Sunday, January 22, 2006

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The Store That Ate The World

This is a longer version of the review appearing in the San Francisco Chronicle.

by William S. Kowinski

The Wal-Mart Effect: How the World’s Most Powerful Company Really Works---and How It’s Transforming the American Economy
By Charles Fishman
Penguin Press

Wal-Mart: The Face of Twenty-First Century Capitalism
Edited by Nelson Lichtenstein
The New Press

Business journalist Charles Fishman begins with a disarming story of how Wal-Mart produced an environmental benefit when the company decided that paperboard boxes around cans of deodorant were unnecessary. So they disappeared—not only from Wal-Mart but from everywhere—thereby saving many trees. But the reason Wal-Mart did this, and the reason everyone else followed, are also the key factors in a new kind and extent of destructiveness.

These factors cause the various manifestations of the Wal-Mart Effect, which is the subject (and not merely the title) of Fishman’s book. The first factor, familiar as Wal-Mart’s slogan, is the company’s single operating principle, administered absolutely, without exception: always low prices. It is the company’s one commandment, its ultimate morality, trumping all other considerations.

The second factor is Wal-Mart’s unprecedented size. “For most of this decade, Wal-Mart has been both the largest company in the world, and the largest company in the history of the world,” Fishman writes. It still would be in 2006 except that doubling the price of oil places Exxon-Mobil in the top spot. But Wal-Mart is still America’s largest private employer—and the world’s. And its stated goal is to be twice its current size by 2010.

The stores themselves are getting larger. Wal-Mart’s explosive growth in the 1990s was largely due to adding supermarkets to create “supercenters.” Now the majority of new stores being built, the 1600 supercenters at the end of 2004 are expected to double by 2010.

Ninety percent of Americans live within 15 miles of a Wal-Mart, and 93% of U.S. households shop at one at least once a year. Fishman concludes: “ Wal-Mart reshapes the economic life of the towns and cities where it opens stores; it also reshapes the economic life of the United States---a single company that steadily, silently, purposefully moves the largest economy in history.”

It all results from the combination of the Law of Lower Prices and Wal-Mart’s unprecedented size and scale(and “the power, the impact that comes with scale”) . The attraction of low prices at Wal-Mart depends on low costs to Wal-Mart. That so obviously translates to low pay for employees that Wal-Mart no longer pretends it pays a living wage. As a number of lawsuits show, it may also translate to lunch and other breaks curtailed, overtime work demanded but not paid for, and undocumented workers locked in overnight to clean stores.

Wal-Mart is so fixated on lowering costs that it will spend a lot of money to do it. It spends lavishly on thwarting union organizing, persuading municipalities to accept its new stores and most recently, with a brand new “war room” of political consultants and public relations, on trying to counter bad publicity.

Wal-Mart’s obsession with continually lowering prices means makers and suppliers of the products it sells must also cut costs, and this is where the power of size and scale really comes into play. “Many manufacturers,” Fishman writes, “report consistent, irresistible requests for yearly 5% cost cutting.”

He provides examples of company after company playing out the same inevitable drama: dazzled by the volume sales possible through a single customer, they sign on to supply Wal-Mart. They get lean and more efficient, and make money. Wal-Mart calls for more volume (which becomes as addicting as cocaine, one manufacturer said) and more cost-cutting. Soon that means cutting corners on materials and quality, and moving production through a descending series of low-wage countries that might end up with a young woman in Bangladesh being paid thirteen cents an hour, and slapped across the face with the pants she’s sewing if she makes a mistake. When costs can’t be cut even further the supplier goes out of business, and Wal-Mart moves on to another.

It is this cost-cutting commandment that led to Wal-Mart demanding that suppliers stop boxing deodorant cans, and Wal-Mart’s power that led to an industry-wide change. But this same combination has meant demands that have destroyed companies and moved other manufacturing overseas. In 2003, there were more Americans selling things in retail than making things in manufacturing for the first time in modern history. For workers it means lower-paying job. For the country it means dependence on industrial capacity and skills elsewhere.

