I’ve been writing for years that the current “Walmart Model” was unsustainable.
The Walmart Model was based on five pillars:
1. Favorable government action, which, in Walmart’s case, included the expansion of the WTO to China; sweet handout deals from local politicians to build more and more stores; and, increased federal benefits to poor Americans.
2. Minimum wages paid to the company’s associates.
3. Relentless squeezing of suppliers in the name of “lean,” “efficiency” or whatever other buzzword-of-the-day could be used to justify the behavior.
4. The ability to constantly shift production to lower cost countries.
5. Ever-rising consumer spending and indebtedness.
Each of these has pretty much run its course:
- Politicians have gotten wise to the negative impact a Walmart store has on a local economy. Recent federal cutbacks have substantially reduced the amounts that poor Americans can spend at its stores.
- Minimum wage increases in many U.S. states, the mandates of Obamacare and a tightening job market have forced employee costs to rise.
- Most of the company’s 100,000+ suppliers can’t give any more. They’ve given more than they ever should have. And, now, the tanks are dry.
- China is no longer the manufacturing panacea that many thought it once was (Maybe it never was...).
- Fearing an economic downturn and rising interest rates, consumers have pulled their spending way back.
Here are some lessons we should take away from the retailer’s decline:
Lesson #1: Public Policy Shifts Are Inevitable
The notion of a free market is only a theory. In reality, government sets the parameters and ground rules for what companies can and cannot do. While firms can seek to influence public policy through lobbying and other approaches, government’s sheer size and power makes it impossible to control.
Lesson #2: Labor Markets Are Shrinking
The exiting of the Baby Boomers from the workforce has already had a tremendous impact. It is getting harder and more expensive to find and retain workers. It will only be more difficult going forward.
Lesson #3: Always Squeezing Suppliers is Dangerous
It is tempting to continuously pit suppliers against one another in an attempt to secure the lowest possible price. Smart companies realize that their suppliers need to be profitable, too. Constantly forcing suppliers to “sharpen their pencil” can create animosity and, ultimately, weaken one’s supply chain.
Lesson #4: Globalization Has Its Limits
Chasing the cheapest around the world is an inherently reactive business approach, not a sound strategy. Producing or sourcing in global markets needs to occur within the broader context of a company’s long-term objectives and goals. Going global simply to meet a lower price overlooks the inherent difficulties faced in doing international business.
Lesson #5: The Era of Cheap Capital is Winding Down
Rising interest rates will make it more expensive for borrowers to attain capital in the coming years. Any assumptions about debt-driven growth must take this into account.