A welcome change for the Wild West

By DAVID MOON, Moon Capital Management, LLC
March 10, 2013

I recently visited the infamous oil boom town of Williston, North Dakota, the once sleepy hamlet near the Canadian border.

The town exploded four years ago, when new oil-drilling technologies provided cheap access to hundreds of billions of barrels of oil in the area.

The town’s population doubled in two years. Employment jumped 32 percent last year, compared to a 0.35 percent increase for the entire US.

Because of a housing shortage, many workers sleep in company-owned housing, often a trailer or motor home. The same bed may be used by two or three different employees, either when someone is between shifts or on a ten-day break following 20 consecutive 16-hour work days.

Local truck driver Randy Hayes told me Williston is a return to the Wild West: a raucous place where law enforcement and public infrastructure had fallen significantly behind the community’s population growth.

My visit to the town and its oil fields was intriguing.

So was my visit to the town’s Walmart. Imagine an Apple store on the day a new iPad is introduced – only 30 times larger.

Because of having to constantly restock the shelves, it felt like a warehouse. The supercenter suspends its 24/7 hours on Sunday, setting aside 12 hours just to fully restock the store.

In the summer, people actually sleep in the store parking lot, using their cars as temporary housing.

Since the store opened, however, a number of small, locally-owned retailers have failed.

Randy says “good riddance.”

Prior to the arrival of Walmart, a loaf of bread cost Randy as much as five dollars. Bulky items – such as paper goods – were often unavailable; the shipping costs into town were simply too high relative to the demand.

The arrival of Walmart solved the pricing problem and much of the product shortage issues.

The cost of these consumer improvements was the loss of the small Williston retailers who tried to compete with the world’s price leader on price.

The winners, however, are everyone who buys bread and toilet paper.

Obviously Walmart does not have the same impact on pricing in Charlotte or Knoxville that it has in rural, northwest North Dakota. But that difference is simply a matter of degree. Otherwise, the pricing influence of Walmart – or any low-cost commodity provider – is the same: it lowers inflation.

Despite having thousands of almost captive customers, those small businesses could not, or chose not to, compete – and many blame the evil, greedy national retailers for their demise.

Nothing could be further from the truth.

Their demise is the result of ignoring change.

A retailer that cannot compete on price cannot logically expect its customers to unnecessarily continue to pay higher prices for similar products. He must differentiate himself.

If Littons in Fountain City sold mediocre, non-descript hamburger-shaped, meat-flavored sandwiches, Burger King would put them out of business. Instead, Litton’s offer a quality product that, while more expensive than a Whopper, Burger King cannot provide.

Change is the constant; ignore it at your own risk.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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