Lower wages also mean families must depend on lower prices, which by an amazing coincidence they can get only at Wal-Mart—especially if local businesses have been driven out of existence, which also means more people have to work for Wal-Mart. One might be excused for imagining that Wal-Mart is turning low-end retail into one big company store.

Fishman’s book is highly readable, incisive, precise and even elegant in concentrating on its central thesis. “Wal-Mart: The Face of Twenty-First Century Capitalism,” an anthology emanating from a University of California conference on this subject, amplifies and augments Fishman’s argument. It provides historical context, economic and sociological analysis (for instance, on why Wal-Mart was sued for discriminating against women as managers), and more information that support and broaden Fishman’s thesis.

Several of its authors write about Wal-Mart’s relationship to government and public policy. Editor Nelson Lichtenstein shows how the company’s growth parallels the failure of labor law reform and enforcement in the 70s and 80s, and free trade legislation that makes importing products and exporting jobs easier.

Bethany Moreton’s excellent historical overview mentions that Wal-Mart founder Sam Walton’s ancestors prospered with government land grants, subsidies and jobs (though Walton’s father wound up repossessing farms for a mortgage company during the Depression).

James Hoopes cites one of many government’s contribution to Wal-Mart today: the estimated $3 billion a year taxpaying consumers spend on medical care, food stamps and housing subsidies for Wal-Mart employees.

Others provide further examples of the Wal-Mart Effect. Edna Bonacich and Khaleelah Hardie find it in the growing role of international shipping, where companies also discover that Wal-Mart can be “an extremely powerful and unavoidable bully that forces them to cut prices beyond what is possible…”

James Hoopes and other authors also note that while technology may empower small enterprises, Wal-Mart uses information, transportation and manufacturing technology to become bigger and exert tighter control. For example, cash drawers and thermostats in all Wal-Mart stores can be controlled at corporate headquarters---the kind of capability that might cause Orwell’s Big Brother to weep with envy.

Fishman also notes that Wal-Mart’s penchant for control extends to information about itself. The company refuses to give out the most ordinary of information, like the dates of store openings, or the figures required by the Consumer Price Index (so it is always wrong.)

The writing is spotty in both of these books, but together with the remarkable middle American voices in Robert Greenwald’s film, “Wal-Mart---the High Cost of Low Price,” they provide a rich guide through the many dimensions of Wal-Mart’s past and present impact.

But what of the future? Fishman defines a few of Wal-Mart’s vulnerabilities: it can’t compete on quality or service, or on presentation and the shopping experience (even Target beats it there), or on employee retention and long-term community relations (Costco is far superior on those.)

Essentially, when it’s not competing on price, it can’t compete. Still, impoverishing Americans isn’t exactly a blueprint for a thriving consumer economy. Perhaps that’s why Wal-Mart is increasingly looking to markets overseas. “Always growing, Wal-Mart adds more than 50,000 jobs and 545 stores in one recent weeks” boasts one of its official web sites, but all the jobs and stores turn out to be in Japan and Brazil. It plans to open 600 new outlets this year: 370 in the U.S. and 230 abroad.

But eventually won’t the marketplace enforce a proper balance? “Wal-Mart isn’t subject to the market forces,” Fishman writes,” because it is creating them.”

In the long-term, it would seem that the Wal-Mart Effect is unsustainable. If the company continues, locust-like, to relentlessly impose its one adaptation of “always low prices” with its sole purposes of survival and reproduction, it will destroy the environment that nourishes it. But by the time that happens, what else will be left?

Thursday, January 12, 2006

The Great Malls of China: Take Two

The earlier entry on this blog led to writing an oped piece that was published in the Los Angeles Times. The following entry uses material from that oped before editing at the Times, plus other pertinent material. So this will be the definitive "free" Internet version.

The news that China is now more popular around the world than the U.S., according to a Pew Research Center survey, is just the latest Chinese challenge to the American ego. The Chinese are buying U.S. businesses with hallowed American brand names, like Maytag and IBM's PC unit, and they're fighting the U.S. for control of Unocal oil. They're making a great deal of what Americans wear, use and buy. They hold a big chunk of the U.S. national debt. And they've even gone ahead in the most characteristic icon of American life: the shopping mall.

