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Thomas Kaminski has another good observation
I also wonder how anyone in Italy makes a buck. Rome is filled with small shops that apparently provide one small good or service—in my neighborhood alone, there are at least 3 competing herbalists (besides 3 or 4 farmacie), 2 guys who sell stuff for remodeling your bathroom, 4 tire stores or auto repair shops (each in a space no bigger than my living room at home), at least 4 small dry cleaners, 3 barbers, 3 hair dressers for women, a furniture restorer, a guy who sells wood and tile for floors, a different guy who sells only paint, a guy who does hand-painting on china (at least I think that’s what he does), and a dozen other small businesses. In fact, from my limited experience here, Rome seems to have far more small shopkeepers (i.e., small entrepreneurs) than Chicago. And I don’t see how any of the proprietors can make enough to keep his doors open.
And I wonder how so many used book stores survive in the expensive districts of central Paris. I also wonder why Italy has so many stores for fancy underwear, and why so many Italians conduct their arguments out in the street.
Posted by Tyler Cowen on April 5, 2007 at 04:24 AM in Travels | Permalink
Comments
I, too, have often wondered that, but the simple answer is:
Prices are much, much higher. And really, there's very little
"true" competition.
Go to any pharmacy for any product and the prices are the same.
Baby food, condoms, aspirin ... all the same.
Of course, it's illegal for supermarkets to sell aspirin (or
gasoline/petrol, for that matter), so no competition from them.
Additionally, Italian businesses are famously late in paying
their bills. So, if a business can collect money in 30 days, but
don't pay their suppliers for 90 days or even 120 days, a
business can survive.
Posted by: glenn at Apr 5, 2007 5:26:49 AM
I don't see the problem. Most Italian little retailers earn a decent living plus all the personal advantages of having their own business. This is better than a Mac job, or a Walmart job, from any point of view. Of course, a fragmented retail sector is largely inefficient but it's the Italian consumers that pay the price, not the retailers.
Posted by: Filter at Apr 5, 2007 7:09:46 AM
How do all those used bookstores thrive in Paris? Easy. The government has price controls on books: 5% reduction is the MAXIMUM allowed by law on new books. Booksellers are likewise forbidden from adding to the suggested retail price. See HERE for details (in French). The only way the average person can afford to indulge a book habit is to buy used (or abroad).
Posted by: Kerry at Apr 5, 2007 8:10:35 AM
Likewise, in Kuwait you have the concepts of 'souqs'; literally a collection of like stores all in one place. The gold souq is a huge collection of gold and silver shops, all in the same couple buildings. The fish souq is the equivalent of the fish market. They have souqs for clothing, for craftware, etc.
Now, try competing when you're within 30 second walking distance of two dozen competitors. Heh heh. But hey, it works.
Posted by: hewhocutsdown at Apr 5, 2007 9:09:48 AM
Where I live in Cobble Hill, Brooklyn, there is a street war in progress in the retail trade: franchize vs local.
Starbucks vs local coffee shops; domino's piza vs local pizza stores; local bookstores vs Barnes&Nobles; Franchise multiplex vs local movie theater; Franchise liquor stores vs local liquor stores. Safeway vs local green grocers; CVS vs locally owned drug stores. Chase vs any leftover local bank.
Notice the pattern here: top down franchize vs bottom up owner-entrepreneurs. Cute neighborhoods like this one become high-priced franchise theme parks like Venice or Soho NYC. Un-cute neighborhoods become dead strip malls.
You may want to enjoy the local entrepreneur options before the big box franchises show up at the party. Consider a different view point of the problem: no price controls but controls on franchise capitalists who drive out owner-entrepreneurs and pillage local economies.
Posted by: stevehar at Apr 5, 2007 9:22:33 AM
hewhocutsdown: Any time you need skilled workers, it's often easier to compete if you're located near your competitors. First, the presence of you and all your competitors acts as a focal point, drawing workers to your location, and furthermore all your competitors' workers are a reserve of labor you can hire away if you hit it big. Second, the presence of you and all your competitors can make specialized businesses that support your activities viable. That's why software startups congregate in Silicon Valley, even though the rents are high and the traffic sucks. (I think this might have been in Marshall....)
Posted by: Neel Krishnaswami at Apr 5, 2007 9:47:10 AM
Filter, the question is *how* they come up with the money to pay their bills, given that they offer goods
of such little value and profit margin, and are using such expensive real estate; NOT whether it's right
that people make a living that way, or what the advantages of being a small business owner are.
I'll hazard a guess: "Inability to comprehend opportunity cost" + "past luck". That is, they have some
critical ownership right in the land or building that is worth a LOT of money, and no present expense
(rent or loan payments) currently reflects that, because of some grandfather clause or because of a
government subsidy/exemption/privilege. So their business looks to be "profitable" when in reality, each
of them would be much better off financially if they just sold the place and lived off the interest.
