Accounting Methods Drive Urban Planning Approach?

[akirlu]

I'm a great fan of neighborhoods that are scaled and ordered for human beings traveling sidewalks under their own power -- well made urban environments, in other words. Here's an interesting theory why supermarket buildings get built on a suburban model even in DC urban environments they are poorly suited to: accounting methods.

Safeway and Giant ... primarily measure stores by their "average receipts", the average amount of money a customer spends on a single visit.

Adding small-ticket items like produce outside the store would bring in more customers and even more total profit, but decrease the average receipts. Despite raising the store's profits, the national headquarters would very likely see the change as diminishing the store's performance.

Wow. The performance measure for evaluating stores is inherently biased in favor of suburban stores and suburban-style shopping. Think about it: in the suburbs most shoppers come by car, lots of them in station wagons and SUVs and vans, and shop for a week's groceries at a time, or more, often for rather more than just one or two adults. It adds up to big per-trip totals. In a city, shoppers are more likely to be traveling on foot or public transit, and will only buy what they can comfortably carry on any given trip. This means shopping for a day or two at a time, for one or two people in many cases, with lots more trips. The average per-customer-trip sales of an urban store will inevitably be lower than those of a suburban store.

So even if an urban-styled store in an urban environment has bigger total sales, way better sales per square foot, and larger profit margins, if the measure of "performance" is receipts per customer trip, it will inevitably look worse on the performance charts when stacked against suburban stores. And any unsophisticated observer will focus on the 'superior performance' of the suburban-style store, rather than the bias of the performance model. And that unsophisticated observer might therefore think that suburban-style markets -- with vast tracts of parking lot out front, and big, faceless blank walls pointing toward the public -- are therefore what they should build more of. Even if an urban-style market would, for instance, have way better profit-per-square-foot.

It never previously occurred to me that the pressure point to get better urban environments might be getting retailers to change their performance accounting model. Go figure.

[Link thanks to Atrios]

Comments

[dd-b.livejournal.com]

So, if this is true, there's a clear niche to be exploited by a management team smart enough to notice. They're partly protected from competition by the other stores' accounting practices!

[ckd]

I wonder if the small Trader Joe's on Boylston St (in a basement, with extremely minimal street-level frontage) is an example of this? It's almost always busy when I'm in there.

(Since TJ's is privately-held, and not in the "leveraged buyout folks took it private with its own money" way, this seems like it could be more likely.)

[madwriter.livejournal.com]

This reminds me of how the hospital my Mom once worked for could make a five billion dollar profit in a year but call it a one billion dollar loss if they'd made six billion the year before.

My mind boggles that some businesses make it at all.

[voidampersand.livejournal.com]

I'm very much in agreement with you about how we should be designing our communities. My favorite market is a converted drive-through milk stand, and my next favorite is an old-fashioned independently run supermarket of modest size. However, I think the accounting technique used by the big supermarket chains is rational. They are maximizing return on investment, by maximizing operating margin over multiple stores in a large geographical area. Even though an urban-style market may have higher sales and profits per square-foot, they also have higher real estate costs per square-foot, and higher labor costs from maintaining the in front of store displays, and from serving a larger number of customer visits. Also, the urban-style stores are not drive-to destinations. They serve a lot of people in their local neighborhood, but each neighborhood has to have its own store. The ideal scenario from the big chain's view is to build a big store that everyone drives to, so they can close several neighborhood stores and also wipe out several of their competitor's neighborhood stores. Again, I think this is rational economics. What's missing, critically, is making economic decisions on the basis of more than the next four quarters. Businesses need to start thinking of how they can be sustainable over decades. That's where urban-style stores and building communities starts to make compelling economic sense.

[akirlu.livejournal.com]

In fairness, it isn't just making the measurement, it's the much trickier process of deciding what to measure, and correctly correlating that measure to what it means. Frankly, potential for bad metric design is a problem in for almost any industry or entity that tries to measure things. I'm thinking here of the study that claimed to have found that oat bran didn't significantly affect heart disease rates, but was conducted in such a way that all the subjects were pre-menopausal women -- it was a nurse study, I suspect -- and so the risk of heart disease in the subjects was already so low that any difference the oat bran would have made fell more or less within the margin of error. For that matter, I'm thinking of the claim that IQ tests measure intelligence, when what they really measure is a certain sort of test-taking aptitude.

Sometimes what we want to evaluate can be hard to measure, and sometimes the metric designers get lazy and settle for measuring something nearby that's easier to quantify. Problems creep in when designers or users then conflate what they wanted to measure with what the metric actually measured.

Coming up with good models, good metrics, and good analysis of what your measurements really mean is a skill and an art, and lots of times that gets swept under the rug because most people aren't good at them, and don't know how to evaluate whether someone else is

[akirlu.livejournal.com]

You might be right if it were a matter of prefering to build suburban-model stores in suburban model settings, but the piece in question is talking about chains building suburban-style edifices in urban spaces. In other words, in places where the overhead costs per square foot and labor would tend to favor a more compact, sidewalk-facing building, and where maximizing the use of every leased square foot matters -- so it's really the opposite of rational economics, it's using a building model that's optimized for a completely different environment, guided by a poor metric.

[akirlu.livejournal.com]

The wisdom of capitalists is greatly overrated, and the reasons many businesses make it is mostly blind luck. And, of course, a great many businesses do fail.

[jry.livejournal.com]

Great post. Are you aware of our local sustainability think tank, the Sightline Institute (formerly Northwest Environment Watch)? This reads like one of their posts (in fact, I took the liberty of pointing them here). One of their primary tenets is to "measure what matters".

You can read about them here: http://www.sightline.org/about and have a look at their blog here: http://daily.sightline.org/daily_score

Full disclosure: I'm a long-time donor to Sightline and currently serve as a trustee focusing on membership development ;-) Sorry about the spam, but I really think you'd like their work.

[kalimac.livejournal.com]

So to better ensure that my neighborhood branch of the big supermarket chain stays in business, I should cease stopping in every other day and buying a few things, and instead stock up once a fortnight? A strange world indeed.

[akirlu.livejournal.com]

If their corporate headquarters uses the same wacky measure of store performance, yes, that seems like it would be the case. It's so wrong.

[akirlu.livejournal.com]

Thanks for the links -- I'll check Sightline out. (Looks like some interesting stuff, judging by a cursory glance at the blog.) Yes, indeed, just the sort of thing I like to know about.

[avram]

Is this really hard to understand?

Imagine someone working a job with a salary of, say $60k/year. He hold this job for several years, makes all sorts of plans based on that level of income. Then he gets demoted to a position that only pays $50k/year. Should he say "Yay, at least I'm still employed"? Well, in this economy, maybe he should. Still, I think most people in that position would think "I just lost $10k/year".

[madwriter.livejournal.com]

Sorry, I should have been a lot less vague here.

With the reports I read and the lingo I'm used to, simply saying that a company took a loss with no other qualifiers would mean that they made less than they'd spent / were currently spending. The situation above--where the company still was making a vast profit, they just couldn't expand as quickly or as widely as they wanted--would've been called a $1 billion drop in profits, or a $1 billion drop from their $6 billion high, etc.