Sunday, July 22, 2007

Inefficiency and modern retail

by Athanasius

"If a peasant can grow a cabbage himself, cook it himself, and eat it himself, he has so far attained the maximum of efficiency and certainly the maximum of economy. Organization means that he must trust the cabbage to strangers on a train, strangers on a trolly, strangers in a shop, until by infinite financial complications he can get it exchanged for a turnip or a cauliflower; and at every one of those stages it is in danger from every one of those strangers. I am not saying that he should not change his cabbage for a cauliflower, or that the exchange could be made without some organization. What I say is that if there is some organization there will be some inefficiency; and if there is more Organization there will be more inefficiency..... That luckless vegetable has been lost in a forest of men, as trees walking; of men of the sort summarized as mostly fools; of human trees which are at least tolerably green. It is almost a wonder that the peasant does not preserve the vegetable in a shrine instead of putting it on a dish."

-Chesterton, On Organization and Efficiency

It seems to me a strange thing, that in our day in age people identify bigger production and business with more efficiency. The truth is, as anyone on the inside will tell you, it brings exactly the opposite.

For example, since my exodus from education, after a short stint as a secretary I ended up in retail, and now work as an assistant manager in a large retail organization, not by choice but by necessity. Now the belief is that large grocery stores and large retail operations such as Walmart and Target get more goods into their shops than the small time grocer or hardware store of old and carry more variety, and do so more efficiently. It is a belief about as firmly rooted in reality as Santa Clause or the Tooth Fairy. Behind the receiving doors of huge stores, waxed floors and massive displays of toilet paper, there is money lost left and right, squashed underneath the boots of receivers, rotting in unopened boxes, destroyed by carelessness, not stocked through sloth, and a dozen other things which cause the profit margin of the store to go down. Let's take Walmart, the company I am unfortunate to find my employment with at this time. There are stores that do over a million dollars in sales each week yet lose money! The second problem is of course what Chesterton described, the forest of human hands that a thing must pass through before it gets to your cabinet at home. Many of the people who work under me are good people, in as much as they know their own business. Yet they don't see the big picture, and if they have no role in the bigger scheme they couldn't conceive of it if you explained it to them. Stockers do not understand that they are creating profit for the department, as I do who run that whole side of the store. They understand cookies come out of box and onto shelf. If some get damaged along the way, oh well. Likewise in the warehouses that supply stores such as Walmart. They do not look at the sales figures that I do every Monday morning and plan displays, and carefully handle merchandise so it arrives intact. It is crammed onto a truck, often labels are incorrect so the store is billed either too little or too much for the merchandise it is not receiving (which messes up counts and ordering and causes sales to be missed) and lots of things are broken. The only way for this process to be more profitable were if I were to load the truck myself, taking care that the right labels are on the right products, then to speed ahead of the truck and unload it myself so items don't get damaged or lost or sent to the wrong department which causes innumerable problems, then to stock the shelves myself and not eliminate displays which have been carefully planned as the stockers do in order to put up a pallet of canned corn that was mis-sent. All of this on top of my other duties of ordering, etc. As we know, the laws of physics and human anatomy make this impossible!

Chesterton's point is equally valid today as it was in his own time, and arguably as valid in any time. Even if all of the stockers, all of the receivers and warehouse clerks were equally as competent and knowledgable about how their pay checks are written as I, and all worked well, there would still be inefficiency simply due to the size of the operation. Waste would still occur, product would still be broken, misplaced, dropped, and stores would still be "shrinking" (losing money) by the hundreds of thousands and sometimes millions at the end of the year. I know of one Walmart in our district that lost over 2 million dollars from the process I have just described, before we count theft. (There is also the sheer waste of resources and products which is almost inhuman, but that should be left for another time). Increase the size of the operation and you only increase the inefficiency and waste. When you calculate the expenses involved in running the business, salaries, electric bills, construction, taxes/rent, and innumerable other expenses, the store just barely pays for itself in many cases, and the profit margin is small. If one takes that profit and starts doling it out for all of the errors I mentioned above from the inefficiency of the supposedly efficient big business, the profit shrinks considerably.

