Wal-Mart Revisited

Published: June 30, 2004, By Yolanda Simonsis, Associate Publisher/Editor

The subject of Wal-Mart's friend or foe relationship with converters in my May editorial struck a chord with readers. I'd like to share some of their comments on the subject:

What you have only touched on the surface is that the company that was built on Red, White, and Blue is the systematic switch to import products and the net effect on jobs in the US. Over 70% (maybe over 80% economically) of their products are produced overseas now.

Wal-Mart is an expert at taking people's ideas and having them knocked off at 30%-50% of the price. If someone were to do the research over the last 6-7 years, you will see they exhibit monopolistic tendencies and have obliterated thousands of manufacturers. It is my bet they…cost the US close to 1 million jobs. Replacing a $15-$20/hr manufacturing job with full benefits is not a reasonable substitute for creating a $6/hr job. Everywhere they go, they destroy what is around them, which is why towns do not want them. What is the benefit of having them if it is at the expense of downtown retailers? Wal-Mart demands and gets lower prices in many ways. Since the retail world mainly consists of Wal-Mart and Target…and a bunch of soon-to-be bankrupt store chains, Wal-Mart tends to be the kiss of death for a manufacturer who might frequently have over half of their sales to one customer. Then eventually they knock it off overseas — and you know what happens to these guys — see ya!

The real problem is the playing field is not level. Labor in China costs $50/mo. As a result, raw materials are cheaper. China subsidized the startup of many of these companies, so their equipment costs are also dramatically less, and therefore [there is] less overhead, too. These companies also do not have the same environmental regulations to adhere to and very little in terms of social costs (pension, health, etc.). Then on top of it, China gives companies an export credit, which certainly cannot meet WTO rules — at one point it was 15% and I believe it is dropping, but still exists at least at 7%. If that is not enough, the Chinese currency being fixed on the dollar artificially is providing another 20%-30% benefit. How are you supposed to compete with that? You cannot. This is why we have continuing record trade deficits even with the dollar weakening dramatically against most of her currencies. — LS

And another reader comments:

Thanks for making public what everyone says over cocktails or behind closed doors about Wal-Mart. Instead of the public relations ads they run on TV, they should state exactly what products they sell that are made in the USA. If they did that they could ‘cut costs’ on advertising because I don't think they have anymore…. — LN

Yet another reader observes:

The Wal-Mart mentality has taken our entire country by storm. Who wants to pay full price for anything anymore? While it might make us all better businessmen, the fallout could be disasterous for our country in the long run, with all manufacturing jobs — except for the service industries — moving from low cost areas to even lower cost areas until there are no more. My concern is what happens if there is ever another major war, how will our country meet the manufacturing requirements when there [is] no manufacturing left? — Larry Claton, F.L. Smithe, Duncansville, PA.

One last solicited comment follows:

There are both short and long range financial and business impacts in doing business with Wal-Mart. Wal-Mart has a reputation of demanding the best price, so when Wal-Mart goes back to my members for price decreases, it puts pressure on my members, which must be similarly difficult for converters. What happens is it may cause switches between vendors because of the price issue.

With pricing such an issue, profit margins are quite small, stifling innovation and the development of new technology, which is similarly true for new packaging. You can't put a lot of dollars towards R&D when there aren't a lot of dollars left in profit margins.

On a positive note, once you've agreed on a price with Wal-Mart, they don't come back and nickel-and-dime you afterwards. They negotiate hard, but that is the final price until you approach the next bargaining session.

As for offshore vendors, Wal-Mart utilizes them in situations causing Wal-Mart to become both a customer and a competitor to their branded goods. Wal-Mart will purchase products directly from offshore locations and create challenges between their own private label brands and those [other] brands in order to achieve the most cost-effective pricing. What happens is the brand ends up competing with Wal-Mart, leading them to ask: ‘Hey what are you trying to do to my business?’ — Tom Conley, president, Toy Industry Assn., New York, NY.

Talk to me! More to follow next month.

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