Thursday, November 27, 2008

A Great Wal*Mart Piece

I'm a fan of Wal*Mart for many reasons. Many liberals are just as strongly not fans of Wal*Mart, but I doubt they can articulate two or three good reasons why. This piece in Investors Business Daily was fairly positive regarding Wal*Mart, and I link to it here because it's been awhile since I've done a Wal*Mart piece. Here are a few key points:

The difference is that Wal-Mart expanded without ever losing its focus on operating efficiently, nor ever eschewed its custom of passing savings along to consumers. That's because Wal-Mart, which produced huge savings when it revolutionized the distribution and delivery of goods to stores on a massive scale starting in the 1970s, has never forgotten the lessons that it learned during its early years...

Still, the Wal-Mart Effect circa 2008 is different in several crucial ways. Two years ago, for instance, Wal-Mart saw an opportunity because of rising prescription drug prices, and it kicked off a campaign to sell generic drugs for $4 for a 30-day prescription.

The move, which the company eventually expanded to all of its pharmacies, sparked a pricing war around the country as big pharmacy chains slashed their own prices on generics. Wal-Mart estimates that Rx customers at its stores alone have saved more than $1 billion.

That might be chump change, however, compared with what's happening in the grocery business. Once primarily a general merchandise discounter, Wal-Mart embarked on rapid expansion of stores selling groceries when it noticed that local supermarket chains were taking a bigger and bigger bite out of consumers' pocketbooks — in some markets doubling their profit margins during the 1990s.

Today, Wal-Mart operates some 2,500 stores selling food items, and food prices at Wal-Mart's stores are typically from 10% to 25% lower than at competitor stores, depending on the food category.

Even if you don't shop at Wal-Mart you're likely to save 5% on your food costs when the retailer enters your market...

(Few of Wal-Mart's general merchandise competitors, like Target or Kohl's or Kmart, are unionized)...

That battle, with Wal-Mart as the subtext during a presidential campaign, helped to galvanize every anti-Wal-Mart constituency.

This disparate group united in their single-minded loathing of the chain includes: (long list follows)

Members of Wal-Mart's founding family, the descendants of Sam Walton, have also angered activists and made the business a target because they have used their fortune to support conservative and free-market causes, especially the choice movement in public education.

Apparently, it's one thing to use the family fortune to back anti-smoking initiatives in the developing world, like New York Mayor Bloomberg's foundation has done, or to advocate for the rights of prostitutes in Africa, as George Soros' Open Society has done, but quite another to promote free-market principles here in the U.S.

Still, despite the unique ability of Wal-Mart to drive a certain type of activist into a frenzy, consumers have mostly just yawned at the anti-Wal-Mart hysteria.

Now, let's talk about pay and benefits:

He notes, for instance, that calls by activists that Wal-Mart pay its entry-level workers more fail to acknowledge that Wal-Mart's overall margin of profits-to-revenues is small, as are its profits-per-worker, and that other retailers with higher salary scales serve a different, more upscale customer.

Furman also disputes the notion that Wal-Mart benefits from "corporate welfare" because some of its workers (4.5% to be precise) are on Medicaid, noting that for entry-level workers, the choice of Medicaid over a company-sponsored plan that requires co-pays simply makes economic sense, and that the benefits of the program accrue to the worker, not Wal-Mart.

I do enjoy shopping at Wally World.


DADvocate said...

Wal-Mart came to Maysville, KY shortly after I moved there. About 5-6 years ago, Wal-Mart upgraded to a Super Center selling groceries.

Kroger competes quite well with Wal-Mart. Kroger did lower prices some but Kroger's sale prices almost always beat Wal-Mart's. The consumer benefited from the competition as Kroger had little before Wal-Mart entered the scene. A point made in the article.

The "certain type of activist" blindly hates Wal-Mart. Yes, Wal-Mart impacted local businesses and hurt some. But, Wal-Mart benefited many others by pulling more customers into the area from surrounding counties. Indeed, Maysville thrives with probably more locally owned businesses than ever before. The small town of 10,000 is now the commercial center for 100,000 people.

mazenko said...

Wal-mart is, in many ways, an excellent company. I don't exactly "enjoy" shopping there - I've always been a Target fan - but I do shop there, as it makes little sense not to.

I'm not philosophically opposed to Wal-mart as many are, though I acknowledge some unfortunate side effects of its success. At the same time, I concur with its benefits.

