Best Buy

The mass-market electronics business is a notoriously difficult nut to crack. Aggressive competition from players like Circuit City is only half the battle. Discounters like Wal-Mart and slightly more upscale venues like Target are eager to gain a piece of the market. And when traditional powerhouses like Radio Shack enter the mix, consumers have enormous options and retailers have significant competition.

The entire business model has changed significantly due to all this competition. What once would have been blockbuster models are transformed into loss leaders. Best Buy can't undercut competition from Wal-Mart when Wal-Mart cuts prices on game systems so low that droves of customers literally crush each other in a mad stampede to get the hottest new product.

Yet the rewards for winning the competition for this sector of retail are especially rich. Best Buy can afford to heavily saturate its stores with sales personnel. While Wal-Mart's customers are left to their own devices, customers at Best Buy need to fight past waves of employees just to reach the merchandise. And in a complicated field like electronics, many customers really appreciate this approach.

While competitors like Circuit City have repeatedly disrespected and underpaid their employees, Best Buy has created an employment paradise. And consumers ultimately benefit.

Russia's Consumption Boom

Forbes reports that a combination of factors including a booming energy sector, low income taxes, and continuing government subsidies have resulted in dramatically increased consumption. The real wage has been growing around 10% a year, and per capita consumption has doubled in the last decade. In dollar terms, consumption grew 27% in 2006 and shows no signs of slowing. Imports have grown 30% over the same period.

Russia is still a poor nation by Western standards, but the spending spree is allowing Russians access to goods like televisions that even the poor have come to expect in the United States. One startling revelation is that the cell phone penetration rate is over 100%. This means the average Russian household has more than one cell phone. And at least one anecdotal account suggests that cell phone service is superior to Eastern Europe.

Russia's booming, consumption driven economy is a stark contrast to the slowing American consumer and China's tight-fisted legions. Russia is also experiencing comparative political stability. Although Putin's recent decision to require 50% positive news in the media is disturbing from the perspective of political freedom, his administration is wildly popular and the prospect of a revolution seems remote. The average Russian will experience a rapidly growing quality of life over the next few years, even if the price of oil were to fall back significantly.

Russia's improving prospects are reflected in the increasing interest from foreign corporations. Nestle has recently invested half a billion dollars in the country and Coca-Cola spent $600 million for Multon, a juice maker.

While rapidly rising standards of living are always something to be welcomed, Russia's recent growth will not return the nation to its previous stature. As long as the political system remains within the iron grip of Putin, the country will not receive maximal access to global financial markets. Many of the revenue streams that Russia is capitalizing on will not be replicable, either elsewhere or even in Russia ten years from now. Carbon credits derived from the economic collapse of the Soviet Union represent a one-time windfall and economies based on exporting national resources are notoriously given to corruption and free-riding.

An old joke from the end of the Soviet Union suggests that three quarters of the men who died in Russia were drunk - no matter how they died. Russia's rising standard of living is a true blessing, but as long as the deep problems illustrated by this dark humor exist the country will still have a long road to recovery.

Reluctant Chinese Consumers

Businessweek reports that the Chinese government is concerned about the fiscal conservatism being demonstrated by its citizens. The Chinese have one of the highest savings rates in the world. Most people are socking away as much as 40% of their income each year. And the trends going forward don't look good. The share of GDP soaked up by private consumption is only 40%. This represents a fall from 48% as recently as 2000. To put this figure in perspective, US consumers spent 8 times as much on consumption goods even though there are only one-fourth as many Americans.

It might seem to some observers that saving a lot of money is really a good thing. And it certainly can be. The US savings rate has been hovering near zero and in fact gone negative for several years now. The problem is that only so much investment can be done at reasonable levels of profitability at any given time. In real terms, this means that every additional dollar saved goes into a slightly worse investment, because all the best investments get taken first. The cost of saving such a high percentage of income is ultimately personal privation. Foreign businesses have been trying to crack the China market for decades with little success. One reason is that the Chinese are simply much more price conscious than other consumers. By only purchasing a few, very low cost goods, the Chinese limit the marketplace by not rewarding manufacturers for catering to them.

The eternally optimistic in the world economic community envision a day when a great Chinese middle class finally starts spending and touches off a tremendous global bull market. And while continued economic growth on the level of 10% per annum makes such an eventuality much more likely, the sad truth is that a day like that is still far off in the future. For all the good press that China has been able to get in the media, the Chinese middle class only includes about 25 million people. Out of a total population well over 1 billion, it is clear that such a small minority is unlikely to move global markets anytime soon.

The real tragedy of weak Chinese consumer spending is that the quality of life of the average person in China is much lower than it could be. Most urban residents don't own cars and despite the best efforts of automakers, that won't be changing soon either.

The Chinese economic miracle is a wondrous thing, but it could certainly be a much more wonderful thing if it benefited the workers who have made it happen.