A cogent reader comment regarding "The economic blight that is Wal-Mart: They don't care if you hate them":
I enjoy reading your blog every week, especially regarding the "Shoppes" project. That being said, I'd like to offer a quick comment on your Wal-Mart post.
I hate Wal-Mart. I never shop there because my time is worth more than the 2 bucks I'll save by standing in line for 30 minutes while someone writes out a check for 3 dollars instead of pulling out 3 singles from their pocket. I CHOOSE not to shop there. What's great about capitalism is that the consumer has the power to influence the profitibility of companies like Wal-Mart. Likewise, the sprinkler manufacturer has the ability to tell Wal-Mart to go pound sand when they are told to sacrifice quality to meet Wal-Mart's demand. Maybe the sprinkler manufacturer shouldn't be so dependant on one low-margin customer like Wal-Mart. Unfortunately for the mom and pops, (and the sprinkler manufacturers) of the world, they need to adapt, innovate, and be "proactive" instead of "re-active" in order to survive. Afterall, how do you think Wal-Mart got where they are today? The demise of the mom and pops is a sad story. Guess what. It's not going to change unless the market CHOOSES to change. We have on one to blame for Wal-Mart but ourselves.
Would that it was so easy to say "no" to the largest retailer in the world!
The problem is this: You are dealing with a retailer that sells as much in THREE MONTHS as the number two retailer (Home Depot) sells in an entire year. That kind of power is utterly unprecedented - - the most laissez-faire capitalist has to agree that even Adam "let the market sort itself out" Smith could not conceive of that economy of scale when he wrote "The Wealth of Nations."
Faced with such a powerful force - - a force that even today benefits from government subsidies! - - a manufacturer often has to find a way to stay in Wal-Mart's good graces. The math is simple: If you say "no," your competitor will say "yes" and drive you out of business in the "honeymoon" period before they themselves get wiped out or marginalized (i.e. closing down domestic production and manufacturing overseas). You want to preserve your company's jobs for as long as possible. You swallow hard and say "yes" to Wal-Mart and hope that either:
(A) you're the rare company that beats the odds and keeps jobs and quality intact while dealing with Wal-Mart, or;
(B) Your employees can hand onto full-time work with benefits for at least another 18 months, rather than the six months it would take you to go under if you say "no."
Had L.R. Nelson said "no," their demise would have been greatly accelerated.
Can you get away with saying "no" to Wal-Mart? Sure - but it doesn't seem pleasant:
Last line of the above-linked story:
And the power and allure of Wal-Mart is such that even Jim Wier, the man who said no to Wal-Mart, a man who knows all the reasons why that was the right decision, has slivers of doubt.
"I could go to my grave, and my tombstone could say, 'Here lies the dumbest CEO ever to live. He chose not to sell to Wal-Mart.' "
From Fast Company magazine's The Wal-Mart You Don't Know:
For many suppliers, though, the only thing worse than doing business with Wal-Mart may be not doing business with Wal-Mart. Last year, 7.5 cents of every dollar spent in any store in the United States (other than auto-parts stores) went to the retailer. That means a contract with Wal-Mart can be critical even for the largest consumer-goods companies. Dial Corp., for example, does 28% of its business with Wal-Mart. If Dial lost that one account, it would have to double its sales to its next nine customers just to stay even. "Wal-Mart is the essential retailer, in a way no other retailer is," says Gib Carey, a partner at Bain & Co., who is leading a yearlong study of how to do business with Wal-Mart. "Our clients cannot grow without finding a way to be successful with Wal-Mart."
From the same article, a look at "the Wal-Mart Squeeze":
What does the squeeze look like at Wal-Mart? It is usually thoroughly rational, sometimes devastatingly so.
John Mariotti is a veteran of the consumer-products world--he spent nine years as president of Huffy Bicycle Co., a division of Huffy Corp., and is now chairman of World Kitchen, the company that sells Oxo, Revere, Corning, and Ekco brand housewares.
He could not be clearer on his opinion about Wal-Mart: It's a great company, and a great company to do business with. "Wal-Mart has done more good for America by several thousand orders of magnitude than they've done bad," Mariotti says. "They have raised the bar, and raised the bar for everybody."
