The Penny Hasn’t Dropped Yet

There is an article in this weeks Economist concerning the job threats of automation to retail workers in the USA. It is a reasonable article but what struck me most about it was its narrowness of view and a failure to grasp the broader, wider implications and realise that this applies right across the global economy and will impact far more than just retail jobs. It will inevitably impinge upon not just the way businesses run but how society reorders itself to deal with the economic consequences.

http://www.economist.com/news/leaders/21722020-shopping-mall-not-factory-where-american-jobs-are-most-risk-how-prepare

A Starting Point

The Economist article starts with the following paragraph:

“IT USED to be the American shopper that exemplified the state of the world economy. The focus now should be on the person on the other side of the till. America’s retail industry is huge: it employs 15.9m workers, who represent one in nine American jobs. It is also undergoing wrenching change, as e-commerce eats into sales. There is no more pressing test of society’s ability to cope with technology’s impact on work.”

The problem is a lack of joined up thinking here because whilst it is well and fine to write about retraining the people who will inevitably lose their jobs, you also need to consider the many thousands of square feet of retail property that will also become redundant with them. What impacts that will have on local tax revenue, the return on investment for property companies and the institutional investors that provide the funds. Of course if the shop workers lose their jobs, the companies that employed them won’t be doing so well either and that will have further job impacts throughout their supply chain.

Looked at in another way, people losing their jobs is just a symptom of something else rather than being its cause however the problem runs far deeper and therefore has broader implications. However in order to grasp those we need to look at exactly where we are today and understand that right now in terms of zero hours contracts, in work poverty and an apparently insatiable demand for cheap labour which fuels immigration, we have clear signposts to the problems ahead.

Warts on Your Warts

It was always the case that a service and consumer economy could fairly rapidly become an inverted pyramid resting on its point rather than its base and ever ready to topple, this is where we now are economically but seeing it for most, is not easy so perhaps some examples.

Back in the 1980s, I attended a charity evening being run by people in the financial services industry, it was amusing, loud, yes rather brash and included a charity auction. The Auctioneer was very talented, highly entertaining and milked a willing audience for quite a lot of money but in one sense, he did too well and ran out of things to auction. No problem said some in the audience, a little the worse for booze and still in full cry, they got him to auction off paper clips and it was quite a hilarious climax to the evening.

In a sense, the 2007/8 crash can be likened to this event although with far more serious consequences. Back then with lots of surplus cash flowing around the system, financial institutions fell back on creating “investments” such as sub prime mortgages in the US being bundled up into packages that frankly had the same value as the paper clips mentioned above. The crash actually came when the ‘markets’, ever fragile in terms of confidence, realised this and the whole deck of cards came tumbling down.

The problem seems to me is that we didn’t learn the lesson and have recreated the same problem but this time in terms of goods and services provided directly to the public. Just like the financial investment industry ran out of innovative ideas so too have manufacturing industries like mobile phones and car manufacturers, another market collapse is inevitable in a world of paper clips.

Last year in a previous blog, ( http://baldysblog.co.uk/2016/04/06/its-not-just-steel/ ), I wrote the following about our economy:

“The Wrong Business Model

I have written before that if the most significant consumer product of these past 5 years is the iPhone and iPad then something is seriously wrong with both our economy and our lack of innovation but it is more than that, sadly much more. The key problem is a race to the bottom as far as pricing is concerned and when that point is reached, we go even further further and wrap it all in a finance package that like sub-prime mortgages of the pre 2007 crash period are obviously not sustainable. We got ourselves into a crock of shit in 2007 and apparently learned so little from it that we have gone out to repeat it all over again, not smart.

Two classic examples come in the shape of new car and mobile phone sales, in neither case do the majority of punters look at the full retail price, all they focus on is what their monthly cost is and whether they can afford that. In the case of a £600 phone, it will be around £40 per month with a calling plan over 24 months with a £20,000 car, around £300 a month for 36 months after which there is a balloon payment of roughly half the original price to keep the car or, walk away from that one and you start all over again.

There are obvious problems with both these deals but the thing to understand is that this situation has come about with the manufacturers investment in high volume production and very low interest rates with which to finance their products into the market place. Between physical automation in production methods and an efficient supply chain, price for quality has bought massive savings much of which has been passed on to the end consumer in terms of higher quality manufactured goods and lower prices. Unfortunately the Achilles heel of this manner of doing business is that is wholly reliant on a constant high level of throughput, it needs high volumes in order to work, any fall in volumes and the knock on effect right through the supply chain can be catastrophic.

