This is a very long read but it should be required reading!
Please take the time to wade through this - makes no difference where you live or what you do - read this!
The Wal-Mart You Don't Know
> >
http://fastcompany.com/magazine/77/walmart.html
> >
> >The giant retailer's low prices often come with a high cost.
> >Wal-Mart's relentless pressure can crush the companies it does
> >business with and force them to send jobs overseas. Are we shopping
> >our way straight to the unemployment line?
> >
> >A gallon-sized jar of whole pickles is something to behold. The jar
> >is the size of a small aquarium. The fat green pickles, floating in
> >swampy juice, look reptilian, their shapes exaggerated by the glass.
> >It weighs 12 pounds, too big to carry with one hand. The gallon jar
> >of pickles is a display of abundance and excess; it is entrancing,
> >and also vaguely unsettling. This is the product that Wal-Mart fell
> >in love with: Vlasic's gallon jar of pickles.
> >
> >Wal-Mart priced it at $2.97--a year's supply of pickles for less
> >than $3! "They were using it as a 'statement' item," says Pat Hunn,
> >who calls himself the "mad scientist" of Vlasic's gallon jar.
> >"Wal-Mart was putting it before consumers, saying, This represents
> >what Wal-Mart's about. You can buy a stinkin' gallon of pickles for
> >$2.97. And it's the nation's number-one brand."
> >
> >Therein lies the basic conundrum of doing business with the world's
> >largest retailer. By selling a gallon of kosher dills for less than
> >most grocers sell a quart, Wal-Mart may have provided a ser-vice for
> >its customers. But what did it do for Vlasic? The pickle maker had
> >spent decades convincing customers that they should pay a premium
> >for its brand. Now Wal-Mart was practically giving them away. And
> >the fevered buying spree that resulted distorted every aspect of
> >Vlasic's operations, from farm field to factory to financial
> >statement.
> >
> >Indeed, as Vlasic discovered, the real story of Wal-Mart, the story
> >that never gets told, is the story of the pressure the biggest
> >retailer relentlessly applies to its suppliers in the name of
> >bringing us "every day low prices." It's the story of what that
> >pressure does to the companies Wal-Mart does business with, to U.S.
> >manufacturing, and to the economy as a whole. That story can be
> >found floating in a gallon jar of pickles at Wal-Mart.
> >
> >Wal-Mart is not just the world's largest retailer. It's the world's
> >largest company--bigger than ExxonMobil, General Motors, and General
> >Electric. The scale can be hard to absorb. Wal-Mart sold $244.5
> >billion worth of goods last year. It sells in three months what
> >
> >number-two retailer Home Depot sells in a year. And in its own
> >category of general merchandise and groceries, Wal-Mart no longer
> >has any real rivals. It does more business than Target, Sears,
> >Kmart, J.C. Penney, Safeway, and Kroger combined. "Clearly," says
> >Edward Fox, head of Southern Methodist University's J.C. Penney
> >Center for Retailing Excellence, "Wal-Mart is more powerful than any
> >retailer has ever been." It is, in fact, so big and so furtively
> >powerful as to have become an entirely different order of corporate
> >being.
> >
> >Wal-Mart wields its power for just one purpose: to bring the lowest
> >possible prices to its customers. At Wal-Mart, that goal is never
> >reached. The retailer has a clear policy for suppliers: On basic
> >products that don't change, the price Wal-Mart will pay, and will
> >charge shoppers, must drop year after year. But what almost no one
> >outside the world of Wal-Mart and its 21,000 suppliers knows is the
> >high cost of those low prices. Wal-Mart has the power to squeeze
> >profit-killing concessions from vendors. To survive in the face of
> >its pricing demands, makers of everything from bras to bicycles to
> >blue jeans have had to lay off employees and close U.S. plants in
> >favor of outsourcing products from overseas.
> >
> >Of course, U.S. companies have been moving jobs offshore for
> >decades, long before Wal-Mart was a retailing power. But there is no
> >question that the chain is helping accelerate the loss of American
> >jobs to low-wage countries such as China. Wal-Mart, which in the
> >late 1980s and early 1990s trumpeted its claim to "Buy American,"
> >has doubled its imports from China in the past five years alone,
> >buying some $12 billion in merchandise in 2002. That's nearly 10% of
> >all Chinese exports to the United States.