Mariotti describes one episode from Huffy's relationship with Wal-Mart. It's a tale he tells to illustrate an admiring point he makes about the retailer. "They demand you do what you say you are going to do." But it's also a classic example of the damned-if-you-do, damned-if-you-don't Wal-Mart squeeze. When Mariotti was at Huffy throughout the 1980s, the company sold a range of bikes to Wal-Mart, 20 or so models, in a spread of prices and profitability. It was a leading manufacturer of bikes in the United States, in places like Ponca City, Oklahoma; Celina, Ohio; and Farmington, Missouri.
One year, Huffy had committed to supply Wal-Mart with an entry-level, thin-margin bike--as many as Wal-Mart needed. Sales of the low-end bike took off. "I woke up May 1"--the heart of the bike production cycle for the summer--"and I needed 900,000 bikes," he says. "My factories could only run 450,000." As it happened, that same year, Huffy's fancier, more-profitable bikes were doing well, too, at Wal-Mart and other places. Huffy found itself in a bind.
With other retailers, perhaps, Mariotti might have sat down, renegotiated, tried to talk his way out of the corner. Not with Wal-Mart. "I made the deal up front with them," he says. "I knew how high was up. I was duty-bound to supply my customer." So he did something extraordinary. To free up production in order to make Wal-Mart's cheap bikes, he gave the designs for four of his higher-end, higher-margin products to rival manufacturers. "I conceded business to my competitors, because I just ran out of capacity," he says. Huffy didn't just relinquish profits to keep Wal-Mart happy--it handed those profits to its competition. "Wal-Mart didn't tell me what to do," Mariotti says. "They didn't have to." The retailer, he adds, "is tough as nails. But they give you a chance to compete. If you can't compete, that's your problem."
In the years since Mariotti left Huffy, the bike maker's relationship with Wal-Mart has been vital (though Huffy Corp. has lost money in three out of the last five years). It is the number-three seller of bikes in the United States. And Wal-Mart is the number-one retailer of bikes. But here's one last statistic about bicycles: Roughly 98% are now imported from places such as China, Mexico, and Taiwan. Huffy made its last bike in the United States in 1999.
Another Wal-Mart experience from the same article:
But not every supplier agrees that the toughness is always accompanied by fairness. The Lovable Company was founded in 1926 by the grandfather of Frank Garson II, who was Lovable's last president. It did business with Wal-Mart, Garson says, from the earliest days of founder Sam Walton's first store in Bentonville, Arkansas. Lovable made bras and lingerie, supplying retailers that also included Sears and Victoria's Secret. At one point, it was the sixth-largest maker of intimate apparel in the United States, with 700 employees in this country and another 2,000 at eight factories in Central America.
Eventually Wal-Mart became Lovable's biggest customer. "Wal-Mart has a big pencil," says Garson. "They have such awesome purchasing power that they write their own ticket. If they don't like your prices, they'll go vertical and do it themselves--or they'll find someone that will meet their terms."
In the summer of 1995, Garson asserts, Wal-Mart did just that. "They had awarded us a contract, and in their wisdom, they changed the terms so dramatically that they really reneged." Garson, still worried about litigation, won't provide details. "But when you lose a customer that size, they are irreplaceable."
Lovable was already feeling intense cost pressure. Less than three years after Wal-Mart pulled its business, in its 72nd year, Lovable closed. "They leave a lot to be desired in the way they treat people," says Garson. "Their actions to pulverize people are unnecessary. Wal-Mart chewed us up and spit us out."
And, lastly, Josh makes a valid point: Companies need to be pro-active rather than reactive in order to survive. However, the huge, government subsidized power of Wal-Mart has caused companies to "pro-actively" outsource to China and cheapen the quality of almost every product you can imagine. It's called "the Wal-Mart effect" because the decisions and demands made by Wal-Mart ripple into every other retailer as well (Huffy and Dial Corp design their entire product lines around making sure Wal-Mart is happy, for instance.)
And, moneybags bursting, Wal-Mart continues to ask for and get government subsidies while increasing the burden on state health care and welfare systems, pressuring suppliers to outsource more and more to China as we bleed jobs here.
Welcome Wal-Mart, indeed.