December 29, 2006
Wal-Mart's Irresponsible Pickle Strategy
Posted by Gordon Smith

I have been cramming for my Wal-mart panel next week at the AALS Annual Meeting, and I found a case study entitled "Corporations and Social Costs: The Wal-Mart Case Study" by Benedict Sheehy. Mostly routine stuff, but this argument about consumerism caught me off guard:

Wal-Mart's approach of increasing by supplying goods in large or bulk size creates its own special set of problems. For example, Wal-Mart decided to use pickles to create an impression of incredibly cheap prices. It pressured a supplier of high quality pickles (with threats to discontinue business with them) to produce gallon jars of pickles for less than $3. The net result was a dramatic increase in sales at very low margins, increased demand on farmers and all pickle producers, undermining its high quality pickle market it had built up over the years, and eventually contributing to the supplier's bankruptcy. Perhaps worst of all, as an executive at the former   pickle supplier observed: "They'd eat a quarter of a jar and throw the thing away when they got moldy. A family can't eat them fast enough."

This problem--promoting over-consumption in a world of limited resources, currently reeling under the environmental costs of its consumption habits--is nothing short of moronic. Americans are the most over-weight people on the planet, spend more money per capita on diets, consume more goods per capita than anyone else on the planet, and Wal-Mart's strategy, effectively, is to promote further over-consumption by under-pricing more goods. Basic economic theory indicates that when goods are under priced they are over consumed. We need look no further than Wal-Mart to see the truth of this principle. While Wal-Mart is not the creator of consumerism, its dominance creates a large responsibility to inform consumers about the real costs. By under-pricing, Wal-Mart is misinforming the consumer encouraging over-consumption, and to do so in the planet's current state is nothing less than perverse. Because of its market dominance, a strong argument can be made for its bearing considerable corporate responsibility to inform consumers about costs by pricing correctly.

After reading Dan's post about the Ethical Practice of Legal Scholarship, I am reluctant to comment on this passage without consulting Mr. Sheehy in advance. Nevertheless, I trust that Conglomerate readers can draw their own conclusions.

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Comments (20)

1. Posted by Jake on December 29, 2006 @ 20:55 | Permalink

Sheehy obviously is out of touch. What family buys a gallon jar of pickles? The more logical purchaser of such a good is someone who is sponsoring a church social, a fundraiser for a local high school athletic team or the volunteer fire company, etc. This sort of makeweight animus against Wal-Mart is annoying. Sheehy should go light a candle or some incense in honor of Mao or Che or some other false god, instead of bothering grown-up people with such nonsense as Prof. Smith relates in his post.

Bah!


2. Posted by Kate Litvak on December 31, 2006 @ 2:28 | Permalink

Is it a particularly soft ball or is this the general level of the Wal-Mart genre? I've seen a few papers from a recent Wal-Mart symposium sponsored by a US law school, and they all seemed to be of the same quality as this one...


3. Posted by Jeremy Telman on December 31, 2006 @ 8:45 | Permalink

Okay, I'll bite.

I concede that Sheehy's anecdote does not, in itself, convince me that Wal-Mart is the source of all evil in the universe. On the other hand, it's hardly an argument for communism (not that there's anything wrong with that).

Assuming the truth of the anecdote, why is this illustration of one way in which Wal-Mart's stranglehold on suppliers promotes ruinous inefficiencies simply risible?


4. Posted by Josh Wright on December 31, 2006 @ 15:29 | Permalink

Jeremy,

I feel a bit silly explaining why Sheehy's rant is ignorant of basic economics. It is kind of like explaining why a joke is funny. But I'll pick some of the lowest hanging fruit anyway because the fact that this sort of argument is not completely rejected in the academy bothers me (good luck on the panel, Gordon!).

First, Sheehy adopts the underlying assumption that downward sloping demand curves are the root of American obesity and inefficient overconsumption. Sheehy's message: low prices are bad because they encourage inefficient consumption.

"Underpricing" relative to what? Not relative to cost a la predatory pricing. These sorts of allegations have failed miserably in courts and dont make much sense in the retail context anyway. But this is not what Sheehy is saying anyway ... which is simply that low prices are bad. No more, no less.

Your question: "why is this illustration of one way in which Wal-Mart's stranglehold on suppliers promotes ruinous inefficiencies simply risible?"

Answer: There are no "ruinous" inefficiencies --- though I dont know what the modifier ruinous means here. Lets assume that Wal-Mart is able to extract more favorable deals from suppliers than previous retailers and extract a greater share of the surplus from them. So what?

Since when is a division of the gains from trade for distributing Coca-Cola more efficient if Coke takes a greater share of the surplus than Wal-Mart? How is this more inefficient? It isn't. Apparently, Sheehy cares more about supplier's share of the surplus than the gains to consumers. Let Coke, P&G, and other suppliers battle with Wal-Mart over the division of surplus ... this is the competitive process and it has worked quite well for consumers in this instance (the evidence that Wal-Mart has generated significantly lower prices for consumers and dramatically increased consumer welfare is overwhelming).