When faced with this state of affairs, we have to ask, is big business really better? Would it not be smarter, more efficient and less wasteful to have a number of small grocers who themselves control their stock and ordering rather than 4 Super Walmarts crowding out a 20 mile radius? Let us consider: The small grocer is not prone any less to inefficiency, but it is on a scale ridiculously smaller. He drops a bag of flower and loses 2.50. Walmart or the Supermarket drops a pallet of flower and over a thousand dollars, not just in what was paid but what was not paid, as in the retail markup. The big store loses an astronomical amount of money, paid back to him by open credit and the large debt he is allowed to run. The small grocer loses a small amount easily paid back to him. Likewise, the small grocer, if there is also a local rather than global economy to support him, is dealing with less and less people to bring him produce, meat products, beverages, etc. This allows the individual to control the passage of goods, and when the number of hands it flows through is smaller, the number of accidents and mistakes is smaller, consequently more money is made overall. Secondly the small grocer, being in control of his stock, can meet the demands of customers better. In a large retailer, products are determined at a district level, by a suit in a corner office crunching sales figures and determining what stores ought to carry. The small grocer can place an order for that which he does not normally carry, if not recommend another store entirely.

Lastly, the small grocer has as his aim to provide for his family, and consequently to stay in business. The large retailer, by such names as we know them, namely my employer, has as its aim to put others out of business. There is an owner, who normally lives in another state from where the large business is located, and he wants to expand his market share to unbelievable levels. This is not only true of Walmart, but it is true of Target, it is true of every Grocery Store regardless of whether it is named "Albertsons", or "Kroger", or "Stop & Shop", or, if you live in the southeast "Piggly Wiggly" (note to California readers that is not a joke! That is the largest chain in the southeast). However, for a Catholic that should prevent a problem, not in the least because of Catholic social teaching, but also if we consider an old examination of conscience. One part, under the 7th commandment, admonishes the man considering his conscience: "Have I done anything to knowingly destroy or assist in destroying another man's business so that he can not provide for his family in order to profit myself." That is precisely what Capitalism does, and encourages one to do. Thus, the smaller grocer, concerned for himself and his family, is concerned with his own affairs. The large one with everyone else's and how to destroy them. As such, Distributism, which aims at the smaller quantity, is more efficient for the salvation of the souls, whereas Capitalism is more efficient in creating greed and infinite perils to the soul.


Kevin said...

It is a curious tactic to argue that large scale capitalism is not efficient. I have to confess I don't know what you mean by efficient. How is it that Walmart is a threat to other stores if it is so inefficient? Somehow it is charging lower prices. If efficiency is measured by the TOTAL cost of bringing the product to the customer and Wal-Mart is not efficient, how on earth can they keep putting other places out of business?

Athanasius said...

I have to confess I don't know what you mean by efficient.

Then you missed the point of the article!

It isn't about how much you churn out, it is about both quality and waste, it is about what is destroyed rather than what is produced. If Walmart was an efficient company it the stores in my district would not have lost more in shrink than they brought in through sales. Furthermore they would not throw away millions of dollars worth of food every day while people within our own cities (forget China) starve.

To your second point Walmart doesn't keep bringing low prices, that is the dirty secret and I know that because I comp (change prices to compete) with other stores in the district all the time, by actually going into those stores and comparing the prices, and I mean every store. On certain furniture items, yes, Walmart's prices are lower because the goods are made by Thai and Chinese slave labor. However, produce is comparable to Trader Joe's which is the high class store and perceived to be more expensive. In fact many times they beat Walmart's prices hands down. Here in Southern California we have three major chains: Albertsons, Ralph's and Vons. Albertsons is owned by the same company that owns Kroger in the mid-west. Now the dry grocery prices are at or about the same, and on select items Walmart tends to have a lower price. Otherwise, all the sales gimmicks are just advertising illusions. Trust me, part of my job is to create those illusions. It is just like being a magician. We have nice flashy red signs, showing you what the price was, decked out and arrayed in various ways. You know you are saving 20 cents on tomato sauce compared with albertsons, and 10 cents on peaches, and 40 cents on an automatic shower sprayer that they have at Vons, then you look up and see a Save Even More sign over bottles of tide with a $10 price next to it and up in the corner it says "Was 12.83". It gives you the impression you are saving (apart from the commercials and a nice yellow smiley face). If you walked into Ralph's however you would see the same Tide for 9.99. Likewise the same 5.99 rugs are 5.99 or lower at Target. Why? Now there is nothing evil or immoral about that with respect to the other companies, because Ralphs and Albertson's both do the same thing with their savings card illusions. That's just another gimmick. Instead of store initiated sales or coupons, they tell you that with your card you will save "x" on ice cream. It is supposed to make you think you are saving!
To answer your 3rd question it is easy credit, Walmart, because it owns more property (which of course it doesn't own, the company is 300 million dollars or more in debt), can garner bigger and bigger loans and survive temporary price shortfalls thanks to being sustained by big banking. Banks are betting on Walmart surviving longer than the mom & pop store for sure, and for the grocery store chain, so it will loan Walmart astronomical amounts of money. Sometimes town districts will initiate taxes to pay for Walmart's store opening because it perceives the tax revenue it will receive through it. Better not get me started on local government, and the idiots in small towns who tolerate them.

