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Get Rich Slowly Schemes

Tyler Cowen has a good response to my queries about regional chains that basically encapsulates all the various responses I've heard everywhere. In response to the evidently near-universal belief that there aren't important economies of scale to be reaped by expanding beyond a single metro area, I'll just say that I think this is wrong and I won't explain why. If you happen to own a chain of grocery stores (or a venture capital firm) and want to hire me as a consultant, send an email and we'll be rich beyond your wildest dreams (my dreams, however, are very wild, since I went to high school with people who did things like fly private helicopters to their weekend houses on the Hamptons or take a quick Concorde to Paris for Thanksgiving). When I was a kid, there were no giant bookstore chains, but we had two independent shops really near my house. One was The Strand, an excellent used bookstore. The other was a place called Barnes and Noble that catered to NYU students. One day, the man in charged hatched an insane scheme for world domination and, well, the rest is history.

My other business scheme involves "mandatory self-insurance" as the solution to the nation's health care problems. You can read all about it on the New America Foundation website. I think their promotion material is very convincing. Indeed, I fervently hope it's convincing, because the plan has a serious flaw that, when exploited, will make me and the health insurance company that hires me a huge sum of money. Economies of scale don't even play an important role!

March 9, 2005 | Permalink

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» Huh? from City Comforts Blog
Matthew Yglesias refers to the: ...near-universal belief that there aren't important economies of scale to be reaped by expanding beyond a single metro area, Come again? Who believes that? Safeway? Wal-Mart? Costco? Starbucks? Home Depot? I have read b... [Read More]

Tracked on Mar 9, 2005 7:40:51 PM

Comments

The Strand bookstore is still alive and well, thriving in fact.

Posted by: Peter | Mar 9, 2005 3:00:19 PM

Some day, Trader Joe will rule the world.

Posted by: bobo brooks | Mar 9, 2005 3:08:23 PM

Indeed, the Strand is excellent and still open. Plus, one continues to see their t-shirts worn all around the country by poseurs and bookworms alike.

Posted by: Matthew Yglesias | Mar 9, 2005 3:14:19 PM

So what's the flaw?

And don't worry, I'm ready, willing and able to sign a non-disclosure, non-compete agreement.
:o)

Posted by: beowulf | Mar 9, 2005 3:16:37 PM

..."mandatory self-insurance" as the solution to the nation's health care problems...

I think this is exactly what they have here in Switzerland, or at least in this canton. You are required by law to buy private insurance policy and if you're totally destitute (only a few are - with 2% unemployment and $15/hour minimum wage) the government will buy it for you. Of course the insurance companies are heavily regulated, I am sure, like everything else.

But the prices of medical care and medications are ridiculous here, beyond believe. Probably worse than in the US, or at least it feels that way.

Posted by: abb1 | Mar 9, 2005 3:17:45 PM

First of all, the economies of scale for the book industry are a little different then the economies of scale for the Wl-Mrt entity. The retail book industry can create demand for books through push. If they buy a huge amount of a particular book, promote it with in store placement, that provides a nudge to make that book a “discussion book”, a piece of information that acquires value by being the topic of conversation among consumers of that species of information (did you see what Tom Wolfe wrote, hear what Michael Jackson did, hear what cousin blank did? All involve social network effects for that information.). In the book business, ordering too many copies of a dud is the key strategic problem. If you own all the stores, you solve a big coordination problem (which book to promote).

The Wl-Mrt entity has economies of scale just like the Post Office or Fed Ex. It needs to move product from one area to another, being large enough that it can arbitrage its stock between areas that have different preferences. This is a nuance that I didn’t notice when I talked about the economies of scale involved in the Wl-Mrt entity’s dominance here. There are economies of scale in retail.

However, those economies of scale were largely facilitated by the information revolution, which is why we are only seeing the slow disappearance of regional chains now. An example I like to use is the Hills/Ames store of the North East. Ames was essentially a different incarnation of the Wl-Mrt entity that was less perfect in its adoption of information technologies.

Finally, after distributional economies of scale are exhausted, a coup de grace is national advertising on the Chattering Cyclops.

Posted by: TheJew | Mar 9, 2005 3:20:37 PM

When I was a kid, there were no giant bookstore chains

When I was a kid -- and I'm pretty sure I'm older than Matt -- there were B. Dalton (which was, for some time, by far the dominant chain, IIRC) and Waldenbooks, at least.

As I recall, both kind of lost their traction in the 1980s and slid in competition with a number of younger chains, and B. Dalton is now part of Barnes & Noble's empire, and Waldenbooks is part of the Borders empire.

