Friday, August 26, 2005

Wal-Mart and the free market

There are a lot of Wal-mart haters out there. Wal-mart puts small retailers out of business, Wal-mart ruins town centers, Wal-mart screws up traffic patterns, Wal-mart does this, Wal-mart does that etc... etc... etc...

I do shop at Wal-mart, even though they are the number one importer from our enemy, China (from our ally Taiwan as well). I do believe that China is our enemy, and that they will start a war with us in the next few years, and I understand that Wal-Mart helps the Chinese army build it's war machine. In fact, analysts say that Wal-Mart accounts for anywhere from 15% to 40% of all real U.S. imports from communist China (I'm not sure whose numbers to believe).

Guess what, every other retailer does it too; Wal-mart is just the most visible.

If I were to refuse to shop at businesses that did business with, or stocked products that are manufactured (or whose components are manufactured) by the peoples republic of China; I would go naked and hungry.

Actually that's not quite true, I could find other alternatives for far more money. Once I did, those alternative suppliers/manufacturers would STILL be dealing with offensive foreign governments; because our labor and environmental movements, and our government and tax system have made the economical manufacture of consumer products impossible in this country.

I fully and firmly believe that Wal-Mart has the right to do business in any way it sees fit so long as it is legal and ethical. I fully and firmly believe in a free and open market.

Wal-mart is where it is, because they used every advantage they had to obtain good market position, then used that position to compete better than anyone else. Nothing that Wal-mart does is immoral, or unethical (mean and viciously competitive is another story). They are using their size and market position as they should be, and it is completely legal and proper for them to do so; they are practicing capitalism at it's finest.

Is it fair? Absolutely. You have the same opportunity Wal-mart does. It took them 40 years to get where they are, and they didn't use any legal trickery to do it. You might be able to do the same thing yourself in 40 years.

Is Wal-mart good for consumers... well that's a mixed bag. In many ways yes, but there are some specific cases where Wal-mart is definitely hurting the consumer.

I shop at Wal-mart for certain items because it is cheaper, and more convenient (theres one two miles from my house). This doesnt bother me.

What does bother me, is that I also shop at Wal-mart because frequently they are the only retailer with an item I want (or it's equivalent) in stock. What bothers me even more, is that to some extent what I can buy at all is dictated by what Wal-Mart wants to sell.

Heres the problem: Wal-mart is HUGE; in fact they are by far the largest corporation in the world, and the largest private employer in the world (just under 300 billion in revenue, and just under 2 million employees). Wal-mart by itself is the 33rd largest economy in the world.

This size, and the power it gives them over their suppliers, creates artificial distortions in the market. Wal-mart is the flipside of the network effect; in that the fewer distribution channels of a product (in this case retail outlets), the more control those channel owners have over the product produced. This reduces the choices and options available in the market, which reinforces the original factors, and creates de-facto monopolies (or partial monopolies).

Let me explain this with a specific market segment example. Wal-Mart essentially dictates what CDs, DVDs, and video games will be released by major producers, and what will sell well; because they sell more than all other outlets for these products (in some cases more than all other outlets combined).

If Wal-Mart chooses not to carry your video game, it will fail; in fact it will most likely never even be released. Your CD or DVD? same thing (unless you are a major star). If they give your product a poor shelf position, not much shelf space, or low stocking levels, it will fail.

Wal-marts size, and low prices have pushed out so many smaller retailers that there are very few outlets left for products that are not sold at wal-mart. In fact in much of rural America, they are the ONLY retail outlet for many products, and thus, if you arent in wal-mart, you aren't in (insert town here).

This means that if Wal-mart doesn't sell it, you can't buy it (let's leave out online for now... oh and we should note that Sears was in this exact same position for many years; from the late 1890s until the developement of the interstate highway system in the 50s)

This also means that for many producers (and/or distributors), if it won't sell at Wal-mart, they won't produce it; or they will change it so that it WILL sell at wal-mart. This prevents many small but viable market positions in music, movies and video games from being filled (at least outside of local distribution), because without Wal-mart as a sales venue they are never produced or distributed.