> >
> >One way to think of Wal-Mart is as a vast pipeline that gives
> >non-U.S. companies direct access to the American market. "One of the
> >things that limits or slows the growth of imports is the cost of
> >establishing connections and networks," says Paul Krugman, the
> >Princeton University economist. "Wal-Mart is so big and so
> >centralized that it can all at once hook Chinese and other suppliers
> >into its digital system. So--wham!--you have a large switch to
> >overseas sourcing in a period quicker than under the old rules of
> >retailing."
> >
> >Steve Dobbins has been bearing the brunt of that switch. He's
> >president and CEO of Carolina Mills, a 75-year-old North Carolina
> >company that supplies thread, yarn, and textile finishing to apparel
> >makers--half of which supply Wal-Mart. Carolina Mills grew steadily
> >until 2000. But in the past three years, as its customers have gone
> >either overseas or out of business, it has shrunk from 17 factories
> >to 7, and from 2,600 employees to 1,200. Dobbins's customers have
> >begun to face imported clothing sold so cheaply to Wal-Mart that
> >they could not compete even if they paid their workers nothing.
> >
> >"People ask, 'How can it be bad for things to come into the U.S.
> >cheaply? How can it be bad to have a bargain at Wal-Mart?' Sure,
> >it's held inflation down, and it's great to have bargains," says
> >Dobbins. "But you can't buy anything if you're not employed. We are
> >shopping ourselves out of jobs."
> >The gallon jar of pickles at Wal-Mart became a devastating success,
> >giving Vlasic strong sales and growth numbers--but slashing its
> >profits by millions of dollars.
> >
> >There is no question that Wal-Mart's relentless drive to squeeze out
> >costs has benefited consumers. The giant retailer is at least partly
> >responsible for the low rate of U.S. inflation, and a McKinsey & Co.
> >study concluded that about 12% of the economy's productivity gains
> >in the second half of the 1990s could be traced to Wal-Mart alone.
> >
> >There is also no question that doing business with Wal-Mart can give
> >a supplier a fast, heady jolt of sales and market share. But that
> >fix can come with long-term consequences for the health of a brand
> >and a business. Vlasic, for example, wasn't looking to build its
> >brand on a gallon of whole pickles. Pickle companies make money on
> >"the cut," slicing cucumbers into spears and hamburger chips.
> >"Cucumbers in the jar, you don't make a whole lot of money there,"
> >says Steve Young, a former vice president of grocery marketing for
> >pickles at Vlasic, who has since left the company.
> >
> >At some point in the late 1990s, a Wal-Mart buyer saw Vlasic's
> >gallon jar and started talking to Pat Hunn about it. Hunn, who has
> >also since left Vlasic, was then head of Vlasic's Wal-Mart sales
> >team, based in Dallas. The gallon intrigued the buyer. In sales
> >tests, priced somewhere over $3, "the gallon sold like crazy," says
> >Hunn, "surprising us all." The Wal-Mart buyer had a brainstorm: What
> >would happen to the gallon if they offered it nationwide and got it
> >below $3? Hunn was skeptical, but his job was to look for ways to
> >sell pickles at Wal-Mart. Why not?
> >
> >And so Vlasic's gallon jar of pickles went into every Wal-Mart, some
> >3,000 stores, at $2.97, a price so low that Vlasic and Wal-Mart were
> >making only a penny or two on a jar, if that. It was showcased on
> >big pallets near the front of stores. It was an abundance of
> >abundance. "It was selling 80 jars a week, on average, in every
> >store," says Young. Doesn't sound like much, until you do the math:
> >That's 240,000 gallons of pickles, just in gallon jars, just at
> >Wal-Mart, every week. Whole fields of cucumbers were heading out the
> >door.
> >
> >For Vlasic, the gallon jar of pickles became what might be called a
> >devastating success. "Quickly, it started cannibalizing our
> >non-Wal-Mart business," says Young. "We saw consumers who used to
> >buy the spears and the chips in supermarkets buying the Wal-Mart
> >gallons. They'd eat a quarter of a jar and throw the thing away when
> >they got moldy. A family can't eat them fast enough."
