NYT Editorial: Don't Blame Wal-Mart

[Unassisted]

I'm not a fan of Robert Reich, but I liked his NY Times editorial today about Wal-Mart. IMHO, it'd be tough to stop shopping there on principle.

http://www.nytimes.com/2005/02/28/opinion/28reich.html?

Don't Blame Wal-Mart

By ROBERT B. REICH

Published: February 28, 2005

erkeley, Calif. — BOWING to intense pressure from neighborhood and labor groups, a real estate developer has just given up plans to include a Wal-Mart store in a mall in Queens, thereby blocking Wal-Mart's plan to open its first store in New York City. In the eyes of Wal-Mart's detractors, the Arkansas-based chain embodies the worst kind of economic exploitation: it pays its 1.2 million American workers an average of only $9.68 an hour, doesn't provide most of them with health insurance, keeps out unions, has a checkered history on labor law and turns main streets into ghost towns by sucking business away from small retailers.

But isn't Wal-Mart really being punished for our sins? After all, it's not as if Wal-Mart's founder, Sam Walton, and his successors created the world's largest retailer by putting a gun to our heads and forcing us to shop there.

Instead, Wal-Mart has lured customers with low prices. "We expect our suppliers to drive the costs out of the supply chain," a spokeswoman for Wal-Mart said. "It's good for us and good for them."

Wal-Mart may have perfected this technique, but you can find it almost everywhere these days. Corporations are in fierce competition to get and keep customers, so they pass the bulk of their cost cuts through to consumers as lower prices. Products are manufactured in China at a fraction of the cost of making them here, and American consumers get great deals. Back-office work, along with computer programming and data crunching, is "offshored" to India, so our dollars go even further.

Meanwhile, many of us pressure companies to give us even better bargains. I look on the Internet to find the lowest price I can and buy airline tickets, books, merchandise from just about anywhere with a click of a mouse. Don't you?

The fact is, today's economy offers us a Faustian bargain: it can give consumers deals largely because it hammers workers and communities.

We can blame big corporations, but we're mostly making this bargain with ourselves. The easier it is for us to get great deals, the stronger the downward pressure on wages and benefits. Last year, the real wages of hourly workers, who make up about 80 percent of the work force, actually dropped for the first time in more than a decade; hourly workers' health and pension benefits are in free fall. The easier it is for us to find better professional services, the harder professionals have to hustle to attract and keep clients. The more efficiently we can summon products from anywhere on the globe, the more stress we put on our own communities.

But you and I aren't just consumers. We're also workers and citizens. How do we strike the right balance? To claim that people shouldn't have access to Wal-Mart or to cut-rate airfares or services from India or to Internet shopping, because these somehow reduce their quality of life, is paternalistic tripe. No one is a better judge of what people want than they themselves.

The problem is, the choices we make in the market don't fully reflect our values as workers or as citizens. I didn't want our community bookstore in Cambridge, Mass., to close (as it did last fall) yet I still bought lots of books from Amazon.com. In addition, we may not see the larger bargain when our own job or community isn't directly at stake. I don't like what's happening to airline workers, but I still try for the cheapest fare I can get.

The only way for the workers or citizens in us to trump the consumers in us is through laws and regulations that make our purchases a social choice as well as a personal one. A requirement that companies with more than 50 employees offer their workers affordable health insurance, for example, might increase slightly the price of their goods and services. My inner consumer won't like that very much, but the worker in me thinks it a fair price to pay. Same with an increase in the minimum wage or a change in labor laws making it easier for employees to organize and negotiate better terms.

I wouldn't go so far as to re-regulate the airline industry or hobble free trade with China and India - that would cost me as a consumer far too much - but I'd like the government to offer wage insurance to ease the pain of sudden losses of pay. And I'd support labor standards that make trade agreements a bit more fair.

These provisions might end up costing me some money, but the citizen in me thinks they are worth the price. You might think differently, but as a nation we aren't even having this sort of discussion. Instead, our debates about economic change take place between two warring camps: those who want the best consumer deals, and those who want to preserve jobs and communities much as they are. Instead of finding ways to soften the blows, compensate the losers or slow the pace of change - so the consumers in us can enjoy lower prices and better products without wreaking too much damage on us in our role as workers and citizens - we go to battle.

