By now, for most people, Thanksgiving 2010 is a distant memory. In my case, I will remember this one for a very long time to come. Thanksgiving 2010 was when I fully grasped the concept of “Two Americas”. This year, we spent Thanksgiving in New York City where we met up with my extended family. We had a great time – Thanksgiving Day Parade, Broadway show, Times Square, 5th Avenue, SoHo, Chelsea Market, skating in Bryant Park, Knicks game, etc.. We had a great time but something was not right.
So what’s wrong with this picture?
On the Sunday morning after Thanksgiving I found myself at the Apple Store on 5th Avenue in Midtown-Manhattan. The place was packed. I was there to exchange a new Macbook for my son, Jack, that we had bought the day before. Jack had found a single pixel defect on the screen of his newly-purchased Macbook. While waiting for the replacement Macbook, I observed 2 undercover security guys grab a young man by the collar and escort him into a room. The suspected shoplifter was a young black man — I am guessing about 20 years old. I looked around the store. This fellow was the only black person in the entire store who wasn’t an employee of the Apple store. The Apple employee who was assisting me explained that this happened on a near-daily basis.
Minutes later I left the Apple store to meet up with my family at the FAO Schwarz toy store. I walked out of the Apple store, took a sharp left, walked past 2 smiling Beefeaters standing in front of FAO Schwarz and made my way to the second floor where the family was observing a live performance on the famous FAO Schwarz Big Piano. If you have never seen such a performance in person, it is entertaining and looks something like this:
After the performance, the crowd applauded enthusiastically. One of the performers then made a brief remark about the performance. The performance itself was memorable. However, the part I will never forget was this: you could own one of these Big pianos for $150,000. Does that include delivery and installation…? And if you walk one block west — past the panhandlers — there is Dylan’s Candy Bar, where it is not too late to order your $15,000 walk-in gingerbread house. Can’t make it to NYC…? No problem. Neiman Marcus will ship it to you.
On 5th Avenue, the luxury stores were packed. It was standing room only in the Louis Vuitton store. Broadway shows were sold out at $250 per ticket for seats in the Mezzanine. We returned home last Sunday evening to a mailbox full of catalogs with more luxury must-haves. Not.
Here is the other America
According to a national survey by CareerBuilder.com, 77% of all workers in America are now living paycheck to paycheck up from 40% 3 years ago. Although this is a shocking statistic, it is in line with the inequality trend that I have previously blogged about here: The Gini is out of the bottle. One year later, the trend has gotten worse as the proportion of the economy attributable to government spending continues to rocket higher. And even with the government subsidy, the top 0.1% earns more than the bottom 50%.
As of November 2010, nearly 43 million persons in the US are now subsisting on Foodstamps, an all-time high. The average monthly assistance per person is about $130. At the same time, food prices have started to spike. Keep in mind that to be eligible for Food stamps — now called SNAP — you need to have not more than $2,000 in “countable resources”. In other words, you have to be completely broke
Meanwhile, the November Non-farm Payroll (NFP) numbers came out on Friday. As I feared, the numbers were horrible — only 39,000 jobs created versus the forecast number of 150,000. Masked in the NFP number is that a very large proportion of the payroll is shifting from full-time to part-time.
Also, masked here is that the welfare state is collapsing. During December, two million long-term unemployed are likely to lose their long-time Federal unemployment benefits. In February 2011, it looks like there will be four million long-term unemployed with no benefits.
In theory, the Federal government can at least fund these Welfare-state operations through issuance of Treasury debt — a significant portion of which can be monetized by the Federal Reserve. The States cannot monetize their debts denominated in Federal Reserve Notes. And therein lies the trainwreck called America.
Surviving and Thriving in the era of Two Americas
Consider the consumer tech darling, Apple. Apple manufactures a laptop computer that is comprised of say $400 in (mostly imported) costs which it then sells at retail for say $1,500. The economics of that business are fantastic which is why Apple is sitting on a $44 billion cash hoard. Apple charges enough that it can pay a fair wage to its employees, provide great customer service, export to the world, and deliver a fantastic return to shareholders. America would be very different if we had another one hundred Apples.
The reality is that most businesses are not Apple — a closed technology ecosystem wrapped around an amazingly strong brand led by a profoundly effective leader. As such, the prospect of selling high margin product to the masses is not readily available to most entrepreneurs. Most products are non-differentiated commodity products vulnerable to instant price comparison. If you can sell a product for $40 with $5 shipping, and someone else sells it for $2 less, odds are good, you lose. There is almost no profit to be made in that environment which is why I don’t envy Amazon.