> >
> >The gallon jar reshaped Vlasic's pickle business: It chewed up the
> >profit margin of the business with Wal-Mart, and of pickles
> >generally. Procurement had to scramble to find enough pickles to
> >fill the gallons, but the volume gave Vlasic strong sales numbers,
> >strong growth numbers, and a powerful place in the world of pickles
> >at Wal-Mart. Which accounted for 30% of Vlasic's business. But the
> >company's profits from pickles had shriveled 25% or more, Young
> >says--millions of dollars.
> >
> >The gallon was hoisting Vlasic and hurting it at the same time.
> >
> >Young remembers begging Wal-Mart for relief. "They said, 'No way,' "
> >says Young. "We said we'll increase the price"--even $3.49 would
> >have helped tremendously--"and they said, 'If you do that, all the
> >other products of yours we buy, we'll stop buying.' It was a clear
> >threat." Hunn recalls things a little differently, if just as
> >ominously: "They said, 'We want the $2.97 gallon of pickles. If you
> >don't do it, we'll see if someone else might.' I knew our
> >competitors were saying to Wal-Mart, 'We'll do the $2.97 gallons if
> >you give us your other business.' " Wal-Mart's business was so
> >indispensable to Vlasic, and the gallon so central to the Wal-Mart
> >relationship, that decisions about the future of the gallon were
> >made at the CEO level.
> >
> >Finally, Wal-Mart let Vlasic up for air. "The Wal-Mart guy's
> >response was classic," Young recalls. "He said, 'Well, we've done to
> >pickles what we did to orange juice. We've killed it. We can back
> >off.' " Vlasic got to take it down to just over half a gallon of
> >pickles, for $2.79. Not long after that, in January 2001, Vlasic
> >filed for bankruptcy--although the gallon jar of pickles, everyone
> >agrees, wasn't a critical factor.
> >
> >By now, it is accepted wisdom that Wal-Mart makes the companies it
> >does business with more efficient and focused, leaner and faster.
> >Wal-Mart itself is known for continuous improvement in its ability
> >to handle, move, and track merchandise. It expects the same of its
> >suppliers. But the ability to operate at peak efficiency only gets
> >you in the door at Wal-Mart. Then the real demands start. The public
> >image Wal-Mart projects may be as cheery as its yellow smiley-face
> >mascot, but there is nothing genial about the process by which
> >Wal-Mart gets its suppliers to provide tires and contact lenses,
> >guns and underarm deodorant at every day low prices. Wal-Mart is
> >legendary for forcing its suppliers to redesign everything from
> >their packaging to their computer systems. It is also legendary for
> >quite straightforwardly telling them what it will pay for their
> >goods.
> >"We are one of Wal-Mart's biggest suppliers, and they are our
> >biggest customer, by far. We have a great relationship. That's all I
> >can say. Are we done now?"
> >
> >John Fitzgerald, a former vice president of Nabisco, remembers
> >Wal-Mart's reaction to his company's plan to offer a 25-cent
> >newspaper coupon for a large bag of Lifesavers in advance of
> >Halloween. Wal-Mart told Nabisco to add up what it would spend on
> >the promotion--for the newspaper ads, the coupons, and handling--and
> >then just take that amount off the price instead. "That isn't
> >necessarily good for the manufacturer," Fitzgerald says. "They need
> >things that draw attention."
> >
> >It also is not unheard of for Wal-Mart to demand to examine the
> >private financial records of a supplier, and to insist that its
> >margins are too high and must be cut. And the smaller the supplier,
> >one academic study shows, the greater the likelihood that it will be
> >forced into damaging concessions. Melissa Berryhill, a Wal-Mart
> >spokeswoman, disagrees: "The fact is Wal-Mart, perhaps like no other
> >retailer, seeks to establish collaborative and mutually beneficial
> >relationships with our suppliers."
> >
> >For many suppliers, though, the only thing worse than doing business
> >with Wal-Mart may be not doing business with Wal-Mart. Last year,
> >7.5 cents of every dollar spent in any store in the United States
> >(other than auto-parts stores) went to the retailer. That means a
> >contract with Wal-Mart can be critical even for the largest
> >consumer-goods companies. Dial Corp., for example, does 28% of its
> >business with Wal-Mart. If Dial lost that one account, it would have
> >to double its sales to its next nine customers just to stay even.
