Cheap (9 page)

America in the 1970s could not have been more receptive to the concept of swapping style, variety, and durability for price. “Stagflation,” a bitter brew of unemployment and inflation coupled with an unnerving energy crisis, had eroded consumer confidence. Gas lines were long, tempers were short, and everyone was trying to save a buck. As labor unions lost traction, the Keynesian ideal of well-paid workers powering a thriving mass economy in which all could share and prosper began to falter. Late in the decade, President Jimmy Carter warned “too many of us now tend to worship self-indulgence and consumption” and that the “piling up of material goods” led to an “emptiness of lives which have no confidence or purpose.” Carter found particularly noxious “a mistaken idea of freedom [as] the right to grasp for ourselves some advantage over others.”

His warning came too late: For better or for worse, that “mistaken idea” had already taken hold. Gradually the consumer had become disassociated from the worker/citizen, as though those who consumed were an entirely separate species from those who worked or voted. Warehouse clubs, off-price retailers, and specialty discounters in electronics, toys, office supplies, and home improvement swelled the discounting ranks, while mass merchandisers such as Sears, Ames, The Limited, and the Gap began to operate on the discount model. In announcing its ambitious plans for Kmart to its stockholders, Kresge characterized discounting as “the fastest growing force in retail merchandising. . . . These self-service stores, eliminating most customer services . . . in economically constructed but functional buildings, have gained impressive public acceptance.” By the decade’s end, Kmart and the other “big three” discounters surpassed even supermarket chains in technological and organizational integration, and their approach was adopted by a growing number of retailers. The line between the discount industry and “full price” retailers had blurred long ago, with retailers of every stripe promising to sell at the lowest possible price. This led to still fiercer competition, a further lowering of prices, and a smackdown. Department stores in particular had difficulty surviving the onslaught of low-price competitors. Their inability to adapt to changing consumer tastes and the emergence of new retail channels that targeted specific market segments—the so-called category killers in hardware, toys, and furniture—deeply eroded their market share. While in the 1960s and 1970s most clothing was sold in full-service department stores, by 1990 such stores accounted for only 29 percent of sales. Many family-run operations were wiped out, and even giants such as Macy’s, Gimbels, Saks Fifth Avenue, Federated, and, yes, the venerable Wanamakers filed for bankruptcy. Of the forty-two department store chains in operation in 1980, only twenty survived that decade. Advances in information technology, further consolidation in the retail sector, and the rise in global competition converged, shifting the power center still further away from the manufacturer and toward the merchant. Major discounters strove to squeeze out still more efficiencies by reorganizing their entire supply chain, from raw material to customer. Previously, planning inventory was guesswork. To avoid running short of desirable items and alienating customers, many merchants bought in large quantities and if sales were slower than expected, “pushed down” the goods by stepping up advertising and price cuts. Emerging information technologies removed some of the uncertainty by allowing retailers to track sales, monitor inventories across stores, and take deliveries from a centralized warehouse. One ingenious invention in particular, the bar code, was transforming.

Entire books have been devoted to extolling the rich technical history of the bar code and its myriad virtues. This will not be one of them, but it’s tough to overstate the impact of this ingenious innovation. Bar codes were first popular with supermarkets, which had relatively few items to tag. (The first product branded with a Uniform Product Code [UPC] was a double pack of Wrigley’s chewing gum in 1974.) Department stores, which had literally hundreds of thousands of different items (think colors and sizes in addition to brands), were understandably more circumspect about adopting the technology. But once Kmart adopted bar codes in the early 1980s, Wal-Mart and a number of other chains caught the fever, pressuring suppliers to tag all their products with the little black bars before delivering them to stores or warehouses.