The West Edmonton Mall in Canada has been the largest shopping mall in the world since it opened in 1985. But this year the largest mall in the world is the Golden Resources Mall in Beijing. It will soon be eclipsed by the South China Mall, complete with a replica of the Arch de Triomphe.

The Mall of America outside the Twin Cities of Minnesota has been the biggest in the U.S. for more than a decade. There are now four malls in China that are bigger. South China Mall will be three times its size.

By the end of the decade, China is expected to have at least seven of the world's ten largest shopping malls. With some 400 malls now, shopping center construction in China is booming, while mall-building has been steadily declining in the U.S. (from 35 major mall projects at the turn of the century, to 13 from 2001-03 to 8 projected for 2004-06, "significantly fewer new mall projects and significantly less" leasable area, according to the International Council of Shopping Centers).

Of course, the U.S. has a half century start while China's vastness is mostly unmalled. But this trend does suggest a few things. China has become one of the world's primary producers of retail goods, based partly on its ability to undercut prices with cheaper labor. Yet there is so much money flowing into China now that a consumption economy is growing fast. The customer potential in China and the far east is one reason that the Simon Property Group, by far the largest U.S. shopping mall developer(including Mall of America)opened an office in Hong Kong in May.

Chinese producers are supplying cheap consumer goods sold in the U.S., mostly at Wal-Mart and other low-end retailers, resulting in a huge trade imbalance. Nearly half of total U.S. imports arrive by sea through the Port of Los Angeles and Port of Long Beach. As Long Beach communications director Yvonne Smith told Frontline, "China is doing the manufacturing, the United States is buying it." Much of the $3 billion in U.S. exports to China consisted of raw material---cotton,scrap metal,waste paper-- for the $36 billion of mostly manufactured goods and the boxes they arrive in from China.

“Wal-Mart has a very close relationship with China," Duke University Professor Gary Gereffi told Frontline. "China is the largest exporter to the U.S. economy in virtually all consumer goods categories. Wal-Mart is the leading retailer in the U.S. economy in virtually all consumer goods categories. Wal-Mart and China are a joint venture."

Frontline continues: "No one can compete with China. Such efficiency, such manpower," said Frank Yuan, the former middleman who did business with Wal-Mart, and who now heads an international apparel trade show. "If you look at [Wal-Mart's] shoes or housewares, 80 or 90 percent is coming out of China. And apparel is not as big as it should be." After U.S. quotas on textile imports expire on Jan. 1, 2005, Yuan expects imports from China to rise to 80 percent of the apparel market.

But while all that income helps create a new consumer class in China, the middle class that once filled America's malls is declining. The U.S. mall industry anticipated a splintering middle class in the 1980s, responding with fashion malls for the better off and emphasizing entertainment to attract what was left of the mass market. Then Wal-Mart came along and stole the growing "low-end" consumer market, becoming the world's largest retailer in the process, as well as China's best customer.

With health care costs still rising, and fewer employers offering good benefits, the increasingly insecure middle class has less money (and with more women working and more people struggling with several low-wage jobs, much less time) for recreational shopping at the mall. What was once unheard of is now fairly common: U.S. shopping malls closing.

The opposite situation seems to be occurring in China. To some, the spectre of an officially Communist country spawning so much business enterprise so successfully seems ironic at best. Others point to all this commerce as the final if unacknowledged triumph of capitalism over Marxism.

But the lessons learned may be a little different. The U.S. has so far managed to avoid widespread conflict over economic inequities by making sure that though many people can no longer afford health care, retirement or higher education, with an extra job or two they can still afford to shop---at least at Wal-Mart.

Especially with all the new and less controllable sources of information becoming available as a result of supplying the West, the Chinese may be learning as well that pacifying the population is not such a bad idea. They may also realize that shopping is the opiate of the people.

In the U.S., even with the wealthy few continuing to get wealthier, the days of the malling of America may be numbered. But those high-end shoppers with the wherewithal to travel can still find the goods and the mall experience they may crave. Because there are some really great malls in China.