> >"Wal-Mart is the essential retailer, in a way no other retailer is,"
> >says Gib Carey, a partner at Bain & Co., who is leading a yearlong
> >study of how to do business with Wal-Mart. "Our clients cannot grow
> >without finding a way to be successful with Wal-Mart."
> >
> >Many companies and their executives frankly admit that supplying
> >Wal-Mart is like getting into the company version of basic training
> >with an implacable Army drill sergeant. The process may be
> >unpleasant. But there can be some positive results.
> >
> >"Everyone from the forklift driver on up to me, the CEO, knew we had
> >to deliver [to Wal-Mart] on time. Not 10 minutes late. And not 45
> >minutes early, either," says Robin Prever, who was CEO of Saratoga
> >Beverage Group from 1992 to 2000, and made private-label water sold
> >at Wal-Mart. "The message came through clearly: You have this
> >30-second delivery window. Either you're there, or you're out. With
> >a customer like that, it changes your organization. For the better.
> >It wakes everybody up. And all our customers benefited. We changed
> >our whole approach to doing business."
> >
> >But you won't hear evenhanded stories like that from Wal-Mart, or
> >from its current suppliers. Despite being a publicly traded company,
> >Wal-Mart is intensely private. It declined to talk in detail about
> >its relationships with its suppliers for this story. More
> >strikingly, dozens of companies contacted declined to talk about
> >even the basics of their business with Wal-Mart.
> >
> >Here, for example, is an executive at Dial: "We are one of
> >Wal-Mart's biggest suppliers, and they are our biggest customer by
> >far. We have a great relationship. That's all I can say. Are we done
> >now?" Goaded a bit, the executive responds with an almost hysterical
> >edge: "Are you meshuga? Why in the world would we talk about
> >Wal-Mart? Ask me about anything else, we'll talk. But not Wal-Mart."
> >
> >No one wants to end up in what is known among Wal-Mart vendors as
> >the "penalty box"--punished, or even excluded from the store
> >shelves, for saying something that makes Wal-Mart unhappy. (The
> >penalty box is normally reserved for vendors who don't meet
> >performance benchmarks, not for those who talk to the press.)
> >
> >"You won't hear anything negative from most people," says Paul
> >Kelly, founder of Silvermine Consulting Group, a company that helps
> >businesses work more effectively with retailers. "It would be
> >committing suicide. If Wal-Mart takes something the wrong way, it's
> >like Saddam Hussein. You just don't want to piss them off."
> >
> >As a result, this story was reported in an unusual way: by speaking
> >with dozens of people who have spent years selling to Wal-Mart, or
> >consulting to companies that sell to Wal-Mart, but who no longer
> >work for companies that do business with Wal-Mart. Unless otherwise
> >noted, the companies involved in the events they described refused
> >even to confirm or deny the basics of the events.
> >
> >To a person, all those interviewed credit Wal-Mart with a
> >fundamental integrity in its dealings that's unusual in the world of
> >consumer goods, retailing, and groceries. Wal-Mart does not cheat
> >suppliers, it keeps its word, it pays its bills briskly. "They are
> >tough people but very honest; they treat you honestly," says Peter
> >Campanella, who ran the business that sold Corning kitchenware
> >products, both at Corning and then at World Kitchen. "It was a joke
> >to do business with most of their competitors. A fiasco."
> >
> >But Wal-Mart also clearly does not hesitate to use its power,
> >magnifying the Darwinian forces already at work in modern global
> >capitalism.
> >Caught in the Wal-Mart squeeze, Huffy didn't just relinquish profits
> >to keep its commitment to the retailer. It handed those profits to
> >the competition.
> >
> >What does the squeeze look like at Wal-Mart? It is usually
> >thoroughly rational, sometimes devastatingly so.
> >
> >John Mariotti is a veteran of the consumer-products world--he spent
> >nine years as president of Huffy Bicycle Co., a division of Huffy
> >Corp., and is now chairman of World Kitchen, the company that sells
> >Oxo, Revere, Corning, and Ekco brand housewares.
