The Oil Drum | Thursday Open Thread

176 comments on Thursday Open Thread

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Leanan on March 23, 2006 - 7:30am

I think Wal-Mart is heading for a fall, but not because of the cost of shipping stuff from China.

Wal-Mart's whole business model is built on cheap energy. Distribution centers that are far from ports and stores, stores that are far from population centers. Cavernous big boxes that take tremendeous amounts of energy to heat and cool. Just-in-time delivery/"rolling warehouses."

Morover, their customer base is low-income. The people who feel high fuel prices first. Every dollar they put in their tanks is a dollar they can't spend at Wal-Mart. Already, some people are not going to Wal-Mart any more, because the cost of the gas to get there would eat up any money they might save shopping there.

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Donal on March 23, 2006 - 8:14am

The Wal-Mart/Sam's Clubs that I know really aren't that far away from things, at least no more than the big malls and other big box stores. If I took the main road, I would ride right past a Sam's on my way to work.

I think people are buying in bulk at Sam's, and Costco, to stretch their dollars because everything is a lot cheaper than at the Giant or Weis stores, or at those little superettes you find in small towns. Maybe they're sacrificing the convenience of local shopping for price, but they would still drive to the local places anyway.

Also, you see Amish, Mennonites, and other country folk that are obviously making their weekly, or biweekly shopping trek. They might as well go to a cheap, big-box store.

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Leanan on March 23, 2006 - 9:04am

Wal-Mart is already feeling the pain. Their stock has dropped something like 25% over the past couple of years.

You may pass a Wal-Mart on your way to work, but your situation is probably not typical. I live in a suburban area, and I would have to go to the next town to shop at Wal-Mart. My parents live in a once-rural area that is fast becoming sprawl. They shop at Wal-Mart regularly, and drive quite a ways to do it. There's one in their town, but it's in an "industrial area," outside of town, past the garbage dump, far from any housing developments. They don't really have to worry about fuel prices, though, so they keep driving their SUV to Wal-Mart.

Not so for others:

As she folds clothes at a Laundromat near her home in San Pablo, Calif., Thamara Morales, 30, counts up the ways high gas prices have changed her life.
There are no more pizza outings on Friday nights. "It's cheaper to cook at home," says the $12-an-hour clerical worker and mother of two.
Her 6-year-old daughter, Audreanna, isn't going to the local theme park on weekends. "Last summer, she had a season pass," says Morales, who lives with her boyfriend.
Trips to Wal-Mart are out. The closest one is about 15 miles away. Just to get there and back costs more than she might save by going.
"I want to go to Chuck E. Cheese's," says Audreanna, bored after several hours at the coin-operated laundry on her mom's day off.
"It's too far," Morales says. The nearest one, in Hayward, is 27 miles. They go to McDonald's instead, just outside the laundry's doors.
For more affluent Americans, gas at almost $3 a gallon provides ample fodder for griping, perhaps regret at having bought a gas-guzzling SUV and low-level anxiety as tank fill-ups cross the $50 mark. But for the most part, the higher costs get absorbed by the monthly budget with little attention to how much they add up.
It's a different story for consumers on tight budgets, or those with long commutes. High gas prices are forcing changes in their lifestyles and buying habits.

USA Today

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Donal on March 23, 2006 - 10:21am

Wal-Mart plays rough and consequently has a lot of image problems, lawsuits, criminal investigations, etc. that may also have contributed to weak stock prices. I would ask: Can you definitely assign a portion of their stock drop to energy costs? and, Is that drop any more than similar stores over the same period?

I'm just sitting here trying to think of what sort of store is going to adapt well to rising energy prices. I think the home building chains will sell lots of caulking, insulation and wood stoves, but I can't think of anyone else that won't be hurt as much as Wal-Mart.

Unless you're selling something local, that you make with local raw materials and local labor, you'll have to deal with higher transport costs, right?

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Leanan on March 23, 2006 - 10:41am

I would ask: Can you definitely assign a portion of their stock drop to energy costs? and, Is that drop any more than similar stores over the same period?

