August 13th, 2012

I was having (losing) a discussion (argument) this weekend about outsourcing, marketing, and pricing. So I thought this article was a timely find. Although it would have been MORE timely on Friday.

Freakonomics blog: Adventures in Ideas: Conversation With Al Norman, Author of Occupy Walmart

For many Walmart shoppers, their grasp of the economic ramifications of a decision to shop at big box stores is no bigger than the dimensions of their own shopping cart. There used to be a Walmart bumper sticker which read: “Outta my way, I’m shopping at Walmart.” But if you look behind the sticker price, there is a hidden price to our economy of shopping at the giant chain stores.

The story of blue jeans will illustrate the economic forces at work. Levi-Strauss was once the iconic symbol of American clothing. Because of pressure from big box stores to lower their prices, two things happened: 1) the manufacturer shut down all its U.S. stitching plants about a decade ago, throwing more than 3,300 Americans out of work, and 2) the company began making a special “big box” brand of jeans only for stores like Walmart, K-Mart and Meijers. Today, you can buy Levi-Strauss slim straight jeans for men anywhere from $22 to $26 at these box stores.

But Walmart also sells its own “Faded Glory” brand jeans for $10 a pair. None of these jeans are made in America, and the cheaper the price, the cheaper the quality. The fabric and the thread count in a Faded Glory jean are inferior to a Levi-Strauss Signature jean, which is inferior to the Levi 511 jeans. If I go to Walmart and buy a pair of Faded Glory or Signature Levi’s, I am supporting the outsourcing of jobs to Asian sweatshops, getting an inferior product that ends up in my town’s landfill in half the time of a superior product, and weakening the value of labor in the U.S. — often described as the shrinking of the American middle class.

When Levi-Strauss closed its U.S. plants, a company spokesman said, “There is no question that we must move away from owned-and-operated plants in the U.S. to remain competitive in our industry…Outsourcing production…helps us maintain strong margin.” Since 2004, a company called Li & Fung USA has been designing, manufacturing, and marketing certain Levi trademarks. In essence, a foreign company has become the “brand manager” for what was once the classic American clothing company.

Companies like Walmart have had a major impact on our trade deficit with China, our loss of millions of production jobs, and our switch from a manufacturing economy to a consumer economy. All this flows from the decisions we make as shoppers to buy Chinese-made jeans at an import store like Walmart.


As I state in my latest book, capitalism is inherently very wasteful and inefficient. Defenders of this “free” marketplace like to quote the Austrian economist Joseph Schumpeter, who popularized the concept of the “creative destruction” of the capitalist enterprise. One of the great economic myths about companies like Walmart is that they are “job creators.” When a new Walmart opens, the company (and local officials) will claim that the new superstore brings with it “250 new jobs.” This is a form of voodoo economics—because studies have shown that as much as 80 percent of these jobs are simply transferred from existing retailers in the same trade area. So the net effect is negligible. In fact, some analyses have shown negative job growth after a Walmart opens.


The point is, capitalism is not “perfectly engineered.” It is perhaps evenly balanced between creation and destruction. In the field or retailing, the nearly 4,000 Walmart stores in American have done little or nothing to lift the economy, and as I have argued for years, have actually precipitated the decline in the value of labor and the sustainability of the middle class. Our economy over the past 50 years would have fared better if Sam Walton had never stumbled onto the concept of discount retailing in small towns.

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