In the book “Good to Great,” Jim Collins wrote about the flywheel effect, a prosperous cycle of work and adjustment that eventually picks up speed and builds its own momentum.
Fewer people talk about the flywheel effect’s evil cousin: the doom loop. This cycle of knee-jerk decisions and failed strategies has taken down many otherwise promising businesses. Collins characterizes it as “reaction without understanding.”
If the phrase doom loop sounds familiar, it may be because you’ve heard it used to describe the negative cycle at play in some of America’s largest cities. While the flywheel effect produces growth and profitability, the doom loop creates a downward spiral of societal decay: poverty, crime, lost value, and finally the relocation of people and businesses.
In this week’s episode of Dial P for Procurement, I consider the doom loop concept from both the public and private sector perspective – because the two meet in these large cities.
Self-Fulfilling Doomsday Prophecy
Another way of thinking about the doom loop is as a self-fulfilling prophecy. LucidMeetings defines doom loop as “a negative belief cycle, where a series of beliefs, actions, and reactions work to reinforce negative beliefs and unwanted behaviors.”
Here’s an example: I don’t like the idea of camping. So I don’t buy adequate gear, good snacks, or spend time scoping out cool locations. When I go on a trip and end up cold, hungry, and bored, it reinforces the idea that I am right to dislike camping.
If, however, I kept an open mind to camping, investing in a better tent, easy to prepare food, and finding beautiful spots to go, it might change how I feel about the activity. In other words, we – individually and collectively – play a role in the outcomes we experience.
Whether you’re talking about economics, entrepreneurship, or camping, the concept is clear. We all respond to conditions, but:
- Do we respond in a way that improves our situation?
- Do we make measured, informed adjustments or flail about?
- Do we learn from what we experience and make changes going forward?
Are you going to San Francisco?
On August 13th, the Wall Street Journal ran a piece titled, “Can San Francisco Save Itself From the Doom Loop?”
Like many cities, San Francisco has seen some significant changes since the start of the pandemic. The city’s office vacancy rate is currently at 25.7 percent, 10 percentage points higher than the average U.S. commercial vacancy rate. San Francisco is (or was) full of employees perfectly suited to remote work, and real estate is so expensive that very few of those people could afford to live downtown. When COVID hit, there wasn’t enough of a mix of commercial and residential to spread out the risk.
Then the layoffs began. Meta has laid off over 20,000 employees in the last year and reduced its San Francisco office space by 36 percent. Salesforce laid off 8,000 people – 10 percent of their workforce – and reduced their real-estate footprint by over 60 percent.
This resulted in a lot of abandoned buildings downtown and a sharp reduction in riders on the Bay Area Rapid Transit trains (BART). Ridership is now at one-third the level it was in 2019. According to research done by the University of Toronto, cell-phone activity in downtown San Francisco is also at about a third of what it was before the pandemic. For comparison: New York is at 75 percent.
That has a follow-on effect among supporting businesses like shops and restaurants. As Aristotle said, “nature abhors a vacuum.” Troubled individuals pursuing troubled activities moved in to fill the void, which hits the city in another place that hurts: tourism.
Who wants to visit a city where it isn’t safe to ride public transportation? Where there are no open restaurants and nowhere to go shopping? Or just where it is just plain gross because properties aren’t being maintained?
You can feel the doom loop forming.
Workers leave, then stores close, so riders don’t take the BART, and people with lifestyle challenges move in to take over the area… So more workers leave, more stores close, and even less people are on the subway. Around and around.
Not a Shrinking Problem
It is certainly challenging for cities like San Francisco that people and companies are leaving, and some businesses are being hurt directly through theft.
Often referred to as “shrink,” this category of loss is made up of damaged goods and goods that are stolen by employees or visitors to stores. The problem is so systemic that companies are budgeting for it.
In May, Brian Cornell, CEO of Target, shared that his company expects $500 million in shrink this year. With $109 Billion dollars in revenue, that is only about half a percent, but still: can you imagine how hard their procurement team is working for each percent of savings? Talk about frustrating.
This is a problem that is getting worse in two ways: the rate of theft is up, and the value per theft incident is up. According to CDW: the average retail theft was about $1,200 per incident in 2022, a 25 percent year-over-year increase. These conditions are simply not sustainable.
The San Francisco Standard reported that nearly half of the stores in the downtown shopping area have closed since 2019. Saks Fifth Avenue and T-Mobile’s flagship store both closed, as did Old Navy and Banana Republic. A brand new Whole Foods closed just one year after opening.
Keeping the Doom in Perspective
Not everyone agrees that retail theft is a growing problem. According to a CNN Business article from January, shrink has been at 1.4 percent for about a decade – and is actually down from 1.6 percent in 2020.
What is up is organized retail crime. According to the National Retail Federation (NRF), there was a 26.5 percent increase from 2020 to 2021. You may have seen videos showing groups of people literally emptying stores and running away with tens or even hundreds of thousands of dollars worth of merchandise. A pattern of losses like that is very hard to recover from with such small profit margins.
I liken this to the perception problem that comes with something like an airplane crash. Hundreds of people are lost all at once when a plane goes down, so it makes big news and everyone worries. But planes are much safer than cars: your odds of dying during a flight are one in 11 million. Your chances of dying in a car crash, on the other hand, are one in 5,000.
But with the doom loop dynamic, it is the perception of theft, crime, danger, etc. that matters more than the amount of small scale theft numbers.
Escaping the Doom Loop
If nothing changes, retailers will be left in the squeeze between inflation, shifting consumer demand, and shrink. Sporting goods store Dick’s didn’t account for enough loss and had to explain that to analysts in a recent earnings call. Other retailers are changing their mix of product, moving high theft items away from entrances, or locking goods up in an effort to keep shrink levels low.
Just last week, Nordstrom CEO Erik Nordstrom said that while the company is accounting for shrink, the costs are dragging down their profitability. Despite actively partnering with law enforcement and making internal changes, they are closing two stores in San Francisco.
That’s another pair of closed storefronts in a city that is already struggling… and back around the doom loop they go.