Posted by: cmdicely | Mar 9, 2005 3:38:43 PM

When I was a kid, there were no giant bookstore chains

When I was a kid -- and I'm pretty sure I'm older than Matt -- there were B. Dalton (which was, for some time, by far the dominant chain, IIRC) and Waldenbooks, at least.

As I recall, both kind of lost their traction in the 1980s and slid in competition with a number of younger chains, and B. Dalton is now part of Barnes & Noble's empire, and Waldenbooks is part of the Borders empire.

Posted by: cmdicely | Mar 9, 2005 3:39:07 PM

"...the plan has a serious flaw that, when exploited, will make me and the health insurance company that hires me a huge sum of money. Economies of scale don't even play an important role!"

Yes, yes, there are too many flaws inherent in the mandatory health insurance scheme. And yes, there are tons of profit to be made from mandatory buying of private health insurance. But I think Halliburton and the Carlyle Group have that territory down, and they might beat you to it...

Posted by: Anjali | Mar 9, 2005 3:40:02 PM

What do we need the insurance comps for if we have universal, homogenoeous, and mandatory participation and coverage.

Sounds like a phoney substitute for a national system. The lower classes pay more and get less.
Silly me. I forgot that's what God intended.

Posted by: Michael Kleist | Mar 9, 2005 3:41:14 PM

Sounds like a phoney substitute for a national system.

I think this would be a concept similar to de-regulating public electric utilities. Might work and save you a few pennies or it might lead to a California-style disaster, depending on how it's implemeted. Disaster probably is a bit more likely.

Posted by: abb1 | Mar 9, 2005 3:52:30 PM

I really don't begrudge B&N anything, because for so much of the country it's been primarily an inferior-chain-killer-- bye-bye, stupid B Dalton and stupid Waldenbooks, where the philosophy section was all New Age spiritualism, no serious magazines were available, no new literary fiction was available, etc.

But for years I extended B&N more credit than it really deserved, on the basis of that great NYU-area B&N, and especially its Annex. (That's gone now, right?) I kept expecting other B&Ns to be like that, and wrote off the ones that weren't as exceptions. Kind of like how Kevin Smith movies made me give Ben Affleck a lot of credit, followed by years of "excpetions," until I finally realized that Force of Nature and Pearl Harbor were the rule, Chasing Amy the special case.

Posted by: Jacob T. Levy | Mar 9, 2005 3:53:58 PM

my dreams, however, are very wild

Those don't strike me as especially wild. Rich yes, but not wild.

Posted by: Saheli | Mar 9, 2005 4:37:47 PM

In response to the evidently near-universal belief that there aren't important economies of scale to be reaped by expanding beyond a single metro area, I'll just say that I think this is wrong and I won't explain why.

As with all things, "it depends."

If your business involves sale of smallish, expensive, nonperishable goods from stores located in "off the shelf" real estate (e.g., Barnes & Noble), you can probably realize economies of scale by expanding nationwide (centralized warehouses, shared overhead, etc.).

If your business is sale of largish, inexpensive, perishable goods from custom-built stores (e.g., supermarkets), then maybe relationships with local distributors and zoning boards are the most important thing.

Posted by: alkali | Mar 9, 2005 4:42:25 PM

Perishable has everything to do with it. I worked at Wawa, a convenience store chain probably familiar to anyone in PA, NJ, DE, MD and VA, which has everything to do with how far it makes sense for the trucks to drive every morning from the single central dairy.

Posted by: Ruth | Mar 9, 2005 4:55:14 PM

Which NYU area Barnes & Noble are we talking about? Off the top of my head, there's the one on 8th St. and 6th Ave., the one on Astor Place, the one on I think 17th in Union Square, and finally one on 5th Ave in the high teens which I think is the one you're talking about, only because its layout is different then the standard Barnes & Noble. All of these could plausibly be described as NYU area.

Posted by: md1395@nyu.edu | Mar 9, 2005 5:18:50 PM

The original B&N is the one on 5th avenue and, I think, 18th street. For a while they were calling it an "annex" or something, but I don't think they do that anymore. It's still in place, however, and still excellent. The regular store on the north end of Union Square is quite good as well.

Posted by: Matthew Yglesias | Mar 9, 2005 6:01:35 PM

It was a fairly substantial error on my part that the penultimate post in this thread includes my e-mail as plain text. Doesn't that make me more likely to get spam? MattY, if you wouldn't mind editing the comment above to put in my standard screen name, I'd appreciate it.

