The Wall Street Journal’s op-ed page is probably the only place left in America where Wal-Mart’s predatory pricing model is viewed, without irony, as a good thing. Of course, the Journal doesn’t see it as predatory at all. In the eyes of the newspaper’s piously pro-capitalism editors, Wal-Mart’s everyday low prices are freeing up more disposable income for the working man. And retail space, too, since vendors who can’t cut the mustard in hard times are the first to go when Wal-Mart targets them in its crosshairs. This is creative destruction at its cruel best, and we supposedly should welcome it, since new and better-run businesses are waiting to take the place of those that have failed to meet the needs of the American consumer.
At least, that’s the theory of it. In practice, however, Wal-Mart has decimated Main Street in hundreds of towns across the land. While consumers were enjoying everyday low prices, their neighbors were closing their shops and trying to figure out how to survive. Some did, albeit barely, by going to work for…Wal-Mart. The company’s slash-and-burn jihad across the retail landscape would not have been much noticed in the big cities, nor in such elitist redoubts of capitalism as the Wall Street Journal editorial room. But that’s about to change, since Wal-Mart has trained its heavy guns on booksellers who have long been among the solidest anchor tenants at the street level of downtown shopping districts.
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The giant retailer’s shot-across-the-bow – offering the top ten best-sellers for $10 — came just in time to devastate book stores during the holiday shopping season. Stores of every size will be vulnerable — from independents who have been savvy enough to survive competition from Amazon, to the largest vendors, including Borders, Barnes & Noble, Target, and even Amazon itself. No seller will make money at that price, not even publishers, but that is of little concern to Wal-Mart, which seeks only to demonstrate in as brutal a manner as possible that it will not be undersold. Nor can independent booksellers simply buy copies from Wal-Mart to resell, since $10 best sellers are being limited to just a few copies per buyer. The predictable result six to twelve months down the road is that many book stores both big and small will be closing, adding hugely to a retail vacancy rate that is already approaching depressionary levels.
Wal-Mart is all good cheer in promoting its everyday values, but there is no longer any denying that its primary goal is to drive all of its competitors into the ground. This strategy will no doubt be abetted by Chinese manufacturers eager to unload goods into a weak U.S. market at any cost. When Wal-Mart eventually succeeds at it, we can be certain that “everyday low prices” will be superseded in practice by prices reflecting whatever the traffic will bear. Wal-Mart has the reach, the naked ambition and the pricing power to bankrupt nearly any competitor in any business, from consumer electronics, to Halloween costumes, to funeral services, to pharmaceuticals, to lawn furniture. A decade ago, a grassroots movement to hold the line against Wal-Mart’s relentless expansion died after the retailer won some local skirmishes. Now the company is too big to oppose, a vital appendage of nearly every town in which it operates. America has paid a huge price for those everyday values.
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{ 26 comments }
Perhaps Wal~Mart will start selling gold and silver bullion 10 to 20% under comex spot?
I wonder how long they can run with that dog. This is a good reminder of the value of
owning bullion……..no debt and no obligation to anyone……..
Rick,
very interesting coment.
In his book “The Anti-trust Paradox”, Robert Bork makes the point, and (then) demonstrably so, that there is no such thing as (effective) predatory pricing (its attempt yes), and that any such tactics would at best be temporary, to the consumers benefit in the process, by supplying below market price products.
I have always felt that a very persuasive case.
Over time, one (hopefulle) learns more, and so perhaps in this instance. Bork is informed by the Chicago School, and that means something different today, than it used to. Not of course, to the WSJ, their tune will be steady.
Perhaps, Wal-Mart will be the great empirical case to disprove what heretofore was a proven axiom.
One thing always missing in any economic analysis of this sort, then as now in the mainstream, were the unquantifiable, rather starkly non-economic externalities of a loss of quality of life, etc (impact on community cohesion, cultural destruction, etc)..
[In a different, but analogous way, Microsoft never truly reaped any above market, deadweight-loss profits on its OS, it was content in giving a market-price product, and collecting market profits, but being the only ones doing so. Smart, allowed them to provail in the anti-trust case, and be where they are today. The downside? For the consumer, an excruciating product, infuriating for decades, not driven to meaningful improvement by competition. For the company, descent into commodity product pruveyor, and eventual loss of relevancy down the line]
This may teach us, too late it seems, that not everything can be judged only by it money/financial, economically quantifiables.
