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May. 28 2010 - 5:54 pm | 388 views | 0 recommendations | 19 comments

Is Wal-mart too big to fail?

A typical Wal-Mart discount department store i...

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Yes, I’m kidding.  But not entirely.

I can still remember back when communities protested mightily whenever Wal-mart announced it was opening a store nearby. Some folks hollered about unwelcome traffic. Others hollered about the awful impact on local small businesses. Still others hollered about coolie wages and nonexistent health insurance. But Wal-mart usually prevailed. And the protests died down.

Why?

Because the fact is, no matter how much folks dislike the company on principle, it does offer good stuff at low prices. (Notice how the unions, despite their loud criticisms, never suggested a boycott of Wal-mart? They couldn’t — their members saved too much money shopping there)

So why am I rehashing this old territory? Because there’s an interesting piece in Bloomberg Business Week (feels weird calling it that, but I’ll get used to it) chronicling how Wal-mart now plans to take over shipping responsibilities from its suppliers. Its logic is hard to dispute: Because it has economies of scale, it can negotiate better prices for fuel, it can make sure its trucks are traveling with full loads and taking the most advantageous routes, and it can better monitor the inventory levels in its stores. Wal-mart expects the suppliers to lower wholesale prices by whatever amount they save in transportation costs. And Wal-mart says it will in turn lower the prices in its stores.

And there’s the rub. Presumably suppliers will continue shipping to other retailers — but with Wal-mart shipments out of the equation, they will lose economy of scale. It will inevitably result in high shipping costs, which they will pass on to the retailers, who in turn will have to either raise their own prices or cut into what are already paper-thin profit margins.

The upshot? Wal-mart gains even more market share at the expense of the ever-dwindling supply of competitors.

Wal-mart’s motives are pretty transparent. In this economy, every company is looking to shave costs. And Wal-mart has suffered through four consecutive quarters of declining per-store sales.

Still, on the surface I want to holler Foul! But I can’t — for the same reason that the unions and communities have for the most part grudgingly accepted Wal-mart’s presence. It’s hard to applaud something that reduces competition — but it’s even harder to condemn something that will result in lower prices, particularly at a time of high unemployment. And even environmentalists have grudgingly admitted that Wal-mart has developed a pretty good green track record. I have every reason to believe that it will operate its fleet of trucks and such in an environmentally responsible manner.

I guess I’ve persuaded myself. Go for it, Wal-mart — if you can do things more cheaply, maybe your competitors will have to learn to fight back on service, on unique stock items, on factors other than price. That, in fact, would really broaden consumer choice.


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  1. collapse expand

    On June 8, California will hold a statewide primary election. My sample ballot has one measure that effects my community, Redlands. It is Measure O, prohibiting the approval for a “Mega-Retail Development.” Around here, that means a Super-Wal-mart occupying a large area on the north-end of our city, close to traffic from the freeways, the 210 and the umbilical interstate, the I-10. A “Yes” vote means no super-center. And, of course, a “No” vote means it will probably be built. The president of our local teacher’s union lives across the street and he has a large “No On O” banner across his yard. Redlands has a large school district and they need the tax money. The local firemen and police want the super-center too. The city has had to make some tough choices and cops and firefighters are not what you want to scale back on. The new center would mean the old Wal-mart building would be vacated, leaving a gaping hole in an already seedy strip mall. We have a Target that anchors another strip mall development, if they went under it would be difficult to imagine what would take it’s place. More traffic, more crime, and the unstoppable phenomena of Wal-mart. I’m voting “Yes” – no new superstores! Tom Medlicott

    • collapse expand

      Target, though, is one of the stores that has managed to compete successfully against Wal-mart, so you might get the best of both worlds. And I understand traffic but how the heck does Wal-mart bring crime?

      In response to another comment. See in context »
      • collapse expand

        San Bernardino, Ca brings crime. The Inland Empire, SoCal’s San Gabriel and San Bernardino valley, has one of the highest unemployment rates in the country. I am afraid that the proposed Super-Center will become a magnet for carjackers, break-in artists, and panhandlers. Our city services are stretched already. I didn’t mention late last night the effect on local business. I remember reading how “chic” it was to shop Wal-mart a few years ago. Wealthy people bragged about it. I also watched the Frontline special. Redlands is a jewel of a city with Victorian homes, good schools, orange groves and a long history for bringing cultural events to it’s citizens. I’m not wealthy, I can use a deal on day to day needs as much as the next man. This is all about tax money, not about the needs of people. Tom Medlicott – thanks for listening

        In response to another comment. See in context »
  2. collapse expand

    WalMart is thinking bigger than everyone else. That’s why they succeed. They’re not just a store. The store is what you see as a customer. They’re actually a highly customized distribution system.

