Too big to fail or too big to survive?

Diplodocus, had a neck that could reach up to 50 feet.

Big animals like dinosaurs needed (need) lots of food and lots of space to survive.  As an animal species increases in size, it has to increase its territory to find enough food to feed its gigantic body.  The same is true in business, the larger,  the business the larger territory it takes to feed it.  We have seen over the last fifty years, the growth of franchises and chains of big box stores until the completely dominate the retail environment. A typical franchise moves into as many locations as it can, think Starbucks one on every corner, or a McDonald’s within five miles of everyone in the country.  The big box stores also try to be in every major market, although not as many locations as the smaller sized franchises.  The big boxes use size as a competitive strategy and continue to increase in as they struggle to out compete the competitors.

Walmart is the usual example used for the big box store, besides moving into every community and competing with the existing grocery and general retail stores, Walmart has also expanded into specialty niches.  That expansion into books, furniture, electronics, home-improvement, clothing, hardware and toys has forced as many specialty big stores out of business as the previous general of Walmarts had done to smaller, family owned grocery and general retail stores.  The common thread between McDonald’s and Wamart is not the size of the box, but the size of the corporation – and that is the animal that as it grows needs more territory to feed its increasing size.

In the natural world, the larger the creature grew to be the more vulnerable it became.  By the nature of its size there are/were fewer of them than there are of the much smaller peer species and the total number of individuals makes them vulnerable.  Any reduction to their food source can threatens each individual and because of their total numbers the species.  Overtime the natural changes in the surface or the climate of the planet will eventually spell the end of all giant species.   The only adaptation that would work under those circumstances would be downsizing – a strategy that is only infrequently successful in nature or business – but it does happen.  However, more commonly the changes that are simply a part of the physics of the planet lead to death of the largest species, the most famous of course was the end of the dinosaurs 65 million years ago.

The federal government and the rest of us bought into the theory that some companies were just too big to fail – meaning we could not afford to let them fail and must provide federal aid to keep them alive.  That may have been a good idea and may have saved the country from a depression, but in the long run too big is a guarantee of failure.  There is no reason to suppose that corporations that continue to grow until they are the largest one on the planet will face the same problems.  They need the economy in every location to stay stable and they need the world economy to be stable and growing presenting new opportunities for the growth that is part of their survival.  And yes Starbucks, McDonald’s and Walmart are moving into Asia. But we know that the world’s economy is at times very fragile and given enough time there will be a dramatic – although possibly short-lived – change.  Any major shift favors the smaller more mobile companies and threatens the larger, long-necked companies the most.

So here, two stories from December 13, 2010 that are part of that big species phenomenon: The Great Atlantic and Pacific Tea Company, now called A&P, was founded in 1859, it was the first national retail chain store.  In 1930 it was the largest grocery store in the country with 16,000 stores doing $1 billion annually.  In 1960 its sales were $4.5 billion, a billion dollars more than its nearest competitor – Walmart was founded in 1962.  In 2009 the 395 existing A&Ps generated $8 billion in sales, Walmart had $245 billion in revenues generated by 8500 stores in 55 countries.  A&P is closing its stores and going out of business, a casualty of the current economy and competition, joining a host of toy, electronics, clothing and home-improvement big box stores to go out of business.

In two days the latest, and most likely the last for a long time,  a mega-casino project in Las Vegas will open.  The Cosmopolitan cost $3.9 billion to build and in the process of its construction bankrupted the first developer which started the project.  In fact, it was finished not by a developer, but by the bank that was financing the project – Deutsche Bank.  The bank felt it was too pregnant to let this one turn into dust on the Strip as several other projects had in the aftermath of the economic meltdown.  The news is not of the opening, but that its is joining the Marriott chain to tap into a large enough data-base to fill its 3,000 rooms and generate enough cash flow to pay the bills on that nearly four billion dollar investment.  Several other major Las Vegas corporations, including the Las Vegas Sands are also affiliating with national or international hotel chains.  The reason is the same, the need for more customers than find their way to hotel by themselves.  The hotel chains are in the same boat, they need more territory and investing in Las Vegas right now is risky and expensive – this is a cheap way to expand for both parties.

The Vegas news is as scary as the A&P story – both show how many big, big corporations are teetering on the edge of a precipice – they need more customers and that means more territory and that means more competition and more vulnerability.