November 13, 2003

Strange Third Quarter News From WalMart

WalMart doesn't seem to have seen the same third-quarter spending boom that the NIPA estimates did, which is quite strange. Something seems to be wrong with our collective visualization of the Cosmic All:

Forbes.com: Wal-Mart dumps cold water on U.S. economic bulls: CHICAGO, Nov 13 (Reuters) - Economists and politicians giddy about prospects for U.S. economic growth got a dousing of cold water on Thursday from Wal-Mart Stores Inc.(nyse: WMT - news - people), the world's largest company. The retailer -- which taps directly into the psyche of the U.S. consumer -- gave a downbeat economic outlook that contrasted with reams of recent data, and bluntly suggested that many of its shoppers are barely making ends meet.

Customers continue to buy the cheapest items in any given category -- a sign that household budgets remain tight, Lee Scott, Wal-Mart chief executive officer, said on a recorded message. Buyers are "timing their expenditures around the receipt of their paychecks, indicating liquidity issues," Scott said. "I don't think consumer spending is slowing, but I also don't see the strength that many of you in the investment community appear to see," Scott said.

Wal-Mart's sober outlook came after the U.S. economy enjoyed its fastest gross domestic product growth in almost 20 years in the third quarter and is seeing job growth after a years-long slump. But retailing juggernaut Wal-Mart, based in Bentonville, Arkansas, is an economic indicator by itself. An estimated 100 million people shop at its U.S. stores every week. The company takes in 6 to 8 cents of every U.S. dollar spent on retailing, excluding autos. "The Wal-Mart numbers leave open the question 'is this just a breather in consumer spending or is it the start of the long-awaited consumer spending recession?'" said Cary Leahey, senior U.S. economist at Deutsche Bank Securities.

Wal-Mart's portrayal of financially strapped consumers highlighted worries about how spending would hold up once midyear federal tax stimulus -- chiefly, from child tax credits -- waned. Spending growth had been expected to slow after third-quarter growth of more than 6 percent, but by how much? Shoppers' caution will probably continue until there is further improvement in employment, Wal-Mart's Scott said...

Posted by DeLong at November 13, 2003 01:11 PM | TrackBack

Comments

Could it be, Stephen Roach may be he who has the last laugh?

Posted by: Cal on November 13, 2003 01:47 PM

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I need to adjust my tin-foil hat--I just received a message that the Administration is cooking the economic numbers to try to talk up the economy.

Not unprecedented, that: Nixon wanted to do it, but the economists he had working for him wouldn't play ball. Led to a famous spouting of anti-Semetic remarks.

OK, better now. No more weird economic messages. But now I'm picking up some Slovenian soccer match. Hmmm . . .

Posted by: jlw on November 13, 2003 01:50 PM

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That buyers are timing purchases to coincide with their paychecks is indeed a slightly troublesome sign. Though I would expect liquidity effects to linger after a downturn as it takes households a while to build their working capital back up.

But the fact that consumers continue to buy the cheapest item in a category doesn't worry me much at all. Over the past 10-20 years (and accelerating in the current productivity boom)product manufacturing quality and productivity have improved so much that the cheapest item in a category is often every bit as good at meeting consumer needs as the most expensive. Why buy the Rubbermaid storage box at $6.99 when the Sterlite storage box at $4.49 is just as good? The Rubbermaid box is "better" when tested against abstract engineering specs, but if all you need is something that will hold the Christmas lights and won't crack after a year, then the Sterlite box is perfectly acceptable. The relevant question is: "what happens to the difference?" If consumers are buying the Sterlite box because they've gone from a pay check to an unemployment check, then overall spending is down and the economy suffers. If consumers are buying the Sterlite box because its just as good, and then turning around and spending the $1.50 difference in price on other goods then that's a positive for the economy.

Plus I'd be leary of reading too much into category price mix data from a retailer that has explicitly staked out a strategic position in the marketplace as the lowest price seller. Wal Mart has two kinds of customers: people without much money who need to save every cent, and people with lots of money who are buying things that they don't highly value (toothpaste, light bulbs)and thus would like to get a deal on. When someone walks in the door at Wal mart they are looking for a low price. That they choose a product with one shouldn't be shocking.

Posted by: sd on November 13, 2003 01:55 PM

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Earlier today you wrote: But was there any reason to trust Bush, or Frist, or Delay about anything of substance before?

I haven't worked for the Fed. Gov't., I'm not an economist, and I don't own a tin-foil hat.

Brad, you differ from me in at least two of the three listed attributes, do you think it possible the numbers are being cooked? If so, where would they start? Where would they end?

Posted by: wolf on November 13, 2003 01:58 PM

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- That buyers are timing purchases to coincide with their paychecks is indeed a slightly troublesome sign. Though I would expect liquidity effects to linger after a downturn as it takes households a while to build their working capital back up. -

Yes, but I find no reason to believe there will be a rapid building of working capital. I am worried about middle class spending versus saving.

Posted by: anne on November 13, 2003 02:01 PM

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I have heard that overall retail numbers are good. If so, a drop in Wal-Mart purchases could signal that consumers are moving upscale.

Or, retail overall could be declining, with outliers wrongly being interpreted as typical.

Too soon to tell, I think. While 3Q represents, IMO, a dead cat bounce, we won't know exactly where the dead cat apogee is until it's well on its way down.

Posted by: Charles on November 13, 2003 02:34 PM

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"the Administration is cooking the economic numbers" - That would be just great, first business administration scandals, then financial intermediares scandals, and then a public administration scandal. Maybe a scandal-index could attract some liquidity?

Posted by: Mats on November 13, 2003 02:43 PM

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It is not just Walmart but Target as well:

Target's quarterly earnings met expectations thanks to strength at its namesake discount stores and big profits in its credit card operations.

The No. 2 discount chain said it may miss Wall Street forecasts for the current quarter -- which includes the key Thanksgiving-to-Christmas holiday season -- because of weakness at its Marshall Field's and Mervyn's department stores.

Shares of both companies shed more than 2 percent in midday New York Stock Exchange trade, weighing on the broader market.

Many Wall Street analysts and industry consultants have predicted a strong holiday shopping season, bolstered by an improving job market and rising consumer sentiment.

But Target and Wal-Mart forecast a fiercely competitive holiday period, with price-cutting expected to be severe in categories such as video games and digital cameras.

In addition, trade deficit is up to $41.3 billion (4.4%)

My thought is this is what happens when the income gap expands even more rapidly. The higher end consumers are spending more, but lower income people are spending less.

Another factor in the survey of people employed not matching the industry layoff figures is that many minimum wage workers work more than one job. If they lose one of them, they are still working, just not as many hours.

Posted by: bakho on November 13, 2003 02:50 PM

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What would it take to make the 6-8 % retail sales of Wal Mart mirror the American economoy like the Big Mac index does the international exchange rate?

Posted by: pt martin on November 13, 2003 02:52 PM

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Is "visualization of the Cosmic All" a Lensman reference?

Posted by: Walt Pohl on November 13, 2003 02:56 PM

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I'm suprised nobody's made the obvious connection yet. The well off avoid WallyWorld, the middle class tolerate it or loath it (myself, I'll spend 5-10% extra to deal with a NonEvil company), the poor survive on it (that 5-10% is a big deal)...

Overall, retail may be improving, but if the lower 1/4 is NOT improving, it would show up in the disparity between the WalMart/Target figures and the overall figures.

Posted by: Nicholas Weaver on November 13, 2003 03:04 PM

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I'm suprised nobody's made the obvious connection yet. The well off avoid WallyWorld, the middle class tolerate it or loath it (myself, I'll spend 5-10% extra to deal with a NonEvil company), the poor survive on it (that 5-10% is a big deal)...

Overall, retail may be improving, but if the lower 1/4 is NOT improving, it would show up in the disparity between the WalMart/Target figures and the overall figures.

Posted by: Nicholas Weaver on November 13, 2003 03:05 PM

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Oh wait, Bahko did say it first. Me bad.

Posted by: Nicholas Weaver on November 13, 2003 03:06 PM

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Oh wait, Bahko did say it first. Me bad.

Posted by: Nicholas Weaver on November 13, 2003 03:06 PM

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While I don't really believe the "cooking the books" theory -- or at least have no reason to believe it -- Bush has a history with this. Remember he served on the audit committee of Harken when they cooked their books.

Posted by: pj on November 13, 2003 03:23 PM

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While I don't really believe the "cooking the books" theory -- or at least have no reason to believe it -- Bush has a history with this. Remember he served on the audit committee of Harken when they cooked their books.

