What Would a Rent Stabilized Grocery Store Look Like?
What Would a Rent Stabilized Grocery Store Look Like?
Who would benefit? Who would lose out? Could it work?
"They say that the essence of futility is to keep doing the same thing while expecting a different result. But is that what key government forecasters are doing in determining their outlook for the economy?"
"Forecasters Keep Thinking There's a Recovery Just Around the Corner. They're Always Wrong," the Washington Post, Feb. 19, 2013.
With the Fed to decide on rate cuts in two days, this quote 13 years later is timely –just swap out 'recovery' with 'recession' in the article title. It is also relevant because the idea of doing something the same way and producing different results does not work, to put it lightly. Solving the housing crisis requires new thinking and different courses of action than those that enabled the situation. Perhaps too, solving the crisis will require using different language to speak about it. Connecting the problem to people in terms they are familiar with could enable deeper levels of understanding and increase the willingness to collaborate across stakeholders.
To that end, please consider the well-intentioned and hypothetical case of a grocery store owner.
Imagine for a second that half of the products in your grocery store are anchored to a specific price and adjusted yearly to account for inflation. Call these green goods. And then, consider that the pricing for the remaining goods wasn't pegged to anything and could just free float. Call these blue goods. The blue goods will be priced higher and probably contain more expensive ingredients, sleeker packaging, and so forth to merit higher pricing.
On the other hand, green goods will probably have very cheap packaging materials, ingredients, and product placement in the store. They may also include many growth hormones, preservatives, and other substances less desired today. Oh, and you generally only have access to green goods if you've been a long-time customer – maybe long enough to have known that all products used to be blue before half went green. Only a fraction of green goods are available for weekly purchase by anyone other than the loyal decades-long customers. Suppliers and producers of green goods don't make much profit from making those green goods, so they don't want to produce more than they currently do. It's critical to keep production costs low and remove any frills or services that would cost producers money. Over time, some producers of these green goods might begin to stop making green goods. For now, demand for their products is very high, and though their expenses are climbing, they keep on keeping on.
Suddenly, the store owner decides to apply price controls on all the blue goods. Just like green products, blue products will be subject to caps on yearly price increases once released. The store owner applies similar price caps when purchasing inventory, so he benefits also. Further, the store owner requires that product extensions for the original green products be priced at no more than the existing product prices + a spread. The new rule affects all green product types from 2% Milk to chocolate milk, homestyle waffles to chocolate chip, and white rice to pilaf. Slowly, the number of new products begin to atrophy, as incentives for innovation and profitability are taken away.
Fast forward a decade, and pricing for all goods should be very close to today’s pricing. Production costs don't stay flat, so producers must hustle to continuously bring their costs down to avoid declining profits. Reducing costs means using stale packaging visuals and cheaper, less healthy ingredients like the green products. On the other hand, this grocery store structure stabilizes pricing for shoppers and offers them a hedge against the rising tides of inflation and a changing economy. The shoppers who began coming to the store before the introduction of price controls are given priority in purchasing very discounted goods. Many of them appreciate this grocery store and will never shop anywhere else.
Years in the future, residents from the next town over who sometimes need to pop in for convenience cannot buy goods as they find most of the products are sold out due to the very low pricing. Buying food at this grocery store is difficult for anyone new to the town. Because of this, the grocery store rarely gets any new customers. It's challenging for these would-be customers because many of them work in the city and spend ample time attending parks in the town. But when it comes to groceries, they must go outside of town.
At some point in the future the shoppers, the suppliers, and the grocery store owner must come to a new equilibrium. Either the shoppers get comfortable with an unhealthy food supply that is cheap in quality and affordable in price, or the store owner loosens price controls without jeopardizing the current clientele’s ability to pay for groceries. Shopper complacency is easy enough to imagine, but what could loose price controls look like?
Exempt new brands and product types from caps on price increases, to incentivize innovation.
Segment food items by their degrees of necessity to healthy diets, and cap pricing only on the essential food sources.
Provide subsidies to grocery-burdened shoppers who spend > 30% of their gross incomes on groceries.
Offer priority ‘green products to new people recently who’ve recently moved into the town where the grocery store is located.
The grocery store owner will only loosen price restrictions if she is incentivized to do so. She needs a push. Food suppliers will be happy to provide that push by withdrawing their goods from the grocery store when they notice how many more profits they can glean from placing their products in other markets and stores.
From 15 milk products down to 6 across 2 brands
From 10 types of bagels down to 3 across a single brand
From 13 coffees varieties to just four coffees across two brands
If the owner does not loosen price controls, the grocery store will eventually suffer from the effects of a poor product mix, and the clientele will simply shop elsewhere.
The key questions are:
How attractive is complacency to shoppers? - i.e., do shoppers prefer inertia or positive. but uncomfortable change?
How long until supplier withdrawal and reduced product mix threaten long-term store profitability – i.e., when does the system break?
I am bullish on NYC multifamily.
Call me at 212 658 1471.
Best Regards,
Romain