Opinion

Felix Salmon

Why online shoppers pay with cash

Felix Salmon
Jul 5, 2012 14:42 UTC

Here’s a reminder, from Stephanie Clifford, of just how two-tier the US economy has become:

Walmart says the majority of in-store purchases are made with cash or debit cards, and that about 15 percent are made with credit cards.

I wrote on Monday about the downside of painless payments, which is that they make it too easy to spend money. And customers at Walmart, it seems, are acutely aware of that particular syndrome.

Megan McArdle moved to a no-debts, no-credit-cards personal-finance system in 2009, where you set up a detailed budget and put cash in different envelopes. “It sounds unbearably tedious,” she wrote. “But it’s actually incredibly freeing. I have never before felt like I had total control over my money”.

This is the downside of any payments revolution: the easier and cheaper it is to spend money, the less control we have over our own spending. Which in turn means that ultra-convenient payments, probably using your phone in some way or another, are realistically going to be a luxury for the middle classes and a cause of stress and danger for families living paycheck-to-paycheck.

Such families, it turns out, are very good — by necessity — at budgeting. Being forced to pay for everything with cash, or with its plastic equivalent, the prepaid debit card, is not an inconvenience so much as a helpful discipline. There are debt instruments out there, for emergencies — but credit cards aren’t used as a payments technology, because they make it far too easy to get into expensive debt without even realizing you’re doing so.

Clifford’s story, about the increasing number of people paying for things online and then picking them up in person, talks a lot about convenience: a Sears spokesman, for instance, is quoted talking about customers’ “need for immediacy”, while a chap from the Container Store conjures up a mom running errands with kids in the car, who just wants to pick stuff up and move on.

But it seems to me that the convenience here runs just as much the other way. Yes, there are people who are shopping online, who want whatever they just bought, and who want it now. These are people who would be shopping online anyway, and who just don’t want to wait to get their goods.

But there are many more people, I think — in number if not in purchasing power — who limit themselves to cash or its functional equivalents, and who welcome the idea of being able to browse and shop online. Shopping at Walmart is never exactly fun, and if you can just punch in an order online — especially if you can simply re-enter your family’s regular weekly shopping list — that saves time in the store and also makes it less likely that you’ll be tempted by some impulse purchase. This kind of customer isn’t using a different fulfillment channel for what would otherwise be a regular online order; instead, they’re basically just using a more convenient way of picking out the stuff they want at a store they’d visit anyway.

At Walmart, clicking the “pay with cash” option doesn’t literally mean you’re going to pay with cash:

In the first weeks of the cash option, Walmart noticed that a different set of customers also found the service appealing. About 40 percent of the customers who paid with cash when ordering online ended up using noncash options, like a credit card or check, when they arrived at the store. They simply had not wanted to provide that financial information online. “There’s still a large segment of people out there afraid of identity theft or just plain putting their credit card online,” Mr. Anderson said.

My gut feeling here is that although fear of identity theft might be part of what’s going on, another part is simply good financial self-discipline. If you want to keep track of where your money is, and if you want to minimize temptation, a “never buy anything online” rule is simple and effective. If you can enter a card number online to pick goods up at a store, then you can enter the same card number online to buy things from just about any website in the world. And many people simply can’t afford to open themselves up to those kind of opportunities.

COMMENT

An insightful article and a whole bunch of very helpful comments. Am I really on the Internet?

I think this exchange of ideas begins to approach the gold standard. Good for Reuters and its readers.

Posted by nikacat | Report as abusive

Kickstarter of the day, Flint-and-Tinder edition

Felix Salmon
Apr 26, 2012 20:33 UTC

If you want an example of Kickstarter-as-QVC which is extremely likely to fail, look no further than Flint and Tinder. The brainchild of one Jake Bronstein, the idea is to create a new company making boxer shorts in the USA. “It’s about more than underwear,” he says in the video. “It’s about redefining what it means to be Made in America.”

rockhard.tiffMy favorite bit of the pitch is when Mr Bronstein shows us a photograph of his rock-hard abs. (Sadly, those abs are spoken for: that’s a wedding ring you’re looking at.) My least favorite part of the pitch, meanwhile, comes in an update:

The last round of prototypes came from the factory on Friday and while they’re good, there’s still lots of work to be done…

It might sound obsessive, but the way I see it is this: So far, 300+ of you ponied-up for underwear that is made in America. What I’d like to send you instead, is the greatest pair of underwear you’ve ever worn… that just happens to be made in America. It’s the only way this thing is going to work.

