Discount Nation: Is Wal-Mart Good for America?

[Michael Hoover <HooverM@xxxxxxxxxx>]

> Discount Nation: Is Wal-Mart Good for America?
>
> December 7, 2003
>  By STEVE LOHR

Essence of the Story:
    - In what has become an annual ritual, Wal-Mart continues
    to grow and eliminate rivals (this time, toy retailer
    FAO Schwartz).
    - Economists generally believe that Wal-Mart benefits
    consumers, especially low-income consumers, by
    providing the lowest possible prices.
    - Others warn against a "Wal-Mart" economy dominated
    by low-wage, low-benefit jobs and hollowed out
    commercial cores.

Political Analysis:
    - Wal-Mart's size (if it were a nation, it would have the
    world's 19th largest economy, larger than Sweden) has
    drawn the interest of government.
    - A change in theories of monopolies (price rather than size
    sensitivity) has blunted calls for regulation.
    - Economic changes brought on by globalization will
    inevitably have political ramifications, but we don't know
    yet what these changes will be.  What is clear is that
    Wal-Mart has significantly reshaped America's rural
    communities.


> THE annual celebration of the American consumer economy -
> the holiday shopping season - is just underway, and
> Wal-Mart, the juggernaut of retailing, already seems to
> have claimed its first victim. The corporate owner of
> F.A.O. Schwarz stores said last week that it would file for
> bankruptcy. Bemoaning the news, analysts explained that the
> F.A.O. Schwarz formula of selling premium-priced toys in
> sumptuous surroundings could not withstand the steady
> advance of Wal-Mart into the toy business.
>
> "Will Wal-Mart Steal Christmas?" asked a Time magazine
> headline.
>
> The toy war is merely the most recent manifestation of what
> is known as the Wal-Mart effect. To the company's critics,
> Wal-Mart points the way to a grim Darwinian world of
> bankrupt competitors, low wages, meager health benefits,
> jobs lost to imports, and devastated downtowns and rural
> areas across America.
>
> Yet there is a wider, less partisan view of the company,
> which perhaps more visibly than any other corporation
> marches to the mandate of the global capitalist economy.
>
> "Wal-Mart is the logical end point and the future of the
> economy in a society whose pre-eminent value is getting the
> best deal," said Robert B. Reich, the former labor
> secretary and a professor of social and economic policy at
> Brandeis University.
>
> To the company's supporters, Wal-Mart is an agent of
> economic virtue, using its market power to force suppliers
> to become more efficient and passing the gains on to
> consumers as lower prices. The enthusiasts say Wal-Mart is
> a big reason for the country's almost nonexistent inflation
> and impressive productivity gains.
>
> There is a lot to be said for getting the best deal,
> economists say. Prices, they note, are essentially a
> yardstick of efficiency, translated into consumer terms.
> Prices are concrete and measurable, while other values of
> consumer and social welfare - say, product quality or job
> preservation - are often hard to quantify or require costly
> intervention like protectionism or subsidies.
>
> Moreover, some economists note, lower prices for the kinds
> of basic goods on sale at Wal-Mart superstores, like food
> and clothes, are of the greatest benefit to the less
> affluent. Grocery prices, for example, drop an average of
> 10 to 15 percent in markets Wal-Mart has entered, analysts
> say.
>
> "Wal-Mart is the greatest thing that ever happened to
> low-income Americans," said W. Michael Cox, chief economist
> of the Federal Reserve Bank of Dallas. "They can stretch
> their dollars and afford things they otherwise couldn't."
>
> Wal-Mart is the largest American corporation in terms of
> sales, $245 billion last year. It is now the nation's
> largest grocer, toy seller and furniture retailer. More
> than 30 percent of the disposable diapers purchased in the
> country are sold in Wal-Mart stores, as are 30 percent of
> hair-care products, 26 percent of toothpaste and 20 percent
> of pet food. Wal-Mart has nearly 3,000 stores in the United
> States, and plans to add an additional 1,000 over the next
> five years. Increasingly, the company is taking its formula
> abroad; Wal-Mart is now the largest private employer in
> Mexico.
>
> The prospect of Wal-Mart amassing even more market power
> does not worry free-market economists like Mr. Cox. Despite
> the company's gains, the retail industry is still not
> highly concentrated, he said, with Wal-Mart accounting for
> 20 percent of the sales of the 100 largest retailers. Its
> success has been built, Mr. Cox said, on mastering the use
