Walmart’s $16 billion purchase of Flipkart has triggered a debate once again around the logic and the impact of it on the retail market in particular and the economy in India in general. I am propounding the view here that the low-cost that Walmart brings in is at a high price. India is currently having conglomerates, such as Bharti, Reliance, Godrej and TATA but Walmart is unique due to its big size but most of its features are also true for the big box discount stores.
What attracts people to Walmart
The sprawling nature of Walmart business is an advantage to the shoppers. They can buy anything, even any type of medicines or body odour lotion. Walmart’s presence is there in all big countries. China has one Walmart in every major city. Japan has also a big presence of Walmart.
Hammering down the prices
Karl Marx in his most famous book called The Communist Manifesto published in 1854 wrote the following:
“The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilisation into their midst, that is, to become bourgeois themselves. In one word, it creates a world after its own image.”
More than a century later the cheap prices in Walmart are giving a similar type of hammering to certain elements of capitalism which do not change the basic nature but bring out certain contradictions in the functioning of the system. The mainstay of Walmart and similar big box discount stores is to reduce price relentlessly so that the buyers don’t go to other stores but come flocking to them. The whole impact of Walmart that we would discuss here is on the economy.
Impact of lower prices on competitors and suppliers
The persistent criticism against Walmart is that it kills business which confronts them. Because of Walmart’s scale and always delivering at lower prices, the impact has gone far beyond to the suppliers and to the workforce in these companies. Walmart has become a threat to free market as a monopoly buyer which is known as monopsony. Monopoly and monopsony are both threat to the free market. Walmart now dominates consumer markets so thoroughly that they have no choice. The result can be dramatic or subtle, immediate or insidiously corrosive. Decisions made in Walmart routinely closed factories as well as open them. The percentage of profit of the suppliers goes down with each of extra sale. Walmart is really forcing companies to get their act together or get crushed. Quality is often compromised to keep the price same.
The way to compete with Walmart
Quality is the only area where the competitors of Walmart are able to succeed. Producing better quality and charging more money is how many manufacturers are surviving. The way to compete with Walmart is to focus, even in the mass market, on things besides price: design, fashion, quality, cachet, and the feel of the shopping experience. The growth of both Target and Whole Foods shows the power of quality even competing against low-priced quantity.
Labour and employment
Work ethics have become inverted such that they now sometimes drive behaviour that is not only exploitative but perhaps illegal. In any case they even resort to questionable workplace practice. Often the senior executives deny knowledge of all these.
Cheap labour at what cost
There has been allegation that textile factories in Honduras have used child labour which is forbidden in a global economy. Similar cheap labour is used in Bangladesh and China under sub-human condition.
Kills innovation and creativity
A point that is made as a criticism of Walmart is that the suppliers 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 percentage of profit going down with each marginal sale.
There are adverse effects of Walmart which overwhelm the simple logic of lower retail prices.
The writer is member, Central Board of Excise & Customs (retired)