The Wal-Mart You Don't Know
The giant retailer's low prices often come with a high cost. Wal-Mart's relentless pressure can crush the companies it does business with and force them to send jobs overseas. Are we shopping our way straight to the unemployment line?
From: Issue 77 December 2003, Page 68
By: Charles Fishman
URL: http://www.fastcompany.com/magazine/77/walmart.html
A gallon-sized jar of whole pickles is something to behold. The jar is the
size of a small aquarium. The fat green pickles, floating in swampy juice,
look reptilian, their shapes exaggerated by the glass. It weighs 12 pounds,
too big to carry with one hand. The gallon jar of pickles is a display of
abundance and excess; it is entrancing, and also vaguely unsettling. This is
the product that Wal-Mart fell in love with: Vlasic's gallon jar of pickles.
Wal-Mart priced it at $2.97--a year's supply of pickles for less than $3!
"They were using it as a 'statement' item," says Pat Hunn, who calls himself
the "mad scientist" of Vlasic's gallon jar. "Wal-Mart was putting it before
consumers, saying, This represents what Wal-Mart's about. You can buy a
stinkin' gallon of pickles for $2.97. And it's the nation's number-one
brand."
Therein lies the basic conundrum of doing business with the world's largest
retailer. By selling a gallon of kosher dills for less than most grocers
sell a quart, Wal-Mart may have provided a ser-vice for its customers. But
what did it do for Vlasic? The pickle maker had spent decades convincing
customers that they should pay a premium for its brand. Now Wal-Mart was
practically giving them away. And the fevered buying spree that resulted
distorted every aspect of Vlasic's operations, from farm field to factory to
financial statement.
Indeed, as Vlasic discovered, the real story of Wal-Mart, the story that
never gets told, is the story of the pressure the biggest retailer
relentlessly applies to its suppliers in the name of bringing us "every day
low prices." It's the story of what that pressure does to the companies
Wal-Mart does business with, to U.S. manufacturing, and to the economy as a
whole. That story can be found floating in a gallon jar of pickles at
Wal-Mart.
Wal-Mart is not just the world's largest retailer. It's the world's largest
company--bigger than ExxonMobil, General Motors, and General Electric. The
scale can be hard to absorb. Wal-Mart sold $244.5 billion worth of goods
last year. It sells in three months what
number-two retailer Home Depot sells in a year. And in its own category of
general merchandise and groceries, Wal-Mart no longer has any real rivals.
It does more business than Target, Sears, Kmart, J.C. Penney, Safeway, and
Kroger combined. "Clearly," says Edward Fox, head of Southern Methodist
University's J.C. Penney Center for Retailing Excellence, "Wal-Mart is more
powerful than any retailer has ever been." It is, in fact, so big and so
furtively powerful as to have become an entirely different order of
corporate being.
Wal-Mart wields its power for just one purpose: to bring the lowest possible
prices to its customers. At Wal-Mart, that goal is never reached. The
retailer has a clear policy for suppliers: On basic products that don't
change, the price Wal-Mart will pay, and will charge shoppers, must drop
year after year. But what almost no one outside the world of Wal-Mart and
its 21,000 suppliers knows is the high cost of those low prices. Wal-Mart
has the power to squeeze profit-killing concessions from vendors. To survive
in the face of its pricing demands, makers of everything from bras to
bicycles to blue jeans have had to lay off employees and close U.S. plants
in favor of outsourcing products from overseas.
Of course, U.S. companies have been moving jobs offshore for decades, long
before Wal-Mart was a retailing power. But there is no question that the
chain is helping accelerate the loss of American jobs to low-wage countries
such as China. Wal-Mart, which in the late 1980s and early 1990s trumpeted
its claim to "Buy American," has doubled its imports from China in the past
five years alone, buying some $12 billion in merchandise in 2002. That's
nearly 10% of all Chinese exports to the United States.
One way to think of Wal-Mart is as a vast pipeline that gives non-U.S.
companies direct access to the American market. "One of the things that
limits or slows the growth of imports is the cost of establishing
connections and networks," says Paul Krugman, the Princeton University
economist. "Wal-Mart is so big and so centralized that it can all at once
hook Chinese and other suppliers into its digital system. So--wham!--you
have a large switch to overseas sourcing in a period quicker than under the
old rules of retailing."
