« How Bad Is The Wall Street Journal? | Main | Good People, Bad Places »
September 06, 2007
Wal-Mart and the Mom-and-Pops
Reihan writes:
As a concrete matter, what really matters is ... how do you feel about Wal-Mart? After all, Wal-Mart embodies the impact of free trade and of the transformation of the service economy. That part of the left that bitterly opposes Wal-Mart is in effect defending the balkanized, decentralized service economy of the past that delivered low-quality products at high prices. Now, they believe that they are in fact defending a "high-road economy," but mom-and-pops hardly represent "the high-road economy": quite the contrary.
That is, in part, right. Wal-Mart is the concrete expression of globalization, the transition from a manufacturing economy to a service economy, and a competitive strategy that relies on constantly slashing labor costs up and down the production chain. Where the specter of globalization lurks ominously and abstractly beneath your bed, Wal-Mart probably sold you your bed, your sheets, and your pillows, not to mention got you laid off from your job at Vlasic pickles. It's real, yo.
But Reihan's wrong to set up a dichotomy between the mom-and-pops and Wal-Mart. Here he's conflating two separate and unequal arguments about Wal-Mart. There's one, dealing with mom-and-pops, that's a cultural qualm. It laments the homogenization of the retail economy and the destruction of individualized, decidedly local, outlets. It's not an economic argument.
The second is an economic argument, perhaps best made by Barry Lynn, that frets over Wal-Mart's obsessive search for low prices, and the ripple effects that quest has on labor standards. If Wal-Mart won't let Crest raise prices a penny on toothpaste, how will they gives raises to their workers? If Wal-Mart will continually slash health benefits and rig the system to purge those who need health care, how can their competitors continue to spend the money on benefits for their employees? And on, and on. Wal-Mart is, far and away, the largest retailer in the world. Their size allows them to dictate what producers will charge and create rock-bottom prices that other retailers have to compete against, which essentially enforces Wal-Mart's low wage, low price vision on the rest of the economy.
The question, in all of this, is never "Wal-Mart or mom-and-pops," or "Wal-Mart: Yes or no?" It's whether Wal-Mart can be better. Whether their efficiencies and focus on low prices can merge with a business ethos that doesn't kneecap the middle class, screw their workers, and and create a ceaseless race to the bottom in product quality and worker standards.
September 6, 2007 in Wal-Mart | Permalink
Comments
Yes.
Although I'm worried that the corporate culture at Wal-Mart will have to change before this is possible. The current crew would require massive oversight to ensure compliance with even current federal laws regarding the treatment of labor/unions.
Posted by: mpowell | Sep 6, 2007 12:10:32 PM
low-quality products
Is he blatantly lying or does he just have no clue what he's talking about? I've never bought anything from wal-mart that didn't fall apart inside of six months.
Posted by: Dan | Sep 6, 2007 12:27:03 PM
That's part of the efficiency of Wal-Mart, Dan. At least the fall-apart crap you buy there is cheap.
Posted by: JB | Sep 6, 2007 12:30:16 PM
Ezra,
Big box retailing also threatens small innovative manufacturers who don't have the requisite SKU # numbers to get an audience with the buyers of Wal-Mart, thus the consumer is denied product choice and small manufactures [those that start the game with less capitol] are denied the American market.
We would be out business [ www.SplicingNut.com ] were it not for the "Balkanized" European market where consumer choice, innovation and quality still have a place. I really think "experts" ought to learn a little about how things are made and sold before making overly broad generalizations.
Posted by: S Brennan | Sep 6, 2007 12:32:17 PM
"Now, they believe that they are in fact defending a "high-road economy," but mom-and-pops hardly represent "the high-road economy": quite the contrary."
Oh really? So the hardware store I go to where the guys actually know something about the products they sell is actually inferior to Walmart, because the product I buy that actually fixes my problem costs a few cents more? The bookstore I used to frequent that had the best selection of fantasy and sci-fi titles in town was not delivering high-quality because the books sold at list price? This is just another lame defense of the "lowest price is all that matters" ethos that conveniently ignores any other criteria.