BTW, Bork’s legal analysis back then, as set out very well in “The Tempting of America” is still worth a look.
It’s a lot more romantic to walk into the bookstore on Main Street owned by the same family for 3 generations. But people care more about their wallets than their neighbors’ businesses.
Big Gov’t has been on the case of Big Oil for over a century. Big Pharma and Big Health Insurers have bulls-eyes on their backs now.
Until Walmart starts raising prices (in a depression?), then they’ll remain untouchable. In the unlikely case that the Democrats survive the 2010 elections, then, maybe, the unions will try to get Walmart in the “witness” chair for Congressional hearings.
Happy Thanksgiving, Rick. Relax and enjoy.
P.S. Au busting 1175, whoa.
I wouldn’t worry about it too much since most of Wal-Mart’s customers are illiterate anyway.
Your view of Walmart is true, at least for now. China has to unpeg their yuan from the U.S. dollar, or go down with it. When that happens, the yuan will soar and the dollar will go off a cliff.
I’d estimate 90% of goods sold in Walmart are imported. If the U.S. dollar tanks, it will be too expensive to import goods from China because it will cost 3x-5x as much as they do now. Don’t believe me? What can Icelanders afford to import? Americans will refuse to pay for expensive imported goods. That means Walmart will have to sell domestic products, but wait, they destroyed a lot of American manufacturing because they insisted on selling the cheaper Asian products. A lot of American jobs went overseas forcing American factories to shut down. If the U.S. dollar tanks, so does Walmart. It’s rather ironic because it was Walmart and the Federal gov’t who lit the fuse to their own destruction.
Dead on!! Huge price to pay for those ‘everyday values’ indeed. It’s also all part of the homogenizing of not only America, but the world, thru the power of global behemoth pseudo-monopolies. I got 2 boys under 5 and God knows what kind of world they’re gonna be growing up in. Keep up the good work.
Afternoon Gentlemen, First of all Dusty and gang the U.S. dollar is not going to relatively tank and the Chinese yuan is not going to relatively soar, while such musings are fun to toss about. USD is weak for its reasons but so are the other major currencies (EU, GPB, JPYen) etc. China is IN CONTROL right now. THEY know it, so WE need to remember that. You can bet your bottom that President Obama knows it after his visit here last week, personally witnessing the China-driven Asia boom for himself while keeping his comments far on the side of reserved. You don’t piss off the one who has essentially saved the world from a meltdown in the past year. The Chinese will slowly revalue their currency peg to the USD over time but they will not make any severe moves. Why would we imagine they will or have to?
More to the point of Walmart, huge kudos to you Rick for calling a duck a duck. The U.S. is in the process of creating a more and more socialist gov’t-supported populus of American society; 25-100 million citizens who’ve been pillaged and placed in a segment of society characterized as a daily lifestyle involved with and supported by the gov’t who is lining up it’s partners in big stock/financials/banking, big health/pharma, even big rail, and as today’s article illuminates, big retail for their daily household needs. They will all have a comfortable, communist-like life with Walmart type jobs and benefits whilst staring at the huge gap to the other side of the economic spectrum getting wider and wider with less and less ways for them to cross over to it, let alone get involved in it or influence it. This my dear friends is the new economic and social reality of America continuing to unfold over the next 10 years. Nadeem Wayalat over at Market Oracle (hope you’re ok with him Rick) speaks wisely I think about the coming inflation due to currency deflation and debt, while at the same time the consumer price and real estate deflation in the U.S. will continue to support this new social structure for awhile longer. Long dollar now. Cheers, Mario
Good article, Rick.
This relates to the true cost of our cheap Chinese goods. Folks should check out this photo-documentary:
http://www.chinahush.com/2009/10/21/amazing-pictures-pollution-in-china/
Aloha All
Mahalo. Some intelligent insights here today on RA.
Sam Walton the friend of a friend.
As long as he was alive, he had a Buy American policy that kept American manufacturers squawking about being ground down on wholesale prices, but in business. Not long after his passing, WMT went to lower quality prison slave labor products from China, the Pier 1 model. Thus began H Ross Perot’s giant sucking sound for American jobs and prosperity.
Yes, about a decade ago http://www.walmartmovie.com/ was all the rage about The High Price of Low Cost and a few labor union states kept WMT out, meaning shoppers just drove out of state to WMT. This year, they have repeatedly been out of product. Seems Just in Time shipping does not work so well when diesel costs so much.