The problem with the two examples I have given, phones and cars concerns demand and market saturation. In the case of mobile phones, as devices and despite all the claims made for them, they have very limited functions of themselves, their real value to the end user lies in what they allow them to connect with and to, Twitter, Facebook, Internet and so forth. Whilst there will always be some people who “must have the latest gizmo” for the majority of users in the West, we are already close to market saturation, most people have a drawer containing various previous handsets so the space for “more” is strictly limited. The obvious thing for the makers of such devices is to look to developing markets to keep their sales up but in places like Africa where electricity and recharging phones is an issue, power hungry smart phones are not suitable.

With cars we have a similar problem but with a twist. Cars are expensive items and unlike a smartphone which will only have a minor value, have a significant residual value which can only be realised in the second hand car market indeed, the finance deals rely on it. The problem comes when the second hand car market becomes saturated and therefore can adversely impact new car sales. Also there is a direct link in terms of pricing between new and second hand cars so that reducing new car prices in order to stimulate the market will inevitably also lower the value of second hand cars which need to have a minimum value in order to make the finance packages work.”

Pitfalls Ahead

What we have to realise is that the “problem” is no longer about which brand is winning and more about what business sectors are viable and are those that global trade rely on still in good health ?

It is not just about “shop workers”, exactly the same circumstances are about to engulf Estate Agents, Lawyers, Accountants, Doctors, Clergy and Teaching, the digital revolution has only just begun and yes, it will hugely impact those professions long since considered ‘safe’ and the province of the ‘Middle classes’. This technological change will be not show respect to “yesterday’s social status”. In fact when discussing the impact of the internet on sales, perhaps we should be focussing our attention to cross border sales which attract no tax revenue but surely should ? From that, getting a global agreement on how to share tax between different countries.

Global society and for the UK in particular on leaving the EU an opportunity beckons, should lead to countries developing new and different ways of organising society from education, through health care and indeed changing our current concept of work, tax and welfare. Handled properly and expeditiously, it could lead to and exciting new world for all, handled badly and the usual response of civil conflicts and wars will no doubt follow.

A Possible Solution

However for retailers and in the UK, for the “High Street” there may be a partial solution to the retail jobs problems. Whilst the Internet is a great way to buy stuff competitively, the real problem apart from the hype generated by manufacturers, is how do you decide which brand/model you want ? Perhaps the solution is to have ‘demonstrator stores’ where the public can feel/touch, even see the various products perform and then once satisfied, buy and book their delivery on-line and in store. It would be a different business model for sure but, the owners of retail premises might supply the opportunity, a retail operator the staff, a manufacturer the product training for that staff and the goods to demonstrate.

This would not be an “Apple Store”, it might be a “Washing Machine Store” or “TV/Audio Store” that houses competing products from different manufacturers but all properly demonstrated by fully trained staff, NOT directly employed by any one Brand. Internet shopping is fine but quite often, I want to touch and feel before I part with my cash.

The point is that in order for retail to survive, it must be a destination venue which is obvious if you are having a suit, shoes and such stuff fitted to you. However, it can go a lot further, the future of retail is on a par with “entertainment” in terms of going to a shop or Mall, you go for a unique experience like, getting to know what you are buying before you part with your cash, just an observation and a thought.

Conclusion

If it is true which I believe it still is that for all the ‘industrial activities’ in any economy, the real vitality and strength of any economy can be judged by sales activity in the retail sector then it is not just a matter of retraining retail workers who are displaced by the internet. The solution needs to be much more far sighted than that, training and education will be important but so too will be the imagination and willingness to re-purpose thousands upon thousands of square feet of redundant retail premises, shopping malls the length and breadth of the country. We have failed miserably on majority of most British High Streets, just how many betting shops and beauty salons do we need and that other staple Estate Agents may well be about to disappear soon too, we need to do a lot better in the future.

If we go back to The Economist article I quote, a particular sentence to highlight: “America’s retail industry is huge: it employs 15.9m workers, who represent one in nine American jobs.” Look at that from another perspective and one might say that a collapse of the retail sector would deprive the US economy of just over 11% of the spending power of those workers wages. True as they will be lower paid than most, it won’t be equal to 11% of the total economy but even if it were just 5% overall it would have a major impact in both the US and right across the global economy.

It has always been obvious that if you automate everybody out of a job, without wages there will be nobody to buy your products, this isn’t rocket science is it ?

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