However, Wal-mart is indicative of an inevitable aspect of American business in the 21st century. I think Robert Samuelson of the Post said it best when he noted,

"Henry Ford knew he had to pay his workers well enough that they could afford to buy a Ford. Wal-mart, by contrast, pays its workers so little they have no choice but to shop at Wal-mart."

rightwingprof said...

Kroger used to set regular prices high, among the highest of the available supermarkets, and price the "Kroger card" low. There was a larger difference between the two prices at Kroger than any of the other supermarkets in the area.

And Wal-Mart pays its workers better than small stores in the same market, a point that leftists will not address.

gbradley said...

So I was debating with my BummerinLaw over Thanksgiving meal.
He says that Wal*Mart is the "Evil Empire".
He says that they come into a small town, and under-cut the competition driving Mom & Pop out of business.
He says that they purposely lose money on select items in order to do this.
My question is this- When do they start raising prices and gouge the consumer after the competition has been beaten down?
I don't see it.
Of course when I present this I get "Evil Empire"..."Evil Empire"

I don't shop much, but when I do, I also prefer the shopping experience at Target over Wal*Mart though.

Ellen K said...

Not all Walmarts are created equal. The two Walmarts in our area that cater to the lower income patrons have noticeably less customer service, more foreign products and are simply not maintained very well. Plus, shopping on Friday or Saturday is a traffic adventure. The other newer store-a "green" store-has less traffic, but while the same folks shop there, it's better maintained, has nicer merchandise and offers more in the way of customer service. I will shop at the latter but not any of the other two. Of course, then there's the one in Denton, where when my daughter was picking up food at 10:00 one night, she got caught in the middle of a police chase in the store. And then there's the sad report today of a Walmart employee being trampled to death in the Black Friday Rush. BTW, is "Black Friday" a racist term? Where are the advocates that scream about things like "Devil's Food Cake" and such being racist...

allen (in Michigan) said...

Robert Samuelson's ability to turn a glib phrase doesn't make up for his inability to appreciate capitalism.

Henry Ford didn't pay his workers well enough to buy a Ford, he paid them well enough to want to work at his factories. Ford could pay his workers as well as he did because of the superior productivity of his assembly lines. Whether he paid them as well as he did out of the goodness of his heart or because he was buying labor peace is secondary to the fact that he could pay them as he did and that capability sprang from the advancements that capitalism engenders.

That's what reveals Samuelson's incompetence about economic matters or his political leanings, which amounts to the same thing. The implication is clear that Samuelson believes employment has a moral component that ought to dictate a certain pay rate which is nonsense and dangerous nonsense at that. In no small measure, that's the reason the American auto industry's in the fix it's in.

We shop at Walmart because the prices are generally quite good and the breadth of merchandise adequate. My guess is that more then a few of the people who can't find a bottom to their hatred of Walmart do the same and for the same reasons although their humorously self-centered apologia is to feel guilty while doing so.

mazenko said...

A comment that Robert Samuelson has an "inability to appreciate capitalism" has no credible foundation and simply reveals an emotional and ideological bias. Samuelson has been one of the nation's most well-informed and non-partisan writers on business and economics for thirty years, and he is well-respected by most rational conservatives and liberals.

His comment on Wal-mart was not intended to imply Henry Ford was excessively moral or that Walmart should be - it was simply an observation of a business cycle. There are two sides to most issues, and Samuelson pointed out one "potential" negative of Walmart's market dominance.

Obviously, we shop at Walmart for basic economic needs. However, there has always been rational ceilings and floors for prices, wages, and working conditions, and history is littered with companies who allow the zeal of short term gains to ultimately drive their businesses under. It's not a moral issue, but a "good business" one, as Samuelson noted. There are various sides/aspects to "good business" practices, and Walmart may be only seeing one of them.

It was an observation, not a condemnation. That's the job of commentators - to help the less-informed understand issues beyond the narrow scope of their own personal experience.

allen (in Michigan) said...

Oh, stop making excuses for the guy. Samuelson's just as capable of pandering to a political constituency as Al Gore.

The remark is, on it's face, idiotic and only has any observable value in pandering to those whose political leanings have led them to confer the honor of Monster du Jour de Luxe on Walmart, a title which was once confered on Henry Ford.

Henry Ford didn't pay his workers enough so they could afford to buy a Ford product, Henry Ford drove the price of Ford products low enough to make cars affordable to the average, working man whose wage Henry Ford raised by increasing the value of their labor.

> However, there has always been rational ceilings and floors for prices, wages, and working conditions...