Scanners made it possible to monitor customer preferences in “real time” so that discounters could quickly sort the slow-moving merchandise from the fast moving and fine-tune their orders. Less merchandise loitering in warehouses meant lower real estate costs, fewer handling costs, and higher inventory turnover, resulting in a smoother flow of capital. The widespread automation of discount retailers’ distribution centers in the 1990s created an environment in which all but the smallest retailers were forced to update their supply chain technology to remain even remotely competitive. Wal-Mart grew famous for its technological wizardry, and for this it was richly rewarded: In 1992, three decades after Sam Walton opened his first store, the chain became the nation’s largest private employer and the largest retailer in the world with $191 billion in revenue.

American productivity—the level of output per hour worked—grew from 1996 to 2000 at nearly double the rate of the previous two decades. Productivity growth in the retail sector grew even faster. Several factors contributed to this: the almost universal adoption of computers and related information technology, a better educated and trained workforce, a high demand for goods, and the fierce battle for primacy by competitors here and abroad. Through all this Wal-Mart surpassed all takers by focusing relentlessly on a single core value: low price. It undercut local competition by making notoriously shrewd deals with suppliers and empowering local managers to react instantly to price fluctuations in their markets. This unflinching focus on low price gave the chain an edge with which no small dealer could compete and that even competing discount chains—Kmart in particular—found daunting.

Discount chains not only put untold numbers of small retailers out of business, they reshaped the American demographic. Since retail traditionally had one of the lowest median rates of pay, the expansion of discount retailers that paid even lower wages contributed to a spurt in poorly paid jobs. Discounters tended to flatten the employment hierarchy that once characterized full-service department stores such as Macy’s and Bloomingdale’s, limiting access to the career track leading from stock clerk to salesperson to buyers and managers. At discount stores the term “career ladder” no longer applied as an ever-growing base of minimum- and low-paid workers supported a much smaller number of loftier posts. Workers did and do rise to management status at discount chains, but fewer workers and—outside of top management—at lower pay.

Harvard cultural historian Lizabeth Cohen has pointed out that mass-market consumption offers the
façade
of social equality without forcing society to go through the hard work of redistributing wealth. Low prices lead consumers to think they can get what they want without necessarily giving them what they want—or need. The ancient Roman phrase for this is
panem et circenses
, bread and circuses, the art of plying citizens with pleasures to distract them from pain. Today, low prices are the circus.

In the postwar boom years of 1947 to 1973, real median family income doubled, as did the value of what the typical worker produced. Fully one-third of Americans belonged to labor unions that secured jobs, benefits, and wages, and those who didn’t benefited as well because nonunion employers strove to keep workers happy to dissuade them from organizing. A middle-class family was usually supported by one earner, typically a skilled or semiskilled factory worker, clerk, or manager. Income distribution leveled thanks to a progressive tax structure—top earners paid a marginal 91 percent under Republican president Dwight D. Eisenhower, and 78 percent under Democrat John F. Kennedy—and a shuffling of the corporate hierarchy that raised the wages of low-level workers.

 

 

 

FROM THE 1970S
through 2008, the national product tripled and Americans were treated to a vast array of nifty new gizmos: computers, cell phones, Hummers, hybrids, big-screen high-definition television, MP3 players, digital cameras. The list goes on and on. Prices for many of these and other goodies dropped, in some cases dramatically. Yet at the same time most of us felt as though we were losing ground, not gaining it. Here is why: All that productivity did not benefit
us.
The medium family income had been flat for years, and the youngest earners in particular were hurting. It is well known that even before the crash of 2008, Americans born in the 1990s were in danger of becoming the first generation in history to do less well than their parents, and that families of workers born in the 1980s were already in a bind. Except for women with college degrees, the earnings of workers age twenty-five to thirty-four were lower then than they had been a generation previous. Young men without a college degree had lost the most with an almost incredible real-income decline of 29 percent since 1975. Meanwhile, the rich got richer and the super rich got richer still: Eighty percent of net income gains went to the top 1 percent of earners, boosting their share of total income to levels not seen since the Great Depression. It’s an old, familiar story and one that left the vast majority of Americans holding the bag—and holding the door for the uberwealthy. In this “new gilded age,” CEOs earned on average eight times as much per dollar of corporate profits as they did in the 1980s. To cite one not entirely random example, before retiring in February, 2009, Wal-Mart CEO Lee Scott Jr. took home in his biweekly paycheck what his average employee earned in a lifetime. The Wal-Mart board of directors was confidant Lee was worth every penny. Some economists agreed, arguing that the low prices at Wal-Mart and other discounters benefited poor and low-income consumers. A Wal-Mart-commissioned study by independent think tank Global Insight pronounced that Wal-Mart saved American families $2,500 a year in 2006, a figure widely reported by the news media and touted by the company. There were quibbles that the report was built on faulty statistics and self-interested analysis, but there was no question that it had a profound impact on public perceptions of the company, which in 2007 changed its slogan from “Always low prices” to “Save money. Live better.”

