Daily Archives: June 15, 2007

Cheap gas

Among the reasons given in support of Big Boxes and in support of Geneseo’s role in hosting Big Boxes is that gas prices are getting too expensive for people to drive long distances to shop. This point was made again at last night’s County Planning Board discussion of the Village of Geneseo’s master plan.

While I have no doubt that rising gas prices are putting the squeeze on consumers, I am skeptical that Big Boxes provide a solution to this problem. The flaw in the argument is that it focuses only on the effects of rising energy prices on consumers, failing to consider their effects on manufacturers, distributors, and retailers.

My understanding of the logic of Big Boxes leads me to the conclusion that the business model on which they are based is particularly dependent on cheap energy. As a result, consistently and significantly higher gas prices will hit them worst, narrowing the margins that provides them a competitive advantage against smaller retailers.

Big Boxes “work,” meaning that they are able to offer low prices and a large selection, by taking advantage of the very low wages of factory workers in Asia and the very low cost of transporting the goods they produce to the United States. Add to this that the core consumers at Big Box stores are lower income Americans and you see that two of the three legs on which Big Boxes stand are weakened by rising gas prices.

Rising energy prices will add significantly to the cost of transporting goods halfway around the world, making the low wages of Chinese factory workers too expensive to reach. Rising gas prices will also add significantly to the already squeezed consumer, reducing their spending.

As manufacturing and distribution costs, heating and cooling costs, and the transportation costs of goods, workers and consumers rise, Big Box retailers will lose some of their competitive advantage. At some point in this process, it will no longer make sense for these retailers to build and maintain four and five acre stores twenty miles apart.

Maybe the most recent run-up in gas prices won’t last. But if it does, look for the Big Box retailers to be hit hard. They’re the ones whose business model depends on transporting large volumes of cheaply made goods long distances and selling them through a vast network of huge stores at narrow profit margins to cost conscious consumers.

Remove any one of those variables, and higher gas prices will change the whole equation. Big Box retailers will pull back, focusing on their core markets and forcing consumers to travel longer distances to find them.

Geneseo is not likely to be one of those core markets. Henrietta will thus return to its role as the regional retail destination for much of Livingston County, smaller retailers – at least those that remain – will regain some of their business, and the Big Box and small box chains of 20A will close.

Indeed, as an Applebee’s executive told the Geneseo Town Planning Board on Monday night, Geneseo is a “C” market, barely eligible for consideration by the likes of Applebee’s. Henrietta is an “A” market and Canandaigua a “B.”

Because of its small size,  Applebee’s is not convinced of our ability to deliver them the profit margins they demand. Because dining out is one of the first expenses to fall to rising gas prices, Geneseo’s C might turn out to be a failing grade.