> >
> >He could not be clearer on his opinion about Wal-Mart: It's a great
> >company, and a great company to do business with. "Wal-Mart has done
> >more good for America by several thousand orders of magnitude than
> >they've done bad," Mariotti says. "They have raised the bar, and
> >raised the bar for everybody."
> >
> >Mariotti describes one episode from Huffy's relationship with
> >Wal-Mart. It's a tale he tells to illustrate an admiring point he
> >makes about the retailer. "They demand you do what you say you are
> >going to do." But it's also a classic example of the
> >damned-if-you-do, damned-if-you-don't Wal-Mart squeeze. When
> >Mariotti was at Huffy throughout the 1980s, the company sold a range
> >of bikes to Wal-Mart, 20 or so models, in a spread of prices and
> >profitability. It was a leading manufacturer of bikes in the United
> >States, in places like Ponca City, Oklahoma; Celina, Ohio; and
> >Farmington, Missouri.
> >
> >One year, Huffy had committed to supply Wal-Mart with an
> >entry-level, thin-margin bike--as many as Wal-Mart needed. Sales of
> >the low-end bike took off. "I woke up May 1"--the heart of the bike
> >production cycle for the summer--"and I needed 900,000 bikes," he
> >says. "My factories could only run 450,000." As it happened, that
> >same year, Huffy's fancier, more-profitable bikes were doing well,
> >too, at Wal-Mart and other places. Huffy found itself in a bind.
> >
> >With other retailers, perhaps, Mariotti might have sat down,
> >renegotiated, tried to talk his way out of the corner. Not with
> >Wal-Mart. "I made the deal up front with them," he says. "I knew how
> >high was up. I was duty-bound to supply my customer." So he did
> >something extraordinary. To free up production in order to make
> >Wal-Mart's cheap bikes, he gave the designs for four of his
> >higher-end, higher-margin products to rival manufacturers. "I
> >conceded business to my competitors, because I just ran out of
> >capacity," he says. Huffy didn't just relinquish profits to keep
> >Wal-Mart happy--it handed those profits to its competition.
> >"Wal-Mart didn't tell me what to do," Mariotti says. "They didn't
> >have to." The retailer, he adds, "is tough as nails. But they give
> >you a chance to compete. If you can't compete, that's your problem."
> >
> >In the years since Mariotti left Huffy, the bike maker's
> >relationship with Wal-Mart has been vital (though Huffy Corp. has
> >lost money in three out of the last five years). It is the
> >number-three seller of bikes in the United States. And Wal-Mart is
> >the number-one retailer of bikes. But here's one last statistic
> >about bicycles: Roughly 98% are now imported from places such as
> >China, Mexico, and Taiwan. Huffy made its last bike in the United
> >States in 1999.
> >
> >As Mariotti says, Wal-Mart is tough as nails. But not every supplier
> >agrees that the toughness is always accompanied by fairness. The
> >Lovable Company was founded in 1926 by the grandfather of Frank
> >Garson II, who was Lovable's last president. It did business with
> >Wal-Mart, Garson says, from the earliest days of founder Sam
> >Walton's first store in Bentonville, Arkansas. Lovable made bras and
> >lingerie, supplying retailers that also included Sears and
> >Victoria's Secret. At one point, it was the sixth-largest maker of
> >intimate apparel in the United States, with 700 employees in this
> >country and another 2,000 at eight factories in Central America.
> >
> >Eventually Wal-Mart became Lovable's biggest customer. "Wal-Mart has
> >a big pencil," says Garson. "They have such awesome purchasing power
> >that they write their own ticket. If they don't like your prices,
> >they'll go vertical and do it themselves--or they'll find someone
> >that will meet their terms."
> >
> >In the summer of 1995, Garson asserts, Wal-Mart did just that. "They
> >had awarded us a contract, and in their wisdom, they changed the
> >terms so dramatically that they really reneged." Garson, still
> >worried about litigation, won't provide details. "But when you lose
> >a customer that size, they are irreplaceable."
