Wal-Mart

The Face of Twenty-First-Century Capitalism

Nelson Lichtenstein, Nelson Lichtenstein

• Publisher: The New Press
• Year: 2016
• ISBN:
  9781595587466
• Topic: Commerce
• Subtopic: Histoire des affaires

A collection of essays that "do an incredible job of balancing the wonders and horrors of the force that is Wal-Mart " ( Booklist, starred review). Edited by one of the nation's preeminent labor historians, this book marks an ambitious effort to dissect the full extent of Wal-Mart's business operations, its social effects, and its role in the United States and world economy. Wal-Mart is based on a spring 2004 conference of leading historians, business analysts, sociologists, and labor leaders that immediately attracted the attention of the national media, drawing profiles in the New York Times, Los Angeles Times, and the New York Review of Books. Their contributions are adapted here for a general audience. At the end of the nineteenth century, the Pennsylvania Railroad declared itself "the standard of the world." In more recent years, IBM and then Microsoft seemed the template for a new, global information economy. But at the dawn of the twenty-first century, Wal-Mart had overtaken all rivals as the world-transforming economic institution of our time. Presented in an accessible format and extensively illustrated with charts and graphs, Wal-Mart examines such topics as the giant retailer's managerial culture, revolutionary use of technological innovation, and controversial pay and promotional practices to provide the most complete guide yet available to one of America's largest companies. "Like archaeologists who pick over artifacts to understand an ancient society, the scholars here [are] examining Wal-Mart for insights into the very nature of American capitalist culture." — The New York Times "Stimulating perspectives on the world's largest corporation." — Publishers Weekly

A Global Corporation

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FIVE

Making Global Markets: Wal-Mart and Its Suppliers

Misha Petrovic and Gary G. Hamilton

Introduction: The Wal-Mart Effect

In the 1990s, as Wal-Mart became the biggest world retailer, its effect on the U.S. economy came under much scrutiny. At first, the “Wal-Mart effect” represented little more than the heightened competition between mass retailers, forcing many of them to merge, acquire other firms, declare bankruptcy, or overhaul their supply chains. But as Wal-Mart revenues grew from $33 billion in 1991 to $191 billion ten years later, some observers argued that the Wal-Mart effect had become an economy-wide phenomenon, even one of global porportions.¹ Economists have pointed out that low retail prices help suppress inflation while saving American consumers billions of dollars. As the biggest private employer in the U.S., Wal-Mart creates more than a hundred thousand jobs a year, and as the leader in the implementation of information technology, it is responsible for a significant share of the economy’s productivity growth. At the same time, numerous political activists, union leaders, and scholars have attacked Wal-Mart for holding down wages, driving small retailers out of business, and accelerating the shift of manufacturing jobs overseas. And the jobs it does create, they argue, merely cannibalize the jobs once offered by Wal-Mart’s higher-waged competitors.²

The net economic impact of any company, even one as big as Wal-Mart, is notoriously hard to measure, mainly because of the difficulties in specifying how the effects of corporate performance reverberate through the rest of the economy. Thus, we should not expect the arguments about the Wal-Mart effect to be resolved anytime soon. Moreover, even if Wal-Mart’s overall impact could be calculated precisely, we would still be left with more difficult issues such as its impact on local communities, quality of life, and the environment.

In this chapter, we examine the Wal-Mart effect from a different angle. Instead of focusing on standard measures of corporate performance, such as profits and sales, we emphasize Wal-Mart’s ability to shape the institutional structure of the economy. More specifically, we explore Wal-Mart’s relations with its suppliers, both domestic and foreign. While this topic has often been addressed in the business and popular press and recently even attracted some attention in the academic literature, what is typically missing from the current discussion is a description of various aspects of the retailer-supplier relation in terms of a broader framework of the creation and reproduction of market institutions. Thus, our main goal is to describe Wal-Mart’s treatment of its suppliers—from negotiations about price to product development, and from arm’s-length transactions to long-term partnerships—as an aspect of its market-making activities.