The fact that Walmart treats their people like crap and drives down wages is reason enough not to shop there. The fact that they push out perfectly good small stores that offer a unique (and generally better) shopping experience but can't compete on price is just more icing on the loathing cake.
Ezra said it better, but it really frosts my petunia when jokers like this spout such nonsense generalizations as "mom and pop stores all sell mediocre crap at high prices".
Posted by: Bill from OH | Sep 6, 2007 12:39:31 PM
3 virtuous circles:
The less money consumers spend on the products they purchase at Wal-Mart, the more money they have to spend on goods and services at other outlets. Employees of those enterprises from whom they buy those bonus goods and services are better off because of the existence of Wal-Mart.
The less money consumers spend on the products they purchase at Wal-Mart, the better off they are.
The fewer resources Wal-Mart expends to bring consumers the products they purchase from it, the more resources are available to the economy to produce alternative goods and services.
3 cheers for Wal-Mart.
Posted by: ostap | Sep 6, 2007 12:45:25 PM
ostap, your argument is based on the premise that the cycle functions that way.
In the sense that there is a certain amount of money that needs to be spent on low-quality, disposable crap, it does, in fact, behoove me to spend the least possible amount of money on said crap, and Wal-Mart serves a valid role in that. However, Wal-Mart's business model is to turn high-quality goods into low-quality crap, sending money to Wal-Mart that would otherwise be spent supporting enterprises that produce higher-quality goods.
Your cycle breaks down because wal-mart causes the destruction of "other outlets."
On the other hand, in industries like drugs, where quality is strictly regulated (and marginal costs for drug manufacturers are low), Wal-Mart's monopsony power plays a useful role.
Posted by: Tyro | Sep 6, 2007 12:58:00 PM
The question, in all of this, is never "Wal-Mart or mom-and-pops," or "Wal-Mart: Yes or no?" It's whether Wal-Mart can be better.
That's a bullshit and very narrowly focused way to look at things.
Once upon a time, energy was very decentralized. You lived near the river that provided your hydropower that turned the mill. There was no "energy factory" that provided your electricity.
When electrical generators were created, my guess is that there were local neighborhoods with service, and competing companies providing to different neighborhoods that got sucked into the gigantic utilities we know and hate today.
That's Walmart.
Over the past 30 years energy has become more decentralized again, allowing small producers that make their own energy to sell that back into the grid. The college I went to did this with a cogeneration plant.
Should solar cell efficiencies increase, or small wind turbine energies increase, we will all be able to do this at our homes.
And now that Wal*mart HAS shown us how to effectively use logistics and computers and JIT to increase efficiency, there is no real reason why mom and pops cannot or will not create similar horizontal logistics and jit operations.
They will not if Wal*Mart can keep undercutting everyone in part by not paying their fair share of health care costs.
But there is no fundamental reason that it's going to be Wal*Mart all the way down.
Posted by: jerry | Sep 6, 2007 1:53:16 PM
And I agree with whomever up above, the quality of walmart products is atrocious! The clothes fall apart after three washings.
I only by at Walmart in an emergency, there just is no cost savings there that I can detect.
Posted by: jerry | Sep 6, 2007 1:54:25 PM
As others have hinted, there is a floor to the cost and quality reductions that can be sustained. At a certain point, folks will gladly choose to spend 10% more for clothes that don't fall apart, toys that aren't toxic, and to get service from knowledgable and experienced sales staff.
Also, no matter how much efficiency Wal Mart squeezes out of their supply chain, the goods still need to be transported half way around the world. Locally produced products with higher labor and manufacturing costs can still compete because they only need to be shipped a few miles.
The only good by-product I see in their race to the bottom in cost of doing business is the potential for Wal Mart to kick start the ramping up of production of solar cells and other alternative energy products:
http://news.com.com/2100-11392_3-6181855.html
Posted by: John I | Sep 6, 2007 2:26:52 PM
If Wal-Mart won't let Crest raise prices a penny on toothpaste, how will they gives raises to their workers?
