Wal-Mart's oligonomy power
Wal-Mart has been frequently mentioned in these pages. In some ways, the world's #1 company is unique. It's a public company that acts very private, it has grown with minimal mergers and acquisitions, and it has invented a whole new strategy for market domination using technology, inventory management, and just-in-time delivery. On the other hand, in many ways, it is the quintessential user of oligonomy power in the world, and serves, for better and worse, as a shining example to a host of imitators. It dominates a wide set of businesses, as we've documented: food, toys, books, music, DVDs, as well as housewares, personal care products, and clothing. Getting the blessing of Wal-Mart is the dream of any supplier in any of those fields -- and the greatest nightmare.
Why nightmare? Wal-Mart has the capability to push any product your company makes to an enormous audience of eager buyers. But dancing with Wal-Mart can be a deadly embrace, as many companies have learned to their dread. That's a phenomenon well illustrated in an insightful article called "The Wal-Mart You Don't Know" in Fast Company (December 2003) by Charles Fishman. Fishman sees Wal-Mart as "so big and so furtively powerful as to have become an entirely different order of corporate being."
The article does talk about the benefits of the Wal-Mart way of doing business, which has made the US economy far more efficient and has pushed productivity gains. As he puts:
There is no question that Wal-Mart's relentless drive to squeeze out costs has benefited consumers. The giant retailer is at least partly responsible for the low rate of U.S. inflation, and a McKinsey & Co. study concluded that about 12% of the economy's productivity gains in the second half of the 1990s could be traced to Wal-Mart alone.
There is also no question that doing business with Wal-Mart can give a supplier a fast, heady jolt of sales and market share. But that fix can come with long-term consequences for the health of a brand and a business.
Most corporate sources are afraid that if they say something critical about Wal-Mart, they'll be the victims of a very vindictive company. But Fishman manages to get the background story from some companies that have had unpleasant tangles with Wal-Mart, to detriment of each company or their US employees. They include:
- Vlasic, the pickle maker, which was maneuvered into taking such low margins on one particular product that their financial position led to bankruptcy even while their growth in sales skyrocketed.
- Huffy, the third largest bicycle brand in the US, was forced to outsource its manufacturing abroad to keep up with Wal-Mart demand, eventually closing its three US plants. But all this hadn't been a bonanza for the company, which sells lots of bikes but at such low margins that it has more down years than up ones.
- Lovable, an intimate apparel maker, was taken up by Wal-Mart, expanding its business enormously and becoming Lovable's biggest customer. Then in 1995, Wal-Mart wanted to rewrite its contracts to get even lower prices. When Lovable said no, Wal-Mart simply went elsewhere. The company, by now so dependent on Wal-Mart, took a crippling blow.
- Jeans maker Levi Strauss, which already had declining sales, hooked up with Wal-Mart to produce a low cost line. The price pressures meant that Levi Strauss has ceased all manufacturing operations, and just resells Asian-made jeans under its trademark. The jeans are far inferior to traditional Levis and they're cannibalizing sales of Levis top brands. But the new jeans are cheap.
- Master Brands has had to move its manufacturing to Mexico to cut costs to the bone on its Master Lock padlocks. They all but shut down their Milwaukee plant.
In these and other cases, Wal-Mart has squeezed suppliers till they scream, and forced them to move jobs abroad to keep cutting costs. Otherwise, Wal-Mart will contract directly with a Chinese firm.
Of course, U.S. companies have been moving jobs offshore for decades, long before Wal-Mart was a retailing power. But there is no question that the chain is helping accelerate the loss of American jobs to low-wage countries such as China.
One way to think of Wal-Mart is as a vast pipeline that gives non-U.S. companies direct access to the American market.
But you can't not do business with Wal-Mart. "For many suppliers, though, the only thing worse than doing business with Wal-Mart may be not doing business with Wal-Mart." It is such a dominant presence that losing them is like shooting yourself in the foot.
But to do business with Wal-Mart, you have to become like Wal-Mart. "The Wal-Mart squeeze means vendors have to be as relentless and as microscopic as Wal-Mart is at managing their own costs. They need, in fact, to turn themselves into shadow versions of Wal-Mart itself."
Once again, it's a matter of an oligonomy leveraging price versus cost. Wal-Mart keeps lowering prices for consumers, but at the cost of diminished wages and eventually their jobs. Wal-Mart now has the power to influence legislation about free trade and minimum wages, and has been caught flouting the laws on hiring migrant labor. While the administration might deplore publicly the underpriced Chinese currency and the trade imbalance with that country, Wal-Mart is the main beneficiary of soaring Chinese imports. And its rivals have to resemble Wal-Mart to compete at all.
Fishman sees Wal-Mart in the role of Adam Smith's invisible hand. In any sector that it chooses to enter, it distorts the role of the free market, and makes any traditional sense of competition seem a nursery tale. And Wal-Mart keeps expanding, as it steadily opens new supermarkets, as it enters new businesses, and as it expands abroad in the UK, in Germany, and in Mexico. Along with squeezing out the inefficiencies of the system, Wal-Mart is on its way to squeezing out the system itself.
