Sukumar Mukhopadhyay: The Wal-Mart Effect

In the context of foreign direct investment (FDI) in multi-brand retail in India, the functioning of the biggest retail mart in the world namely the Wal-Mart is extremely relevant for appreciating what is in store for India. There is a view that the low cost that Wal-Mart brings in is at a high price.  This treatise is based on books such as The Wal-Mart Effect by Charles Fishman, The World is Flat by Thomas L. Friedman and several other writings on the subject such as by Stephan Goetz and David Fleming. The big retailers are known as big box discount stores and there is a conside rable resistance to them.  India is currently going through a retail revolution with the introduction of  ncer's, a popular hyper mart, traces its history as far back as 1863. Similarly, conglomerates, such as Bharti, Reliance, Godrej and TATA have over the last decade ventured into large format retail chains, though small and medium enterprises (SMEs) still account for the majority of the daily consumer transaction needs.  What I am writing about Wal-Mart is also largely true of other big box stores though the impact of Wal-Mart is far more pronounced than ordinary or middle level discount stores. Wal-Mart is unique due to its big size but most of its features are also true for the big box discount stores.


Where and how many and how big


            The first Wal-Mart was established in 1962.  That year also saw the opening of the first Target and the first K Mart.  Wal-Mart, Target, Best Buy and J.C. Penney are some of the biggest retailers in the world but Wal-Mart is by far the biggest.  The headquarters of Wal-Mart are situated in a small town in Bentonville, Arkansas.  This allows them to have huge space to handle goods.  The spectre of goods moving in huge trucks and conveyer belts look like streams feeding into a powerful river.  Wal-Mart has a hyper efficient supply chain for goods from tennis shoes to laptop computers, from body odour remover to water sprinkles, socks to sushi and so on.  Wal-Mart operates its own trucks, the largest private trucking fleet in America.   Wal-Mart is known as the world’s biggest grocer. Today Wal-Mart sells more groceries than any company, not just in the United States but in the world.  Wal-Mart is the largest retailer both in Mexico and Canada and second largest grocer in Britain.    Wal-Mart grew phenomenally over the years. Between 2005 and  2010. Total sale increased from $ 320 billion to $419 billion, annual average pay for workers increased from $19760 to $24,440,   total employees increased from 1.8 million to  2.1 million, number of stores in America increased from 3856 to 4413 and the number of stores outside America increased from 2285 to 4556 .  So we see that the expansion was more than the increase in the employment.  More than 70 percent of all new retailing jobs in seven years between 1997 and 2004 came just from the growth of Wal-Mart. During the same period manufacturing jobs fell by 3.1 million jobs. The impact, therefore, on the employment sector was that there has been more retail jobs at the expense of manufacturing jobs.  The impact of expansion was, however, more on the suppliers which we shall see later. 


            Wal-Mart’s presence is there in all big countries.  China has one Wal-Mart in every major city.  The Japan has also a big presence of Wal-Mart.   


What Attracts people to Wal-Mart


The sprawling nature of Wal-Mart business is an advantage to the shoppers.  They can buy anything, even any type of medicines or body odour lotion.  One has only to drop of the prescription for the medicines, do other shopping and pick up the medicines while coming back.   A shopper gets everything at one place. 


