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.

The Drive to Luxury: Commodity Fetishism or Innate Human Need?

Over the last several decades, across the globe, there has been a marked increase in consumers' collective demand for luxury goods.  What are luxury goods and why do consumers seem to express such an insatiable demand for them?  While most researchers cannot agree on a standard definition for luxury goods, they generally agree that it is any consumer product or item that is not a true "necessity."

In other words, access to potable water is a necessity to survive in the world, but owning a diamond-studded watch is not.

Some researchers argue that the luxury marketplace focuses the consumer on a perceived need to belong to an elite group and manifests desire for extremely high quality products, often far in excess of actual need.

Some political commentators on the left have argued that luxury goods are a negative form of "commodity fetishism," a term coined by Karl Marx. Marx decried the capitalistic drive toward exclusionary private property and seemingly irrational desire for classist exclusion that he believed luxury goods represent.

He argued that humans were encouraged to ascribe irrational value to arbitrary materials (such as gold or diamonds), which then are perceived as having a false "intrinsic" value in the marketplace.  He argued that such exclusion was designed to oppress the working classes, and served no other socially beneficial goal.

Yet, despite persistent economic turbulence and political instability in many emerging markets, the global luxury goods market remains largely robust.  Indeed, the pursuit of luxury has been a sustained growth trend, even in societies that have experienced substantial political perils.

But is this trend just a blip, or a new long-term reality?

I contend that the drive toward luxury is a positive feature of normal human economic and psychological development, and not just a short-term phenomenon or an irrational manifestation of oppressive capitalism gone awry.

As any human society develops, its' collective needs and consumer preferences will gravitate from satisfying the lower-level human needs (such as general stores selling staple household goods) toward increasing demand for brands that represent quality, the respect of others and social achievement.

Maslow's hierarchy of needs is a theory in psychology proposed by Abraham Maslow in his groundbreaking 1943 paper "A Theory of Human Motivation" in Psychological Review:

In essence, Maslow argued that all human behavior can be analyzed within the general framework of this pyramid, representing a dynamic progression toward higher thought processes and a greater degree of social functioning as one's temporal needs are met.

In other words, once a person's immediate physical needs and safety/security are satisfied  he will gravitate toward forming communities and families, and eventually, trend toward morality and achieve self-actualization.  Without one's lower-level needs met, that person -- and eventually his entire society -- will flounder.

From the perspective of predicting and analyzing consumer behavior, Maslow’s hierarchy can be thought of as also predicting macro-level social mobility and consumer preferences.  Such a model allows one to understand trends in demographics, and even develop sound long-term financial and investment strategies.

In other words, in a properly functioning society where social mobility is fluid, eventually, the retail options will become higher-end, and luxury goods retailers will move in.  The “local hardware store” will be replaced by a mass market retailer.  The mass market retailer eventually will be replaced by the shopping mall.  The shopping mall eventually becomes filled with luxury goods retailers.

Therefore, over time, as societies economically, psychologically and demographically evolve, luxury goods should become both desirable and attainable.

Financial data bears this trend out. Standard & Poors Global Consumer Enterprises Index is comprised of thirty of the largest publicly-traded companies in the GICS consumer discretionary sector that meet specific investability requirements.  The index provides exposure to leading publicly-listed companies in developed markets, which meet minimum international revenue exposure requirements.  100% of the companies included relate to consumer discretionary spending.  

Since this custom Index was created by S&P in 2009, it has demonstrated 5-year annualized returns of 25% growth, an astounding rate of return: 

Empirical consumer survey data bear out this trend, as well.  In a recent survey conducted by Empathica Consumer Insights Panel, the largest reported reason that consumers made a luxury purchase was to "reward themselves" (31.9%), although many consumers also indicated they were finally getting around to buying a luxury item that they had previously delayed purchasing (17.5%).  

Others bought a luxury good for a significant other (12.5%), or said they had extra money to spend and just wanted one (11.5%).  Despite the recent recession, three out of four consumers indicated that they perceived that there are the same or even more luxury brands available today than there were two to three years ago, making this luxury goods market more competitive than ever.  Interestingly, 28% of consumers also report that they will tell others about their luxury purchase through social media sites like Twitter, Facebook or blogs.

