The pandemic taught corporate America a valuable lesson: variety is not necessarily a good thing.
Disruptions to supply chains that accompanied the global lockdowns meant companies could no longer provide the extensive range of goods that customers had become accustomed to before COVID-19. But even though supply strains have mostly disappeared, businesses are keeping their downsized offerings largely in place, becoming more efficient and helping to make the economy stronger and more durable.
The Wall Street Journal detailed how furniture retailer Malouf now sells beds and bedding in a fraction of the colors it did a few years ago, while Newell Brands Inc. has stopped making 50 types of Yankee Candle and Coca-Cola Co. offers half as many drinks. By reducing their offerings and focusing more on what was in demand, businesses were able to protect their earnings power from the chaos in supply chains. After an initial dip, the average profit margin for the members of the S&P 500 Index rebounded to a record 13.7% in early 2022 on a trailing 12-month basis, and remains above its pre-pandemic levels, according to data compiled by Bloomberg.
Shoppers don’t seem to lament the lack of choices – if they even notice. Consumer spending bounced back even faster than profit margins, and by June 2020 retail sales had exceeded their pre-pandemic record. Over the next two years they would grow by 25%, according to the Commerce Department.
The economy has behaved recently in ways that have mystified economists, but consumer indifference to declining choices should not have been a surprise. Even before the pandemic began academic research had uncovered the so-called paradox of choice. Psychologist Barry Schwartz argued in his 2004 book on the subject that excess choice was making consumers miserable, and that unconstrained freedom led to paralysis.
Yet, over the past two decades a consensus has emerged that shoppers are more likely to be overwhelmed by the abundance of selection in consumer goods, ranging from soft drinks to automobiles, than they are to feel deprived of adequate choices. That implies that the post pandemic reductions in choice represent a true gain in efficiency.
It's worth asking how corporate America’s product offerings became overly bloated in the first place. Shouldn’t competition have prevented that sort of wasted effort? At least two factors seem to be at work. First, changes in retail conflated the benefits of expanded selection with the cost savings from consolidated operations. Starting with discount retailers like Walmart and then big box stores such as Best Buy and finally culminating with online giants typified by Amazon.com, large scale operations were able to offer savings because they could spread their costs over a larger array of products. Lower costs led to lower prices and increased sales but masked the detrimental effects of choice overload on shoppers.
This leads to the second factor, which is that the expansion in retail offerings contributed to market confusion amongst producers. As pointed out by Roger Martin, former dean of the University of Toronto’s Rotman School, companies tend to overestimate the size of the market in which they compete. For example, a manufacturer may estimate that it commands 8% of a generically defined market. Martin argues that most customers in such a broadly defined market will never even consider purchasing many products on offer. Choice overload implies shoppers will only entertain the few products most suited to them. Hence, at a minimum a seller probably has around a 20% share of a much more narrowly defined market.
Companies that overestimate the size of the market they compete in spread their sales and marketing efforts over too wide a range of customers. Yet, retailer expansion encourages precisely this type of overestimation by bringing a wide range of buyers and sellers together in the same store or on the same website. In reality, an overabundance of offerings was leading consumers to mentally block out all but a few sellers as realistic alternatives.
Endless choice may sound nice, but it’s not the bedrock of an efficient business or economy. Companies seem to finally be coming around to that idea.
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