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April 24, 2007

The Wal-Mart Effect

There's an interesting twist to this Business Week article on the chaos Wal-Mart sparked in the consumer electronics industry when they began dropping their prices on flat-screen TVs. "Circuit City shares have fallen 24%, to $18.76, since the end of November," reports Business Week, "when the price war started. In the same period, Tweeter's shares declined 32%, to $1.72, near a 52-week low, and Best Buy's stock is down 9%, to $48.73. Shares of Rex Stores have been flat, down 0.7%, to $16.98."'

It's a standard tale, so mundane that it even has a cute descriptor: "The Wal-Mart effect." What's surprising about this particular version of the story is how the threat of Wal-Mart's full-bore entrance into a market allows them to dictate the standards without exposing themselves to the very pressures they've set in motion. "Despite its bold move last year, Wal-Mart currently is not the largest seller of flat-panel TVs. In fact, even though Wal-Mart set in motion the price drops, it has actually been a bit player in the high-definition TV segment. By most accounts, Wal-Mart had little to lose by dropping the price on the Panasonic TVs because it sold out its inventory nearly instantly."

Not so for the stores that specialize in consumer electronics, like Circuit City. "The Richmond (Va.) company lost $12.2 million in its fiscal fourth quarter ended Feb. 28, compared to a net income of $141.4 million in the same period last year. At Tweeter, where flat-panel TVs make up more than 51% of sales, the price declines hurt badly. Sales in its fiscal second quarter ended Mar. 31 declined 12%, to $139 million." They have to compete with Wal-Mart, even as Wal-Mart feels no particular need to compete with them.

Now, nothing Wal-Mart is doing here is wrong, illegal, or even unethical. They decided to slash prices on a product, and their competitors responded. But the company's sheer size means that relatively minor decisions in Bentonville can transform whole sectors of the economy. Wal-Mart sold out of their cheap Panasonics fairly quickly -- that ended it for them. But Circuit City laid off 3,400 workers and Tweeter is still reeling. And it's like that at every level, in every sector, of retailing now. Wal-Mart is almost a de facto central planning vehicle; not because that's their ambition, but because that's their size.

April 24, 2007 in Wal-Mart | Permalink

Comments

Don't forget that they have a very similar effect on their own suppliers as they do on their competitors - they're such a dominating buyer that if you're a manufacturer you just sort of have to charge what they're willing to pay.

Posted by: Seth D. | Apr 24, 2007 1:10:51 PM

I don't follow. First off, Wal-Mart's a "bit player" in this niche. Second, the article says that there's been increasing production and more distribution channels. It sounds to me like Best Buy and Circuit City just weren't prepared for what would happen when prices on TV's dropped. That's a pretty big error on their part - it's not like prices on electronics stay stable.

Posted by: ptm | Apr 24, 2007 1:11:27 PM

Worht noting that Circuit City has been laying off people for years--they've never been able to compete with Best Buy--and their "layoffs" have often been particularly unfair and exploitive. (Like the salespeople who were told that no, they're not being laid off--they are just changing the job description--but it was a 60-70% pay cut.)

Posted by: SamChevre | Apr 24, 2007 1:16:37 PM

A co-worker of mine used to be a manager for Wallmart. Based on what he told me, there is nothing incidental or accidental in such decisions. According to him, such decisions are calculated to cripple, if not outright destroy, competitors. Wallmart management aspires to call the tune in every area of their market. Whether that can be described as "centralized planning" is a semantic trifle.

Posted by: W.B. Reeves | Apr 24, 2007 1:28:16 PM

Now, nothing Wal-Mart is doing here is wrong, illegal, or even unethical. They decided to slash prices on a product, and their competitors responded.

That is correct.
Even those who seem to hate WalMart will benefit from this when it's time to buy their new TV as well as other goods.
If WalMart were a huge behemouth that were driving up prices, I would be more concerned. Instead, we have a big behemouth that is making goods less expensive through efficiency. The fact that competitors were able to follow suit just shows how much fat was in that market in the first place.

Posted by: Fred Jones | Apr 24, 2007 1:40:51 PM

...but have the government do it, and it's eeeevil eurocommie failed social planning!

Posted by: verplanck colvin | Apr 24, 2007 1:51:46 PM

I am a recent purchaser of a flat screen TV from Best Buy and am very pleased by Walmart's action. The result, after all, was to transfer money from Best Buy's shareholders to me. Three cheers for central planning!

Posted by: arthur | Apr 24, 2007 1:59:15 PM

For what its worth, I was in a Wal-Mart the other day, and they were selling Toshiba Plasma big screens for $800, and they were not sold out-- they had plenty of inventory.

So at least based on that anecdote, they are competing in the market and not just signaling it.

Posted by: Dilan Esper | Apr 24, 2007 2:05:16 PM

...but have the government do it, and it's eeeevil eurocommie failed social planning!

