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Operating Costs Squeeze Retailers

30 Jan, 2003 By: Joan Villa


Video rental revenue may rise and fall, but many retailers are finding that their operational costs move in just one direction: up.

Labor, rent, energy bills, workers' compensation insurance, business insurance and especially health insurance have all been on the rise, retailers say.

“Our workers' comp and health insurance have increased dramatically, and that's cutting into profits,” said Scott Whitmer, VP of 13-store Video Depot in Palm Desert, Calif. “Our rents are going up as well.”

Retailers say that health insurance is the biggest culprit, with 50 percent increases or more in just the past six months and 30 percent to 50 percent hikes in insurance for fire and theft, according to Ted Engen, president of 2,000-store Video Buyers Group outside of Minneapolis. Combine what Engen calls the “big mess” of insurance with increases in taxation, and his estimate is that total operational costs are up 20 percent to 30 percent in the past year.

“I don't think there's any retailer you could call, if they've got insurance on their business, who wouldn't say operational costs have skyrocketed in the past 12 months,” he said. “Medical insurance has just skyrocketed, and it's probably one of the biggest issues for self-employed people like video retailers.”

Bob Webb, owner of four Video Revue stores based in Decatur, Ill., recently reviewed his operations and discovered that, in the past five years, rent has climbed 15.5 percent due to built-in escalators in rent contracts, while health insurance has soared 220 percent for the store managers, full-time clerks and corporate employees his chain covers.

“We just recently changed health insurance after a couple years of increases,” he said.

“What we find is, companies will bid your business somewhat competitively and then in a year they'll raise it 30 percent. It's difficult because there are so many aspects to the different plans. It's hard to compare apples to apples. What we've found is every time we change we generally end up getting less coverage.”

The Video Software Dealers Association provides a health plan that makes sense for some retailers, but it is not always a better option than what businesses can find locally, said VSDA VP Carrie Dieterich.

“It's really difficult when you're dealing with insurance to get something nationwide that will be lower in every state,” she said.

Such costs have been on the rise for large, public chains as well, confirmed analyst Dennis McAlpine of New York-based McAlpine Associates, although the operating costs are not always spelled out in public disclosures.

Many large chains negotiate premiums on multiyear contracts that afford them some protection against increases, but they still face escalating operating costs, he said.

“There's no way you're going to escape it -- it's going up, and your choice is to pay higher premiums or offer lower benefits,” McAlpine added.

“This is a dilemma that most people are facing,” he said.

Retailers could eliminate coverage altogether, but it's an option some reject as unfair to their employees.

“We pay 50 percent of the employees' premium,” Webb said. “But we've considered just giving everybody a raise based on what we are currently paying and then not providing it anymore. That would be great for us because we'd never have to worry about increases but it would be bad for employees. So far we haven't done that because we feel strongly that health insurance is crucial for people and if we don't provide it some people would go without.”

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