[Vision2020] Re: Joan and her arguments against a WalMart Supercenter

[Andreas Schou]

I realize that I missed two points.

First, I promised to explain how Wal-Mart forces its suppliers to sell
goods at low margins or even at a loss?

Imagine you are a relatively small supplier. Wal-Mart approaches you
with an order that exceeds your capacity. You, being a good business
owner, do an economically sensible thing and take out a loan for
capital investment. If Wal-Mart has a five year purchase contract,
it's not at all unreasonable to take out a ten year loan for slightly
more than the contract Wal-Mart owner, assuming that Wal-Mart will
likewise increase their loans.

Wal-Mart may demand an exclusivity contract, or at least exclusivity
for certain products. But this is your big break! All it does is
prevent you from seeking out other purchasers for your goods, or at
least to give Wal-Mart a better price than other buyers*.

When it's time for you and Wal-Mart to renegotiate your contract, if
you're a small supplies, Wal-Mart will demand a smaller margin for
you. In many cases -- say, for instance, the case of the three-dollar
Vlasic pickle jar -- they may demand a higher margin than the supplier
can offer. Wal-Mart is likely to ask you for your private financial
records, tell you your margins are too high, and tell you to reduce
them.

You're a small supplier. Your loan payment is due. Wal-Mart is 90% --
or 50% -- or 30% of your business. If that gets cut out, your widget
factory is operating at less than capacity. Wal-Mart offers you a deal
that may put your margins to very little -- or into the negative --
but you might be able to make it up in the next fiscal year.

Not everything is bad. You've still got good growth numbers. You've
got great sales numbers. In a normal world, your books are reporting
that you're going through a normal period of capital investment that's
eating up your profits, except -- if Wal-Mart is your only potential
buyer, or has half of your market -- you'll never be able to wield
enough market leverage against Wal-Mart to worm your way out from
under them. Those growth and sales numbers mean nothing, because -- so
long as Wal-Mart is cramming your margins down -- those numbers are
never going to produce profits. And when Wal-Mart decides that your
project would make a good loss-leader, your business is going to be
basically entirely hosed.

Also, I basically completely forgot to finish this paragraph. I fired
my editor. It shouldn't happen again. It should read:

By "worst" you mean "businesses that can't compete with Wal-Mart."
Wal-Mart will not wipe out the worst 5% of corporate citizens -- it'll
wipe out the businesses that refuse to play by its rules. Many of
these will be uncompetitive. Others will be suppliers that don't
cooperate. That's a big problem.

-- ACS

* This is actually illegal under the Robinson-Patman Act, which has
gone entirely unenforced during the Bush Adminstration.