Which reminds of the Standard Oil Monopoly broken up by Teddy Roosevelt for having 88% of the market. Founding Families put their shares in Trust and Foundations to avoid scrutiny and taxes. Less than a generation later, each of the seven daughters/sisters was worth more than the parent company. We saw similar with the breakup of AT&T. GE, GS and MSFT were not broken up, but also illustrated similar principles. So much for free markets and competition providing the best products and services, with the possible exception of Apple, which charged more for a better product and got it.
On the other hand, while at Oxford, we noticed the so-called Fair Trade laws allowed book sellers to price books at the same price in pounds as dollars.
And here in the US textbooks, Drugs and Devices are still a quasi-monopoly moat due to government subsidies of Education and Healthcare with rising prices.
So our idea was to reco WMT privately before WEB bought it.
If you can’t lick ‘em, join ‘em.
True, at some point, entropy wins, as Pier 1 shows, another reason we think the dollar-yuan link may be severed, the dollar rally and American manufacturing productivity increase to reflect comparative advantage rather than beggar thy neighbor.
Meanwhile, with the Fed reporting more economic growth in 2010, we think the QT Quantitative Tightening may do its work on bubbles in the markets…
Happy Thanksgiving All*Rich
PS: Trust no one gets trampled at WMT on Black Friday this year.
Lie to Me even did an episode on this. The consumer society may be passing on…
Hey Rick, discounters like Walmart have always been around. I remember in Canada when Woolco was going to destroy all the small businesses in the early 70’s. Woolco is gone and my favourite bookstores are still around. Like Paul I prefer to walk to the store for a liter of milk or a book and a coffee. Doesn’t anyone calculate the cost of driving to these box stores as part of the cost of buying this badly made crap. I could fill a book on things like winter boots that have fallen apart in 2 weeks or tools that do not work bought from places like Walmart or Home Depot. I have tracked vehicle costs for years in the oilfield and and actual opex runs close to 0.5$/km (.30$/mile) for a large SUV. If you are driving more than a mile or two to buy a 10 $ book it simply is costing way more that the amazing 10$ price on a book. If you live in a place that has no retail near by and continue to drive high cost machines …you are trapped in a very high cost paradigm, of your own making. That to us, is more the issue. Unless cheap energy returns even the Wallmart(s) are eventually going to become extinct.
If Rick (and others wringing their hands over the Walmart juggernaut) were to transport himself back 100 years, his comments would be identical to newpaper editorials of the day decrying the destruction that Sears, Roebuck and Co. mail-order was wreaking on Mainstreet merchants.
Speaking of Sears, my most recent visit there revealed a preponderance of “Made in China” labels. A trip to Target revealed the same.
As a kid, I noticed that Sears had a preponderance of “Made in Japan” labels. Sears, via its marketing arrangement with Matsushita for televisions and consumer electronics, initiated the long decline of the American consumer electronics industry.
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On the evidence, Sears had neither the power nor the inclination to destroy its competitors with the equivalent of Wal-Mart’s $10, loss-leading best-seller. Concerning televisions, if America had invested in TV plants and technology rather than squandering its capital on consumption, Motorola today would be competitive with Sony. RA
Armstrong on gold:
http://www.martinarmstrong.org/files/GOLD-5000-11-11-09.pdf
Dusty–
I would futhermore add that it is 100x easier to destroy an industrial base than to revive one. Lots of the institutional memory is destroyed because workers are getting older and past retirement age Machinery shipped to china or allowed to rust has to be rebuilt with what machine tool industry
I am surprised at your free enterprise position. I thought all republican conservatives viewed big business as sacrosanct and any attempt to prevent competitive pricing to flourish is a crime punishable by death. I had thought that “unions” were a disease that had to be eradicated.
Isn’t this argument also carried over to the giant “too big to fail” financial institutions? Didn’t this same philosophy allow unregulated rampant greed to take hold?
The bottom line is that our standard of living will continue to deteriorate until the tipping point occurs where “good jobs” are no longer available in the United States. This is indeed cyclical and I suspect that economic bust cycles usually occur during peak disparity between big corporations control and the overall wealth shift. Today we have dwarfed the gap between rich and poor by the largest margin in the United States since the Industrial Revolution.
This is going to end badly. The end result will be a dramatic shift to socialism.