Steve Dobbins has been bearing the brunt of that switch. He's president and
CEO of Carolina Mills, a 75-year-old North Carolina company that supplies
thread, yarn, and textile finishing to apparel makers--half of which supply
Wal-Mart. Carolina Mills grew steadily until 2000. But in the past three
years, as its customers have gone either overseas or out of business, it has
shrunk from 17 factories to 7, and from 2,600 employees to 1,200. Dobbins's
customers have begun to face imported clothing sold so cheaply to Wal-Mart
that they could not compete even if they paid their workers nothing.
"People ask, 'How can it be bad for things to come into the U.S. cheaply?
How can it be bad to have a bargain at Wal-Mart?' Sure, it's held inflation
down, and it's great to have bargains," says Dobbins. "But you can't buy
anything if you're not employed. We are shopping ourselves out of jobs."
The gallon jar of pickles at Wal-Mart became a devastating success, giving
Vlasic strong sales and growth numbers--but slashing its profits by millions
of dollars.
There is no question that Wal-Mart's relentless drive to squeeze out costs
has benefited consumers. The giant retailer is at least partly responsible
for the low rate of U.S. inflation, and a McKinsey & Co. study concluded
that about 12% of the economy's productivity gains in the second half of the
1990s could be traced to Wal-Mart alone.
There is also no question that doing business with Wal-Mart can give a
supplier a fast, heady jolt of sales and market share. But that fix can come
with long-term consequences for the health of a brand and a business.
Vlasic, for example, wasn't looking to build its brand on a gallon of whole
pickles. Pickle companies make money on "the cut," slicing cucumbers into
spears and hamburger chips. "Cucumbers in the jar, you don't make a whole
lot of money there," says Steve Young, a former vice president of grocery
marketing for pickles at Vlasic, who has since left the company.
At some point in the late 1990s, a Wal-Mart buyer saw Vlasic's gallon jar
and started talking to Pat Hunn about it. Hunn, who has also since left
Vlasic, was then head of Vlasic's Wal-Mart sales team, based in Dallas. The
gallon intrigued the buyer. In sales tests, priced somewhere over $3, "the
gallon sold like crazy," says Hunn, "surprising us all." The Wal-Mart buyer
had a brainstorm: What would happen to the gallon if they offered it
nationwide and got it below $3? Hunn was skeptical, but his job was to look
for ways to sell pickles at Wal-Mart. Why not?
And so Vlasic's gallon jar of pickles went into every Wal-Mart, some 3,000
stores, at $2.97, a price so low that Vlasic and Wal-Mart were making only a
penny or two on a jar, if that. It was showcased on big pallets near the
front of stores. It was an abundance of abundance. "It was selling 80 jars a
week, on average, in every store," says Young. Doesn't sound like much,
until you do the math: That's 240,000 gallons of pickles, just in gallon
jars, just at Wal-Mart, every week. Whole fields of cucumbers were heading
out the door.
For Vlasic, the gallon jar of pickles became what might be called a
devastating success. "Quickly, it started cannibalizing our non-Wal-Mart
business," says Young. "We saw consumers who used to buy the spears and the
chips in supermarkets buying the Wal-Mart gallons. They'd eat a quarter of a
jar and throw the thing away when they got moldy. A family can't eat them
fast enough."
The gallon jar reshaped Vlasic's pickle business: It chewed up the profit
margin of the business with Wal-Mart, and of pickles generally. Procurement
had to scramble to find enough pickles to fill the gallons, but the volume
gave Vlasic strong sales numbers, strong growth numbers, and a powerful
place in the world of pickles at Wal-Mart. Which accounted for 30% of
Vlasic's business. But the company's profits from pickles had shriveled 25%
or more, Young says--millions of dollars.
The gallon was hoisting Vlasic and hurting it at the same time.
Young remembers begging Wal-Mart for relief. "They said, 'No way,' " says
Young. "We said we'll increase the price"--even $3.49 would have helped
tremendously--"and they said, 'If you do that, all the other products of
yours we buy, we'll stop buying.' It was a clear threat." Hunn recalls
things a little differently, if just as ominously: "They said, 'We want the
$2.97 gallon of pickles. If you don't do it, we'll see if someone else
might.' I knew our competitors were saying to Wal-Mart, 'We'll do the $2.97
gallons if you give us your other business.' " Wal-Mart's business was so
indispensable to Vlasic, and the gallon so central to the Wal-Mart
relationship, that decisions about the future of the gallon were made at the
CEO level.