But if Wal-Mart allows Crest to raise prices and give their workers a raise, doesn't the cost of the more expensive Crest just get passed on to other workers, who now have to pay more for toothpaste (which is the equivalent of a pay cut)?
If Wal-Mart will continually slash health benefits and rig the system to purge those who need health care, how can their competitors continue to spend the money on benefits for their employees?
Well, with respect to health care, at least, I'm very much a "heighten the contradictions" kind of guy. The sooner the whole "tying health insurance to employment" deal collapses, the better, in my opinion.
Look, I personally favor a substantial strengthening and expansion in the size of the government-provided safety net: one on the order of at last 3-4 points of GDP. But straightarming firms into providing higher living standards (instead of just taxing the economy and relying on government to do it) just makes it more difficult for the economy to provide government the tax revenue it needs. Doesn't it? Doesn't it make way more sense to spread the costs of such things as healthcare over the size of the economy as a whole (rather than over the size of just one firm)? I mean, Wal-Mart's big, but not nearly so big as the Gross Domestic Product of the United State.
Posted by: Jasper | Sep 6, 2007 2:44:06 PM
The fewer resources Wal-Mart expends to bring consumers the products they purchase from it, the more resources are available to the economy to produce alternative goods and services.
Except those crappy quickly fall apart, requiring you to go buy new crappy products, leading you to ultimately spend more money than you would on stuff that was just well made to start with.
Posted by: Dan | Sep 6, 2007 2:57:13 PM
The fewer resources Wal-Mart expends to bring consumers the products they purchase from it, the more resources are available to the economy to produce alternative goods and services.
That's a zero sum game definition of the economy that I have never heard before. (Or I don't think I have heard it.)
Posted by: jerry | Sep 6, 2007 3:03:52 PM
Exactly! I'd happily pay 10% more for something that lasts 300% longer.
I haven't regularly shopped at Walmart in years (this jaw-dropping LA Times piece was a major factor in that), and the once or twice a year I wander in I'm flabbergasted at the shoddy quality of...well, nearly everything.
Posted by: JB | Sep 6, 2007 3:05:16 PM
The question, in all of this, is never "Wal-Mart or mom-and-pops," or "Wal-Mart: Yes or no?" It's whether Wal-Mart can be better.
Nope, it's a third question: Wal-Mart with or without strong government regulation.
Wal-Mart's maniacal (and possibly counter-productive) drive to the lowest possible price is not based on some search for the platonically ideal cost for a particular good. They want to find the floor. And, then drill through to the basement.
So long as there are no government regulations that define a higher floor, Wal-Mart's going to keep racing to the bottom, dragging everyone along with it. This applies to wages, employee benefits, environmental degradation (from its suppliers' fish farming, for example), &c.
It's not to say that regulations are the only answer. With health care, for example, the better bet is to have government take on what should never have been an employer responsibility.
Posted by: Sean | Sep 6, 2007 3:09:52 PM
The current 'gas prices are high so I shop at Wal-Mart' campaign has me spitting blood. Doesn't it mean that Wal-Mart is squeezing its suppliers even more, and getting even cheaper crap from China, since its warehouses-on-wheels are pretty fucking sensitive to the price of gasoline?
On ostap's BS argument: Wal-Mart's model isn't to free up the remainder of a discrete amount of money that could be spent either on high-quality, fit-for-purpose goods or cheap crap. It's based around having that remainder spent on more cheap crap 'because we're here now, and it's too much hassle driving somewhere else, and whoever went to the checkout at Wal-Mart with just one item?'
Posted by: pseudonymous in nc | Sep 6, 2007 3:15:52 PM
Re the poor workers at Crest. How can they get a raise if WalMart won't pay more for Crest?
I'm going to be a little rude here. You don't know much about economics. Henry Ford got rich, not by raising the price of Fords but by lowering the price. Crest can pay its workers more if it can cut the cost of manufacturing toothpaste.
Then the workers will lose their jobs! Some of them will, but they can move on to other jobs that will pay them more than they were earning making toothpaste.
