Real estate continues to plummet, prices are decreasing rapidly. Bottom expected in 2010 (points, homes)
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Actually most are in or around big cities. Many are closing in the LA area for example (one right down the street from me!). The problem is that they built too many too close together. But this problem isn't isolated to Star Bucks. Its played out all over the country, retail is just so overbuilt. Not necessarily, in the sense of the same company build too many stores like Star Bucks, Home Depot etc. But there being too many stores of the same nature right next to either other. It seems they completely ignored any sort of market research when they decided build a store, build a hotel, build an office. Commercial real estate is way overbuilt and many crappy companies what were riding the loose credit gravy train are going to go out of business.
Actually, there is a reason why gas stations are across the street from each other, why home depot and lowes are always pretty close together, why Best Buy and Circuit City are nearby and why there are "Auto" squares vs. dealerships separated apart. Marketing folks know more than you think, and there are population counts/studies/demographics maps, programs that determine the "optimal" position where shops should be located.
The basic idea is that like businesses have the most optimal division of market share when they are close together.
Unfortunately, Starbucks was a little big headed and thought the market for their product was larger than it is.... likewise for many retailers/businesses that will go under/shrink in the future.
Nice spin Franklyn. Not everyone handles the mess of concurrent events that are a housing crash, bank failures, week job outlook and higher gas prices so effortlessly as you do. Let's respect the fact that everyone is entitles to their views and opinions and ways of coping with this mess. Unless the problem is you refuse to acknowledge there is a mess and are in denial?
I enjoyed reading your posts, Mike. The numbers you posted were interesting to read and I found value in your perspective. I'm sure I'm not the only one--there are lots of us lurking and learning from your posts. Keep up the good work.
I appreciate the kind words.
I try and keep an open mind even though I am accused otherwise.
Marketing folks know more than you think, and there are population counts/studies/demographics maps, programs that determine the "optimal" position where shops should be located.
Not not really. Hotelling's "law" (I have no idea why they call it a law...) only explains why two similar stores may be located next to each other in some cases. Not why commercial real estate was so overbuilt or why a particular city needs both a home depot and a lowes. The problem with star bucks is they built too many stores too close, this has nothing to do with Hotelling's "law" instead **** poor market research/management. Anyhow, I'm not talking about why two gas stations (or something similar) are right next to each other. Instead why there are so many stores in a general area that sell the same crap. Most of the businesses failing are the ones that deluded themselves into thinking the gravy train from loose credit and the housing bubble wouldn't end. Some of the business that filed from bankruptcy were junk before the bubble (e.g., mervyns) and were able to continue doing business due to loose credit. Others over expanded due to poor marketing/research (Linens ‘n Things), and yet others due to silly schemes (Steve and berry's). But all are related to the credit expansion and now credit contraction. Many more business will go under and commercial real estate will crash with it.
Not not really. Hotelling's "law" (I have no idea why they call it a law...) only explains why two similar stores may be located next to each other in some cases. Not why commercial real estate was so overbuilt or why a particular city needs both a home depot and a lowes. The problem with star bucks is they built too many stores too close, this has nothing to do with Hotelling's "law" instead **** poor market research/management. Anyhow, I'm not talking about why two gas stations (or something similar) are right next to each other. Instead why there are so many stores in a general area that sell the same crap. Most of the businesses failing are the ones that deluded themselves into thinking the gravy train from loose credit and the housing bubble wouldn't end. Some of the business that filed from bankruptcy were junk before the bubble (e.g., mervyns) and were able to continue doing business due to loose credit. Others over expanded due to poor marketing/research (Linens ‘n Things), and yet others due to silly schemes (Steve and berry's). But all are related to the credit expansion and now credit contraction. Many more business will go under and commercial real estate will crash with it.
Totally agree that there is over saturation of retail and maybe commercial RE in some areas. The market that they "counted" on (demographics, buying power, etc.) in the past doesn't exist currently or in the near future (booms are usually associated with over capacity). I was just trying to explain why similar businesses locate by each other (since many people sometimes comment on that). Density of businesses is dependent on the market and purchasing power.