Posted by: pj on November 13, 2003 03:26 PM

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bakho and Nicholas Weaver:

"Sowerby dismissed the impact of the Wal-Mart report, saying better-than-expected retail-sector results still outnumber negative earnings surprises by a 3-to-1 ratio. "That bodes well for this very cyclical and sensitive part of the economy ahead of the all-important holiday selling period," he added. ... A number of other retailers also posted their quarterly results with generally favorable outcomes. Target and Tiffany posted in-line earnings, while American Eagle Outfitters beat by 2 cents, Urban Outfitters topped by 4 cents, and Ann Taylor and Children's Place each came in a penny ahead. The CBOE Retail index ($RLX: news, chart, profile) lost 1.2 percent. "

http://cbs.marketwatch.com/news/story.asp?siteid=mktw&dist=nwtpm&guid=%7BC05DA6C2%2D6DA3%2D47BF%2D8519%2D903735D32DFA%7D

Perhaps Wal-Mart could be sufferering from bad publicity due to its maltreatment of immigrants and women?

Posted by: Charles on November 13, 2003 03:47 PM

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Charles, that data matches just as well the "poor aren't getting better" hypothesis. Better, in fact.

The general ranking places Tar-Je a non-trivial cut above WalMart, and the other retailers mentioned are way above Target.

Personally, I won't shop at WallyWorld, I will commonly shop at Target [1], partially because of quality differences but mostly just because of the principle: I don't want to do business with what is really a vile company to work for or sell to, so why should I buy from them?

But those who regularly DO shop at wall-mart however, really can't afford to spend 5-10% extra on the principle of the matter, and are getting the lowest cost versions of what they do buy. The working poor are the least likely to avoid WalMart because of the Evil Factor.

WalMart may be 6-8% of US retail sales (non auto) in dollar volume, but for those in the lower 1/4 of the income scale, the fraction is much, MUCH higher. It would be interesting to see the numbers (if they exist).


[1] And, if I'm buying a suit, I'll get gouged in the wallet badly and just go to Nordstroms. Sometimes, quality really is needed, even if the price is excessive.

Posted by: Nicholas Weaver on November 13, 2003 04:15 PM

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Well I fit the Wal-Mart profile. The bank finally cleared my social security check today (delay for Veteran's Day), so I went out and bought groceries. Didn't visit Wal-Mart tho - I have to budget for that.

Well off avoid Wal-Mart? If the top 2% could carry the economy we'd be rolling in profits now, given the Bush policies.

Posted by: Dick Thompson on November 13, 2003 04:22 PM

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First, I believe the Fed's books are cooked. Too much stuff doesn't add up. But I'm just a small business man and part time casual observer, not an expert.

Regarding the Wal-Mart perspective, I tend to take what they seriously. As I understand it, they have the most massive and sophisticated retail tera-server database on the planet. They know what individual shoppers are going to buy and in what quantities when they drive in the parking lot and already have the just-in-time inventory replenishments on order by the time they walk in the door.

Well, not really, but it is quite amazing from what I've been told.

Posted by: skb on November 13, 2003 05:04 PM

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First, I believe the Fed's books are cooked. Too much stuff doesn't add up. But I'm just a small business man and part time casual observer, not an expert.

Regarding the Wal-Mart perspective, I tend to take what they seriously. As I understand it, they have the most massive and sophisticated retail tera-server database on the planet. They know what individual shoppers are going to buy and in what quantities when they drive in the parking lot and already have the just-in-time inventory replenishments on order by the time they walk in the door.

Well, not really, but it is quite amazing from what I've been told.

Posted by: skb on November 13, 2003 05:08 PM

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And by "Fed's", I mean the administration, not the Federal Reserve.

Posted by: skb on November 13, 2003 05:18 PM

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Maybe Walmart should follow Ford's, or was it GM's, example and pay its employees enough money so that they could afford to buy its own products, in this case something above the cheapest brands.

Posted by: cag on November 13, 2003 05:42 PM

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Of course the Target credit card division is doing well. They harrass their clerks to argue customers into signing up for cards -- and then they send the first bill so late that they get to sock the customer-sucker for a $35 dollar late fee with the first payment.

How's that for a racket?

[and of course the 'visualization of the cosmic all' is from EE 'Doc' Smith, Mr. Pohl]

Posted by: Tina on November 13, 2003 07:43 PM

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"They know what individual shoppers are going to buy and in what quantities when they drive in the parking lot and already have the just-in-time inventory replenishments on order by the time they walk in the door. "

I understand they are working on a system that would just deliver whatever you were going to buy once a week or so. You wake up on Tuesday morning, say, and find WalMart crates on your front steps, miraculously filled with all kinds of stuff you thought you might want.

That way they avoid having stores at all.

Posted by: Bernard Yomtov on November 13, 2003 08:20 PM

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Very upscale business (I work in one) is doing very well, thank you. The lower classes, on the other hand - well I think the hypothesis that they've been screwed, blued and tatooed is a good one.

But I don't trust these figures completely either. Some result from all that cash sloshing around was bound to happen - but still, I remember too many revised numbers.

Almost all revised down.

Posted by: Ian Welsh on November 13, 2003 09:00 PM

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...the fact that consumers continue to buy the cheapest item in a category doesn't worry me much at all.

It should, if they're not buying the cheapest items by choice.

Posted by: dave on November 13, 2003 09:30 PM

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Isn't this consonant with the job market and income distribution news? People at the bottom are feeling the pinch, and people at the top don't shop at Wal-Mart.

SKB: I expect that the Fed's statistics--to the extent they're based on data the Fed itself collects--are honest; Alan Greenspan is honest, at least. Thing to remember is that you're in a not particularly economically strong region (and neither am I). In richer places I expect the numbers look bettter.

Posted by: Randolph Fritz on November 14, 2003 12:22 AM

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Remember that Alan Greenspan endorsed Bush's first tax cut. Even though it was based on a rosy scenario, something that Greenspan would have seen before.

In the end, Greenspan isn't honest; he just understood not to sell out too publicly too early in his career. And this would actually be a good time for him to compromise any and all ethics, if he'd like to retire as a hero. He messed up by not retiring during the late 1990's, leaving his successor to take the blame for the recession. As it is, I'm sure that he wouldn't mind pumping up the economy, getting Bush re-elected, and then retiring as soon as the economy is clearly booming.

That way, he could go out looking good.

Posted by: Barry on November 14, 2003 04:31 AM

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Real retail sales growth is more than one standard error above what my equations --
function of real income, lagged fed funds, consumer confidence & inflation --says it should
be. Historically, when this happens you see a
sharp slowing of real retail sales growth.

I have believed the 2nd Q bounce was due almost completely to rebate checks. Now that that is spent the consumer does not have the real income or confidence to sustain continued strong spending growth.

I go back to the point that the big story in the last employment report was not the pop in the employment data, it was the continued weakness
in income growth. Nominal personal income growth
remains too weak for the economy to be as strong as the data shows.

Posted by: spencer on November 14, 2003 05:19 AM

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I thought all the Eddorians has been moved on to the next plane.

Posted by: TJ on November 14, 2003 07:19 AM

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The "cheapest item in the category" finding seems less important to me than the "timing purchases around paychecks" finding -- if Wal-Mart customers are having to defer their purchases of groceries and other staples until payday, how comfortable are they going to feel splashing out on holiday gifts or durable goods?

Posted by: Alex on November 14, 2003 07:52 AM

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I must be in the mood to be tonguelashed (or typelashed, as it were), but anyway:

What is the evidence that, relative to other corporations, Wal-Mart is exceptionally evil and profit-hungry? Last year, Wal-Mart made around eight billion dollars in profit, on $244 billion in sales, which means that its net profit margin was 3.2%. That's minuscule, which suggests it's not ripping off workers and then pouring the profits into the company coffers. In fact, since the company invests somewhere between six and eight billion a year in new stores, new equipment, etc., on average the company banks almost nothing every year. And, unlike many companies, it doesn't play games to lower its tax rate (which is around 35%), so that last year it paid $4.5 billion in taxes. Since 1998, its cash holdings have risen by just $900 million. And the company has 4.3 billion shares outstanding, so it's not as if each individual shareholder could be taking home lots of money in dividends every year.

Wal-Mart's executives are well-paid, but not exceptionally so by corporate standards, and most of their compensation is well-tied to performance, both of the company and of the stock. As far as I can tell, Wal-Mart has never repriced stock, or handed out mega-option grants, or engaged in the kind of compensation lunacy that characterized corporate America over the past decade.

