<html><body style="word-wrap: break-word; -webkit-nbsp-mode: space; -webkit-line-break: after-white-space; "><div id="header" style="margin: -20px 0px 4px; text-align: center; color: rgb(51, 51, 51); font-family: georgia, 'times new roman', times, serif; font-size: 12px; line-height: 18px; background-color: rgb(255, 255, 255); position: static; z-index: auto; "><img id="57fbf393-932d-47a2-82bb-debd1e75c80b" height="18" width="122" apple-width="yes" apple-height="yes" src="cid:81F47368-2FE5-4BFD-8E47-BF944ACB28BA@att.net"><a href="http://boss.blogs.nytimes.com/" title="Go to You're the Boss Home" style="color: rgb(102, 102, 153); "><img alt="You're the Boss - The Art of Running a Small Business" id="6961180a-45b7-4bba-b65a-b47235a1f291" height="100" width="562" apple-width="yes" apple-height="yes" style="border: none; " src="cid:E2272DD9-3FCB-4AFB-91B3-A83F77581C5A@att.net"></a></div><div id="content" class="hfeed" style="margin-top: -7px; padding: 0px 30px; color: rgb(51, 51, 51); font-family: georgia, 'times new roman', times, serif; font-size: 12px; line-height: 18px; text-align: left; background-color: rgb(255, 255, 255); position: static; z-index: auto; "><div class="post-75044 post type-post status-publish hentry category-thinking-entrepreneur tag-bezos-jeffrey-p tag-e-commerce tag-sales-and-excise-taxes tag-shopping-and-retail tag-small-business tag-zappos entry " id="entry-75044" style="border-top-style: none; padding: 15px 10px 0px; "><header class="postHeader"><div class="postMetaHeader"><time datetime="2013-05-14T11:00:05+00:00" title="May 14, 2013, 7:00 am" style="font-family: arial, helvetica, sans-serif; font-size: 1.1em; color: rgb(128, 128, 128); padding: 0px 6px 0px 0px; ">May 14, 2013, 7:00 am</time> <span class="postMetaHeaderCommentCount commentCount" style="padding: 0px 0px 0px 8px; font-size: 1.1em; border-left-width: 1px; border-left-style: solid; border-left-color: rgb(204, 204, 204); "><a class="commentCountLink icon commentIcon" href="http://boss.blogs.nytimes.com/2013/05/14/for-local-businesses-the-internet-threat-isnt-just-the-sales-tax/#postComment" style="color: rgb(102, 102, 153); text-decoration: none; padding-left: 13px; background-image: url(http://graphics8.nytimes.com/images/icons/multimedia/comment_icon.gif); font-family: arial, helvetica, sans-serif; background-position: 0% 50%; background-repeat: no-repeat no-repeat; ">47 Comments</a></span></div><h1 class="entry-title" style="margin: 6px 0px 4px; color: rgb(0, 0, 0); font-size: 2.4em; line-height: 1.083em; font-weight: normal; ">For Local Businesses, the Internet Threat Isn’t Just the Sales Tax</h1><address class="byline author vcard" style="font-style: normal; font-family: arial, helvetica, sans-serif; font-size: 1.1em; line-height: 1.2em; color: rgb(128, 128, 128); margin-top: 2px; margin-bottom: 2px; ">By <a href="http://boss.blogs.nytimes.com/author/jay-goltz/" class="url fn" title="See all posts by JAY GOLTZ" style="color: rgb(102, 102, 153); text-decoration: none; text-transform: uppercase; ">JAY GOLTZ</a></address></header><div class="entry-content" style="margin-top: 15px; "><div class="inlineModule" style="width: 190px; padding: 10px 0px 0px; border-top-width: 2px; border-top-color: rgb(149, 201, 199); border-top-style: solid; margin: 5px 0px 10px 12px; clear: right; float: right; "><div class="entry categoryDescriptionModule" style="border: none; padding: 0px; "><h6 class="kicker" style="margin: 0px; color: black; font-size: 1.1em; line-height: 1.4em; text-transform: uppercase; "><a href="http://boss.blogs.nytimes.com/category/thinking-entrepreneur/" style="color: rgb(0, 66, 118); text-decoration: none; letter-spacing: 0.04em; ">THINKING ENTREPRENEUR</a></h6><div style="margin: 0px; font-size: 1.2em; line-height: 1.4166em; color: rgb(102, 102, 102); ">An owner’s dispatches from the front lines.</div></div></div><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">I am a third-generation retailer. My father and grandfather owned a “dime store” (<a href="https://www.google.com/search?q=dime+store&client=firefox-a&hs=xmd&rls=org.mozilla:en-US:official&tbm=isch&tbo=u&source=univ&sa=X&ei=pymRUZ_rH6WL0QGg2oCwDQ&ved=0CGoQsAQ&biw=1414&bih=915" style="color: rgb(102, 102, 153); ">Google it</a>), and working there gave me a foundation that would allow me to become a successful entrepreneur.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Because my father was unable to teach me anything about management (only one nonfamily employee), marketing (didn’t do any) or finance, I learned most of what I know about business through trial and error. But I did learn something more valuable, something more basic from my father. What I learned has since been termed customer service, but it is something I have been giving since I was 7 years old.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">My father was good at it. But in the end, it couldn’t make up for the competition from bigger stores that slowly put him, and thousands like him, out of business. All of these years later, I wonder whether specialty stores like mine — picture framing, art, a furniture store — will be put out of business by the latest version of bigger stores, the Internet retailers.<span id="more-75044"></span></p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Small retailers have been under attack for 40 years. The number of local hardware stores, shoe stores and clothing stores has fallen drastically. Other small businesses — privately owned drugstores, office supply shops and small electronics stores — have all but disappeared. But some small businesses are at least holding their own, and some are even doing well. The local bakery, locksmith, jewelry store, shoe repair store, bike shop, frame shop, cleaners, hair salon, pizza parlor, tailor and florist still occupy space in strip centers across America.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Many of these businesses have a strong service component, which means they don’t really have Internet competitors. But some do. In particular, I think of the local shoe store. Customers can come into the store, try on numerous pairs of shoes and walk out empty-handed — only to go home and order online, perhaps saving sales tax and maybe a few dollars more. Great customer service may help the local retailers, but nothing is going to stop some people from stealing their time.