Senior Member

Colorado
285 posts, Sep 2003

posted 01-08-2004 12:41 PM            

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Hey shoppers! I've been boycotting Wal-Mart for three years, now -- and was never thrilled about their store or products! How 'bout you? This article explains a lot and covers the subject of globalism and job loss quite well! Wal-Mart is an unbelievable force and one of the largest corporations in America!
Long, but great article!

________________________________

The Wal-Mart You Don't Know

The giant retailer's low prices often come with a high cost. Wal-Mart's
relentless pressure can crush the companies it does business with and
force them to send jobs overseas. Are we shopping our way straight to
the unemployment line?

From: Issue 77 December 2003, Page 68
By: Charles Fishman Photographs by: Livia Corona

URL: http://www.fastcompany.com/magazine/77/walmart.html

A gallon-sized jar of whole pickles is something to behold. The jar is
the size of a small aquarium. The fat green pickles, floating in swampy
juice, look reptilian, their shapes exaggerated by the glass. It weighs
12 pounds, too big to carry with one hand. The gallon jar of pickles is
a display of abundance and excess; it is entrancing, and also vaguely
unsettling. This is the product that Wal-Mart fell in love with:
Vlasic's gallon jar of pickles.

Wal-Mart priced it at $2.97--a year's supply of pickles for less than
$3! "They were using it as a 'statement' item," says Pat Hunn, who calls
himself the "mad scientist" of Vlasic's gallon jar. "Wal-Mart was
putting it before consumers, saying, This represents what Wal-Mart's
about. You can buy a stinkin' gallon of pickles for $2.97. And it's the
nation's number-one brand."

Therein lies the basic conundrum of doing business with the world's
largest retailer. By selling a gallon of kosher dills for less than most
grocers sell a quart, Wal-Mart may have provided a ser-vice for its
customers. But what did it do for Vlasic? The pickle maker had spent
decades convincing customers that they should pay a premium for its
brand. Now Wal-Mart was practically giving them away. And the fevered
buying spree that resulted distorted every aspect of Vlasic's
operations, from farm field to factory to financial statement.

Indeed, as Vlasic discovered, the real story of Wal-Mart, the story that
never gets told, is the story of the pressure the biggest retailer
relentlessly applies to its suppliers in the name of bringing us "every
day low prices." It's the story of what that pressure does to the
companies Wal-Mart does business with, to U.S. manufacturing, and to the
economy as a whole. That story can be found floating in a gallon jar of
pickles at Wal-Mart.

Wal-Mart is not just the world's largest retailer. It's the world's
largest company--bigger than ExxonMobil, General Motors, and General
Electric. The scale can be hard to absorb. Wal-Mart sold $244.5 billion
worth of goods last year. It sells in three months what

number-two retailer Home Depot sells in a year. And in its own category
of general merchandise and groceries, Wal-Mart no longer has any real
rivals. It does more business than Target, Sears, Kmart, J.C. Penney,
Safeway, and Kroger combined. "Clearly," says Edward Fox, head of
Southern Methodist University's J.C. Penney Center for Retailing
Excellence, "Wal-Mart is more powerful than any retailer has ever been."
It is, in fact, so big and so furtively powerful as to have become an
entirely different order of corporate being.

Wal-Mart wields its power for just one purpose: to bring the lowest
possible prices to its customers. At Wal-Mart, that goal is never
reached. The retailer has a clear policy for suppliers: On basic
products that don't change, the price Wal-Mart will pay, and will charge
shoppers, must drop year after year. But what almost no one outside the
world of Wal-Mart and its 21,000 suppliers knows is the high cost of
those low prices. Wal-Mart has the power to squeeze profit-killing
concessions from vendors. To survive in the face of its pricing demands,
makers of everything from bras to bicycles to blue jeans have had to lay
off employees and close U.S. plants in favor of outsourcing products
from overseas.

