Cheap (25 page)

 

 

 

EMEK BASKER,
an economist at the University of Missouri who focuses on the retail sector, is described by at least one analyst as the country’s leading “Wal-Martologist.” Basker earned her PhD from MIT and is a faithful empiricist, interested not in speculation but in verifiable facts. “The goal of my research is to shed light on recent changes in the retail sector: their causes and consequences and implications for the wider economy,” she told me. “I try not to approach these questions from a particular position (pro or con) but rather focus on understanding what’s going on and why.” Basker’s study on Wal-Mart pricing was meticulous. She gathered price data on ten specific products, including men’s Dockers “no wrinkle” khakis, 11-ounce bottles of Johnson’s Baby Shampoo, and cartons of Winston cigarettes, king size. The data were collected over a period of twenty-one years, from 1982 through 2002, in 165 cities across the United States. To control for seasonality she took four readings each year, one for each season. Then she checked to see how prices changed in these communities after Wal-Mart’s arrival, controlling carefully for inflation and a host of other factors. Using regression analysis and other analytical tools, she concluded that Wal-Mart does indeed have low prices and tends to lower them in other nearby stores. No surprise there. Perhaps less predictable was that Wal-Mart does not lower prices on everything. Drugstore standards such as shampoo and toothpaste were cheaper than average after Wal-Mart came to town. But the vaunted “Wal-Mart effect” on cigarettes, Coke, and no-wrinkle khakis was either weak or nonexistent. When I asked Basker what might account for this, she responded that in the absence of data she could only guess, and sensibly declined to do so. But her data alone reveal a dirty little secret of bargain retailing.

A midsized Wal-Mart supercenter may offer for sale one hundred thousand different items or stock-keeping units (SKUs). The general public knows the going price of only about 1 to 2 percent of these items, generally things we buy most frequently. As we now know, discounters tend to discount most deeply frequently purchased generic items—such as generic lettuce and ground meat—rather than items we buy only occasionally. When discounters carry well-known, highly-sought-after big-ticket items, the discount is often extremely modest. For example, when Wal-Mart started stocking the Apple iPhone in the final week of 2008, it knocked only $2 off the full price. Much touted “everyday low prices” are applied selectively, often on inexpensive high-volume goods that are essentially thinly disguised loss leaders. Wal-Mart actually has higher than average prices on about one-third of the stock it carries. On those items for which prices are lower, the average savings is 37 cents, with about one-third of items carrying a savings of no more than 2 cents.

 

 

 

DISCOUNTERS lower the overall price of the average market basket by lowering prices on the things we buy most frequently: generic paper supplies, canned vegetables, dishwashing detergent. The small stuff matters. A 5 cent discount on a bottle of ketchup can woo customers, especially when accompanied by a 5-cent discount on related items such as hot dog buns and paper towels. So discounters position low-priced, high-volume items such as these in high-visibility areas, both to encourage consumers to buy them and to leave the impression that everything in the store is cheap. Since most of us need paper towels and many of us buy ketchup and hot dog buns, discounters do in fact save us money. But this is low-hanging fruit, loss leaders designed to lure us into stores we might otherwise avoid. Discounters generally offer less variety in any given category than do traditional stores. In one study of organic food, Wal-Mart, currently a leading seller (by volume) of organics, had by far the lowest prices, but selection was so limited that a comparison with other stores was almost impossible. The study authors concluded: “For all the hoopla, Wal-Mart is truly stocking only a very small number of organic SKUs. But they are some of the highest-volume products in the industry, so they will likely have quite an impact.” While Wal-Mart was selling an enormous volume of low-priced organics, the bulk of it came in the form of one product, milk, some of which was organic in name only.

America’s discount behemoths have in recent years been hailed as sentries against a frightening prospect: inflation.
Business Week
reported in 2002 that “one reason the Federal Reserve is less concerned about inflation than the European Central Bank . . . is the deflationary impact of America’s more competitive retail environment.” Wal-Mart, Dollar Stores, Big Lots, and the like help keep inflation in check, which seems a very good thing indeed.

Inflation is a prominent and recurring source of public anxiety the world over: In 2008 a sharp rise in the price of fuel and food led to political unrest and hardship in India, China, and elsewhere around the globe. Those of us who came of age in the 1970s, when America experienced what some economists contend was the nation’s first and only experience of peacetime inflation, are all too familiar with its dangers. At the time, inflation was targeted—in the words of economist James Galbraith—as a “public evil” that “inspires public citizens to oppose it with an energy and perseverance devoted to few other tasks.” In 1978 the Humphrey-Hawkins Act mandated that inflation be reduced in ten years from the then-current level of 9 percent to zero. The Federal Reserve Bank under both Paul Volcker and Alan Greenspan strove tirelessly to achieve this ambitious goal by controlling employment levels through the manipulation of interest rates. Volcker and Greenspan reasoned that too great a demand for workers would lead to an increase in wages, which both economists deemed inflationary. When the unemployment rate fell below 5.5 or 6 percent, or seemed headed in that direction, the Fed raised interest rates to inhibit economic growth and by extension, hiring. As a result of this strategy, the unemployment rate climbed to 9.6 percent in 1983, its highest level since the Great Depression, greatly enlarging the pool of people seeking work and substantially diminishing the power of most workers to demand an increase in wages and benefits. Wages flattened, and if workers wanted to buy more, they took out a loan, often in the form of credit card debt.