Correct. Some people's idea of capitalism seems to equate to following:

Despotic control of markets by Government = Bad!
Despotic control of markets by Corporations = Good!

Posted by: W.B. Reeves | Apr 24, 2007 2:09:36 PM

And now, Wal-Mart wants to offer healthcare services as well. It gives new meaning to the words "Company Store".

Posted by: fiat lux | Apr 24, 2007 2:12:44 PM

Never lose sight of the fact that wal-mart is making the market better by forcing competitors to keep up, they're trying to elimnate those competitors. And if you hate the gubmint calling the tune, wait until wal-mart is your only retailer. Not only will get shit quality but the prices will skyrocket. Lucky consumers.

Crow all you like about them now, wait until you have no other option.

As for the competitors themselves, tweeter's been sucking wind, through several orifices, for a while now. Their product mix is dreadful and their staffing is worse. They've been flailing long past their time.

circuit city has been doing the same though not nearly as badly as tweeter. The kind of scary thing with cc is that they dumped their credit card division awhile back which was a wonderful source of cash. Now, with that cash spent, or invested or something, they actually have to produce sales, efficient sales. Look for a significant portion of that chain to disappear very soon.

best buy has some expansion issues. They've been baning their heads against the walls of market saturation and operational problems with existing store. bb lost their ass in the musicland takeover (whose freaking idea was it to buy a bloated, unprofitible 1300 store CD chain in 2001, in 2001!). They've also sunk a ton of money into "magnolia" their bid to become the walmart of custom home work. People love them and of three discussed, they are clearly the strongest. That said, they'll have their ass handed to them by walmart if bentonville decides to do so.

There are opportunities for small and regional indies because some people just don't want to shop at walmart. That said, there's always folks like Costco who have also helped to significantly erode profitibility on flat panels.

I don't walmart "taking over" anytime soon but with that said, woe to the consumer on the day they do so.

Posted by: ice weasel | Apr 24, 2007 2:30:33 PM

Well, when microsoft leveraged its market dominance in one field of computing to damage its competitors in other fields, that was still considered an antitrust violation. Of course, antitrust is another one of those "quaint" ideas from the last century, so what Walmart is doing is no doubt brilliant.

Although in many cases Walmart's prices are in fact higher than those of competing local stores, the damage of their monopoly power doesn't really come in terms of their prices but rather their wages (and the wage/employment structure they effectively dictate to the rest of the retail industry and to their suppliers). What the heck good does it do for inflation to be low if the real wages of below-median workers are effectively flat or falling? I'm sure that (except for some of the folks at the Fed) most of us would be willing to put up with a point of additional inflation for even a half share of the past decade's productivity gains, instead of the 1/10 or less that we actually got.

Posted by: paul | Apr 24, 2007 2:32:57 PM

...but have the government do it, and it's eeeevil eurocommie failed social planning!

That is true.

And the reason is, WalMart will be in control until they no longer serve the market. Then another business that is more efficient will take over as consumers flock to their stores.

A government is in control by fiat and doesn't have to remain efficient to stay in control. Once you have government control, you can't get rid of it.

Posted by: Fred Jones | Apr 24, 2007 3:47:49 PM

Once you have government control, you can't get rid of it.

Hahahahahahahaha!

I believe the word you're looking for is called 'deregulation'.

Deregulation worked out really well for the S&L industry.... NOT.

Posted by: fiat lux | Apr 24, 2007 3:57:51 PM

"Crow all you like about them now, wait until you have no other option."

For years I've bought almost all my electronic/computer products from CostCo or Frys and both have always been competitive with Wall-Mart on price --

Circuit City's problem is that it's a crappy store. They don't stock enough products or brands, almost always are higher priced than other competitors in the area, have the least knowledgeable sales help, and the slowest check-out clerks.

Posted by: Jay Jerome | Apr 24, 2007 4:35:45 PM

"best buy has some expansion issues. They've been baning their heads against the walls of market saturation and operational problems with existing store. bb lost their ass in the musicland takeover (whose freaking idea was it to buy a bloated, unprofitible 1300 store CD chain in 2001, in 2001!). They've also sunk a ton of money into "magnolia" their bid to become the walmart of custom home work. People love them and of three discussed, they are clearly the strongest. That said, they'll have their ass handed to them by walmart if bentonville decides to do so."

Not that this is anything more than something very tenuously related, but there was an interesting article a few weeks ago about how CDs are still profitable, just not in big national chains. Instead, they are doing well in regional chains, or in places like Starbucks. Read it here: http://www.slate.com/id/2162771/

"Circuit City's problem is that it's a crappy store. They don't stock enough products or brands, almost always are higher priced than other competitors in the area, have the least knowledgeable sales help, and the slowest check-out clerks."