Impact on Environment


Wal-Mart reduced packaging to help environment. It developed a new system of bundling their cardboard carton and shipping them directly to the manufacturer to be repacked and turned into cardboard pizza boxes for Wal-Mart store-brand pizzas.  Others also have been inspired by Wal-Mart drive to reduce packaging. Card board boxes are manufactured only to be discarded after transportation of goods.  By not using such disposable boxes the impact on cutting trees to manufacture paper boxes is quite evident on environment.  Wal-Mart reduces the packaging of products it sells by 5% by redesigning the shapes of the pasta and hamburger etc. That also helps in reducing the number of trucks used in transport.  Wal-Mart pioneered double concentrated liquid laundry detergent, working with the big three detergent makers – Procter & Gamble, Unilever and Church & Dwight.  It meant concentrated products in less space, less weight, less trucks and less plastic required for bottles.  Wal-Mart undertook efforts to teach farmers to be more efficient, to use pure chemicals and less water and reduce cost so that they can sell cheaper to Wal-Mart.  (Critics say that scientist from agricultural department of the government of each country can also teach such things and they need not sell the products to Wal-Mart).  Wal-Mart claims that when it helps farmers to eliminate bad chemicals such as carbide to ripen fruits, they are improving quality of food.  And when they are reducing packaging they are eliminating the cutting down of rainforests.  On the other hand there is also contra effect on environment like when salmon, which is a fish in great demand in America, is wild –caught in such huge numbers for low cost that the environment has had adverse effect in that part of Chile where it is most cultivated.


Hammering down the prices


            Karl Marx in his most famous book called “The Communist Manifesto” published in 1854 wrote the following:


"The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians' intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, that is , to become bourgeois themselves. In one word, it creates a world after its own image."


More than a century later the cheap prices in Wal-Mart is giving a similar type of hammering to certain elements of capitalism which do not change the basic nature but bring out certain contradictions in the functioning of the system. 

            The mainstay of Wal-Mart and similar Big Box Discount stores is to reduce price relentlessly so that the buyers don’t go to other stores but come flocking to them.  The whole impact of Wal-Mart that we would discuss here is on the economy because of the suppliers being forced to reduce prices and because of the consequences that come along with such an effort. The price paid to the supplier by the Wal-Mart is as minimum as possible in the negotiation.  The founder of Wal-Mart Mr. Sam Walton, famously said that he was “not probably the best negotiator in the world because he lack the ability to squeeze that last dollar”.   Its effect is on labour, both in regard to wages and unemployment and also in regard to many other factors such as environment.  It has also its impact on how goods are presented after manufacture and packed and marketed.  Even the quality of goods is impacted by the need to reduce prices.  From the gas mileages of its own trucks to the energy use of toy factories in China, from the way toilet papers and pizza boxes are made in the United States to the way farmers in India raise food and the way supercenter freezer cases are lit, Wal-Mart is turning itself into a laboratory of  new practices. 



Impact of lower prices on competitors and suppliers


             Too much of a good thing, high cost of low prices and hidden universe of squeezed suppliers, are some of the expressions used as impact of Wal-Mart on suppliers and consumers and the economy in general.


            One of the great ironies of Wal-Mart’s success is that the very things that allowed it to thrive so inexorably are now the source of so much criticism. While reducing price at the point of  sale in the retail shop of Wal-Mart was initially a big attraction to the purchasers, soon the full impact came to be realised that what met the eyes was not all.  The impact was far more than commonly evident.   Back in the 1970s and 1980s nobody would have thought that Wal-Mart`s obsessive efforts to keep prices low would have had some unpleasant consequences.  Nobody could have argued against low prices.   Some economists said that it helped in keeping inflation under check.

            But the impact of lower prices offered by Wal-Mart to suppliers sent jitters to manufacturing units across the country.  In 2004 in the USA, The  Music Trades Magazines called Wal-Mart a Real Threat.  The editorial said that Wal-Mart decision to start selling inexpensive guitars was sending shudders to independent musical dealers.  After seeing $89 guitar in Wal-Mart, if a customer walks into a music stores and see a guitar for
$500, his immediate reaction would be, “This guy’s ripping me off”. Wherever there are American big box stores, there is always a conscious efforts   to what is described as “fend off the damaging competition that a large Wal-Mart penetration would inflict on indigenous retailers”.Procter & Gamble and Gillette, two of the most innovative and stable consumer product company merged due to their motivation in part by the company’s need to maintain scale in the face of Wal-Mart


                        The persistent criticism against Wal-Mart is that it kills business where it comes.   Because of Wal-Mart’s scale and always delivering at lower prices the impact has gone far beyond to the suppliers and to the workforce in these companies.  Wal-Mart has become a threat to free market as a monopoly buyer which is known as monopsony.   Monopoly and monopsony are both threat to the free market.