To cite a recent example, Wal-mart told rockstar games that if they didnt do something about the "hot coffee" issue, that they would drop all Rockstar games now and in the future from distribution. This would immediately put Rockstar out of business, so of course Rockstar immediately moved to recall the game etc... etc...

All of this also means that Wal-Mart gets propietary products made just for them, that are similar to the main product line products that other retailers get, but with slightly fewer features, slightly lower quality construction, and at a slightly lower price. This reduces the total volume of sales for the main product line, which increases it's prices and reduces it's availability. It can also create incomaptibilities with the main product line.

What's worse (to my sensibilities anyway) is that Wal-mart also gets special versions of movies, CD's, books, and other intellectual property that are changed from the original versions to meet Wal-marts standards (again, this would not be a problem were it not for Wal-marts strongly dominant retail position making them the only consumer option in many markets).

Given all of these factors, Wal-mart is the priority for most manufacturers that do business with them. This means Wal-mart gets stock first, and Wal-marts special versions ship first, while other retailers are left waiting.

Let us list some other markets where Wal-Mart has similar (though not as pervasive) effects:

- Low end housewares
- Small Appliances (toasters and coffemakers etc...)
- Toiletries and sundries
- Small consumer electronics (things like hair dryers and alarm clocks)
- Discount clothing
- Low end jewelry and watches (Wal-mart is by far the #1 jewelry retailer in the world)
- School supplies (kids non-designer backpacks are a biggie, being sold almost entirely at discount stores)
- Low end bedding

In all of these markets Wal-mart has a dominant (or at least very strong) influence, because while there are alternatives, they are significantly fewer in number, they are significantly less convenient, fewer consumers have access to them, and their prices are significantly higher.

Ok, that's out of the way, now the question remains: can and should there be anything done about this distortion?

How about NO and NO? The only thing that could reasonably be done is break up Wal-Mart, and that definitely should NOT be done. There is no legal or moral justification with any legitimacy, for breaking Wal-mart up.

The only other option is to start up (or build up) a viable competitor (or competitors) that will counter these distortions, and provide an outlet for those non-WalMart products; then hope it is commercially viable. Kmart and sears are trying to do that right now. It wouldn't surprise me at all to see Meijers, Target, and Kohls get together for the same reason.

So in the real world how do you compete against Wal-Mart? Well, in the case of video games, CD's and DVD's as I mentioned above, you really can't. There are only 5 major record companies, and they want to deal with the BIG retailers, so the only way to compete is to BE a big retailer or a big distributor dealing with the small places. This is why that particular market segment distortion causes a problem for me; there really is no alternative national channel

Now as to other market segments however, competing with Wally world is simple: Aim Narrower, Aim Wider, Aim Higher, and Aim Nicer

Okay being cryptic there, and aren't those things a bit contradictory? What does that mean?

Wal-mart looks to take a median to low-end position in most of the market areas it serves; they carry a relatively narrow selection of a broad range of product types, all at the low end of that product types spectrum; and they provide the minimum amount of customer service necessary to allow consumers to select a product and complete a purchase.This is how they offer the lowest possible prices on most of what they carry.

To compete, you offer consumers what Wal-mart doesn't:

1. You give customers a narrower selection of product types, more relevant to their needs
2. You give customers a much broader selection of brands, models, and options within those types
3. You give customers the option to purchase the higher end models and brands that Wal-mart doesn't carry
4. You strongly emphasize customer satisfaction, and enjoyment of the shopping experience. People will pay more for better service, so long as it's a reasonable amount more.

If you do that, Wal-mart can set up a superstore in the same shopping center as your little niche shop, and you'll just be thanking them for the foot traffic.

Let me give you a generic example that has repeated itself all across the country:

Wal-mart is the #1 retailer of firearms and ammunition in the country, mostly because they have the most locations (by a factor of at least 50) of any retailer in that market. When Wal-mart opens a new store near an exisiting gun shop, sometimes that gun shop goes out of business, but more often they see a large INCREASE in their business.


