October, 2003

Fruits of Thought

Two Cheers For Wal-Mart

In the old days, the Wal-Mart behemoth would have been broken up like Standard Oil, because anti-trust law pretty much assumed that what was big was bad. Today, however, a much more subtle and analytical approach to anti-trust law requires looking at the actual result of large size. Is the company using large size to gain economies of scale and logistical efficiencies that benefit consumers in the form of lower prices? If so, contemporary interpretations of anti-trust law see no foul.

And Wal-Mart is big. My estimate is that in all its divisions, Wal-Mart is already selling about 15 percent of all the produce sold at retail in the U.S. But Wal-Mart is comparatively weak in produce. Experts say Wal-Mart accounts for 30 percent of most non-food staples sold in the U.S. – and that excludes sales at its Sam’s Club division.

Not surprisingly, big guys attract the shots – especially when most competitors have not the slightest idea of how to compete and thus hope to stop Wal-Mart’s expansion by supporting “grass-roots” organizations and hostile labor unions to block new stores.

But Wal-Mart is a national treasure, probably the single largest factor in enhancing the prosperity of the common man in the latter quarter of the 20th century. And Wal-Mart is one of America’s best tools for keeping our competitive edge in the 21st century.

Let’s look at the basic attacks on Wal-Mart:

1) Wal-Mart pays cheap wages. The riff against Wal-Mart is that a clerk trying to raise a family on a Wal-Mart clerk’s salary would be below the poverty line. The charge is non-sensical. First, the rural location of so many Wal-Mart stores means that the national averages don’t correspond. A horrid wage in Manhattan is a good wage in the rural south. Second, many Wal-Mart employees are retirees, teenagers and second-wage earners looking mostly for part-time or flexible hours.

You don’t get 1.4 million people to come to work for you if the balance of what you offer – wages, benefits, flexible scheduling, social opportunities – is not appealing.

2) Wal-Mart destroys established businesses and communities. Yes, this is true – not just of Wal-Mart though. It is true of Home Depot, Office Depot, and Amazon.com – true of all new retail technology.

People who voice this complaint just don’t read enough Schumpeter. Joseph A. Schumpeter was a brilliant economist who taught us that what makes economies grow is the doctrine of creative destruction. When a more efficient way of making or selling goods is discovered, the economy needs a way to transfer resources – capital and labor – from antiquated ways of doing business to the new, more efficient ways. In our system, those closing Main Street hardware stores free up the real estate, the capital invested in inventory and the labor for more productive pursuits.

3) Wal-Mart is policing the culture. Well, let’s thank heaven someone is doing this. Among the most disgusting people on the planet are those Hollywood and recording executives who will put out anything to make a buck. Wal-Mart has some modest rules whereby it won’t sell some music and computer games with mature ratings. It won’t sell some magazines and conceals the cover of others.

Can anyone claim that the problem with our culture is that we don’t allow enough profanity and that we are too sexually repressed? We need other companies to step up to the plate to take responsibility for what they sell.

4) Suppliers are bullied by Wal-Mart. By all accounts Wal-Mart is an honorable buyer. It doesn’t hit up people for slotting fees; it doesn’t intimidate people with stupid letters demanding that suppliers buy tables at dinners. It shares huge amounts of data in an effort to work with suppliers to increase sales.

The executives at Wal-Mart also recognize that suppliers have to be viable in the long term to be of much help to Wal-Mart. Still, they are relentless in driving costs out of the system, and that disturbs settled ways of doing things.

But produce vendors should be happy. Perhaps the most significant cultural difference between Wal-Mart and the conventional supermarket operator is that Wal-Mart perceives itself as a buying agent for consumers. This means that where other chains will perceive a drop in price as an opportunity for margin enhancement, Wal-Mart sees an opportunity for a price reduction.

Bottom line: The Wal-Mart effect on the economy means that consumers can get access to the things that make life acceptable at a reasonable cost. That, in turn, makes it possible for every other industry in America to pay its associates at a level that keeps them competitive in world markets.

We are entering a new world of retailing. The new retailing environment will be fiercely competitive – but between formats. Today you can buy bananas at a general merchandise store, a warehouse club, a convenience store, a supercenter, a supermarket, a produce stand, a health/organic-oriented concept or via a delivery service. The industry needs to be prepared to customize its product offering and its promotional and distribution strategies for the different market segments.

So why only two cheers for Wal-Mart? Well some would say it is because three cheers must be reserved only for the blessed Trinity itself. Put another way, there is no perfection on this earth, and Wal-Mart, mighty and powerful, is of this earth.

So some future pundit on this page is bound to write one day of another Schumpeterian revolution in which new and better ways usurp the powers of the once-invincible Wal-Mart. If the industry needs to be mindful of Wal-Mart, executives at the most powerful retailer in the world also need to be mindful of not getting too full of themselves. For this too shall pass.  pb