Finally, you write that this is hardly an argument for communism. Well, the argument that WM should "price correctly" by deviating from decentralized, competitive pricing which has caused consumers to "overconsume" relative to this "correct" ideal is pretty darn close, no? The only question is whether the ideal price is set by a central planner, Sheehy, a roll of the dice, or some other mechanism.


5. Posted by Jeremy Telman on December 31, 2006 @ 19:49 | Permalink

Josh,

Your comments are perfectly reasonable, but they don't seem to me to be a complete response to Sheehy's anecdote, as I understand it. The problem that the anecdote addresses is not only underpricing but the requirement that products be supplied in oversized quantities. Consumers don't want the product in these quantities and suppliers don't want to package their products in such large quantities. But Wal-Mart is in a position to demand such packaging, which results in inefficiencies (moldy pickles) which I call ruinous because the pickle company ended up in bankruptcy.

If the supplier is Coke, I presume that company can fend for itself, but if the anecdote is to believed, WM's policies destroyed the pickle supplier. Is this good for capitalism?

Do the studies that show that WM has increased consumer welfare account for the waste symbolized by the moldy pickles? Consumers might be paying less per product purchased but more per product consumed.

But please don't assume that because I pose these questions I presume to know the answer or am determined to find that WM is indeed evil incarnate.

I don't think "communism" means the same thing for you as it does for me. You reduce communism to central planning. To me, the essence of communism is worker control of the means of production, but we can tackle that issue another day and then move on to world peace.


6. Posted by Josh Wright on December 31, 2006 @ 20:54 | Permalink

Jeremy,

A complete response would require me to incorporate by reference a micro principles textbook. Instead, I'll write a longer blog comment and I hope that will suffice. As per communism (perhaps I should have said socialism), perhaps "inefficiencies" mean something different to you and I. Maybe capitalism, too. So lets move to the economics.

You assume that "consumers don't want the product in these quantities and suppliers don't want to package their products in such large quantities" but that WM exercises its muscle in the form of demanding larger pickle quantities than its consumers desire. You note that this supplier threw out some pickles and went into bankruptcy and that we shouldn't worry about this is the supplier is Coke.

Let's start with the assumption. I find it an odd one to make given the state of retail competition in the United States. If you're right about unsatsified demand for pickles, there is an excellent profit opportunity to be had in retailing in smaller quantities for pickles and other items where WM has exercised its power to deprive consumers of their desires. Each supplier would have an incentive to deviate from the WM organized pickle cartel! So would each retailer.

There is another problem. If this is a monopoly story, why would WM extract its monopoly rents in the form of selling pickles that consumers do not want which would presumably mean FEWER sales??? Also, WM does not have a monopoly share in retail (30-35% or so is a reasonable estimate). But even monopolists respond to consumer preferences --- afterall, the want to earn their monopoly rents.

In reality, there is a TON of retail competition and lots of retailers who could appropriate this profit opportunity if you are right. In sum, we have very little to worry about regarding consumers not getting the pickle sizes they demand. In the meantime, pickles prices fall and consumers are better off.

No they are not, you say, because what about this supplier who is out of business. You ask if the elimination of this supplier is good for american capitalism. Because we may not agree on what capitalism means, or the "american" version of it, I dont know how to respond. But if we start from the more realistic presumption that consumers value large jars of pickles --- btw, a presumption that is tested by the operation of the marketplace rather than mere assertion --- we can safely answer: "yes." A supplier who cannot respond to consumer preferences going out of business is good for the competitive process. Turns out that competition in the pickle market, like most others, is tough.

Remember when the supermarkets drove out the mom and pop grocery stores? One could make the same argument you are making here in that context: yes there are lower prices because supermarkets exploit economies of scale, but they cannot do what the mom and pop does and so elimination of this retailer is bad for capitalism.

Well, luckily, the market provides a test for these sorts of claims. If consumers value what WM is doing, they will shop there and if WM does not offer what consumers demand, they will go elsewhere. If a retailer offers the wrong assortment of products, consumers leave. Retail competition is incredibly vigorous. Revealed preference suggests that WM does a pretty good job responding to consumer demand.

Say what you will about WM, but the crusade against them is simply very bad for consumers.


7. Posted by Kate Litvak on December 31, 2006 @ 22:42 | Permalink

Josh: not nice to beat up small kids and their case studies. The interesting question (to me) is why most of the Wal-Mart "scholarship" produced by legal academics seems to be of the same quality.


8. Posted by Jeff Lipshaw on December 31, 2006 @ 23:37 | Permalink

I don't do a lot of shopping at Wal-Mart, but I am a big Costco fan. As in Texas, everything is bigger at Costco. When I don't want enough chocolate syrup to fill a moderate-sized lake, I buy a smaller one at Kroger. All I know is the lines are always really long to check out at Costco.

Gosh, I hope there isn't a spillover effect with the next panel on Costco's stuff being too cheap. If it weren't for the Dockers khaki pants (as my daughter says, pants for the bigger butted man) table, and the Ralph Lauren tape-stripe oxford cloth shirt table, I probably wouldn't buy clothing at all.