Finally, Wal-Mart let Vlasic up for air. "The Wal-Mart guy's response was
classic," Young recalls. "He said, 'Well, we've done to pickles what we did
to orange juice. We've killed it. We can back off.' " Vlasic got to take it
down to just over half a gallon of pickles, for $2.79. Not long after that,
in January 2001, Vlasic filed for bankruptcy--although the gallon jar of
pickles, everyone agrees, wasn't a critical factor.
By now, it is accepted wisdom that Wal-Mart makes the companies it does
business with more efficient and focused, leaner and faster. Wal-Mart itself
is known for continuous improvement in its ability to handle, move, and
track merchandise. It expects the same of its suppliers. But the ability to
operate at peak efficiency only gets you in the door at Wal-Mart. Then the
real demands start. The public image Wal-Mart projects may be as cheery as
its yellow smiley-face mascot, but there is nothing genial about the process
by which Wal-Mart gets its suppliers to provide tires and contact lenses,
guns and underarm deodorant at every day low prices. Wal-Mart is legendary
for forcing its suppliers to redesign everything from their packaging to
their computer systems. It is also legendary for quite straightforwardly
telling them what it will pay for their goods.
"We are one of Wal-Mart's biggest suppliers, and they are our biggest
customer, by far. We have a great relationship. That's all I can say. Are we
done now?"
John Fitzgerald, a former vice president of Nabisco, remembers Wal-Mart's
reaction to his company's plan to offer a 25-cent newspaper coupon for a
large bag of Lifesavers in advance of Halloween. Wal-Mart told Nabisco to
add up what it would spend on the promotion--for the newspaper ads, the
coupons, and handling--and then just take that amount off the price instead.
"That isn't necessarily good for the manufacturer," Fitzgerald says. "They
need things that draw attention."
It also is not unheard of for Wal-Mart to demand to examine the private
financial records of a supplier, and to insist that its margins are too high
and must be cut. And the smaller the supplier, one academic study shows, the
greater the likelihood that it will be forced into damaging concessions.
Melissa Berryhill, a Wal-Mart spokeswoman, disagrees: "The fact is Wal-Mart,
perhaps like no other retailer, seeks to establish collaborative and
mutually beneficial relationships with our suppliers."
For many suppliers, though, the only thing worse than doing business with
Wal-Mart may be not doing business with Wal-Mart. Last year, 7.5 cents of
every dollar spent in any store in the United States (other than auto-parts
stores) went to the retailer. That means a contract with Wal-Mart can be
critical even for the largest consumer-goods companies. Dial Corp., for
example, does 28% of its business with Wal-Mart. If Dial lost that one
account, it would have to double its sales to its next nine customers just
to stay even. "Wal-Mart is the essential retailer, in a way no other
retailer is," says Gib Carey, a partner at Bain & Co., who is leading a
yearlong study of how to do business with Wal-Mart. "Our clients cannot grow
without finding a way to be successful with Wal-Mart."
Many companies and their executives frankly admit that supplying Wal-Mart is
like getting into the company version of basic training with an implacable
Army drill sergeant. The process may be unpleasant. But there can be some
positive results.
"Everyone from the forklift driver on up to me, the CEO, knew we had to
deliver [to Wal-Mart] on time. Not 10 minutes late. And not 45 minutes
early, either," says Robin Prever, who was CEO of Saratoga Beverage Group
from 1992 to 2000, and made private-label water sold at Wal-Mart. "The
message came through clearly: You have this 30-second delivery window.
Either you're there, or you're out. With a customer like that, it changes
your organization. For the better. It wakes everybody up. And all our
customers benefited. We changed our whole approach to doing business."
But you won't hear evenhanded stories like that from Wal-Mart, or from its
current suppliers. Despite being a publicly traded company, Wal-Mart is
intensely private. It declined to talk in detail about its relationships
with its suppliers for this story. More strikingly, dozens of companies
contacted declined to talk about even the basics of their business with
Wal-Mart.
Here, for example, is an executive at Dial: "We are one of Wal-Mart's
biggest suppliers, and they are our biggest customer by far. We have a great
relationship. That's all I can say. Are we done now?" Goaded a bit, the
executive responds with an almost hysterical edge: "Are you meshuga? Why in
the world would we talk about Wal-Mart? Ask me about anything else, we'll
talk. But not Wal-Mart."
