Dell and the Wal-Mart Effect

In the Hutong
Relieved to be out of October
1926 hrs.

One of the reasons I review books here at Peking Review and not at some more established venue is my conviction that some books – or movies, or plays, or music, or art – cannot be reviewed on deadline. Or, more accurately, should not be reviewed on deadline.

Simple fact: some works need to be fully absorbed – “grokked,” to borrow a phrase from Robert Heinlein’sStranger in a Strange Land – before they can be fully understood and appreciated.

I very rarely get feeling when I read a book about American business. But when I finished The Wal-Mart Effect, Charles Fishman’s highly readable endoscopy of the infamous retail leviathan, I found myself unable to write a single word about it. So I passed it across the bed to the Party Secretary here in the Hutong, and I proceeded to meditate.

That was about six weeks ago. And now it is grokked.

Seeds of Destruction

Not that there is anything particularly complex about The Wal-Mart Effect. It is a deeply researched, highly readable, straightforward journalistic examination of Wal*Mart and the effect it has had on the economy, its customers, its communities, and its vendors.

Yet, despite what I thought was a highly balanced treatment of the subject, I walked away feeling like I had just read a modern tragedy. I haven’t been able to figure out why. Now I think I know.

Fishman ends the book with an imprecation, urging readers to call upon their solons and regulatory bureaucracies to write an entirely new book of laws to shackle this Beast from Arkansas and prevent it from doing a Godzilla on vast swathes of the US economy. Yet by the time he issues this call to arms, you are already left with the conclusion that it won’t be necessary.

What has made Wal-Mart successful, the book teaches us, will eventually kill – or at least cripple – the retailer.

Wal-Mart has grown immense by promising low prices, every day. It has created a business that is structured – financially, operationally, and psychologically – toward the single purpose of driving prices on every item it carries to the absolute lowest level possible, and then going one level lower.

All of which sounds great, until you begin to read about the compromises vendors are having to make to deliver that price. At some point in that spiral, something has to give, and all of the smart design and offshoring to Mexico or China will only get you so far. One is left with the unmistakable impression that if it ever comes down to a question of quality vs. price at Wal-Mart, the system inside the organization dictates that saving the extra nickel will win.

Low Prices…Forever. Bwaahahahahahahahaha!

The only problem with that for Wal-Mart is that it runs the risk of not only becoming the guarantor of low prices, but also gaining a reputation as a purveyor of the cheap. Say what you will about Americans, there are not many people in the world who will be happy trading in their hard-earned for a whole lot of inexpensive junk. Not, at least, when there are alternatives.

That tends to build a pretty high wall that looks set to limit Wal-Mart’s organic growth, and limits the cash hoard it can use to change its strategy or acquire a new growth engine. Wal-Mart is stuck with Always Low Prices.

What will happen when Wal-Mart stops growing? When low prices aren’t enough anymore? When competitors – in unreasonable defiance of economic logic – prove that people are willing to pay a little more for a noticeably better product and a more fulfilling buying experience?

Ask our friends in Round Rock, Texas. Michael Dell pioneered the idea that good computers could be made cheap and sold cheap. He also found out – the hard way – that a lot of people in the world wanted more out of a computer than just a low price. Now he is trying to turn the ship around and take another tack, and he is discovering that simply changing the way you think about your business – much less the way you do it – is really, really hard.

The Sad Ballad of Bentonville…and Bubugao

What happens when any major listed corporation stops growing? The hounds begin braying for blood. The takeover artists and hedge fund types move in. If you want to look into the Wal-Mart’s future – or the future of any major retailer shackled to a stagnant business model – look at what happened to Sears. Store closings. Games with intellectual property. Facelifts. And then the vultures move in.

Personally, I’m ambivalent about Wal*Mart. I get a better experience at other retailers for about the same price, so when I am back in the U.S., I go to Target, Costco, Barnes & Noble, and the Apple Store.

But I feel a bit sad for the company. After all of its promise, after all of the superlatives, the hyperbole, the hope, and the fear, uncertainty, and doubt, the company has peaked, and it’s going to be a long, ugly downhill run.

Living in China, one need only look at the host of companies battling each other to offer lower and lower prices, be they retailers, electronics manufacturers, or even online auctioneers, and see fodder for the financial carrion-birds. It is painfully clear that a lot of wealth is set to be destroyed as China’s business leaders learn that a race for the basement means your company is pointing straight down at the ground.