On top of this, there's the simple fact that Wal-Mart has so many employees. The top five execs at the company last year made, together, about $37 million. Wal-Mart has 1.3 million employees worldwide. So if you paid the top executives nothing -- which would probably make it hard for the company to keep making money, but I tend to think the value of CEOs are overrated, so who knows? -- you could pay each employee an extra $30 a year. Even if you reduced the company's total profit by, say, two billion dollars -- which would make the business, in all likelihood, a bad investment given the amount of money invested in it -- it would give each employee an extra $40 a week or so (it would depend on the full-time/part-time thing). That's before payroll taxes, etc. That's not insignificant, especially for people who are scraping to get by, but it's not going to change anyone's life. So when you talk about how Wal-Mart should emulate Henry Ford, where is the money coming from?

The obvious place where it could come from is from Wal-Mart's customers, who are obviously the real winners in the whole situation. But how does raising the prices that one hundred million people -- many, if not most of them, as has been said here, people of modest means -- qualify as a socially beneficial scheme? Given Wal-Mart's impact on American productivity, which a famous McKinsey study has shown is immense, and the way it forces competitors and suppliers to keep prices low, the company clearly saves all of us (even those of us who shop at Target instead) significant amounts of money every year. In that sense, if you're unhappy with Wal-Mart, you're not really unhappy with the company. You're really unhappy with the American consumer's desire to get more for less.

Posted by: James Surowiecki on November 14, 2003 09:18 AM

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I agree with James Surowiecki. Walmart is probably the best managed company in the USA.
Sure there have been some minor problems and some significant discrimination against women problems. But given the poor qualifications of most of WMTs employees it is probably a much better job, and better paying job than they could get elsewhere. I'm willing to bet the average WMT employee probably has a high school diploma, but many, many do not.

For the past several years the deflator for
GAF Sales -- department store type merchandise --
has been averaging about minus 4% (minus is right). WMT has probably done more to benefit the average low income worker than any other major
US institution over the past decade. I hear many
people knocking WMT, and sure it does not meet the standards that upper-income consumers expect,
but for the typical low-income american WMT is offering them more selection and better quality than they can get anywhere else, especially if you are in rural America. In the little town in south-central Kentucky that I left 40 years ago,
(before there was a WMT) WMT is the best store within 100 miles. It depends on your perspective.

Posted by: spencer on November 14, 2003 12:47 PM

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Correction -- the US institution that has dome more for low-income americans is the military.

The US military is the best education institution in the US.

Remember, in the current military everyone is in it because it offers them their best economic opportunity.

OK, what reaction am I going to get to that?

Posted by: spencer on November 14, 2003 12:53 PM

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James Surowiecki asks, "What is the evidence that, relative to other corporations, Wal-Mart is exceptionally evil and profit-hungry?"

Phrasing the issue in terms of corporate morality and greed is a strawman, at least on these boards.

Wal-mart has been in the news lately for coercing overtime, preventing workers from organizing to form unions as is their right under the Constitution, and using aliens under near slave-labor conditions. The reports I see suggest that these abuses are widespread and could be described as the norm.

JC Penney, Sears, Target... have any of these been so accused? If not, then one has to concede that perhaps Wal-Mart's corporate ethics are lesser than its competitors. What does that mean from a business standpoint?

As you point out, Wal-Mart's profit margin is thin-- but that reflects its ambitious growth as well as its attempt to run competitors out of business. A better metric is the enterprise value. If the enterprise value has increased, then one may ask whether that is at the expense of its employees.

The real question to ask is whether Wal-Mart could have knocked out so many competitors had it been forced to obey the law.

I don't know if that is the lashing that Mr. Surowiecki had hoped for. If not, he should feel free to file a complaint and sterner rhetoric will be deployed.

Posted by: Charles on November 14, 2003 01:37 PM

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Just to add a small meek point to what Charles said, would raising pay and improving working conditions for Walmart workers raise prices at Walmart? Yes, but exactly how much would depend on the percentage of labor costs per dollar of sales, which figure I do not know, but I would guess, given the high volume and vaunted efficiency of the operation, it is not a high percentage. Furthermore, though what really counts for wage workers are real wages and thus lower prices are a valid consideration, seeking competitive advantage through lowballing workers' pay puts downward pressure on the pay of competitors' workers and the low-wage population in general, as well, whereas the benefits of lower prices are not just reaped by or distributed to low-wage workers. And as Charles indicated so well, the actual profitablity/competitive advantage gained from such a low-wage policy is not indicated by nominal accounting profits alone, but would have to be scored more dynamically. The net benefits to a corporation and the net benefits to a society and its economy as a whole are obviously not an accounting identity, for all that there is a need to employ the masses of inbred illiterates out there.

Posted by: john c. halasz on November 14, 2003 03:00 PM

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James, Spencer: what an elegant, footnoted way to point out that the back of the invisible hand sometimes has pooh on it. Yeah, and the US Army is the best managed military on the planet. We could fall on any enemy like the proverbial ton of bricks and we do occasionally, eh? Nice but irrelevant.

Size trumps all? A healthy balance sheet the size of Brazil's does not ipso facto indicate a healthy business model. Poor emplyee qualifications? Do some DD and find out how many ex-managers or owners of small vertical businesses are now wearing blue vests, and not as the boss. Charles' enterprise valuation is one I think I agree with. In WMT's case, they are effectively pushing wide swaths of local economic development inititiatives out of the way. They are dividing family allegiances, shredding communities and tax bases in the determined march to shave nano percentages off their operating costs at the expense of entire positive cashflows of suppliers or competitiors. Scorched earth is not in my brochure about the american dream, friends. Neither do I invest in companies that get compared to fascists by my small to mid-cap business-owning clients.

Of course they win and make money. Walmart is the 800 pound perennial champion of the bantam to superheavywweight retail championships. The 800lbs is not hyperbole, nor a typo in the frame of this metaphor.

Posted by: fouro on November 14, 2003 03:09 PM

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If there's a straw man in the debate, I didn't construct him. I was simply responding to Nicholas Weaver calling companies that weren't Wal-Mart "non-evil" (and thus Wal-Mart, by extension, evil, which seems to imply something about corporate morality and greed). In any case, I'm not sure how Wal-Mart's thin profit margin -- that's the 3.2% -- reflects its "ambitious growth." The profit margin doesn't include any spending on expansion, building new stores, etc. And saying Wal-Mart is trying to "run competitors out of business" really means that it's forcing competitors to cut costs and prices or else lose customers. That's exactly how a competitive market is supposed to work. If the implication that Wal-Mart, once it's gotten rid of the competition, will start to raise prices, there's zero evidence of it in the past and no reason to think it will happen in the future.

I wish Wal-Mart would be more receptive to unionization. But again, there's no evidence it's more hostile than myriad other U.S. companies. Sears, Target, J.C. Penney: none of these, unless I'm mistaken, is unionized. Perhaps that's because no one's tried, but I doubt it. And using the subcontractors to clean the stores was beat, but let's be serious before we use words like "slave labor." These people were underpaid. There's no suggestion that they were forced to work, or that anyone was stopping them from returning home. And again, K-Mart and Target have been accused in the past of doing the same. And I don't think anyone who's looked closely at Wal-mart would suggest that the key to its success is a willingness to disobey the law.

The point isn't that Wal-Mart is a saintly company. But I still don't see how its business practices, labor or otherwise, are meaningfully different from other American firms. And balanced against this have to be Wal-Mart's willingness to pass its cost cuts on to consumers and its reputation for scrupulously honest and fair relations with its suppliers (albeit relations that force suppliers to cut costs ceaselessly). I just saw a study that suggested Wal-Mart had saved consumers (directly and by forcing competitors to lower prices) $100 billion. What's the social value of that?

Posted by: James Surowiecki on November 14, 2003 03:13 PM

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One other minor point: I don't really understand the idea that Wal-Mart's profitability needs to be "scored dynamically" or reflected in enterprise value, or whatever. A company's value is the value of its future free cash flow. It's possible -- and perhaps even likely, given today's market -- that the stock market will overvalue companies in the short-term. But over the long run, the value of the company depends solely on the free cash that it generates for shareholders. The 3.2% net profit that it made last year isn't even free cash (it's before money is reinvested in the business). With 4.4 billion shares outstanding, how many billions of dollars a year do you think would constitute a reasonable return on investment?

The dynamic accounting might make sense if you thought that in the future Wal-Mart's profit margin would soar, but I see no evidence of that. Its profit margin has held pretty steady over the past decade, even as it's gotten significantly more efficient, which suggests, again, that almost all of its cost improvements are passed along to consumers.