Finally, I’ve put together a top-notch team to help realize this goal, but there are still several key roles to fill. Feel free to point me towards anyone you think I should be talking to.

This is a significant backtrack from the original post, where Bronstein said he had already got the designs and needed just $30,000 “to get it going”. As a result, at least one donor ponied up $3,600 and has been promised 365 pairs of premium men’s underwear.

It’s possible, of course, that Bronstein will end up with a genuine retail product at the end of all this. Possible, but unlikely. It’s also possible (and equally unlikely) that the people who have given him $45,882 to date are really just wanting to support an American entrepreneur, and don’t particularly care all that much about when or whether they’ll ever actually receive their briefs.

This project encapsulates my issues with Kickstarter. I’m not saying that Bronstein is a fraud, but I am saying that he seems to have little if any manufacturing or retailing experience*, and is going to face an enormous number of unforeseen obstacles before he ever starts selling this product online. What he wants to do is start a company; Kickstarter quite explicitly says that it does not exist to help people start companies, but that seems to be what it has become anyway.

The fact is that starting companies is hard, and that there’s a very high failure rate in such things. Bronstein has almost certainly underestimated his chances of failure; all entrepreneurs do. Meanwhile, Bronstein’s funders have similarly overestimated the chances that they’re actually going to receive underwear if they fund this project. It’s a deal based on delusion, and it has a high probability of ending in tears and frustration all round. I just wish that Kickstarter were much more honest about that.

*Update: Jake Bronstein replies in the comments, saying that he does too have manufacturing and retailing experience, as the founder of Buckyballs. (He also says that I could easily have discovered this fact by looking at his profile on Kickstarter; it’s true I missed that link.) His mention of Buckyballs, however, did remind me of this video, where Bronstein left an extremely aggressive and intimidating nastygram message for Zen Magnets, a smaller competitor.

The Kickstarter project seems to be gathering a lot of momentum, and at the margin the more money it raises the more likely it is to be able to deliver a product. Still, my broader point is less about Bronstein and more about Kickstarter. Sooner or later, a bunch of these product-related Kickstarter projects are going to fail. And at that point a lot of funders are likely to be extremely unhappy.

COMMENT

I happened to find this posting when I was looking online for some commentary on the Flint and Tinder product I just bought (and happen to think is fantastic). What I love most about this post is not how “better than thou” it was towards the kickstarter campaign memeber, but how WRONG it was! This Kickstarter campaign, which was deemed an “example of Kickstarter-as-QVC which is extremely likely to fail,” turned out to be one of the most successful campaigns Kickstarter has seen to date. Not just successful, but a RECORD BREAKER. As techcrunch noted on October 21st, this Kickstarter Record Breaker received 850K in seed funding. Way to know the trends.

I applaud Felix’s desire to take a position, but …. seems he needs a better pulse on what the public really wants if he is going to be so adamant. Guess this was a post that was more extremely likely to fail than the product it was criticizing.

Posted by reuterscomments | Report as abusive

A tale of two retailers

Felix Salmon
Dec 28, 2011 18:54 UTC

The two biggest expectations-defying retailers of the past decade were Sears Holdings and the Apple Store. Expectations could hardly have been higher when the former was created: it was one of those rare deals where the stock of the acquiring company went up on the news, and in an article headlined “Eddie’s Master Stroke“, Businessweek waxed positively rhapsodic about the prospects for the company becoming the next Berkshire Hathaway. Three years earlier, of course, it had published a column headlined “Sorry, Steve: Here’s Why Apple Stores Won’t Work“.

There are lots of reasons why Apple Stores succeeded while Sears stores have failed, not least the fact that people really want what Apple is selling. But the biggest and most obvious difference, I think, is in the two companies’ approach to spending money. Apple Stores are the most expensive on the planet: whatever it costs to make them insanely great, it will get spent. Meanwhile Eddie Lampert seems to have exactly the same attitude — only instead of spending money on his stores, he spends it on stock buybacks.

