Americans Go into Spending Rehab

This article was first published at Pajamas Media on 02/02/2009:

“I don’t think we will live the same way for 10 years,” says Howard Davidowitz, chairman of New York-based retail consultant and investment bank Davidowitz & Associates. “People are so scared they’re starting to save.”
The concept of our citizens putting money into savings is not a condition that has been seriously considered any time recently by American retailers. Riding a bifurcated wave of prosperity and debt-fueled consumption, the industry has ballooned to outrageously unsupportable proportions, blanketing our nation and the developing world with malls and storefronts that are unlikely to be of much further use in their current orientation.
Don’t get me wrong, I like a good cup of coffee as much as the next guy. But until quite recently, Starbucks, the Seattle mega-coffee retailer, was reported to have been operating 17,000 stores in 94 countries. God bless the guys who figured out they could sell $6.00 cups of coffee on even a small scale. Now layoffs and store closings are the order of the day. Under what economic system was expanding to 17,000 boutique coffee shops considered a viable long-term business plan? Apparently the American one.
Laissez-faire capitalism helped created the retail circus that America has been running in all three rings for the past two decades. OK, so McDonald’s has more than 31,000 outlets in 119 countries, but Ray Kroc’s brainchild sells hamburgers in a volume that can only be understood by Timothy Geithner, and they have a pre-school indoctrination program that the Democrats would like to get their hands on. In fact, McDonald’s profits were reported to have increased 80% in 2008.
These remarkable numbers were produced in the teeth of a recession that is decimating over-extended companies like Starbucks. And the overreachers are legion. The signs beneath the McDonald’s arches have become a piece of genuine Americana and might even reach “One Trillion Sold” before Obama’s deficit does. Starbucks, if it is to survive Barackonomics at all, needs a lot more than a face-lift. Financial bariatric surgery is more likely in order. This fits Davidowitz’s retail analysis:
Narrow specialties (Sprint’s cellphones) and high prices (Starbucks’ coffee) are tough sells as the consumer mood turns thrifty. What plagues Starbucks will also affect other upscale goody chains like Mrs. Fields’ Cookies, and causal dining outlets like Applebee’s and Cheesecake Factory. Any of the neighborhood outlets for those restaurant chains could be a casualty this year. For too many customers now, it’s McDonald’s or bust.
Now the nearly 20 year-long expansion is spent and the painful retraction is tearing through retailers like peanut butter and salmonella sandwiches through a retirement home.
And it isn’t just Starbucks getting reverse-biggie-sized. Circuit City, an electronics retailer, is closing all 567 of it’s stores; Charming Shoppes (Lane Bryant, Catherine’s, & Fashion Bug) closed 150 stores and announced the closing of another 100; Office Depot is closing 112 locations; and the outdoorsy Timberland & Eddie Bauer, 69 between them. Many retailers are simply closing all of their stores: Steve & Barry’s (173 units), Tweaker (a Bostonian electronics retailer-150 stores), Mervyns (149), Whitehall Jewelers (373), Club Libby Lu (98), and Linen’s N’ Things (however many they had.)
When Andrea Mitchell’s hubby Alan Greenspan described the go-go tech stocks boom of the 90s, he asked precisely the question American retailers should be asking themselves each time they open another storefront:
But how do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions as they (did) in Japan (in the 1980’s?)
I’ll take this one: We know now. The free market works. Despite suggestions from Democrats to the contrary, the evidence of failure on an increasingly grand scale is proof of precisely how the market was meant to work. Capitalism doesn’t mean that prosperity is continuous and uninterrupted. There are winners and losers. As an Indiana farmer once explained it to me: “Pigs get fat and hogs get slaughtered.”
Bankers lending money based upon a logical credit and collateral analysis results in fatter bankers getting fatter paychecks. Bankers lending money on the basis of politically correct bromides results in Indymac sausage.
Retail expansion based upon demographic analysis coupled with clear-eyed economic forecasting creates larger, healthier corporations. Retail expansion to the point of nine Starbucks locations in my hometown of Carmel, Indiana (population 68,000), creates the corporate personification of the law of diminishing returns. While 10 or maybe even 200 trendy latte shops might be a good thing, 17,000 U.S. barista-training centers more than likely spells irrational exuberance indeed.