No one wants to end up in what is known among Wal-Mart vendors as the
"penalty box"--punished, or even excluded from the store shelves, for saying
something that makes Wal-Mart unhappy. (The penalty box is normally reserved
for vendors who don't meet performance benchmarks, not for those who talk to
the press.)
"You won't hear anything negative from most people," says Paul Kelly,
founder of Silvermine Consulting Group, a company that helps businesses work
more effectively with retailers. "It would be committing suicide. If
Wal-Mart takes something the wrong way, it's like Saddam Hussein. You just
don't want to piss them off."
As a result, this story was reported in an unusual way: by speaking with
dozens of people who have spent years selling to Wal-Mart, or consulting to
companies that sell to Wal-Mart, but who no longer work for companies that
do business with Wal-Mart. Unless otherwise noted, the companies involved in
the events they described refused even to confirm or deny the basics of the
events.
To a person, all those interviewed credit Wal-Mart with a fundamental
integrity in its dealings that's unusual in the world of consumer goods,
retailing, and groceries. Wal-Mart does not cheat suppliers, it keeps its
word, it pays its bills briskly. "They are tough people but very honest;
they treat you honestly," says Peter Campanella, who ran the business that
sold Corning kitchenware products, both at Corning and then at World
Kitchen. "It was a joke to do business with most of their competitors. A
fiasco."
But Wal-Mart also clearly does not hesitate to use its power, magnifying the
Darwinian forces already at work in modern global capitalism.
Caught in the Wal-Mart squeeze, Huffy didn't just relinquish profits to keep
its commitment to the retailer. It handed those profits to the competition.
What does the squeeze look like at Wal-Mart? It is usually thoroughly
rational, sometimes devastatingly so.
John Mariotti is a veteran of the consumer-products world--he spent nine
years as president of Huffy Bicycle Co., a division of Huffy Corp., and is
now chairman of World Kitchen, the company that sells Oxo, Revere, Corning,
and Ekco brand housewares.
He could not be clearer on his opinion about Wal-Mart: It's a great company,
and a great company to do business with. "Wal-Mart has done more good for
America by several thousand orders of magnitude than they've done bad,"
Mariotti says. "They have raised the bar, and raised the bar for everybody."
Mariotti describes one episode from Huffy's relationship with Wal-Mart. It's
a tale he tells to illustrate an admiring point he makes about the retailer.
"They demand you do what you say you are going to do." But it's also a
classic example of the damned-if-you-do, damned-if-you-don't Wal-Mart
squeeze. When Mariotti was at Huffy throughout the 1980s, the company sold a
range of bikes to Wal-Mart, 20 or so models, in a spread of prices and
profitability. It was a leading manufacturer of bikes in the United States,
in places like Ponca City, Oklahoma; Celina, Ohio; and Farmington, Missouri.
One year, Huffy had committed to supply Wal-Mart with an entry-level,
thin-margin bike--as many as Wal-Mart needed. Sales of the low-end bike took
off. "I woke up May 1"--the heart of the bike production cycle for the
summer--"and I needed 900,000 bikes," he says. "My factories could only run
450,000." As it happened, that same year, Huffy's fancier, more-profitable
bikes were doing well, too, at Wal-Mart and other places. Huffy found itself
in a bind.
With other retailers, perhaps, Mariotti might have sat down, renegotiated,
tried to talk his way out of the corner. Not with Wal-Mart. "I made the deal
up front with them," he says. "I knew how high was up. I was duty-bound to
supply my customer." So he did something extraordinary. To free up
production in order to make Wal-Mart's cheap bikes, he gave the designs for
four of his higher-end, higher-margin products to rival manufacturers. "I
conceded business to my competitors, because I just ran out of capacity," he
says. Huffy didn't just relinquish profits to keep Wal-Mart happy--it handed
those profits to its competition. "Wal-Mart didn't tell me what to do,"
Mariotti says. "They didn't have to." The retailer, he adds, "is tough as
nails. But they give you a chance to compete. If you can't compete, that's
your problem."
In the years since Mariotti left Huffy, the bike maker's relationship with
Wal-Mart has been vital (though Huffy Corp. has lost money in three out of
the last five years). It is the number-three seller of bikes in the United
States. And Wal-Mart is the number-one retailer of bikes. But here's one
last statistic about bicycles: Roughly 98% are now imported from places such
as China, Mexico, and Taiwan. Huffy made its last bike in the United States
in 1999.