While retailers generally spend $6 to $8 per square foot a year on updating their stores, Sear’s spends only about $1.50 to $2, notes ISI analyst Greg Melich. That is not even enough to keep up with depreciation and amortization.

Amazingly, Sears has spent $5.2 billion over the past five years buying back its stock, more than twice as much as on capital investment.

Steve Jobs was never very good at financial engineering; Eddie Lampert has never been very good at anything else. Lampert likes to buy things which already exist; Jobs liked to spend money building things the likes of which the world had never seen.

One of my favorite new toys is the Apple Store app for the iPhone. You walk into an Apple Store, find any product selling for less than $100, and scan the barcode with your phone’s camera. The app then asks you if you want to buy the product; if you do, you just type in your iTunes password, and you’re done. The purchase is charged to your iTunes account, and you can waltz out of the store without interacting with a single salesperson.

It’s just another small way in which Apple is revolutionizing the retail experience. And it seems to me that if you’re an ambitious retailer, then if you don’t want to revolutionize the retail experience, at least somewhere, somehow, you’re doing something wrong. Which does contrast, rather, with the way that Eddie Lampert extolled Sears when he bought it, saying the store was “every bit as good as any of the competition”.

Well, it wasn’t for long.

Update: Jeff Matthews reminds us that Eddie Lampert actually compared Sears to Apple in last year’s letter to shareholders. “Like Apple,” writes Lampert, Sears tries to “create long-term value” by “improving our operating performance, innovating, and delighting customers”. Matthews also notes:

An investor with access to a Bloomberg machine can spot one difference between Sears and Apple that would make a Sears shareholder throw up: even at current prices, Apple shares are cheaper than Sears, at 8.3X EBITDA versus 10.2X for Sears.
Oh, and we used EBITDA to compare the valuation, since Sears doesn’t have any earnings to speak of.

Like Apple,
COMMENT

I agree with what you say, Felix. But here’s what everyone seems to miss.

Steve Jobs got one thing horribly WRONG! When he repackaged NeXT as OSX and customers did not flock to adopt it, he began a series of moves to FORCE migration. Gradually Macs could no longer boot in earlier systems.

The “Classic” OS 9 emulator preserved, for a time, one’s ability to run earlier owned and adequate software. Then he changed from the PPC chip to an Intel chip, and Classic didn’t work any more. Some older applications could run on Classic’s replacement “Rosetta” but, with Lion, that has been dropped.

Since developers always make new applications for the “latest and greatest” Apple system, with each “new” system owners of older Macs are left in the dust. I don’t WANT nor can I afford to live my computer life on the bleeding edge of technology.

I want no less than ten years out of an application I take the money to buy and the time to learn, and I want a “patch” when a new Mac comes out that will allow me to use the old software STILL if it continues to meet my needs. I’ll pay a nominal amount for that patch.

So my 2010 (Thanksgiving) Intel Mini will be the last Mac I buy. I was one of the first Mac customers, a 512K E with a 20MB HD in 1985, and I’ve been a customer ever since. But I didn’t like it when MacWrite was replaced with MacWrite II. I didn’t like it when I then had to transition to WriteNow.

In my transition to OSX, kicking and screaming, I left WriteNow for Word for six months…NOTHING would have tempted me to continue wrestling with Word. I still modify OSX to look and work as OS 9 did because much of the visual IN YOUR FACE difference was not technically necessary and yet not made optional.

I bought Pages when it came out and was again happy, but it does not run on my Intel Mac, so I bought a later version. None of this irritation and learning time has resulted in a meaningful increase of utility to my word processing efforts.

I guess everyone else in the world does not mind being exploited in this manner, or maybe they’re just used to it. This is the “down side” of some so-called genius convinced he knows what I “need”, both now and in the future. NO MORE!

I don’t have an iPhone, I don’t NEED an iPhone. The iPad may eventually get my attention since it’s handy in the cockpit of a private aircraft and could replace a laptop, but I don’t want my familiar computer interface constantly tweaked so functions can be the same as on devices I don’t use.

Obviously Apple wants frequent purchasers more than loyal customers, and this is more profitable. So be it.

