« The Deal On The Deal | Main | Goldwater Nostalgia »

September 22, 2006

Can't Say I Favor Door #2, Either

Kevin Drum assures conservatives that there are three methods Wal-Mart uses for keeping their prices down.

1) A spectacularly efficient supply chain and logistics system that's the envy of the industry.
2) A willingness — in fact, an almost palpable enthusiasm — for using their enormous size to beat the lowest possible prices out of their suppliers.

3) A scorched-earth campaign to prevent unions from organizing at Wal-Mart sites, thus keeping wages and benefits as low as possible.

Progressives, he says, merrily embrace #1 and #2, but oppose #3. Well, uncomfortable as it is to wreck a consensus, I've got to cop to some concerns over #2 as well.

My guess is that Wal-Mart's size and might is having much more profound effects on our economy through the demands and strains it places on suppliers than through their lowish wages and benefits for direct employees (although those labor standards give them a competitive advantage over chains with higher standards, and so we race to the bottom...). So much as I want the latter to go up and unionization to rush across the land, I'm more worried that Wal-Mart's size and status as the indispensable outlet for products, when coupled with their virtually maniacal (though fully understandable) demands for lower pricing, are pushing down wages and work conditions all throughout the land and, for that matter, the world. Suppliers simply can't pay better and push the marginal cost to consumers -- Wal-Mart will drop them faster than you can say "Always low prices."

What that means is that suppliers simply can't pay better. And if they already do, Wal-Mart will make them stop. High labor costs translate to higher product costs, and if that's what the producers value, Wal-Mart, by far the largest retailer in the world, will simply promote an in-store brand or a competitor, pushing the high-paying producer out of business. It's a real problem, and one folks aren't giving enough thought to. As I've said before, I'm relatively unsure what the appropriate solution is, but it's long past time to recognize that Wal-Mart's demands are literally shaping and planning our economy, and we must decide whether the economic norms they're setting are ones we want. As the economist Rashi Fein likes to say, we live in a society, not an economy. And we need to think about how Wal-Mart's actions comport with the sort of society we inhabit. For more on this argument, do see that piece I'm always recommending by Barry Lynn. I think it really is essential to understanding the dynamics of the coming economy.

September 22, 2006 in Wal-Mart | Permalink

Comments

Thank you for saying this. Being able to make your suppliers do whatever you tell them to is, after all, what being a monopsony is all about.

But I do have to take issue with this:

What that means is that suppliers simply can't pay better. And if they already do, Wal-Mart will make them stop. High labor costs translate to higher product costs

Higher labor costs (or at least higher wages for workers) don't alway translate to higher product costs -- if you balance the higher wages with higher productivity and lower turnover, product costs go down. (Indeed, that equation, minus the higher wages, is what has led to the explosion in US corporate profits and upper-management income during the past five years.) So a high-wage producer could do just fine by increasing productivity.

But that's where Walmart's famed involvement with their suppliers' business practices comes into play. As suppliers work to increase their efficiency, anything a high-wage producer figures out can be implemented (with Walmart's help) by a low-wage producer. And Walmart's own recipes for improving efficiency, I have a feeling, are unlikely to include a workforce that (if it's in the US at all) doesn't need to shop at their stores.

Posted by: paul | Sep 22, 2006 10:44:42 AM

The coming economy? Don't bother, they're here.

Of course the pressure on suppliers causes painful ripples throughout the system. How exactly does one think that dresses get made that can retail for $16.99? That's squeezing every possible drop of cost out of the system.

The real question is whether customers who can afford to choose really shop on price alone in all categories. Frankly, until the people ina position to make the choice vote with their dollars for better service, better merchandise, less barn-like locations etc, there won't be a change. People who shop purely for price will choose the company that's wringing every cent of cost out of the supply chain and the cost of workers.

Personally, I see glimmers that Wal Mart has reached the logical endpoint on this - there are signs that they are beginning to look at attracting customers who are looking for style, fashion, quality etc. The problem with that will be that such demands are antithetical to a purely price driven player. Wal Mart cannot be all things to all people. As long as it concentrates on what it does well, it will win. Always. But try to reach, say, that Target customer who wants hip, stylish things on a budget, and it will be very easy for a Wal Mart to lose its way. Meanwhile, if you prefer quality and style and are able to pay a little bit more, vote with your dollars, and get out of the Wal Mart.

Posted by: weboy | Sep 22, 2006 11:11:46 AM

the thing is that any money you spend on employees is taken off the bottom line. And high bottom line is the only goal of business. A company could always choose to make less money but they won't. If you can get more productivity out of workers it goes to the bottom line, not in the worker's wallet. This is not always the case in a privately owned company, but it's really the fiduciary responsibility in a publically owned company.

But the other problem with Wal-Mart is that the $4 prescriptions could well force other pharmacies out of an area, I'm not talking mom and pop stores - they are gone already - but CVS and Rite-Aide, so the consumer's choices will be limited. Ultimately the Wal-Mart juggernaut seems to have the goal of being the sole source for every type of commodity item, in every location. In a way the inherant need for constant increasing growth in all publically traded companies seems to lead to the corporate monoliths that William Gibson envisioned in his Neuromancer series. Kind of a corporate feudal state. OK for the people on top, hard on the serfs.