As Mariotti says, Wal-Mart is tough as nails. But not every supplier agrees
that the toughness is always accompanied by fairness. The Lovable Company
was founded in 1926 by the grandfather of Frank Garson II, who was Lovable's
last president. It did business with Wal-Mart, Garson says, from the
earliest days of founder Sam Walton's first store in Bentonville, Arkansas.
Lovable made bras and lingerie, supplying retailers that also included Sears
and Victoria's Secret. At one point, it was the sixth-largest maker of
intimate apparel in the United States, with 700 employees in this country
and another 2,000 at eight factories in Central America.
Eventually Wal-Mart became Lovable's biggest customer. "Wal-Mart has a big
pencil," says Garson. "They have such awesome purchasing power that they
write their own ticket. If they don't like your prices, they'll go vertical
and do it themselves--or they'll find someone that will meet their terms."
In the summer of 1995, Garson asserts, Wal-Mart did just that. "They had
awarded us a contract, and in their wisdom, they changed the terms so
dramatically that they really reneged." Garson, still worried about
litigation, won't provide details. "But when you lose a customer that size,
they are irreplaceable."
Lovable was already feeling intense cost pressure. Less than three years
after Wal-Mart pulled its business, in its 72nd year, Lovable closed. "They
leave a lot to be desired in the way they treat people," says Garson. "Their
actions to pulverize people are unnecessary. Wal-Mart chewed us up and spit
us out."
Believe it or not, American business has been through this before. The Great
Atlantic & Pacific Tea Co., the grocery-store chain, stood astride the U.S.
market in the 1920s and 1930s with a dominance that has likely never been
duplicated. At its peak, A&P had five times the number of stores Wal-Mart
has now (although much smaller ones), and at one point, it owned 80% of the
supermarket business. Some of the antipredatory-pricing laws in use today
were inspired by A&P's attempts to muscle its suppliers.
There is very little academic and statistical study of Wal-Mart's impact on
the health of its suppliers and virtually nothing in the last decade, when
Wal-Mart's size has increased by a factor of five. This while the retail
industry has become much more concentrated. In large part, that's because
it's nearly impossible to get meaningful data that would allow researchers
to track the influence of Wal-Mart's business on companies over time. You'd
need cooperation from the vendor companies or Wal-Mart or both--and neither
Wal-Mart nor its suppliers are interested in sharing such intimate detail.
Bain & Co., the global management consulting firm, is in the midst of a
project that asks, How does a company have a healthy relationship with
Wal-Mart? How do you avoid being sucked into the vortex? How do you maintain
some standing, some leverage of your own?
This July, in a mating that had the relieved air of lovers who had too long
resisted embracing, Levi Strauss rolled blue jeans into every Wal-Mart in
the United States.
Bain's first insights are obvious, if not easy. "Year after year," Carey, a
partner at Bain & Co., says, "for any product that is the same as what you
sold them last year, Wal-Mart will say, 'Here's the price you gave me last
year. Here's what I can get a competitor's product for. Here's what I can
get a private-label version for. I want to see a better value that I can
bring to my shopper this year. Or else I'm going to use that shelf space
differently.' "
Carey has a friend in the umbrella business who learned that. One year,
because of costs, he went to Wal-Mart and asked for a 5% price increase.
"Wal-Mart said, 'We were expecting a 5% decrease. We're off by 10%. Go back
and sharpen your pencil.' " The umbrella man scrimped and came back with a
2% increase. "They said, 'We'll go with a Chinese manufacturer'--and he was
out entirely."
The Wal-Mart squeeze means vendors have to be as relentless and as
microscopic as Wal-Mart is at managing their own costs. They need, in fact,
to turn themselves into shadow versions of Wal-Mart itself. "Wal-Mart won't
necessarily say you have to reconfigure your distribution system," says
Carey. "But companies recognize they are not going to maintain margins with
growth in their Wal-Mart business without doing it."
The way to avoid being trapped in a spiral of growing business and shrinking
profits, says Carey, is to innovate. "You need to bring Wal-Mart new
products--products consumers need. Because with those, Wal-Mart doesn't have
benchmarks to drive you down in price. They don't have historical data, you
don't have competitors, they haven't bid the products out to private-label
makers. That's how you can have higher prices and higher margins."
Reasonable advice, but not universally useful. There has been an explosion
of "innovation" in toothbrushes and toothpastes in the past five years, for
instance; but a pickle is a pickle is a pickle.
