The Price of Cheap: The Hidden Cost of E-Commerce

For years “energy independence” has been the catch-all solution promoted by politicians, talk radio hosts, newspaper columnists and others who point out that the U.S. is short on oil refining capacity. Nonetheless, petroleum production facilities are not only in the process of downsizing in response to a weak economy, but permanently so the Los Angeles Times reports in “Oil companies look at permanent refinery cutbacks” [March 11, 2010].

The oil industry, which as recently as 2007 broke so many profit records that allegations of collusion and price-gouging surfaced, is singing a different tune: Limiting supply to increase sagging profit margins is the solution, analysts say, for losses induced by everything from fuel efficient cars to retiring baby boomers who no longer commute to and from work.

And to think: Just a few years ago SUVs, with their paltry ~13 mpg, were the rage from Coast to Coast. Could it be that Cash for Clunkers, unintentionally so, was a little too effective — or are oil industry insiders selling Americans up the river when they can least afford it? Whatever the case may be, nothing says Green like fuel-efficient automobiles and the beginnings of an alternative energy infrastructure. Even so, the picture the LAT paints is far from complete. The Perfect Storm of tightening supply, increasing commodity prices, rising taxes and further job losses looms on the horizon.

Hang on to your hat! The price of life is going up.

Cutbacks and closures of community services nationwide are not cited as a reason for oil refinery cutbacks, but they are egging on these emergent economic norms: Sales tax revenues are down nationwide, and for an increasing number of locals that can only mean an unpalatable combination of higher taxes and limited services. The upshot? Even less incentive for our consumer-driven economy to spread the money around. Local and state governments from California to Michigan are banking on the hope that when the economy rebounds the Red Ink will stop flowing.

Will it?

Even if the demographic shifts associated with baby boomers retiring en masse were not inevitable, a grossly underestimated component to this trend looms larger by the day: e-commerce.

It’s no secret to Internet-savvy folks transversing state lines in search of tax-free online bargains that virtual shopping can be a real moneysaver — and a timesaver to boot. Amazon, for instance, is a leading go-to place for everything from books to home and garden products. Not only are purchases tax-free for many shoppers but free shipping offers often seal the deal.

Never before has the oft-repeated refrain “Shop locally!” encountered so many challengers.

Macintosh computers aren’t cheap now, but they were downright expensive when I purchased my first Apple computer nearly 20 years ago. Back then, it was not unusual to spend $4-10K on hardware alone (CPU, monitor, printer, scanner). The solution? Peruse ads in the back of nationally-distributed computer magazines. There I located a tax-free bargain on the opposite side of the country. Even with the cost of shipping factored in, I saved several hundred dollars foregoing traditional “brick & mortar” retailers. And it wasn’t for lack of local buying options, either: There were plenty of places vying for a slice of the personal computing revolution: Computer City, CompUSA, Circuit City, Fry’s Electronics and Best Buy, just to name a few. Notice what happened, however: All but the latter two succumbed to market forces. Is this because our collective appetite for new and improved technology has diminished? Absolutely not. Americans are more likely to own a personal computer hooked up to a high-speed Internet connection than ever before.

So what changed?

Competition amongst conventional retailers has diminished as more and more players drop out of the market. This makes comparison shopping on the Internet — where a greater number of competitors are in reach — more attractive by the day. Just as Big Box Retailers threatened mom & pop establishments, the Internet is the newest bull in the china shop. To cite just one example, antique stores in downtown areas nationwide have increasingly succumbed to online venues, and bars and restaurants — among the few types of businesses that rely on irreplaceable foot traffic — have sprung up in their wake.

Just how many bars and eateries can a local economy support?

The profound yet oddly imperceptible economic influences wrought by the Digital New Age are numerous: Even as more people embrace Internet shopping, surviving B&M retailers have responded by limiting their in-store selection in favor of just-in-time inventory, of which an increasing percentage is available exclusively online. Shopping at the click of a mouse is both novel and convenient, to be sure, but nonetheless a form of “special ordering” reminiscent of the old-time General Store method of awaiting out-of-town deliveries.

Except that most of us aren’t living in remote outposts.

The Green side of the coin is that fewer and fewer products for which there is inadequate demand are oversupplied to the market, thereby limiting the so-called carbon footprint associated with building and transporting more widgets than there are consumers willing to purchase them. But the environment is not the sole beneficiary. By limiting supply, prices and profit margins are maintained throughout the supply chains. What this means for the rest of us is that the “red tag sales” retailers offer to move an oversupply of product are likely to become increasingly few and far between. Prices between the remaining chain stores are generally pennies apart, and sales leaflets that would appear to advertise discounted deals are increasingly listing regular prices.

