Watch those Prices soar

The other day, while standing for two hours in line outside my local Trader Joe’s supermarket, I was reminded of a business trip to Moscow in 1993..

I’d just started one of my favourite jobs with Shell, as retail advisor for central and eastern Europe. I had a big say in deciding which of the newly liberated countries Shell should build petrol stations in, when and how. The job had everything: one huge benefit was that we could attract the very best talent, some of the smartest people I ever worked with. But the best part of all was being one of the first Brits to see the wonders of Prague and Budapest and the other great capitals.

During the trip to Moscow, a frighteningly lawless place at the time, everybody was persuading me to approve a retail business there. Retail would be the flagship for the new entity there, and even the bosses in London wanted the legacy of Shell stations in Moscow. To bolster their case they drove me around the city to see the stations already there, pitifully few, mostly dilapidated, and all with long lines of cars outside waiting to be served.

Back in the office, some rare inspiration enabled me to make a very perceptive remark. Ah, I said, I did see a lot of cars on the way in. But I prefer to count them on their way out. All the sycophants thought I had made a joke and laughed, but I was not joking. Yes, there was massive pent up demand in Moscow. But the real issue were supply bottlenecks. Most of stations only had one pump open, and often ran out of stock even so. On the way in there was indeed a flood, but on the way out a mere trickle. And the income derives from those making their way out. The supply bottlenecks came from the only refinery and the control of the mafia. Why did we as Shell think we could defeat those forces when obviously nobody else could? It was ten years before Shell opened a station in Moscow, and I believe lives as well as money was saved as a result.

Back to Trader Joe’s, we are all tempted to look at the lines, observe higher prices than we are used to, and accuse them of gouging. But look more carefully. The line is because they only allow fifty into the store at once, and various other costly social distancing stipulations. At the cashier and on the way out, there are fewer transactions than before the pandemic. They are not gouging; in fact they are suffering.

Further, fair play to Trader Joe’s, one of the other skills I picked up in my commercial career is to know a well-run store when I see one. Trader Joe’s on Metropolitan Avenue is a very well-run store.

As we emerge from the pandemic, all businesses will have to change. Demand will be sluggish, then surge, then settle, perhaps at a lower level than before because people have less money in their pockets and Amazon will have eaten all the cake. Supply will ramp up slowly, and fixed costs will be higher, at least until commercial rents collapse. What does all this mean for which businesses will survive and for prices?

When social distancing does not fundamentally altered supply, the new equilibrium might arise close to the old one. The sectors that will change the most are those where we all used to pack into tight spaces. Among others, these are restaurants, airplanes, theatres and events.

It is a gross simplification, but it is fair to argue that there are two types of restaurants that used to make money. You have the posh places with the brands and the cachet, where very few clients all pay a small fortune. And there are the places where each client offers only a small margin but the place turns over four sittings per night.

The first group might even thrive after the pandemic. They have plenty of space, and established brands and will have less competition: we won’t treat ourselves as often as earlier, but we’ll go up market when we do. The second group are in trouble, because the basis of the model, packing us through, can’t work when we need more separation. Many will go under. But some will succeed, and they will gravitate towards their posh peers: they will put up their prices. Because there will be less competition, we’ll pay anyway, as long as the quality is good.

We will have to get used a world where those luxuries that we enjoyed tightly packed with us will be less available, less frequent and much more expensive. It will feed inequality, because much of the poor will be completely priced out, and because those same poorer people are the ones who won’t get their jobs back as these sectors consolidate.

What can we do? Not much. Governments will soon realise that there are better things to do with our taxpayer dollars than propping up zombie restaurants. Arts and culture will have to rely even more on wealthy donors. The ugly oligopoly of airlines in the US will get even uglier.

We have one immediate recourse, if we want to keep our favourite local restaurant in business. Uber eats and Doordash are currently pulling the same parasitic trick on restaurants that Ticketmaster and Stubhub did to events. I do everything I can to boycott those bastards, always buying directly at the box office whenever I can. That is easy for restaurants, we can just order directly rather than through the middleman. Restaurants need our help, and that is something we can do.

We can also pause before we condemn Trader Joe’s and their ilk. Some are gouging for sure, and some of our local stores are treating their staff very badly. But we should understand that in many cases, despite appearances, their costs have gone up while their volume has gone down, so increasing prices is not an unreasonable reaction.

Next time you are standing in line at the supermarket, placing a direct order with your local restaurant, remember Moscow. Could the customers on the way out, not the way in.