Posted by OneOfTheSheep | Report as abusive

The Groupon roadshow

Felix Salmon
Oct 21, 2011 16:20 UTC

Here’s something I haven’t seen before: an IPO roadshow appearing online for the world to see. (Click the link on the left; the link on the right basically just takes you to a copy of Groupon’s S-1.) In fact, I’ve never seen an IPO roadshow pitch before. They’re boring! And, they feature senior executives looking uncomfortable wearing ties in front of a dark-grey background, talking to slides!

But, this roadshow is also very helpful indeed for people looking to understand Groupon’s business. And it includes cohort information which has never been made public before, and which is rather more bullish on Groupon’s prospects than the analysis we’ve had to make do with to date from Yipit.

First, though, it’s worth taking a look at the price tag on this company. As Anthony Hughes reports, the price range indicated here values Groupon at no more than $11.4 billion, with Groupon itself getting a maximum of $540 million in cash. These are big numbers; the valuation is essentially double the amount that was reportedly offered by Google for the company in December, and is 2.3 times the $4.875 billion valuation at which Groupon raised money that month. (Interestingly, Groupon is actually raising less money in the IPO than it did in that round.) Still, the valuation’s nowhere near the $25 billion or even $30 billion numbers that were being whispered a few months ago.

Andrew Ross Sorkin is very critical about all that $30 billion number, talking about known issues surrounding Groupon, and writing:

How did so many Wall Street firms desperate to underwrite the Groupon I.P.O. miss these warning signs when pitching such a sky-high valuation? …

A deep dive into the numbers should have raised alarm bells at the outset about even talking about the possibility of a $30 billion valuation…

If it were to really slow its marketing spending, it is possible Groupon could turn a profit.

Even so, it does not fully explain how Groupon’s underwriters, whose endorsement of the company is supposed to be considered the Good Housekeeping Seal of Approval, originally came up with Groupon’s questionable $30 billion valuation.

Sorkin, here, is saying that Goldman Sachs and other banks, when pitching their IPO services, told Groupon that they could bring the company public at a $30 billion valuation — indeed, that they “originally came up with” that number. And, frankly, I don’t believe him. All conversations about these matters are off the record, of course, so it’s hard to be definitive. And Sorkin certainly talks to many more bankers than I do. But going public really isn’t about the IPO — it’s about being a publicly-listed company in perpetuity. And Groupon has very little incentive to launch at a bubblicious valuation which can only exacerbate volatility over time.

I think that the $30 billion number was never something that bankers seriously pitched to Groupon as a launch-valuation possibility. Instead, it was a number thrown out by people looking at LinkedIn’s first-day pop, and was intended to reflect not the IPO price but rather the level at which Groupon shares might trade in the secondary market, if the market remained frothy. (And even today LinkedIn is worth more than $8 billion, which makes $11 billion for Groupon seem pretty reasonable in comparison.)

As for Groupon’s business, I do still like the model — with the proviso that I have no idea how to place a present value on such a thing, so I take no position at all on what a sensible valuation for the company might be.

And in the light of the numbers Groupon released today, it’s no stretch at all to say that “Groupon could turn a profit”: the company’s total loss in the third quarter was a tiny $239,000 — essentially, the company broke even.

One thing which makes me look more favorably on Groupon now that I’ve seen the roadshow is the company’s cohort data. One of my biggest concerns about Groupon, up until now, has been the idea that its subscribers suffer from “deal fatigue”. You sign up in a fit of enthusiasm, you buy a few deals, and then the novelty wears off and you go back to your old life. That thesis was supported with charts like this one, generated from some of the relatively sparse information that Groupon provided in its S-1.

This chart could show that subscribers spend less and less money over time. On the other hand, it doesn’t necessarily show that. There’s an alternative explanation: basically, that there are diminishing marginal returns to marketing spend. Groupon picks the most valuable low-hanging fruit first, and then as its subscriber base grows, the newer subscribers spend less money than the older ones, bringing the average down. Even if the older subscribers keep on spending just as much as they ever used to.

And that’s what’s shown in two charts from the roadshow. They look at the numbers associated with the subscribers that Groupon acquired in the second quarter of 2010:

As Groupon CEO Andrew Mason explains with regard to the first chart,

This shows the repeat purchasing behavior of a typical cohort of customers; this one joined in Q2 of 2010. You can see that quarter after quarter after quarter, they continue to buy at the same pace.