John's obviously right that low-wage workers don't reap all the benefits of Wal-Mart's low prices, while they bear the brunt of its costs. I'm not sure this is strictly true: Wal-Mart's pressure on suppliers to cut costs has had an effect on myriad different industries. But again, I don't see how Wal-Mart could significantly increase workers' salaries and still make an adequate return on capital. It's just not making enough money, and it has too many workers, for the math to work. More important, low-wage workers surely capture the lion's share of the benefits of Wal-Mart's low prices. And you can't say that about many things in the U.S.

Re: fouro's comments, the idea that Wal-Mart is "shredding tax bases" is absurd. It pays as a high a percentage of its income in taxes as any corporation in America. And as for eliminating the positive cash flows of suppliers and competitors, well, in an efficient market there aren't supposed to be any economic profits. Are we really supposed to celebrate the inefficiency and exercise of local market power that allowed so many local businesses to exploit consumers in the past?

Finally, all the money we save at Wal-Mart is being spent somewhere else, which means that there a host of other small businesses that have customers they otherwise wouldn't.

Posted by: James Surowiecki on November 14, 2003 03:38 PM

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Damn, James, you can do better. Sorry to be so abrupt but your myopia hurts my brain. I'm not an economist, just a guy who helps organizations haul their asses out of the ditch. Consolidation works on a tax base curve as well for an operational cost curve if my understanding is correct. Aggregate tax income can be diminished just as operational costs can be "improved" in this scenario. Sum of parts and all that: 5 Walmart Tax dollars in one payment does not replace 7 tax dollars distributed over say a local grocery store, autoparts biz, office supply outlet ad infinitum.

There is an economic food chain--ignored by the big checkbook crowd who love Crown Jewel silver bullets, like stadia or supermalls, that are monuments to their own ego and business connections and have bupkis to do with organically growing viable economic communities. Per 50 sq miles: 1 lion, 2000 gazelles, 40000 rabbits, 100000 mice, 100,000,000 ants. Call WMT the lion who stoops to eat mice and ant. With no natural competion of note, except its own appetite.

You can talk efficiencies all you like, but your Adam Smith-ism here is a market myth akin to dropping two objects of different weight in a vacuum. Show me a natural and political and economic vacuum. Ain't gonna and doesn't happen.

This kind of silo thinking by you and head-fake "pitching" by big box retailers or, the holy "grail" of economic development, manufacturing, smashes my planning commissioner partner in the head weekly. CEO and politician french kiss, exchanging short-term gain for long term strangulation. Just because you can't spreadsheet incoherent growth policies for towns as easily as P/E ratios, doesn't make those decimated business categories and the resulting displacement and shift of wealth any leass deadly to the country's long term health.

Posted by: fouro on November 14, 2003 04:31 PM

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I don't like walmart mostly how they treat their suppliers. A supplier is traditionally a partner, while WalMart treats them as an enemy.

If WalMart was an individual, it would not be considered a trustworthy person, but rather someone who would squeeze you at a moment's notice.

For now, WalMart results in low prices to the consumer, but for how long until their local monopoly positions allows them to start raising prices? Especially give the current regulatory climate?

Additionally, due to their dominant market position, they are able to dictate their own morality onto suppliers through market forces, a morality which may be different from their customers. Without a single dominant retailer, this wouldn't occur as easily.

Posted by: Nicholas Weaver on November 14, 2003 04:43 PM

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Fouro --

You're lumping Wal-Mart in with a bunch of things that it has nothing to do with, like stadia and supermalls and manufacturers that get tax breaks to build a plant somewhere. These things add little or nothing to the productivity of the economy, they're often subsidized by taxpayer money, and their economic benefits are dubious. Wal-Mart, by contrast, has made the entire U.S. economy more productive, it takes no taxpayer money, and it generates enormous economic benefits for consumers. And those facts need to be taken into account when considering the supposed havoc Wal-Mart wreaks on communities.

More important, I don't accept this fetishization of the virtues of small business. Small retailers have never been known for paying their employees exceptionally well. They're not especially productive, and their prices are higher than they would be in a competitive market. The idea that we should line the pockets of small business owners (which, in practice, is what keeping big-box retailers out means) in order to make town planning easier strikes me as absurd. So, too, does the idea that big-box retailers make for long-term strangulation. Again, all the money we save by shopping at Wal-Mart gets spent somewhere else. So what is it strangling? And as for the long-term, there are towns across the South where Wal-Mart has been for almost three decades. Where's the evidence that it's a bad community member?

Ultimately, your argument is analogous to someone saying in 1908, "If we let Ford make so many Model Ts, it will crush local auto manufacturers, so let's restrict Ford's production and keep the local automakers in business." We didn't do that because we accepted that society as a whole is better off when we can produce more (and sell more) with less labor. This has nothing to do with vacuums, social or otherwise. Productivity is the key to long-term economic health. Allowing unproductive companies -- small or otherwise -- to prosper therefore makes everyone (except the companies) worse off.

Posted by: James Surowiecki on November 15, 2003 12:25 AM

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James Surowiecki:

Retail business is highly competitive and profit margins are thereby low. Bankruptcies are also frequent. In Walmart's case, low wages, economies of scale, high-tech inventory control, and immense market power with suppliers has comprised a business model that is highly competitive, swallowing up competitors and increasing its market power in the process. (I think that they have effectively swallowed up the whole-sale/distribution function in their m.o. and this largely accounts for the inability of more traditional retail business models to compete.) That they then plow their profits back into further relentless expansion, further increasing their market power/distribution of overhead/cost-suppression renders them all the more competitive and powerful. This is a deliberate decision to enhance their reach rather the maximalize their current profitability. I think it is doubtful that they could ever attain true monoploy status given the nature of the business they are in, but dominant oligopoly does seem to be the objective. (And here one can only speculate, but further profitability could be attained by "tie-ins", in deals with other businesses, to their dominant network.) So somewhere between their reported earnings given their rigorous cost-suppression and expansion strategy and the value of the networks that they swallow up, both competitively and complementarily, would lie a more "realistic" estimate of the value of Walmart and their ability to sustain decent wages. This is what I meant by "dynamic scoring". (I was responding to your citation of actual numbers as the sole basis for estimating the margins by which wages could be increased.) Now were Walmart to increase wages by , say, 28%- (the average union premium)- this would certainly force them to raise prices and thereby temper something of their overwhelming competitive advantage, but it would clearly not raise prices by anywhere near that amount, probably by just a few percent. (Hell, would the minimum wage be raised to a reasonable level, say $8/hour, roughly the equivalent of the U.K. minimum wage of 5 pounds, this itself would force Walmart, as well as its like-minded competitors, to raise wages, as well as temper abusive employment practices, due to the competitive pressure of alternative employment on the labor market.) But raising wages would not in any way impugn the actual productivity gains involved, except insofar as they are the result of competitive advantages gained through fanatical cost-suppression.

Posted by: john c. halasz on November 15, 2003 02:43 AM

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James Surowiecki says, "If there's a straw man in the debate, I didn't construct him. I was simply responding to Nicholas Weaver calling companies that weren't Wal-Mart "non-evil" (and thus Wal-Mart, by extension, evil, which seems to imply something about corporate morality and greed)."

Sorry, I didn't catch the reference. One straw man re-assigned. I do tend to think it's silly to call a legal construct "evil" or "greedy". The owners and/or managers of corporations may be either or both, but the corporation itself is simply an idea on a piece of paper.

JS adds, "I'm not sure how Wal-Mart's thin profit margin -- that's the 3.2% -- reflects its 'ambitious growth.' The profit margin doesn't include any spending on expansion, building new stores, etc."

While you're right that capital investment would not show up on the P/L sheet, there are expenses associated with expansion, some of which can't be capitalized. I'm not enough of a financial accountant to give you a sense for how large those are in Wal-Mart's case, but they are there.

JS adds, "And saying Wal-Mart is trying to "run competitors out of business" really means that it's forcing competitors to cut costs and prices or else lose customers. That's exactly how a competitive market is supposed to work."

It's how monopolies work. In competititive markets, everyone is trying to raise the price as high as possible, but it turns out that if they raise it above the equilibrium level, they lose all market share. If Wal-Mart's cost curve were slightly below that of other companies, we would say that the situation represents a competitive market. What's happening is the destruction of business, not simply the reduction of wages and prices.

JS adds, "I wish Wal-Mart would be more receptive to unionization. But again, there's no evidence it's more hostile than myriad other U.S. companies. "

Wal-Mart breaks the law. Unfortunately, these things are not generally talked about openly. In Guatemala, Wal-Mart seems to have been behind the abduction and rape of an organizer. See http://www.rtmark.com/more/walmart.html In the US, they have been repeatedly cited by the NLRB for unfair labor practices http://www.corpwatch.org/action/PAA.jsp?articleid=4851

JS adds, "And using the subcontractors to clean the stores was beat, but let's be serious before we use words like "slave labor." These people were underpaid. There's no suggestion that they were forced to work, or that anyone was stopping them from returning home."