> >
> >Lovable was already feeling intense cost pressure. Less than three
> >years after Wal-Mart pulled its business, in its 72nd year, Lovable
> >closed. "They leave a lot to be desired in the way they treat
> >people," says Garson. "Their actions to pulverize people are
> >unnecessary. Wal-Mart chewed us up and spit us out."
> >
> >Believe it or not, American business has been through this before.
> >The Great Atlantic & Pacific Tea Co., the grocery-store chain, stood
> >astride the U.S. market in the 1920s and 1930s with a dominance that
> >has likely never been duplicated. At its peak, A&P had five times
> >the number of stores Wal-Mart has now (although much smaller ones),
> >and at one point, it owned 80% of the supermarket business. Some of
> >the antipredatory-pricing laws in use today were inspired by A&P's
> >attempts to muscle its suppliers.
> >
> >There is very little academic and statistical study of Wal-Mart's
> >impact on the health of its suppliers and virtually nothing in the
> >last decade, when Wal-Mart's size has increased by a factor of five.
> >This while the retail industry has become much more concentrated. In
> >large part, that's because it's nearly impossible to get meaningful
> >data that would allow researchers to track the influence of
> >Wal-Mart's business on companies over time. You'd need cooperation
> >from the vendor companies or Wal-Mart or both--and neither Wal-Mart
> >nor its suppliers are interested in sharing such intimate detail.
> >
> >Bain & Co., the global management consulting firm, is in the midst
> >of a project that asks, How does a company have a healthy
> >relationship with Wal-Mart? How do you avoid being sucked into the
> >vortex? How do you maintain some standing, some leverage of your own?
> >This July, in a mating that had the relieved air of lovers who had
> >too long resisted embracing, Levi Strauss rolled blue jeans into
> >every Wal-Mart in the United States.
> >
> >Bain's first insights are obvious, if not easy. "Year after year,"
> >Carey, a partner at Bain & Co., says, "for any product that is the
> >same as what you sold them last year, Wal-Mart will say, 'Here's the
> >price you gave me last year. Here's what I can get a competitor's
> >product for. Here's what I can get a private-label version for. I
> >want to see a better value that I can bring to my shopper this year.
> >Or else I'm going to use that shelf space differently.' "
> >
> >Carey has a friend in the umbrella business who learned that. One
> >year, because of costs, he went to Wal-Mart and asked for a 5% price
> >increase. "Wal-Mart said, 'We were expecting a 5% decrease. We're
> >off by 10%. Go back and sharpen your pencil.' " The umbrella man
> >scrimped and came back with a 2% increase. "They said, 'We'll go
> >with a Chinese manufacturer'--and he was out entirely."
> >
> >The Wal-Mart squeeze means vendors have to be as relentless and as
> >microscopic as Wal-Mart is at managing their own costs. They need,
> >in fact, to turn themselves into shadow versions of Wal-Mart itself.
> >"Wal-Mart won't necessarily say you have to reconfigure your
> >distribution system," says Carey. "But companies recognize they are
> >not going to maintain margins with growth in their Wal-Mart business
> >without doing it."
> >
> >The way to avoid being trapped in a spiral of growing business and
> >shrinking profits, says Carey, is to innovate. "You need to bring
> >Wal-Mart new products--products consumers need. Because with those,
> >Wal-Mart doesn't have benchmarks to drive you down in price. They
> >don't have historical data, you don't have competitors, they haven't
> >bid the products out to private-label makers. That's how you can
> >have higher prices and higher margins."
> >
> >Reasonable advice, but not universally useful. There has been an
> >explosion of "innovation" in toothbrushes and toothpastes in the
> >past five years, for instance; but a pickle is a pickle is a pickle.
> >
> >Bain's other critical discovery is that consumers are often more
> >loyal to product companies than to Wal-Mart. With strongly branded
> >items people develop a preference for--things like toothpaste or
> >laundry detergent--Wal-Mart rarely forces shoppers to switch to a
> >second choice. It would simply punish itself by seeing sales fall,
> >and it won't put up with that for long.