Posted by: cathy | Sep 22, 2006 11:20:49 AM

"Wal-Mart's demands are literally shaping and planning our economy, and we must decide whether the economic norms they're setting are ones we want."

So, what do you purport to do?

Posted by: DRR | Sep 22, 2006 11:21:10 AM

Bitch about it

Posted by: Fred Jones | Sep 22, 2006 11:25:40 AM

Mainly, that's true ;-)

Posted by: Ezra | Sep 22, 2006 11:33:10 AM

Someone recently likened Walmart to Standard Oil and that it should be broken up. Monopsony.

http://www.newamerica.net/publications/articles/2006/breaking_the_chain

Very compelling.

Posted by: scott | Sep 22, 2006 11:40:13 AM

If it makes you feel any better, when I worked in Accounting at a Dana-Spicer transmission production/rebuild plant near Knoxville, TN, our biggest customer dictated our prices, even accepted shipments and refused to pay for them.

International Truck and Engine Corporation, a heavily unionized organization, was using the same tactics that some here seem to think Wal~Mart invented. The transmissions that we made went into the trucks that International made for UPS, another big union operation.

Our plant wasn't union and I doubt it would be in business long if it were, but it could be argued that our non-union workers were subsidizing the unions to some degree. If I remember correctly, in order to keep producing transmissions, the plant was moved to TN from OH for lower labor costs with the same or better skill levels.

Also, we set the terms to our suppliers (dozens of machine shops, mostly in East Tennessee) and never paid a late payment penalty since we were usually their only customer.

This was about 12 years ago. Why Wal~Mart is 'credited' with some invention of these practices is beyond me. Back to the "all politics is local" 'discovery' example . . .

How bargaining for a better price is somehow bad is just bizarre.

Posted by: Guy Montag | Sep 22, 2006 11:43:50 AM

Great, the Standard Oil example is dredged up.

Even before they were threatened with being broken up, for the silly reason of being good at distributing refined oil products, a whole slew of competitors was springing up in Oklahoma, Texas and points west.

Some monopoly power.

Oh, Standards competitors actually owned oil wells, pipelines, refineries and distribution. Standard did not own a single well.

Love the solution to break them up too. Every shareholder got the same proportion of the smaller firms as they had of the big one.

Before anybody brings up the Bell System breakup, they asked to be broken up, it was not the gunpoint method preferred by Leftists.

Posted by: Guy Montag | Sep 22, 2006 11:50:00 AM

"How bargaining for a better price is somehow bad is just bizarre."

That's just it. Once you reach the size and influence Wal-Mart currently has you do not bargain, you dictate.

Posted by: DM | Sep 22, 2006 11:52:47 AM

DM,

The same way A&P dictated and took over the entire grocery world, tossing every independant grocer under it's massive wheels of monopoly, greasing the cogs of delivery vehicles with the blood of children!

Yes, we see the aftermath today, with $135 jars of cherries and throngs of starving wretches surrounding great palaces occupied by A&P executives as the seas rise meters per year to drown them because of evil oil used to deliver $1000 tomatoes and the masses scratch for their next wafer of Solient Green.

Yes, you have turned me around. I shall stop believing my lying eyes and believe you.

Posted by: Guy Montag | Sep 22, 2006 12:03:45 PM

Wal-Mart pounds their suppliers until they produce in the cheapest place possible. Generally, a country with lots of people with no rights, no labor laws and toxic wast dumping. If you guessed CHINA, you're correct.

Chinese people are great, their food is fun to eat, but the only real threat to the United States is from China, and Wal-Mart is the biggest culprit.

Posted by: fasteddie | Sep 22, 2006 12:08:50 PM

What Wal-Mart is doing isn't in any way new or original. The question is whether it's harmful and worrisome.

Posted by: Ezra | Sep 22, 2006 12:12:38 PM

Ezra,

What Wal-Mart is doing isn't in any way new or original. The question is whether it's harmful and worrisome.


It is neither. One of these days they will slide back down, probably through fat lazy management practices and your children and grandchildren can complain about the firms that are destroying Wal~Mart.

As I mentioned before, people were whining about K-Mart when they showed up, saying they were going to put the other smaller stores out of business.

Same way the generation immediately before mine (actually, including mine too) whined about Japanese automobile manufacturers destroying US manufacturing and taking jobs away.

The generations before them could have whined about US automobile manufacturing dropping from hundreds of competitors to just a handful of car makers, but there was that pesky World War distracting everybody as the FDR administration was deciding who would stay in business and who wouldn't.

Same way that people whined about the hundreds of bicycle manufacturers going out of business when the motorcycle became inexpensive and popular. Oh yes, someone was just complaining about the demise of Huffy. If they were around in the early 20th century I doubt that they could survive the shock of hundreds of bicycle shops disappearing almost over night.

