Rogoff: Big Box Stores and the Productivity Miracle

Kenneth Rogoff on the costs and benefits of Wal-Mart. He also discusses the large contribution of big box stores to recent increases in productivity and notes that as much as 75% of productivity gains can be attributed to efficiencies in big box stores and their supply chains. With so much of recent productivity gains coming from this sector of the economy, he asks a good question, what will happen once such productivity gains have run their course?  I added the map simulation he references at the end of the commentary:

Wall-to-Wall Wal-Mart?, by Kenneth Rogoff, Project Syndicate: Do you want to know which video clip will soon be scaring the daylights out of policymakers throughout the world? In a scenario that looks uncannily like the spread of a global pandemic, the economist Thomas Holmes has prepared a dynamic map simulation showing the spread of Wal-Mart stores throughout the United States. Starting at the epicenter in Bentonville, Arkansas, where Sam Walton opened his first store in 1962, giant boxy Wal-Mart stores have now multiplied to the point where the average American lives less than seven kilometers from an outlet.

Interestingly, the video shows how the stores spread out like petals of a flower, ever thickening and expanding. ... Even though each new store takes away business from Wal-Mart stores established nearby, ever-improving supply efficiencies help maintain the chain’s overall growth.

Love them or hate them, what is undeniable is that Wal-Mart is the quintessential example of the costs and benefits of modern globalization. Consumers pay significantly less than at traditional outlets. ... economists estimate that the food section of Wal-Mart charges 25% less than a typical large supermarket chain. The differences in price for many other consumer goods is even larger.

Consider the following stunning fact: together with a few sister “big box” stores (Target, Best Buy, and Home Depot), Wal-Mart accounts for roughly 50% of America’s much vaunted productivity growth edge over Europe during the last decade. Fifty percent! Similar advances in wholesaling supply chains account for another 25%! The notion that Americans have gotten better at everything while other rich countries have stood still is thus wildly misleading. The US productivity miracle and the emergence of Wal-Mart-style retailing are virtually synonymous.

I have nothing against big box stores. They are an enormous boon to low-income consumers, partly compensating for the tepid wage growth that many of them have suffered during the past two decades. ... As a consumer, I think big-box stores are great. ... But I do have some reservations about the Wal-Mart model as a blueprint for global growth.

First, there is the matter of its effect on low-wage workers and smaller-scale retailers. ...Wal-Mart’s labor policies exploit regulatory loopholes that ... allow it to sidestep the burden of healthcare costs for many workers (Wal-Mart provides healthcare coverage to less than half its workers). And the entry of big-box stores into a community crushes long-established retailers, often traumatically transforming their character. ...

Indeed, many Europeans, and others, will view Holmes’s video simulation of Wal-Mart’s spread as a horror film. The French may have invented the hyper mart – the forerunner of the big-box store – but they never intended to let their growth go unchecked. The big question for Europeans is whether they can find ways to exploit some of the efficiency gains embodied by the Wal-Mart model without being overrun by it.

For Americans, there is the additional question of what to do when the big-box store phenomenon has run its course. If so much of the US productivity edge really amounts to letting Wal-Mart and its big-box cousins run amok, what will happen after this source of growth tapers off? ... It is curious how many people seem to think that the US will grow faster than Europe and Japan over the next ten years simply because it has done so for the past ten years.

Wal-Mart and its ilk are a central feature of the modern era of globalization. They are not quite the pandemic that their explosive growth pattern resembles, but nor is their emergence completely benign. Those who would aim to emulate US productivity trends must come to grips with how they feel about big-box stores sprouting across their countryside’s, driving down wages and plowing under smaller-scale retailers. Americans, in turn, must think about where the proper balance lies between aesthetics, community, and low prices.

Comments

[save_the_rustbelt]

"They are an enormous boon to low-income consumers, partly compensating for the tepid wage growth that many of them have suffered during the past two decades. ..."

Emphasis on "partly."

[Holly W.]

Dare one suggest that Wal-Mart et al, rather than 'compensating' for tepid wage growth, may be tangentially contributing to it: "We can't afford to give anyone raises this year, but it doesn't matter because you all live within 3 miles of a Wal-Mart -- I hear they even sell groceries now!"

[spencer]

For years I have calculated a monthly estimate of real retail sales per retail employee hour -- a great first approximation of productivity. It is a powerful variable in regression analysis explaining the relative
performance of the S&P index of retail stocks.

For years this productivity measure has shown that
retail productivity growth was stronger then manufacturing productivity growth. But economic theory suggest that this faster productivity growth should show up in better wages for retail employees. But it
hasn't as average hourly earnings in retail has remained at some 75%-77% of total average hourly earnings. But the point that stronger productivity growth has not shown up in stronger wage growth in the retail sector certainly raises some interesting questions.