The first chart shows the quarterly revenue from the customers that Groupon acquired in the quarter; the second chart shows the quarterly profit from those same customers. In both cases, the numbers are remarkably consistent over time — they’re not falling off.

My other big concern is about targeting — Groupon’s ability to differentiate between consumers based on much more than just what city they live in, and to show them deals they’re likely to love. Groupon product head Jeff Holden talks about this around slide 26. Groupon has something called Smart Deals, which tries to implement just that kind of targeting. One way it’s doing that is by getting its customers to click on categories called Deal Types, so that it knows what kind of deals that customer is interested in. And then of course given that customers keep on buying deals over time, it’s easy to see what kind of deals they’re buying, and what kind of deals they’re not.

Holden also gives the best explanation of Groupon Now that I’ve seen — the way it offers yield management for merchants.The idea is that the Groupon app on my phone is a great way for me to save money: I fire it up, and immediately see a list of deals nearby. Merchants can offer or not offer those deals in real time: they can make them better when business is slow, and turn them off when business is already overwhelming. That’s great for both merchants and consumers, who hate turning up to a Groupon-featured merchant and finding it overwhelmed with bargain-hunters.

There’s a rewards system, too. You know those punch-cards at coffee shops, where you get a free coffee after you’ve bought ten? That can now be built in to what the company is calling Groupon OS — all you need to do is allow Groupon to associate you with your credit-card number, and then every time you use that card to buy a certain item, it will automatically show up in the Groupon app. Eventually, you become eligible for a reward. It’s pretty effortless, for the consumer, and it brings an element of addictive gameplay into the shopping experience.

There’s a couple more slides which are relevant too, and directly address my concern that Groupon has to develop a reputation for high-quality deals. It can’t just let its salespeople maximize revenue, as sales people are wont to do: it has to delight its customers, by pointing them to great merchants. And it turns out that Groupon does actually attempt to do just that. One slide talks explicitly about “curation”:

And another (with the dreadful title “operational excellence”) shows the huge number of steps that need to be gone through before and after an offer appears on the site.

I love the way that under “Editorial” there are separate steps for “Humor”, “Voice Edit”, and “Copy Edit”. So there are systems in place here. But the really crucial step is buried somewhere in that “Deal Quality Assurance” circle. Groupon does not have the best reputation for picking only fabulous merchants; it probably needs to work on that a bit.

Overall, then, I think it’s pretty clear that people who think Groupon’s some kind of Ponzi scheme are wrong. There’s a real business here, with a real business model. The big question is whether Groupon can execute. Can it create a much-loved mass-market brand, which people and merchants trust and return to on a regular basis? We will always hear about bad experiences, of course — that’s a statistical inevitability, given the number of deals and employees going through the Groupon system. But will those significantly damage Groupon’s reputation? That’s a harder question to answer. (And it’s worth remembering, too, that for comparison reasons some small percentage of Groupon customers are going to have to continue to receive offers which are not targeted to them. If you’re one of those unlucky few, you might have a much worse experience of the company than everybody else.)

If I had to make a forecast, I’d say that Groupon is going to be around for the foreseeable future, but that the error bars on its future size are enormous. It could just slow down and lose its competitive advantage over its competition; it could, on the other hand, genuinely revolutionize the infrastructure of commerce and even become that thing everybody wants to be these days, a platform.

Like all fast-growing technology companies, Groupon is a risky bet from an investor’s point of view; it’s in no sense a widows-and-orphans stock. Like many consumer-facing companies, it’s probably better for most people to just take advantage of it as consumers. Individuals are much better at judging whether a money-off deal is a good one than they are at judging whether a particular stock is a good investment. But if Groupon’s sales continue to grow at anything like their recent pace, that’s an indication that a lot of individuals will continue to love what Groupon’s doing. And ultimately that’s going to show up on the bottom line.

COMMENT

if this is true you have to wonder how they set valuations at groupon
Did Groupon Value Its China JV Gaopeng at $500m in July? | DigiCha http://bit.ly/r1Zmd2

Posted by niubi | Report as abusive

Canine umbrella stand datapoint of the day

Felix Salmon
Jun 6, 2011 19:26 UTC

The right-hand column of page A3 of the NYT — the first thing you see when you turn the front page — has historically been home to slightly silly luxury-goods ads from high-end New York retailers. Today is no exception, with Tiffany at the top and Brooks Brothers in the middle. But there’s clearly money in e-retailing again, because the bottom slot has been bought by 1stdibs, which uses the space to advertise this “rare umbrella stand in the form of a collie dog by Piero Fornasetti”, yours for $4,600.