Accounting profit vs. economic profit, in other words.
Posted by: Person at Apr 5, 2007 10:32:26 AM
Thanks, Tyler, for posting my note. Let me add one or two more things. I significantly UNDERCOUNTED the number of small shops in the area. I'm talking about a space merely 3 short blocks in one direction by 4 short blocks in the other. Since I wrote the original note, I've noticed 3 or 4 additional tire stores/car repair outlets, plus more women's hairdressers and bathroom remodelers. My wife has pointed out to me about 5 different perfume stores. And just about every neighborhood I go through has similar numbers of small shops. I don't see how there can possibly be enough demand in these neighborhoods to keep all these shops open.
Also, I'm not sure whether everyone charges the same price for goods. In the perfume stores there doesn't seem to be great variance in prices, but I've also checked dry cleaners, where the price for cleaning a pair of men's pants seems to go from 3.50 Euros to about 6 Euros. That's a significant spread. The person who charges only 3.5 Euros has the smallest shop, and I wonder if she is trying to undercut the competition. The person who charges 6 Euros has a more elegant storefront than the others, and I wonder if people are willing to pay 6 Euros for the atmosphere of where they have their pants cleaned. When I went in there and asked the price, I turned right around and found a cheaper place. But of course, I'm American, not Italian, and I respond to price signals rather than to class signals.
Posted by: Tom Kaminski at Apr 5, 2007 10:33:07 AM
stevehar,
If the local shops are so much better than than evil-corporate-franchise-behemoths you so loathe, then they would soon go out of business as the locals CHOOSE the superior-local shops?
It's called revealed preference.
In my little snooty neighborhood, there was a huge city council fight to block the opening of a Starbuck's in the city's "Historic" downtown. As amazingly the council allowed it. Now there are four coffee houses in a five block strip. That doesn't sound like much but this is suburban CA. Now, every weekend, there is a line out-the-door at the Starbuck's. The others are doing quite well, each with its own ambiance and specialty...
We should all be free to choose.
-Ed
Posted by: Ed at Apr 5, 2007 10:49:29 AM
Because when they argue in the kitchen their mothers throw them out of the house!
Posted by: SteveA at Apr 5, 2007 10:52:53 AM
Too many shops,( each one beside the other) sell the same good = Mall
Posted by: john at Apr 5, 2007 11:10:17 AM
Roman pattern is the copy of Mumbai/Kolkotta/Delhi/any Indian city pattern, but alas big giant retailers Walmart type already entered the country and we fear our next door shop keeper friends will be having bad days.Still we prefer to visit our friends small shops and engage in a nice talk with him about almost all matters under the sun while sipping the cup of tea he/she kindly offers us.
Posted by: GVV at Apr 5, 2007 11:52:23 AM
I saw a shop in the Byculla neighborhood of Mumbai which was so small the shopkeeper had to sit outside so you could see everything he sells.
Posted by: Russ Nelson at Apr 5, 2007 1:02:44 PM
Person: the post mentions "herbalists", "dry cleaners", "hair dressers for women", "furniture restorers", etc. They don't seem like "little value" businesses. And they aren't, at least in Italy.
Posted by: Filter at Apr 5, 2007 1:06:46 PM
Filter, I didn't mean little "societal" value, I just mean low market price. It's true, that doesn't
apply to all of them, but regardless, they mostly require a steady stream of business to function and
the post makes it sound like the all severely underutilize prime real estate.
Posted by: Person at Apr 5, 2007 2:03:36 PM
The difficulties of transportation in Italy surely play a role in allowing for more
small retail outlets? Fewer people own cars, gasoline is much more expensive, and the public
transportation in my experience is passable but not on a par with (say) Germany's in terms of
allowing someone to quickly and reliably get from point A to point B. So of course many people
will buy goods and services within walking distance of where they live, or alternatively within
walking distance of wherever they've decided to go shopping.
I wonder if people are willing to pay 6 Euros for the atmosphere of where they have their
pants cleaned
According to my brother (who lived in San Gimignano for many years) there is a strong element of
class consciousness such as you describe. The trains, for example, are almost identical in the
accommodations provided in first and second class - but enough people are willing to pay for the
privilege of not having to travel with the lesser second class passengers that first class still
costs substantially more.
Posted by: bbartlog at Apr 5, 2007 2:20:29 PM
Because old buildings are cheap buildings?
Posted by: Megan at Apr 5, 2007 3:35:04 PM
It is not just in Italy or LDCs that small firms do not do as well as large firms.
Census and the Small Business Administration recently did a census of small vs big firms. They found that firms with over 500 employees pay about one third more then smaller firms and have revenues per employee that are about 60% higher -- not double checking the data so this is off the top of my head. Of course this also implies they are much more profitable.
Incidentally, the census data shows that from 1990 to 2005 large firms -- those with over 500 employees -- accounted for 65% of total employment growth.
So much for the myth that small firms are the ones creating all those jobs.
