Blowin’ in the Wind

07/11/2022

There’s been a lot going on in the news lately.

Europe has been torn apart by its largest land war since 1945. The pandemic continues to rage, having already killed more than 15 million people worldwide. The worst inflation in 40 years has thrown markets into disarray, and threatens to trigger a recession. Mass shootings at an American supermarket, church, and elementary school have rattled the public.

I don’t know what your personal coping mechanism may be, or how you have maintained your equilibrium over the past couple of years. A lot of people find solace, or at least distraction, in the creation of art. That tendency has been a bright spot in the nighttime for art supply retailers throughout these harrowing times. The world may be unraveling, but, hey, sales are good.

Not being an artist myself, I’ve been obliged to find other diversions and stress relievers. I play a lot of golf and tennis, and I watch sports on TV, even sports I don’t really like. I read a lot of old books and watch a lot of old movies.

The main thing is to avoid watching television news, and especially cable news. It seems as though the prime directive of that business is to choose the most depressing situation in the world and cover it 24/7, regardless of whether there are any new developments or not. To that end they assemble panels of experts whose purpose is to convince you that no matter how bad you think the situation is, it’s actually much worse.

Given the sad and scary state of affairs, you could be forgiven for just avoiding the news altogether, proceeding on the assumption that you can’t do anything about the situation anyway, so why worry about it. This attitude would be in keeping with the widely held financial advice that during volatile periods in the stock market you should not look at your retirement accounts.

I get that, and I haven’t looked at my retirement savings lately myself, but I do read the newspapers, though not for the horrible headline stories I mentioned earlier. What I’m looking for are the business-related items that have been overshadowed by the tragedies going on in Ukraine and Uvalde. Sometimes those neglected stories could have huge implications for small businesses such as yours and mine.

Let me give you just a couple examples of articles I came across in The Wall Street Journal in the past two months. One was entitled “Foreign Business is Falling Out of Love with China,” which documents a trend I have been expecting for some time.

A recent survey conducted by the European Union Chamber of Commerce found that almost a quarter of the international companies based in the Eurozone are planning to move current or future manufacturing projects out of China. That’s the highest level of such intentions in the past 10 years.

That sentiment is even stronger in America. The American Chamber conducted its own survey in April, which showed that more than a third of U.S. multinationals expect to reduce their dependence on Chinese manufacturing, based upon the “policy” environment there.

As far as I can tell, the policies in question fall primarily into two categories. The first is COVID response, which has included lockdowns far more complete than anything ever implemented by the world’s democracies, or pretty much anyone else. Those lockdowns have exacerbated the supply chain issues which have proven to be such a persistent problem for our economy.

The other category relates to China’s threat to our national security and that of the world. China has been supportive of the Russian invasion of Ukraine, and therefore by extension all the carnage and disruption that the conflict has caused. It buys up most of the Russian oil that has been shunned by others, which funds the war, and it has declared that the friendship between the two nations is closer than ever.

Other low-cost manufacturers, such as India and Southeast Asia, seem to be past their COVID lockdowns and haven’t taken oppositional positions to the West on foreign policy. They have young, growing, inexpensive labor forces and they do not appear to be headed toward a military confrontation with the United States.

One of the major corporations that plans to reduce its footprint in China happens to be the subject of the other Journal article that caught my attention, but this piece had nothing to do with the Far East. It may have an even more significant effect on your business, because the corporation in question is probably your biggest competitor.

The article was entitled “Amazon’s Flagship Online-Shopping Business Stalls After Decades of Growth.” I don’t know about you, but I have been waiting for that headline for an awfully long time.

Part of the slowdown was to be expected, because Amazon’s sales had shot up during COVID lockdowns when everyone was forced to shop from home. Although the virus is still with us, fear of COVID has faded and most Americans have returned to brick-and-mortar retailers.

But Amazon’s growth was sluggish even in 2021, and has remained flat through the first half of this year. Management has acknowledged that it could slow even further going forward.

One way to look at Amazon’s situation is to consider its share of online commerce. For the past 20 years it has rapidly increased market share continuously, to the point that it commands approximately 39 percent. Analysts estimate that over the past 18 months it has increased by just two-tenths of 1 percent.

Over that same period, Amazon’s costs have skyrocketed as it has hired tens of thousands of employees and built out infrastructure to handle the COVID-driven surge. North American operating expenses have grown by 58 percent in two years.

It’s not like Amazon is going to go away anytime soon. The company is still doing well overall thanks to the rapid escalation of its advertising and cloud computing divisions, and its “Amazon Prime” subscriptions continue to grow, though much more slowly.

We might, however, finally be seeing the end of an era in which online commerce expanded at the expense of traditional retailers. According to Mastercard, for example, online retail declined by 3.3 percent in March from the previous year, while brick-and-mortar retail increased by 11.2 percent.

Moreover, the online merchants rising up to compete with Amazon are themselves brick-and-mortar retailers, such as Walmart and Target. The times they are a changin’.

Which is my point. Dramatic events and trends have dominated the headlines in recent months, which has pushed business news off the front page, but that doesn’t mean there hasn’t been any.

Some of it might even be good.


You can e-mail Kevin at kfahy@fwpi.com

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