High cost of low price in retail

Last Updated: Mon, Dec 03, 2012 04:10 hrs

It is an oxymoron that low price for goods can have a high cost to the economy as a whole. But this is what is true of the impact of big box discount stores such as Walmart. In the context of foreign direct investment (FDI) in multi-brand retail in India, knowing the impact of the biggest retail mart in the world, namely the Walmart is extremely relevant for appreciating what is in store for India.

The lower prices of Walmart are much trumpeted as its virtue for keeping inflation in check but the total effect turns out to be too costly for the country in terms of losing its small retail shops, small-scale manufacture, even big scale manufacture, employment and other features which make an economy grow. An August 2011 report by ICRIER concludes that Kirana shops will co-exist but the study is based on a survey of only 300 people, without including kirana shops, and is unreliable due to scant and superficial handling of the issue .

Relentlessly hammering down the prices, Walmart ensures that the buyers don’t go to other stores but come flocking to them. The suppliers are forced to reduce prices and squeeze the labourers to abject penury. Cheap labour is at great cost.

They are made to work in sub-human conditions in China and Bangladesh. There have been allegations that textile factories in Honduras have used child labour, which is forbidden in a global economy. People in America have started asking questions such as “Do Americans need clothing to be so inexpensive that the people making it cannot afford a toothbrush?” or “Should some people lose their livelihood so everyone’s underwear and laundry detergent can be cheaper?”

Cheap labour is at great human cost. Walmart now dominates consumer markets so thoroughly that the suppliers have no choice and they are left with so little profit that there is no money left for innovation.

The suppliers to Walmart become complete slaves to Walmart, always trying like mad to cut cost. They become captive suppliers with the percentage of profit going down with each marginal sale.

This is corroborated by studies in The Walmart Effect by Charles Fishman and The World is Flat by Thomas L. Friedman.

Walmart does not promote economic growth. Stephan Goetz and David Fleming in an article in the Economic Development Quarterly, 2011, concluded that locally owned business pack more powerful economic punch. Smaller, locally-owned businesses and start-ups tend to generate higher and long-term economic growth and income for people in a community than big, non-local firms, which can actually depress local economies, they said.

To survive in the face of the sort of pricing demands Walmart made of famous companies such as Vlasic, Huffi, Loveable, Levi Strauss and some other consumer product companies, they had to lay off employees and close the US plant in favour of outsourcing products overseas.

The same Walmart which in the early 1990’s trumpeted its claim to “Buy American”, doubled its imports from China between 1997 and 2002 and in the next two years increased it to another 50% so that in 2008, 10 percent of all goods imported from China to the USA were by Walmart alone.

Analysts of China’s business practices say that its size and economic power mean that it will soon be setting the global floor not only for low wages but for lax labour laws and work place standards. This is known in the business as “ China price”.

These days 95 per cent of the bikes sold in the United Sates are imported from China. The prevalent joke in America is that it manufactures only the “Made in China” tags. Unionism is not allowed in Walmart.

While more than 70 per cent of all new retailing jobs in seven years between 1997 and 2004 came just from the growth of Walmart, during the same period manufacturing jobs fell by 3.1 million jobs.

The impact, therefore, on the employment sector was that there have been more retail jobs at the expense of manufacturing jobs.

Not every cost squeezed out is good. Walmart becomes a combination of monopoly and monopsony which constitutes threat to the free market. It creates a whole hidden universe of squeezed suppliers, manufacturers and labourers.

Email: smukher2000@yahoo.com  

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