[Robert]

Rogoff's got an interesting point and it is germane to so much of economics, psychology and behavioural finance and probably should have its own segment in INTRO ECON 101 entitled: The Fallacy of Extrapolation.....

Caveat Extrapolateur ?

[Iasius]

My question regarding all of this is:
Is Walmart really that much superior or is some part of the better productivity over say Germany and Japan simply due to the consumption boom in the USA (share of GDP >70% etc). Walmart is making losses in Germany and competitors Aldi and Lidl offer lower prices.

[slink]

if we got single payer health
(the ultimo big box PROVIDER )
we could get some
nice scale effect
on paper shuffle productivity

on the nominal wage/ real wage waltz

whats the idea here
you can't count lower then otherwise
prices twice

if you're talking real wages
the story is already told

and for the bottom half
despite walmart prices
real wage rates
didn't grow

spencer puts a finger on it :

"the point that stronger
productivity growth
has not shown up
in stronger wage growth
in the retail sector
certainly raises some
interesting questions"

thats the core of the walmart effect .

[lonesome moderate]

They are definitely a hugely strong, efficient competitor herre in the USA, or at least they have been. From what I understand their business model does not travel well.

[spencer]

lonesome moderate -- Can WMT make its model work abroad is a great question for investors. WHT can no longer realize extremely high domestic growth rate so it go to new markets to sustain it growth rate. Interestingly, no retailers has really ever been able to do this -- even Sears in its heyday only did a little in Latin america.

but it is a great question -- why can other american firms take their brands overseas -- like Coke or Mac Donalds -- but not retailers?

[cm]

spencer: Competition usually works better on your home turf, if you get my drift. Support by local politicians and all that.

I have little insight into the details, but it looks like the Wal-Mart business model either does not work that well in Europe, and/or the European retail sector is so efficient that Wal-Mart does not have a significant edge. The latter is a very likely ingredient. Retail competition in Germany at least is fierce, and margins are very low. That Germans keep their purse strings rather tight certainly does not help. Maybe, just maybe, they also have a lower propensity of buying the specific type of cheap trinkets Wal-Mart is offering up here in the US.

[crack]

This article mentions a few other big box companies, but there are many more. A possible area for continued productivity growth is in the big boxing and supply chain managing of more sectors. Fastenal has been using a tight supply chain strategy in the construction supply sector with great results.

Crack

[donna]

Wal-Mart is the closest store to my house.

I refuse to shop there.

And I'm sick of cheap crap from China.

I want quality products, well made, that LAST.

Give me some of that, America.

[cm]

donna: A variety of things is made in China. A good part is cheap crap, but esp. tech widgets tend to be good quality. (Most of those are manufactured somewhere in the Far East on equipment and using designs supplied by the "West", and "only" the operators are local.) I don't know what Wal-Mart carries though, perhaps not the better stuff.

[calmo]

Yes, 'made in China' no longer means just junk.
Moreover, the components in the 'made in the US' may come from China.
Even moreover, 'made in China' could contain American components.
Even moreover still, there may be some Chinese branches of MNC HQ'd in the US making products for the US market.
Actually more than half.

Last thing: those low priced plastic gardening shoes had molded right into their soles "Made in Vancouver" despite the price sticker declaring "made in china".

[spencer]

One way to look at WMT is that it applied the grocery store model to other retail sectors. Grocery stores are a very low margin but high turn over business.
For example if you start with a $100 in capital and buy a $100 worth of merchandise and sell it for $101 it does not look like you are making much money. But if you sell that $101 of merchandise in one week and repeat it week after week at the end of the year you have earned $52 in profits -- $1 per week -- from that $100 in capital. that is a great ROE.

Most department stores and other retailers turn there stock some 5 to 10 times a year. So if you sell that $100 worth of merchandise for $105 and do that 10 times a year at the end of the year you have earned profits of $50.

So what WMT did was devise a system where it could turn it merchandise in one or two weeks -- my data is years old from when I was a retail analysts some 20 years ago so it may be different now. If WHT sells the $100 worth of merchandise for $102 some 25 times a year it still earns profits of $50 a year, but it is able to underprice the competition that charges the customer $105.

[Winslow R.]

if we got single payer health
(the ultimo big box PROVIDER )
we could get some
nice scale effect
on paper shuffle productivity

while I agree

Wal-Mart’s labor policies exploit regulatory loopholes that ... allow it to sidestep the burden of healthcare costs for many workers (Wal-Mart provides healthcare coverage to less than half its workers)

Given those workers are then covered by Medicaid, who says big box is not already moving us towards universal health care?

Perhaps the 'real' restraint on increasing productivity in health care is not Walmart types but rather companies like Ford and GM that pay a living wage with private sector benefits. Things might have to get much worse before they get better, as is often the case.