The Price of Lower Prices

...
Hey, a Wal-Mart post that has nothing to do with the proposed Wabash Ave store in Springfield! (For the record, I really don’t care about where Wal-Mart builds but I do have a number of problems with the Wal-Mart operation in general.)

I was interested to read this Kevin Drum post on Wal-Mart where he states there are three things that keep prices low at giant retailer:

1. A spectacularly efficient supply chain and logistics system that's the envy of the industry.

2. A willingness — in fact, an almost palpable enthusiasm — for using their enormous size to beat the lowest possible prices out of their suppliers.

3. A scorched-earth campaign to prevent unions from organizing at Wal-Mart sites, thus keeping wages and benefits as low as possible.

He then goes on to say:

I'm pretty sure liberals like us don't have any problem with #1, and not much of a problem with #2 either. Needless to say, we also don't have a problem with Wal-Mart selling stuff as cheaply as possible. That's good for everyone.

It's really only #3 we have a problem with, because Wal-Mart is so big that their low wages have a depressing effect on all service sector wages.

I’d like to say that while I generally agree with Drum’s assessment, I actually do have some problem with #2. Not in theory but in practice. Like any tool, their bulk buying power can be used for good or for bad.

Let me relay this story I heard recently from an old friend of mine who I hadn’t seen in many years. He’s employed, in management in fact, by a decent sized and well established Central Illinois manufacturer. He told me he no longer shops at Wal-Mart because of Wal-Mart’s buying practices –buying practices the directly burned his employer.

Here’s what he says happened. His employer supplied Wal-Mart with a large number of the items they manufacture. In fact, Wal-Mart was a huge client of theirs. One day, Wal-Mart came to them and said they were, from now on, only going to pay a certain amount for the product. This was an amount significantly lower than what they had been paying. So, my friend’s employer decided the only way they could afford to accept this new low amount was to relocate some of their operation to Mexico where wages were less costly. That’s bad enough but it gets worse. Apparently, Wal-Mart got wind of the plan to move some of the manufacturing to Mexico and then came back, citing the lower Mexican manufacturing costs, and dictated an EVEN LOWER price to this manufacturer.

Now, to be honest, I don’t think my friend go around to telling me how the story ended (did they stay with Wal-Mart or not) but he was clearly disgusted with them. And this isn’t a guy who I would exactly call “liberal”.

My point is, even item #2 in Kevin Drum’s list isn’t always a good thing in the long run and, in fact, can do some of the same kind of damage as #3.

Update: Ezra Klein has now weighed in and has a similar take:

My guess is that Wal-Mart's size and might is having much more profound effects on our economy through the demands and strains it places on suppliers than through their lowish wages and benefits for direct employees (although those labor standards give them a competitive advantage over chains with higher standards, and so we race to the bottom...). So much as I want the latter to go up and unionization to rush across the land, I'm more worried that Wal-Mart's size and status as the indispensable outlet for products, when coupled with their virtually maniacal (though fully understandable) demands for lower pricing, are pushing down wages and work conditions all throughout the land and, for that matter, the world. Suppliers simply can't pay better and push the marginal cost to consumers -- Wal-Mart will drop them faster than you can say "Always low prices."

What that means is that suppliers simply can't pay better. And if they already do, Wal-Mart will make them stop. High labor costs translate to higher product costs, and if that's what the producers value, Wal-Mart, by far the largest retailer in the world, will simply promote an in-store brand or a competitor, pushing the high-paying producer out of business. It's a real problem, and one folks aren't giving enough thought to.