After writing this piece on Wal-Mart’s earnings, what prompts us to return to the matter was a note we received regarding a piece on Business Week’s website by the title " Wal-Mart and the Paycheck-to-Paycheck Consumer”. The piece discusses why the US Wal-Mart stores reported negative comps for the 4th quarter. It also notes that Sam’s Club comps were up 0.7% during the same period. The article also pointed out was that customer traffic was down. The piece cited food deflation and speculated that Wal-Mart’s core customer was living “week to week” as to the reason why.
This may all be true, but a Pundit correspondent, who was once a major vendor to Wal-Mart, suggested some other reasons:
1. Wal-Mart has shifted from a sales strategy to a margin strategy. This has manifested itself in two ways:
A) Wal-Mart has been raising prices for some time now. While they still maintain some price advantage, the gap is narrowing. And as Pundit sister publication, PRODUCE BUSINESS has pointed out in its long-running series, the Wal-Mart Pricing Reports, they are not the market leaders in some markets. Wal-Mart has always been a “price play” in the minds of the customers. EDLP resonated in the customers’ minds, and the perception proved to be true in the stores. The company now raises prices, then rolls them back. This is a cultural revolution; there was a time, not all that long ago, when a buyer would be fired for doing that!
B) The second issue is the drive by Wal-Mart’s top echelons to expand private label at the expense of national brands. This causes at least two problems: One is that now the customer is being forced to buy what Wal-Mart wants to sell them instead of what they want to buy. This is having a huge impact on all customers, but especially those with discretionary income. These customers tend to be more brand-loyal and are willing to pay for that brand. Now, they have to find those items elsewhere. The other problem is that a private brand strategy compromises a store’s price image. This may sound counter-intuitive as private label items generally cost less. But customers can’t compare prices at different chains by their private label as quality standards vary widely. Tide is Tide, whether at Wal-Mart or Kroger, so it’s a true apples-to-apples comparison.
2. Wal-Mart has made a major shift in merchandising. Wal-Mart was a “price and item” merchant. The new merchandising leadership has removed “action alley” and has become a “solution merchant”. So when a customer walks into a store, there is no price impact.
3. Wal-Mart touts its inventory reduction. What they fail to mention is their horrendous out-of-stock problem, particularly on periphery items. Basically, customers can’t fill their shopping list because of out-of-stocks. This is both a replenishment problem and a merchandising problem. When suppliers were held accountable for in-stock, they had selfish incentive to stay in stock on their items. And when they collaborated on modular, they would be pushing the buyers to give enough shelf space to key items.
4. Finally, Wal-Mart’s quality standards have really slipped, and it’s starting to show. They have finally screwed the suppliers down so much that the supplier is making other choices about who they ship their top box to.
Bottom line: Wal-Mart’s issues are leadership issues. It is amazing how smart Sam Walton really was! Look at his legacy of ideas:
● EDLP ● Price and Item ● Always the Low Price — Always ●We Sell For Less
That vendors might yearn for the “good old days” is understandable. It may even be the correct response, but it is not realistic. Wal-Mart is not going back.
Our own assessment is that Wal-Mart’s leadership has become increasingly tactical, identifying a short-term problem and jerry-rigging a solution rather than developing an alternative strategic approach to the one Sam Walton detailed.
So sometimes sustainability is the key focus and other weeks it is beating up suppliers for cheap prices — sustainability be dammed. Some weeks Wal-Mart is rolling back prices and other weeks it is raising them.
In the meantime, Aldi and other deep discounters are increasingly undercutting Wal-Mart on price and the Behemoth from Bentonville has simply no strategic response.
While we have praised those involved in the effort, including Dan’l Mackay Almy, Managing Partner of DMA Solutions, Inc., and the self-proclaimed “ring leader” of the effort. As well as the many companies that have donated fresh produce. We have also cautioned that the institutions of the produce industry ought to be cautious about the flippant attitude Ellen has shown toward nutritional science in this endeavor.
Particularly we questioned whether the industry ought to join a crusade to declare sugar verboten but urge the consumption of things such as agave nectar — which we argued are essentially the same things:
In fact, very quickly, Ellen began to backtrack and in a way that made us question the scientific sensibility of her program.
By day two, she was declaring that it is OK to put Agave nectar in coffee and that she is “all for” what she calls “natural sweeteners.” Yet sugar cane and sugar beets are every bit as natural as the various species of agave.
In fact, the reason Ellen likes agave nectar is because it is sugar; it is mostly fructose and glucose. Table sugar is sucrose, which can be split into its two component sugars, fructose and glucose.
People, including Ellen, can prefer one source of sugar to another, and some types are sweeter than others and that might effect how much one consumes but, basically, there is simply zero evidence that anyone’s health will be improved by putting 25 calories of agave nectar in their coffee as opposed to 25 calories of sugar.
Obviously many were confused by Ellen’s declarations because she pretty quickly felt the need to announce that, yes, she was still eating fruits and vegetables and that she meant to say she was giving up “cake” — and would try to get a nutritionist on the show because she didn’t want to be “telling people the wrong thing to do.” A thought you would have thought might have crossed her mind before she went on national television announcing this plan.
This type of junk science has become ubiquitous in our society, and it must be resisted. In the end, endorsing this type of thinking will lead to a rejection of scientific approaches to issues such as food safety — with significant consequences for the industry.
It is not just Ellen DeGeneres who is guilty of this type of sloppy thinking. Virtually the same thinking is involved in the war being waged against high-fructose corn syrup. Michelle Miller, a correspondent with CBS Evening News with Katie Couric, just did a piece titled, Is High-Fructose Corn Syrup Really So Bad??