Market making refers to all activities oriented toward creating and reproducing opportunities for trade, from pricing and contracting, to finding and retaining trading partners, to getting the products into and through the market. Wal-Mart’s ability to make markets—to define the shopping environment, the assortment of merchandise, and the “everyday low price” for its customers, and to specify the rules of conduct and standards of performance for thousands of its global suppliers—is the most profound of all Wal-Mart effects, revealing how the corporation has reshaped the global market for consumer goods during the last twenty years.

At the same time, we should note that our present focus on Wal-Mart should not be taken to imply that this company’s market-making efforts are somehow unique or unprecedented. While its size and global influence may indeed be exceptional, Wal-Mart is just the most outstanding example of the new brand of retailers that have recently come to play a dominant role in creating and shaping global markets for consumer goods. Wal-Mart may have the starring role, but it is surrounded by a very talented cast that includes Carrefour, Aldi, Metro, Royal Ahold, Tesco, Ito-Yokado, Kingfisher, and IKEA, as well as Home Depot, Costco, and Best Buy. And these large retailers are joined by a supporting crew of brand-name marketers and assemblers, such as Nike, Gap, VF Corporation, the Limited, Louis Vuitton, Otto Versand, Dell, Hewlett-Packard, and many other similar firms.

Our analysis of Wal-Mart as a market maker should be seen as part of a larger historical narrative that brings together three trends in the global economy. The first is the shift in the balance of market power from manufacturers to retailers, a process that so far has developed to the greatest extent in the United States, but is also starting to accelerate elsewhere. The second trend refers to the rise of new global manufacturers, especially in East Asia, and the concomitant decline of international competitiveness of many American manufacturing firms. The third trend is the growing power of consumers in shaping marketing and production choices throughout the distribution channel. All three trends represent a shift in market power relations, and in all three, large American retailers have played the crucial role. Since the late 1970s, they have provided market mechanisms by which the competitive advantages of foreign manufacturers have been translated into lost orders for American firms. At the same time, their access to consumer purchasing information and their control over marketing channels have not only increased retail power over their suppliers but also generated a greater sensitivity to consumer preferences, which is often somewhat misleadingly interpreted as an increase in “consumer power.”³

Market Making and Retail Power: A Conceptual Overview

Since the late 1970s, an increasing number of industry observers have been describing the shift in market power from manufacturers to retailers. They have identified several causes of such a power shift, including the retailers’ ability to use point-of-sale data to directly assess consumer preferences, the increase in retail concentration, the decrease in effectiveness of mass media as marketing channels, and the proliferation of store brands. Large retailers, they argue, are increasingly able to squeeze their suppliers and induce various forms of price concessions.⁴

However, empirical studies of the performance of retailers and their suppliers in this period show no clear evidence of systematic differences or a shift in their profitability. Moreover, manufacturers who sell only to large retailers that dominate particular markets do not necessarily have lower profit margins than those that do not, or even than those powerful retailers themselves.⁵ Instead of trying to explain away such findings, we propose to sever the link between the notion of market power in the distribution channel and the profitability of retailers and their suppliers. Thus, we define vertical competition and, by implication, the power distribution between retailers and manufacturers, in terms of their respective abilities to shape the conditions of trade. These abilities cannot be reduced to mere bargaining about prices and quantities. Market negotiations also include issues such as how and when the product will be delivered, who will take the responsibility for packaging and presentation, advertising and warranty provisions, and even product character and composition. In other words, retailers and manufacturers compete not only to determine the outcomes of market negotiations, but also to set the rules and mechanisms by which these outcomes are typically determined.