    I’m not sure why other big stores haven’t figured this out yet. It is not exactly a secret. I guess little minds think alike.

  3. collapse expand

    Ms. Deutsch,

    You missed one other aspect of this shift in transport, many of the truck drivers not working for Wall-Mart are unionized while those working for Wall-Mart will not be.

  4. collapse expand

    Sometimes regulated monopolies are more efficient than competition. If that is the case here, then the key is to regulate Walmart. For a writer, though, you miss another point about the power of scale. If a musician or a novelist can’t get on the shelves at Wal-mart, they have a hard time making their sales numbers. Wal-mart not only sets prices, they censor art.
    Here’s a sincere question: is it better to break up an incipient monopoly and lose the economies of scale, to regulate it and risk the regulation failure we see so often, or to let it metastasize and no longer have to compete?

  5. collapse expand

    Yeah, anti-competitive practices, what’s the big deal? Winning the race to the bottom, hey, if it’s cheaper it’s cheaper, ain’t no thing. Making sure everything you buy is made in sweatshops for $1.75 a week? No problemo. Paying so little that employees qualify for government assistance and then breaking the law to avoid paying benefits? It’s just business. Vicious, illegal anti-union efforts? Well what big business wants a union around? Dodging taxes that small businesses could never hope to avoid? Come on, who likes paying taxes? Hey, they’ve got an environmental responsibility program that actually gets a fair chunk of their marketing budget, that should be enough for all the liberals out there complaining all the time. Destroying small town economies and running literally dozens of American manufacturers out of business? They would probably have failed anyhow. And besides, cheap stuff! How doesn’t that help poor Americans?

    This sort of amoral, shallow thinking is everything that’s wrong with America. Articles like these pander to the needs of large corporations that are responsible for raping the American economy and suppressing wages for the sole benefit of people who profit through exploitation, both of people and of the capitalist system itself. You should be ashamed of yourself for supporting a business like Wal-Mart.

  6. collapse expand

    In regards to your substance, you say that wal mart offers good things at low prices. I guess that is right if you call poison dog food and lead tainted children’s toys good things. And if you don’t mind being responsible for slavery. Seriously. Workers in many chinese factories live on the “factory campus.” They live in a room with dozens of bunk beds and recieve food onsite, not leaving. Even in California, it is bad. Several years ago there was a class action involving night cleaning crews, where people were being paid $3/hr, and working 7 days a week with no overtime. Calling in sick once meant termination, even if you had been there for years. Of course, they worked for a subcontractor, so wal mart claimed ignorance, but the sheer numbers, in the 10s of thousands of people indicate otherwise. So yeah, good stuff made cheap. Of course, if you are an American factory worker who lost his job to the Asian slave trade, cheap doesn’t really matter unless cheap means free.

    On to your title. Yes, Walmart is too big to fail. It is scary. Several years ago, while studying poli sci, the company was frequently used as an example. I forget the exact number, but they employ something like 1% of the population of the US. That is pretty incredible. And when they place distribution centers in smaller communities, they employ such a large percentage of the local workforce that politicians have to give them whatever they want. There was fear on the part of several of my professors about having corporations that were large enough to control politics through brute force. (although business does largely control politics anyway)

    Finally, while your argument about economies of scale certaintly holds water, it is absolutely not the only reason for wal mart’s sucess. They outsourced everything they could to a country without acceptable labor policies/requirements for a living wage, and one where factories could operate without the constraints of pollution controls. While they certaintly are an admirable example in some respects, in many, many other respects, wal mart should be despised.

    • collapse expand

      Your last sentence first: hey, in my post and in some of my comments, I admitted, lots of things about Wal-mart make me queasy. But not everything.

      We have been bemoaning the move of manufacturing jobs to China, India etc. for decades. This is true of companies that make items they sell to other businesses as well as companies that make consumer goods — we cannot blame Wal-mart if mainframe computers or forklifts are being manufactured in China, or if call centers are being manned/womaned in Bengalore.

      By the same token, poisoned toys, etc., are not being made at Wal-mart’s behest, nor sold exclusively at Wal-mart. As you may recall, last year Mattell got caught up in a scandal regarding dangerous toys it was importing from China. No one blamed Toys ‘R’ Us, did they?

