The Wal-Mart Effect Book Review

The Wal-Mart Effect by Charles Fishman examines how America’s largest retailer is transforming the way companies conduct business and its overall effect on the American economy. Before beginning this book I have to admit that my attitude towards Wal-Mart was not exactly what one would call friendly. I have not shopped at a Wal-Mart store in over a decade; I tend to believe that they do more harm than good in a number of areas, not the least of which are the environment and the economy. So I began reading Mr. Fishman’s book with some personal baggage. I had gleaned from the dust cover that this book was not a manifesto on the evils of Wal-Mart nor was it a tome singing the praises of Sam Walton. The dust covers states, “Fishman has discovered how Wal-Mart brings prices down so dramatically and what the remarkable payoffs and high costs of those ‘everyday low prices’ really are.”

Indeed, the book opens with a remarkable example of how Wal-Mart’s drive for low prices helps to save millions of trees. Prior to 1990 when you bought deodorant it came packaged in a cardboard box. Wal-Mart, in its quest to keep costs low for their customers, saw the box as an item that was really just waste. It added cost to the product but no value. Generally everything that was printed on the box was also printed on the plastic container of deodorant inside the box. The first thing the customer did when they got the deodorant home was to tear open the package and discard the box. The box added extra weight in shipping the product. The box was waste and it had to go. So, Wal-Mart asked its antiperspirant suppliers to leave out the box. This one seemingly small change saved millions of trees. Perhaps my loathing of Wal-Mart had been misplaced. My curiosity was piqued.

As I worked my way through the book many things jumped out at me – for instance, the size of Wal-Mart. I had always known Wal-Mart was big, but it took some facts and figures to really put it in perspective for me.

• There are 3,811 Wal-Mart stores in the United States (p.6)
• 93% of American households shop at least once a year at a Wal-Mart store (p.6)
• Wal-Mart is the world’s largest private employer - 1.6 million employees (p.7)
• Half of all Americans live within five miles of a Wal-Mart store (p.5)
• In the United States Wal-Mart is the number one seller of:
• Pet food and supplies (p.108)
• Home furnishings (p. 108)
• Routine apparel (p.108)
• In the United States Wal-Mart sells:
• 16% of all groceries (p.4)
• 21% of all toys (p.108)
• 23% of all health and beauty products (p.108)
• 27% of all house wares (p.108)
• Wal-Mart’s U.S. sales are equal to $2,060.36 spent per household per year (p.6)
• Wal-Mart’s average profit on $2,060.36… $75.00 (p.6)
• A typical Wal-Mart checker scans six to eight items per minute (p.13)

According to Fishman this huge scale is what makes “the Wal-Mart effect” so powerful. It’s the huge volume of products sold through Wal-Mart stores that enables them to pressure deodorant suppliers (as well as all their many other suppliers) to change the way they do business.

As I read on I begin to see Wal-Mart in a more neutral light. No longer did they seem to be the evil despots of capitalism, but rather just a very successful business which, unlike many corporations, strives to keep their costs low so they can pass that savings along to their customers. Indeed, I was surprised by the apparent absence of any sort of corporate greed. The book doesn’t talk about lavish birthday parties thrown for executives’ wives on strange exotic islands. In fact, just the opposite comes out in this book. The absolute austerity of the Wal-Mart corporate community took me by surprise.

Fishman writes about corporate offices furnished with lawn chairs likely left behind by some potential supplier to Wal-Mart. He goes on to tell us how many of the executives bring office supplies from home to help keep costs down. I began to feel my anti-Wal-Mart position fade a little bit. I found myself feeling a strange affinity for this mega-retailer. It was refreshing to see a wildly successful company not acting like it. Here is Wal-Mart, the most dominate retailer in the US, and it requires its vendors to supply them with an 800 number to call or be willing to accept collect calls from Wal-Mart.

So what’s the catch? Why have I thought ill of Wal-Mart for so many years? There had to be something I was missing. As I continued to read Fishman pointed it out that there is, indeed, a catch.