I couldn’t help but think of the famous $15,000 umbrella stand that Tyco CEO Dennis Kozlowski had in his Fifth Avenue apartment. Has there been massive price deflation in such things? As it happens, I had a meeting at Artnet this morning, which has a comprehensive database of auction results for such things, and they couldn’t find a single dog-shaped umbrella stand coming up for auction ever.

But then I found a description of the Kozlowski umbrella stand, and it’s definitely not a Fornasetti:

The stand is a sculpted terrier on its hind legs with a brass ring through its paws to hold umbrellas.

So there’s no chance that the umbrella stand on 1stdibs was formerly owned by a convicted felon. But we do now know that we’re about 31% of the way towards the point at which a universal touchstone of corporate greed and profligacy becomes a purchase so mainstream that it’s advertised in the Monday New York Times. Is this a sign of another bubble? And if so, is the bubble in dog-shaped umbrella stands, in online retailers, or in New York Times readers with thousands of dollars to drop on umbrella stands? Much as I’d be tickled by the first, I suspect the answer is some combination of the last two.

COMMENT

That umbrella stand looks like a bad piece of kitsch from the 70s, and worth about 50 cents.

Posted by BarryKelly | Report as abusive

Amazon arbitrage of the day

Felix Salmon
Aug 20, 2009 18:30 UTC

One of the best travel books ever written (indeed, one of my favorite books, period, ever) is The Surprise of Cremona by Edith Templeton. Unfortunately, it’s not easy to find: your best bet is to track down the 2003 Pallas Athene paperback with an introduction by Anita Brookner.

If you go to the Amazon page for that book, you’ll find there are “7 new” copies for sale. The cheapest is $20; the most expensive is $166.18. Woody’s Books, for instance, is selling the book for $27.50 — plus a $125.79 “sourcing fee”, plus $3.99 shipping from New Jersey — $157.28 in all.

On the other hand, if you check the book out on Amazon.co.uk, you’ll find “6 new” copies for sale, including Woody’s UK, which will sell you the book for £12.99, plus a sourcing fee of just £0.01. Shipping, to the US, is £3.08, for a total of £16.08, or about $26.51 in dollars — less than the sticker price on the US book before the massive sourcing fee. And yes, the book is still shipped from New Jersey.

In other words, the same book, from the same US-based seller, being shipped to the same US address, costs either $26.51 if you buy it on Amazon.co.uk, or $157.28 — pretty much six times as much — if you buy it on Amazon.com. There might be a good reason why Woody’s is doing this. But I don’t think it reflects particularly well on Amazon.

COMMENT

@ Rather Not Say

You said:

“But that wasn’t the comparison I made; I said that *Amazon* has a better inventory system than either drop-shipping or non-dropshipping booksellers. Futhermore, there’s guaranteed lag in using their API. My point was simple: when you buy a used book on Amazon, much of your discount is your risk of not getting the book, whether it’s in stock at the used bookseller’s or not.

By “podunk” I just mean relatively small; probably a bad choice of words. There’s no contradiction between being podunk and being competitive

And where did I disparage anybody? I don’t have anything against any booksellers.”

And before, you wrote: “I suggest that if you *must* have the book, you should buy it new.”

Here’s the disparagement (and I’m not claiming intent on your part, btw) – my claim is that a good booksellers inventory is just as reliable as amazon.com’s- that’s the assumption and the foundation of 3rd party selling on amazon.com.

And, ironically, it’s an assumption that’s built into the practice of drop-shipping.

Cheers.

Posted by Mark Beauchamp | Report as abusive

Thomas Kinkade: Bad, not evil

Felix Salmon
Jun 19, 2009 19:36 UTC

Hamilton Nolan is snarking gleefully over the fact that Thomas Kinkade, whom he calls “Painter of Darkness”, has lost a round of the endless litigation he’s been involved in for years now, ever since he took his company private in 2004. Now I’m no fan of Kinkade. But the plaintiffs in this case are trying to make a pretty astonishing case: that they’re owed damages on the grounds that Kinkade talked a lot about God, and thereby fraudulently persuaded them to place their trust in him.

