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Musings Report 2020-25 6-20-20 Appreciating What's Gone For Good
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For those who are new to the Musings reports: they're a glimpse into my notebook, the unfiltered swamp where I organize future themes, sort through the dozens of stories and links submitted by readers, refine my own research and start connecting dots which appear later in the blog or in my books. As always, I hope the Musings spark new appraisals and insights. Thank you for supporting the site and for inviting me into your circle of correspondents.
Thank You, Patrons and Contributors!
I want to extend a special thank-you to some of my most stalwart supporters, whose contributions via mail in April and May I just received: Jim A., Royce M., Mitch S., Allison I. and Darren B.--thank you very sincerely for your many years of encouragement and support.
Mailing Address Change
After 15 years, I'm changing my mailing address from PO Box 4727 Berkeley CA 94704 to PO Box 10847 Hilo HI 96721 to reflect the reality that we've spent zero days in California this year and I doubt we'll spend much time there, if any, for the remainder of the year.
Appreciating What's Gone For Good
I considered titling this Musings "mourning what's been lost" because mourning what has closed or come to an end will likely be one of the universal experiences of the pandemic.
But since the end can also be necessary or a relief, I decided to widen the emotional range to "appreciation" rather than just mourning.
I also wanted to use "gone for good," as it means "gone forever" but also carries the idea that this change was for the good.
After pondering this topic for months, a "gone for good" closure of a local business prompted me to write about it today.
Our town's only wine shop closed for good this week. The supermarkets and the one big liquor store stock wine, of course, but "Grapes" was a labor love of the owner, a tiny storefront in a ramshackle old wooden building downtown with a single narrow aisle--just enough room for a handful of customers (four was about the maximum).
What made Grapes unique was the owner Randy's enthusiasm for wines, his first-hand knowledge (via tasting) of all the wines he stocked and his effort to stock wines from all the major regions, almost all in the affordable price range (under $20).
Two months after the lockdown/shelter-in-place order took effect, Randy sent an email to his loyal customers announcing his decision to close the shop after 12 years. He explained that he'd been considering closing since Fall of 2019.
I don't know his age, but I would place him in his late 50s to mid-60s. My sense is he felt he'd had a good run but fighting the good fight to stay open was no longer worth the sacrifices. When I visited his store for the last time this week, I thanked him and asked if the business had become too much.
He didn't answer directly, saying that he was moving to the next phase, a blog where he would post recommendations for wines available elsewhere in town--and he added "for free." In other words, there would be no revenue; he was switching from an enterprise to a hobby.
The business model for a small wine shop was always marginal, as fixed costs are high, profit margins slim and the customer base limited. Randy's shop was a labor of love, not a geyser of profits, and I think many small businesses that are closing are like this: a marginal business model, sustained by the devotion of the owner, not by profits or growth.
My experience is that only those who've owned and operated small businesses understand the marginality of most small business models. These models only work--i.e. generate enough revenue to pay all expenses and a profit large enough for the owner to pay down debt and accumulate savings--if everything is at a full boil: the dining room is crowded every lunch and every dinner, peak seasons bring in enough sales to compensate for all the months of losing money, and so on.
Restaurants, cafes, retail shops--all of these enterprises are intrinsically marginal business models. They all have high fixed costs (rent, utilities, insurance, general overhead, fees, wages, taxes, etc.) and limited customer bases because there's a limit on how many customers can fit in the space and a limit on how much customers are willing to pay for their meals, services and goods.
The marginality of small businesses has been increasing for the past two years as the global economy slowed. Several long-established restaurants in town closed in the last half of 2019, and nobody has leased the empty spaces. The costs remain so high and the economy has been so stagnant that prospects were simply too poor to take the risk--and this was in late 2019.
Sectors most people assume are rock-solid--airlines, tourism, colleges--are just as intrinsically marginal as small businesses, for the same reasons: their business model has high fixed costs and overhead, limits on how much customers are willing to pay, and limits on how many customers can be served.
These business models simply don't work at 70% capacity, any more than a restaurant can stay afloat if it's half-empty at peak hours.
Another vulnerability in all these business models is they're dependent on discretionary spending, i.e. spending that is optional. (Yes, even college, as much cheaper community colleges are an option for the first two years, or simply skipping college entirely and entering a field that doesn't require a college degree.)
Airlines have high fixed costs--each aircraft costs $100 million and up ($320 million for a long-range Boeing 777), fuel is a huge expense, and so on--and high overhead: the entire reservation/service infrastructure is enormously expensive to maintain.
These overhead costs are distributed over each flight and customer, so if the number of flights and passengers plummets, the overhead costs per flight/passenger skyrocket, because the costs of buying or leasing the plane and operating the reservation system don't go down.
Put another way, airlines are only solvent if they are turning around their aircraft as often as possible and filling each flight. If neither condition is met, the airline cannot survive unless it raises its ticket prices significantly.
Airlines have long paid their basic costs by serving business travelers, but the lockdown has illustrated that much of what was once considered essential travel is in fact discretionary. This is a mortal blow to the airline business model.