Bain's other critical discovery is that consumers are often more loyal to
product companies than to Wal-Mart. With strongly branded items people
develop a preference for--things like toothpaste or laundry
detergent--Wal-Mart rarely forces shoppers to switch to a second choice. It
would simply punish itself by seeing sales fall, and it won't put up with
that for long.
But as Wal-Mart has grown in market reach and clout, even manufacturers
known for nurturing premium brands may find themselves overpowered. This
July, in a mating that had the relieved air of lovers who had too long
resisted embracing, Levi Strauss rolled blue jeans into every Wal-Mart
doorway in the United States: 2,864 stores. Wal-Mart, seeking to expand its
clothing business with more fashionable brands, promoted the clothes on its
in-store TV network and with banners slipped over the security-tag detectors
at exit doors.
Levi's launch into Wal-Mart came the same summer the clothes maker
celebrated its 150th birthday. For a century and a half, one of the most
recognizable names in American commerce had survived without Wal-Mart. But
in October 2002, when Levi Strauss and Wal-Mart announced their engagement,
Levi was shrinking rapidly. The pressure on Levi goes back 25 years--well
before Wal-Mart was an influence. Between 1981 and 1990, Levi closed 58 U.S.
manufacturing plants, sending 25% of its sewing overseas.
Sales for Levi peaked in 1996 at $7.1 billion. By last year, they had
spiraled down six years in a row, to $4.1 billion; through the first six
months of 2003, sales dropped another 3%. This one account--selling jeans to
Wal-Mart--could almost instantly revive Levi.
Last year, Wal-Mart sold more clothing than any other retailer in the
country. It also sold more pairs of jeans than any other store. Wal-Mart's
own inexpensive house brand of jeans, Faded Glory, is estimated to do $3
billion in sales a year, a house brand nearly the size of Levi Strauss.
Perhaps most revealing in terms of Levi's strategic blunders: In 2002, half
the jeans sold in the United States cost less than $20 a pair. That same
year, Levi didn't offer jeans for less than $30.
For much of the last decade, Levi couldn't have qualified to sell to
Wal-Mart. Its computer systems were antiquated, and it was notorious for
delivering clothes late to retailers. Levi admitted its on-time delivery
rate was 65%. When it announced the deal with Wal-Mart last year, one
fashion-industry analyst bluntly predicted Levi would simply fail to deliver
the jeans.
But Levi Strauss has taken to the Wal-Mart Way with the intensity of a
near-death religious conversion--and Levi's executives were happy to talk
about their experience getting ready to sell at Wal-Mart. One hundred people
at Levi's headquarters are devoted to the new business; another 12 have set
up in an office in Bentonville, near Wal-Mart's headquarters, where the
company has hired a respected veteran Wal-Mart sales account manager.
Getting ready for Wal-Mart has been like putting Levi on the Atkins diet. It
has helped everything--customer focus, inventory management, speed to
market. It has even helped other retailers that buy Levis, because Wal-Mart
has forced the company to replenish stores within two days instead of Levi's
previous five-day cycle.
And so, Wal-Mart might rescue Levi Strauss. Except for one thing.
Levi didn't actually have any clothes it could sell at Wal-Mart. Everything
was too expensive. It had to develop a fresh line for mass retailers: the
Levi Strauss Signature brand, featuring Levi Strauss's name on the back of
the jeans.
Two months after the launch, Levi basked in the honeymoon glow. Overall
sales, after falling for the first six months of 2003, rose 6% in the third
quarter; profits in the summer quarter nearly doubled. All, Levi's CEO said,
because of Signature.
"They are all very rational people. And they had a good point. Everyone was
willing to pay more for a Master Lock. But how much more can they justify?"
But the low-end business isn't a business Levi is known for, or one it had
been particularly interested in. It's also a business in which Levi will
find itself competing with lean, experienced players such as VF and Faded
Glory. Levi's makeover might so improve its performance with its
non-Wal-Mart suppliers that its established business will thrive, too. It is
just as likely that any gains will be offset by the competitive pressures
already dissolving Levi's premium brands, and by the cannibalization of its
own sales. "It's hard to see how this relationship will boost Levi's
higher-end business," says Paul Farris, a professor at the University of
Virginia's Darden Graduate School of Business Administration. "It's easy to
see how this will hurt the higher-end business."