This trend presents both an irony and a threat to bargain hunters: B&M retailers that have grown in popularity as consequence of recession-induced thrift include Ross, TJ Maxx and Marshalls — retailers that specialize in discontinued, overstock and out-of-season merchandise offloaded by department stores and boutiques. As mainstream retailers par down inventory, the number and quality of inventory available to discount retailers and Internet shopping sites alike are likely to diminish for the foreseeable future. Consequently, just as demand for bargain bin deals heats up, supplies may be harder to come by. Similarly, as consumers become conditioned to shop for “everything else” online, the convenience, expediency and tax revenue benefits of shopping locally are lost. Eventually, the advantages of web-based commerce — what with United States Postal Service cutbacks, shipping cost increases and the inevitable legislative move to tax online shopping — suggests that this bargain hunters’ paradise may amount to little more than a tool of necessity in the years to come.

Even the Internet cannot overcome a fundamentally flawed economy.

So how do our novel new shopping habits dovetail with the news that oil refiners may permanently shutter facilities? For one, less incentive to drive to the mall. Or to go antiquing in a nearby community. And if you do? Fewer places to shop, fewer products and brands in stock, and fewer still mom & pop establishments. The list of nationally-recognized retailers to meet their demise in the Globalized Era is staggering: Broadway, Fedco, May Company, Woolworth’s, Best, Service Merchandise and Marshall Fields; Circuit City, Linens ‘N Things, The Sharper Image and The Good Guys — to name but a few.

To be clear, traditional retail in some shape or form will never be eliminated. But the trend of online shopping at the expense of local sustainability seems likely to accelerate as retailers respond by narrowing their shelf offerings to match lessening in-store demands. In the even longer term, conventional shopping may again become a destination — traveling long distances to reach large, diverse retail centers that are fewer and further between. The town-by-town, city-by-city retail landscape of today may become a thing of the past, not unlike the drive-in movie theater whose heyday has come and gone. Movie rental stores seem to be the next in the obsolescence line, edged out by inexpensive DVDs sold in discount stores, video-on-demand services and novel new competitors such as Netflix. How much more “local color” will fade from our towns, cities and communities until there are few signs of life outside the ‘net — but for the cookie-cutter ubiquity of fast food joints, liquor stores and dry cleaners?

Be careful what you wish for.

The shift in the way we shop not only impacts our gasoline consumption but just about everything we take for granted close to home: from schools, parks and public safety to the ability to find a suitable last-minute gift in a mass market environment increasingly lacking in diversity. This trend, in turn, suggests an increasing number of commercial real estate vacancies and even fewer sales tax revenues for local municipalities. As retail and warehouse job opportunities erode in much the same way manufacturing jobs did in the 1980s and 1990s, even low-skill service sector jobs are likely to dwindle — all of which adds up to a torrent of Red Ink.

Is it possible to become too good of a bargain hunter? Victims, if you will, of our own success?

As a “starving student” I never would have given it any thought, yet we do, indeed, have the power to harm our communities simply by making a habit of shopping online. It’s not that making a few online purchases here or there will topple the economy, but it is fundamentally shifting the game just as surely as the trend of paperless electronic bill paying has sent the USPS into a tailspin. More ironic still, online shopping — to the extent that it is powered by coal — isn’t much Greener than the conventional sort. According to a CNN report, the more energy efficient consumers perceive their electronics, products, services and transportation sources to be the more resources we consume.

Our entire landscape, physical and economic, is in the midst of gargantuan change. Whether such change represents the evolution of a new, Green economy remains to be seen. It could just as easily represent another largely unanticipated wrinkle in the lockstep march of globalization: Economic “desertification” wherein those who live adjacent to an oasis of innovative upstarts, manufacturing plants and retailers will thrive, whereas the vast majority of Americans, even those who live in highly populated areas, will find it increasingly necessary to shop online because it is no longer profitable for retailers to maintain local operations and/or no longer feasible — as gasoline supplies contract and crude prices increase — to transport durable goods great distances from port to shelf.

Perhaps we’ll save the planet. But will we save ourselves?

Economic experts would likely argue that this is the free market at its finest — and to point out, rightfully so, that such shakeups have occurred with every major technological advance. But such observations do not get at the crux of the question: Are we entering a time in this Globalized Era at which the rate and scope of change may exceed our ability to fully appreciate the ramifications? Will a collective deer-in-the-headlights reaction render legislatures unable or unwilling to craft economic policy conducive to a successful transition?

Put another way, we can’t predict where we are headed because we have never before been there. Consequently, our best attempts to plan for the future are likely to come up short — and all the more so when motivated by the desire not to shake fragile consumer confidence. Conventional wisdom, after all, views the phenomena known as market concentration — a diminishing number of viable businesses competing for our dollar under increasingly deregulated conditions — as the hallmark of “efficiency“. Prices are lower and demands are met so no harm, no foul the argument goes. But the more apt question, the one too few of us appear to be asking — not unlike the way in which financial firms and economists alike underestimated the phenomena of “irrational exuberance” prior to the Great Recession — is whether we’ll fumble the transition because we have failed to appreciate that it is possible to take a “good idea” too far.