What do you call it when an employer demands overtime and refuses to pay for it? It sounds like slave labor to me.

Wal-Mart lost a case alleging forced labor in 2002 and that's just a small fraction of the problem http://www.cbsnews.com/stories/2002/12/20/national/main533818.shtml

Wal-Mart also uses sweatshop labor http://www.urbanconservancy.org/walmart/award.html and http://www.now.org/issues/wfw/wm-facts.html

Unfortunately, the citations I'm able to give are the tip of the iceberg. For every complaint that's filed, there are perhaps 100 others that aren't. Some of the stories one hears outside of the media are troubling. And remember that US labor norms are far less stringent than the rest of the industrialized world. To the rest of the world, Wal-Mart's practices are regarded as violative of human rights.

If this were simply a matter of normal competition, I'd be in favor. There's no question that Sam Walton's original business model, especially the notion of increasing inventory turnover, represented genuine innovation. The telecommunications links to suppliers was also commendable. But Wal-Mart long ago decided that it was going to make its money any way it could, including breaking labor law, including coercing unpaid work, including sex discrimination, including sweatshop labor.

At this point, Wal-Mart is simply too large and too arrogant for its good or for the nation's. In my opinion, it's time to apply the Sherman Act and time to revive basic labor standards.

Posted by: Charles on November 15, 2003 02:59 AM

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James, I'd like to repeat my plaint of how much I miss you at Slate. "Moneybox" in your day was one of Slate's gems.

Anyway, I share your views on this. I should say that I don't know enough about Wal-Mart in detail to evaluate some of the claims and counter-claims in this thread, and I wouldn't be surprised to discover that Wal-Mart isn't an exemplary corporate citizen.

But I share James's rejection of the "fetishising" of small businesses. I'm leery of Wal-Mart bashing because most of it that I've heard has not been detailed such as Charles's, but just a generalized and oft-accepted maxim that this big chain is Evil and small businesses are Good. And I reject that. In fact, I associated it (perhaps unfairly) with a bourgoisie sense of an entitlement to a quaint shopping "experience", and, you know, no ugly buildings.

Posted by: Keith M Ellis on November 15, 2003 04:48 AM

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Well, I'd written a long response and then the computer crashed and I lost it, so I guess I'll just be brief:

I'm in favor of raising the minimum wage to $8 an hour, as John suggests. The average wage in discount retail is $7.62, though, so I'm not sure how much difference it will make. More to the point, Wal-Mart is not successful because it pays its workers significantly less than other retailers do. K-Mart and Target are hardly munificent employers.

As for raising workers' pay by 28%, let's say, back-of-the-envelope, Wal-Mart pays around $15 billion a year in wages (that's a million workers at $7.62 an hour, annualized, and is about 40% of Wal-Mart's SG&A expenses). A pay increase of 28% would cut pre-tax profits by five billion dollars, or roughly in half. That may be reasonable, but again, it's not as if Wal-Mart has monopoly profits that it should disgorge. It could, of course, raise prices, but in a business where the operating margin is five cents on every dollar, I'm not sure how much room for that strategy there is, either.

Charles' description of Wal-Mart's strategy as that of a monopolist baffles me. Its cost curve is below its competitors (at least its small competitors). They try to raise (or keep) prices above equilibrium. They therefore lose market share (some at first and eventually all). Wal-Mart isn't using loss leaders to drive its competitors out of business and then raise prices. Its prices aren't higher in places where it's been for a long time (and therefore presumably has more market power). It's just more efficient than anyone else, and it passes all those efficiencies along in the form of price cuts, which again is what competition is supposed to do.

Charles' other charges are serious, and I don't want to defend illegal behavior. But in almost all the cases he cites, the actual culprit was not Wal-Mart, but rather one of its suppliers or subcontractors. (In the case of the Guatemalan worker, which is taken from Bob Ortega's book on Wal-Mart, there is zero evidence that Wal-Mart had anything to do with the crime, or that the company even knew that the organizer had talked to Ortega). Obviously, it's easy for big companies to get subcontractors to do their dirty work, so Wal-Mart may in fact be responsible, but I don't think the case against the company is a slam-dunk. More to the point, this whole thread started around the question of whether Wal-Mart is worse than other companies, and there I think the answer is an unambiguous no. I think the economics of "sweatshops" are a good deal more complicated than Charles apparently does, but even if we accept that they are an unalloyed bad, just about every discount retailer in America has been cited for buying sweatshop goods. Wal-Mart is opposed to unions, but again, no discount retailer is unionized. These issues are systemic, not company-specific. (And I will continue to argue that if I do work and then don't get paid, it doesn't make it slave labor. It makes it an employer reneging on a deal. A slave is someone who cannot refuse to work -- this was not true of any of the cleaners.)

By the way, the article that Charles linked to which includes the discussion of the Guatemalan organizer is telling, because a good chunk of it is devoted to precisely the issues that Keith (thanks for the nice comments about "Moneybox," Keith) suggests really bother people about Wal-Mart. You've got the "self-employed clothing designer" complaining about how Wal-Mart is visually atrocious, and how it makes everybody "buy all the same things," and crank James Kunstler inveighing against the company's "corporate colonialism" wrecking downtowns and shutting down businesses whose owners would otherwise coach Little League teams. It's classic Big is Evil stuff.

Posted by: James Surowiecki on November 15, 2003 08:51 AM

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James Surowiecki says, "Wal-Mart is not successful because it pays its workers significantly less than other retailers do. K-Mart and Target are hardly munificent employers."

You look at the nominal wage rate to reach that conclusion. But suppose Wal-Mart is squeezing 12 hours out of people while paying them for eight. Are K-Mart and Target doing the same? I don't think so. Wages are part of cost structure and can't be dismissed out of hand.

JS adds, "A pay increase of 28% would cut pre-tax profits by five billion dollars, or roughly in half."

Or Wal-Mart would be forced to raise its prices.

"Charles' description of Wal-Mart's strategy as that of a monopolist baffles me. Its cost curve is below its competitors (at least its small competitors). ... It's just more efficient than anyone else, and it passes all those efficiencies along in the form of price cuts, which again is what competition is supposed to do."

Monopolies often do seem to be "efficient". They enjoy some competitive advantage that places the cost curve below that of other suppliers. But suppose that Wal-Mart's cost advantage is illegally cheap labor. Is that of benefit to society? When one looks at externalities, Wal-Mart looks to me to be a very expensive store.

As for sweatshop labor worldwide, it's true that Wal-Mart is hardly the only offender. But were companies seeking out sweatshop labor before Wal-Mart pushed prices down so far? I don't think so.

JS adds, "But in almost all the cases he cites, the actual culprit was not Wal-Mart, but rather one of its suppliers or subcontractors. (In the case of the Guatemalan worker, which is taken from Bob Ortega's book on Wal-Mart, there is zero evidence that Wal-Mart had anything to do with the crime, or that the company even knew that the organizer had talked to Ortega). ...I don't think the case against the company is a slam-dunk. "

One's perspective on this comes from how many times one hears the same or similar charges. After a while, one ceases to believe it is all just chance, disgruntled employees or flying saucer tales. Having known a few unindicted corporate criminals personally, I lean toward believing the victims. People who have been subjected to threats or violence are very hesitant to come forward.

Companies are often very good at concealing ties to union busters. Perhaps Wal-Mart did not understand that in a nation where 200,000 people have been murdered by the government, instructing a union buster to stop unionization might lead to violence. Or perhaps they knew very well.

JS says, "A slave is someone who cannot refuse to work -- this was not true of any of the cleaners."

Perhaps you should talk to aliens, particularly illegal aliens. They live here under considerable fear. After the Tiananmen Square massacre, the elder president Bush allowed Chinese to stay in the United States. At that time, a senior corporate executive told me, "We will hire Chinese. We can get them cheaply, and we have them by the balls." And, yes, he got a very compliant workforce, with which he drove his company into bankruptcy through his own bad decisions.

For illegal aliens, the fear is often as great or greater than it was for Chinese resident in the US at the time of Tiananmen. At some point, fear becomes coercion, and coerced labor is slave labor. I don't know specifically about the immigrants who have filed suit. I am, unfortunately, confident that all of the illegals and any of thelegals with so much as a parking ticket will be retaliated against, very likely jailed and deported. In jail, they may well be physically abused.