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It’s not free enterprise that has failed, but the egregiously deformed version of it that developed in partnership with the U.S Government. Concerning the unions, they are anti-capital and a severe drag on productivity, but unlike the white-collar looters in the board rooms, they cannot be blamed for wrecking the economic system. RA
Some interesting ideas for trailing buy and sell stops:
DZZ 12.06
GLL 8.96
EUO 16.20
YCS 19.05
RHO 33.79
A free enterprise system will always gravitate towards corporate America becoming bigger by developing a formula that works. I believe Wal-Mart has found that formula. There is no conspiracy here, no government intervention, and no unfair practice. In fact the free enterprise system is working so well that all the constraining rules and regulations were disbanded. The repeal of the Glass Stiegel Act was the epitome of free enterprise.
Have you ever wondered just why socialism comes roaring back after an economic debacle? I wonder how people would react to your statement about Unions during the heart of the next depression. Once ideology clashes with reality you know which one will win out.
Me, I am a throwback to a society that cherished its high-quality output despite higher costs. I do not believe bigger is better. It’s a phantom drive after all that really accomplishes nothing. What is the end game? Making more money at all costs?
As for productivity, I would suggest that you try altering your perspective on its importance. It’s not productivity that drives a better standard of living for most. Its higher productivity combined with high paying new jobs. The trend today is higher productivity at the cost of jobs and higher pay.
In fact advancement in technology has come along so far that it is now dropping workers that had high pay. Cloud technology is just one example. The high costs associated with Corporations IT Department can now be a thing of the past. No need for high tech people at any firm. Outsource the software, hardware, and technical know-how.
If all we strive for is Corporate profits then the winners become fewer and more powerful.
Basic economics understanding shows that Walmart is the symptom of a spending consumption disease and not the cause. “Predatory Pricing” from the prospective of the competitor is just value pricing to the consumer, and it is basic capitalism functioning correctly to benefit the society as a whole.
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There are no benefits to “society as a whole” from Wal-Mart’s driving competitors out of business by selling best-sellers for a loss. RA
So are the independent bookstores that are ’savvy’ enough to survive severe price undercutting by Borders, Amazon etc. for over a decade NOW getting stupid because Walmart is doing the same thing.
So really, you are asking us to shed those tears for Borders, Amazon etc. Sorry, not buying it.
And you left off Costco – who is a huge seller of best sellers at below cost prices. Doesn’t Costco put people out of business too? Where is that editorial?
And for the record..I write as small business insurance agency owner that has survived decades against the Geico, Progressives of the world, and the St Farms and Allstates that can afford to advertise on the Super Bowl and American Idol.
If all a small business can offer the customer is price, they deserve to go out of business…
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Your survival claim is just hubris, Steve. What is your best-selling, bread-and-butter policy? Do you think you could survive if Geico and Progressive were offering identical coverage at a very substantial loss on each policy? As for Costco, they discount books and other items, but not to the point where they are losing money on each sale. And, coupon deals aside, they don’t restrict retail buyers on quantity, so in theory anyone can compete with them on price. RA
I am really glad I do not own any interest in any Malls, strip malls or shopping centers that Walmart may be decimating. But is not that your point!
Rick, I see you changed your earlier reply, and I appreciate that. Thus, my reply now. I apologize for any hubris, and my last sentence of my earlier post was far too harsh. I mentioned my own business experience not to brag, but to sympathize. Actually, (to answer your question) it is quite common in soft markets for my (much larger) competition to approach my customers with a premium below profitability – just to win the business. Yes, it makes no sense to offer a business that averages $100,000 a year in claims consistently for 15 years a renewal quote of $90,000 – but it happens. And I have to fight for that business beyond price. We are very fortunate to have a client base not 100% dependent on price, but we also have worked very hard to make that the case….like all small business owners surviving today.
As an aside, I also oversee a non-profit that has an ancillary bookstore, so I am even more ‘in tune’ with this topic. I do stand by my earlier comment that Barnes & Noble, Amazon etc destroyed most of the independent stores over a decade ago (remember the backstory to ‘You Got Mail’) – if Walmart hurts their bottom line now, I really feel no sympathy. And the ones that survived this past 10-15 years, probably can also survive this new challenge – as those owners are obviously doing something right.