Therefore, consumers consistently express a deep need to have the ability to "reward themselves" through the purchase of a luxury good that was not a true necessity.  The approval, perceptions and respect of others played a critical role, as well.

Over time, I predict that this drive toward luxury is here to stay, as it represents the innate human drive to progress toward higher levels of achievement and acquire the respect of others, and not simply irrational exuberance or the exploitation of artificial demand.

Preliminary Injunction Against MAXIM Deodorant Denied, Court Finds "Insufficient" Harm to the Brand From Unlicensed Use

In a startling decision, a federal court refused to grant a court order against the continued unauthorized use the trademark "MAXIM" to sell antiperspirant, on the basis that the likely consumer confusion and harm to the brand was not sufficiently "irreparable" to justify a preliminary order halting the infringement.

Maxim magazine is a popular mens' "lifestyle" magazine with a circulation of over two million. Maxim magazine's publishers, Alpha Media Group, intend to license the "MAXIM" trademark to a line of body sprays, perfumes and colognes.

Corad Healthcare, Inc. manufactures antiperspirants to treat hyperhidrosis, a medical condition which causes excessive sweating. Corad has used the term MAXIM since 2001, but historically used clinical-looking packaging  on "prescription-strength" medication.

More recently, Corad began to use colorful packaging with "lifestyle" graphics, such as pictograms denoting golf and exercise. Further, Corad's "Maxim" name on its antiperspirant wipes started to look a lot more like Maxim's logo.  Consequently, upon learning of the new packaging, Alpha Media sued Corad, and sought a preliminary injunction.

The Accused Products

The court rejected the plaintiff's application for a preliminary injunction.  In its decision denying Alpha's motion, the District Court essentially agreed that there was the potential for Maxim's publishers to lose the ability to control its brand through Corad's unlicensed third party use. However, the Court then found that the publishers did not put forth evidence that such a result "will, in fact, occur."

The problem with the court's decision is that it requires a brand owner to prove the impossible until after the damage is already done.

Furthermore, a simple economic analysis demonstrates the flaw in the Court's logic.

It used to be the law that a preliminary injunction should usually issue when the use of a mark creates a likelihood of confusion in the consumers' minds as to the ownership or sponsorship of a product, because a high probability of confusion as to sponsorship almost inevitably establishes irreparable harm.

However, in 2010, in Salinger v. Colting, Judge Calabresi sitting in the Second Circuit Court of Appeals, penned a copyright decision finding that "a court deciding whether to issue an injunction must not adopt 'categorical' or 'general' rules or presume that a party has met an element of the injunction standard.

In plain English, Judge Calabresi effectively required that intellectual property owners factually "prove" the impossible, before it occurs:  that they are likely to be harmed by unlicensed third parties abusing their rights.

The reason such factual proof is impossible is not because it is untrue. It is because there is no simple way to measure the harm to a brand before such harm actually occurs. And once that harm occurs, it cannot be recovered. Judge Calabresi is a renowned law and economics scholar who should fully understand this point.

Here is an example:  Suppose Maxim's publishers seek to market and expand their brand to sell antiperspirants.  They set up a meeting with an established company that manufactures and distributes such products (such as Procter and Gamble).

In this hypothetical scenario, P&G would decline to market the Maxim-branded products on the basis that the trademark is already registered and used by Corad.

There is no way to ever calculate with precision the economic "harm" wrought on Alpha by the continued existence of Corad's unlicensed product in the marketplace.  

However, the economic opportunity cost to Alpha is significant:  It cannot meaningfully market a product that was its right to do so until after trial, which could be four years away.

At the conclusion of the lawsuit, a jury might award damages to Alpha Media based upon Corad Healthcare's infringement.

However, as this chart shows, the recovery of Corad's profits does not equal the opportunity cost to Maxim's publishers.  In other words, Alpha loses out on more than Corad actually gains:

The Second Circuit Court of Appeals has ignored this reality, and effectively would require that intellectual property owners suffer these losses.

The problem is that Corad will never be able to adequately compensate the publishers for the harm it causes to the brand owner.  Such "irreparable injury" is precisely why preliminary injunctions were commonplace when a brand owner could prove a high likelihood of confusion.

Under the new, "non-categorical" standard in the Second Circuit, brand owners must suffer these losses due to no fault of their own.

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.