My complements to the retailers – Twin Cities

0 3

Edward Lotterman

Some things are more closely related than one first thinks. Crossing over our weekly econ lesson with the marketing majors, we discover ways in which Sears and bar popcorn play similar economic roles.

The comparison arises in an ongoing lawsuit between Transform Holdco and the Mall of America. The first party is a company created by a former Sears CEO to buy remaining useful assets of that ill-fated retailer out of bankruptcy. The MOA owns one of the properties over which Transform Holdco wants to maintain control.

It is a considerable one, 200,000 square feet of retail space on three floors at a key corner anchor location at the huge Bloomington mall. For perspective, that is 4.6 acres, over four football fields and nearly 2.5 soccer pitches. At a facility like the MOA, the rent must be astronomical, right?

Well no. Transform Holdco says it maintains the right to lease the space at a fixed contractual annual rate agreed on in 1991. This deal gave Sears use of all this space for $10 per year fixed for 100 years. That is not $10 a square foot, it is $10 for 200,000 square feet, or one-twentieth of a cent per foot. Sears could display 20 standard washers and driers shelling out only 6.25 cents per year in rent.

So one can easily realize why a renter would want to maintain that sort of lease and the landlord would want to end it. That is the legal question in the suit.

The economic question is broader — why on earth would a gigantic mall rent out so much of its best space for almost nothing, and for a century to boot? Were the MOA developers crazy? Did they not understand that success in property management is to get enough rent to amortize the acquisition cost, pay ongoing operating expenses and still turn a profit? What were they thinking?

The answer is that the Sears facility had the same economic function as popcorn at a neighborhood tavern. The MOA owners followed the same logic as the tavern keeper and, for that matter, some of the most famous and successful business people in history.

To an economist, popcorn and beverages in a bar are “complements in consumption.” Consuming one make’s consumption of the other more satisfying or desirable. Catsup makes fries taste better. Ditto for tartar sauce and fish. And the complementarity does not just apply to taste. Peanuts and Crackerjacks make going to a baseball game much more enjoyable, it is said.

Complements can also be needed accessories. Paddles and life jackets complement a canoe. Helmets and leathers complement a big Harley.

Durable items with necessary attachments that wear out are another example. The detachable brush that lasts a few months complements the electric toothbrush handle and motor. So are the disposable “dry sweeping cloths” that go on a durable Swiffer mop handle. So do razor blades that clip onto a handle that lasts for years. So are the blades for small metal cutting bandsaws used by thousands of DIYers. With each, the buyer eventually spends many times more on the consumable items than on the device itself.

Marketing majors will recognize the razor citation. In 1901, King C. Gillette perfected the thin steel disposable safety razor blade, incorporating ideas from several other inventors and entrepreneurs. The first year he sold about 91,000 razor handles and 123,000 blades. That’s about one and a third blades per razor. But by 1915 he sold 70 million blades and 1 million new handles and he was rich.

Sell the handle cheap, even at less than the cost of making it, and cash in selling the disposable complement, the blades. Give popcorn away free and the increased sales of soda and beer will more than compensate for the cost of the snack. Convince a then-premier U.S. retailer to open a store in your new mall and the people who go there for Craftsman tools, Kenmore appliances and myriad other goods will sure enough visit enough other smaller retailers plus kiosks selling cinnamon buns, pillows and all the rest. These secondary businesses could rent space cheaper in other locations, but are willing to pay substantially more to be in a flagship mall with tens of thousands shoppers passing through daily. MOA developers were rational profit maximizers. They simply could not see what the future had to hold.

Moreover, MOA was not just another suburban “dale.” It wanted to make a big splash, get in the news and draw shoppers, not just from other states, but from other nations. Getting a big Sears right in one corner was a smart move. Did any of us have any idea the firm would fade so fast?

So understanding the dynamics of products that are complements to each other is a core competency for any retailer.

Complements are not the only category of what econ students learn as “related goods.” Even more common are “substitutes” — where the relationship is either-or rather than better-together. Ground beef, chicken and pork chops are substitutes. So are canoes and ski boats, Skechers and Manolo Blahniks, Asian buffets and taco bars, bus tours to Branson and Viking River cruises, or weighing a Prius against an F-250. Also understand that millions of products are not related at all, chain saw oil and Viagra or beach towels and dental implants.

So far we are talking about complements and substitutes in consumption. They also exist in production. Some complements in production are “joint products.” Refine petroleum for planes, trains and automobiles and you inherently produce asphalt for road paving. Raise sheep for wool in Patagonia and you get mutton. Raise lambs for meat in New Zealand or Ohio and you also get wool. Grow oats and you get straw.

Then there are substitutes. Plant an acre of soybeans and you give up corn. Roll steel beams, angles and channels and you cannot cold-roll strip steel for appliances and autos. Try to morph your charter airline into a scheduled one and you inevitably will encounter the feast end of the feast-or-famine charter business but will have to turn away business because most of your planes must cover scheduled runs.

These related goods, both in production and consumption, are important in the dynamic interactions of supply and demand. But that is a lesson for another day.

Source link

Leave A Reply

Your email address will not be published.