Is this the way we want our country to be?

JS comments on one of the articles linked, "It's classic Big is Evil stuff."

Unfortunately, the mainstream press doesn't talk much about labor issues. Tell me where I can turn on talk radio run by the United Food and Commercial Workers or the PBS issues show headed by Rich Trumka.

Labor abuses occur in the shadows. In order to learn about them, one needs to go to sources other than the comfortable and familiar ones. I have no qualms about reading articles that I regard as extremist from, say, National Review. One assembles an accurate picture of reality by reading many sources, not by dismissing certain sources because they use strong language or are written by true believers.

Posted by: Charles on November 15, 2003 10:42 AM

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Wow. Thoughtful stuff. I'm in a break from soccer coach dad saturday so no time to really post yet, but my keyboard will be active this evening. James, I too enjoyed your moneybox column, hence my opinion "you can do better."

Suffice to say I am not as you put it, "fetishishing small" business. You miss that and many other points I'll try and express more clearly tonite.

But for Small business: They have many issues, most made of their own shortsigthednes. However clumsy the food chain analogy it is apt, it is there. And It did not apply to small business in and only of itself, but to the ecosystem that it belongs. Neighborhoods, infrastructure, schools, you name it.

And yes my friend, stadia and supermalls are cousins to same "super killer" silver bullet thinking cranked out by b-schools everywhere. Walmart is The Powell Doctrine applied to market force. More later.

Growth for growth's sake is the model of the cancer cell. To suggest that because Walmart can absolutely micromanage to perfection it's supply chain lifeline, and so maintain better P/L, therefore it deserves to live, thrive and rule is exactly how A&P got whammed in the early 20th century--presto, predatary pricing laws were invented. A&P had 3 times more stores than Walmart now. Moguls used the same worshipful "capitalism must rule, darwin is king" to justify their being on top for othr industries too. The Ford example? Won't hunt. If Ford was a player in a mature, broadly and deeply rooted market like retailing the analogy might work. But He, for all intents and purposes had invented the car business. Try another one.

WalMart's been smart, can't fault that. Maybe we can talk tonite about Ted Bundy's IQ relative to his performance. If it weren't for "smart" business people. I'd have no business.

Great thread by the way. Thanks for sharing.

fouro

Posted by: fouro on November 15, 2003 11:38 AM

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Charles --

If Wal-Mart could raise its prices as easily as you suggest, why wouldn't it just do so now? All the extra revenue would drop right to the bottom line. Especially if it's a monopolist, what's stopping it from doing so? More to the point, if it does raise prices, that means that American consumers will be paying for the higher wages. That was my point to begin with: it's the American consumer's desire for more for less, not Wal-Mart, that's the real issue here.

The idea that before Wal-Mart, companies were not seeking out cheaper labor to make shoes and clothing is simply bizarre. The textile industry moved from New England to the South in search of cheaper labor, then to Mexico, and then to Asia, all before Wal-Mart was any kind of force in the market. The same is true of the sports shoe industry, where from the 1970s on production has been done abroad.

Are conditions worse in the factories from which Wal-Mart buys products than those from which Target or Sears buys its products? Even the global anti-sweatshop movement has provided no evidence of this. As far as I can telll, American retailers all buy from similar suppliers, who treat their workers as badly as bosses in newly industrializing countries always have.

The deeper disagreement that we have is that I don't think there's any evidence that Wal-Mart is systematically profiting from underpaying or overworking its employees, relative to its competitors. I have no doubt that some store managers, hyped on the need to keep costs down, illegally forced their workers to put in overtime hours that they did not get paid for. And Wal-Mart should be forced to give those employees back pay, as I think it already has in a couple of cases. But I have tremendous doubts that this, as you suggest, is the reason for Wal-Mart's competitive success. On the simplest level, do you think Wal-Mart has continued, as a company-wide policy, to do this even after it's been sued in 25 states? Doesn't that seem like it would be a crazy strategy to pursue?

One note on Fouros' comments: I'm not arguing growth for growth's sake. I'm arguing that delivering more value for less price is better than delivering less value for more price. And I guess I would still say that talk of ecosystems and food chains boils down to fetishizing small business. Certainly the driver behind all predatory-pricing legislation was small business' attempt to protect their local monopolies or oligopolies. And I don't understand the argument that companies in mature industries should be more insulated from competition than companies in new industries. The fact that you've been in business for a long time should give you no special privileges. In fact, the auto industry in the 1970s is a perfect illustration of this. Had we not allowed Japanese and German competition, we'd still be driving overpriced, unreliable cars that exploded when they were hit from behind.

Posted by: James Surowiecki on November 15, 2003 01:02 PM

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James Surowiecki asks, "If Wal-Mart could raise its prices as easily as you suggest, why wouldn't it just do so now? All the extra revenue would drop right to the bottom line. Especially if it's a monopolist, what's stopping it from doing so?"

You know the answer as well as I do: raise prices, and existing firms would be able to compete. Until Wal-Mart creates a high barrier to re-entry by forcing competitors to close, it has to compete destructively. The following abstract is valuable: http://www.rje.org/abstracts/abstracts/1994/Spring_1994._pp._72_93.html as is this one http://www.rje.org/abstracts/abstracts/1999/Spring_1999._pp._22_43.html

I find it ironic that we agree on the facts but have to quarrel over their interpretation. We would agree that pricing competition has led to the reduction of competitors, as measured by market share. In the limit, that represents pure monopoly. At this stage, it is not pure monopoly. Is Wal-Mart using pricing to maximize current profit (the economically rational strategy) or to drive competitors out (the monopolistic strategy)?

Unless we're allowed to use pentothal and torture on corporate management, neither of us really knows. I base my interpretation in part on having seen the work of unindicted corporate criminals at other businesses. Wal-Mart smells that way to me.

By the way, Business Week states that "one of Wal-Mart's biggest competitive advantages is lower wages." Evidently I'm not the only one who believes they've built their success on the abuse of their employees. Reinstate the Constitutional protections to freedom of assembly, enforce domestic and international law on the use of coerced labor, and Wal-Mart's "brilliant" business strategy might well prove to be as much a mirage as Ken Lay's off-balance sheet entities.

JS adds, "The idea that before Wal-Mart, companies were not seeking out cheaper labor to make shoes and clothing is simply bizarre. The textile industry moved from New England to the South in search of cheaper labor, then to Mexico, and then to Asia, all before Wal-Mart was any kind of force in the market."

Where did the pricing pressures come from? Why didn't companies outsource to Mexico in the 1950s and 1960s-- even the 70s? There are many answers to these questions. One is the high dollar policy of the 1980s. Another is the improvement of transportation and telecommunications. But a third reason is that certain firms began deliberately trying to drive costs as their primary business strategy. Remember: other firms were using a "buy American" strategy, emphasizing service or using strategies other than cost. Such strategies are often effective. But post-1975, with the downward pressure on wages, people could no longer afford to exhibit social solidarity by paying higher prices.

Wal-Mart opened in 1962. One cannot discount it as a force in the movement of manufacturing offshore.

"Are conditions worse in the factories from which Wal-Mart buys products than those from which Target or Sears buys its products? "

I would guess they're comparable but don't have any precise knowledge. Do you?

"...I don't think there's any evidence that Wal-Mart is systematically profiting from underpaying or overworking its employees, relative to its competitors.... On the simplest level, do you think Wal-Mart has continued, as a company-wide policy, to do this even after it's been sued in 25 states? Doesn't that seem like it would be a crazy strategy to pursue?"

Not at all. Ford Motor Company decided that the costs of lawsuits related to the Pinto "exploding gas tank" would be less than the sum saved by not building it right. Again, until one sees corporate amorality in action and the jawdropping sort of wrongful acts it results in, one can hardly believe it. The Business Week citation above agrees that judgment costs are small relative to its profits. Many times, it's easier and cheaper to buy injustice than to do what's right.

I agree that foreign competition with the US auto industry is a good example of how genuine competition is good.

On a personal note, I notice with pleasure that Donald Luskin is on the opposite side of this issue.

Posted by: Charles on November 15, 2003 02:25 PM

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Heh. back between match 3 and 4.

Geez, I should not do this before I have time....

James, Keith, please. This is chess, not addition. Do I fetishize your need for a California lime grower because you like Gin & Tonics? (Guessing, obviously.) Wake up. Walmart knows it can't own the supply chain, and they have demonstrated by virtue of their deep pockets and attractiveness to exactly those smaller players you denigrate, that if you can't own, you indenture. I challenge you to suggest that I'm worried only for mom & pop and their 2 ambitious kids when i talk about "small" business.