The waning years of the last millennium brought profligate spending in a time of reduced means. There were more tempting outlets for disposable income than ever before, and more payment schemes and forms of credit with which to buy them. President George W. Bush’s stirring call to spend after the fall of the Twin Towers in New York City on 9/11 seemed surreal to those Americans who recalled President Carter’s 1979 “sweater speech,” in which he donned a cardigan and asked Americans to turn down their thermostats to conserve energy for the sake of national prosperity and security. National leaders cranked up mass consumption through tax cuts and other spending stimulants, while taunting countries such as Japan where the culture promoted saving over spending. With the real price of many consumer goods only half of what they were a century ago, Americans worried less about accumulating debt than about the lost opportunity of not buying. Obsessed with “getting ours,” we sometimes failed to notice or acknowledge the real price we paid for all those marvelous bargains.

In a carefully constructed consideration of Wal-Mart’s impact on the retail sector, Arindrajit Dube and his colleagues at the Institute for Research on Labor and Employment at the University of California at Berkeley focused on 1992 to 2000, the years when the chain expanded outside the South and into major metropolitan areas across the nation, growing from 1,800 to 2,500 stores. By the end of the 1990s more than half the counties in the country had at least one Wal-Mart, with three-quarters of the newly built stores located in urban counties. Dube found that the opening of a Wal-Mart store lowered wages and benefits in the surrounding region by up to 1 percent, with grocery store workers losing about 1.5 percent of their income. At a national level, the study found that thanks to Wal-Mart the total earnings of retail workers declined by $4.5 billion, with most of these losses concentrated in metropolitan areas. Dube acknowledged that Wal-Mart made low-priced goods available to these workers and to their neighbors, but pointed out that since wage and benefit savings are not the main part of the cost advantage for the company it could (conceivably) “continue to pass on most of these savings while paying higher wages and benefits.”

Lee Scott did not agree. Wal-Mart, the nation’s largest employer with 1.8 million employees worldwide, is not in the business, he said, of providing secure jobs on which to build a life or necessarily a career. “Some well-meaning critics believe that Wal-Mart stores today, because of our size, should, in fact, play the role that it is believed General Motors played after World War II. And this is to establish this post-world war middle class that the country is so proud of. The facts are that retail does not perform that role in this economy.”

That’s a stark assessment and an honest one. Each year
Fortune
magazine ranks companies by size, profitability, and a number of other parameters. In 2008, Wal-Mart ranked number one in all but one of the relevant categories, including “high profit growth,” “high revenue growth,” and “high returns to investors.” It did not rank number one or number two or at all under the category of “best company to work for.” Wal-Mart may not be great to its employees, but it is great to its investors. In its announcement,
Fortune
explained how the company triumphed during a period of economic difficulties and looming recession: “A face lift and even lower prices kept the world’s largest retailer afloat in a troubled economy. Staring down the barrel of brutal fourth-quarter retail forecasts, CEO Lee Scott dramatically cut prices on 15,000 items—including popular toys and electronics—by 20% more than usual to lure holiday shoppers. That rocked the industry, pressuring other retailers to squeeze already tight margins.”