A tale of two shops

Rustenburg, South Africa.  Until the town became better known to the world as one of South Africa’s host venues for the 2010 World Cup which will be swamped by English and USA fans on June 12th, it was known by locals as one of South Africa’s fastest growing urban areas on the back of the platinum mining boom of the past decade.

But this is neither a post about the world cup nor about platinum.  This is a tale of two shops.

In Rustenburg there are two supermarkets that teach us about freedom, ownership, and governance.  The shops are situated close to one another and compete for clientele. 

Shop 1 is a subsidiary of the giant retail group which we’ll call MassMarket.  It is a modern, clean facility, has very impressive floor space, good position in the town to attract footfall and spend, and is backed up by the massive buying power of a large retail group, meaning that it can offer lower prices than its competitors for many goods. 

Shop 2 is owned by a local Portuguese family and managed by three brothers.  It is smaller, less physically attractive, less well positioned, and is not supported by anything other than sales and the personal wealth of the family that runs it.

It’s a case of Beauty and the Beast.

The large store, Shop 1, is fully supported by the parent company, MassMarket.  It has state of the art electronic stock management systems and buying procedures.  It benefits from a stock distribution network already firmly in place, and, because it is integrated with all other stores of its kind around the country, it simply runs the promotions it is told to run, for the length of time stipulated at group level.  Its manager is an appointee of the group and reports directly to the group.

The small store is not so fancy.  It does not rely on any special stock management system, has to manage its own stock distribution network of suppliers, run its own promotions on the products it chooses for the prices it determines and for the length of time it deems appropriate.  Its managers are not the blue-eyed corporate boys anointed from above – they are ordinary businessmen making things happen at the coalface.  They have skin in the game.

Which shop do you suppose out-competes the other?  That’s right, shop 2.  Walk into Shop 1 on any given day of the week and the floors and shelves are clean, but largely because it’s half empty.  Walk into Shop 2 and it’s less pretty to look at, but it’s packed full of customers.

Why?  Because Shop 1 is being run Soviet-style.  Directions come from the central planning committee at MassMarket and filter down to the minions at floor level.  Ordering new stock might be well systematised, but it takes too long.  The manager does not own the store and his directives are from above, so he sits pretty in little office while real life happens below.  When he eventually ventures onto the floor and discovers a certain product is out of stock the battle is already lost.  He then tropes upstairs to his lair, punches in a few numbers into his clever system, and waits for the central planning chain to kick in.

By the time his stock arrives, Shop 2 has already cleaned up.  The managers of the family business are hands-on.  Because their families’ livelihoods depend on the performance of the store, these three brothers are permanently on the shop floor, managing, checking, cleaning, interacting with customers, guarding their stock, and making sure their shelves never run dry.

These unencumbered store owners are nimble, competitive, and can steer their business in a far more flexible manner than can Shop 1.  They don’t have to run promotions that don’t work, they don’t have to take orders from a detached management chain, and they don’t need fancy systems.  They spend their lives immersed in the market they serve.

The net result is that while all the external gloss would suggests that Shop 1 should be the better business, the reality is that Shop 2 is the winner by far.

This is a great lesson in the folly of central planning.  It renders the system cumbersome, inefficient, and unresponsive to real needs.  The Shop 2 model on the other hand is a classic case of economic freedom.  It may have an uglier look and feel about it, but when it matters most it is able to respond quickly and effectively to customers needs.

Economic agents need ownership and freedom, and a market of free and unencumbered producers, suppliers and sellers needs to be able to determine what people want, not a bunch of central planners.  We don’t need to study the Soviet Union to know why central planning fails, we just need to take a look at our two shops in Rustenburg.

The ultimate purpose of any economic system or structure is to meet people’s needs in the best way possible.  The lesson from the tale of two shops is that needs are best met when people can act freely in their environment and not be bound by directives from a group of moribund central planners.

Now that’s freedom in action.