Margin and the art of corporate maintenance

When you're a national public company like Home Depot, you have to grow to keep your shareholders happy. That means that each dollar you put into the company has to make at least as much profit as the ones you put in before. And at the end of the day, you grow by either participating in a growing market, taking market share from your competitors, or by making your business more efficient. Ah, but what kind of efficiency?

One way to become more efficient is not to carry everyday items that don't have high margins, things like filters for your air conditioner (50 cents), steel wire (a dollar), and other cheap, but specialty products...the kinds of things that your neighborhood hardware store would always have, but now that most of these mom and pop stores are out of business (because of Home Depot), and people just throw most things away instead of repairing them, it's no longer necessary for the huge chains to be part of that market either.

Lorna and I have been noticing how it is impossible to find small but useful items in the vastness of Home many cases they just aren't around anymore, though some sales guy remembers how they were there "just last year".

Instead, you can buy washer/dryers, grills, entire bathroom and flooring upgrades, and the usual generic building materials.

Whoever is doing the silly b-school analysis of gross margins and concluding that a Home Depot shouldn't carry air conditioner filters and a variety of steel wires is incredible, awfully mistaken.

If you make your business into a place where customers cannot obtain the day-to-day, they will not visit and learn about the rest of what you do. If you do not serve your customers' needs, they will find another solution for them.

If you make them use Internet stores for simple hardware needs, you might find that you have some incredibly fierce competition for your high-margin items, too.

There's a lesson in making things too maintainable, though. This story might play out a bit like the Checker Cab Company. See, once Checker was an actual manufacturer of automobiles, not just the namesake of a cab company. They made cars that actually ran for a million miles. The company that made them went out of doesn't pay to make cars that can go for a million miles.

And so you find yourself one day with a humidifier that cost $50, with a filter that has gone bad. And nobody at all has the filter, and you check literally a half-dozen stores. And at the end of the day, you actually find it easier to throw the entire thing out and buy a new one, for lack of a replaceable filter.

What kind of economics can support this sort of "maintenance" efficiency? It seems to me that it's only by an attitude of a society that eschews waste and doesn't reward the disposable. And perhaps online technologies make this sort of thing efficient again. And for the immediate needs, maybe we can keep some of our mom and pop "inefficient" hardware stores around to support us in this. I surely hope so.

But as Churchill said, "History is written by the victors," and in our world, the victors are the ones with high margins.

New washing machines, not steel wire, after all.

1 comment:

  1. My favorite media tech teacher in high school, the late Pat Coakley, owned several Checkers. This was in the early 80s, and the cars hadn't changed their body designs since the 50s. They were, unusually, bolted rather than welded together. That way, if your 1968 cab got a dented left front fender, you could unbolt it and bolt on the fender from a cab ten years younger and be on your way, modulo some paint.