I can't; I'm not a business expert. But Fortune magazine had an article last year that explicitly tied high energy costs to Wal-Mart's doldrums. Because their distribution system is built on cheap energy, and their customers are lower-income than most. (Unfortunately, Fortune doesn't leave its articles on the Web for long, and it's gone now.)

I'm just sitting here trying to think of what sort of store is going to adapt well to rising energy prices.

Target has done very well. Their strategy? Aim for richer customers than Wal-Mart traditionally has. Wal-Mart is now trying to emulate that strategy.

Unless you're selling something local, that you make with local raw materials and local labor, you'll have to deal with higher transport costs, right?

Yes, but there are more efficient ways of dealing with it than Wal-Mart uses. Wal-Mart is exquisitely adapted for a world in which energy is cheap. That's one reason they were such a juggernaut for so long. But now the world is changing, and what was once Wal-Mart's strength is now a weakness.

If you're really interested in the differences between companies prepared to operate in a "carbon-constrained world" vs. ones that are not, check out this site:

http://www.ceres.org/

They are more concerned with global warming than peak oil, but good info nonetheless.

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Don Sailorman on March 23, 2006 - 10:54am

Leann,
I do not know if you are familiar with the concept of a Giffen good. The idea behind the concept is that as incomes fall, people consume more of the cheapest goods--even as the cheapest goods increase rapidly in price.

For a possible example (The factual historical details are in dispute.) consider potatoes after the Great Potato Famine in Ireland. Potatoes went up a in price after the blight, but people changed their diet to eat more potatoes because that was still the cheapest food, and they cut down on luxuries such as bread or oats or fish or beer.

By analogy, my observation has been that some middle-class Target customers are shifting to Wal-Mart to take advantage of lower prices. Also, Target has had some bombs in their Cherokee line of clothing (which are now dumped at Goodwill and sold as if they are used items, which they are not), while Wal-Mart has an extremely astute marketing department that sells what people will buy--and nothing else. To some extent, I think Target has gotten fat, dumb and happy, while Wal-Mart is still lean and exceptionally mean and hungry.

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Don Sailorman on March 23, 2006 - 11:59am

Leanan,
Please accept my apologies for mispelling your name frequently. Is it from "Lea Nancy"? The problem is that I know well a couple of women named Leann (or Leanne), and I've been misreading your name consistently.

Anyway, thank you for the great quantity and excellent quality of your posts--something to look forward to each morning!

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Cherenkov on March 23, 2006 - 7:22pm

Ah, the glorious race to the bottom.

Soon we will all be foraging in the most low cost bix box stores of all, the garbage dump.

Weeeee. What fun it is to be American and stupid.

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Donal on March 23, 2006 - 11:21am

Yes, Forbes tied Wal-Mart to energy prices, but sharp investors ignored the conventional wisdom and snapped up Wal-Mart shares at a bargain. I'm no fan of Wal-Mart, but I still don't see what makes them uniquely susceptible to energy problems. And from what I've read, they are aggressively trying to adapt to energy woes.

Nordstrom's might get away with selling to the rich, but Target sells to the middle class, and IMO the American middle class is an endangered species.

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Leanan on March 23, 2006 - 12:14pm

Yes, Forbes tied Wal-Mart to energy prices, but sharp investors ignored the conventional wisdom and snapped up Wal-Mart shares at a bargain.

Wal-Mart is at $48 dollars today, near its five-year low. Target is near a five-year high.

I'm no fan of Wal-Mart, but I still don't see what makes them uniquely susceptible to energy problems.

I think the very things that gave them an advantage a few years ago are biting them now, and it will only get worse.

For example, just-in-time delivery. They keep only a three-day supply of their most popular items, depending on "rolling warehouses" (frequent, carefully-timed truck deliveries). That makes sense in a cheap-gas world. Why pay more for on-site warehousing when you can have daily deliveries instead?

Obviously, that math changes if fuel is expensive and real estate is cheap. Wal-Mart loses its advantage over its competitors.

And from what I've read, they are aggressively trying to adapt to energy woes.