Of course, U.S. companies have been moving jobs offshore for decades,
long before Wal-Mart was a retailing power. But there is no question
that the chain is helping accelerate the loss of American jobs to
low-wage countries such as China. Wal-Mart, which in the late 1980s and
early 1990s trumpeted its claim to "Buy American," has doubled its
imports from China in the past five years alone, buying some $12 billion
in merchandise in 2002. That's nearly 10% of all Chinese exports to the
United States.

One way to think of Wal-Mart is as a vast pipeline that gives non-U.S.
companies direct access to the American market. "One of the things that
limits or slows the growth of imports is the cost of establishing
connections and networks," says Paul Krugman, the Princeton University
economist. "Wal-Mart is so big and so centralized that it can all at
once hook Chinese and other suppliers into its digital system.
So--wham!--you have a large switch to overseas sourcing in a period
quicker than under the old rules of retailing."

Steve Dobbins has been bearing the brunt of that switch. He's president
and CEO of Carolina Mills, a 75-year-old North Carolina company that
supplies thread, yarn, and textile finishing to apparel makers--half of
which supply Wal-Mart. Carolina Mills grew steadily until 2000. But in
the past three years, as its customers have gone either overseas or out
of business, it has shrunk from 17 factories to 7, and from 2,600
employees to 1,200. Dobbins's customers have begun to face imported
clothing sold so cheaply to Wal-Mart that they could not compete even if
they paid their workers nothing.

"People ask, 'How can it be bad for things to come into the U.S.
cheaply? How can it be bad to have a bargain at Wal-Mart?' Sure, it's
held inflation down, and it's great to have bargains," says Dobbins.
"But you can't buy anything if you're not employed. We are shopping
ourselves out of jobs."

The gallon jar of pickles at Wal-Mart became a devastating success,
giving Vlasic strong sales and growth numbers--but slashing its profits
by millions of dollars.

There is no question that Wal-Mart's relentless drive to squeeze out
costs has benefited consumers. The giant retailer is at least partly
responsible for the low rate of U.S. inflation, and a McKinsey & Co.
study concluded that about 12% of the economy's productivity gains in
the second half of the 1990s could be traced to Wal-Mart alone.

There is also no question that doing business with Wal-Mart can give a
supplier a fast, heady jolt of sales and market share. But that fix can
come with long-term consequences for the health of a brand and a
business. Vlasic, for example, wasn't looking to build its brand on a
gallon of whole pickles. Pickle companies make money on "the cut,"
slicing cucumbers into spears and hamburger chips. "Cucumbers in the
jar, you don't make a whole lot of money there," says Steve Young, a
former vice president of grocery marketing for pickles at Vlasic, who
has since left the company.

At some point in the late 1990s, a Wal-Mart buyer saw Vlasic's gallon
jar and started talking to Pat Hunn about it. Hunn, who has also since
left Vlasic, was then head of Vlasic's Wal-Mart sales team, based in
Dallas. The gallon intrigued the buyer. In sales tests, priced somewhere
over $3, "the gallon sold like crazy," says Hunn, "surprising us all."
The Wal-Mart buyer had a brainstorm: What would happen to the gallon if
they offered it nationwide and got it below $3? Hunn was skeptical, but
his job was to look for ways to sell pickles at Wal-Mart. Why not?

And so Vlasic's gallon jar of pickles went into every Wal-Mart, some
3,000 stores, at $2.97, a price so low that Vlasic and Wal-Mart were
making only a penny or two on a jar, if that. It was showcased on big
pallets near the front of stores. It was an abundance of abundance. "It
was selling 80 jars a week, on average, in every store," says Young.
Doesn't sound like much, until you do the math: That's 240,000 gallons
of pickles, just in gallon jars, just at Wal-Mart, every week. Whole
fields of cucumbers were heading out the door.

For Vlasic, the gallon jar of pickles became what might be called a
devastating success. "Quickly, it started cannibalizing our non-Wal-Mart
business," says Young. "We saw consumers who used to buy the spears and
the chips in supermarkets buying the Wal-Mart gallons. They'd eat a
quarter of a jar and throw the thing away when they got moldy. A family
can't eat them fast enough."

