Editorial

Big Casket: Do Box Stores Have a Future?

Whatever else happens, the days of customers driving several kilometres to the warehouse store on the edge of town are numbered.

By Ryan McGreal
Published April 09, 2006

I've written before about Wal-Mart's great economic advantage: not its vast purchasing power, use of sweatshop manufacturing labour, or predatory anti-union employment policy (although these certainly help to keep costs down), but its incredibly sophisticated logistical system.

Wal-Mart adapted the manufacturing industry's just in time (JIT) philosphy to its entire supply chain, eliminating warehousing costs and reducing inventory to a minimum. As you take the last package of widgets off the shelf, a truck is pulling into the loading dock to deliver three more. In a week, just as someone else takes the last package off the shelf again, another truck will pull in to replace them again.

The coordination involved in making this possible is incredible. Cash registers send purchase and return data to central processors in real time, and stock depletion curves calculate the best amount and frequency to deliveries to maintain a minimum amount of stock on the shelves.

The entire supply chain runs for ten thousand kilometres starting at the factory floor in China, and it's managed with a precision that competitors simply can't beat. That's Wal-Mart's real secret, and it's possible thanks to cheap, fast telecommunications and cheap, abundant petroleum.

Computers and data networks are getting faster, but oil production is at or near a global, historic peak. As demand strains against supply limits and the price of oil goes up, the competitive advantage of just in time logistics will steadily erode until the cost of frequent micro-deliveries to nearly five thousand stores around the world exceeds the cost of the more traditional factory-to-warehouse-to-retail organization.

At the same time, the big-box model replaces many small community stores with one large warehouse store. Instead of the company delivering goods to locations close to customers' homes, customers must leave their neighbourhoods and drive to the warehouse store. This effectively subsidizes the store: it no longer has to deliver its products close to its customers.

Amazingly, most of the cost and energy use of transportation is swallowed up in the final trip - from store to home. Shipping is very energy-cheap, and can get even cheaper with the use of sails (no kidding!), as is rail transport. However, the cumulative total of every customer taking a private vehicle to the store and back consumes tremendous amounts of fuel.

Looking at the whole system, offloading warehouse-to-neighbourhood costs to customers is a very inefficient method of distribution. The company wins by distributing its 'last mile' costs among a large pool of customers, but the total cost to those customers is much higher than it would be for the company to deliver the same goods to neighbourhood store.

As the cost of driving continues to rise, market pressure to provide locations closer to people's homes may eventually force a shift away from warehouses and back to smaller neighbourhood centres that customers can reach by walking or taking public transit.

Alternately, if both public transportation to what are now sprawling big box compounds and the physical layout of the compounds themselves improve significantly, they may be able to preserve their business model by adding delivery to their service. One large vehicle dropping goods off to a dozen homes is more efficient than a dozen individual cars driving up to the store and back.

It's possible Wal-Mart understands this. After a year of rising energy costs (and, ironically, being bumped out of the number one spot in the Fortune 500 by ExxonMobil), the company recently announced that it plans to push heavily into poor neighbourhoods and "create more opportunities for small businesses to capitalize on the benefits of having a Wal-Mart store in their community."

On the one hand, capital investment is exactly what poor areas lack, not to mention affordable goods, so the company's decision to spend money cleaning up contaminated brownfields sounds encouraging. On the other hand, the ongoing de-industrialization of North America by moving factory work offshore is a big part of why many neighbourhoods are so poor in the first place.

Also, the cynic in me contends, Wal-Mart is less likely to face organized community resistance from a poor neighbourhood that has limited resources and is desperate for any kind of investment.

It's far too early to write the big box industry off. These companies may yet find ways to reinvent themselves for a post-Peak economy. One thing is clear, however: the days of customers driving several kilometres to the warehouse store on the edge of town are numbered.

Ryan McGreal, the editor of Raise the Hammer, lives in Hamilton with his family and works as a programmer, writer and consultant. Ryan volunteers with Hamilton Light Rail, a citizen group dedicated to bringing light rail transit to Hamilton. Ryan writes a city affairs column in Hamilton Magazine, and several of his articles have been published in the Hamilton Spectator. He also maintains a personal website and has been known to post passing thoughts on Twitter @RyanMcGreal. Recently, he took the plunge and finally joined Facebook.

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By adrian (registered) | Posted April 11, 2006 at 01:47:28

I think what you say in your other article, Toward a New Vision for Hamilton, is the key issue here: [Gilbert] explained that between current gas prices and $2.50 per litre, the price shift alone wouldn't cause much change to Hamiltonians' way of life. People may replace their cars with smaller, more efficient models, but life will mostly go on as it has. However, gas above $2.50 a litre starts to trigger some more basic changes in people's choices of where and how to live. At $4.00 a litre, our current situation becomes impossible to maintain. I don't think the big box stores will suffer until a lot of people can't afford to drive, period. As long as people are commuting long distances to work and driving long distances to see friends and family, I don't think a 5 or 10 minute trip to Wal-Mart is going to phase them much. The key is definitely "locations closer to people's homes" where they can get whatever they need. Being able to purchase items across the street that are similar in price to the Wal-Mart that's 25 kilometres away would be a big draw regardless of the price of gas.

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By adrian (registered) | Posted April 11, 2006 at 01:48:24

Note that there ought to be blockquotes around the middle portion of my post, starting with "[Gilbert] explained" and ending with "impossible to maintain".

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By David (anonymous) | Posted April 14, 2006 at 06:34:33

Gee - weren't small stores near people's homes just what we had before the era of China-Mart? The height of realization how these big box outlets have damaged America came when I went into a store in a major iron mining area and bought an iron pipe fitting for a plumbing project, only to see upon returning home that it had "China" stamped on it. And I'm not even sure how to label the news story I heard last year where China-Mart officials were in Washington lobbying for increased minimum wages so that their core customer base could afford to buy more stuff from them - at minimum it seems like some strange sense of entitlement. But we can't blame the company who run these stores - we have to blame the people who patronize them and bring them more power. The concept seems great for customers up front, but the damage to trade deficits, personal debt, energy consumption, and local manufacturing, And after paying a few local people a substandard wage, they haul huge dollars from the local economy back to Arkansas while putting those small local stores out of business. In the end, the concept becomes so disgusting that it becomes hard to imagine why so many continue to patronize them. But there is another huge issue that might be fodder for another whole artical - the cheapening of America. Quality is becoming very expensive or non-existent as tolerance of cheaply made items from China for low price runs rampant. There used to be a saying - "If you buy it cheap, you buy it twice." China-mart is helping to insure we won't have a choice.

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