I wouldn't say commercial RE will totally fail. Businesses can still thrive in today's market... but they would have to rely less on the consumer and find ways to sell to other expanding/growing markets... such as manufacturing and exporting goods... R&D in energy... health care... alternative transportation... environmental... infrastructure... etc. that are growing market segments.
And... if businesses are able to adapt and find new revenue sources... there's no reason why those populations/demographics can't sustain a reduced number or retail establishments. It's all about the jobs.
It will fail in the same sense residential real estate is going to fail. Its way overbuilt and it will take many years for it to get used, this means that construction will be weak for many years both in commercial and residential (Which of course means a decline in jobs).
It also means that malls, offices etc are going to have high vacancies for awhile and many commercial real estate loans are going to default.
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there's no reason why those populations/demographics can't sustain a reduced number or retail establishments. It's all about the jobs.
As the weak businesses fail, it raises unemployment which puts stress on businesses that were previously doing okay. At this point
the spiral in unemployment is pretty apparent. I'm not sure what is going to stop it, its a bit worrisome. There are a few potentials though, manufacturing being brought back here due to increase transportation costs, higher exports, developments in alternative energies etc. But such things existed during the depression too.
Now is a good time to buy, fact is prices are way down now in some areas. No one knows for sure if they will continue to go down. If you buy know you know you are paying much less than a person who bought in 04, 05, 06, 07.
Nice spin Franklyn. Not everyone handles the mess of concurrent events that are a housing crash, bank failures, week job outlook and higher gas prices so effortlessly as you do. Let's respect the fact that everyone is entitles to their views and opinions and ways of coping with this mess. Unless the problem is you refuse to acknowledge there is a mess and are in denial?
No. Things are rough for a lot of people right now. Including me. Recently we had to drastically and substantially postpone our own financial plans. But I know many folk are hurting much worse, so feel even sorrier for them. The SoCal and Lost Wages markets have taken a harder hit than my baliwick. But from what I read Stockton was hurt even MORE. Now THAT's a depressed area. But then 30 miles away things have almost turned around. So it's not totally universal, and maybe we all need a little more perspective. Sorry if I "dissed" desertsun41. Was just looking for a little more accuracy. But I know he's worried, and probably for good reason. So thanks for your post.
Good call, chuck22b. I once saw this law applied to a rural four-way stop intersection on two busy roads between four small towns. Someone put in a gas station there, and within the next year developed it into a station that averaged 10k gallons per month. So it was a 10k/month corner.
Along came a competitor and put in another station and within a year they were both averaging 12k gallons per month. It was then a 24k/month corner.
A third station came in and within a year they were all three averaging 15k gallons per month, making it a 45k/month corner. Then a fourth station came in and they all jumped - in a little while - to 20K gallons per month, making it an 80k/month corner. Three years later it had become a 150k/month corner.
The presence of the competitors at one location became a marketing benefit for all, thus driving up business volume for everybody at that location. Of course their volumes were not EXACTLY even, but the figure for the amount of gallons for the corner are conservative.
So that explains why Lowes and Home Depot [and OSH and Lumbermans] might locate fairly close to each other. I think the Starbucks thing is - as said elsewhere - just a complete mistake of understanding their market. Something that happens a lot with company's overstocked with too many "bright young executives". [They might now be a bit older and wiser].
The presence of the competitors at one location became a marketing benefit for all
Just to note, this isn't the point of Hotelling's law. It isn't about marketing benefits, what probably happened in this case is the existence of the new station put pressure on some others that were closer to only one small towns. The one right in the middle got a benefit because it was right in the middle of all the towns, and some others had to follow suite.
Home Depot and Lowes generally aren't right next to each other, at least all the cases I know of are not. Hotelling's law primarily works for commodities, so gas stations become the prefect example. Regardless, Hotelling's law has little to do with commercial real estate being overbuilt and there being too many retail stores that sell the same crap in the same city.
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