local auto repair shop that you use. You may have a computer repair guy locally. If you ever broke a window, there would be somebody to replace the glass locally. There is always a need for a local plumber.

This is true.  I would say we have specific stores, cleaners, mechanics, and eateries.

What I’m saying is this: in terms of retail outlets, the only really secure ones are repair oriented. If something breaks, you have to get it fixed locally. If it is something electronic, you probably do not get it fixed. You go online and buy a new one.

A local repair shop does not need a lot of square feet. The tools are simple. There is somebody at the front desk to accept your credit card. It probably does not have to be located in a high-traffic, high-cost-per-square-foot part of town. The repairman drives to your house and fixes whatever it is.

People pay for residential real estate. They are committed to a particular home in a particular neighborhood. They don’t want to be forced out of their homes. But renters of retail commercial real estate do not have the same degree of commitment. If someone gives a significantly better deal, they can probably afford to move to a new location. In the next recession, this is going to put tremendous pressure on strip malls around the nation. People have invested money to build up excess capacity that will not be used in the next recession.

There is a strip mall next to a Publix supermarket in an area of town that doesn’t have a lot of people. We used to live there when we first rented. I go there to take my grandsons to a Subway shop every Saturday. Then I take them to the library. This strip mall never recovered from the 2009 recession. There are still empty spaces in it. But Publix is a good anchor in any strip mall in Georgia. It is a first-rate store. It has a lot of traffic.

An Ace Hardware store 200 yards away opened in 2008, and it closed in 2009. That space is still empty. It has a lot of square footage.

I am obviously not a promoter of commercial real estate as an investment. I think our world is moving away from small commercial real estate in general. The chain stores will buy the best locations, and they will get most of the traffic. In a Pareto world, 80% of the real estate is going to generate 20% of the rental incomes. The other 20% will be owned on the main drag in town by the national chains.

“I am obviously not a promoter of commercial real estate as an investment.”  That is North’s point with regard the next recession.

Local banks are the sources of the funding of local real estate. Any bank that has relied on commercial real estate for its profits has already gone through the wringer in the last recession. It is going to go through the same wringer in the next recession.

I virtually never go into a shopping mall. I may not be representative, but I don’t think most men spend much time in shopping malls. This is why they are closing around the country.

Shopping takes time, and shopping online is far more efficient than wandering up and down the aisles of the shopping mall. You can get accurate information about prices. You can find reviews. You can find the latest models. You can order it on Amazon, and it will be delivered within three days. You don’t have to go in your car to a shopping mall to wander aimlessly up and down the aisles in order to find something that you want to buy. You start with something that you want to buy, and then you use the Web to find the best deals. This is not going to stop. It is why the local Yellow Pages are dying. In print form, we rarely see them. They are not automatically delivered to our doors every year.

The big chain stores are not going to go out of business in the next recession. Local competitors will go out of business in the next recession. They will not be able to hang on.

Any local business that depends on discretionary income, and which caters to the middle class and lower middle-class, is vulnerable. The people who are employed by these stores are going to feel a terrible crunch in the next recession, just as they did in 2009-10. Main Street is not going to get crushed, but every other street in town will. Main Street is where the national chains are. They employ low-paid workers who have no fringe benefits. There will be lots more of these unemployed people trying to get jobs in the second year of the next recession. These jobs are never going to produce much of an income for the people whose skills are such that they have no other employment opportunities.

This is not the result of Chinese imports. This is not the result of immigration. This is the result of a fundamental shift in the cost of information. This shift is going to accelerate. When people can find what they want online, and they can shop for price, they are going to do so.

The Yellow Pages have had a famous symbol:

Yellow Pages

The assumption behind this symbol was this: after your fingers did your walking, you would get into your car, drive to a local retailer, and buy something. Today, almost nobody uses his fingers in this way. They use the same two fingers on a mouse. They do not get into the car. A UPS truck delivers what they want three days later.

Now what they want is free shipping. This is where the real competition is.

I am convinced that things connected with mechanical repairs and services such as painting and carpentry will continue to be salable services, even in a recession. Electronic repairs are hopeless. It is inexpensive simply to replace the item. But repairs of things that are physical, and which break, will always be needed.

This was good news.  Let’s hope it prevails.

It is best to sell to people in the top 20%. It is best to sell to the upper middle class. These people muddle through even in recessions. They still have discretionary income.

I agree.  Sell to people with money.  You aren’t going to sell RVs to folks in the ghetto.  No offense.  How do you learn who has money?  How do we learn this?

To the extent that any business is dependent on walk-in traffic from people in the lower middle-class, it is going to be competing against the big box stores. To generate a significant unique selling proposition that will suffice in a price competitive era in which people shop online is going to prove to be one of the great difficult tasks over the next 20 years.

I hope your children and grandchildren understand this by the time they are freshmen in high school. They had better plan their curriculum accordingly.


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