From a small northwestern observatory…

Finance and economics generally focused on real estate

Posts Tagged ‘Amazon

WordPress v. Facebook

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Loyal readers will note that I’m frequently on Facebook and less frequently here.  You may have also noted (or not….) the very different tone of my two sets of writings.  My pure FB posts are generally either my (fairly strident) political views or mental meanderings about family, travel, restaurants, and bars.  In other words, normal stuff.  My blog posts lean to business, finance, and the economy, with a bent toward real estate.  By construct, the “voice” on this blog is different than the “voice” on FB.

Here’s where life gets interesting.  I had the honor last week to speak to a small audience at a luncheon at Seattle’s historic Rainier Club about the economy.  It’s quite impossible now-a-days to separate “economy” from “politics”, much as I might like to.  Calvin Coolidge, I believe, said that the “business of America is business”, and the current government in D.C. has adopted that mantra.  Sadly, the current government in D.C. appears to know quite little about mainstream business.  they know a bit about a few things, and almost nothing about most things.  That said, they’ve sold a bill-of-goods to many mainstream business folks.  I saw a truck heading into Seattle today with InfoWars and “Arrest Hillary” bumper stickers.  The driver was a bearded young man who appeared to be a hard working fellow.  He’s been sold on the notion that the government in D.C. is on his side now, and they’re going to make everything a lot better.  I’m waiting to see that.  I haven’t seen anything yet out of D.C. that suggests this government is representing anyone other than Russian bankers and the Koch brothers.

At my Rainier Club talk, a questioner — clearly a Trump supporter — commented that the benefit of the new administration was that they were dismantling onerous regulations which affect small business.  I reminded the questioner that I’m Chair of the Board of a business headquartered in Seattle, and that nearly all of our regulations are imposed by the City of Seattle and the State of Washington.  I further reminded him that these regulations make Seattle the sort of place where creative people wanted to live, and since my bread and butter is hiring creative people, I’m happy to put up with these regulations in order to hire creative folks.  I noted that Amazon, Starbucks, Nordstrom, Weyerhaeuser, Expeditors International, Expedia, Alaska Air, Microsoft, Boeing, Costco, the Russell Group, Symetra, F5 Networks, Paccar (who make Peterbilt and Kenworth trucks) and a host of other global companies were also willing to put up with these Washington State regulations in order to be able to tap into the brain trust that wants to live here.  Intriguingly, the most “regulated” cities and states in the nation tend to be homes to the most forward-thinking and growing businesses.  Indeed, New York and California have over 20% of the Fortune 500 headquarters, and the states which are generally the least regulated have no Fortune 500 or even Fortune 1000 companies (Montana, Maine, South Dakota, Wyoming, West Virginia, New Mexico, and Alaska).  You go figure….

Kroger…. sigh….

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I truly like Kroger.  I do the largest portion of my “commodity” shopping there.  Friends and colleagues know of my constant battle with my weight, and sadly enough, Kroger (or their pacific northwest brand, Fred Meyer) is partly to blame.

That said, I’m very concerned with Kroger (and Fred Meyer) as brands, and by extension as users of big boxes of real estate and anchors of shopping centers.  Kroger’s stock hit a one-year high of $37.86 last July, and is today 40% lower at 22.82.  Admittedly, about 7 points of that loss came on the heels of Amazon’s announced acquisition of Whole Foods.  However, another 7 or 8 points came from slow drift over the last 11 months.  For the record, during the past 12 months, the S&P 500 (not the most aggressive benchmark, for sure) rose from 2000 to 2433 (today, 1pm EDT), for a gain of just under 22%.  Hence, Kroger has underperformed the S&P by 62%.  Ahem…. To put this in more meaningful terms, Kroger has lost about $14 Billion in shareholder wealth in 11 months.

So this morning, I took time out of my nasty, busy schedule to listen to Kroger’s CEO, Rodney McMullen, interviewed on CNBC.  I was underwhelmed, to say the least.  He basically wanted to defend their current modus operandi, and bragged about their cheese department (which, I will admit, is quite good).  Arguably, when one loses $14 Billion in shareholder wealth in 11 months, perhaps one should have a “Plan B” to discuss on CNBC.

From a real estate perspective, Kroger and its other brands (e.g. — Fred Meyer) run 2,778 grocery stores in the U.S.  At about 50,000 square feet each, that’s roughly 140 million square feet of real estate (not counting 786 convenience stores, 37 food processing facilities, 1,360 supermarket fuel centers, and such and so forth).  Further, most of these stores are anchors for community shopping centers.  Lose the grocery anchor, and the entire shopping center becomes a dust bowl pretty quickly.

A long time ago, In Search of Excellence established that businesses “in the middle” of a market are doomed to failure.  You can make money at the top of the market (Whole Foods) or at the bottom (WalMart Super Centers) but not in the middle.  Profit margins in grocery have always been razor thin.  I can think of a dozen business scenarios that make sense for Amazon and Whole Foods, not the least is the fact that Whole Foods, geographically, is well positioned to serve as distribution centers for the sort of “top of the market” customers who would order groceries from Amazon.  I would love to see where Kroger thinks its market lies, but I’m going to guess that everyone in the grocery biz who is not chasing the top of the market will be in a race for the bottom of the market.