Maybe you can revisit the topic in 6-12 months to see if your prediction comes true. I appreciate your writings, and rarely post since I rarely object – at least to be objecting from a position of personal experience. Meanwhile, it is only barely that booksellers large and small have survived Amazon,
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Steve:
I spent 25 minutes responding to your post, only to have my WordPress publishing tool “eat” my mini-essay, along with the tail end of yours. That is as much time as I have in a day for such tasks, but I will say nonetheless that Wal-Mart’s $10 offer — assuming it is for real; your later posts suggests this may not be the case — is, for booksellers large and small, going to be the straw that broke the camel’s back. RA
Rick, one other thing. Your prompted me to research what is actually happening. This is only for online orders of ten selections before the release date – and Target and Amazon both are doing the same thing. It is about getting traffic to a website. Frankly, your article was a little light on details. I assumed this was a permanent store pricing model for new best sellers. It is not at present, and the official word is it is not going to be, and that in-store prices after release date will be higher.
This NY Times piece (no friend of the Wall St Journal editorial pages) offers a good balanceI feel. http://www.nytimes.com/2009/10/17/books/17price.html
I found the quotes from Borders and the Independent seller of interest.
I swear I am not hijacking the comments. But I just went to Walmart.com and looked up Palin, Grisham, and King’s latest (which were on this list) – they all are selling at normal discount like other chains (in the 14.50 range).
I guess this is old news now..
An oft overlooked source of profit, or at the very least ability to discount heavily, for Walmart is the float it gets squeezing every last day between collecting money and paying it out to vendors and suppliers. A few bps on a few $B adds up to a lot of flexibility…
Walmart is just a drop in the bucket – We buy foreign cars, Ships, Aircraft, enegy, food, machinery and even large perecentages of out domestic built aircraft are imported (how much of our military equipment is produced internally or from, for example, north american steel), look at the Alaska pipe line – Japanese and korean steel)etc. we don’t even register our ships in north america because it costs too much (ie the goverment fees are too high and we would have to use American labour).
If the noth slope is drilled it will be with offshore built equipment and the pipelines will be offshore steel pipe- imagine the taxes that would be paid by American labour producing this line.
The morth american problem is that we manufacture less and less every day- We have lost most of our high paying manufacturing jobs that produce tax revenue and we are at the point were goverment, financial , medical, merchandising jobs will come under heavy pressure as fewer people have less to spend and tax revenue will decrease further and goverment will go bankrupt.
The only way to reverse this is to stop buying none northamerican and start manufacturing what we nead ourselves even if it does cost more- the altenative is depression and 3rd world living standards.
People will buy cheap , only the goverment can force us to buy our own products.
Nothamerican industry can compete if it is given a chance – and if it is we will have lots of tax revenue to fund goverment and pay of goverment debt.
if we don’t change we will continue downword.
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Reg: From where will the savings come to allow us to retool and ramp up America’s neglected manufacturing sector? These savings will be all the more difficult to come by if we are paying up to “buy American” instead of cheaper foreign goods. RA
re. money to retool.
America has unused capacity that can be used to make the goods; you know, the plants were no one works any more (Ie. US steel at less than 50% capacity, Ford, GM, Chrysler, Catipillar, GE,etc.). Increased production lowers costs and produces profits that are used to build the manufacturing sector back. . This is what the free entrprise / democratic system is all about. Goverment can lend trillions to the banks so why not to the sector that will return revenue – silly idea, right.
Keep buying foreign, utilization goes down, unit costs go up and we are more uncompetative. Our autos are competative now even when facilities are underutilized and would be very profitable if fully utilized.
Soooo, Make what we need or we go down the tube
All the new powers, China, india, Japan,Russia control what comes into their countries- (Try to sell US grown rice in Japan were the selling price is 10 times as high as here -not allowed by the Japanese-we can compete but are not allowed to )we are the dumb ones that only care that we can save a dime on a $10 item and don’t care if if it’s made off shore.
THE US TRADE DEFICIT IS ABOUT 600 BILLION A YEAR-ie. 10 YEARS= 6 TRILLION NATIONAL DEBT. so cheap goods are not so cheap after all.
One day the factories here will be producing again but the new foreign owners will not have to even pay the wages that they pay workers in their country.
Just one last thought- uncontrolled imports have done more damage to the USA than all the terrorists could every dream of doing and we go to war because of them..
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Read the story in Monday’s Wall Street Journal about Japan’s new $11B Sharp plant if you think we can simply convert old factories in the U.S. and be competitive. One more point: It takes actual savings, not government funny money, to produce capital investment. RA
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