James said...

I agree with your argument that small is preferable to big business. However, many, if not most, of the Piggly Wiggly stores that you referenced are small businesses owned by families and individuals. The Piggly Wiggly purchasing and distribution allows these small businesses to compete with the Walmarts and Targets. Broadline distribution is efficient (i.e. low cost) in many ways and is the best solution we have until there is a sufficient small, local, and diversified business prescence to take the place of the broadline model in terms of producing and delivering products to market. And, as Kevin points out, Walmart is profitable. However, I would certainly agree that the big-box stores have a negative impact on communities (families). I vote with my wallet and don't shop at Walmart. Keep spreading the word.

Kevin said...

Don't forget the value of having a large selection of goods under one roof. It costs you money and precious time to drive from one store to another. When you can get everything in one place, that is an added value for the consumer.

Tom said...

ut wal-mart is not profitable... yet. They are PREDICTING that, after huge amounts of growth, they will be profitable x amount of years in the future, and since they are such a large corporation, banks give them loans to cover any losses in the years between. This is how almost every large business is run these days! In fact, no one expects a company to make a real profit (more than enough to keep the individual store afloat) for around 15-10 years. That's why in order for a large corporation to get major bucks in loans, they have to provide the banks with a detailed profit geared plan, and the employees are given goals to fulfill in sales revenues every day/week/month/quarter/year so that they can prove they're sticking to that plan.

Now, Wal-mart at the moment is very much in debt, and after the huge explosion of building new super-centers all over southern california and in some other states, they are not even EXPECTING to make large profits immediately. They have lost much this year, their stock is at an all time low (for investors who believe in wal-mart, now would be the time to buy stock, if you can believe they will eventually make big profits soon), and they are constantly hiring and then letting go of employees because they cannot afford to pay them. According to what I've been hearing from a share-holder in the company, the numbers don't look good at all for Wal-mart at the moment, and the future doesn't look great either.

In fact, after the huge idea of super centers has proven bust, wal-mart's new strategy for the future is smaller, local stores! Interesting... And learnt in so short a time.

Athanasius said...

Exactly. Everything I've been saying and more at our district meetings.

James said...

Again, I would agree with your sentiments concerning many of the undesirable effects that Walmart and other giant retailers have on our society. But, the fact is that Walmart is profitable. Their $33 billion in debt should also be viewed in light of $345 billion in sales, $151 billion in total assets of continuing operations, $61 billion in shareholder equity, with an 8.8% return on assets and a 22% return on shareholder equity (fiscal year ended 1/31/07). And, they would not have paid a $.22 per share cash dividend if they were losing money. To put this in perspective, most people who buy a house have a negative net worth after the loan closes. Walmart has a very healthy balance sheet compared to most businesses and even families. How they achieve this (through the use of credit) you can debate.

It's important that we look at this situation objectively and, like it or not, see Walmart for what it is - a profitable business. The significant threat that Walmart and the other giants pose is not exclusive to their predatory pricing practices at the community level. The means by which all the big retailers profit is through reducing their cost of sales. This can be accomplished through paying low wages to employees or through purchasing products at a lower cost to name a few. And it is this latter tactic which has driven domestic production of consumer and capital goods to the east where labor is ridiculously cheap. The loss of our manufacturing base is the looming crisis that will ultimately hurt the family and our country. All nations that have prospered have done so through a strong manufacturing base. We are losing ours – thanks to our addiction to the low-cost goods sold by the giants. And, as you have pointed out, much of these prices are not that much lower.

I would urge those with a sincere desire to change the present state of affairs to a sustainable, family friendly business environment - one that is marked by the widespread ownership of the means of production - to be objective when arguing for such a system. One reason the Distributist approach has failed to take hold is that its advocates have not put forth credible arguments. Again, like it or not, we must work to win converts by "selling" them on the merits of a distributsist model and demonstrating through objective arguments why the other models are not sustainable. Most importantly, at some point, the textbooks and debates must be laid aside and the workshop opened, the seeds sowed in the soil of the family farm, and the small shop opened for business. Until this happens nothing will change.

