Thursday, June 1, 2023

Bad Commercials. And the Water Bed Effect.

This all started with an op-ed I read in The New York Times on the real reason our grocery prices are increasing so greatly. You can (and should) read it here. 

There are many people who avoid reading about economics. They do themselves a disservice. They avoid such articles figuring they will be either too complicated and esoteric for them or somehow abstruse and therefore a waste of time. Good economists, however, like good thinkers everywhere, break down difficult information and make it simple to understand. At that point, it becomes something of value.

That used to be our job in advertising. But that was a long time ago and, once again, I'm harkening back.

Legend has it, by way of example, that Einstein was once asked to explain his Theory of Relativity. He said, “When you sit with a nice girl for two hours you think it’s only a minute, but when you sit on a hot stove for a minute you think it’s two hours. That’s relativity.” That's what I mean about making things understandable. There's an art to it. And often a smile.

The article I linked to above is about the economics of retailing food in the United States. Walmart and the giant food chains have gotten so big, so powerful and so unregulated they contribute not only to rising food prices, but even worse, "food deserts," whole communities that have no access to fresh food, or even a wide-variety of food choices.

Major food conglomerates like Kraft Heinz and General Mills rely on Walmart for over 20 percent of their sales. When a supplier has that much muscle (whether they're a wholesaler or the local drug syndicate) they make offers that can't be refused. 

When I was a kid, the kid with the football always got picked for the team. He had leverage. Without his ball, we couldn't play.

Today in America, a few giant companies are like the kid with the football. 

Walmart "now captures one in four dollars Americans spend on groceries. Its rise spurred a cascade of supermarket mergers...If the latest of these mergers — Kroger’s bid to buy Albertsons —goes through, just five retailers will control about 55 percent of grocery sales." 

Here's where we get to what economists call "the water bed effect." The article defines the water bed effect this way: "as suppliers cut special deals for Walmart and other large chains, they [the suppliers] make up for the lost revenue by charging smaller retailers even more." That's the water bed effect. A turn on your wife's side is a riptide on yours.

About twice a day, I have a phone call or an email or text exchange with someone like myself who's been kicked out of the industry. Most are working fairly regularly--I have a talented circle of friends. But even so, making your "nut" is harder than ever. 

The big four or five agency holding companies compete today primarily on price. They squeeze freelancers in turn (the water bed effect) to recoup some of their shrinking margins.

A lot of independents are like the owner-operated food stores that used to thrive (pre-Walmart) in small towns. They offer better service and better quality than the big chains at slightly higher prices.

When Federal regulation stopped being enforced (the 1936 Robinson-Patman Act which mandated that suppliers offered the same terms to all retailers) suppliers, due to the water bed effect and the squeeze put on them by the Walmarts of the world, charged these little stores more to make-up their diminished margins. So the little guys had to charge eight dollars for what would cost four dollars at Walmart.

Soon, they had to either pray they could find people to pay their rates or they had to cut their rates. Before long, many went out of business. 

And nothing was left where they used to be.

The same has happened in effect in advertising. The big five holding companies control about 75-percent of client billing and 75-percent of jobs. Their power lets them compete on price and even with very slim margins, they can make a profit. As the old huckster used to say on late-night commercials, "They make it up in volume."

The little grocery stores--or agencies--have to abide by the prices set by the giant firms. However, the little guys are high-touch businesses. Their cost of doing business is higher because the service and the quality they supply is better.

Ergo, the squeeze is on the little guy.

So far, GeorgeCo., LLC, a Delaware Company has resisted the effects of the water bed effect. I've been able to keep up a steady stream of business--some new clients, many repeat clients and I've been able to keep my prices where I need them to be. 

I will say no more less I jinx my entire operation.

There's a notion among many people today that concentration of wealth--and therefore power--is a good thing. That the Walmarts of the world drive down the prices we pay for the goods we need.

But they also drive down quality. They limit choice. And service, I've found, is uniformly abysmal and getting worse. When people are a discretionary cost, they'll eventually be eliminated. And service will get even worse.

From the food I buy, to my ISP, to travel by air, to the commercials we see, to the candidates pur two oligopoly political parties put up for election, almost everything today is under the control of a few giant companies.

The remaining little companies suffer.

We all do.

Fucking water beds.

Can't sleep.



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