Thursday, August 28, 2003

Retail Productivity in Europe and America

Amongst the various blogs I read regularly, I'd have to say that Brad DeLong's is by far my favorite. It isn't because he shares my political sympathies that I enjoy reading him - he supports income redistribution with a lot more fervor than I could ever muster - but because the man is simply brilliant, and what is more, always intellectually honest. By brilliant, I mean to say more than that he is a person of broad learning (which he definitely is), but that his analytical insight into issues often leaves one wanting to say "Bravo!" at the intellectual tour de force laid out before one's eyes.

To get a feel for DeLong's witty style in action, take a look at this fisking of an article by John Kay for the Financial Times, from which I've taken the liberty of extracting the following lengthy excerpt:

When the U.S. Bureau of Labor Statistics calculates that retail productivity has increased, they don't see a bunch of people who used to shop at Andronico's now shopping at Costco, divide pounds of beef (or even pounds of Chateaubriand purchased) by dollars spent, and say, "Aha! Productivity has increased!" The economists and the statisticians at the Bureau of Labor Statistics thought and think long and hard about improvements in productivity in customer service-intensive and customer service-spare kinds of retailing, and thought and think long and hard about how much of the increasing share of big box retailers is due to their offering a genuinely better deal to consumers, and how much is simply a zero-sum reduction in money spent that is matched by a reduction in the usefulness of what is bought because of the lower quality of customer service provided.

The BLS is not as stupid as John Kay implies when he writes that "...the quality of retailing is enhanced by a range of outlets and by diversity of product range, congenial surroundings and knowledgeable salespeople. Nevertheless, such analysis is not what economists do..." and that "...national accounts measure not retail output but the volume of retailed goods..." The key is that big-box customer service-spare stores have a larger market share in the U.S. today than they did a generation ago because the price gap between CostCo and Andronico's and between WalMart and Nordstrom's now is much greater than the analogous price gaps were a generation ago. U.S. retail productivity growth is not an illusion created by the sacrifice of customer service for lower prices. U.S. retail productivity growth is due to the fact that information technology has allowed customer service-spare stores to offer consumers a much better--a much cheaper--deal than analogous stores could offer a generation ago.

Now for us the opportunity to shop at CostCo does not matter much. We are far from poor, and we are not huge meat eaters: our beef is unlikely to come from CostCo, and very likely to come from Andronico's. Years sometimes go by between our trips to CostCo.

But for many not-rich Americans it does matter, and matters a lot. For them, the fact that the price gap between CostCo and Safeway (let along Andronico's) looms a lot larger than it did a generation ago plus the opportunity to shop at CostCo is a real boon: you get your meat a lot cheaper, and you can afford a weekend car trip to Yosemite Valley.

The French--and the British (I know: I've shopped in Britain)--are deprived of the opportunity to buy in the equivalent of CostCo and WalMart, and deprived of the opportunity to get lots of good stuff cheap by shopping at high-volume retailers who have taken advantage of the efficiencies of distribution offered by bar codes, POS systems, databases, and all the other information-age inventions that make it possible for retailers and distributors to keep track of stuff.

This doesn't matter much to John Kay: he doesn't have trouble financing his vacation to the Mentonnaise Riviera: "...between Monaco and Italy, the mountains and the sea, Menton is like an island where life flows serenely... Nestled at the foot of the Azur Alps which plunge into the Mediterranean..."

But there are lots of guys living in western Europe for whom the lack of an opportunity to shop at a WalMart equivalent--and thus to shave 50% off the retail margins they pay while shopping in the picturesque marché municipal--is a real loss. True, they would miss out on their "pleasant excursion[s] to pick up some produce in Menton's marché municipal and browse the FT over an espresso in the place Clemenceau." But if they paid less for produce and staples, they might use the money to pay for a better vacation of their own, or perhaps a dishwasher. They are more than picturesque background figures to entertain John Kay's eye: they are people with limited incomes, but with lives and plans of their own.

I heartily recommend that you read the original in full, or you'll miss out on a great deal of context. Brad manages to cut through the fog, and get right to the elitism behind the anti-commercial thinking of most of those who would prohibit the spread of a supposedly ugly "American-style" capitalism to their "unspoilt" shores. Progress is only optional when you've more than enough to spare to begin with.