They are, but whether they will succeed is a whole different story. It's not easy to change a large, complex organization like Wal-Mart. They may want to sell fine wine and sushi to rich yuppies, but so far, the yuppies are still going to CostCo.

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Donal on March 23, 2006 - 2:04pm

JIT is hardly unique to Wal-Mart. I think when you say "Wal-Mart" there are a whole lotta big boxes doing much the same thing. But Wal-Mart is the biggest. Will Sears and K-Mart eat Wal-Mart's lunch? I haven't seen either of them do anything right for twenty years.

Target (Tar-jay) will do well as long as my sister still has a credit card.

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Leanan on March 23, 2006 - 3:23pm

JIT is hardly unique to Wal-Mart.

Of course not. But they do it best. They are more committed to the strategy than anyone else, and will have a harder time changing.

I think when you say "Wal-Mart" there are a whole lotta big boxes doing much the same thing.

Oh, yeah. I think all the box boxes are doomed, actually.

Will Sears and K-Mart eat Wal-Mart's lunch?

Who knows? Maybe Sears will find a way to make its catalog business work again. :)

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Donal on March 23, 2006 - 4:41pm

Again, I have a hard time understanding why hard times are going to hurt Wal-Mart but leave the Quickie Mart in good shape. Where is Apu going to get his stock? How is he going to stock up if credit evaporates?

I think there will be a lot less stuff to sell, and a lot fewer dollars to pay for them, and as DS mentioned, WM keeps track of what is selling very well.

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Leanan on March 23, 2006 - 5:09pm

Again, I have a hard time understanding why hard times are going to hurt Wal-Mart but leave the Quickie Mart in good shape.

Because the QuickieMart will still have customers. Indeed, it will have more customers, while big boxes will have fewer. And the big boxes are dependent on high volume to make a profit.

Where is Apu going to get his stock?

From the distributors who can no longer sell to Wal-Mart, either because Wal-Mart doesn't need the stuff, or can't pay for it.

How is he going to stock up if credit evaporates?

Hopefully, he won't need credit.

I think there will be a lot less stuff to sell, and a lot fewer dollars to pay for them, and as DS mentioned, WM keeps track of what is selling very well.

I agree, but Wal-Mart has a lot of resources sunk into infrastructure for the current system. Computers and software to keep track of inventory, huge stores and distribution centers. And look at what they are planning for the future. RFID tags on everything, so just-in-time can be just-in-time-ier. Entering the financial services market, so Wal-Mart can be your bank, too. Expanding to Brazil, Canada, Japan, etc.

Wal-Mart has to do this kind of thing. Stockholders want to see growth. The local Mom and Pop store doesn't have to grow or die. As long as they aren't losing money, they'll be okay.

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Donal on March 24, 2006 - 8:10am

What I think is that all supply chains will have to adapt to the new realities, even the one that eventually supplies the Quickie Marts. There will be winners and losers. I don't see Quickie Mart as a guaranteed winner just because it is close to customers, nor do I see Wal-Mart a guaranteed loser because they are currently in big-box stores.

In Wal-Mart: The High Cost of Low Price, Brave New Films profiled a WM that negotiated with some town for an initial two years without sales tax. When the period was up, they abandoned the stores for new ones just across the town line. What this tells me is that WM is more than ready to adapt their store locations to current conditions.

In general terms, I am skeptical of the belief that PO is going to "get" all those groups that we don't like (SUV drivers, Wal-Mart) leaving PO-aware people with PV panels, backyard gardens and wood stoves to inherit the Earth. Energy depletion will certainly bring change, but I suspect many of the pre-Peak winners will also be post-Peak winners.

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Leanan on March 24, 2006 - 9:22am

I don't see Quickie Mart as a guaranteed winner just because it is close to customers, nor do I see Wal-Mart a guaranteed loser because they are currently in big-box stores.

Agreed. There's no guaranteed anything after TSHTF.

In Wal-Mart: The High Cost of Low Price, Brave New Films profiled a WM that negotiated with some town for an initial two years without sales tax. When the period was up, they abandoned the stores for new ones just across the town line. What this tells me is that WM is more than ready to adapt their store locations to current conditions.