Posted by: washerdreyer | Mar 9, 2005 6:37:18 PM

This post blew my mind for a second, because I was about halfway through it thinking I was still reading Brad DeLong's blog, where he had commented on his idiosyncratic grade school mathematics class. I'm thinking "Brad grew up in Manhattan? And I never knew this?"

I was waiting for either a sketch of a proof of his assertion on economies of scale, or at least a punchline to a very bizarre private joke... Sigh. It was kind of a disappointment to switch back into the correct context. I'd probably go to my grave thinking of "That day Brad DeLong flipped his lid and offered his services as a business consultant to regional chains." before recalling that the whole thing was a mirage.

Posted by: Paul Callahan | Mar 9, 2005 7:14:23 PM

Jacob Levy is right on. Right now I live in Portland, Oregon, home to the best...used book store...ever, so I'm all about supporting the local independents. But I grew up in Daytona Beach, Florida, and believe me, it was a godsend when Barnes & Noble finally showed up in town.

I don't care if they have all kinds of insidious contracts to distort the market by pushing certain publishers' books; I don't care if they serve crappy coffee. They have a TON OF BOOKS, so many that they almost can't help but have a decent selection.

If you're a bright fourteen-year-old in suburban/exurban America and you'd like to take a look at Descartes, or Dante, or Willa Cather, or Kurt Vonnegut, or Stephen Jay Gould, or a monograph on El Greco, or whatever, what are you supposed to do? Waldenbooks sure as hell doesn't have them. (Or if it does, it's in a cheap mass-market paperback format.)

Amazon helps, now, but you can't browse in the same way. The Daytona Beach Barnes & Noble was like, I don't know, the Bodleian library of my youth. Urbanites who are inclined to decry the rise of large chains should try living outside the city for a while and see how they like doing their bookshopping at Jim Bob's Book Rack.

Posted by: Chris | Mar 9, 2005 8:46:07 PM

"The original B&N is the one on 5th avenue and, I think, 18th street. For a while they were calling it an "annex" or something, but I don't think they do that anymore."

There used to be a B&N on the west side of Fifth Avenue, across from the original store, that was called the annex. It was converted to other uses several years ago.

Posted by: Peter | Mar 10, 2005 12:10:06 AM

I don't know, I tend to think brick and mortar is a thing of the past (or will be soon). I know people have been saying this for a few years, but Amazon has every book you could want without having to go to an actual store. They save on overhead and labor with strategic supply warehouses. Shopping for perishables online will also be superior to brick and mortar once they streamline delivery. Or maybe not, just a thought.

Posted by: Res Ipsa Loquitor | Mar 10, 2005 12:18:30 AM

I remember being charmed by Palo Alto's book store when I was there. But I think it was one of the Borders.

Posted by: abb1 | Mar 10, 2005 3:01:55 AM

If you're a bright fourteen-year-old in suburban/exurban America and you'd like to take a look at Descartes, or Dante

Instant, free access to Dante, Descartes and (and pretty much anything else of note before 1923) via project Gutenberg texts in various forms, for exmple, here's your Decartes:

http://www.blackmask.com/cgi-bin/newlinks/search.cgi?d=1&query=descartes

Ironic, isn't it, that the oldest texts are available in the newest form...

or Willa Cather, or Kurt Vonnegut, or Stephen Jay Gould, or a monograph on El Greco, or whatever, what are you supposed to do?

Amazon, B&N, Half.com, Addall.com


Amazon helps, now, but you can't browse in the same way.

No, but you can browse in a different and richer way--you can read professional and reader reviews, search for text in the book, and check out any related book on the subject (not dependent on what the store you're in has decided to stock).

Posted by: mw | Mar 10, 2005 8:06:42 AM

There used to be a B&N on the west side of Fifth Avenue, across from the original store, that was called the annex. It was converted to other uses several years ago.

Yep, that's what I was thinking of. It had half-price review copies and lots of academic books., and was a bit easier to navigate than the Strand. I was pretty fond of it.

For the record, Chris is wrong in identifying this rather than this as the best used bookstore ever. An understandable mistake.

(Kidding. The Hyde Park Powell's is the best used *academic* bookstore in North America-- yes, better than Labryinth or Moe's, dammit-- and I love it for that, but it's not in the Strand's or Portland-Powell's league when it comes to anything else, like, say, fiction.)

Posted by: Jacob T. Levy | Mar 10, 2005 10:39:54 AM

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