9. Posted by Fred Tung on January 1, 2007 @ 16:25 | Permalink

Kate, let me try a (partial) answer to your interesting question. All other things equal, scholarship is of lower quality when the writer already knows the answer before the research has begun. The quality is lower because the analysis has to be massaged to reach the desired conclusion.

Many legal academics hate Wal-Mart because it grabs efficiencies that hurt constituencies that many legal academics (myself included, to some extent, with some limits and mixed feelings, yada yada yada) care about--workers, local businesses, for example. Moreover, the harm to these constituencies is quite salient, since local businesses go bust, and workers make less at Wal-Mart than they did at the less efficient local businesses (even though Wal-Mart probably employs more people than the local businesses it displaced). By contrast, consumer gains are not salient. Consumer gains come in itty bitty pieces over an enormously broad range of goods and services. Consumer gains don't generate poster children. Only dismal scientists get really excited about consumer gains. Legal academics don't jump up and down to defend consumer surplus. Consumers aren't a cohesive group; they (we) are broad and diffuse, and don't generate sympathy from legal academics (and often not from policy makers either).

So hating Wal-Mart is easy. Too easy.


10. Posted by Ben Sheehy on January 1, 2007 @ 22:26 | Permalink

I am concerned that the quoted section fails when the context is stripped away. The general argument is that Wal-Mart's power harms the efficient functioning of the market. By supplying goods in unusable sizes (is it realistic to suggest Wal-Mart is attempting to capture the Church funtion pickle market?), it is as Jeremy questioned: "[does] increased consumer welfare account for the waste symbolized by the moldy pickles? Consumers might be paying less per product purchased but more per product consumed."

Encouraging the purchase of needlessly large quantities under the illusion of savings causes waste. The criticisms in this blog fall into the traditional economics perspective that ignores the externalities I am trying to highlight. What of the resources--land, water, labour, energy--wasted on unconsumed, unnecessary purchases? Are we truly living on a planet with excess resources to sqander?

It seems to me that failing to price in the full environmental costs (as these are typically excluded in production costs for various reasons), permits the promotion of over-consumption. Wal-Mart's marketing decisions and strategies are prime examples of this larger phenomenon. As Jeff observes, when he wants a smaller quantity he goes to Kroger. Fine, but it fails to address the promotion of over-consumption.

Further, in the matter of supplier destruction by Wal-Mart, my point is that driving suppliers out of business is hardly a benefit to society. My argument is not about the distribution of the surplus. Let the consumer have good prices. Who argues against that?

My point is that putting so much pressure on suppliers puts them in a position of bankruptcy, creating opportunities for monopolies in the supply market and reduction of choice for consumers, and/or forces margins to be so thin that they must externalize their own costs even further. Externalities must be paid. They don't simply disappear. Whether it is the loss of local jobs, the environmental disaster unfolding around the globe, or the stress of less security, lower quality jobs (see notes in the article concerning the net job loss to communities), social costs are paid. Economists' political decision to focus exclusively on the immediate and measured financial costs is a choice. Following that choice has been an important basis for the extreme right wing politics and neo-classical economics that currently rules (although it is falling from favour). (I deal with these issues in greater depth in a piece I have coming out in the J.of Interdisc. Econ.)

As a "small kid with a case study" it seems curious that my scholarship was sufficiently rigorous to be published by Northwestern. I am not certain the "quality" here is not a political quality being sought. I am not certain what type of research this blogger has in mind as "legitimate" or "quality" research. In my research for the piece, I did come across empirical work (should that be the prefered flavour) and have put it into the note. But surely all research has its own perspective, and if my perspective and method do not please, by all mean, please provide us with your own piece dealing with Wal-Mart and externalities.

Further, as a point of clarification, it should be noted that my work actually went reverse to the suspected direction. I was doing research on law and economics and the corporate form. As my research led me beyond the traditional, narrow, neo-classical economics perspective, I began to think about an example that would be familiar to readers, and demonstrate many of the concerns raised by my research. I have lived and visited many countries and have seen the impact of producing low cost consumer goods, and the effects of big box stores on communities. As the largest retail business in the world, and being well known, I thought an investigation of Wal-Mart might be insightful. Conclusions, however, were not drawn until the research was done. You will note Wal-Mart's replies have been included. Their weakness and implausibility (at least as regards the employee claims), suggest that the case I am making has more credibility than you are prepared to give it.

The allegation that the conclusions were made prior to the research is an unsubstantiated argument and an ad hominen attack--something one would hope would not be found here. For one person to make unsubstantiated allegations of improper motives against another suggests more about the accuser than the accused.

It seems odd to be "accused" of being "communist" because of pointing out a few problems with the implications of current economic policy and modelling. I do not recall any suggestions that central planning, or my personal opinion on costing ought to be adopted. In any event, a failure to appreciate communism's successes is as foolish as it is to ignore capitalism's failures. "Communist or capitalist"--so what? The issue is to survive in a safe, sustainable, respectful world. Neither Mao, nor Che, nor Regan, nor Bush have been successful in this regard. So, let's move on, find new ways of looking at things, and new ways to make life on our planet acceptable to all.

In any event, it has been most interesting to read the responses to the article, and I thank you for taking the time to review it and comment.

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