Yes, but only in a society which enjoys the benefits of capitalism which, it should be noted, is the *voluntary* exchange of considerations of value. In societies, or situations, in which the exchange is involuntary, by definition, one party is getting screwed as a matter of course.

The idea that Walmart employees are being screwed seems to be most obvious to people who aren't Walmart employees because as far as I can determine violence, threats of violence or physical restraint aren't used to force Walmart employees to do their jobs. That must mean they want to work at those jobs and that such other choices as they have are not as attractive.

mazenko said...

Valid points, Allen.

But let's not assume that people "want" those jobs, more than they want "a job."

Throughout history - from miners to railroad workers to builders of Hoover Dam to people dying in meatpacking plants (both in the 19th century and today) - people have accepted dangerous and low paying jobs because that was what was available. However, as a society, we know the harsh conditions of the early industrialization weren't good for people. My grandfather luckily made it out of the coal mines, where he began working at the age of 10, and he certainly wouldn't have resisted higher wages and better working conditions.

Just because someone takes a job doesn't mean that's the best a company can do.

allen (in Michigan) said...

I can see you've fully accepted the notion that an important function of a corporation, perhaps its most important function, is to provide good-paying jobs with decent, safe working conditions.

It's not true of course but it's an understandable mistake since the meme's been repeated endlessly.

The purpose of Ford Motor Company is no more to provide jobs to Ford employees then is the purpose of the Detroit Public Schools district to provide employment to teachers; that's just the only means anyone can devise to achieve the aims of the organization.

If tomorrow William Clay Ford, Jr. awoke with a plan that would allow Ford Motor to dispense with every blue collar employee and still produce a competitive vehicle he wouldn't be a monster for seeing the plan through, he'd be doing exactly what he's supposed to do. That would obviously be a catastrophe for those employees but maintaining their employment isn't one of the purposes for which Ford Motor was formed and why it exists to this day.

In fact, Mr. Ford would be ethically bound to put his plan into effect since his duty is first to those who own the business, the shareholders, and only secondarily to those who work in the business. Mr. Ford would even have an ethical obligation to society at large to fire those workers since that's exactly how economic progress has been made down through history - by improving productivity.

That's why Walmart's the success it is. The company's found a way to improve employee productivity by a relentless attention to every aspect of the business from product design to stock turnover. That increased productivity shows up, as it did for Henry Ford, as it always does, in lower prices which benefits society at large.

mazenko said...

Obviously, economics that exists in a vacuum has no moral component - a company exists only to generate product and profit. I acknowledge that, and as a stockholder I would expect that decisions be made based on giving me the greatest returns. Creative destruction is an important component of that. For this reason, I have always argued - even with many conservatives - that "price gouging" doesn't exist, and is no the business of the government.

However, we are a society of human beings with morals and ethics, and they should, in fact, guide our decisions. Taking your argument about eliminating workers altogether, it would seem logical that companies who need workers could return greater profits if they enslaved their workers. instead of paying them. However, as a society we have decided that is morally unacceptable. Thus, because of our humanity, we establish certain ethical standards by which we do business.

Obviously, both examples are extreme, but the point is clear. As human beings we know there are acceptable levels for these transactions. Both too little and too much pay are counterproductive. The UAW is one example and Walmart is another. Businesses are not ethical, but the people who run them can be.

allen (in Michigan) said...

Taking your argument about eliminating workers altogether, it would seem logical that companies who need workers could return greater profits if they enslaved their workers. instead of paying them.

Uhh, we tried that. Turns out it doesn't work so well because you can't trust slaves to do anything other then what they can be driven to do. That's OK for simple, agricultural work but once any degree of judgment are required the shortcomings of slave labor become unsupportable as the Nazi war machine found out.

Besides, slavery is in no sense a capitalistic exchange since the critical component of a voluntary exchange of considerations of value is absent. You're not going to prove the shortcomings of capitalism by pointing out the shortcomings of authoritarianism.

In fact, I don't particularly ascribe to the standard view of the reason for the ending of slavery in the west. The moral objections were made economically viable by the Industrial Revolution and if the ending of slavery threatened an economic collapse of western civilization I don't believe that abolitionists would've been successful.

Both too little and too much pay are counterproductive.

When you come up with an intellectually defensible means of objectively determining what the right rate of pay is, drop me a line. It's not everyone who gets to know a historically-important figure. Till then the best way of determining the right rate of pay is to see what it takes to get people to work for you.