I don't know if Wal-Mart will ever make it into New York City. I do know that New Yorkers, like most other Americans, want the great deals that can be had in a rapidly globalizing high-tech economy. Yet the prices on sales tags don't reflect the full prices we have to pay as workers and citizens. A sensible public debate would focus on how to make that total price as low as possible.

Robert B. Reich, the author of "Reason: Why Liberals Will Win the Battle for America," was secretary of labor from 1993 to 1997.

[GAC]

Did anyone happen to see the CNBC special on WalMart last night? Very in-depth, and killed some of the myths and misperceptions spread about Wal-Marts that seem to be going around. They talked with alot of Wal-marts suppliers and contractors, and even went to their headquarters in Arkansas to show how the process works. They even went along with some suppliers in the process to try and get Wal-Marts to carry their product. Very informative.

If Wal-Marts is so hard on suppliers (and unfair), then why are they lined up for miles DAILY trying to get them to carry their product?

They interviewed numerous suppliers, both large and small, and they all agreed that Wal-Marts is tough when it comes to wanting to keep prices down; but they all said that Wal-Marts is fair. Everyone said the same thing. And Wal-marts so-called "tactics" have trickled down and caused suppliers to improve their own efficiency and systems.

[cincinnati chili]

Great editorial.

Thanks!

[Redsfaithful]

They interviewed numerous suppliers, both large and small, and they all agreed that Wal-Marts is tough when it comes to wanting to keep prices down; but they all said that Wal-Marts is fair.

I'd love to see the supplier that would say Wal-Mart is unfair. That's a great way to guarantee that they won't be carrying your goods.

[Redsfaithful]

And to echo Chili, thanks for posting this, it's interesting.

[Reds/Flyers Fan]

I absolutely despise Wal Mart and would gladly pay a little more somewhere else to avoid going in there.

The fact that this destructive chain is bulldozing acres of pristine farmland near Lebanon on Rt. 42 doesn't help their case with me. Like the world needs another Super WalMart. I guess Lebanon's quaint small town business district was too tempting...Wal Mart would love to see it shuttered up.

[cincinnati chili]

I absolutely despise Wal Mart and would gladly pay a little more somewhere else to avoid going in there.

I agree with you. I haven't gone to WalMart in a few years, after learning about their practices. This editorial does point out some of my own hypocricies tho', such as being pro living-wage, yet scouring the internet for the cheapest airfares and cheapest books.

The article just shows that the dialogue on the balance between pro-consumerism and pro-decent wage needs to be bumped onto a higher level in a hurry. It's not nearly as simplistic as people on the left and right try to make it.

[GAC]

I'd love to see the supplier that would say Wal-Mart is unfair. That's a great way to guarantee that they won't be carrying your goods.

You could say that about an enterprise/business. You speak bad about someone and I doubt they'll want to do business with you.

There were suppliers who acknowledged Wal-Marts tough standards and negotiating tactics, especially when it came to keeping prices down. They covered and talked in-depth on this issue. And they had people from both sides responding (Wal-Mart's CEO and various suppliers). CNBC went pretty in-depth on how the process works from beginning to end (buyer-sellers). And some suppliers readily acknowledged that at first they didn't like it, and saw it as possibly being strongarmed. But after they have been in their relationship with Wal-Marts, and saw how it has improved their processes (and profits), and helped to expand their businesses in the longrun, they see it differently now. Some may interpret that as being unfair or getting the shaft. Some see it as the fine art of negotiating.... the art of the deal (haggling).

Does Wal-Mart hold the upper hand in any way? Sure they do. The tide has shifted. They didn't get to be the world's #1 retailer via unethical or immoral business practices; but through hard work, an developing a logistic and very efficient system that has blown the other retailers away.

And I find it interesting that people support an global economy; but it seems to me that America is not prepared, or has yet been able to adapt, in order to COMPETE in that global economy where the competition is very fierce.

