October, 2001

From the Editor

The Coming Tide

In the aftermath of September 11th there is little question that, for a long time, we will be poorer as a nation than would otherwise have been the case.

Though substantial and horrible, it is not so much the loss of equity and human capital that took place as a direct consequence of the terrorist attacks that will hinder economic growth. Rather it is the continuing expenditure on security precautions that will hinder productivity growth.

Increased prosperity depends fundamentally on increasing productivity. Real increases in prosperity occur when capital, technology and training are employed in such a way that one person can produce more. A simple example: If a transport container that had always been 35 feet long was replaced by one 40 feet long, productivity of the truck driver will improve. For every hour he works, he will move more products. If the inputs of capital, technology and training necessary to achieve this advance are not too much, the driver, and the whole economy, will become more productive.

The problem with expenditures for security is that we wind up investing a lot of inputs – capital, technology, and training labor – yet don’t increase output at all.

To go back to our trucker, if we insist that all trucks have a security guard on board at all times, then the productivity will fall by 50%. In other words, it will cost twice as much in labor to move the goods as it did before.

Sometimes these expenditures are obvious. There have been many efforts to legislate a requirement that convenience stores be staffed with two people at night, when most have only one. These proposals, made long before September 11, were motivated by a number of robberies during late night hours, and they have been bitterly resisted by the convenience store industry because, very clearly, there is so little work to do at night. The proposals might as well legislate a tremendous increase in costs caused by cutting the productivity of the existing night person in half.

And security expenditures don’t always break out so obviously. When the government closed down the air transport system on September 11, it also imperiled countless companies that had been moving closer to “just in time” manufacturing systems. These systems are designed to reduce the cost of holding inventory, costs that are measured both in financing costs and the risks of product spoilage, theft and obsolescence.

If every company that previously had fixated on reducing costs of carrying parts and ingredient inventory decided that prudence now dictates they carry a two-week inventory of all parts and ingredients, the cost to the economy, in terms of capital no longer available for useful purposes, would be many times the capital loss of losing the World Trade Center.

What this all points to is a structural change in the U.S. economy, one in which substantial portions of our available resources – our capital, our labor, our training, our technology – will not increase output.

This indicates that the blow to foodservice, for example, is not likely to be a short dip with a steep rebound. In general the deli operations in mass market retail outlets are well positioned for the new world. Increased risk and uncertainty leads to less going out and more eating at home – a major reversal of the trend of the last few decades.

In addition delis are generally highly price-competitive. In a world that, unfortunately, is going to be less prosperous than it would have been, price competitiveness is a highly competitive asset.

Other societal trends may yet intervene to assist supermarket delis. It would not be surprising to see restrictions on immigration and more rigorous enforcement directed against illegal aliens. Restaurants are much more dependent on this labor pool than are supermarket delis.

It would be unseemly to gloat that trends that are bad for our nation are somehow good for supermarket delis – but that is likely to be case. The biggest challenge is whether we have the merchandising savvy to capitalize on these massive winds of change whipping our society and economy.

Although the trends – from a desire to roost at home, to a desire to save a few pennies – will open the door to capturing new customers, merchandising efforts to persuade consumers of the quality, convenience and the status of buying supermarket deli are very much required.

For although the new customer prospects may have reason to buy, or buy more, from supermarkets delis they need to be convinced that it is an appropriate thing to do. That is why during a recession, few Jaguar customers buy Chevy’s; they are much more likely to hold off buying a new car for another year.

With a small investment in nice signage and upscale packaging, a bit of effort on branding supermarket deli operations and a little training to upgrade retail clerks into servers, there is a real chance for the deli industry to grab onto the trends and ride them to success. Shakespeare taught us that “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune.” A tide is coming.    DB