The secret of a prosperous economy is not charging high prices but being productive. Increases in productivity is the only possible source of wealth.
The U.S., after the Civil War, did not grow rich by charging high prices for grain and cotton. Prices for those commodities fell as productivity rose, world-wide. The percentage of the population working in agriculture dropped as people moved into better-paying jobs in manufacturing. Now the productivity of manufacturing soars while its share of the workforce declines.
Posted by: Alan Vanneman | Sep 6, 2007 4:41:12 PM
Crest is actually a special case because their toothpaste has to meet a standard of effectiveness in order to remain an ADA-certified toothpaste... unless the downward pressure prices from Wal-Mart becomes so severe that Crest decides to cut corners on that matter and Wal-Mart decides to look the other way on quality control. Then you end up with a sitaution like what we had with the chinese pet food and children's toys. For the most part, Wal-Mart puts pressure on its suppliers to lower prices. The suppliers may switch their manufacturing methods or locations to meet Wal-Mart's demands. When Wal-Mart realizes that the supplier is doing this, they demand the supplier reduce prices even further. To keep up, the supplier starts cutting corners on manufacturing quality. Wal-Mart doesn't mind, since they don't do quality control-- they just want the supplier to keep delivering at the price they're willing to pay.
they can move on to other jobs that will pay them more than they were earning making toothpaste.
They could work for wal-mart!
Posted by: Tyro | Sep 6, 2007 4:53:38 PM
Huh? Henry Ford got rich by lowering the cost of producing automobiles, sure. But he also instituted the 40-hour workweek in his plants and paid people the unprecedented salary of $5 per hour. He believed in profit sharing.
It's a stupid argument that Wal-Mart or Crest or any other company can thrive only by treating workers like shit and paying them little. Ford and H.J. Heinz were both on the cutting edge of worker treatment and did quite well. These days, Costco seems to keep high-quality, low-priced items on the shelf without making peasants of its work force. These decisions to underpay and undervalue workers are decisions companies make to make a quick buck. They are not the only decisions that can lead to prosperous business.
And, as Tyro points out, the cost of low prices is becoming abundantly clear in the past year or so. Our society is buying a whole lot of cheap junk that might kill our pets or our kids, but we sure can buy a lot of it. Who in their right mind thinks that's good?
Posted by: Magenta | Sep 6, 2007 5:45:22 PM
It's a stupid argument that Wal-Mart or Crest or any other company can thrive only by treating workers like shit and paying them little.
Who's arguing that that undervaluing workers is the "only" way a company can thrive? Talk about straw man arguments. Obviously plenty of private sector employers in the United States pay excellent wages and benefits. Indeed, American workers are some of the world's most expensive. The key question is: what if any role should government play in mandating how much workers should cost.
While it may be true that sometimes firms can prosper quite nicely while paying a relatively high price for labor (see Ford Motor Company circa 1928) it's equally true that employers can sometimes perform pretty dismally while overpaying for labor (see Ford Motor Company circa 2007). All in all I'd just as soon have a firm's owners, and not government, determine how much they can afford to pay for labor. I doubt Goldman Sachs or Boeing or IBM or Pfizer are paying more than they have to for their American workers. It's just that the going rate for skill sets in those fields is high -- a lot higher than the going rate for the skill sets involved in stacking shelves or flipping burgers.
Not that workers doing these types of less skill-intensive tasks ought to be treated badly. Far from it. They ought to enjoy -- like their counterparts in other rich countries -- the generous protections of a robust, taxpayer-supported safety net. The big advantage to relying on government for social protections -- rather than private sector mandates -- is that government is too big to fail. One can certainly imagine a GM, say, or a Caterpillar having trouble paying for healthcare or pensions. But the United States government is very unlikely to give up ownership of its printing presses.
Very robust safety net + very free markets: the Nordics have it right.
