Sunday, May 12, 2013

The Seven Dollar Toaster - How Brands Decline in a Disposable Economy

In 2012, I purchased a Toro brand lawmower at Home Depot for $400.  This lawnmower was supposedly "guaranteed to start."  After only 3 uses in 1 month, the mower simply and inexplicably refused to start again.  
After sending a personal letter to the CEO of Home Depot (that he actually responded to, to his credit), the retailer decided to replace the unit with a new one.  I used the replacement lawnmower only 2 times so far in 2013.  Now, the second unit refuses to start.
A quick visit to reveals that this Toro brand lawnmower received 38 ratings, 24 of which were only 1 star, the lowest rating possible on that site. Customer comments such as "piece of junk," "buy anything else," "broke after 3 weeks," disgusted" and "definition of a lemon," can only lead to the conclusion that Toro may end up facing yet another class action lawsuit.
But, in all honesty, what mass market brands haven't demonstrated a notable decline in quality in recent years?  This dramatic drop-off in quality that almost all household brands are exhibiting is called the "Wal-Mart effect," essentially blaming the power of the massive discount retailer for the decline of all brands.
For example, Wal-Mart sells a toaster that retails for $7.84 — a price that an article on Grist points out effectively renders its longevity virtually irrelevant.  If it breaks, just buy another.  
If you are another toaster manufacturer, how can you compete by offering a high quality toaster for $50? No, instead, you lower your own quality dramatically and try to sell competing toasters for $20 or $30.
Consequently, since 1995, the number of toasters and other small electro-thermal appliances sold in the U.S. each year increased from 188 million to 279 million. The average household now buys a new TV every 2.5 years, up from every 3.4 years in the early 1990s. These changes exceed the pace of population growth.
We buy more than 2 billion bath towels a year, up from 1.4 billion in 1994. In general, prices on household goods have fallen by about one-third since the mid-1990s.  Since 1994, the consumer price of apparel as well, in real terms, has fallen by 39 percent.  Quality, like price, is a fraction of what it used to be. 
And as Grist points out, while there are certainly factors beyond Wal-Mart that have contributed to this ever-expanding avalanche of consumption, Wal-Mart has clearly been a major driver of the trend.  Its astounding growth and profitability rest on fueling an ever-faster churn of products, from factory to shelf to house to landfill.
In a paper that was released in 2010, three business professors illustrated how inducing manufacturers to cut product quality enhances Wal-Mart’s competitive position: “Because lower quality products are usually cheaper to produce, it is often argued that discount retailers induce lower quality in order to drive down prices.  Our model suggests, however, that the competitive and bargaining position effects provide incentives to induce lower quality regardless of changes in production costs,” the authors write.
In other words, because of the fierce competition with Wal-Mart, all brands have an incentive to lower their quality and production costs each successive generation, in a perpetual bid to increase profits.  
Brand equity suffers eventually, but only relatively, since other brands' quality will decline, as well.  Many brands seem to have succumbed to this desire to increase profits over the short-term, without any real vision for how to survive the onslaught of customer complaints. Only time will tell which brands will survive this march to mediocrity in a disposable economy.

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