> of information technology to streamline its operations -
> much like Dell Computer in the personal computer business.
> Inevitably, less efficient rivals will be winnowed, he
> added, and those that remain will compete aggressively for
> consumer dollars.
>
> "With the new technology of the information age," Mr. Cox
> said, "we're moving to a new market structure in a lot of
> industries. And the optimal number of firms has gone way
> down."
>
> Antitrust has traditionally been the tool for insuring
> competition and keeping a watchful eye on powerful
> companies. But the evolution of antitrust policy over the
> last 30 years - to emphasize price, not the number of
> competitors - has actually worked to the advantage of
> businesses like Wal-Mart.
>
> In the past, antitrust policy assumed that more companies
> meant more competition, which was good for consumers. The
> Robinson-Patman Act of 1936 - sometimes called the
> anti-chain store act - was passed partly to protect small
> local retailers from the Great Atlantic & Pacific Tea
> Company, the Wal-Mart of its time. It prohibited price
> discrimination, or discounts, to different purchasers when
> the effect was to lessen competition. At the time, the
> drift of antitrust policy was to restrain big business and
> protect mom-and-pop stores.
>
> The populist tinge to antitrust continued for decades. In
> ordering the break-up of the Aluminum Company of America in
> 1945, Judge Learned Hand of the United States Court of
> Appeals for the Second Circuit wrote that the purpose of
> antitrust was to "perpetuate and preserve, for its own sake
> and in spite of possible cost, an organization of industry
> in small units which can effectively compete against each
> other."
>
> In 1966, the Supreme Court sided with the Federal Trade
> Commission in challenging a merger in the Los Angeles
> grocery market, Von's Grocery and Shopping Bag Food Stores,
> which together had only 7.5 percent of the local market.
>
> But the intellectual tide shifted by the 1980's, especially
> under the growing influence of the so-called Chicago school
> of economics, which emphasized prices as the fundamental
> gauge of consumer welfare. Market concentration and company
> size meant little. If big companies raised prices, they
> were bad. But if, like Wal-Mart, they achieved greater
> efficiency from economies of scale and passed the benefits
> onto consumers as lower prices, they were praised.
>
> "Has our thinking on antitrust driven us toward an economic
> world that Wal-Mart represents?" asked Andrew I. Gavil, a
> professor at the Howard University law school. "I would say
> that it has. The harder question is whether that is a good
> or a bad thing."
>
> To keep cutting costs, Wal-Mart is tough on its suppliers.
> Selling to Wal-Mart, by all accounts, is a brutal
> meritocracy. Manufacturers have been forced to lay off
> workers after Wal-Mart canceled orders when another vendor
> cut its price a few cents more. Other suppliers have
> shifted to low-cost operations in China and elsewhere when
> squeezed by Wal-Mart to cut costs further.
>
> Yet here again, many analysts regard Wal-Mart's practices
> as simply leading the way in the inevitable drive to making
> the economy more efficient. "Wal-Mart is tough, but totally
> honest and straightforward in its dealings with vendors,"
> said Michael J. Silverstein, a senior vice president at the
> Boston Consulting Group. "Wal-Mart has forced manufacturers
> to get their act together and forced them to compete
> internationally."
>
> There is some evidence that the company's zeal for
> efficiency has gone too far. Wal-Mart's detractors point to
> a trail of litigation over pinch-penny issues like unpaid
> overtime, and to a federal investigation into its use of
> poorly paid illegal immigrants as janitors. Wal-Mart
> insists that any problems do not reflect the culture of the
> company as a whole. "If there is valid criticism that comes
> from these cases, we will own up to it and made
> improvements," said Ray Bracy, vice president of
> international corporate affairs for Wal-Mart.
>
> Wal-Mart's growing power has brought increased scrutiny
> from federal and state regulators. But as long as the
> company keeps delivering lower prices, they will most
> likely be reluctant to act, beyond prosecuting employment
> infractions. The classic behavior of a predatory
> corporation is to cut prices to drive out competition in
> order to raise them later. There is no evidence yet that
> that is the Wal-Mart strategy.
>
> "Consumers get huge benefits from Wal-Mart as long as it
> has real competition," Mr. Reich said. "The worry is that
> it becomes so powerful that it can unfairly stifle
> competition."
>