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">A recent You’re the Boss <a href="http://boss.blogs.nytimes.com/2013/05/02/finding-the-right-words-to-confront-a-showroomer/" style="color: rgb(102, 102, 153); ">blog post on this topic</a> got quite a response, with many people agreeing that “showrooming” is wrong. But the responses also reminded me that many people do not understand what happens on the other side of the counter. There are many misconceptions about why there are cost savings from buying on the Internet, with some of them stemming from the phrase “bricks and mortar.” There is a common assumption that local retailers charge more because they have to pay more in rent. But that generally is not the case. As a retailer who sells both on the Web and off, I can assure you that competing on the Web is not <i>free</i>. The cost of building and maintaining a Web site can easily eat up whatever savings you enjoy paying warehouse rent instead of retail rent.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">So what are the differences? Well, the big Internet businesses are going to have lower costs because of their economies of scale. And labor can be a huge savings. Web retailers don’t have to pay commissions, and they don’t pay people to stand around and wait for the opportunity to serve customers. But much of this cost advantage can disappear if the site offers free shipping.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">On the other hand, the advantage Internet retailers have enjoyed by not having to collect sales tax has been greater than many realize. If you have bought from <a href="http://www.zappos.com/" style="color: rgb(102, 102, 153); ">Zappos</a>, you may have noticed that its prices are often the same as the local shoe store’s — until the local store charges for sales tax. Forcing Internet retailers to collect this tax will do much to level the playing field. But there is another reason that some of these big companies charge less, or more accurately <i>choose</i> to charge less, and it is one that is poorly understood. They charge less because they are O.K. with not making a profit. Most small businesses can’t afford to do that.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Why would a company choose to operate without a profit? Because it wants to provide great value? Check. Because it wants everyone to love the brand? Check. Because it wants to gain market share? Check. Because it wants to put everyone else out of business, so that it can one day flick a switch to raise prices and make a fortune? CHECK!</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Don’t believe me? Well, here is Jeff Bezos of Amazon, <a href="http://www.theverge.com/2013/4/12/4217794/jeff-bezos-letter-amazon-investors-2012" style="color: rgb(102, 102, 153); ">explaining why making a profit isn’t important</a>. Of course, he doesn’t say he’s planning to raise prices after he puts a lot of people out of business, but let me translate something for you: Gaining market share by not taking a profit makes the most sense if you are planning to raise prices later when you have less competition.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">If this competition with giant Internet companies seems like some kind of Brave New World, it’s really not. It’s pretty much the same strategy the robber barons employed in the 19th century. Today’s combination of tax avoidance and profit delay enjoyed by the Web retailers has made it very difficult for some local retailers. But is the end near?</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">Well, the Internet’s free ride on sales tax may be. And I believe that if that ends, the game will change. It may be <a href="http://www.nytimes.com/2013/04/27/technology/internet-sales-tax-coming-too-late-for-some-stores.html" style="color: rgb(102, 102, 153); ">too late for some</a>, but it will make it easier for local companies to compete. Of course, there will continue to be some casualties because of inventory levels, buying power, and maybe even service. And make no mistake: not all local retailers learned the customer-service lessons my father taught. Meanwhile, some Web retailers do give great service, including Zappos.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">But here is some sobering math — and perhaps the ultimate misconception. When a local store loses 10 percent of its business to Internet competition (or for any other reason), it doesn’t sound devastating. But that 10 percent decline in revenue can easily mean a 100 percent decline in profit. Here is the (simplified) math. Let’s say a store has $1 million a year in revenue and a 5 percent profit at the end of the year, or $50,000. If sales fall 10 percent, to $900,000, and the business’s cost of goods sold is 50 percent, the $100,000 drop in revenue will wipe out the entire $50,000 in profit. And if sales should fall 20 percent, the store will post a $50,000 loss. That can’t last long.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">People are often surprised when a local store or restaurant that <i>seemed</i> busy closes down. But would an outsider even notice a 10 percent drop in business? Of course, the person paying the bills — or <em>not</em> paying the bills, in this case — will always notice.</p><p style="margin: 0px 0px 1em; font-size: 1.4em; line-height: 1.5em; ">So what is the moral of this story? If you are a retailer facing Internet competition, the new sales tax law — if it passes — should help, but it may not solve all of your problems. And if you are a customer, <i>please</i> think twice before you use the services of a local retailer without any intention of buying. We all may pay a hefty price for your “savings.” Empty storefronts don’t help a neighborhood.</p><div style="margin: 0px; font-size: 1.4em; line-height: 1.5em; "><em>Jay Goltz owns <a href="http://www.jaygoltz.com/about-companies.php" style="color: rgb(102, 102, 153); ">five small businesses</a> in Chicago.</em></div></div></div></div></body></html>