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The Wal-Mart Effect: is it really worth the price?


Built on the formula “buy cheap, sell for less than the other guy, and make a profit on high volume and fast turnover,” Wal-Mart today is the world’s largest retailer.  Founded in 1962 by Sam Walton, the company’s key focus is selling goods at the lowest price possible.  Wal-Mart places what seems like a fanatical emphasis on the slogan “Always low prices.  Always.”  Although this business strategy may appear to be very appealing in a consumer’s point of view, Wal-Mart has faced significant criticism for the way it operates.  Over the years, Wal-Mart has appeared to favor one group of stakeholders: its consumers.  Wal-Mart has placed so much emphasis on satisfying one group of stakeholders that it has neglected the other groups of stakeholders, like employees, or other businesses.  Wal-Mart has affected communities and businesses both nationwide and worldwide, but one big question remains – is Wal-Mart worth really worth price? In other words, does the money consumers save ultimately translate into a better quality of life for the majority of people?

In order to fully understand the criticisms of Wal-Mart, one must first grasp the phenomenon better known as “The Wal-Mart Effect.”  In The Wal-Mart Effect and a Decent Society: Who Knew Shopping Was So Important, Charles Fishman discusses what the Wal-Mart effect is and how it is shaping everyday life in both the United States and around the world. Fishman says that the “Wal-Mart Effect” is this:

“It is when Wal-Mart comes into town, reshapes shopping habits, and drains the viability of traditional local shopping areas or mom-and-pop shops.  It is the relentless downward pressure on the prices of everyday necessities that a single vast retailer can exert on behalf of customers.  It is the suburbanization of shopping; the downward pressure on wages at all kinds of stores trying to compete with Wal-Mart; the relentless scrutiny of unnecessary costs that allows companies to survive on thinner profits; the success of large business at the expense of its rivals and the way in which that success builds on itself” (Fishman, 2006).

Clearly, Wal-Mart effects more people than simply those who shop at the stores.  Fishman furthers his argument about the Wal-Mart effect and claims that the effect can be felt both directly and indirectly.  “Those who never shop at Wal-Mart typically pay 5% less for their groceries if Wal-Mart is in their town” (Fishman, 2006).  When a Wal-Mart opens in a surrounding area, businesses are forced to compete with the lower prices, and thus will lower their prices as well.  Even if people never set foot in a Wal-Mart, they still reap the benefits – specifically, lower prices (Fishman, 2006).  However, the real question is about how much Wal-Mart really saves the consumer, and whether or not those saving dramatically offset the costs of the Wal-Mart effect.

It is clear that Wal-Mart has a significant impact on businesses and communities in the area, but what is it that makes Wal-Mart so unique?  In other worlds, how are they able to lower prices to unprecedented amounts?  According to Professor Edna Bonacich of U.C. Riverside, featured in the Frontline documentary “Is Wal-Mart Good for America?” Wal-Mart operates by using something called the “pull system”.  Essentially, this involves retailers, like Wal-Mart, deciding what is being sold, collecting information on what is being sold, and then telling manufacturers what to produce and when to produce it (Frontline, 2004).

According to John Lehman, a former Wal-Mart store manager, this kind of business is apparently very one-sided.  In the documentary, Lehman discusses how Wal-Mart doesn’t leave much room for negotiation.  Essentially, Wal-Mart tells a company what price they want to sell something for, and then the manufacturer must find a way to make the product such that they can meet this demand. If a manufacturer cannot meet these expectations, Wal-Mart will find another manufacturer who can fulfill their needs.  This usually means outsourcing to Asian manufacturers, where they can meet these needs because standards of living are much lower, and companies can produce goods at a cheaper cost.  Skip Hartquist, an attorney at Five Rivers, mentioned in the documentary, discusses how outsourcing is affecting American manufacturers.

“It’s not fair trade. It’s not free trade. The Chinese are pricing their products in a manner contrary to the obligations they undertook when they joined the World Trade Organization a few years ago. The Chinese system has built-in advantages that no one else in the world has. Their currency is undervalued by, we estimate, about 40 percent. Their workers are not treated fairly in terms of worker rights. The government provides subsidies to Chinese producers at preferential interest rates that may not even have to be repaid. It’s a rigged system” (Frontline, 2004).

While Wal-Mart is now the leading retailer in the United States, their business model is not sustainable as they favor only one group of their stakeholders: their consumers.  Wal-Mart must operate as a social institution, not just a corporate system.  In other words, Wal-Mart must realize the connections between the private troubles and public issues in order to create a harmonious balance between stakeholders.  Connecting private troubles and public issues is imperative for companies, as discussed in The Sociological Imagination, by C. Wright Mills.  In this case, Wal-Mart is the public sector and its stakeholders make up the private sector.  The sociological imagination, according to Mills, is the capacity to shift from one perspective to another (Mills, 1959).  Wal-Mart must shift their paradigm and realize that focusing solely on low prices comes at the cost of many people.  People are not just consumers – they also need to earn a living as well.