      In response to another comment. See in context »
  7. collapse expand

    i live in a small town in the south… i know people who work at walmart. they are barely keeping afloat. so this story still rings true to me

    http://www.pbs.org/itvs/storewars/stores3.html

  8. collapse expand

    Claudia,
    Nice article and the comments are great. I often use Wall-Mart as the poster child of where we are a country right now. The problems we have right now in finance, our oil disaster, health care crushing costs and Wall-Mart crushing the competition are all one and the same. The need and search for more and more profits and trampling over those in the way is just capitalism. We as a society are protected by words that simply do not describe what’s really going on. As someone mentioned earlier about Wall-Mart being supplied by laborers in “sweat-shops”. The more honest term should be slave-labor. The problem is that most folks are more comfortable with sweat-shops because as you mention, we all love those lower prices. All these corporations and we as a country are trapped. They must use this slave labor, as without it, some other corp will prop up and exploit the fact that they can do it for cheaper. The financial corps are the same as the riskiest investments make the most profits and if Goldman can get you 9% with this model, the other banks must jump in as well or be crushed by Goldman.
    We have arrived close to the point where there is simply little ways to slice costs, so the only way to do this is to heap on risks that are collectively exploding all around us. Sadly, we are still not at the bottom yet and my believe is that things are going to get a lot uglier before we begin to find real solutions to our challenges. Some day some though we will begin to figure out the true meaning of the terms we have in front of us. Capitalism is just that, a system where we get closer and closer to one capital and one winner that has all the marbles. Ironic that the game of monopoly is exactly the end game that is capitalism. Old President Reagan said it best with the trickle down theory, what people didn’t get was that the trickle would get slower and slower for the populace. While at the same time the trickle up would get greater and greater. The Walton family are all billionaires closing in on a 100 billion each. I’m sure we should all be excited about this and maybe in the future we can build statues to celebrate their greatness. Or maybe or more likely, they’ll build them for us.

    • collapse expand

      One of my favorite cartoons, cut out from my own union’s (Newspaper Guild) periodical and hanging on my fridge, shows one outhouse mounted atop another outhouse. The top one is labeled Rich John, the bottom one Poor John. The cartoon’s caption: Trickle Down Theory.
      As you know, I agree with much of what you’re saying. But not all. When Goldman et al create and trade exotic instruments that I can barely pronounce, and that I have no access to buying or selling, the aftermath is their responsibility. But when Wal-mart sells shirts for $10, and it sells out in one day, I have less patience for the shoppers who, as they walk out the door with their bargains, mutter “slaver” or “corrupter” or anything else. We as a society have the absolute power to bring Wal-mart down — and we, as a society, have made them as big and rich as they are. The people get the government they deserve — maybe they also get the business models they deserve.

      In response to another comment. See in context »
      • collapse expand

        Cluudia,
        Could not agree with you more on many of your points. We have indeed elected the government we deserve. However, the real struggle that is upon us now is the fact that we are being hit over the head daily that the pursuit for profits and being the lowest seller of whatever product only has one endgame. That being that we are all, including the consumer, out for the best deal for me. I’m truly saddened that my generation, the one that fought our government about Vietnam and the injustice of the government veil of lies. We have become an even greater machine of pulling the wool over so many eyes. We started out as the WE generation and have become the ME generation. This reversal is not that hard to understand and the right has done a great job of framing an argument that markets will prevail the good of us all and the government should get out of the way so we all can prosper. This mentality is easy to sell to the populace, but has proven to be disastrous for our country as a whole. The real issue that the right’s misses and that most people can’t wrap their hands around or admit is that most (emphasize most) is that people are pre-disposed to look out for me, even at the expense of the greater good. This type of thinking and planning is wonderful in the short term, but is bringing our county to it’s knees with it’s long term effects that are just now showing it’s real ramifications.

        In response to another comment. See in context »
  9. collapse expand

    The simple fact is that a growth-based consumer economy is impossible post resource-peak. Goldman, Boeing, Wal-Mart, etc., are simply tumors growing at the expense of the rest of the body. Like all terminal cancer patients, the U.S. is in the “denial” phase of the “grieving process.”

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    About Me

    I graduated from Cornell with a degree in child psychology, enough years ago so that all you needed to break into journalism was willingness to starve. I went into business journalism because, in the 60s, the business press was the crusading press, the ones that wrote about environment, race relations, etc. Since then I have worked for Business Week, Chemical Week and, from 1984 through May 2008, BizDay at the New York Times. I remain bored by and ignorant of esoteric financial instruments; I remain fascinated and pretty knowledgeable about management, marketing, environment, all the non-financial aspects of business. But my true passions? Tennis, both playing and watching, and food, both cooking and eating.

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