"Margin Retreat" is when an enterprise drop simple, less profitable products/services and "retreats" to the high-end of the market because their costs have gone up and they lose money on the cheaper products.
Trucks and cars and snowmobiles and ATVs became bigger, faster and loaded with more "mandatory" features due to margin retreat.
A base S-10 pickup truck cost $12,600 in 1999 (and you could usually pick one up even cheaper at model close-out). Today, a Colorado work-truck has an MSRP of $36k or 3X as much. The annualized, compound interest of 4.3% in price doesn't seem outrageous but the official CPI numbers are a 93% increase and an "official" rate of inflation of 2.6%.
Fast food
The fast food industry shows how the market creates a conveyor-belt that pushes enterprises into margin retreat.
McDonalds opened a drive-in restaurant but didn't make a lot of money, so they famously decided to only prepare and serve those items they made money on. They got rid of the girls on roller skates and the fancy glasses. Hamburgers, fries and soft-drinks all served in paper. They printed money.
The idea caught on. Thousands of me-toos sprang up.
Competitors offered bigger burgers. McDonalds matched them. Competitors offered fish sandwiches. McDonalds matched them. Menu complexity grew.
Real-estate agents became adept at sniffing out where McDonalds was shopping for new locations. The asking prices went up.
Civic leaders started leaning on McDonalds to "contribute to the community" as if providing thousands of kids their first employment experience was not enough.
Customers started suing McDonalds, not because McDonalds is bad but because they have money.
Stockholders expected dividends.
Staffing became a challenge.
And a flotilla of bare-bones burger-joints opened up that undercut the bottom end of McDonalds menu; competitors with names like In-and-out Burger, Just-a-Burger. In time, if they are successful, they will acquire the non-business costs that accreted on McDonalds, like so many layers of water depositing calcium carbonate on a stalagmite. A company that was once agile and nimble is now cemented to the floor by costs.
Margin retreat is everywhere
You see it in the cost of housing.
Builders say they lose money on stick-built houses smaller than 2000 square-feet. That is sad because two empty-nesters don't need 2000 square-feet and many of us don't want to live in apartments.
Lots, utility hook-ups or on-site wells/drainfields, driveways, garages, worker rules, waste disposal rules, ever-advancing insulation and electrical codes...all add to the cost of the building and don't add a single, salable square-foot. In fact, the insulation requirements reduce the usable, interior room.
Getting back to trucks
Back in the 1990s, it became fashionable for ranchers and people who grazed animals to leave their $35k pickup parked in the driveway and use a simple UTV + trailer to do fence maintenance. Why use a vehicle that can go 90mph and carry 2000 pounds of cargo when you needed a vehicle that could go six mph over rough ground or maybe 35 mph on gravel roads while carrying (or towing) 300 pounds of fencing tools and supplies?
Maybe you had a way to carry a light varmint rifle or a shotgun for targets-of-opportunity but the that was the extent of the frivolity.
At that time, UTVs like the 400cc Yamaha Kodiac/Grizzly seemed to hit the sweet-spot. MSRP of about $6000.
Today, the smallest engine that ride comes with is a 700cc motor and the MSRP plus mandatory destination charges will cost you $11k.
And, just as sure as God made little-green-apples, there are competitors flooding into the space the big names abandoned.
Nice explanation
ReplyDeleteA free market capitalist society ensures the market will always respond to the consumer's wishes. When you have 'things' that put their thumb on the scale, you have problems. You really don't hate the government enough, no matter how much you hate them.
ReplyDeleteI'm keeping my eye open for an old jeep. I could get 5 of them for $11K. There are ways to make money on small houses, but the profit margin will keep you awake at night. Remember George Bailey, "...lie awake figuring how to save six inches of pipe."
ReplyDeleteThank you for succinctly capturing and explaining to me what I've been unconsciously dealing with for years.
ReplyDeleteThe critical thing you didn't mention is increasing regulations.
ReplyDeleteIn California, it costs over $100k in permits and approvals for a house before ground is broken - those costs are hard to recoup for a builder on any house but impossible on a small house or anything remotely "affordable".
Similarly, regulatory compliance on vehicles has gone up: not just the crash testing and fuel economy most people hear about, but visibility, back up cameras, traction control, so on and so fourth. I've seen claims that these requirements ads $10,000 to most new cars; again these costs make cheaper cars a non starter.
Jonathan
Thank-you for pointing that out.
DeleteIn-n-Out is an interesting case. The company is run by the daughter of the founder (privately held) and they do not franchise, all stores are owned directly. The stores get chilled (not frozen) beef patties, produce, and whole potatoes, so they are placed close to commissaries for support. No breakfast menu, no fish, no 'bbq ribs', they serve burgers, cheeseburgers, fries, sodas, and milkshakes. The big difference is they will make a burger as big as you want it (4x4 for the young and hungry guys).
ReplyDeleteFounded in SoCal they are moving HQ out of state for obvious reasons.
This has been a common complaint around our place for last several years. We don’t want ‘bigger is better’, or more features. Just the smaller, easier to use, less stuff to break, etc. it’s hard to find smaller houses around here, unless they need significant repair work.
ReplyDeleteHonda was making the Recon Atv. Aimed at the youth market maybe, 250cc. Not 4WD. But it gets me around nicely, smaller size than the Rancher or Foreman, and costs a lot less too.
Southern Nh
The sense I get is that many farm women are big users of these machines. They don't WANT 85 horsepower or 1200 pound machines. They don't want to have a vehicle that is so tall that they need a step-ladder to get onto it.
DeleteSame thing for grand-dads. We aren't into competing and comparing the size of our manhood. We have nothing to prove...although electric start is a GOOD thing.
It is sort of the same thing with off road hunting in Alaska not counting fly in and horse people. In the sixties and seventies it was done with repurposed army surplus trucks with ballon tires etc. Then it went to four wheelers and meat trailers and now side by side rigs have taken over. Not only increasing costs but turning some trails into road hunting instead of just going in to a good camp spot and walking from there!
ReplyDelete