15.4.06

EVERYDAY LOW PRICES, SQUEEZED SUPPLIERS, HIGH TURNOVER? Economist's View links, without comment, to a Washington Post story on Wal-Mart, good and bad.

Question 1: What is the opportunity cost of a bottle of barbecue sauce?

Suppose you're the manager of barbecue sauce at Kraft, he began. You go down to Bentonville to show off the new label on your bottles and the summer's jazzy cardboard display, "and all they say is: 'What's your price?' And you say, '99 cents a bottle.' And they say, 'You know, we don't care about the cardboard display, that's cute and everything, but, 79 cents.' "

How do you deal with that? [author Charles] Fishman [writing in the Ida Tarbell tradition?] asked.

"You slap your palm on your forehead and you say: '79 cents a bottle! What a brilliant idea!' "

And if you don't?

"They say, 'Well, we're not going to carry the barbecue sauce.' "

But wait! You represent a major multinational corporation! Why wouldn't you hold the line?

"Well, you just lost 20 percent of your barbecue sauce business for the year. By the time you get back to Chicago from Bentonville, you're fired."

On the other hand, if you took a loss on the sale to Wal-Mart, you're fired. Is Kraft attempting to hold-up Wal-Mart, or the other way 'round?

Question 2: How much waste is inherent in packaging?

Prowling the health and beauty section, he reminds me that some years back, just about all deodorant brands came in paperboard boxes. Then Wal-Mart said: Boxes costs money, they take up space, who needs 'em? Pretty soon, deodorant didn't come in boxes anymore.

No harm done there, unless you were a box manufacturer: Wal-Mart was using its clout to force waste out of the system. What's more, Fishman says, it passed on most of the savings. Its main goal, when forcing suppliers to economize, is to keep prices down, not to increase its extremely low profit margins. Its formula is simple: Low prices equal volume equals growth and thus success.

But what happens when the factor-minimal frontier is achieved?

The company's record on outsourcing is less good.
Last year, [Bangladeshi garment worker Rubina] Akther joined 14 other workers from Bangladesh, China, Swaziland, Indonesia and Nigeria to sue Wal-Mart, arguing that its suppliers' actions are the company's responsibility. Wal-Mart has argued, in response, that it has a code of conduct for its suppliers and a worldwide inspection program to enforce it. Fishman's analysis of this program led him to conclude that Wal-Mart's inspections, however well-meaning, are not tough, frequent or independent enough to prevent abuse.
Some companies are able to resist the hold-ups.

That would be the Snapper mower, a high-end brand whose management decided a few years back that it couldn't afford to continue dealing with Wal-Mart. The reason? Meeting Wal-Mart's incessant demands for lower prices would put the company in what Fishman describes as a "death spiral" of "collapsing profitability, offshore manufacturing and the gradual but irresistible corrosion of the very qualities for which Snapper was known."

Almost no one turns down Wal-Mart. The sales volume it offers is simply too enticing. But "once you get hooked on the volume," as the CEO of Snapper's parent company once explained, "it's like getting hooked on cocaine."

Fast Company has more on Snapper (looks like Brett Favre does endorsements) choosing not to deal with Wal-Mart.

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