The whaling industry was hit hard by the discovery and use of kerosene. Think of all the sailors who were without whale hunting work after evil kerosene oozed its way into lanterns around the world. Kind of doubt the whales minded much. (No, Greenpeace had nothing to do with that market shift)

Now, a good example of a firm that has resisted falling apart is General Electric. They keep increasing in value and getting more efficient and have an amazingly long track record.

Posted by: Guy Montag | Sep 22, 2006 12:36:32 PM

There's some useful academic descriptions of what makes a monopsony. Pricing power is only a part of it. With WalMart not actually operating in many urban areas and taking, what is it, 12% of the retail dollar? I'd rather doubt that they meet the standards of a monopsony yet.
GM still has, what, 20% of the car market and we don't say that's a monopoly, do we?
WalMart might grow into a monoposony, sure, but I don't think you can fairly describe it as one yet.

Posted by: Tim Worstall | Sep 22, 2006 1:46:30 PM

What can be done is to find a way to get carbon taxes and fuel inefficiency taxes put in place. Wal-Mart's model also depends on the Big Box, and the Big Box depends on public and private subsidies of automative transport.

Indeed, I would add that as door number 4, and still would only like door number 1.

Posted by: BruceMcF | Sep 22, 2006 4:29:03 PM

"Mainly, that's true ;-)" ...Ezra

Nationalize 'em. In line with the Goldwater post, this is an honesty day, and I never was one of the kool kids anyway.

Posted by: bob mcmanus | Sep 22, 2006 5:41:24 PM

I really like Rashi Fein quote (we live in a society, not an economy). Its snappy!

Posted by: slickdpdx | Sep 22, 2006 7:34:09 PM

Again, Bruce, until you folks are driving 'hybrids' like me, I am not taking your 'environmentalism' seriously.

lol

Posted by: Guy Montag | Sep 22, 2006 9:33:51 PM

Guy Montag ate my balls

Posted by: oldie but goodie | Sep 23, 2006 1:55:44 AM

Posted by: Guy Montag | Sep 22, 2006 6:33:51 PM Again, Bruce, until you folks are driving 'hybrids' like me, I am not taking your 'environmentalism' seriously.

You infer that I drive a gas burning vehicle ... how, exactly?

As long as its a pluggable hybrid, though, I'll slot you over on the side of setting the stage for US Energy Independence.

Posted by: BruceMcF | Sep 23, 2006 2:56:49 AM

BruceMcF,

On the 'hybrid' thing, check the link in my handle on this post. It is a joke.

A reporter at The New Republic printed a fabricated quote in order to make a paragraph work and transformed me into a hybrid driver.

She has never revealed if it is the 1972 Dodge Charger or the 1996 Jeep Cherokee that is supposed to be a hybrid.

If you ever ran across the "hydrogen powered Jeep story" that has been around for almost 10 years, it is related.

Posted by: Guy Montag | Sep 23, 2006 6:28:30 AM

Wal-Mart is the wet dream of Communists.

Capitalism was beating Communism, because critical economic information is distributed and a central planner with a pencil and a sheet of paper can not manage it all. So you had to leave that to the local manager/business owner.

Communism did not have the informational tools for administering the whole economy. Wal-Mart increasingly has the computing power to manage a growing share. Integrated supply chain systems and electronic data interchange became popular in business in the 90s.

There was also this article a few years ago about Wal-Mart data-mining their terrabytes of information to better plan distribution and logistics.

One day it will be possible to manage it all from one single CPU farm. It's quite funny, Capitalism will die through its own capitalistic means...

Posted by: Oskar Shapley | Sep 24, 2006 10:50:35 AM

Oscar,

That is a unique observation, insomuch as I have never come cross it before (might not be unique at all, but I certainly liked reading it).

If applied to a national economy it could actually work, if the administrators stuck to efficiency in meeting the demands of their customers, in this case The People, rather than redirecting resources to the whims of how they think things should be.

I have no faith in that happening, but it could.

Posted by: Guy Montag | Sep 24, 2006 11:12:34 AM

Here are several quotes from Hayek, which to my understanding are becoming increasingly OBSOLETE:

http://www.mises.org/journals/qjae/pdf/qjae5_3_3.pdf

"A mind endowed with full information could of course choose every point on the n-dimensional surface that appeared desirable to him andthen distribute as he saw fit the product of the combination he chose. But the only point on (or at least somewhere near) that surface we can reach using a procedure known to us is the one we reach when we leave its determination up to the market."

- Wal-Mart has near full information in it's own domain.

"About many important conditions we have only statistical information rather than data regarding changes in the fine structure."

- Wal-Mart has the data.

"It means, however, that of the combination of different goods that is actually being produced [in the market economy], as much is produced as we can manufacture by any method that is known to us. That is of course not as much as we could produce if infact all the knowledge that anyone possessed or could acquire were available at a central point and from there could be entered into a computer."

Computers in Hayek's time were sloooow and user unfriendly. The data mining tools that Wal-Mart can use now are much closer to Hayek's "mind endowed with full information".

Posted by: Oskar Shapley | Sep 24, 2006 11:25:03 AM

The comments to this entry are closed.