Tourism is similar: resorts have high fixed costs regardless of how many guests have booked rooms.
Colleges also have enormous fixed costs: their campuses, staff and administration. Many U.S. universities have become dependent on Chinese students (often subsidized by the Chinese government) paying full tuition. These students are now gone, and the loss of this revenue will push many colleges into insolvency.
A significant percentage of travel and higher education costs were also paid by debt. Now that lending is tightening up and households are experiencing declines in income and realizing the importance of saving, debt will no longer be used as freely.
Then there's entire sectors that have suddenly become marginal, for example commercial real estate. It's very likely that 40% or more of all office/retail space in the U.S. will soon be vacant. There are knock-on effects of empty office buildings; all the cafes and small businesses that depended on office workers won't have enough customers to survive.
The only way these marginal business models can function at half-capacity is to cut fixed costs in half. This means rents have to drop by half or more, overhead expenses have to fall in half, and so on.
As I often point out, revenues are on a slippery slide and can go down very quickly, while costs are on a ratchet and refuse to go down until the system breaks.
What happens when office and retail space remains vacant? The owners still have mortgage and property tax payments, and so eventually they go bust and declare bankruptcy. The potential buyers will base their bid on the reality that a space that once rented for $2,000 a month might fetch $500 a month, but even that is uncertain. There may not be any demand for the space at any price because the odds of generating a profit on the space are so low.
The line of high fixed costs dominoes is long. Once commercial space loses half or more of its value, property taxes will eventually fall as well. Once airlines go broke, airports won't be able to charge high fees. The entire fixed cost structure will have to be completely reworked from the ground up because nobody will be left who can afford high rent, high fees, high wages, high taxes, etc.
The federal bailouts are designed to fill a temporary gap in revenues, with the assumption that all these marginal business models that depend on discretionary spending will soon soar back to full occupancy. But the models were always marginal, and returning to anything less than full occupancy dooms all these enterprises to insolvency.
The restructuring of fixed costs will be painful but necessary. The high cost structure is "gone for good."
I'm going to miss Randy's little wine shop, and the odds that someone else will open a similar shop as a labor of love are near-zero: the costs are too high, the risks of losses are too high, and it's too much work for such an uncertain return. As someone with decades of small-enterprise experience, I know how crushing even the smallest enterprise can be.
We will mourn the labors of love that close, and then all the marginal businesses that can no longer afford their high fixed costs. Those collecting the rents, taxes, etc. are unprepared to accept the reality that all these marginal business models will never come back until their fixed costs fall so far that everyone down the line goes broke, too.
If we understand the impossibility of paying the extraordinarily high fixed costs of enterprises that have to run at full capacity, we realize that the era of cheap credit, cheap air fares and everything else that was only affordable because debt was expanding faster than income and the real economy are gone for good. Many will mourn it all, but some of us will feel relief that the craziness and pressure the system placed on us will be gone for good, too.
Highlights of the Blog
New Podcasts:
AxisOfEasy Salon #9: Algorithmic Guerrilla Warfare
Posts:
For the Rich to Keep Getting Richer, We Have to Sacrifice Everything Else 6/19/20
The Fed's Casino Is In Flames, But Please Continue Gambling 6/18/20
The Fed's Grand Bargain Has Finally Imploded 6/16/20
Best Thing That Happened To Me This Week
Sometimes we discover the best thing isn't what we have but what we don't have. In chatting with another customer at the now-closed wine shop, she mentioned taking care of her 89-year old Mom who suffers from dementia. I realized the best thing is that we're taking care of my 89-year Mom-in-law and that she doesn't have dementia. That's an extraordinary blessing that I didn't fully appreciate.
From Left Field
Americans turn to home-farming as they fear for their food supply: As Covid wreaks havoc on the US agricultural chain, a wholesale reform of the country's food system is on the cards
Satellite Data, Internet Searches Suggest COVID-19 Hit China 'Long Before' Previously Known: Harvard
Wealthy buyers reportedly in 'mad rush' to leave San Francisco-- it begins....
The fundamental problem with Silicon Valley’s favorite growth strategy (via T.D.)
Party Leaders: Comrade Leonid, Comrade Donald -- ouch...
Galbraith: 'Disillusion' Is America's One Big Growth Sector Right Now
The Macroeconomics Of Degrowth
The Looming Bank Collapse: The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it. -- well worth a close read....
'You won't need to abolish us – we won’t be around for it': Why many police officers like me are quitting the force
The Smart Neanderthal
Nobody takes the renewable energy transition seriously-- so true... it's all unicorns and fairies dancing...
There may be no immunity against Covid-19, new Wuhan study suggests-- not the news everyone wants but the news we should understand...
Four Sisters Take Same Photo Together For 40 Years—And The Results Are Heartwarming (via Laserlefty)
"Everything you add to the truth subtracts from the truth." Aleksandr Solzhenitsyn
Thanks for reading--
charles |
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