Posted by: spencer at Apr 5, 2007 3:46:43 PM
Class signals? In dry cleaners? Please.
The point is simply that Italian shops charging 6 euros for cleaning pants do a better job than the one charging 3,5 euros. Product differentiation. Better cleaning, better ironing, quicker delivery, etc.
If you think that 2,5 euros is a too much of a difference, well, maybe Italians are very clean and their demand curve for cloths in good shape is a bit more rigid than the demand in other countries. So, if you're from abroad go for the lousy 3,5 euro cleaners.
Posted by: Filter at Apr 5, 2007 6:43:55 PM
I also wonder . . . why so many Italians conduct their arguments out in the street.
Maybe they argue everywhere, and one only sees a proportionate share in the street.
Posted by: Tyrone Slothrop at Apr 5, 2007 9:08:37 PM
The question can be rephrased to "why is the sole proprietor model still efficient in Italy and not in the US?". I think the reason is a mix of restrictive planning laws, restrictive labour laws, lack of cheap finance and opportunity for tax evasion. There is obviously demand for, say, 3 full time herbalists (using the example) in the area. In the US the same 3 persons would be provided as part of a single franchised large store to get economies of scale. 2 of the 3 would be employees (cheaper than having partners) since hiring/firing is easy in the US and the banks would be willing to lend to the proprietor based on the franchise model. In Italy (and other countries) getting permission to build a big store in an established neighbourhood will take forever and cost lots in fees and bribes, no-one wants to have the hassle of employees given the tax issues and the difficulty of firing them and banks will not lend as easily as there is no established business model. Finally the sole proprietor model allows significantly greater opportunities for tax evasion (you have to provide much more transparency in your accounts if you have employees and bank finance). The sole proprietor model explains why there is not more competition in prices, each sole proprietor can only handle a given amount of business, attracting more business would mean they would have to hire employees which for the reasons discussed above would be a bad idea.
Posted by: ChrisA at Apr 6, 2007 3:53:17 AM
Quality of service plays a key role. In the US, a big Supercuts where most of the workers are not career-hairdressers will give you lousy haircuts for a very low price. In your typical European city, the neighborhood hairdressers have been there forever, are good at what they do, and will hence charge a high price for a high-quality service. Same reasoning applies in the case of dry-cleaners, or used-bookstores: the people running them are good and knowledgeable, and you won't find them working another job in a couple of months (as is common in the US, where many young people find temporary jobs in services but do not make a career in them). As long as there is strong demand for high-quality services, then those small neighborhood stores will be able to survive with no problems. You should be happy that you're able to choose between the high-quality service and the low-quality service there, instead of having to accept the low-quality product as the only, inevitable option.
As for arguing in the street: southern Europeans are much more likely to hang out and have conversations outdoors, haven't you noticed? Also, an anglo-saxon might easily perceive as an argument what might only be your regular, passionate discussion with heavy use of arm gestures. It's just a cultural difference, like Americans showing their teeth when they pose for a picture (which to a southern european looks like a fake and artificial display of happiness that does not capture the true reality of the moment in the picture, but which is understood for what it is: a simple cultural difference).
Posted by: ALD at Apr 6, 2007 1:53:16 PM
You should be happy that you're able to choose between the high-quality service and the low-quality service there, instead of having to accept the low-quality product as the only, inevitable option.
Here, you're choosing between Walmart, Tarjait (me), or Neiman-Marcus. Lots of choice, and generally more options because it's big-box. I AM snooty about my local big-box bookstore, though.
Actually, plenty of high-quality smaller places stay in business in the US. They really have to be have something good going for them, though. Or be an inherently local business like nails or laundry.
In the US, interestingly, alot of small stores stay in business because immigrants like running them (low start-up capital), and for them it's a relatively big cash-stream. We recently saw a neaby laundromat change hands from 1st-generation immigrant to 2nd-generation. The new owner is alot less enthusiastic about it, of course.
Posted by: Jon Kay at Apr 6, 2007 7:27:19 PM
Consumer preferences at stores in Brooklyn neighborhoods vs Suburban CA suburbs. in Cobble Hill Brooklyn I don't own a car, walk to locally owned stores shop more often in smaller quantities and , take the subway out of the neighborhood. The grocery shopping carts are sized for people not SUVs. D'Amicos sells Red Hook coffee that is better than Starbucks, the bookstore staff at Bookcourt.org recognize you when you visit, the green grocer actually gets local farmer product, the butcher actually takes orders, and the guy at the store from wine store has been there for 17 years.
Let's talk again when the price of gas hits $6 a gallon and public sector tax incentives swithch from private to public transportation.
Posted by: stevehar at Apr 8, 2007 11:06:53 AM
They also likely do not pay their fair share of taxes.
They don't have to be true capitalists if they can
under-report income.
Posted by: glenn at Apr 11, 2007 9:42:40 AM