Take a helicopter ride, gain some altitude.

America is about diferentiation, and America is a branded product. Walmart is anti-branded products when it CAN be or when it THINKS it can force it's hand. It is NOT a value-added entity, proposition, or model beyond it's own fascination with slotting and SKU-wars to benefit it's own propagation: That is, "everything" at "lower prices". Period. It's glossy 10k and it's actions and operations dream of monopoly and operational cloning of suppliers, in service of "consumers" prove this, at least to me. And so finely tuned is it's ambition, Walmart's relatively off the radar real estate arm makes the top REITs in the country look like pikers. (James, if you don't write it, I willl.) Walmarts imperative, from a strategic standpoint is to dictate the operations, marketing, branding, and staffing requirements of the companies it does business with.

(Given their size, and their live or die value to supliers and consumrs, are you willing to bet on their vision?)

To me, that is anti-market, and anti-democratic. Worse, maybe, it squeezes out innovation due to lack of capitalization or just sheer un-imagination. That's not a good/evil dyad. it's not to say David Glass is Satan. He's just doing his job.

And it's misguided, as practiced up to tthis point. If he were my client, I'd also tell him to slow down and think beyond domination to respectful constituency. Why? Because when everyone had to go the the A& P, they did. not. like. it .

I'm tired, I'm muddy, it's been a long day. Sorry for the brusqueness, back on a rested and footnoted mind...

Posted by: fouro on November 15, 2003 02:49 PM

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PS: One of my favorite Moneybox columns

Posted by: Charles on November 15, 2003 09:45 PM

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Charles, I'm not sure we completely agree on the facts. You seem to be implying that Wal-Mart is engaging in predatory pricing in order to drive competitors out of business. (At least, that's what the abstracts you linked to are about.) Predatory pricing traditionally implies that a company is cutting its own prices so low that it's taking a loss, which it's willing to do to drive competitors out of business. I don't think Wal-Mart is doing that. It's just setting prices as low as it can and still make a small profit on each sale, while maximizing inventory turnover. I don't know of any economist who would say this was a bad or disreputable strategy.

That Business Week line has no accompanying data to back up the assertion. Time magazine writes, "Wal-Mart's wages are competitive with those paid by rivals such as K-Mart and Target."

With regard to outsourcing and cost-cutting, I think you're indulging in a historical fantasy when you say that before 1975 Americans were willing to pay higher prices in order to "exhibit social solidarity." In fact, as Fouros has suggested with his mention of A&P, the battle of small businesses and manufacturers against price-cutting retailers raged throughout the twentieth century. If there's a real reason why the quest for lower prices became ubiquitous after the mid-1970s, it may be that that's when Congress finally repealed a law that had allowed states to enact price-maintenance -- that is, price-fixing -- statutes. In other words, in many states it was actually illegal to cut prices too much. These were not laws that most Americans wanted, but they were laws that small businesses -- who we know exert inordinate influence over state legislators -- wanted. I think since then, Americans have voted with their dollars and made it clear what kinds of prices they prefer to pay.

I'd similarly take issue with your account of the evolution of outsourcing. To me, it's much more a case of developing countries finally having the industrial know-how and infrastructure to become reliable suppliers, along with the improvements in telecom and transportation you mentioned. Certainly had the container ship never been invented, the global economy would look completely different. Wal-Mart did not drive these changes, any more than it drove the move of the American textile industry from New England to the South.

Obviously, our real disagreement is over the real source of Wal-Mart's success -- criminal behavior or operational hyper-efficiency -- and over the consequences of its low-cost strategy. I'll give our host the last word (from me) on the question. This is from an article Brad co-wrote with Stephen Cohen and John Zysman:

"Wal-Mart's extraordinary efficiency advantage can be credited in large part to its early investments in modern information technology, and to careful thought and skilled execution of how modern information technology can achieve economies of distribution. . . . These efficiencies went primarily to boost the real incomes of shoppers across the country who
benefited from the lower prices and greater range of goods available at Wal-Mart and its
imitators."

That about says it all.

Posted by: James Surowiecki on November 16, 2003 12:08 PM

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James Surowiecki says, "Predatory pricing traditionally implies that a company is cutting its own prices so low that it's taking a loss, which it's willing to do to drive competitors out of business. "

That implication is not necessarily correct. If a would-be monopolist can cut its prices far enough to put competitors out of business while still running a profit, it might well do so. That's the case of Wal-Mart. Why does it not raise its prices? Because it would lose market share. Is it profit-maximizing or market-share maximizing? Neither of us can be certain. My opinion is they are maximizing market share at the expense of profit. That is a monopolistic practice.

JS adds, "That Business Week line has no accompanying data to back up the assertion. "

So you dismiss it out of hand? On that basis, one would dismiss your entire half of this discussion.

JS adds, "Time magazine writes, "Wal-Mart's wages are competitive with those paid by rivals such as K-Mart and Target.""

The *nominal* wage rates may well be. But you forget that we were discussing coerced labor and how the *real* wage rate may well be substantially lower than the nominal.

JS adds, "With regard to outsourcing and cost-cutting, I think you're indulging in a historical fantasy when you say that before 1975 Americans were willing to pay higher prices in order to "exhibit social solidarity." "

I was basing that comment on what happened in the early 1980s, as the wave of good, cheap Japanese products arrived on American shores. Many manufacturers, notably Chrysler, launched a "Buy American" campaign. Prior to that, Japanese products were regarded as inferior (with no little odor of racism around that characterization.) Indeed, in the post-war period, many people would not buy Japanese products because of Pearl Harbor. All of these are manifestations of social solidarity as a factor in purchase decisions. Do you deny that they exist? Do you fail to see social solidarity as a factor in the anti-price cutting state laws you cite?

No, when one speaks of fantasy, one should go back to some of the columns written about, say, the AOL-Time Warner merger. At the time of that merger, I regarded it as a huge mistake on the part of Time Warner, one that was blindingly obvious: old-line execs, dazzled by new technology and hype, exchange the family jewels for a packet of magic beans.

At the time of the merger, that thinking was derided. People like me were fools who couldn't see the synergy, the new paradigm, the power of the Internet.

Perhaps you might take just a half dram of humility? It would help in discussion.

The issue of state laws regarding price cutting is one that I would like to read more about. Do you have a link?

JS adds, "I'd similarly take issue with your account of the evolution of outsourcing."

Although, apparently, you *agree* with all of what I *said* was a multifactorial process for which enumeration of all the factors is difficult. This is quibbling for the sake of quibbling.

Also, technological push and demand pull are two different issues. Where did the demand side for trade come from? In large part, from the quest for low wage labor. Where did that come from? From consumer demand for cheapness over other product virtues. Where did the consumer demand come from? From the pressure of stagnant/declining salaries among other factors.

JS quotes DeLong et al in saying, ""Wal-Mart's extraordinary efficiency advantage can be credited in large part to its early investments in modern information technology, and to careful thought and skilled execution of how modern information technology can achieve economies of distribution. . . These efficiencies went primarily to boost the real incomes of shoppers ..."

It's certainly one factor. And I certainly don't disagree with the effect on shoppers' incomes. The problem is what happened to the incomes of workers and suppliers. It's only when one adds up *all* of those factors that one can say, "That about says it all."

Many economists, notably Joseph Stiglitz, are re-thinking the 1990s, the effects of globalization and so on. At the moment, my position-- that Walmart owes its success post 1980 in considerable measure to abusing workers-- may well be a minority position. But, as everyone who has consumed a half-dram of humility knows, minority positions very often turn out to be right. Think AOL-Time Warner.

Posted by: Charles on November 16, 2003 12:50 PM

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Sorry this link failed to show up in a previous post:

A favorite Moneybox article: slate.msn.com/id/1004347/

Posted by: Charles on November 16, 2003 12:52 PM

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Charles,

"Sorry this link failed to show up in a previous post:

A favorite Moneybox article: "

http://slate.msn.com/id/1004347/

You only have to prepend http:// to the URL if you put a "a href" it is stripped out.

DSW

Posted by: Antoni Jaume on November 16, 2003 01:02 PM

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Thanks, Antoni.

Posted by: Charles on November 16, 2003 03:05 PM

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Well, I wrote a long response and then lost it all, and I'm too weary to rewrite it, so just a few short notes:

I'm not sure what the opinion I had on the value of AOL's stock in the winter of 2000 has to do with my opinion of Wal-Mart today. Nor do I understand the line about half of a dram of humility. I don't think my position on Wal-Mart is infallible. I may be wrong. But I think I'm right. Do you feel differently about your position? And are you seriously arguing that because I was wrong about AOL's stock price, my comments today about Wal-Mart should be discounted? I'm sorry, but that's just a bizarre debating tactic.