“People say Wal-Mart is making $10 billion a year. But that’s not how the people inside the company think of it. If you spent a dollar, the question was, how many dollars of merchandise do you have to sell to make that $1? For us, it was $35.” – Ron Loveless, one of Sam Walton’s early managers (p.23)

Wal-Mart sells its goods at razor thin margins. This is the philosophy which has propelled them to the top. The problem with operating under razor thin margins is that a company is forced to turn a profit by selling large volumes of its goods, which can have unintended consequences.

Fishman provides a good example of some of the problems that low margin/high volume items can present. Wal-Mart sells Atlantic salmon fish fillets for $4.84 per pound. Not too many years back salmon sold for $15 to $20 per pound. What happened to make this fish so affordable? Salmon farming happened. The ability to raise fish within a controlled environment within the ocean enabled fish farms to spring up. These farms allow huge quantities of salmon to be produced. This massive worldwide increase in the supply of salmon has helped to push the cost of salmon down year after year. Still, Wal-Mart sells it for less than the competition.

This dynamic is possible because of the scale that Wal-Mart brings to bear on the marketplace. In fact, salmon farming is the second largest export industry for Chile when just over a decade ago Chile exported exactly zero pounds of salmon. The problem isn’t that Chile is raising fish for consumption by Americans, nor is it that Chile plans to double its output of salmon in the next few years; the problem lies in how Wal-Mart is making its low prices possible.

If Wal-Mart were to purchase the salmon from a U.S. supplier, the supplier would include in the cost of the product to Wal-Mart everything that goes into the production of the salmon filet. This cost would include wages, benefits, environmental safeguards, safety considerations, etc. However, raise the same fish in Chile and not only are wages lower and benefits rare, if existent at all, but also there are no regulations about farming of salmon off the country’s coastline. Perhaps this lack of regulation is due to the relative newness of the industry in the country, or perhaps not, but the point is Chilean salmon farmers are not required to pay the (immediate) cost of killing thousands of acres of seafloor with huge deposits of salmon droppings. The salmon are raised in large netted areas just off shore, and this concentration of fish has a detrimental effect on the ocean floor directly beneath the nets. The cost associated with the destruction of this valuable resource, however, is not included in the cost when Chile sells its salmon to Wal-Mart.

As I continued reading I happened upon another interesting bit of information. Despite Wal-Mart’s dominance across a wide array of consumer goods, the U.S. government does not include any information from Wal-Mart in its Consumer Price Index (CPI) calculations. At first this omission didn’t really mean that much to me, but as I read on I began to realize the implications of not including Wal-Mart in this calculation. By not including Wal-Mart in the CPI we tend to get an inaccurate depiction of what is happening with inflation. The CPI figure assumes that the average American family is spending $100 per month on groceries, but due to the effect of Wal-Mart’s low prices this family is really only spending $85 dollars per month. Now, multiply this $15 difference by 100,000,000 families and then by twelve months and all of a sudden the CPI is off by millions upon millions of dollars. This miscalculation can lead to poor monetary decisions by the Federal Reserve Bank which, in part, bases its decision to raise or lower the prime lending rate on the CPI. The discrepancy can also lead to poor decisions made by politicians regarding public policy.

The book ends with Fishman making a call for more openness and transparency for all corporations, noting that Wal-Mart, as well as most major U.S. companies, keeps much of their financial and business-related information secret. Some of the information being withheld really holds no value to competitors but is crucial for economists and policy makers in order to help better plan and regulate how business grows in the United States.

Although the book does not directly call for the break-up of Wal-Mart under Anti-trust laws, it does reference the break-up of AT&T as means of illustrating the ubiquity of the company. Such marketplace dominance can lead to non-competitive behavior within the marketplace. Wal-Mart appears to exploit its powerful position not to line the company’s pockets with dollars, but rather to put a few extra pennies in the pockets of their customers. Ironically, to save these few extra cents it has become increasingly common for Wal-Mart’s suppliers to look overseas for a cheaper labor supply to help keep cost low to help keep Wal-Mart happy; thereby undermining the purchasing power of the very customers it seeks to serve.

By the end of The Wal-Mart Effect my attitude towards the company has cooled to more of a neutral stance. I no longer view Wal-Mart as a soulless, grasping empire with no regard for the environment or the economy. I still don’t intend to shop there, however, and believe it prudent to carefully factor the Wal-Mart effect in to national economic and public policy, as well as to monitor the company for any non-competitive behavior in the future.