Because Wal-mart offers a low entry cost into the shooting sports, but serves a very limited section of the market, with a very limited selection of products, very little knowledge of the segment, and very little customer service.

Lets get into a bit of detail here:
  • Wal-mart only stocks 7 brands of firearms in most of their stores (They do sell about 20 brands total, but most of them arent stocked in most stores). If you don't want one of those seven brands, you need to go elsewhere.

  • Yes, Wal-Mart sells the Ruger 10/22 for $25-$50 less than most gun shops do, but it's the only Ruger model most stores carry. Wal-mart only carries a few models from each brand, and if you don't want those specific models, you are out of luck. Most decent gun shops will carry far more brands, and will carry many models per brand.

  • Most wal-marts will only carry one or two ammunition selections, in a small number of very popular calibers. If you want something else, sorry, they don't have it. Most decent gun shops will have at least one load if not two or three from every major ammunition manufacturer in the popular calibers, and at least one offering in most of the less popular calibers. If they don't have it, they will almost certainly order it for you, or they will know who does.

  • Wal-mart stocks special wal-mart only versions of many of the firearms it sells. Some of these special versions are made in China or Japan, while the standard production models are made in America. Some of these models are made to a lower quality, fit and finish, or poorer tolerances than the standard production models are.

  • Most Wal-marts only stock a few dozen guns; most decent gun shops will stock several hundred.

  • Most gun shops will order a gun for you if they don't carry it, Wal-mart will not.

  • In most gunshops you can load (generally not with live ammunition), unload, disassemble, and work the action and trigger of a prospective purchase before you buy it. In wal-mart, you can't. In fact in some Wal-marts you can't even touch the gun you are going to purchase until you leave the store (a manager carries it out to you).

  • Wal-mart doesn't sell handguns at all. If you want a handgun, you have to go somewhere else.

  • Wal-mart (obviously) doesn't sell used products. Used guns account for at least half of most gun shops business.

  • Wal-mart does not service the weapons they sell, and they don't carry parts or repair items for them. They also generally do not carry accessories for them other than scopes and rings.

  • Wal-mart doesn't stand behind the guns they sell. In many Wal-marts guns cannot be returned, even if defective; they must go back to the manufacturer.

  • Wal-mart associates generally don't know anything about guns. They generally can't give you advice on what to buy, or why.Wal-mart isn't a place where you can experience the "gun culture". You don't trade stories with the counterhand at wal-mart.
All of these factors add up to a significant competitive advantage for the specialty retailer. These advantages can apply to almost all the product categories that Wal-mart (or any other retailer) sell. No, there is no way you'll ever compete with Wal-mart on price; but if you work it right, you don't have to. In fact frequently folks will pay more for the very same product at your specialty store (like the Ruger 10/22 I listed above), because they prefer the experience of shopping with you; and because they expect and recieve better service from you.

What it comes down to, is you are meeting their need better than Wal-mart is, and this difference in value is worth the extra cost to them. That's the whole secret to competeing against ANY lower priced item.

If you don't provide better service, and better selection; then yes, Wal-mart is going to put you out of business; and I don't see how that's a bad thing.

"But.. but.. the little old lady down the road and her husband make these adorable little stuffed bears for $50 each, and the cheap $10 wal-mart teddy bears are driving them out of business, and it's just not fair"

Quit whining, that's the way the market works. You could make the best product in the world, and wal-mart can sell something that is only half as good, for 3/4 as much; but if consumers dont want to spend the extra 1/4 for your extra quality or functionality, then you will fail, AND YOU SHOULD. That's what a market economy is all about; you survive, and you succeed, by giving the customer what they want, and taking what they want to pay for it.

If Wal-mart is chopping the price out from under you, then obviously your product isn't worth the price difference to the people who are buying from Wal-mart. Either find different customers who value your products more, or increase the value of your product to the existing customers (or both, thus doubling your potential market).