February 20, 2006 | Comments: (0)

Book Review: The Wal-Mart Effect

TAGS: Random

I just finished reading Charles Fishman's The Wal-Mart Effect, and found it fascinating and disturbing. I admit to despising Wal-Mart: I don't like companies who only innovate in making things cheaper, without product innovation and/or without taking responsibility for cutting prices in a responsible fashion (as, for example, Southwest Airlines does).


Fishman writes a cogent, fair analysis of Wal-Mart and its effects on its customers, suppliers, and cities/counties/etc. in which it operates. He doesn't come across as a Wal-Mart fan, but nor does he write as holy crusader against Wal-Mart (as I would be). Still, Wal-Mart can't help but come out looking ugly in its devout, relentless insistence on "Everyday low prices." It's not that Wal-Mart is an evil machine, but rather, as Fishman notes, that its scale makes some of its practices destructive, no matter how innocent they may have been in its founding decades ago.

At some point, for example, a rigid insistence on lower costs means suppliers must cut corners. Those corners may be the quality of their products (as Fishman illustrates with Snapper lawn mowers), the quality of the environment (Chilean salmon at $4.84/pound in part because of the massive destruction of the Chilean oceanic waters), or the quality of the lives of their suppliers (inhumane working conditions in Bangladesh and elsewhere to produce Kathy Lee Gifford apparel). But you can't forever squeeze costs without squeezing someone.

This "Wal-Mart effect" is just one reason that I don't like it when we view open source as a commoditizing force. If all open source can do is wring costs out of the system, then it is a paltry gift indeed. No, open source is a way to refocus innovation, allowing us to innovate closer to the customer's perceived value rather than reinventing (company by company) the infrastructure of, say, a CRM system. Open source is more efficient, or can be, without being blindly efficient, in the way I believe Wal-Mart to be.

Anyway, here are some of the more interesting factoids/comments from Fishman's excellent book:

• At the end of 2000, Wal-Mart had 888 supercenters (up from 9 in 1990), and was the number-one food retailer in the United States. So, the company went from a "standing start" to first place in roughly 10 years. That's power. (3)

• Every seven days more than one hundred million Americans shop at Wal-Mart - one third of the country. Each year 93 percent of American households shop at least once at Wal-Mart. Wal-Mart's sales in the United States are equal to $2,060.36 spent there by every U.S. household in the last year. (Wal-Mart's profit on that $2,060.36 was just $75.00.) (6)

• ExxonMobile, number-one on the Fortune 500 list, employs about 90,000 people worldwide; Wal-Mart employs 1.6 million. ExxonMobile is growing by raising prices; Wal-Mart is growing despite lowering prices. (7)

• Wal-Mart sells more by Saint Patrick's Day, March 17, than Target (its closest competitor) sells all year. (7)

• How does Wal-Mart do it? Not by focusing on profits, but rather on cost containment. Relentlessly driving pennies out of the dollar: driving jobs overseas (without much concern for how those jobs are fulfilled, so long as the result is a lower cost), driving costs of its own employees (locking them in its stores overnight, forcing them to work overtime without pay, skimping on their wages and health insurance, etc.), and driving its suppliers out of business.

  For example, Wal-Mart has proved exceptionally adept at externalizing costs to its suppliers. Wal-Mart "charges many of its vendors with keeping product in stock on its shelves; Wal-Mart cascades data about its sales out to its vendors...but it gives those vendors the responsibility of analyzing those waves of data and reporting the insights back to Wal-Mart." (94-95)

• Does Wal-Mart create or kill jobs? Fishman reports: "While the entire country (from 1997 to 2004) was adding 670,000 new retail jobs, Wal-Mart was adding 480,000 jobs in the United States. More than 70 percent of all new retailing jobs in the United States in the last seven years came just from the growth of Wal-Mart. The remaining new retail jobs - 190,000 in the entire nation spread over seven years - amount to just 540 new retail jobs in each state, each year...." (107)

  Juxtapose this with manufacturing, and those lame Wal-Mart jobs look even worse. During that same period of time, "U.S. manufacturing jobs...fell by 3.1 million jobs, a loss of 37,000 factory jobs a month, on average, for eighty-four straight months." (108) [Interesting factoid from Fishman: the US now has more people working retail than in manufacturing, a shift that happened in 2003. We truly are a consumer nation.]