The Evolution of the Retail Power, 1960–1990

Before the late 1970s, there was little talk about the power of retailers over their suppliers. A few giant retailers, such as A & P and Sears, have had an undeniable power over their vendors for the better part of the twentieth century, but they were treated as exceptions rather than indications of industrywide trends. In the postwar era, the economic power of large American manufacturers seemed unassailable. They were seen as paragons of technological sophistication and organizational efficiency, in marked contrast with the labor-intensive, low-tech retail sector still dominated by relatively small firms and segmented markets.

The relations between retailers and their suppliers started to change in the early 1970s as a result of three major factors: retailers’ ability to deploy new information technologies to assess consumer demand; increased concentration in the retail sector; and the rise in global competition in suppliers’ industries. While the impact of these three was felt throughout the 1970s, it was not until the early 1980s that they converged to bring about a dramatic change in the retail power and enable the new generation of big-box retailers to become a major driving force in shaping the American economy. For the first time since the 1920s, and perhaps since the emergence of the modern industrial enterprise, it was the merchant, not the manufacturer, who led the drive to rationalize market institutions. From the diffusion of bar codes and scanning devices, to electronic data interchange, direct store delivery, and quick replenishment, to integrated logistics solutions and vendor-managed inventory, the rationalization initiatives and technological innovations flowed from large retailers to their suppliers.

Although less well recognized, the impact of the big U.S. retailers on their foreign suppliers and on the growth of their host economies was no less powerful. Retailers did not just buy products in developing countries; they also organized and rationalized global supply chains, established trade standards and logistics solutions, and even ventured into product development. The rapid growth of East Asian economies in the 1970s and 1980s would have been inconceivable without the strong U.S. demand for manufactured goods, and the paramount role of big retailers in organizing and channeling that demand.⁶

The retailers that emerged as industry leaders in the 1980s were not the same ones that dominated the top ranks of the industry between the 1930s and 1970s. Instead of traditional department stores, national mass merchandisers (Sears, Montgomery Ward, and JCPenney), and grocery chain operators, the new industry leaders came from the ranks of full-line and specialty discounters. Wal-Mart, Kmart, and Target, the “big three” of the discount industry, all started their operations in 1962; Home Depot, Costco, Best Buy, Office Depot, Gap, Limited, and Nike are of an even more recent vintage. In order to understand the sources of the retail power in the 1980s, then, we first need to go back to the 1960s and the emergence of the discount retailing.

In its 1961 annual report, the Woolworth Company, then the seventh largest retailer and for several decades the largest variety chain operator in the United States, depicted a worldwide revolution in retailing which “reveals consumer willingness to dispense with certain services in exchange for cash savings and the shopping for all manner of goods under a single roof, with self-selection and checkout counters.” Responding to this trend, the company announced that it would establish, beginning in early 1962, “a chain of mass-merchandise, self-selection, low-margin, high-quality Woolco Department Stores” in the United States and Canada.⁷

By the time Woolworth decided to join the ranks of discounters, the “discounting revolution” that had started only a couple of years earlier was in full swing. The success of the pioneer hard-good discounters of the 1950s, such as E.J. Korvette, Vornado, Zayre, and Arlan’s, revealed that massive inefficiencies could be squeezed out of traditional retailing. Apart from the grocery sector, where supermarkets had driven the rationalization trend since the 1940s, and the automotive and gasoline sectors, where distribution was tightly controlled by large manufacturers, other retailing firms enjoyed the benefits of the seller’s market, with high gross margins, little direct price competition, and little incentive to innovate.⁸ Thus, the first discounters were able to offer standard, mostly branded consumer goods at prices 10–25 percent less than what other stores were charging, simply by cutting their operating costs and accepting lower profit margins. By the late 1950s, discounting became sufficiently well established to attract the attention of large chain operators, mostly of variety and junior department stores, whose entrance into the field signified the beginning of the discount revolution. These included Dayton Hudson’s Target stores, and Treasure Island stores operated by JCPenney, as well as Woolworth’s Woolco and Kresge’s Jupiter and Kmart stores. In 19...