> >
> >But as Wal-Mart has grown in market reach and clout, even
> >manufacturers known for nurturing premium brands may find themselves
> >overpowered. This July, in a mating that had the relieved air of
> >lovers who had too long resisted embracing, Levi Strauss rolled blue
> >jeans into every Wal-Mart doorway in the United States: 2,864
> >stores. Wal-Mart, seeking to expand its clothing business with more
> >fashionable brands, promoted the clothes on its in-store TV network
> >and with banners slipped over the security-tag detectors at exit
> >doors.
> >
> >Levi's launch into Wal-Mart came the same summer the clothes maker
> >celebrated its 150th birthday. For a century and a half, one of the
> >most recognizable names in American commerce had survived without
> >Wal-Mart. But in October 2002, when Levi Strauss and Wal-Mart
> >announced their engagement, Levi was shrinking rapidly. The pressure
> >on Levi goes back 25 years--well before Wal-Mart was an influence.
> >Between 1981 and 1990, Levi closed 58 U.S. manufacturing plants,
> >sending 25% of its sewing overseas.
> >
> >Sales for Levi peaked in 1996 at $7.1 billion. By last year, they
> >had spiraled down six years in a row, to $4.1 billion; through the
> >first six months of 2003, sales dropped another 3%. This one
> >account--selling jeans to Wal-Mart--could almost instantly revive
> >Levi.
> >
> >Last year, Wal-Mart sold more clothing than any other retailer in
> >the country. It also sold more pairs of jeans than any other store.
> >Wal-Mart's own inexpensive house brand of jeans, Faded Glory, is
> >estimated to do $3 billion in sales a year, a house brand nearly the
> >size of Levi Strauss. Perhaps most revealing in terms of Levi's
> >strategic blunders: In 2002, half the jeans sold in the United
> >States cost less than $20 a pair. That same year, Levi didn't offer
> >jeans for less than $30.
> >
> >For much of the last decade, Levi couldn't have qualified to sell to
> >Wal-Mart. Its computer systems were antiquated, and it was notorious
> >for delivering clothes late to retailers. Levi admitted its on-time
> >delivery rate was 65%. When it announced the deal with Wal-Mart last
> >year, one fashion-industry analyst bluntly predicted Levi would
> >simply fail to deliver the jeans.
> >
> >But Levi Strauss has taken to the Wal-Mart Way with the intensity of
> >a near-death religious conversion--and Levi's executives were happy
> >to talk about their experience getting ready to sell at Wal-Mart.
> >One hundred people at Levi's headquarters are devoted to the new
> >business; another 12 have set up in an office in Bentonville, near
> >Wal-Mart's headquarters, where the company has hired a respected
> >veteran Wal-Mart sales account manager.
> >
> >Getting ready for Wal-Mart has been like putting Levi on the Atkins
> >diet. It has helped everything--customer focus, inventory
> >management, speed to market. It has even helped other retailers that
> >buy Levis, because Wal-Mart has forced the company to replenish
> >stores within two days instead of Levi's previous five-day cycle.
> >
> >And so, Wal-Mart might rescue Levi Strauss. Except for one thing.
> >
> >Levi didn't actually have any clothes it could sell at Wal-Mart.
> >Everything was too expensive. It had to develop a fresh line for
> >mass retailers: the Levi Strauss Signature brand, featuring Levi
> >Strauss's name on the back of the jeans.
> >
> >Two months after the launch, Levi basked in the honeymoon glow.
> >Overall sales, after falling for the first six months of 2003, rose
> >6% in the third quarter; profits in the summer quarter nearly
> >doubled. All, Levi's CEO said, because of Signature.
> >"They are all very rational people. And they had a good point.
> >Everyone was willing to pay more for a Master Lock. But how much
> >more can they justify?"
> >
> >But the low-end business isn't a business Levi is known for, or one
> >it had been particularly interested in. It's also a business in
> >which Levi will find itself competing with lean, experienced players
> >such as VF and Faded Glory. Levi's makeover might so improve its
> >performance with its non-Wal-Mart suppliers that its established
> >business will thrive, too. It is just as likely that any gains will
> >be offset by the competitive pressures already dissolving Levi's
> >premium brands, and by the cannibalization of its own sales. "It's
> >hard to see how this relationship will boost Levi's higher-end
> >business," says Paul Farris, a professor at the University of
> >Virginia's Darden Graduate School of Business Administration. "It's
> >easy to see how this will hurt the higher-end business."