You don't like the cheap foreign labor? Or the reasons these other 3rd world countries are able to utilize it due to their lower standards of living? Then what is the solution? tariff wars? And it's just not America's retail industry that is suffering/taking all the hits in this global economy.

Here is an excellent article....

http://www.pbs.org/wgbh/pages/frontl...ets/shots.html

Washington -- For me as a reporter, the most startling discovery of six months of reporting was how much our major mass retail chains call the shots in today's global economy, with a powerful impact on the decline of manufacturing in America and the rise of manufacturing in China and Asia.

"Wal-Mart is one of the key forces that propelled global outsourcing -- off-shoring of U.S. jobs -- precisely because it controls so much of the purchasing power of the U.S. economy," says Gary Gereffi, a Duke University professor who studies global supply chains.

"Wal-Mart," Gereffi continues, "has life-or-death decision over [almost] all the consumer goods industries that exist in the United States, because it is the number one supplier-retailer of most of our consumer goods -- not just clothes, shoes, toys, but home appliances, electronic products, sporting goods, bicycles, groceries, food."

At first blush, this seems a stark assertion. It comes as a shock because this isn't the way most of us think the global economy works. We don't imagine that retail chains are deciding whether goods should be produced in the U.S., China, Mexico or Bangladesh.

This is because global economics is a bit like geology: Massive subterranean shifts take place below the surface, and we discover them only when our world is shaken. So we notice U.S. jobs migrating overseas as we see factory lights go out from Ohio to the Carolinas to California. We're generally aware of job losses since the early 1980s to waves of imports from Japan and the Asian tigers that hit one industry after another -- steel, autos, electronics, textile, apparel and toys.

So when it comes to cause and effect, we attribute our woes primarily to the export boom in China -- and before that, in Japan, Korea, Hong Kong and Taiwan. But scholars now explain that since Japanese cars and electronics swept into America in the late 1970s and '80s, most of our job and industry losses didn't happen primarily because of Asia's aggressive export policies.

Instead, the experts tell us, these are self-inflicted wounds. American companies played a central role in the rise of China and the Asian Tigers. The seismic shifts in the global economy, they say, have been largely driven by American companies -- not just by multi-national manufacturers like GE or Hewlett Packard moving production overseas, but by giant American retailers like Wal-Mart, Target, Kmart, Toys "R" Us and Home Depot, and brands like Nike or Liz Claiborne galvanizing Asians to export to the U.S.

The Americans, they say, have gone well beyond merely hunting for bargains already being produced in Asia. In fact, both academics and business executives report, American retailers have actively driven outsourcing -- teaching East Asians how to design and manufacture products for American consumers, creating their own house brands in league with Chinese and Asian producers, and then bluntly warning beleaguered U.S. manufacturers that they'd better move their American plants to China and Asia if they want to survive.

Years of extensive interviews with Asian and American manufacturers, as well as study of trade flows, have persuaded Professor Gary Hamilton of the University of Washington, that the big box retailers, epitomized by Wal-Mart, have been "driving a massive restructuring of production worldwide; moving jobs from the U.S. and Europe to Asia. They do it by setting price points and forcing suppliers to meet their targets. Only lowest-cost labor can meet their targets, and that means producing in Asia."

Case in point: Bill Nichol, CEO of Kentucky Derby Hosiery, a sock manufacturer that has supplied Wal-Mart for 40 years. He credits Wal-Mart with forcing his company to be more disciplined and efficient, but he adds: "Their message to us, surprisingly, is, 'There's a broad market out there. If you want to focus on the lowest-cost part of the market, it's obvious that you can't do that in the United States'." So half of Nichol's 1,500 U.S. employees will soon be out of work and he'll have to open plants in China and other low-cost countries to hang onto his Wal-Mart account.

We heard that story again and again from American manufacturers in sectors as diverse as electronics, apparel, bicycles, furniture, and textiles. They expressed private dismay at the relentless pressure from the likes of Wal-Mart and Target to cut costs to the bone in America and then, when that did not satisfy the mass retailers, more pressure to move production to China or elsewhere offshore. But most did not dare to go on camera and tell their story publicly for fear of jeopardizing their remaining sales to Wal-Mart.