In order to be a sustainable company, Wal-Mart must find a balance among its stakeholders.  In Stakeholder Theory of the Modern Corporation, Ed Freeman argues its management’s duty to look after the health of the corporation.  This means paying attention to anyone who is a stakeholder of Wal-Mart.  As companies get bigger, other groups of stakeholders, such as governments, NGOs, critics, etc. become equally as important.  Although Wal-Mart started out as a small company, it has grown to be the largest retailer in the United States.  Since the company has grown significantly, their responsibilities have grown as well.  According to The Wal-Mart Effect and Business, Ethics, and Society, Wal-Mart cannot view its stakeholders purely in economic terms.  R. Edward Freeman argues that Wal-Mart is focusing its business strategy only within the context of the traditional stakeholder theory – maximizing profits.

One example of a similar company that has managed to find a harmonious balance between stakeholders is Costco.  Costco’s business model is simple: sell a limited number of items, keep costs down, rely on high volume, pay workers well, have customers buy memberships, aim for upscale shoppers, and don’t advertise (Cascio, 2006).  The fundamental difference between Wal-Mart and Costco is that Costco delivers low prices in a more stainable manner, by focusing on satisfying all stakeholders, rather than just favoring one group of stakeholders, like Wal-Mart.  Costco not only pays its employers higher than the average Wal-Mart employee, but Costco also has better relations with their suppliers.  While Wal-Mart is notorious for having very one-sided relationships with their suppliers, Costco has a different approach.  According to Wayne Cascio in Decency Means More than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club, Costco is tough on its suppliers to keep prices low, but instead of refusing to do business with a supplier if they can’t exactly meet Costco’s needs, Costco simply warns suppliers not to offer other retailers lower prices than what they get (Cascio, 2006).  Furthermore, Cascio warns that Wal-Mart’s cheap-labor model is very costly in the long run.  “It can lead to poverty and related social problems, and transfer costs to other companies and taxpayers, who indirectly pay the health-care costs of all the workers not insured by their frugal employers” (Cascio, 2006).

In conclusion, The Wal-Mart effect is not a new phenomenon, nor is it going away any time soon.  Indirectly or directly, people who live in an area with a Wal-Mart store feel the effects of the retailer.  Although Wal-Mart prides itself on its ability to set the precedent for low prices, the reality is this: low prices come at the cost of many people.  Moving forward, Wal-Mart must recognize that favoring one group of stakeholders is both unsustainable and unethical.  Wal-Mart should adopt a business model more similar to Costco’s – one that balances the interests of all groups of stakeholders.

Bibliography

Cascio, Wayne F. Decency Means More Than “Always Low Prices”: A Comparison of Costco to Wal-Mart’s Sam’s Club. Academy of Management Perspectives (Aug.,       2006), pp 26-37.

Fishman, Charles. The Wal-Mart Effect and a Decent Society: Who Knew Shopping Was So Important? Academy of Management Perspectives, Vol. 20, No. 3  (Aug., 2006), pp 6-25. Published by Academy of Management. Article Stable URL:             http://www.jstor.org/stable/4166248

Freeman, Edward. “Stakeholder Theory of the Modern Corporation.” General Issues in Business Ethics: 39-49. Print.

Freeman, R. Edward. The Wal-Mart Effect and Business, Ethics, and Society. Academy of Management Perspectives, Vol. 20, No. 3 (Aug., 2006), pp 38-40. Published by: Academy of Management. Article Stable URL: http://www.jstor.org/stable/4166250

Frontline. 2004. Is Wal-Mart Good for America? November 16. Retrieved from http://www.pbs.org/wgbh/pages/frontline/shows/walmart/view/ on April 3, 2012.

Mills, C. Wright. “The Sociological Imagination.” Oxford University Press (1959). Print.

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The Costs of Being Costco: Why Ethics Matter


Almost everyone has heard of the membership warehouse retailer, Costco Wholesale, whether or not you actually choose to shop there. You can find one of their warehouses in over 400 locations around the United States, as well as an additional 200 warehouses in Canada, Mexico, Australia, the United Kingdom, and parts of Asia. Although they are not quite as instantly recognizable as their main competitor, Sam’s Club of Wal-Mart Inc., Costco has attracted somewhat of a cult following due to their unusual business operations. In many financial comparisons, Costco seems to beat out all of their industry competitors. Even in the recent economic downtown, Costco still posted growth in their stock, as well as higher than industry average profits. So what exactly makes Costco so successful? Many business analysts argue that Costco’s focus on corporate social responsibility is what sets them apart from other retailers such as Sam’s Club or BJ’s Warehouse. Their focus on doing “the right thing” for all of their stakeholders, as well as a vision that aims for long-term success, is a unique business model that has interesting implications for many debates within the business world today. Should a company’s main focus be profit? Do they have a responsibility to act in the best interest of all stakeholders? What are the effects of these decisions? Using Costco as a prime example of a socially responsible corporation, I hope to prove that acting in a socially responsible manner towards all stakeholders is ultimately more beneficial for a company. Continue reading

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