The Profound Ways that Wal-Mart Affects the Brands That It Sells

There is certainly no shortage of commentary on how the unprecedented expansion of Wal-Mart has affected American society, both for good and ill.

There are those who lament Wal-Mart's treatment of its own workers which the New York Times describes as "authoritarian," and those critics who decry Wal-Mart's (and similar large retailers') policies as tantamount to encouraging modern slavery.

But the chain also has its supporters, who argue that Wal-Mart can offer community support, as well as low prices on staple commodities for consumers on public assistance.

But the proliferation of Wal-Mart's ubiquitous retail stores has affected the very brands that it sells, often in ways that are subtle but profound.  Here are just a few:

• Potential for Quality Deterioration:  For certain basic products, Wal-Mart has a "clear policy" that its prices must go down from year to year, rather than up.  If a particular vendor does not keep its wholesale prices competitive with other suppliers, they risk having their brand removed from Wal-Mart's shelves in favor of a lower-priced competitor.  Critics say that this eventually pressures all vendors to shift manufacturing jobs to China and other developing nations, where the cost of labor is less expensive.  Over time, they argue, the quality of Wal-Mart's products must inevitably decline, rather than improve.
  
• Decreasing Brand Diversity:  Any retailer only possesses a limited amount of visible shelf-space to display products in a category, such as baby diapers.  Because of their packaging and size, baby diapers occupy a fair amount of the retailers' valuable "real estate."  Therefore, a retailer must carefully choose which brands to carry.  Wal-Mart, one of the nation's savviest retailers, chooses among the competing brands to determine shelf-space return on investment. Consequently, Wal-Mart chooses to devote 95% (or more) of its shelf space to Luvs, Pampers and Huggies, the three top sellers in that category. Per square foot, across all its stores, it simply may not make economic sense for Wal-Mart to even consider carrying any smaller, "alternative" brands such as Seventh Generation diapers which appeal to shoppers who want diapers free of bleach, latex or fragrances.  Wal-Mart's customers therefore benefit from lower prices for Luvs, Huggies and Pampers, but are not presented with a diverse selection of alternatives.  Over time, this trend can harm brand diversity, as Seventh Generation must rely upon niche market health food stores and online retailers to compete, thus creating a significant entry barrier for smaller brands.
• Weaker Intellectual Property protections:  Perhaps desiring to sell cheaper, lower quality mass-market versions of popular designs, Wal-Mart has also advocated and lobbied very effectively for limiting intellectual property protections for budding designers.  For example, in 1997, children's clothing maker Samara Brothers had sued Wal-Mart for "knocking off" its entire clothing line of high-end clothes.  Wal-Mart didn't dispute the copying, but took the case all the way to the U.S. Supreme Court to challenge the designer's claims, a process which took years and cost hundreds of thousands of dollars in legal fees.  The Supreme Court ultimately ruled that Samara's clothing line was unprotectable as a matter of law because it couldn't satisfy stringent legal "distinctiveness" criteria. Wal-Mart won not only the case, it helped to set precedent in its favor whenever it chooses to copy other designers. The Samara case is still the prevailing law of the United States, which limits the availability of trade dress protection to product configurations. The commercial reality is that very few private parties have the resources to litigate such cases against Wal-Mart, all the way to the Supreme Court, and even fewer can win. In contrast, Wal-Mart possesses both the will and the resources to dedicate serious efforts to altering the legal landscape in its favor.

America: Made in China

This image was taken from a real label that was found on the streets of New York.

The economic value of China's annual exports to the United States is estimated to be $417 billion, and growing each year. The number of American jobs lost to Chinese imports each year is likely in the hundreds of thousands. This data may help to explain why the Obama administration has struggled with a nagging unemployment rate of approximately 8%, even as the stock market reaches record highs.

It is no surprise to the consumer that very little furniture, electronics, toys or apparel are manufactured in the U.S. any longer, as these items are increasingly imported from China and other developing nations.

The Wall Street Journal has reported that the negative impact of cheap Chinese imports on the American economy is far greater than previously thought.

