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February 26, 2014

Manufacturers of buggy whips are virtually unknown. Henry Ford’s Model T(s) and other “horseless carriages” (as they were known at the time) did not require buggy whips for locomotion and demand for buggy whips consequently plummeted as millions of such horseless carriages chugged along the potholes of America’s then primitive highway system. Buggy whip manufacturers were victims of mechanical and marketing genius sparked by innovation and invention.

Economic history is full of tales about how old products and methodologies have been supplanted by newer and better products and methodologies more adapted to the wants and needs of the times. Buggies are replaced by horseless carriages; better cars and trucks are supplanted by yet better cars and trucks as demand follows design. Cargo planes, huge cargo ships and giant tankers are invented and put into play. Market forces determine what sells and what doesn’t, aided by advertising. Government, innovation, capital, labor and consumers with money in their pockets provide the setting for a successful marketplace for offerings of newly developed goods and services (and old ones not yet improved).

However, not all change is in goods and services. There are also marketing, management, details of business plans, finance and a host of other such business decisions to be made in how to present goods and services for sale in the most cost effective manner, including but not limited to transportation, warehousing, plans for future expansion etc. Even business plans themselves must be changed and/or amended as demanded by market conditions and that is where I think Wal-Mart comes in the picture.

Wal-Mart is in many ways the victim of its own success. Their “big box” model and the addition of a grocery line has served them and their shareholders well, but now there are some cracks beginning to show in their model. Sales are dropping; quarterly profit projections are reduced; their stock values are headed south. Could this giant retail chain be slipping, and, if so, why? More than one theory has been advanced as to why, and I have mine, as follows.

While people of every income level participate in shopping at Wal-Mart, the great bulk of shoppers at their stores are poor to middle class, people who may be on SNAP and, if employed, on minimum or near minimum wages. These are people lured into such stores for the low prices constantly advertised in the media, people who really do need bargain prices. Rising prices for petroleum products, electricity and other such items not for sale at Wal-Mart are taking a larger share of such customer’s resources, thus reducing what they have to spend at Wal-Mart. However, the 800 pound gorilla in this supply and demand story is wage inequality. One can work full time and be on SNAP and Medicaid because median family wages are now and have been either stagnant or falling for decades (when adjusted for inflation). The particular swath of people who shop at Wal-Mart number among this group. Businesses such as Wal-Mart which have been opposed to rises in the minimum wage have been cutting their own economic throats. I have blogged persistently that aggregate demand is what makes the economic world go around, and people who live from one pay check to the next, who are the most vulnerable, cannot provide demand because they have less and less purchasing power. Result? Sagging Wal-Street sales. What can be done? Raise the minimum wage – substantially. Wal-Mart has another problem which I will discuss in some other setting and it is this: their big-box business model is headed the way of the buggy whip. It worked once upon a time, but so did horseless carriages. Expect change.  GERALD  E

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