Wage stagnation and growing indebtedness made discounting all the more attractive, a way to level an increasingly uneven playing field. Influential University of Chicago economist Christian Broda, a darling of the financial press here and in the United Kingdom, has argued that thanks to discounters America’s astonishing income disparity was not nearly as damaging as people assumed. “The reason is simple,” he wrote. “How rich you are depends on two things: how much money you have, and how much the goods you buy cost. If your income doubles but the prices of the goods you consume also doubles, you are no better off. Unfortunately, the conventional wisdom on U.S. inequality is based on official measures that look only at the first half, the income differential. National statistics ignore the fact that inflation affects people in different income groups unevenly because the rich and poor consume different baskets of goods.”

Broda pointed out that between 1994 and 2005 price inflation for the richest 10 percent of American households was six percentage points higher than for the poorest 10 percent of households. The poor buy roughly twice as much of their nondurable goods in discount superstores than do the rich. The rich spend far more on durable goods and services, such as education and transportation, which are usually less subject to competition and therefore less elastic. Hence, Broda reasoned, it is the rich—not the poor—who are losing ground in the world of cheap goods. “Trade sceptics who suggest that there is no point in buying cheaper goods if you have lost your job should check America’s unemployment rate,” Broda concluded in July 2008. “It is about 5 percent, close to a record low.”

There are several things Broda appears to misunderstand. For one, that 5 percent unemployment rate. In Broda’s calculation, anyone who works is employed. This might include, say, a machinist laid off from his $40-an-hour job and currently making $220 a week at the local Quicky Mart. This is hardly helpful. According to the Bureau of Labor Statistics, fully 9.4 percent of Americans were without
sustaining
jobs in May 2008—that is, jobs that could support them and, if they had one, a family. This figure includes not only the officially unemployed (at the time 5.5 percent of the population) but also marginal and part-time workers searching for full-time work, like our hypothetical pal at Quicky Mart.

But we need not look that deeply to notice that something is amiss in Broda’s assessment. By his reasoning, what we buy is necessarily what we want to buy. Do the poor shop at discount stores because they really prefer to shop at discount stores? There is no research on this question that I know of, but there are clues. Given that getting to a discount store often entails a cost in time and inconvenience, most of us shop at discount stores not because we prefer the merchandise or the ambience but because we believe it will save us money. The poor have no choice. The wealthy do have a choice, and some shop at discount stores for
some
things. What marketers call “price-sensitive affluents” regularly shop at discount stores to take advantage of the price elasticity of nondurable goods such as paper and office supplies, cleaning products, diapers, and cosmetics. But while the affluent can and do shop at discounters, the poor and working class cannot expand their incomes to accommodate the growing cost of essential goods and services. So it is hardly convincing that a low price on T-shirts, toilet paper, and lettuce truly compensates for the soaring costs of health care, education, and transportation.

The worst economic disaster in U.S. history, the Great Depression, was characterized not by inflation but by deflation, particularly income deflation. Similarly, deflation of financial assets brought many Americans to their knees in 2008. When unemployment and the risk of unemployment keeps wages low, deflation in the price of consumer goods may seem like a panacea. But this is an illusion, because cheap consumer goods do not constitute the bulk of our expenses. Just before Broda published his findings, the
New York Times
reported that medical bills alone accounted for almost one-fifth of the average family income—a whole lot of “lettuce,” cheap or not, in almost anyone’s book.

And health care is only one component of this disturbing trend. Harvard Law School professor Elizabeth Warren has made clear just how disturbing. Warren’s biography defies Ivy League cliché. A native Oklahoman, she married at nineteen and entered Rutgers School of Law with a two-year-old toddler in tow. Not born or raised in privilege, she sees the world a bit differently than do many of her colleagues. Warren is an expert on bankruptcy and has a particular interest in the factors that inflict it on so many hardworking people. She is thrilled that women today are working and contributing to the well-being of their families, and she is frustrated that this correlates in time with so many American families falling behind. Average household income in 2003 was higher than it was in 1971 when relatively few women were working outside the home, yet household debt in 2003 was much higher. Adding to this puzzle was that in 2003 we Americans spent 32 percent less on clothes, 52 percent less on appliances, and 18 percent less on food than did our parents.

Warren took a close look at this apparent paradox and found that any savings from low-priced consumer goods was more than wiped out by the rising costs of nondurable goods and services: a 76 percent increase in mortgage payments; a 74 percent increase in health insurance costs; a 25 percent increase in tax costs; and, because it barely existed in 1971, a monumental increase in child care costs. In the 1970s, American middle-class families—with only one working parent—spent just half of their income on fixed expenses. Thirty years later, American middle-class families with two working parents spent three-quarters of their income on fixed expenses. This meant that after paying for essentials, middle-class families had a lot less money than they once did to spend on T-shirts and lettuce—certainly far less than economists like Broda imply. This is particularly true of families eking out a living laboring in the fields of cheap consumer goods, but it is also true for middle-class consumers who maintained a shaky grip on shrinking lifestyles by mortgaging their homes to the hilt and incurring record levels of credit card debt.

WHILE PRICE INFLATION is certainly not a great thing for consumers, wage deflation and unemployment are to many minds worse. For retailers, cutting jobs, salaries, and benefits is often the first step on a long, dark road to nowhere. Circuit City, the midsized electronics discounter, offers a harrowing example. In March 2007 the company announced that it was hemorrhaging money and fired without notice 3,400 experienced salesclerks with the reassuring promise that after a ten-week unpaid “cooling-off period” the employees could reapply for their old jobs at lower pay. The company had hobbled through a very, very bad period—sinking from a $140 million profit in the 2006 fiscal year to a $12 million loss in 2007. Naturally, it was hoping a slash in staff and wages would aid recovery.