Wal-Mart -- Changing the Economic Balance of Power

What lies behind this surprising story is the largely unnoticed shift in the balance of power in American business. This world has been so dramatically transformed in the past 15 years that academic analysts say we now live in what they call a "buyer-driven" global economy.

Nelson Lichtenstein, an economic historian at the University of California, Santa Barbara, draws a colorful analogy to medieval times: "The power of Wal-Mart is such, it's reversed a hundred-year history in which the manufacturer was powerful and the retailer was sort of the vassal," he says. "It's changed that. It turned that around entirely. Now the retailer, the mass global retailer, is the center, the power, and the manufacturer becomes the serf, the vassal, the underling, who has to do the bidding of the retailer. That's a new thing."

Brink Lindsey, an economist at the Cato Institute, a liberterian Washington think tank, agrees. "We've definitely seen a shift in the balance of bargaining power between manufacturers and retailers," Lindsey says. "Back in the old days, manufacturing was a high-productivity endeavor; retailing and distribution was fairly low-productivity. And manufacturing was big and consolidated; retailing was small-scale and decentralized. And so manufacturers called the shots.

"Now, things are very different. You have large-scale retailing that's very high-productivity, that has a lot of bargaining power. And they can go to smaller manufacturers and call the shots and say, 'If you want to be on our shelves, you have to do it our way.' …Wal-Mart -- they're very demanding, and they've got a lot of bargaining clout to back up their demands."

So how did the world of business get turned upside down?

In part, as Lindsey says, power shifted because the mass discount chains consolidated the retail industry. At Rubbermaid, for example, former CEO Wolf Schmitt recalls that in the early 1980s his company used to make products for thousands of different retailers, but within a few years, Rubbermaid was selling two-thirds of its output to just half a dozen big chains.

Today, many manufacturers sell 20-30 percent of their output to just one big box retailer -- Wal-Mart, which represents the consolidated buying power of 100 million customers who shop in its 3,500 stores every week.

But there are other secrets to Wal-Mart's leverage in the marketplace. One is that, far better than its competitors, Wal-Mart understood the power of information. It revolutionized the retail industry by blazing a new trail with information technology.

David Glass, who succeeded founder Sam Walton as Wal-Mart's former CEO, helped persuade Walton to invest in IT and computers. Bobby Martin Jr., for a long time Wal-Mart's chief information officer, pushed the retail trade to adopt the universal barcode, forcing manufacturers to adopt common labeling in place of their own labels. That helped put retailers in the driver's seat.

Then Wal-Mart exploited the magic of the information hidden in the barcode. That put Wal-Mart ahead of the curve, and ahead of its suppliers, in terms of understanding exactly what consumers want and are buying.

"You can track sales on specific items specific weeks, specific days, specific hours of the day," former Wal-Mart store manager Jon Lehman told me. "You can find out what size of toothpaste is your best seller, what times of the year you sell that toothpaste. You can track sales spikes during the year, during certain seasonal periods -- clothes, sizes, colors, flavors -- all of those things. It's really incredible."

By accumulating information from year to year, Wal-Mart can foretell seasonal trends. From current sales, it can jump on hot new items. From detailed data gathered at each individual store, it can tailor the product mix to the demographics of local shoppers -- young or old, rural or urban, civilian or military, warm climate or cool, boot-cut jeans or straight cut, chunky peanut butter or smooth.

Wal-Mart's use of IT gave it another leg up -- undisputed mastery of the arcane but vital world of logistics. It has fine-tuned its supply chain from factory floor to store shelf, insisting on just-in-time deliveries from its suppliers to cut waste and down-time in warehouses.

Sam Walton -- Going Global for Bargains and Profits

As a world leader in logistics, Wal-Mart has taken its logistical genius around the globe and made the most of it.

