The Office Supply Oligopoly is Reeling

Today's earnings announcement from one of the two major players in the "bricks and mortar" office supply retailers, Office Depot, was another telling story of the state of retail in America. Fewer and fewer players are offering more and more shelf space to fewer and fewer suppliers, resulting in lower selection, quality and higher prices to consumers over the last 20 years.  FINALLY this is catching up to the retailers and is sending their businesses into a free fall.  Anyone with 1/2 a brain knows to buy office supplies on line from Non-Brick and Mortar companies that gouge and rip off any flesh and blood buyer that walks into one of their stores.

The announcement read on Seeking Alpha states Office Depot will close 400 stores after it's merger with the other oligopoly player Office Max in November 2013. Staples, the 3rd oligopolist, announced just about a month ago the closing of over 200 stores. 

There is no mistake in why these companies are reeling from their business models.  They are totally flawed.  The model has been replicated in retail across the US for a couple decades:  Open big box stores with a large selection of supplies in every category.  Start with low prices that drives out all the "mom & pop" business that dominated the industry since the beginning of time.  Then start weeding out your suppliers, shrinking the selection of products in each category, while slowly raising prices.  Eventually each product category is down to one supplier and maybe your store brand.  Then keep raising prices.  Meanwhile, the producers of all of the products you used to sell start to also go out of business.  Thousands more manufacturing jobs disappear as the major retailers squeeze out the supply chain till it virtually disappears for all but the select few suppliers.  Now the retailer "is" the supply chain and those who produce products sell directly into that supply chain and are forced to continuesly lower their prices (forcing more and more production "off shore") to increase the profit margin of the retailer.  The also start to lower the quality of their own products to meet this spiraling need for higher profits every quarter to their investors as well.  If they don't play this game they will get swallowed up or merge or go out of business all together.  In the end it is just the end consumer who looses every time.

Enter the Internet and the migration of some of the more tech savvy "mom & pop" businesses.  They find those suppliers left producing and selling products to the non-oligopoly retailers and start selling  online at steep discounts to the brick and mortar retailers.  This phenomena starts to seriously eat into the business of the oligopolist.  Business, the bread and butter of the office supply industry, are not stupid. They go to alternative suppliers. The brick and mortar business start to market more to retail buyers, trying to sell consumer electronics, back to school supplies and other non-core products to consumers who are not as knowledgeable about pricing, are less frequent buyers and easier to rip off.  Eventually even this approach fails as consumers catch up to the game.  Stores close.

The above scenario has happened in many retail industries in the US.  One has to wonder what is on the minds of the Fed and other "economist" when they say there has been no inflation for so long and they are hell bent on increasing this supposedly non existent inflation.  Obviously they have no understanding of the retail dynamics that have been going on in the US for years. The fact that so many of the products Americans buy are sold by so few sellers and those sellers have been diligently shrinking their suppliers, resulting in prices that have done nothing but rise for the last two decades to the retail consumer seems to escape them.

Case in point: I went to buy one gallon of deck sealer a week ago for my deck.  I went to Sherwin Ripoff, I mean Williams.  This is another brick and mortar retailer to both consumer and contractor businesses that had to merge with Duron to stay in business, creating yet another strong oligopoly player in the paint business.   The result: One gallon of deck sealer is $47!  Yes $47 for a GALLON of deck sealer!!  This is INSANE!  I could start replacing the wooden deck boards for the cost of just two gallons of sealer to protect the wood!  Why is this so?  How is it possible?  (The Fed would say there is no inflation because the quality of the deck sealer has increased so much it is now WORTH $47! Ha!) Simple, from the chemical manufactures to the retailers there has been such consolidation that there are no other product options available.  What better then a heavy, expensive to ship item like paint to create an oligopoly industry in.  I could literally buy raw ingredients and make the gallon of deck sealer for less than $47 if I really wanted to. 

