US Retail Space and the European Mess

Thought about an old acquaintance today, we’ll call him Harry.

Harry unfortunately is no longer with us. I first met Harry years ago when he was an in-patient on a medical ward in a large, cold, indifferent hospital in an even larger, colder, more indifferent big city. Already in his 80s, his body was frail, but his mind laser-beam sharp.

One of Harry’s most prized possessions was a faded birthday card from his only surviving relative, a niece living in a distant city, whom he hadn’t seen in years. He kept the card sitting on the nightstand next to his bed like a trophy on display so he could show it to anyone and everyone who ventured into his room.

For most that passed in and out Harry was, understandably, just an old guy really late on the back nine of his life. To me he was a treasure trove of information, in some ways worthy of the status of a national monument.

 Harry spent his professional life trading commodities. He jokingly told me once that over his career he traded everything from cotton to soybeans to wives. Listening to him as the days passed pull streams of commodity prices out of his head, each with its fascinating own story, told me everything I wanted to hear, someone who had been there, seen it and survived.

 Back then I was early on the front nine of my life, trying to learn how to effectively practice some serious internal medicine. So time was a critical commodity for both of us. Whenever I could I dropped by his room, pulled up a chair and started firing questions. He never seemed to mind. If anything it seemed to take 10 or 15 years off his face. I found out Harry several times in his life had been up and he had been down. Up is always better he told me.

One day we were discussing high lumber prices when he suddenly stopped, paused for several seconds and said: “Listen, son, this is a point the politicians, the bureaucrats and all those regulators never seem to get; and probably never will. The cure for high prices is high prices.” It was a simple, declarative statement, probably too simple to be appreciated by many.

What brought Harry to mind after all these years is an article about US retail space that appeared in the Financial Times today. It’s funny how we choose to look at things. Who would associate retail space with high prices as in how many square feet are out there versus foot traffic. Harry would’ve.

The article, “Too many shops, too few shoppers,” quoting from a book by Robin Lewis and Michael Dart, The New Rules of Retail, about the economic downturn’s effect on store traffic and excessive retail space, points out: “To put the excess in a wider context, Mr Lewis and Mr Dart say the US has 22 sq .ft of retail space for every person in the country. The second highest figure is Sweden with 3 sq. ft. per capita.”

No doubt some will point out there is a big difference in population between Sweden and the US. And to be sure there is. But space and prices are synonymous; too much space equals too high prices. Just ask, as the article states, retailer Gap.

“The process of shedding space began this year at Gap…whose prolonged slump came because it opened too many stores….”  Gap isn’t, unlike some others, Borders and Circuit City, the once big electronic chain, going out of business; it’s simply cutting the number of its stores by 20 percent.

There are two ways to reduce excess; the harsher of the two is called bankruptcy.

The difference between Circuit City, Borders and the Gap is implied in Harry’s statement. You do it or the market will do it for you.

Think about it. Isn’t this what the bond investors are really saying to all those European bureaucrats and politicians? And that's why it's just as importnat to let the market process work.