Call it wrong and we not only risk a double-dip recession but a generational lifestyle realignment in which a college education, white picket fence, an automobile in the garage, a chicken in the pot, and 2.5 children in the home move increasingly out of reach.

By some counts, the time to have invested in an alternative economy is some 30+ years overdue. By a more conservative measure, we’re nearly 15 years behind the 8-ball both in terms of minimizing harm to human welfare and the climactic shifts associated with the over-use of fossil-fuels. By other accounts, the solutions proposed thus far are recklessly unworthy of widespread adoption.

And that’s why a benign practice so seemingly unrelated to the permanent loss of petroleum refining capacity — shopping online — may evolve into the straw that breaks the camel’s back. The desertification of our consumer-driven economy in the absence of a fully viable way to fill the economic vacuum may very well be a phenomena we do not come to appreciate until the list of “usual suspects” no longer explains a still-lagging outlook years from now.

Of course, there will be oases in this Brave New economic landscape. But the increasing concentration of those jobs in fewer areas of the country nonetheless portends harm to communities that rely upon traditional manufacturing and retail access. And that’s not the only casualty of our worship of all things economically efficient. The otherwise worthy aim of Greening the planet may lose its luster if it comes to mean the absence of opportunity: Restricted access to goods and services. Restricted markets. Restricted tax revenues. Restricted growth. Quite possibly even the best and most innovative entrepreneurial ventures will be forced to settle for a mediocre definition of success in the event that consumers, lacking in discretionary incomespurn new products and services in reaction to lost or stagnating wages.

Will we realize the “price of cheap” before the solution to state and local tax revenue losses shows up in the form of massive tax hikes? That is the question. None of this, of course, even begins to account for the tax hike incentives that exist as a result of a decade-plus worth of war-driven Federal deficits, TARP bailouts, unsustainable trade deficits, and the empty coffers long-predicted of Social Security, among other entitlements — just as baby boomers begin to draw them down.

Even as the storm clouds gather over a still-ailing economy, a recent TIME magazine article echos a common refrain: American innovation, writes Barbara Kiviat in “The Workforce: Where Will the New Jobs Come From?” [March 19, 2010], will offset job losses in time. Let’s hope the Green 21st Century jobs we’ve been told to bank on aren’t a case of too little, too late.



All About: ‘Green’ Shopping | CNN

The Fight Over Who Sets Prices at the Online Mall | StarNewsOnline

The Death of Retail | The Entrepreneur Network

New Tack for Taxing Online Sales | Durango Herald News

Killing America’s Jobs Machine | Roanoke Times

The Recession could Reshape State Governments in Lasting Ways |

Comparing Online to “Brick and Mortar” Shopping |

The Broken Society | New York Times

Customers Want it Cheap, Workers Pay Heavy Price | China Daily

The Price of Cheap Imports: What does America Make besides Policies? | WaterWorld

The Slippery Slope of Price Fixing | E-Commerce News

Sales Tax on the Internet: Who Pays, Who Doesn’t | Yahoo!

2 thoughts on “The Price of Cheap: The Hidden Cost of E-Commerce

  1. Great post. Not sure if i agree entirely though. . . .

    E-commerce uses energy, but electricity is certainly more efficient than gasoline- even if its from coal. Factor as well the massive electricity used to light/operate the store.

    With all this ‘market concentration’ going on we’re seeing fewer and fewer sources of goods. Fewer options means we’re all buying the same things. If we all make the same purchases, its simply more efficient for a truck to come to me and my neighbours than for us all to drive our cars to the store.

    Its true what you say about online destroying local, but its not necessarily a bad thing. Walmart destroying local retailers is terrible, because its a concentration of control- the little guy is destroyed . . …But online, the little guy can survive, its a place for independents to thrive.

    Commuter costs and dwindling opportunities to work and shop are driving everyone to move into cities. As downtown density increases, the viability of B&M shops increases. More customers= higher profit= increased supply= more customers. . . .To be truly ‘green’, we all need to move into downtown towers where we are able to walk to the store.

    Do we go to the store or does it come to us?. . .Urbanizing: the most logical answer. We all basically just move into the store. I got my degree at Costco, how about you?


    1. The Social Critic

      A degree from Costco… Well, between you and me mine came from Toys ‘R Us!

      This piece really didn’t get into some of the issues that accompany our changing consumption habits, but they definitely factor in in a big way.