I refused to buy the Sherwin Ripoff sealer.  Instead I went to one of the other oligopoly sellers of paint products, Home Depot (the other being Lowes) where the retailer has followed the same pattern explained above and only allows ONE brand of deck sealer on their entire shelf space, Bear.  What is the result?  I got a gallon for ONLY $33.  Yea, deck sealer is worth about $8-$10 Max.  But we as a retail buyer are paying $33-$50 for the product.  Sure the profit margins are rising across the board for the few companies still manufacturing and selling the products but for how long before the entire game implodes? 

Who pays the most for this consolidation?  Well simply put, I can still swing the $33.  But to the rest of the world where $33 can be a day to a week's wages, no way.  The cost of buying nearly EVERYTHING has gone further and further out of reach of the rest of the world.  Yet you will hear hot shot economists bragging that the number of people living on less than $1 a day has declined to like a billion people.   Big F&%#@ing deal!  One needs $3 a day to even think about living in today's world without completely starving yet economist are still using a 25 year old metric to measure poverty.  Where are the central bankers and economist who actually see how the world works, not just plug in numbers in the latest modeling software and call it a day?

From the Horse's Mouth

Six years ago, our current president Obama was talking about rebuilding our national infrastructure.  Of course, after 2 pointless $1 trillion + wars we are sitting on an infrastructure that is essentially six years older with little to show for improvement.  So Vice President Biden's quote about LaGuardia Airport in NY is kind of ironic.  I mean it is his administration that ran on the premise they would increase investment in the nations infrastructure.

Here is the quote:

"If I...blindfolded you and took you to LaGuardia airport in New York, you'd think, 'I must be in some third world country."'

Why on earth does this obvious statement get so much attention?  My latest trending thought process goes something like this:  "America is in a great big state of denial." That this Biden Quote gets any attention at all by the mainstream press is proof of this.  I can see some of the regular folks who have been harping on the decline of America to a 2nd world status jumping on this statement and saying, "See, finally someone who runs the country is starting to understand how bad it is." or whatever.

But for mainstream media?  I mean aren't these folks people who travel regularly?  Don't they go to European and Japanese, Korean airports and even Middle Eastern airports that represent what can be  built in a developed environment?  Is it not painfully obvious that the miles of "drywall" that fills the interior of "public" spaces in the US and the extremely poor workmanship, lack of energy efficiency, lack of technology in nearly every facet and a general feeling of inhumanity is everywhere?  There are exceptions as the US rebuilds it's urban infrastructure after 4 decades of urban decline (in select cities) but for the most part we are still decades behind in our infrastructure upgrades. 

The FT article that discusses the US infrastructure issue also quotes from ASCE:

The US would need to invest $3.6tn to return its infrastructure – including energy, parks, schools and transport – to a state of good repair by 2020, according to estimates last year by the American Society of Civil Engineers.

Then they go about discussing all these stupid ways various cities are going about raising extra money JUST TO KEEP UP WITH MAINTENANCE of the existing infrastructure.  Well, funny the $3.6 trillion is just about the cost of the two pointless wars (with interest, long term care of the solders etc.).  This nation has plenty of money to take care of all it's issues but it has a tax system the favors the rich and upper middle class so extremely they keep getting richer and richer while everything falls apart outside of their isolated little burroughs where their exceptional tax base supports the perception in their environment that everything is just fine. 

So while 50% plus of children drop out of high school in many top urban areas in the US and while the nations infrastructure, manufacturing base and wages go into a free fall, while the average weight, income disparity and per-capita energy use continues to increase, Americans are just plain "in a state of denial" about nearly every reality around them.

So this is my latest rant and thinking.  As many people who know me know, my ideas and trend thoughts shift every 6 months to year.  Moving to the 2nd world has been around for a while, living in a state of denial is the latest reality...  Hope to contribute a bit more going forward.

By the way, it looks like I will be pursuing my Master's in Econ this year going forward, so stay tuned for some interesting reads!