Back in the late 1970s, Sam Walton, Wal-Mart's founder, first began scouring the globe for cheap imports. But Sam Walton was not the first. Sears, Montgomery Ward, JCPenney and Kmart got to Asia ahead of Walton, and for several years Wal-Mart lagged behind them in global sourcing.

But as Wal-Mart gained competitive advantage through its computerized supply chains, it overtook its rivals and became the most efficient global sourcer of all. Today, it is a massive conveyor belt to the U.S. consumer of $15 to $30 billion a year in products from China. By the estimate of Retail Forward, Wal-Mart now imports more than half of its non-food products.

"They were more single-minded in terms of global cost cutting and internal efficiency than any other U.S. retailer," says Professor Gereffi of Duke. "And that helps us understand how and why they were able to pass companies like Kmart and Sears that were the early leaders in U.S. retailing and offshore sourcing."

For a long time, Wal-Mart soft-pedaled its growing dependence on low-cost Asian imports, especially during the late 1980s and early 90s when Wal-Mart was touting Sam Walton's "Buy American" campaign. In fact, in several highly publicized examples, Sam Walton did help out some U.S. companies by buying their products when imports were on the verge of driving them out of business.

Nonetheless, Wal-Mart kept steadily expanding its low-cost Asian imports through the '80s and '90s, according to Jay Moates, chief U.S. accountant for PREL (Pacific Resources Exports, Ltd.), Wal-Mart's exclusive global buying agency from 1989 to 2002. "I think it's one thing to have those sentimental thoughts and values and another to short your shareholders," said Moates. "I mean if you can get the [imported] product cheaper and sell it, I think you're obligated to do that."

Imports helped fatten Wal-Mart's profits, Moates told me, because he estimated Wal-Mart's profit margins were four to six times higher on Asian imports than on American-made goods.

A Global Procurement Center in China

Wal-Mart ramped up its global sourcing even further in 2002, when it took over the global buying operation from PREL and set up its own global procurement center in Shenzhen, the "miracle city" and hub of South China's export industries.

Wal-Mart prefers to deal directly with the Chinese and other suppliers, Ray Bracy, Wal-Mart Vice President for Federal & International Public Affairs, told me. "If there's a middleman in our process, even if it's a Wal-Mart middleman," Bracy said, "we try and eliminate those." From PREL's long work, Wal-Mart inherited a massive list of global suppliers, now winnowed down to 6,000 global suppliers, 80 percent in China.

Lee Scott, Wal-Mart's current CEO, and other top Wal-Mart executives make the point that Wal-Mart is serving American consumers by getting imported goods at the lowest possible prices. Some economists even credit Wal-Mart with lowering the U.S. rate of inflation by its aggressive cost-cutting and raising U.S. productivity through its supply chain efficiencies. But when Lee Scott and Tom Schoewe, Wal-Mart's chief financial officer, talk with Wall Street analysts, they also point to global sourcing as vital to maintaining and increasing Wal-Mart's bottom-line profits.

Moreover, both scholars and U.S. manufacturers describe Wal-Mart's role as much more pro-active in pushing U.S. production overseas. Professors Gereffi and Hamilton contend that Wal-Mart's global procurement operation has the power to decide not only what to buy but where and in what countries goods will be produced.

"Wal-Mart gets its economic power because it is a gateway to the U.S. consumer," says Duke's Professor Gereffi. "The demand for Wal-Mart stores is what provides China and other countries in Asia with their access to the most powerful capitalist economy in the world."

What's more, the analysts say, the power of Wal-Mart -- and competitors like Target -- is increasing, as they reduce their dependence on well-known American brand names by developing their own in-house brands. According to Wal-Mart Vice President Bracy, Wal-Mart has significantly stepped up development of house brands "because there [are] supply chain efficiencies to gain by working directly with the factories." And also, more profit for Wal-Mart.

Chinese entrepreneurs describe how Wal-Mart presses them to integrate their operations into Wal-Mart's business plans and supply chain. Frank Ng, a partner in Force Electronics, which makes radio-controlled toys and other high-tech gadgets for Japanese toy firms to sell to Wal-Mart, told me Wal-Mart requires his firm to send managers for training to Wal-Mart's center in Shenzhen, makes the firm use Wal-Mart's computer software, and then monitors its production.