Kevin said...

Quoting Tom:
"They are PREDICTING that, after huge amounts of growth, they will be profitable x amount of years in the future, and since they are such a large corporation, banks give them loans to cover any losses in the years between. This is how almost every large business is run these days!"

Tom, there is an extraordinary amount of the bank's money on the line here. Do you think the banks are being foolhardy with their money? How long do you think a bank would be around if they couldn't distinguish which businesses were likely to be able to pay back a large loan?

Kevin said...

Quoting Tom:
" they are not even EXPECTING to make large profits immediately. They have lost much this year, their stock is at an all time low "

Tom what do you mean by "all time low"? I took a good look at their stock price history and I can't make heads or tails of this statement. Their stock is about $48 right now. It was below $45 in late summer 2006, and it dipped that low briefly in 2005 as well. It was never above $20 before the late 90s.

Kevin said...

Quoting Athanasius:
"Furthermore they would not throw away millions of dollars worth of food every day while people within our own cities (forget China) starve."

This quote serves to bolster my overall theory that distributist thought is characterized by a total and complete lack of perspective.

Obesity is a bigger health risk to the poor than malnurishment. Think before you type.

Kevin said...

Quoting Athanasius:
"To your second point Walmart doesn't keep bringing low prices, that is the dirty secret and I know that because I comp (change prices to compete) with other stores in the district all the time, by actually going into those stores and comparing the prices, and I mean every store."

This only goes to show, however, that there is real competition with regard to the prices of commodities, and people are always looking to go to the store with the bargains. All the stores are scurrying to undercut their competitors, or to create the illusion that they are doing so. If Wal-Mart was truly inefficient with regard to the total cost of bringing the product to the customer, it would add up. They wouldn't be able to come close to competing with the local places that are supposedly more efficient. No matter how much leverage they have through debt, if their total cost of delivering the goods is unusually high, this would come through in the kind of research that their potential lenders do. Banks aren't in the business of throwing money away.

So to answer your assertion that big stores waste more, I think something doesn't add up. The smaller stores probably waste just as much or more, relative to their size, only in different ways.

Anonymous said...

Kevin said...
"Obesity is a bigger health risk to the poor than malnurishment (sic). Think before you type."

Obesity IS malnourishment. When people eat nutritionless white flour type junk food from demineralized soil, they are hungry more often than they would be if they ate nutritional food. Many low income people perceive they are getting a bargain from junk food because the price is lower. But it isn't really cheaper per nutrient because it contains nutritionless filler. One more argument for buying locally grown and produced fruit, vegetables, bread, meat, poultry, etc.

Kevin said...

Besides arriving a year late to the conversation, you are just changing the subject and imagining that I've said something other than what I've said.

Anyway I'm not promoting a junk-food diet.

Anonymous said...

"Tom, there is an extraordinary amount of the bank's money on the line here. Do you think the banks are being foolhardy with their money? How long do you think a bank would be around if they couldn't distinguish which businesses were likely to be able to pay back a large loan?"

I know I'm a couple years late to the discussion, but in light of recent events, this post amused me. A lot.

Unknown said...

Having been in small business myself, and working for a large corporation (Bed, Bath, & Beyond) I see the difference in efficiency. If large corporations were not propped up not only through credit, but by government subsidy, incentives, and tax credits, many (not all) would perish. Small business must shoulder all the burdens of regulations, rules, and taxes but get no assistence from the state and are harshly viewed by banks. Throw in the obscene rents in commercial real estate and you have to be already wealthy to even start a business. It is ridiculous!

Do we really think a good profit is less than 1%? That is what BBB's is. Out of $1.91 Billion in sales, that get $151 million! That is an abysmal profit margin! Small businesses that manage to survive all the regulations and taxes generally do better margins than that, showing their overall greater efficiency. I knew an owner of a Hallmark store who, out of $700,000 in sales, had a net of $110,000. Big margin difference, is it not?

I am often amazed when I reflect that my great-grandfather came here from Portugal at the age of 13, and by 28 had and financed his own fishing business. Certainly not an accomplishment most of us could make, even after working for 15 years. An indication of how much the survile state has obliterated opportunities to make a living in a small business, rather than turning them into expensive hobbies, as they have.