  As Fishman says, "We find the abandonment of U.S. factories from Georgia to Michigan unnerving; we find cheaper stuff on store shelves addictive. And we don't connect the two." (108)

  More: In the first year after a Wal-Mart opens, it adds 100 new jobs to the typical U.S. county. Keep in mind that each Wal-Mart typically employs 150-350 workers. Do the math: even as Wal-Mart opens, it puts others out of business. That 100 new jobs? All Wal-Mart jobs. No one else benefits. Then, in the years after Wal-Mart arrives, retail employment falls gradually, so that five years after Wal-Mart's arrival in a county, there are only a total of 50 new retail jobs. Add to this the fact that unlike smaller competitors, Wal-Mart does its own distribution, resulting in a net loss to a county of 20 wholesale jobs. Five years after Wal-Mart moves in, a county has gained only 30 new jobs. Wal-Mart is hardly a growth engine for any economy. (144)

• On suppliers. "Companies doing 10 percent or less of their business with Wal-Mart had operating profit margins of 12.7 percent. Companies that become..."captive suppliers" to Wal-Mart - selling more than 25 percent of their goods to Wal-Mart - see their profit margin cut almost in half, to 7.3 percent." (163)

• Wal-Mart and poverty. Economists found that "once you control for everything else, U.S. counties that had a Wal-Mart just before 1989, or that added one during the decade, had higher poverty rates than counties that were Wal-Mart free. In a county with at least one Wal-Mart, poverty fell not to 10.7 percent but to 11 percent. The difference - three tenths of a percentage point - looks trivial....But it is not. In counties with a Wal-Mart, the rate of poverty fell 10 percent more slowly than it would have without a Wal-Mart during that decade." (164)

• Wal-Mart and groceries. "Part of the reason Wal-Mart can sell a salmon fillet for $4.84 [It used to cost $5.00 or more for a quarter of a pound of salmon] is that...'they don't internalize all the costs.' Pollution ultimately costs money - to clean up, to prevent, to recover from. But right now those costs aren't in the price of a pound of Chilean salmon. Salmon-processing facilities that are run with as much respect for the people as the hygeine of the fish also cost money - for reasonable wages, for proper equipment, for enough workers to permit breaks and days off. Right now those costs aren't in the price of a pound of Chilean salmon, either." (179)

• Workplace conditions. A recent lawsuit against Wal-Mart alleges that Wal-Mart's low price guarantee and relentless insistence on squeezing costs "makes it impossible for suppliers to comply with even the most basic laws where they operate, including wage and hour laws." Yes, Wal-Mart does a limited number of inspections of its suppliers for safety/workplace conditions. 12,500 of them in 2004. "But only 8 percent of them were surprise inspections. That means 1,000 inspections were unannounced, and 11,500 were scheduled in advanced. Still, Wal-Mart reports, 9,900 of the inspections resulted in violations serious enough to either suspend a factory or put it on notice. Even if you presume that the 9,900 number includes every single surprise inspection - that is, if you presume that every surprise inspection resulted in uncovering serious violations - that leads to a remarkable conclusion: 8,900 inspections of factories in 2004 revealed serious violations in factories that knew in advance that Wal-Mart inspectors were coming. if the code of conduct has to be signed by the factory management, if it is posted on the factory wall, if the inspections are scheduled with advance notice, and still thousands of Wal-Mart supplier factories get a "yellow" or "red" rating...how seriously are the factories really taking Wal-Mart's code of conduct?" And if those are the conditions in the factories on a day when managers know Wal-Mart is coming, what is life like on a typical day? (189-190)

• "Wal-Mart sells $178,125 worth of stuff per employee.