            Suppliers have become afraid of talking about the impact of Wal-Mart on their company.  The impact of Wal-Mart’s bulk purchase at low cost has reached such a level that it forces its suppliers to do everything from redesigning packages to redesigning their computer system if they want to sell to Wal-Mart.  Wal-Mart now dominates consumer markets so thoroughly that they have no choice.  The result can be dramatic or subtle, immediate or insidiously corrosive.  Decisions made in Wal-Mart routinely closed factories as well as open them.  The percentage of profit of the suppliers goes down with each of extra sale.  Wal-Mart is really forcing companies to get their act together or get crushed. 


             Sherrie Ford, a factory owner and long time manufacturing management expert put the points succinctly as follows: 


“Every time you see the Wal-Mart smiley face, whistling and knocking down the prices, some where there is a factory worker being kicked in the stomach”.


Quality is often compromised to keep the price same as it has happened in the case of Levi jeans which are made now with cheaper denim. The only thing truly “Levi” about them is the name.


The way to Compete with Wal-Mart


Quality is the only area where the competitors of Wal-Mart are able to succeed.  Producing better quality and charging more money is how many manufacturers are surviving.  The way to compete with Wal-Mart is to focus, even in the mass market, on things besides price: design, fashion, quality, cachet, and they feel of the shopping experience.  The growth of  both Target  and Whole Foods shows the power of quality even competing against low priced quantity. 

Labour and Employment

Wal-Mart is the world largest private employer with 1.6 million associates, as the company refers to its labour court.  There is criticism that Wal-Mart creates jobs at the expenses of other businesses.  Labour unions oppose big-box development because the employees of such stores are usually not unionized. Unionism is not allowed in Wal-Mart.  Unions and cities are attempting to use land use ordinances to restrict these businesses.  Wal-Mart now finds itself under attack, politically, economically and legally for its treatment of workers – including a law suit on behalf of women who worked for Wal-Mart , that there is systematic sex discrimination in promotion and pay.  There is allegation of making the workers forcibly work extra hours. The surest indicator of Wal-Mart’s failure to evolve is the wave of workplace problems the company is facing and the manner in which it handles them.  The original culture in Wal-Mart of hard work, cost control and discipline were admirable at one time in the beginning but that missionary zeal has changed much towards atrocity towards the worker when Wal-Mart has become the most powerful company and the largest empire in the world.  By the fall of 2005, Wal-Mart faced forty separate law suits filed by employees from one end of the country to the other, alleging they were forced to work off the clock, either working through scheduled breaks or punching out and continuing to work for no pay.  In October 2003 federal agents raided Wal-Mart stores in 21 States in a single day before dawn arresting 245 illegal emigrants who were cleaning the stores over night as employees of sub-contractors.  Wal-Mart had to pay $11 million to the Federal Government in 2005 to resolve the investigation. The original core values of Sam Walton have become inverted such that they now sometime drive behaviour that is not only exploitative but perhaps illegal.  In any case they are currently resorting to questionable workplace practice.  Often the senior executives deny knowledge of all these.

Cheap Labour at what cost


            There has been allegation that textiles factories in Honduras have used child labour which is forbidden in a global economy.  Similar cheap labour is used in Bangladesh and China under sub-human condition.  Salmon is the most popular fish in America and Wal-Mart is either number one or number two seller.   They get Salmon from Chile using cheap labour in extremely inhuman condition.  People in America have started asking questions such as “Do Americans need clothing to be so inexpensive that the people making it cannot afford a truth brush?” or “Should some people lose their livelihood so everyone’s power tools and underwear and laundry detergent can be cheaper?”