So, how can a business hope to create a foundation on which to earn a sustainable margin? In this age of instant price discovery and brutal competition for share of wallet, I think there are really three core models that can thrive in this climate:
- Deliver compelling value in a winnable niche — Be the Amazon of ____ : If you are going to sell to the masses, you will need a superior value proposition. Spend a few hours on a site like Alibaba.com and you will see the true cost of products — fashionable earmuffs cost about $0.20, swim goggles about $1.25, etc., an ice cream maker about $10. Shipping a 20-foot container costs about $2200 from inland China to a west coast port city like Seattle. Shipping a 40-foot container costs about $2700. Sure, Wal-Mart will pay less but not that much less. If you want to be the best at selling high margin non-perishable consumer good online, there is an abundance of product that can be imported profitably. An exact match domain name can be the foundation on which to sell a compelling value proposition in volume.
- Create a brand that offers a unique promise that has broad appeal: Building a great brand often requires laser focus on delivering on a promise that is implied in that brand. A great brand is often planned to the smallest detail — environmental design, packaging, fonts, colors, etc. Moreover, veteran marketers know that the best brands are built on stories — the story of how the brand came into existence. Think about famous brands that you know and you will likely know the story of how those brands were created. The implied promise of a brand is the foundation on which consumers build trust and even emotional connection which is what gives brands pricing power, brand loyalty, word of mouth, etc. Brands can be huge (e.g. Apple, Virgin, Trump) or specialized (e.g. Burts Bees, Airborne).
- Offer an Ultra-Premium product which appeals to a demographic that can afford it : The top 5-10% of American households are doing just fine. In addition, a growing number of emerging economies have pockets of extreme wealth. For the truly rich, the very best has a high price. In fact, for the truly rich, price is a value signal. For the truly rich, if the price is too low, many won’t buy it because (1) lesser mortals can afford it, and (2) the quality is probably not to their standard. Ultra-premium is a hit and miss business but there is always a market for the best of the best. In bad times, only the rich can afford them. In good times, the less-rich aspire to afford them. Still don’t get it? Flip through a copy of the Robb Report or stroll through Neimans and take note. I am not saying it is rational. It is what it is.
Entrepreneurship still works. Stumped for ideas? Subscribe to Inc Magazine — it is full of practical case studies of folks who are building businesses from the ground up with little or no capital. The local library probably has the back issues.
Do you know someone who needs a good domain name on which to build a business? Check out the inventory at stores.epik.com (turn-key stores), EpikDomains (undeveloped domains). Assuming it is an Epik-owned domain, we are happy to provide interest-free financing or consider offers.
The Week Ahead
On Sunday evening, at 7 pm ET, Fed Chairman Ben Bernanke will be on 60 minutes. This is his second appearance on 60 Minutes. The last time he appeared on 60 minutes was a week after the 2009 low on the Dow of 6440. I think this means one of two things: (1) the fix is in and the Dow is heading higher in dollar terms, though not in gold/silver terms, or (2) the Fed fears they are losing control of the situation. The timing of this broadcast is interesting for two reasons:
- There is a global short squeeze under way in the market for physical silver with one very large Fed member bank (JP Morgan Chase) reportedly with a bet-the-company short position. December is a delivery month for Comex silver. The last delivery month was September 2010. In September 2010, there were contracts for delivery of 12.5 million ounces of silver. For December 2010, the contracts outstanding for delivery are 86 million ounces which may or may not be available for delivery. Oops.
- On Tuesday, December 7, there are rumored plans for a Pan-European grassroots bank run initially promoted by Manchester United soccer player Eric Cantona. I have no idea whether this will amount to anything. However, if it takes root, and it just might, the implications for highly levered European banks would not be good. It is worth noting that the Fed previously bailed out European banks during an earlier liquidity crisis.
Anyway, sorry for the long post. If you got this far, hopefully you at least understand where my head is at these days. The fact is that the internet economy is as strong as ever. In fact, I really can’t think of a better time to be an Internet entrepreneur. The online economy continues to out-grow the offline economy. If anything, that growth gap is widening. Yet, without question these are challenging times for anyone stuck on the wrong side of history.