This argument doesn’t really hold water, and in fact Kinkade has — justly — won the vast majority of the lawsuits which have been brought against him. I wrote about this case at some length back in March 2006, so I might as well just plagiarize myself here: Kinkade is more of a bad businessman than an evil one.

Kinkade took his business public in 1994, with a $110 million IPO. Between 1997 and 2005, according to Kim Christensen of the LA Times, he earned more than $50 million in royalties. And at the end of Jauary 2004, just over 9 years after going public, Kinkade bought back his company for $32.7 million – a price about $14 million higher than the company’s market capitalisation at the time. People who bought Media Arts Group at $20 per share, of course, weren’t particularly thankful that Kinkade paid them $4 rather than $2.30 for their stock. But the fact is that Kinkade was more optimistic about the outlook for his company than the markets were.

The people who ran Kinkade stores are upset at him, because he acted a bit like Chrysler towards dealers it ended up closing: Kinkade forced the dealers to buy expensive inventory which simply didn’t sell, and refused to accept returns unless they were accompanied by orders for three times as much art as was being returned.  Obviously, it was hard for the shops to make money in such circumstances. But I get the feeling they’re missing the forest for the trees: they weren’t losing money because of the decisions being made by Kinkade’s company, so much as they were losing money because they’d hitched their wagon to a company which was in a tailspin.

Obviously, they have every right to try to sue. But it’s pretty hard to make the case that one should expect better behavior from Christians than from non-Christians. And any company, once it starts failing, is going to result in people losing money. It’s also worth pointing out that virtually everyone who entered the Kinkade industry did so out of greed – not just Kinkade himself.

The store owners saw a booming market, and then lost money when the market stopped booming and the internet made secondary-market values of Kinkade’s work much more transparent. Suddenly, the enormous growth in past Kinkade sales was no longer a good thing: there were a lot of Kinkades to go around, and many of the buyers were people who bought on the assumption that their paintings would increase in value and they could make money on their investment. Up until the arrival of the internet, that worked for Kinkade, whose company set the prices for all his paintings and would raise them steadily. After the arrival of the internet, a whole industry arose buying and selling Kinkades at market-set, rather than Kinkade-set, prices. And that was the end of the success days for the company: without monopoly pricing power, Kinkade was nothing.

The stores failed, ultimately, not because Kinkade treated them badly, and not because other stores were undercutting them. The stores failed because Kinkades are a commodity, and anybody wanting to buy one could get a second-hand Kinkade online at a much lower price than that charged at retail. Buyers no longer believed that their paintings would increase in value, so they bought fewer than they used to. And when they did buy, they were likely to buy already-existing Kinkades rather than new ones.

As a general rule, no retailer has ever consistently been able to make money by selling the proposition that his goods are going to increase in value after they’re bought. Kinkade managed it for a few years, but then, inevitably, the bubble burst. And when bubbles burst, people get hurt. It’s not the fault of Thomas Kinkade, it’s simple market dynamics.

COMMENT

It seems to me that there are four main reasons why people don’t like Thomas Kincade:
1) He has been quite successful financially in his business
2) His style of artwork doesn’t appeal to them
3) The manner in which his work is produced appears inauthentic to them
4) They have been burned financially due to their business relationship together

It would be a tough case to argue that Thomas Kincade has not been successful in his business. He has made millions. To build up a company and name recognition like he has and to have generated millions of dollars in revenue from scratch is astounding. I challenge anyone to repeat that process if they disagree.

If you happen to like Thomas Kincade’s artwork then great, you have no problem with his sucess. If his style doesn’t appeal to you because you think it’s kitsch, too syrupy sweet, or without substance then the fact that he has been so successful financially is a little dumbfounding and leads one to believe that he must have manipulated people somehow.

As for the way that he produces his work, his “prints” are created with the available technology of the day. I have gone to art school and studied printmaking -relief printing, lithography, intaglio, silkscreen. In their time those were all the high tech ways of producing a series of identical images. I find woodblock printing and intaglio printing more appealing because of the archaic, physical nature of the process, and the visual and physical qualities of the print -the emboss and the way the process informs the character of the image. Therefore giclee prints and canvas transfers are not my cup of tea.