  Target sells $156,506 worth of stuff per employee.

  Whole Foods sells $121,875 worth of stuff per employee.

  As those numbers go down, the pleasurability of the shopping experience goes up, and that's no accident....Wal-Mart is relentless at measuring its own costs; it isn't so interested in measuring its customers' costs [i.e., of waiting in line, finding shelves stocked and organized, etc.]." (203)

• Conflicted shoppers. a recent study uncovered four basic kinds of Wal-Mart shoppers: champions (they love Wal-Mart and heavily promote it), enthusiasts, conflicted ("Actively dislike Wal-Mart because of its impact on communities, wages, and jobs"), and rejecters [me]. Shockingly, conflicted shoppers are "by a wide margin...the second most frequent shoppers at the store [5.6 visits/month]...and they spend nearly as much at Wal-Mart as the champions - $289 a month." (220)

• The punchline. "[Wal-Mart's] dominance at both ends of the spectrum - dominance across a huge range of merchandise and dominance of geographic consumer markets - means that market capitalism is being strangled with the kind of slow inexorability of a boa constrictor. It's not free-market capitalism - Wal-Mart is running the market. Choice is an illusion. Wal-Mart's suppliers can't consider themselves serious players...unless they are doing business with Wal-Mart. Once they are doing business with Wal-Mart, though, they are doing business on Wal-Mart's terms because Wal-Mart already dominates whatever business they're in....

  [By way of example, t]he new P&G [formed by the merger of Procter & Gamble and Gillette] will be number seventeen, or thereabouts, on the Fortune 500 list in 2006. But remember: Wal-Mart isn't just P&G's number-one customer; Wal-Mart is as big as P&G's next nine customers combined. Cheerful discussions of partnerships notwithstanding, Wal-Mart owns P&G's business." (234)

• Bigness beyond Wal-Mart. "The five biggest public companies in the United States - with sales of $1.1 trillion - account for 9 percent of the economy. The top twenty companies account for 20 percent of the economy. Those numbers are arresting, and they are moving in the direction of increased concentration [as 10 and 20 years ago the top 30 companies accounted for 20 percent of the U.S. economy]....We don't often talk about the concentration of corporate power, but it is almost unfathomable that the men and women who run just twenty companies make decisions every day that steer one fifth of the U.S. economy." (242) Indeed.

• Wal-Mart isn't just a store, or a huge company, or a phenomenon anymore. Wal-Mart shapes where we shop, the products we buy, and the prices we pay - even for those of us who never shop there. It reaches deep inside the operations of the companines that supply it and changes not only what they sell, but also changes how those products are packaged and presented, what the lives of the factory workers who make the products are like - it even sometimes changes the countries where those factories are located. Wal-Mart reaches around the globe, shaping the work and the lives of people who make toys in China, or raise salmon in Chile, or sew shirts in Bangladesh, even though they may never visit a Wal-Mart store in their lives.

  Wal-mar has even changed the way we think about ourselves - as shoppers, as consumers. Wal-mMart has changed our sense of quality, it has changed our sense of what a good deal is. Wal-Mart's low prices routinely reset our expectations about what all kinds of things should cost....

  The Wal-Mart effect touches the lives of literally every American every day. Wal-Mart reshapes the economic life of the towns and cities where it opens stores; it also reshapes the economic life of the United States - a single company that steadily, silently, purposefully moves the largest economy in history....

  Who knew shopping would turn out to be so important?" (5)

  Posted by Matt Asay on February 20, 2006 07:45 PM

  
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  But wouldn't Microsoft be doing the equivalent in the software world? Their relentless drive to fold more and more software into the operating system, their ambitions to own more and more of the processor spaces, and their ever increasing range of interlinked applications have left the Windows world a vast sterile wasteland. Gone are all the other strong competitors. Gone are all the development jobs at those competitors. Microsoft now shapes what software we buy, the software that we buy and the prices that we pay...

  The only alternative is really open source, and an argument can be made that open source is simply analogous to the remaining retailers banding together to create their own competing mall....

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