Small Town Economics

I’ve spent some time in both Gisborne and Blenheim recently. One thing you notice is that in smaller towns, there are a lot of big chains. I was thinking about why this is, and have a theory that goes something like this:

Because margins in retail have become quite thin, even long supply lines (distance from distribution centre to a node in a retail network) can be economic and profitable when these processes are highly productive.

The local retailer does not have buying power – they can’t negotiate directly with the manufacturer, they can’t get good freight deals because the volume of their freight is far lower than a national chain – the economies of scale are enormous when you add them up across all of the inputs for a basic retail store, particularly when you think about technology and point of sale efficiencies.

And that’s before you think about wages – stories in the US suggest that big chains pay better than “mom and pop” stores. What is a riskier employment proposition – a small store or a national chain that might even offer management training and higher wages over time?

The only hope for smaller retail stores is to have very streamlined and flexible lines of business. Selling higher margin products helps, but easy online shopping, returns and customisations and smart marketing are the only way to stand out from the crowd.