The gallon jar reshaped Vlasic's pickle business: It chewed up the
profit margin of the business with Wal-Mart, and of pickles generally.
Procurement had to scramble to find enough pickles to fill the gallons,
but the volume gave Vlasic strong sales numbers, strong growth numbers,
and a powerful place in the world of pickles at Wal-Mart. Which
accounted for 30% of Vlasic's business. But the company's profits from
pickles had shriveled 25% or more, Young says--millions of dollars.

The gallon was hoisting Vlasic and hurting it at the same time.

Young remembers begging Wal-Mart for relief. "They said, 'No way,' "
says Young. "We said we'll increase the price"--even $3.49 would have
helped tremendously--"and they said, 'If you do that, all the other
products of yours we buy, we'll stop buying.' It was a clear threat."
Hunn recalls things a little differently, if just as ominously: "They
said, 'We want the $2.97 gallon of pickles. If you don't do it, we'll
see if someone else might.' I knew our competitors were saying to
Wal-Mart, 'We'll do the $2.97 gallons if you give us your other
business.' " Wal-Mart's business was so indispensable to Vlasic, and the
gallon so central to the Wal-Mart relationship, that decisions about the
future of the gallon were made at the CEO level.

Finally, Wal-Mart let Vlasic up for air. "The Wal-Mart guy's response
was classic," Young recalls. "He said, 'Well, we've done to pickles what
we did to orange juice. We've killed it. We can back off.' " Vlasic got
to take it down to just over half a gallon of pickles, for $2.79. Not
long after that, in January 2001, Vlasic filed for bankruptcy--although
the gallon jar of pickles, everyone agrees, wasn't a critical factor.

By now, it is accepted wisdom that Wal-Mart makes the companies it does
business with more efficient and focused, leaner and faster. Wal-Mart
itself is known for continuous improvement in its ability to handle,
move, and track merchandise. It expects the same of its suppliers. But
the ability to operate at peak efficiency only gets you in the door at
Wal-Mart. Then the real demands start. The public image Wal-Mart
projects may be as cheery as its yellow smiley-face mascot, but there is
nothing genial about the process by which Wal-Mart gets its suppliers to
provide tires and contact lenses, guns and underarm deodorant at every
day low prices. Wal-Mart is legendary for forcing its suppliers to
redesign everything from their packaging to their computer systems. It
is also legendary for quite straightforwardly telling them what it will
pay for their goods.

"We are one of Wal-Mart's biggest suppliers, and they are our biggest
customer, by far. We have a great relationship. That's all I can say.
Are we done now?"

John Fitzgerald, a former vice president of Nabisco, remembers
Wal-Mart's reaction to his company's plan to offer a 25-cent newspaper
coupon for a large bag of Lifesavers in advance of Halloween. Wal-Mart
told Nabisco to add up what it would spend on the promotion--for the
newspaper ads, the coupons, and handling--and then just take that amount
off the price instead. "That isn't necessarily good for the
manufacturer," Fitzgerald says. "They need things that draw attention."

It also is not unheard of for Wal-Mart to demand to examine the private
financial records of a supplier, and to insist that its margins are too
high and must be cut. And the smaller the supplier, one academic study
shows, the greater the likelihood that it will be forced into damaging
concessions. Melissa Berryhill, a Wal-Mart spokeswoman, disagrees: "The
fact is Wal-Mart, perhaps like no other retailer, seeks to establish
collaborative and mutually beneficial relationships with our suppliers."

For many suppliers, though, the only thing worse than doing business
with Wal-Mart may be not doing business with Wal-Mart. Last year, 7.5
cents of every dollar spent in any store in the United States (other
than auto-parts stores) went to the retailer. That means a contract with
Wal-Mart can be critical even for the largest consumer-goods companies.
Dial Corp., for example, does 28% of its business with Wal-Mart. If Dial
lost that one account, it would have to double its sales to its next
nine customers just to stay even. "Wal-Mart is the essential retailer,
in a way no other retailer is," says Gib Carey, a partner at Bain & Co.,
who is leading a yearlong study of how to do business with Wal-Mart.
"Our clients cannot grow without finding a way to be successful with
Wal-Mart."