Does it matter if someone else dabs paint on the canvas or if the work is “signed by a machine?” It matters only if that is important to you. Did Thomas Kincade design and produce the original painting before it was recreated in the print? Yes. If someone is buying a print because they think it is an actual painting then that is misleading and material misrepresentation. If they are buying a print with paint dabbed on the surface because it adds to their enjoyment of the piece then so be it. The value of a work of art is determined merely by what others are willing to pay for it.

If someone is disgruntled with Thomas Kincade because of a bad business decision then they really have themselves to blame. No one is forcing an individual into business with Kincade. Investment and business relationships are speculative. You can win and you can lose, and it’s up to you to make the appropriate decision given the terms of the business arrangement.

Am I a Kincade fan? I bet you can tell by looking at my artwork.

Posted by noahmakesart | Report as abusive

Excising the cheapest options

Felix Salmon
Jun 13, 2009 20:10 UTC

Alex Tabarrok wonders why no stores stock cheap (as opposed to expensive) HDMI cables, and Kevin Drum — who used to manage a Radio Shack — recounts his own tale of looking for a simple patch cable:

Last year I made the rounds of every retail store in the area after I got annoyed at the price of a simple Cat-5 network cable, and there wasn’t a single place that sold them for a reasonable price. Not one. It was almost like there was a cartel or something. (And the cartel worked! I didn’t feel like waiting the few days it would take to order online, so I went ahead and bought an expensive one. Their fiendish strategy turned out to be remarkably effective.)

I think there are two very simple explanations of what’s going on here. Kevin hints at the first: if you need an HDMI cable or an ethernet cable or a USB cable, you generally want it now, and you don’t want to faff around with ordering it on the internet and wondering when it might arrive. (Note that Alex’s example of HDMI cables being sold for “virtually nothing” turns out to be one of those examples where next-day shipping — still decidedly less convenient than just walking home with the cable in your bag — costs $30.)

But more to the point, your local retail outlet will quite rationally try to maximize the profit it makes on its HDMI cables. Alex I think is wrong here:

Ordinarily, we would expect competition to push prices down but in this case it seem as if the mere existence of Monster is anchoring high prices everywhere but online.

I think what we’re seeing here has almost nothing to do with anchored expectations. Instead, consider this: most remotely educated consumers will simply buy the cheapest cable on sale, and so there’s a very strong incentive to ensure that item is as expensive as possible.

Why would we expect competition to push prices down? Well, let’s say you’re managing a Radio Shack down the street from a Best Buy. You could, if you were so inclined, start selling HDMI cables at a fraction of the cost of the cheapest cables available at Best Buy. Would that be a good idea? Well, it would get you the business of the kind of people who shop around different stores for the cheapest HDMI cable, and it would improve your reputation as a store which doesn’t needlessly rip people off. On the other hand, people would pretty much stop buying expensive cable from you overnight, and all the associated profits would simply evaporate.

I’ve recently been shopping around for a folding bike — one which (fingers crossed) the security guards at 3 Times Square will let me bring in to the office. There’s a sweet little folding-bike shop in my neighborhood, stocking a pretty wide range of different brands, although they do tend to push Bromptons over everything else. And they don’t stock the cheapest brands. Could it be that the cheaper bikes are simply not very good? Maybe. Or maybe it’s just that if their customers have the option of buying a cheap folding bike for a few hundred bucks, they’ll be much less inclined to drop $1,000 on something else, and the store’s total profits will go down.

I suspect you’ll see the same thing at say kitchen stores: while there might be a big range of pots or knives, most shops selling the high-end stuff will be reluctant to stock very cheap stuff alongside it. Doing so just makes it far too easy for the consumer to decide that the extra cost isn’t worth it.

COMMENT

This theory makes pretty good sense, but it still seems like “the power of small” would kick in at some point and someone would offer the cheaper cables to undercut the bigger competition that is only offering the pricier ones. Sort of like how collusion supposedly can’t work because someone will take advantage of the price gouging by pricing below the colluded price. If these cheaper cables exist, someone must sell them, right?

Posted by Rhys | Report as abusive
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