      To the extent rising gasoline costs inspire people to relocate to urban areas where resources are concentrated, be it jobs or goods and services, I agree that the problems would be resolved to a great extent. My perspective, however, is largely influenced by where I live. It’s a “car culture” state where suburban sprawl ramped up in the post-WWII/baby boom era when none of these concerns were on the public mind. On the positive side, it would create plenty of jobs to revamp aging urban areas into a more people- and energy-friendly landscape. The proverbial Catch-22 is that with less local and state revenues — whether it is lost to a poor economy or the proliferation of tax-free online shopping — comes less money with which to fund those much-needed modernization projects.

      Where I live, suburban sprawl has been driven by people trying to get away from the high cost associated with living in established urban areas and/or the crime and poor schools they associate with many of these areas. Housing in outlying areas became attractive over the past 25+ years for a variety of reasons: Unlike homes built in 1950 and prior newer homes tended to be larger (the so-called McMansion), and because these were built in less developed areas they also tended to be cheaper (at least in the 1980s and early 1990s when many of these tract homes were built). And last but not least, these newer areas did not — at first, anyhow — have much reputation for crime. Initially, these areas were attractive to retirees and later to young families. In recent years, when gasoline prices began to skyrocket and the economy faltered, what initially attracted families became a source of entrapment (a damned-if-you-do, damned-if-you-don’t scenario). The bursting of the housing bubble may well be the only thing that gave many such homeowners an out (a dubious silver lining at best).

      What’s even more ironic is that suburban sprawl is likely to catch a second wind if and when widely available fuel-efficient technologies allow the process of spreading out in search of cheaper housing to continue at a low cost. This will only fuel shopping online on the one hand (since there will be less incentive to increase shipping prices); if not the willingness, on the other hand, for people to transverse greater and greater distances for “Destination Shopping”. None of this will eliminate the strip mall landscape, but it will change the nature of what those strip malls contain: Convenience stores and fast food franchises vs. B&Ms that are willing to shoulder the overhead when it would be cheaper to do business online and/or more attractive to relocate to a centralized “Mega Retail” destination point. In the long run, this may have the perverse effect of putting more delivery trucks on the road AND more individual drivers who, thanks to the eventual prevalence of fuel-efficient vehicles, consider it “normal” to drive as far to the shopping mall as many folks presently do to their jobs.

      Of course, there will be exceptions depending on the state in which one lives, the age of the community, the foresight of urban planners, tax laws and the like. But I don’t see the older, poorly planned urban areas remedying this problem soon enough. In part, the redevelopment funds won’t be there if and when more B&Ms limit their local inventories or close stores due to the same forces that are denying local governments much-needed sales-tax revenues: online shopping and the constraints on consumer spending as gasoline prices reach new highs. Add to that the growing percentage of retiring baby boomers living on fixed incomes and the convergence of state and federal budget problems and the outlook appears iffy at best.

      Eventually, there will be a ready supply of inexpensive transportation sources just as soon as highly fuel-efficient technologies in both personal and industrial transportation becomes the rule rather than the exception it is today. But before that is the norm, higher gas prices will become a reality and that will only drive more B&Ms to move online and more people to seek out tax-free bargains online. It’s the “gap years” during which time even the Big Box retailers will struggle to justify their B&M presences that may touch off a series of events that will not bode well for a smooth transition.

      As for the energy demands of a traditional storefront vs. the virtual variety, the jury is still out. What we presently see is that most major retailers now have two presences. Maintaining parallel presences increases both their reach and their energy requirements. Consider a historic comparison: After the printing press was invented so too was the environmental cost of printing books — albeit quite limited and low at that point. Then the radio came along and coexisted alongside publishing/print media. Then the television came along and took its place alongside the other two. And now we have the Internet, competing for a slice of the pie. In each case, technology seems to be additive — and the energy requirements cumulative. By inventing something new, the old may be threatened but not necessarily eliminated (rather, a whole lot less profitable). The question is whether we can sustain the economic impact of all these “additives” when there is only so much consumer demand to go around to support any single one of them.

      When it comes to the Internet, while it is true that some data centers are run on environmentally friendly sources of electricity, many more server farms are feeding off the largely coal-driven power grid. That’s thousands of servers coming online around the world each and every day to power what you might call “Internet sprawl”. But though our conception of the online world is virtual one, the energy costs associated with expansion are still just as real as they ever were.

      One last thing that didn’t figure into this piece is that the burning of coal is responsible for much of the mercury pollution in fish and the environment worldwide. I read an article in which researchers in Texas correlated proximity to a coal power plant with rates of childhood autism. While just about everyone with an interest in autism is debating the danger of mercury in vaccines, mercury exposure from coal-powered electricity has flown under the radar of public consciousness. Until our electrical production methods are modernized, the near-infinite expansion potential of the Internet represents yet another culprit in the greenhouse gas problem at the very least, and quite possibly a large contributor to the autism epidemic, among other problems. Behind this novel modern facade is an age-old dirty coal problem.


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