Similarly, a Wall Street Journal report in April 2012 found that America’s largest multinational corporations outsourced more than 2.4 million jobs over the last decade, even as they cut their overall workforces by 2.9 million. 

Outsourcing jobs to a cheaper foreign labor pool, and increasing the number of cheaply made products from China makes perfectly sound business sense at the microcosmic level in the short-term. Indeed, Wal-Mart has generated billions of dollars in profits derived virtually entirely from this very business model.

However, as a long-term matter, this strategy has the potential to tarnish brands, lower quality, encourage counterfeiting, and even destroy entire industries.

For example, in Deluxe: How Luxury Lost Its Luster, author Dana Thomas chronicles how some luxury brands have resorted to cheap, Chinese mass-market production methods, and how doing so has risked their previously sterling reputations.

No industry is immune from the effects of globalization, cheap imports and job outsourcing. Ironically, even U.S. patent lawyers have seen previously high-paying jobs outsourced overseas.

Should Government Really Be Run Like a Business?

In a previous post, we noted that, from an Intellectual Property and legal perspective, American voters are treated as consumers, and politicians can become trademarks.

We were sent a thought-provoking and interesting video by OnlineMBA.com, which creatively argues that government should not be run like a business:

This video advances a few arguments comparing businesses and governments generally.

First, it notes that the core purpose of government is fundamentally different from that of a corporation.  For example, it argues that the U.S. federal government is responsible for managing the divergent, competing priorities of over 300 million Americans, and it alone must secure the general welfare by building and maintaining roads and bridges, providing for the common defense, and the like. The video contends that voters are "people," which are more important than "profits."

If a government becomes profitable, it argues, that government is probably hording tax dollars for no good reason. In contrast, a corporation is legally bound to advance one goal: amass profits, and a massive cash reserve can promote its positive fiscal growth.

While it is generally true that government serves a different legal and social purpose than a corporation, this video misses the mark.

First, it ignores the reality that the U.S. federal government has clearly become a major player in the commercial sphere, in its own right. The U.S. Treasury Department reports that current federal expenditures affect huge swaths of the private, domestic economy with trillions of dollars spent each year by the federal government on private defense contracts, the post office, as well as social program spending.

The Treasury Department also notes that federal spending is anticipated to exponentially increase in the decades ahead, mostly to service interest on the debt, to pay for existing expenditures.

Therefore, the video's general proposition that the federal government should not be concerned about amassing profits is not a realistic assessment of the current situation anyway.  The government's budget should at least be solvent, if not profitable.

It is worth noting that the U.S. federal government's budget is currently much larger than that of dozens of mega corporations combined, and its decisions have major fiscal as well as political consequences.

Indeed, a recent story on NBC News noted that the federal government is better at creating low-paying jobs than Wal-Mart.

Therefore, the government MUST be run like a mega corporation, if it is going to act like one.

Further, another argument that the video advances is that shareholders and citizens have fundamentally different "rights" within their respective systems.  A minority shareholder in a corporation, for example, has no meaningful say in whether to remove a failing CEO, the video argues.  

This analogy is weak and imperfect.  Within a larger framework of a properly functioning stock market, a shareholder can always choose to "vote with his feet," and sell his share in the corporation to someone else.  Therefore, his potential impact is greater in affecting change in that manner in that particular corporation, than his shareholder proxy "vote."

If such an aggrieved minority shareholder, along with thousands of other shareholders, chooses to dump and sell his stock, presumably the failing CEO will be fired or forced to resign.  Consequently, the value of a single share in that company will decrease if the CEO is doing a poor job at managing it.

In comparison, an American citizen cannot "sell his vote" in quite the same way, since he has limited options.  Because the federal goverment holds a constititional monopoly on power, there is no competition with it.  Ironically, the aggrieved American voter is in an actually weaker position than a minority shareholder in a corporation, at least in comparison.

Finally, at least with respect to presidential elections, it is worth noting that a large segment of the American populace is effectively disenfranchised because of the Electoral College.  Democratic voters in "red states" and Republican voters in "blue states," have effectively no vote in the Presidential election.

In summary, the debate will continue to rage on as to what extent government should emulate private industry, and vice-versa.

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 Amazon.com 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.