The mindless nature of the discussion is perfectly illustrated by the contrasting quotes:
Author and NYU Professor Marion Nestle, who is no friend of industrialized food but is both highly intelligent and intellectually honest, explains the facts when asked what is high-fructose corn syrup:
“It’s corn starch that has been treated to turn it into sugar,” said New York University Professor Marion Nestle. “It is sugar. It’s just sugar.”
In contrast, parents in San Francisco pushed corn syrup out of the chocolate milk in the school system in San Francisco, and the head of the committee doing the pushing justified the act this way:
“People feel like they don’t know where their food is coming from anymore,” said Dana Woldow, the co-chair of the student nutrition committee. “They don’t understand how it is produced and I think they have a natural suspicion of anything in their food system that they feel is not natural.”
Now it would be one thing to want to get rid of chocolate milk; that is a judgment call weighing the pros of getting more kids to drink milk versus the negatives of additional calories added to the milk.
But if you read over the two quotes, the problem is clear: Professor Nestle is dealing with science; Ms. Woldow is dealing with superstition and prejudice.
Even the Center for Science in the Public Interest, which we have blasted here, has to admit the truth:
The food police — the ones who told us Chinese food and theatre popcorn were bad — would also be yelling about high-fructose corn syrup. But instead, they say the controversy is all hype.
”The evilness of high-fructose corn syrup has become an urban myth,” said Michael Jacobson with the Center for Science in the Public Interest.
Jacobson blames the high-fructose corn syrup controversy on a 2004 study that seemed to link soft drinks sweetened with high-fructose corn syrup to the obesity epidemic.
”They didn’t have one shred of evidence to back up their theory,” Jacobson said. “And they eventually recanted and they realized that HFCS and sugar are essentially the same. But they couldn’t put the genie back into the bottle.”
Many food manufacturers have altered their formulations to avoid the use of high-fructose corn syrup. This is a matter of marketing. It is a matter of producing products that will sell. If people object to this ingredient, it is understandable producers will eschew it.
But we should have no delusion that this anti-scientific way of thinking is good for our country. Thinking is hard, and investigating things and gaining knowledge before coming to an opinion is a challenge, but the alternative is to live in a world dominated by mysticism. This impedes progress and makes our society poorer and less successful.
Recently Guam was in the news because there is a plan to send 8,000 marines, about 25,000 people with their families included, to Guam. Guam is the westernmost US territory and so the best place in America to maintain a forward posture ready to move into Asia or other points west if need be.
During hearings on the military build up, Rep. Hank Johnson (D-Georgia) decided to grill Adm. Robert Willard who is the head of the U.S. Pacific fleet:
“My fear is that the whole island will become so overly populated that it will tip over and capsize,” Johnson said.
Fortunately the Admiral was able to reassure the Congressman:
Willard paused and replied, “We don’t anticipate that.”
After the fact, the Congressman’s office issued a statement that the Congressman was just joking. We have our doubts. And watching this exchange depresses one at the thought we can ever get intelligent policy — on food safety or anything else. You can watch the video clip yourself and decide:
The commercials promote “eating right” and, specifically, point out that recipients can get fresh fruits and vegetables with the program.
We appreciate the plug, and the industry worked hard to get fresh produce included, but we have to wonder if this kind of promotion is really a good thing.
The commercial points out that one may qualify for the program even though one has a job, owns a car and owns a home. In fact, though the commercial doesn’t say it, one can have a million dollars in a Roth IRA and another million dollars in home equity and still qualify because retirement funds and home ownership are both exempt from consideration in calculating who qualifies.
We appreciate the idea to feed the bodies of poor people and we begrudge helping out no one, but we can’t help but think that whatever its impact on the body, this attempt to expand food stamp usage can’t be good for the soul.
There are a lot of struggling people who can hold their heads high because they managed to take care of their own. These commercials are attempts to erase the stigma of accepting food aid, but we suspect that people know if they are getting welfare or not, and if they are, no amount of upbeat commercials will make them feel good about themselves.
There has been much written about lower income males, often not educated or skilled, may not be able to contribute much income to a family. If their contribution is made superfluous because it can easily be replaced by programs like SNAP, the men themselves will be seen as superfluous and you’ll have more broken families and more children growing up without fathers present — a situation far more likely to lead to delinquency than an in-tact home.
William F. Buckley, Jr. once advanced the idea of having available to all, without income limitations, public pantries that would provide staples such as bread, milk and peanut butter. Probably not too many rich people would bother to get the free goods, especially if we carefully controlled the locations of the public pantries to make them inconvenient to affluent areas.
Yet the fact that anyone could access the pantries, much like they can access a public library or a public park, would eliminate the stigma and thus encourage healthy eating without putting people on welfare and without rewarding a family with extra money because their income goes down when a man abandons his family.
In Fiddler on the Roof, Tevye, the poor milkman and father of five daughters, speaks to God:
“Dear Lord, you made many, many poor people. I realize, of course, that it’s no great shame to be poor. But it’s no great honor either! So, what would have been so terrible if I had a small fortune?”
What is missing from these commercials is any notion that this should be some short term help until someone gets on their feet or that one should organize their affairs by, say, considering if they can afford another child before they have one. There is no notion that an adult should not be depending on charity to eat.
In the short run, we suppose that a family that gets extra food from a program like this is healthier. We wonder though, if long term, the family that eats cabbage soup and mac and cheese for awhile doesn’t wind up being more prosperous as the children see an example of self-reliance and making do and as the family values the contributions that each family member can make.