The Retail Revolution in America

The traditional retail business in America used to be small outlets owned and run by families, the so-called “mom and pop” shops. Nowadays, their survival is increasingly threatened by big chain stores such as Costco, Wal-Mart and Target that offer one-stop shopping for a wide range of products at low prices. In addition, the Internet has given rise to and many others that offer even the great convenience of shopping at home.

This retail revolution has great and complicated consequences. It is driven by low cost, convenience, and a wide offering of products. The consumers seem to like this new way of shopping, contributing to the success of the big chains. The push for lower cost has led the big retailers to vertically integrate their business to include distribution and contract production. They have extended operations to many foreign countries where costs are low. Thus the big American retailers have joined the manufacturers in becoming important agents of globalization and outsourcing.

Wal-Mart is the best-known case of globalized retail. It operates more than 8500 stores under 55 different names in 15 different countries. With annual sales of $420 billion, its bargaining power over the suppliers looks intimidating. Since getting a shelf space in Wal-Mart stores guarantees great exposure, this retail giant can dictate the lowest price, yet is still able to find willing suppliers to fill its shelves. Due to cheap labor cost, Chinese manufacturers dominate the retailer’s supply chain. We now have a situation where a giant retailer directly controls the methods of production of many foreign manufacturers by simply insisting on low prices. In order to secure a contract with the retail giant to deliver the lowest price possible, the suppliers must adjust their factors of production regarding labor, materials, quality, working conditions, even the observance of environmental rules. Never before has a retailer acquired so much power over so many suppliers worldwide.

Is this good or bad? It depends on the conscience and integrity of the giant retailer. It can use its bargaining power to help create better working conditions and enforce cleaner environmental rules; or it can just focus on raking bigger profits year after year. As far as the American consumers are concerned, the retail revolution has helped tamed inflation by importing products of lowest costs made elsewhere. On the other hand, the contracting of production with suppliers in low-cost countries has added to the painful job losses in America. In China where most of the big retailers sign supply contracts with local manufacturers, the increase in employment is seen in the large context of high economic growth and foreign investments, and fast degrading environmental conditions.

Another well-known example is McDonald’s with annual sales of $24 billion, and 33,000 fast-food restaurants worldwide. Because food is perishable, McDonald’s relies mainly on local suppliers rather than overseas to deliver to its outlets. Hence outsourcing represents less of a problem of job loss. Still, the bargaining power of McDonald’s is intimidating due to its large retail network. One report says that the fast-food giant plans to open 20,000 more restaurants in China alone over the next decade. Recently, McDonald’s comes under increasing criticism for the fat content of its food and the sugar content of the soft drinks it sells, which is not healthy for the public especially the young. It is also criticized for insisting on a particular strain of potatoes that makes long French fries. This encourages potato growers to gravitate to a monoculture to satisfy McDonald’s demands. The monoculture practice weakens the potato crop and makes it less resistant to weather change and plant disease.

A third example is Coca-Cola (annual sales $35 billion). The uniqueness of this company lies in its high-profit but low-price product of carbonated sugar water with a taste and a legendary brand name that capture many people. The rising popularity of bottled water fails to make a dent in its sales because the company has the vision to expand into this new business through acquisition. Coca-Cola establishes bottling plants overseas close to the local consumer markets to take advantage of lowest cost. In so doing, it comes into conflict with the local population in areas of tight water supply, as exemplified in India. There is also the problem of Western culture carried by the brand that some areas of the world find it hard to accept.

The retail revolution brings both positive and negative impacts with far-reaching consequences. It puts increasing responsibility on the giant retailers to find a way to improve their image, and better the conditions in places where they do business, for the simple reason of their size and tremendous bargaining power. As for a big retailer focused simply on profits, we should question what kind of public interest is being served despite all the good things that the retail giant claims to have done.

(April 2012)


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