That tells me they are very short-sighted. Who is going to give them tax breaks again, if they keep doing that?

In general terms, I am skeptical of the belief that PO is going to "get" all those groups that we don't like (SUV drivers, Wal-Mart) leaving PO-aware people with PV panels, backyard gardens and wood stoves to inherit the Earth.

That is not what I am arguing, nor is what I believe. I am arguing that the companies that are best-suited for the current situation are often the worst-suited for a radically new one. (Regardless of whether I like them or not.) Sort of like organisms that are most specialized tend to be most vulnerable when the environment changes.

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jokuhl on March 23, 2006 - 10:54am

The People of Damariscotta, Maine just voted down the possibility of a Wal-mart in their town. (Via a 'Max Store-area limitation') They have to drive to neighboring towns to get their Plasti-Crap.
http://morningsentinel.mainetoday.com/news/local/2563816.shtml

I have to wonder if these big-box places might not find it worthwhile in the, well, Medium-Run.. to work with city-governments who are planning Mass Transit, in order to locate stops and stations at their outlets. We have busses that run to the Maine Mall, in South Portland, but I've wanted to see us get more serious with our Routes, and maybe start looking at the Electric Light Rail kinds of options as a next step, to make it really easy to get to shopping centers. Big disincentive to the City of Portland, of course, to send the spenders down to SOUTH Portland, but certainly a number of Benefits could be weighed into the mix, including perhaps the ease with which you could park at the mall, and then have easy access IN to Downtown as well, without the hassle of dealing with 'Them City Drivers', as people from within a couple of miles of Town are more than apt to say around here.

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AlanfromBigEasy on March 23, 2006 - 2:01pm

The Portland "Gateway" station is the nexus of their Red, Blue and under construction Green Light Rail Lines. Although poorly orientated, there are a number of "Big Boxes" (I went to Office Depot or Staples) accross the parking lot from the light rail "super station" and they get a steady business of walk-ins from people on their way home.

Other Portland stops are next to supermarkets, small town centers and new shopping malls (eastern terminus of Blue Line and near western terminus of Blue Line). Blue Line also goes through middle of pedestrian mall at "Saturday Market".

Portland and San Diego have lead the nation in Light Rail development. Congrats ! :-)

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Fletcher on March 23, 2006 - 8:39pm

Alan, we're talking a different Portlands here. Indeed Portland Oregon has a recent history of novel land use ordinances and a committment to light rail and other forms of public transit. Portland, ME has made modest efforts that have not been especially successful. Portland has had a rail connection to Boston for about five years now, and that has been pretty popular, even allowing residents in Southern Maine to commute to Boston (York and Cumberland Counties are a population of approximately 350K).

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jokuhl on March 23, 2006 - 10:04pm

I was going to tell him. I just wanted to bask in some undeserved glory for a few minutes.

Beyond the line to Boston, I hear that there's a line between Freeport and Rockland, I think it was.. now if they can just bring it back down to Portland, then the east coast would be somewhat accessible again. (If Boston deigns to connect the Nor'easter to South Station)

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knmnloyd on March 23, 2006 - 11:32pm

There is almost nothing to congratulate San Diego about inre transportation. (Or almost anything else.) This is the housing bubble, 90 mile commute, take the ATVs to the desert in the "Toy Hauler" for the weekend capitol of the world.

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AlanfromBigEasy on March 23, 2006 - 1:48pm

Zara's, 1.5 blocks from my home will likely continue to do well. An IGA large corner. very small supermarket. Active Po-Boy shop in back of store in meat area.

Wal-Mart SuperStore is 6 blocks away (came in against great neighborhood opposition) and is likely to reopen in a few months.

Saturday Farmer's Market (~8/10 mile way) is also about to restart.

WalMart, whatever it's faults, is well managed and will strive to adapt. Shifting distribution centers to rail sidings and delivering as much as possible by rail is one possible adaptation.

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reno on March 23, 2006 - 9:43am

My shadow hasn't crossed a WalMart door in over two years.

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176 comments on Thursday Open Thread

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