Posted by: Jasper | Sep 6, 2007 6:26:47 PM
I actually think the problem here is that these things can't be separated - Wal-Mart, yes or no IS Wal-Mart or Mom and Pops IS Can Wal-Mart be better. Because the answer to all of them, in terms of economics is No. Wal Mart long ago figured out a business model where ever more efficient cost cutting created its biggest profit gains. Pretty much every substantial fiscal improvement it's made has come from an improvement in the supply chain, or worker efficiencies, or identifying businesses ripe for discounting. The problem is they don't know how to do anything else. They are absolutely befuddled by Target's model of class at mass prices, and their recent disastrous foray into fashion clothing proves it. Wal-Mart is reaching a natural ceiling for success - which is why, lately, its numbers have hit walls all over the place - it's not they can't raise Crest prices by a penny; it's that they can't lower Crest any farther and still make money on it. The problem is that, as the elephant in the room, a failing Wal-Mart really can have deep impact on the whole economy. There's no arguing - and Reihan's got this nailed - that Wal-Mart's supply chain improvements have had major impacts on retailing overall, and some of it, one has to admit, has been all to the good. But the price of lowering the floor was destroying notions of just how little consumers would expect for value pricing - poor service, shoddy goods, limited selection and all. It turns there is a market for a lousy $7.99 blouse, for cheesy $49 bookcases, and, as Exra suggests, tatty $10 sheets well beyond what anyone thought. Knowing that will make it hard to go back. People forget how bad it was when the last round of disasters hit the budget shopping market - the collapse of Zayre, the implosion of K-Mart, the crash of Woolworth's. A limping, not quite successful Wal-Mart - which is what liberals think they want - will be an enormous drag on the whole economy. Enormous. Massive. And that, I suspect, is what's on the horizon out of this credit crunch. And the real scary thing for me is I don't think anyone can do a damn thing to stop it.
Posted by: weboy | Sep 6, 2007 6:29:42 PM
Wow weboy! I didn't realize that was the upside to the credit crunch! Thanks, my day is much brighter now!
Posted by: jerry | Sep 6, 2007 8:22:29 PM
Jasper,
It was a very specific sort of comparison, and it was in response to someone who implied that Ford only paid his employees well because he cut manufacturing costs. Ford obviously could have cut those costs while choosing to pay his workers the industry standard rather than sharing those profits. That has been Wal-Mart's decision.
Ford chose to pay workers more for reasons that included increased productivity of happy workers with leisure time and his recognition that by raising wages he could create a better market for his cars. Now, there are complicated factors of how much he was trying to avoid unionization and the like when he was making these decisions and the like, but he still saw the wisdom of offering good wages. Of course, Ford didn't have the benefit of college business types explaining that nothing mattered except the profit reports for the next quarter so he foolishly thought longer term.
Do "high-skilled" industries pay their people more than they have to? It depends on if you think it requires a super-genius to obtain a business degree from a decent U.S. college. As we offshore more and more business roles, there is no reason to think accountants and managers won't soon find their jobs can be done reasonably efficiently and much more economically by people overseas.
We'd agree, for the most part, on the need for a broad social safety net. I'm not sure, though, that I'd still agree that government is too big to fail. Our country is hovering on the brink of fallen Rome, I fear.
Posted by: Magenta | Sep 7, 2007 12:30:44 AM
Oh, and I forgot to add ...
The government already does take a role in mandating what workers should cost. A minimum wage exists in the Nordic countries as well as in the United States.
Posted by: Magenta | Sep 7, 2007 12:36:52 AM
Henry Ford wanted his workers to be able to afford the cars they made. Wal-Mart wants its workers to be just about able to shop at Wal-Mart. I'm not sure that counts as progress.
And weboy's right. The current Wal-Mart campaign -- paying more for gas? buy cheap crap from us! -- hints at the stratification of the US retail economy into dollar-stores and luxury stores. Lowering the bottom-end hollows out the middle in terms of production, retail and consumption, the latter split between scrimping (cash/debit) and splurging (credit where available). That's not healthy.
Posted by: pseudonymous in nc | Sep 7, 2007 12:42:02 AM
The comments to this entry are closed.