Setting aside your ad hominem attack, our disagreement about the history of outsourcing is not a matter of quibbles. On the contrary, it's central to the argument. I don't think the rise of outsourcing had anything to do with a decline of social solidarity or an increased willingness on the part of Americans to place price ahead of other considerations. Similarly, the success of Japanese products in the 1970s and 1980s was not due to Americans' newfound obsession with price as a result of downward wage pressure. It was the result of the fact that -- for the first time -- Japanese products were superior in quality and value to American products. If Japanese products had a reputation as inferior before that, it's because they were. Of course, some consumers have always preferred to "buy American." But before the 1970s, consumers had almost no opportunity to buy good, reliable, cheap foreign products -- because, for the most part, they did not exist. When they did get the chance, they leaped at it. Look at the success of the Volkswagen in the late 1950s and early 1960s. This was just fifteen years after World War II, but Americans still happily bought Beetles.

Wal-Mart has a million employees. It has a hundred million customers every week (including, I presume, many of its employees). I have a hard time imagining any scenario in which the social benefits to Wal-Mart's customers are outweighed by the costs (assuming they exist) to its employees. As for its suppliers, insofar as Wal-Mart has forced them to become more productive and efficient, and has eliminated any excess profits they were making because of a lack of competition, that's a good thing for society as a whole. In an efficient market, there are no economic profits.

One last question: What facts could change your mind? The evidence of Wal-Mart's corporate criminality is anecdotal and piecemeal. We have no evidence that the forced overtime or employing illegal aliens was done at the behest of corporate headquarters, or that these things occurred at more than a small fraction of Wal-Mart's stores. But you believe that these practices were company-wide and systemic, which perhaps they were. Given that Wal-Mart executives are unlikely to ever admit that their success was due to coercive labor practices, and given that you don't believe them when they make their denials, what evidence would suffice to convince you that you were wrong?

Posted by: James Surowiecki on November 16, 2003 03:19 PM

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Here's another article on Walmart for your edification...
http://www.fastcompany.com/magazine/77/walmart.html

Posted by: Wes McGee on November 16, 2003 08:44 PM

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Whoa. Interesting stuff. Would have loved to contribute but we achieved a broken leg in the fouro family Saturday evening at the much muddied soccer matches. Reading and enjoying, catching up when possible.

Posted by: fouro on November 17, 2003 09:28 AM

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Charles, I'm with James on the labor point. As I said, Walmart is very smart, but I don't think--absent some screw-ups--that they're criminal.

Likewise, I'm a firm believer in "innovation" as a defense against discounting. Problem is, many products find themselves in maturity and suffer from leadership that does not get "innovation". That's bad for two reasons:

1. They expose their underbelly to WalMart style retailers who view volume as the "cure" and

2. Customer choice gets refined down, not outward or upward.

Walmart's story is not one of price cutting per se, but of the ethic of price cutting, and what it is doing to the retail--and overall--market. This is market convergence, not divergence. Genericizing branded products--encouraging, insisting, downward price movement--ignorant of valuation simply because you can, is a doomsday scenario for retailing. With WalMart's size and clout, that should be worrisome for more than just their suppliers.

Posted by: fouro on November 17, 2003 10:24 AM

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James Surowieki says, "I don't think my position on Wal-Mart is infallible. I may be wrong. "

Such an attitude does not exactly jump out at the reader when one uses phrases such as "simply bizarre" and "fantasy" to describe the opposition position in debate. Accusing *me* of ad hominem is truly rich.

The Moneybox column is only relevant for one line: an unequivocal declaration that AOL stock was not overvalued in January, 2000.

The absolute certainty that other voices must be wrong runs through (your side of) our debate. Where I see a patch of common ground, you insist that there is none. Such certainty about the sources of Wal-Mart's success is just as well-founded as that of your call on AOL. In fact, I think you argued that one better than you have argued your case here.

I understand your opinion that social solidarity and declining wages have no role in purchase decisions. I've presented my reasons to believe that they are. I've presented a quote from Business Week indicating that low wages are a significant factor in Wal-Mart's success (this you discarded because there were no detailed figures given.)

If you had given me any substantive reason to change my opinion, I would have. I see no substance in your defense of your position. What facts could change my mind? Try presenting some and let's see. So far, I find few if any facts in your posts.

What I find is opinion, unsubstantiated so far with even a link-- and yes, I have read the B-school papers about how brilliant Wal-Mart's business model is. So was Enron's in September, 2001. But where's that link regarding 1970s era laws on price cutting, for example?

Yes, the evidence of corporate criminality is fragmentary and anecdotal. This is usually the case when crimes are committed. One does not know the depth of the criminality until there is a thorough investigation. Forty citations by the notoriously ineffectual NLRB is, however, extraordinary and suggests a pattern and practice of contempt for the law. Unfortunately, opinion either pro or con will remain opinion until there are serious protections of the right to organize and other basic human rights. That's not likely to happen in this new Gilded Age.

Regarding "excess profits," I do happen to understand basic economic theory. I also know that economic theory doesn't precisely correspond to the real world. The "excess profits" that a unionized worker "wrings" out of his employer are the money that sends his daughter to medical school. If he were unable to do that, only the owners of property would be able to enjoy such things.

In the laissez faire extremism that is the vogue nowadays, human considerations like that one are wrung out of the debate. What is left is a world headed toward serfdom, led down this path by economic ideologues who don't even really understand the theory.

Ironically, the best theorists, the ones who understand the approximations and assumptions that are made in constructing a theory are often sensitive to the issues of externalities, market imperfections and so on. Those who are rigidly doctrinaire are often, in my opinion, those who don't know how the sausage is sliced in making economic theory.

Unless my comments about what I regard as a regrettable style of debating on your part have any resonance, let's leave it there. Time will show who is right.

Posted by: Charles on November 17, 2003 01:30 PM

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Wes McGee, thanks for the link. It made interesting reading, and was balanced in terms of seeing the pros and cons.

The fact that suppliers are afraid to simply talk about Wal-Mart is what I see as the most interesting feature.

Fouro, I'm sorry to hear about the broken limb. It sounds like you take your soccer seriously.

As for whether Wal-Mart's success is due to criminality or to normal corporate behavior, it is necessarily a matter of opinion. That's understood. Until light is cast on the issue by having some truth on the extent of their criminality, I will follow my nose. That nose scents in the corporate hagiography the odor of the same sort of BS that Ken Lay put out. It can be wrong.

There are many industries where real innovation is simply not realistic. At the high end of technology, discontinuous change is a good strategy.

But the high end is getting narrower. We need to have an economy that works for everyone, not just some or many or even most.

In fact, we need to keep in mind that the *human outcomes* are the bottom line of economic theory. It's all very well if for GDP to rise, but if the cost is turning the United States into a corporate state, the cost is too high. Only when GDP rise is accompanied by greater freedom, greater peace, greater tolerance for others, greater ecological stability, and greater satisfaction with life can it be called success.

Posted by: Charles on November 17, 2003 01:54 PM

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Fouro, my response yesterday failed to post.

I'm sorry to hear about the broken bone. It sounds as if Fouros take their soccer seriously.

As for criminal vs. occasional screwup, the data isn't there to prove either side. Time, one hopes, will tell. Wal-Mart smells like Enron to me: a magic paradigm which creates untold wealth and foreshadows a great new era... which, on closer examination, proves to be a chimera. I could be wrong.

For some industries, innovation is a real strategy. For others, it's not. As shown by the article posted by Wes McGee, Vlasic tried to market its pickles by differentiation. Wal-Mart's strategy was to have Vlasic produce unsliced pickled cucumbers. Neither strategy kept the company solvent. Sure, there have been great examples of innovation in the food industry. But innovation costs money, and low-margin industries don't have it.

Posted by: Charles on November 18, 2003 01:39 PM

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If you would be unloved and forgotten, be reasonable.

Posted by: Maisel Mel on November 28, 2003 01:13 PM

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Perceptions do not limit reality.

Posted by: Abe Kaho on November 28, 2003 01:17 PM

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Unusual ideas can make enemies.

Posted by: Mohaiemen Naeem on December 9, 2003 07:33 PM

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Some things cannot be taught, only discovered.

Posted by: Yazmir Keith on December 20, 2003 02:05 PM

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Communism has nothing to do with love. Communism is an excellent hammer which we use to destroy our enemy.

Posted by: Lieber Katherine on January 8, 2004 06:41 PM

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Describing is not knowing.

Posted by: Henckler Andrew on January 9, 2004 12:44 AM

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