> >
> >If Levi clothing is a runaway hit at Wal-Mart, that may indeed
> >rescue Levi as a business. But what will have been rescued? The
> >Signature line--it includes clothing for girls, boys, men, and
> >women--is an odd departure for a company whose brand has long been
> >an American icon. Some of the jeans have the look, the fingertip
> >feel, of pricier Levis. But much of the clothing has the look and
> >feel it must have, given its price (around $23 for adult pants):
> >cheap. Cheap and disappointing to find labeled with Levi Strauss's
> >name. And just five days before the cheery profit news, Levi had
> >another announcement: It is closing its last two U.S. factories,
> >both in San Antonio, and laying off more than 2,500 workers, or 21%
> >of its workforce. A company that 22 years ago had 60 clothing plants
> >in the United States--and that was known as one of the most socially
> >reponsible corporations on the planet--will, by 2004, not make any
> >clothes at all. It will just import them.
> >
> >In the end, of course, it is we as shoppers who have the power, and
> >who have given that power to Wal-Mart. Part of Wal-Mart's dominance,
> >part of its insight, and part of its arrogance, is that it presumes
> >to speak for American shoppers.
> >
> >If Wal-Mart doesn't like the pricing on something, says Andrew
> >Whitman, who helped service Wal-Mart for years when he worked at
> >General Foods and Kraft, they simply say, "At that price we no
> >longer think it's a good value to our shopper. Therefore, we don't
> >think we should carry it."
> >
> >Wal-Mart has also lulled shoppers into ignoring the difference
> >between the price of something and the cost. Its unending focus on
> >price underscores something that Americans are only starting to
> >realize about globalization: Ever-cheaper prices have consequences.
> >Says Steve Dobbins, president of thread maker Carolina Mills: "We
> >want clean air, clear water, good living conditions, the best health
> >care in the world--yet we aren't willing to pay for anything
> >manufactured under those restrictions."
> >
> >Randall Larrimore, a former CEO of MasterBrand Industries, the
> >parent company of Master Lock, understands that contradiction too
> >well. For years, he says, as manufacturing costs in the United
> >States rose, Master Lock was able to pass them along. But at some
> >point in the 1990s, Asian manufacturers started producing locks for
> >much less. "When the difference is $1, retailers like Wal-Mart would
> >prefer to have the brand-name padlock or faucet or hammer,"
> >Larrimore says. "But as the spread becomes greater, when our padlock
> >was $9, and the import was $6, then they can offer the consumer a
> >real discount by carrying two lines. Ultimately, they may only carry
> >one line."
> >
> >In January 1997, Master Lock announced that, after 75 years making
> >locks in Milwaukee, it would begin importing more products from
> >Asia. Not too long after, Master Lock opened a factory of its own in
> >Nogales, Mexico. Today, it makes just 10% to 15% of its locks in
> >Milwaukee--its 300 employees there mostly make parts that are sent
> >to Nogales, where there are now 800 factory workers.
> >
> >Larrimore did the first manufacturing layoffs at Master Lock. He
> >negotiated with Master Lock's unions himself. He went to
> >Bentonville. "I loved dealing with Wal-Mart, with Home Depot," he
> >says. "They are all very rational people. There wasn't a whole lot
> >of room for negotiation. And they had a good point. Everyone was
> >willing to pay more for a Master Lock. But how much more can they
> >justify? If they can buy a lock that has arguably similar qual-ity,
> >at a cheaper price, well, they can get their consumers a deal."
> >
> >It's Wal-Mart in the role of Adam Smith's invisible hand. And the
> >Milwaukee employees of Master Lock who shopped at Wal-Mart to save
> >money helped that hand shove their own jobs right to Nogales. Not
> >consciously, not directly, but inevitably. "Do we as consumers
> >appreciate what we're doing?" Larrimore asks. "I don't think so. But
> >even if we do, I think we say, Here's a Master Lock for $9, here's
> >another lock for $6--let the other guy pay $9."
> >
> >Charles Fishman is a senior writer at Fast Company . Andrew Moesel
> >provided research assistance for this story.
>