27 October 2003

Grocery Business Transformation

Just some thoughts on the grocery worker strike in California that has been averted in Arizona...

Krogers, Safeway, and Albertsons (and whatever their "equivalents" are called in other locales) are to K-Mart as some of their newer competitors (including Wal-Mart superstores) are to Wal-Mart and newer upstarts (Kohls). What I'm trying to say is that I don't think labor costs are a factor for their market usurpation, just that new and different grocery models are supplanting their market power. And I believe such a strike in Arizona would be ineffective. I was thinking about this thread and the economist training in my head started churning...

Back in my parents day, grocery shopping was an affair that entailed a circuitous journey. Bread was bought at a bakery, meat at the butcher shop, produce at a produce store and/or farmer stand, and the grocer supplied canned goods and daily perishables (milk and bread). Then the supermarket chains consolidated, grew larger and offered prices that put the small time grocer out of business. And while some people still frequent farmers markets and bakeries, most began to fill the bulk of their grocery list at the Safeways and Krogers. Also, in many states, it wasn't until the early 80s where grocery stores were open late and open all days of the week (in many states, grocery stores were closed on Sundays).

Now, a different transformation is taking place and the Safeway and Kroger type stores are getting squeezed from both ends. First, from the Wal-Mart superstore bit that they publicly acknowledge. But they're getting squeezed from another end too, and I think they may not have a handle on this threat as just like K-Mart, their financial prospects are headed south.

One of the grocery chains here in Arizona pays it's workers (I think they're Union too) higher than the others and you can tell the difference - customer service is better, the cashiers are more knowledgeable and go out of their way to assist customers. They have an toyroom area where you can leave your kids supervised while you shop (not concealed, glass enclosed) and run specials on the weekends where you can get good deals on steaks or even exotic stuff like elk steaks and buffalo meat. They also run an upscale restaurant where you can get gourmet meals and feature humidors and florists... Another chain has moved in that offers organic foods, health foods, wines and bulk foods. These new types of grocery stores have been successful and are popping up all over Arizona. Meanwhile, Albertsons has had to close a few stores and they've strengthened themselves mainly by buying failed stores from other chains, some defunct now.

Similarly, K-Mart was it's own nemesis in it's losing battle with Wal-Mart. Customer service has really sucked in K-Marts for some time and when you cut labor costs, as has been done in retail, it doesn't repair ill will to customers. Wal-Mart never offered CS, just a large size store stocked to the brim with merchandise. And once they clawed their way to the top, they've been even more successful in applying their monopolistic control to keep themselves positioned at the top of the mountain. And they've been willing to stoop as low as they can, relying on slave labor from China and importing Asian H1-Bs for tech positions.

Labor is the business area that is always targeted to extract more profit. But labor is rarely the primary cost. Even in labor intensive industries (like automobile manufacturing), labor costs amount to 20-25% of the product price. In terms of cheap import goods from developing countries, the labor cost can be measured as low as percentage fractionals. Slavery in the new millenium.

The other factor is the increased profit expectations of the new era. In years past, a 5-10% profit margin was considered a solid mark of performance. Now, however, anything less than 20% is considered failure. So the drive to whittle costs has been a jihad for the cheapest labor, no matter the social cost or compensation inequality that results. This does not bode well for future progress. Some believe that all win when the cost of labor goes down but there are many economists, and I share the view, that believe the converse - that lowering the cost of labor retards economic growth and promotes a greater disparity of income. Empirical data has shown time and time again that rising cost of labor is the powerful motivating force encouraging mechanical and technical innovation, and that falling wages ignites a race to the bottom, where economic welfare stagnates as wealth is extracted, not created.


henry ford was right, if you pay your help more they can afford to buy your product lowering the standard of living to make more money is self defeating in the not so very long run.what walmart is doing is very bad for this country. their slave labor business will destroy the american middle class.