Entries for December 06, 2005

Here is a dispatch from frequent e-mail correspondent Ironman from Connecticut:

I note with interest your latest GM post. It seems they closely track another Michigan based behemoth, Kmart.

In the 1970s and 1980s, Kmart was the 800-pound gorilla in retailing (I know as my parents ran a market research firm that kept trying to get data on what they were up to). They had basically locked up the blue-collar and middle-class postwar suburbs in the industrial Northeast and Midwest and had a major presence in the larger metro areas of the South and West. Only small rural towns, some large central cities, and the chichi northeastern suburbs were beyond their limits.

Then the 1990s hit and Wal-Mart emerged from the small towns to start taking on Red State suburbs as home turf. For some reason the peril of allowing market leadership in places like Atlanta and Orlando eluded Kmart management. Then the Bentonville boys, having gained the upper hand in the fast growing parts of America, eclipsed Kmart and brought their economies of scale to bear against Kmart's Midwestern base. Along the way single-focused "category killers" like Home Depot, Bed, Bath & Beyond, and Sports Authority stole massive numbers of shoppers, especially in more-upscale markets.

Kmart responded by a few strategies reminiscent of GM: reliance on outdated rust belt locations, an unwillingness to close failing facilities, a decision not to reinvest in the core business and to pay dividends, reliance on preserving market share with older, less affluent consumers at the expense of building the "brand" with younger, future upscale [consumers] (Kmart even featured the 90-plus-year-old Bob Hope in its national TV campaigns, someone horrendously irrelevant to younger, nonwhite and/or hipper consumers), and toward the end, massive discounting in a futile effort to win a price war with a cash-rich competitor.

When Kmart finally declared bankruptcy, it was widely reported that Wal-Mart was now the dominant retailer in Michigan, their home state, and shoppers bemoaned that they "had owned the State of Michigan and lost it," mostly because of their tired stores and poor selection of merchandise, which had driven away formerly loyal shoppers.

So, after investors lost their shirts, Greenwich financier Eddie Lampert took the firm out of bankruptcy, got some things done like making the stores and merchandise more presentable, and promptly bought Sears (another struggling Old Economy Rust Belt centered retailer, with its own parallel to GM, becoming incredibly dependent on appliances, hardware, and auto service a la GM's addiction to SUVs) to gain adequate economies of scale to stay viable.

So, I expect GM to go bankrupt, to be scooped up by a financial turnabout whiz, and to get merged with Ford. Since the parallel is so clear.

The Kmart headquarters is at the corner of Big Beaver and Coolidge in Troy. When I was in my teenage years, this land was a square-mile farm owned by the grandfather of a schoolmate. Now, the land has seen Kmart's rise and fall. Across the street is Somerset Mall, the premier high-end mall in Michigan, with Saks Fifth Avenue and Neiman Marcus as key tenants.

Sunday newspapers are typically filled with evergreen stories, many of which have sat on the in-type list for weeks or even months, that editors hope will prove interesting to readers even though they don't advance the news. Such a story, I suspect, was Mary Jordan's piece, datelined London, on the House of Lords in last Sunday's Washington Post. It's well written and full of the kind of ornate detail about ye olde England that many readers, like many tourists, love.

Unfortunately, it misses entirely the big story about the House of Lords in the past few years. In 1999 Tony Blair's New Labor Party, with its typical distaste for tradition, revoked the voting rights of all but 92 of the hereditary peers; those lords were allowed to elect from their number 92 who would continue to have voting rights. This was part of a compromise between Blair and Lord Cranborne (now the Marquis of Salisbury), then the Conservative leader of the House of Lords. I interviewed Cranborne at the time these reforms were pending, and he readily conceded that the existing character of the House of Lords was indefensible. When all the hereditary peers had a vote, the Lords had a permanent Conservative Party majority. While the Lords cannot veto legislation, they can delay it. As Cranborne admitted, it was inherently unfair to allow one party the power to delay legislation—a power that can amount to a veto late in a parliamentary session. But he also made the point, which others in Britain corroborated, that the unreformed House of Lords rarely exercised that power. That's because peers understood that their power was unfair and did not want to be seen exercising it except in the most dire of cases.

Blair's reforms meant that the 92 hereditary peers with a vote can easily be outvoted by the life peers, whose titles are not hereditary. Life peers are nominated by all three of the political parties—Labor, Conservatives, Liberal Democrats—and others without party ties are nominated as well. They tend to be people who have won distinction in many walks of life—a pretty impressive bunch, actually. Also, in the reformed House of Lords, no party has a majority, and probably no party ever will. There are enough Conservative and Lib Dem peers now to outvote the Laborites, and a substantial number of peers are "cross-benchers," which means that they accept the discipline of no party.

The result is that the House of Lords now takes a more active role on legislation and votes against measures passed in the House of Commons far more frequently than it did when there was a perpetual Conservative majority. Peers tend not to feel inhibited from voting down legislation approved by the Commons, since no party unfairly has a majority and since it's widely recognized that the voting peers are a group of able and public-spirited citizens. Also, the willingness of the Lords to vote against provisions of legislation have enabled Conservatives in the House of Commons to get the government to withdraw such provisions in the Commons, lest the Lords delay the legislation altogether. The House of Lords is thus much less of a rubber stamp and more of a serious legislative body than it was before 1999.

Whether this is a good thing in policy terms one could debate. The Lords tend to be more civil-liberties-minded than the Commons under Blair, and they tend toward the prejudices of educated elites—after all, they are an educated elite by definition. Interestingly, among those named life peers are politically active lords who also hold hereditary titles: Salisbury votes as a life baron and leaves the 92 seats reserved for hereditary peers to others.

The Post story makes much of advocates of an elected House of Lords. But no one in Britain expects that the body will be made elective. The reason is simple: An elected House of Lords would be even more willing to vote against the Commons, and the House of Commons is not likely to create such a serious rival. Moreover, how would you elect lords—from what districts? By proportional representation? By party? Who would nominate them? No one seems willing to sort through those issues—a point Salisbury made to me before the 1999 reforms. The current House of Lords, with greater practical power than before 1999 but still without enormous power, is a tolerable institution—the sort of muddle with which the British have been able to live for many years. But you wouldn't know any of this if you had to rely solely on the Post's story, lavishly illustrated with pictures of famous Lords in their robes.