If Levi clothing is a runaway hit at Wal-Mart, that may indeed rescue Levi
as a business. But what will have been rescued? The Signature line--it
includes clothing for girls, boys, men, and women--is an odd departure for a
company whose brand has long been an American icon. Some of the jeans have
the look, the fingertip feel, of pricier Levis. But much of the clothing has
the look and feel it must have, given its price (around $23 for adult
pants): cheap. Cheap and disappointing to find labeled with Levi Strauss's
name. And just five days before the cheery profit news, Levi had another
announcement: It is closing its last two U.S. factories, both in San
Antonio, and laying off more than 2,500 workers, or 21% of its workforce. A
company that 22 years ago had 60 clothing plants in the United States--and
that was known as one of the most socially reponsible corporations on the
planet--will, by 2004, not make any clothes at all. It will just import
them.
In the end, of course, it is we as shoppers who have the power, and who have
given that power to Wal-Mart. Part of Wal-Mart's dominance, part of its
insight, and part of its arrogance, is that it presumes to speak for
American shoppers.
If Wal-Mart doesn't like the pricing on something, says Andrew Whitman, who
helped service Wal-Mart for years when he worked at General Foods and Kraft,
they simply say, "At that price we no longer think it's a good value to our
shopper. Therefore, we don't think we should carry it."
Wal-Mart has also lulled shoppers into ignoring the difference between the
price of something and the cost. Its unending focus on price underscores
something that Americans are only starting to realize about globalization:
Ever-cheaper prices have consequences. Says Steve Dobbins, president of
thread maker Carolina Mills: "We want clean air, clear water, good living
conditions, the best health care in the world--yet we aren't willing to pay
for anything manufactured under those restrictions."
Randall Larrimore, a former CEO of MasterBrand Industries, the parent
company of Master Lock, understands that contradiction too well. For years,
he says, as manufacturing costs in the United States rose, Master Lock was
able to pass them along. But at some point in the 1990s, Asian manufacturers
started producing locks for much less. "When the difference is $1, retailers
like Wal-Mart would prefer to have the brand-name padlock or faucet or
hammer," Larrimore says. "But as the spread becomes greater, when our
padlock was $9, and the import was $6, then they can offer the consumer a
real discount by carrying two lines. Ultimately, they may only carry one
line."
In January 1997, Master Lock announced that, after 75 years making locks in
Milwaukee, it would begin importing more products from Asia. Not too long
after, Master Lock opened a factory of its own in Nogales, Mexico. Today, it
makes just 10% to 15% of its locks in Milwaukee--its 300 employees there
mostly make parts that are sent to Nogales, where there are now 800 factory
workers.
Larrimore did the first manufacturing layoffs at Master Lock. He negotiated
with Master Lock's unions himself. He went to Bentonville. "I loved dealing
with Wal-Mart, with Home Depot," he says. "They are all very rational
people. There wasn't a whole lot of room for negotiation. And they had a
good point. Everyone was willing to pay more for a Master Lock. But how much
more can they justify? If they can buy a lock that has arguably similar
qual-ity, at a cheaper price, well, they can get their consumers a deal."
It's Wal-Mart in the role of Adam Smith's invisible hand. And the Milwaukee
employees of Master Lock who shopped at Wal-Mart to save money helped that
hand shove their own jobs right to Nogales. Not consciously, not directly,
but inevitably. "Do we as consumers appreciate what we're doing?" Larrimore
asks. "I don't think so. But even if we do, I think we say, Here's a Master
Lock for $9, here's another lock for $6--let the other guy pay $9."
Charles Fishman (
[email protected] ) is a senior writer at Fast Company
Andrew Moesel provided research assistance for this story.
Some other interesting tidbits turned up by a little research:
-for every two jobs created by a Wal-Mart, the community loses thee others
-80% of Wal-Mart employees are women
-Wal-Mart has a 50% annual turnover rate
-Each day, Wal-Mart sends all deposits from all stores to its Bentonville, AR headquarters - none remains in the local economy
-Wal-Mart buys almost 10% of all Chinese exports to the United States
-Mexico now houses 81 Wal-Mart stores, 52 Sam's Club stores, 52 Suburbia department stores, and 267 Vips restaurants
-In the U.S., a union supermarket worker makes about $19 an hour on average; at Wa-Mart, where there are no unions, that worker makes about $9 an hour; in Mexico, a newly hired Wal-Mart cashier makes about $1.50 an hour
-Wal-Mart is the world's biggest company in terms of revenues, with $245 billion in annual sales (that's more than the economies of all but 30 of the world's nations)