Collaboration with its firms now extends to joint efforts at creating, designing, and producing products for the American market. "Wal-Mart gives Chinese suppliers the specifications for Wal-Mart products," says Professor Gereffi. "And they teach those suppliers how to meet those specifications. They have to do with price. They have to do with quality. They have to do with delivery schedule. So, in a sense, Chinese suppliers learn how to export to the U.S. market through large retailers like Wal-Mart."

"It sounds like a commercial marriage made in heaven," I suggested.

"Wal-Mart and China are a joint venture," Gereffi replied. "And both are determined to dominate the U.S. economy as much as they can in a wide range of industries."

This hand-in-glove partnership increases the squeeze on U.S.-based manufacturers to outsource or shut down. Privately, they report that Wal-Mart house brands, made in China, are undercutting their American-made products. Some add that Wal-Mart buyers "advise" and push them to move a certain share of their production abroad, up to 30 percent, and then periodically check to see whether American firms are meeting Wal-Mart's quota for overseas production.

When I asked Wal-Mart's Ray Bracy about the complaints of U.S. suppliers that they were being pressured to shift production overseas, he said he could not confirm that happened but added, "I suspect that this is a legitimate occurrence that you're citing and, and there may be some validity to that."

Bracy concluded by citing the economic facts of life, as Wal-Mart sees them: "The sad truth is because of, perhaps, the pressure on price … and because the pressure of costs on the other side [for American suppliers], that it's difficult to make ends meet -- if you're a business -- by staying here. It's a sad, if you will, situation."

[RBA]

Blame Wal-Mart? I thought we were all suppose to blame those damn liberals for 99.9 percent of the problems in this country. And Al Qaeda for the rest. But Al Qaeda is a arm of the Liberal agenda, so we can blame it 100 percent on Liberals.

[GAC]

I blame NAFTA! We opened "Pandora's Box!

We (America) want to compete in a world, and open the market, where the playing field is not even (cheap foreign labor, etc). Then we (not the consumer so much) are complaining when systems such as this evolve, or the tide starts to shift?

[M2]

It's odd, but where I live people hate Wal-Mart and LOVE Target. My take has been that people don't object to Wal-Mart because of its labor practices so much, they just want a cleaner, better-organized store with better quality mechandise.

[westofyou]

We have a place here called Bi-Mart which is employee owned and just like a mini Wal Mart, alas they have no Zout and to Wal Mart I must go to buy our years supply.

[RedsBaron]

It's odd, but where I live people hate Wal-Mart and LOVE Target. My take has been that people don't object to Wal-Mart because of its labor practices so much, they just want a cleaner, better-organized store with better quality mechandise.

I find it odd as well. I know people who denigrate Wal-Mart but love Target, but I don't know why. I've found little difference in the quality of the merchandise; Target stores I've been in are no better, if as well, organized as Wal-Mart stores; I've found no difference in cleanliness; Wal-Mart prices are usually just a bit cheaper; and Target seems to have the poorest customer service of any store I've ever been in.
I'm not in love with Wal-Mart. I don't understand why some people love Target.

[westofyou]

Target merchadise in Housewares has a less "homey" style and uses more color than Wal Mart. I find Targets space more open and theor products a notch up in quality.

But that is a non statistical observation with no quantifing data.... and we all know how I feel about that.

[M2]

My guess is the quality of any chain varies from store to store. I know Target's done well in upper middle class suburbia and that the ones near me are a lot more aesthetically pleasing than other big box retailer stores I've been in. In terms of merchandise, I've found housewares and even clothing (which blows my mind because I used be constitutionally opposed to buying clothes from those types of stores) that meet my tastes.

Perhaps because Target comes from suburban Minneapolis they naturally developed a style that appeals to my type of demographic. So when they get it right, someone like me is apt to take notice. It's just a theory, but they're doing something right. I've met a good number of people who have the cash to shop wherever they want and they choose to go to Target.