Bookstores, Breweries, Bunk

Local Habit, in San Diego, offers a variety of California craft beers. Beer has become as much a part of the San Diego identity as surf and sun. CREDIT PHOTOGRAPH BY EROS HOAGLAND/THE NEW YORK TIMES/REDUX

Local Habit, in San Diego, offers a variety of California craft beers. Beer has become as much a part of the San Diego identity as surf and sun.
CREDIT PHOTOGRAPH BY EROS HOAGLAND/THE NEW YORK TIMES/REDUX

It was already so good at what it did in print, it was easy to wonder what would come next. How to respond to the digital era? The New Yorker‘s transformation has been welcome, and Tim Wu is clearly an awesome part of it, as you may already know:

Consider a few surprising and optimistic facts for the new year: nationwide, independent bookstores have grown by about twenty per cent since 2009; meanwhile, American craft breweries collectively now sell more than 16.1 million barrels of beer annually, outpacing, for the first time, Budweiser. This isn’t the only evidence that small-scale businesses are making a comeback. Over the last ten years, the long-running decline of small farms has levelled out, and more than three billion dollars was spent last year on more than four thousand independent feature films. Over all, since 1990, small businesses (with, generally, fewer than five hundred employees or less than $7.5 million in annual receipts) have added millions of employees, while big businesses have shed millions.

None of these developments has individually transformed the American economy, but taken together they represent something. Once upon a time, or in the last century, to be precise, it was an article of faith that most sectors of the economy faced unavoidable domination by a few big players. The pattern just kept repeating itself. In the automotive industry, hundreds of small companies became Detroit’s Big Three. Old general stores and other local shops were killed by department stores and chains, which were in turn devoured by the big boxes. Even restaurants, which might seem inherently smaller scale and local, became dominated by big fast-food and family-restaurant chains such as McDonald’s and Red Lobster.

Despite all this, some people, ranging from Louis Brandeis to the “small is beautiful” economists of the nineteen-seventies, continued to believe in the advantages of small-scale business. “A corporation may well be too large to be the most efficient instrument of production and of distribution,” Brandeis said, in 1911. It may also “be too large to be tolerated among the people who desire to be free.” But Brandeis and his ilk were regularly dismissed as naïve. Here is Peter Drucker, a twentieth-century management guru who wrote a worshipful tome about the efficiency of General Motors: “Mr. Brandeis maintained that bigness was economically inefficient. We know today that in modern mass production, the small unit is not only inefficient, it cannot produce at all.”

Drucker’s logic held forth: scale does yield natural efficiencies—it simply cost Ford and General Motors much less to build cars than it cost their rivals. A retailer such as Walmart, buying at scale, can offer lower prices. For most of the last century, no matter where you looked—retail, telecommunications, apparel, manufacturing—scale businesses ran over their smaller, inefficient rivals. Today, in some industries, that story continues to hold true: on the Web, for example, few companies dare to directly challenge giants such as Amazon or Google. But in other areas, the simple story of big-beats-small is more complicated.

Consider the story of craft beer. Large-scale breweries destroyed their smaller rivals in the twentieth century because they were able mass produce the stuff for cheaper (reaching wholesale prices of about fifty cents a beer or less) and because their fat margins allowed them to pay for things such as television advertising. In the late nineteenth century, there were thousands of breweries in the United States; then, Prohibition came, and, after it ended, a consolidated industry emerged. By 1979, there were just forty-four remaining. The giants had won again.

But the small breweries came back. Their beers were not better advertised and certainly not better priced. Rather, the crafts went after an enormous blind spot for the big breweries—namely, flavor. I don’t entirely mean to be snide; more precisely, craft beer succeeded by opting not to compete directly, instead pursuing what can be called a “true differentiation” strategy. That means they established a product that, in the mind of the consumer, is markedly and undeniably different (as opposed to “false differentiation,” which is more or less the same thing with different packaging). True differentiation, if it works, actually changes consumer preferences. The dedicated craft-beer drinker, once he’s hooked, no longer cares if Coors Light costs three dollars less. Today there are once again thousands of breweries in the United States (more than 3,000, in fact)…

Read the whole post here.

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