I've noticed at least a few of these things. Now, not that this is necessarily indicative of the chain's problems as a whole, but a few months ago, I got into a discussion with a coworker about different stores. She mentioned how she'd never walk into a Circuit City again because when she bought a CD changer for her brother's car as his Christmas present, they installed it, and a month or so later, there was a problem. Now, while they might have not been responsible and while it might not have been covered, the manager's specific response to my friend was, "That's not our problem." At the chain restaurant I work at, I'm often disgusted at how we bend over to keep a customer, but that's just an insanely awful way of treating somebody. And this coworker of mine hasn't been in a Circuit City in six years.

Posted by: Brian | Apr 24, 2007 4:51:44 PM

As some have pointed out, this story doesn't make much sense as given. If Wal-Mart sells out its inventory right away, why should prices go down so much? You can match Wal-Mart on a limited inventory until they run out, and then you can go back to the usual prices. Either they're really competing or they aren't.

It makes little sense to speak of Wal-Mart as a controller of the market in the hi-def market if it's a bit player.

There's a big difference between Wal-Mart setting its own prices based on what it can make a profit at, and the government setting prices for everyone based on who knows what.

Posted by: Sanpete | Apr 24, 2007 4:52:30 PM

What are Walmart-phobes bitching about here?

Posted by: DM | Apr 24, 2007 4:54:04 PM

"Wal-Mart is almost a de facto central planning vehicle; not because that's their ambition, but because that's their size."

No, Wal-Mart actually IS the central planning vehicle.

"Then another business that is more efficient will take over as consumers flock to their stores."

If that other business can find capital, locations, staffers, advertising and suppliers all willing to supply them (a startup) in the face of the wrath of Wal-Mart. I suppose Fred's the sort of guy who's willing to lose the $x billion account to get the $50,000 account, but Fred's awful special.

Posted by: burritoboy | Apr 24, 2007 4:54:10 PM

Hey, if they can't, then WalMart still is the most efficient.

Let's be honest. It's not WalMart's price wars that piss off liberals. This is just something else they would like to make into a mountain, when it isn't.

I think Ezra said it best when he said WalMart is doing nothing wrong, illegal or immoral and it's actually been good for consumers.

Posted by: Fred Jones | Apr 24, 2007 5:12:13 PM

Truthfully, I find this article's claims a bit tenuous. If Wal-Mart is such a bit player in the flat-screen TV market, why is their influence on the retail practices of other stores so large with respect to these products?

At best, one could make the case that they're a monopoly engaging in anti-competitive practices if in fact they really are a big player when it comes to the market for flat screen TVs or if, overall, it acts like a "central planning vehicle." Also, Best Buy's stock price may have gone down a bit, but Wal-Mart's stock hasn't performed well over the past 6 months, either.

This article is trying to claim that Wal-Mart's metaphorical flapping of its wings in Bentonville causes a retail hurricane at Best Buy.

Posted by: Constantine | Apr 24, 2007 5:17:51 PM

A government is in control by fiat and doesn't have to remain efficient to stay in control. Once you have government control, you can't get rid of it.

That's right if only there were someway citizens could express their wishes and affect government. Perhaps we could have people choose the the people serving in government by marking a piece of paper every oh, let's say 2 years for one house and 6 years for the other. And have those people write the laws. And then we could elect a chief executive who could enforce those laws. And we choose him/her every four years.


nah, it'd never work.

Posted by: Fledermaus | Apr 24, 2007 5:21:03 PM

Of course, if you really like the idea of centralized planning.....whoa! I just remembered that's been tried already, comrade.

Posted by: Fred Jones | Apr 24, 2007 6:15:14 PM

Consumer electronics has been a sad, terrible retail business for years and years. The companies have terrible repuations for sales, service, and pricing. The sales people are usually on awful commission systems that have them pushing product for incentive dollars rather than any test of quality or need. The landscape is littered - Lechmere? The Wiz? Montgomery Ward? anyone? - with companies that staked their fortunes on electronics and paid for it. The economics are not good, were not good, and will not likely be good. Wal Mart committing itself to diving deep into electronics is not necessarily good for them, as these things are expensive, not necessarily easy to mark down, and you can get caught really short when a fad ends or the "next big thing" makes your old product obsolete. Which, by the way, is why they're also taking a bath on their experiment in selling higher end, more designer-like fashion. Wal Mart cannot do everything, despite their attempts to look like the Wizard of Oz. If Best Buy (which itself is a Big box killer of smaller electronics outfits) or Circuit City (a regional player that's trying to be Best Buy) fail, lots of things will play into it, not just the Home Of All Things Evil in Bentonville.

Posted by: weboy | Apr 24, 2007 8:16:27 PM

PS I'd also point out that the most interesting non-quote in the story is from Panasonic. If they are well and truly pissed at Wal Mart for marking down the TV sets, they are better positioned to make the retailer pay than most, especially in electronics, where suppliers have a lot more control than, say, in drug store items and othe things where Wal Mart flat out dictates rules for things. Best Buy is much better positioned with these suppliers, I would think.

Posted by: weboy | Apr 24, 2007 8:24:07 PM

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