Law of Marginal Productivity comes to Macy’s

In theory, the more demand there is for a good or service, the more a producer wishes to provide this good, and that producing in bulk lowers costs. Even when consumer demand is down, a supplier can also produce more, in the hopes of defraying a decrease in price with a bulk increase in sales. However, certain costs of production are fixed. In other words, the Law of Marginal Productivity holds constant. This economic law states, namely that “when the technology of production and some of the inputs are held constant and the quantity of a variable input increases continually, the marginal productivity of the variable input will eventually decline.” (King, 2004)

This law is perhaps most obviously evidenced in agriculture or conventional factory production, where even if there is an increased demand for grapes, putting more and more workers onto the field to pick more of the grapes will eventually bottom out in value — each additional worker can only pick so many more of the desired fruits, or each worker in a factory can only work so much harder on a crowded assembly line, before the increase in wages does not pay for the increase in production and sales. Such “inputs that are held steady are called the fixed inputs.” (King, 2004) The costs of maintaining the depreciating inputs of land and capital are fixed costs for fixed inputs, as are the price of worker wages and required benefits, unlike the actual number of workers involved in production, which a factory owner, for example, can alter at his or her discretion.

Another way to express the law of marginal productivity is that, as the variable input increases, the output also increases, but at a decreasing rate. The marginal productivity of labor is the rate of increase in output as the labor input increases. To say that output increases at a decreasing rate when the variable input increases is another way to say that the marginal productivity declines. (King, 2004)

The “Law of Marginal Productivity affects not only factory production, and agricultural production” however. This law as well, affects retail stores. Stores have many fixed costs — not just wages, but lighting, air temperature control, and other maintenance costs — the longer a store is open during the day, even with an increased customer level of foot traffic, the more workers the store must have. “Over the years,” many department stores “have turned into clothing and beauty emporiums, but because they were trying to make the high profits that went with their high expenses – you don’t see marble floors in Target – they have paid dearly. “In other words, to be a department store of a certain caliber and to justify higher prices for goods, one must also, as a fixed cost input, make the store look like a place that sells expensive goods. (Rozhon, 2005)

But the desired increased foot traffic does not always, only translate into more sales, as “it is no longer the department store” as a place to buy goods, “that’s the lure,” for consumers. “It’s no longer even a shopping mall anymore – it’s an entertainment and lifestyle mall with playhouses, community halls and restaurants.” (Rozhon, 2005)

Thus, recently Federated Department stores announced that it was buying Lord & Taylor and Marshalls, to increase its diminishing profits from Macy’s and Bloomingdales, by expanding its venues of production, as it cannot defray its costs by cutting wages or maintenance costs of its current facilities. Federated found that lowering clothing prices was not working, given that “to compete with discount stores like Target, department stores have often reduced both prices and profits, and, analysts say, lost their reputation for high quality,” while still not being able to lower their prices as low as discount stores. The result was that the department stores lost their trademark for quality and were still turning customers in even greater droves to discount venues. Even Saks tried “an electronics department, something called the Elephant Pharmacy, even wine bars,’ but to little avail. (Rozhon, 2005) Still, “sales at May Department Stores in January were 7% less than they were in the same stores a year ago. Federated, which is receiving many plaudits now, was down 0.4% last month. Saks Department Store Group, which includes Parisian and Proffitt’s but not Saks Fifth Avenue, was down 0.9%.” (Rozhon, 2005)

While department store sales were down, costs of production remained fixed or increasing — thus selling a greater variety of goods (such as toys and electronics as some department stores have striven to do), with longer hours, or online hours, simply was not enough, to defray the fixed costs. Hence, consolidation was deemed necessary. One way to reduce fixed costs for retailers, of course, is to go online — Amazon.com needs no fancy lighting, marble floors, and only a skeleton staff. But for clothing manufactures, such as Lord & Taylor, 80% of its business is still done in the real rather than the virtual world. This is particularly true of stores that sell to both men and women. Despite men’s supposedly greater technical confidence, one salesmen noted, “After all, when a guy buys a suit, he wants to see a whole outfit; he doesn’t know, can’t enunciate it, but he wants to see mannequins with everything: the shirt, the tie, the socks, the shoes.” (Rozhon, 2005)

Thus, the trend to consolidation amongst department stores is likely to remain strong, as a way of defraying costs — even internationally, “The Macquarie CountryWide Trust of Australia and the Regency Centers Corporation agreed to buy 101 shopping centers from the California Public Employees’ Retirement System for about $2.74 billion, the companies said.” Around the word, retailers that rely upon foot traffic and the perception of quality are scrambling to stay ahead of Wal-Mart and Target’s cheapness and diversity of products. (Company News, 2005) Hopefully, the increased revenues from the consolidated stores will increase profits for the company, consolidate costs and lessen at least some of the fixed costs for the formerly individual department stores, and thus eventually increase sales and stimulate lagging productivity.

Works Cited

“Company News: Macquarie & Regency to Buy 101 Shopping Centers.” (16 Feb 2005) Business Financial Desk. The New York Times. Retrieved 1 Mar 2005 at http://query.nytimes.com/gst/fullpage.html?res=9B04E5DD133AF935A25751C0A9639C8B63& fta=y

King, William (2004) “Law of Diminishing Returns.” Economics. Drexel University. Retrieved 1 Mar 2005 at http://william-king.www.drexel.edu/top/prin/txt/MPCh/firm8a.html

Rozhon, Tracey (2 Mar 2005) “No Longer the Queens of the Mall, Department Stores Try Makeovers.” The New York Times. Retrieved 1 Mar 2005 at http://www.nytimes.com/2005/03/01/business/01shop.html?