The Walmartization effect

The Walmartization of America

Walmart. You either love it (consumers) or hate it (suppliers and competitors). But all agree it has changed America. It is the world’s largest company with $ 237B in sales (2002) and with 1.45 millions of employees. It is the proverbial 800 pound gorilla that wrecks everything in its path. Its obsession with low prices (Everyday Low Prices) appears to have taken it on a path similar to an analertizic teenager: less and less without regard to the final ominous outcome.

Walmart imported $ 10B of goods from China in 2002, making it the largest single importer. But that is only half of the story. Its relationship with suppliers is legendary: if you want to do business with us, you do it on our terms and we will tell you the price you are going to charge. Take it or leave it. Most take it because the company is their single largest customer (amounting in some cases to one-third or more of their business) and not to would be giving the market to one’s competitor. But there is a dark side of prosperity: Walmart is so insistent on perpetual cost decreases, companies may have record revenues and little to none or negative profits: what you make lose per unit you make up in volume. If you can’t meet the cost requirements of the Gorilla, they will take their business elsewhere. So you do what you must do: outsource to China to meet their cost requirements. If Walmart imported $B of goods, you can be certain its suppliers at least matched that number if not far exceeded it.

Which brings us to the question of the day: What good is Everyday Low prices if no one has any jobs to provide the income to pay for the cheap goods? Henry Ford’s breakthrough of paying his workers $5/day was a shrewd way of providing a ready market for his cars: now his workers could afford to buy one. Walmart seems to have taken the other tact: emphasize costs above all else and let the chips fall where they may!

For the past two years we’ve seen a jobless recovery with growth, record productivity, profits but no jobs. What is happening with Walmart, the Walmartization of America, is happening nationally. Record productivity is great for the economy and the company but not for those workers whose jobs have forever been lost. Outsourcing jobs to China and India saves money, creates profits, and executive bonuses but is little consolation for those workers who wave goodbye to their living. In the years to come I fully expect to see this phenomena to continue (the recent announcements from the Automotive world regarding severe cost cutting measures being imposed upon their suppliers only confirms the notion).

I do not envy today’s youth. “Go to College” we tell them. “You must have a college education to succeed.” So today’s youth graduate with five figure student loans and with few job prospects. Only a decade ago, IT (Information Technology) jobs were in such high demand, one could name his/her own price and markets were begging people to enter the field. Now those that followed their advice find job pickings thin (the irony of the situation is not lost upon the laid-off manufacturing worker who lost his job to Mexico who retrained himself as an IT person only to lose his job to outsourcing to India). Many of these IT jobs (as well as several millions of traditional white collar and professional careers such as support, accountants, engineers) have found their way to India and other “cheaper” countries. Global economists may praise this shift as raising the standard of living of those in developing countries and providing productivity increases, more profits, and less expensive goods for the American consumer. The American consumer, however, must have cash, usually obtained from a job, to purchase these cheaper goods. If their jobs have disappeared, where will they obtain the cash? To paraphrase the Wal-Mart example; what benefit are cheaper goods if there is no one to buy them? My gut belief is the 00 decade will be one where the standard of living actually decreases. As much as I wish it were not so, this generation of youth graduating from college will probably be the first generation to have a decrease in quality of life compared to their parents.

The United States as a result of this Walmartization of America, is rapidly moving towards the ‘hollow corporation’ where the manufacturing has been outsourced overseas (China), the white collar (IT, support, accounting, marketing, engineering) subcontracted abroad to the cheapest source (India), and what’s left is top management. This has the audiacious beginnings of the double hump income curve often seen in lesser development countries: a huge under class, a tiny upper class with most of the income, and a small middle class. America’s middle class has traditionally come from well paying manufacturing jobs (soon to be gone), the white collar (going quickly) or the professionals (your time will come). What will be left will be plenty of minimum wage retail, fast food, and other service positions but not sufficient to provide the same quality of life as we once had.

What jobs are likely to remain in the US? Those positions that require direct contact. Primary medical physicians (doctors, dentists, optometrists, etc.), surgeons, nurses (however, radiologists whose job are to read X-rays are already being outsourced to India so too will similar back-office positions). Judges and lawyers (although those in the law profession not required face to face could well find themselves outsourced as well!). Bankers and Brokers and financial advisers who have required face-time with their clients. And on the other extreme, plumbers, carpenters, painters, electricians, gardeners and other craftsman. Perhaps we should be telling our kids to go for broke (doctors) or not go to college at all and take up a craft.

What can companies do to avoid being caught in this Walmartization of America effect? One is not to place all your eggs in one basket: diversify customers. The temptation is to have a big Daddy client who is consistent and large. But Big daddy rarely remains benigh and will inevitably begin dictating terms and conditions to you, even the price you are allowed to charge. At that point you are no longer an independent company but merely a colony. Two: keep innovating and differentiating your products. If you are the only game in town, you and only you have that product, you have the power, not the retailers. If they want your product, you can maintain your independence, perhaps just a bit longer. Three: search out alternative markets. For example, on-line through the internet or direct marketing through network marketing. Once again, you hopefully will retain the power and not the Gorilla retailers.

Ten years from now, what remains of the middle class will look back at the nineties as the Good Ole Days. They will wonder what happened and how to recover from the storm that wrecked their lives. We are unlikely to see such prosperity again. Globalization has mixed blessings. I too would like to see a wealthier India and China but not at my expense.