Written by johnkilpatrick

June 27, 2017 at 9:27 am

Retail and the Internet

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First, if you can only read ONE magazine every week, it must be The Economist.  If I were to go into hibernation for a year (or 20, for that matter), a cover-to-cover read of the current issue would bring me up-to-date on pretty much every topic of major importance, both in the U.S. and globally.  And no, I don’t get a kick-back from them on subscriptions.

The current issue has not one but TWO thoughtful pieces on the impact of the internet on retailing.  From a real estate perspective, this is of vital importance for three reasons.  First, internet retailers actually DO occupy space, but it’s a very different kind of space than most-bricks-and-mortar retailers occupy.  (For more on my perspective on this, read my interview about Amazon in Seattle’s Daily Journal of Commerce this past week.)  Second (as the Economist articles point out), many retailers “get it” but many don’t (more on this in a minute).  As a result, some retailers thrive (Apple and Disney are two cited examples, but I’d also note Seattle’s Nordstrom as a firm that grasps how to thrive in both markets).

The third reason is a bit more subtle.  The Economist quotes Roy Amara, the American futurologist, who says, “We tend to overestimate the effect of technology in the short run, and underestimate the effect in the long run.”  As a small-e economist, I would note that in the long run, internet retailing has the very real impact of making American business more productive, in terms of “unit of output” per “unit of cost” (or “unit of labor”), which is a very good thing indeed.  Why?  Simply put, the developed economies (U.S., Europe, and Japan, for starters) are fighting a demographic battle.  Japan and Europe are more-or-less losing.  Their populations are becoming increasingly older, and their population growth is basically flat.  The U.S. is barely winning the demographic battle, ironically thanks in no small part to immigration (both legal and otherwise).  Why is this important?  Simply put, increases in GDP are necessary in order to create jobs and to support the increasing costs of an increasingly aging population.  There are only two real ways to accomplish this (note the word “real”, as in without inflation):  either grow the working-age segment of the population (we’ve already thrown in the towel on that one) or make equal strides in productivity.  Hence, the information age allows fewer workers to generate greater productivity in order to support a population in which increasingly large segments are not part of the productive landscape.

As noted, some bricks-and-mortar retailers “get it”.  For many segments of the shopping landscape, an on-line substitute just won’t do.  Apple figured this out with the Apple Stores, which are slick looking, very efficient, and a far better solution when need instant answers or want to buy something “Apple”.  By the way, I have an Iphone which I acquired from an ATT store.  I have to go back into that store occasionally for upgrades or accessories — it’s near my house and thus very convenient.  I can’t help but notice that they’ve re-done the store in much more of an Apple-esque image.  Accident?  I don’t think so, plus the shopping experience is much more efficient and enjoyable now.

Borders didn’t make it, but Barnes and Noble seems to be hanging on, in no small part because of the adaptation to the internet.  Interestingly enough, many “mom-and-pop” booksellers were predicted to go out of business due to Amazon, yet many of them have thrived by partnering with Amazon and doing what entrepreneurs do best (catering to “niche” needs).  Last time I bought a “new” book it was a Christmas present, and I got it at a deep discount at Costco.  The last 10 books to come into the Kilpatrick house, though, came from small-town retailers who had partnered with Amazon, and to whom we paid full-retail.

Interesting side note — ONE of these retailers was Seattle’s Goodwill store, who have cataloged their bookshelves and partnered with Amazon to sell used books.  (My congratulations to my good friend, Ken Colling, the CEO of Seattle Goodwill, and no, I didn’t get a penny’s worth of discount.)  Also, by the way, it was cheaper for me to go on-line to Seattle Goodwill, buy the book, and have them mail it to us, than for us to drive to downtown Seattle and buy the book the old fashion way.  Is Goodwill going out of business because of Amazon?  Far from it — this is a windfall for them.

As The Economist notes, and I concur, retailers are struggling to figure out this new paradigm.  They are also coping with an explosive growth in shopping space — between 1999 and 2009, shopping space in the U.S. ballooned from 18 square feet per person to 23 square feet.

A final note:  The Economist deals primarily with the experience in the U.S..  Clearly in Europe and Japan, this is also a struggle and perhaps an even worse one.  However, this information-age paradigm shift is occurring right as many developing nations (China in particular) are seeing an emerging middle class, and the retail-therapy that permeates middle-classes everywhere.  Retail real estate developers who look at the Chinese economic trends and think that China may need as many square feet of shopping experience as Americans have come to enjoy over our cultural history may need to think again.  The simultaneity of the emergence of the information age with the emergence of a Chinese middle class (not to mention the cultural history, which in China may favor small, entrepreneur-driven businesses) may portend a very different retail future.

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