       The impact on the poverty rate or rather on the rate of change in the poverty rate overtime has been studied by Stephan Goetz and David Fleming in an article in the Economic Development Quarterly, 2011, and have found that locally owned business pack more powerful economic punch. They studied data from the Edward Lowe Foundation on the economic growth and residence status of business owners in 2,953 U.S. counties, including both rural and urban counties.

They have found that in the counties in the USA with Wal-Mart, the rate of poverty fell 10% more slowly than it would have without a Wal-Mart during that decade. Larger retailers, such as Walmart, tended to depress income growth generally in the communities where they operate.  Small, locally owned businesses and start-ups tend to generate higher incomes for people in a community than big, nonlocal firms, which can actually depress local economies, said Stephan Goetz, professor of agricultural and regional economics."Local ownership matters in important ways," said Goetz. "Smaller, locally owned businesses, it turns out, provide higher, long-term economic growth."

Big-box and large corporations displace more entrepreneurial small firms. Examples of non-locally owned large companies include retail chain stores such as Wal-Mart and Best Buy, and service providers such as U.S.-based call centers for car rental agencies, banks,   health care providers and telecommunications firms.

According to Goetz, small businesses and start-ups provide more than just jobs for community members. They also can improve innovation and productivity on a local level and use other businesses in the community such as accounting and wholesalers, while larger businesses develop their own infrastructure. "This is really a story about startups," said Goetz. "Many communities try to bring in outside firms and large factories, but the lesson is that while there may be short-term employment gains with recruiting larger businesses, they don't trigger long-term economic growth like start-ups do."




Outsourcing-Wal-Mart sends factory jobs overseas to the cheapest manufacturer


            The criticism is that in order to buy goods cheaper, Wal-Mart purchases from China where manufacturing is cheaper.  This is mainly because of cheaper labour and long working hours in China .  To survive in the face of the sort of pricing demands Wal-Mart made of famous companies such as Vlasic, Huffi, Loveable, Levi Strauss and some other consumer product companies, they had to lay off employees and close US plant in favour of outsourcing products overseas.  That Wal-Mart which in the early 1990’s trumpeted its claim to “Buy American”, doubled its imports from China between 1997 and 2002 and in the next two years increased it to another 50% so that in 2008, 10 percent of all goods imported from China to the USA were by Wal-Mart alone.   Analysts of China’s business practices say that its size and economic power mean that it will soon be setting the global floor not only for low wages but for lax labour laws and work place standard.  This is known in the business as the China price.   These days 95 percent of the bikes sold in the United Sates are imported from China. 


            The predominant feeling in America is that they are shopping themselves out of jobs.  This means that to buy cheap things, they are losing jobs in favour of creating them in China or elsewhere.  The argument further goes that goods are cheap alright but unemployed people cannot buy them in any case.   The cost structure of operating manufacturing plant in the USA is just enormously out of sync with what people want to pay.  While more than 70 percent of all new retailing jobs in seven years between 1997 and 2004 came just from the growth of Wal-Mart, during the same period manufacturing jobs fell by 3.1 million jobs. The impact, therefore, on the employment sector was that there has been more retail jobs at the expense of manufacturing jobs.


Kills Innovation and Creativity


            The point that is made as a criticism of Wal-Mart is that the suppliers are left with so little profit that there is no money left for innovation. Reasonable profitability is what allows companies to higher talented people pay them well, do research and development and roll out innovations. The Wal-Mart effect is so unrelenting in its demand for performance that  it may initially help a company to get in shape but ultimately leaves the same malnourished without any scope for independent thinking which is necessary for creativity in designing new products.  The suppliers to Wal-Mart become complete slaves to Wal-Mart always trying like mad to cut cost.  They become captive suppliers with percentage of profit going down with each marginal sale.




            There should be a wiliness to admit that not every cost squeezed out is good.