Many companies and their executives frankly admit that supplying
Wal-Mart is like getting into the company version of basic training with
an implacable Army drill sergeant. The process may be unpleasant. But
there can be some positive results.

"Everyone from the forklift driver on up to me, the CEO, knew we had to
deliver [to Wal-Mart] on time. Not 10 minutes late. And not 45 minutes
early, either," says Robin Prever, who was CEO of Saratoga Beverage
Group from 1992 to 2000, and made private-label water sold at Wal-Mart.
"The message came through clearly: You have this 30-second delivery
window. Either you're there, or you're out. With a customer like that,
it changes your organization. For the better. It wakes everybody up. And
all our customers benefited. We changed our whole approach to doing
business."

But you won't hear evenhanded stories like that from Wal-Mart, or from
its current suppliers. Despite being a publicly traded company, Wal-Mart
is intensely private. It declined to talk in detail about its
relationships with its suppliers for this story. More strikingly, dozens
of companies contacted declined to talk about even the basics of their
business with Wal-Mart.

Here, for example, is an executive at Dial: "We are one of Wal-Mart's
biggest suppliers, and they are our biggest customer by far. We have a
great relationship. That's all I can say. Are we done now?" Goaded a
bit, the executive responds with an almost hysterical edge: "Are you
meshuga? Why in the world would we talk about Wal-Mart? Ask me about
anything else, we'll talk. But not Wal-Mart."

No one wants to end up in what is known among Wal-Mart vendors as the
"penalty box"--punished, or even excluded from the store shelves, for
saying something that makes Wal-Mart unhappy. (The penalty box is
normally reserved for vendors who don't meet performance benchmarks, not
for those who talk to the press.)

"You won't hear anything negative from most people," says Paul Kelly,
founder of Silvermine Consulting Group, a company that helps businesses
work more effectively with retailers. "It would be committing suicide.
If Wal-Mart takes something the wrong way, it's like Saddam Hussein. You
just don't want to piss them off."

As a result, this story was reported in an unusual way: by speaking with
dozens of people who have spent years selling to Wal-Mart, or consulting
to companies that sell to Wal-Mart, but who no longer work for companies
that do business with Wal-Mart. Unless otherwise noted, the companies
involved in the events they described refused even to confirm or deny
the basics of the events.

To a person, all those interviewed credit Wal-Mart with a fundamental
integrity in its dealings that's unusual in the world of consumer goods,
retailing, and groceries. Wal-Mart does not cheat suppliers, it keeps
its word, it pays its bills briskly. "They are tough people but very
honest; they treat you honestly," says Peter Campanella, who ran the
business that sold Corning kitchenware products, both at Corning and
then at World Kitchen. "It was a joke to do business with most of their
competitors. A fiasco."

But Wal-Mart also clearly does not hesitate to use its power, magnifying
the Darwinian forces already at work in modern global capitalism.

Caught in the Wal-Mart squeeze, Huffy didn't just relinquish profits to
keep its commitment to the retailer. It handed those profits to the
competition.

What does the squeeze look like at Wal-Mart? It is usually thoroughly
rational, sometimes devastatingly so.

John Mariotti is a veteran of the consumer-products world--he spent nine
years as president of Huffy Bicycle Co., a division of Huffy Corp., and
is now chairman of World Kitchen, the company that sells Oxo, Revere,
Corning, and Ekco brand housewares.

He could not be clearer on his opinion about Wal-Mart: It's a great
company, and a great company to do business with. "Wal-Mart has done
more good for America by several thousand orders of magnitude than
they've done bad," Mariotti says. "They have raised the bar, and raised
the bar for everybody."

Mariotti describes one episode from Huffy's relationship with Wal-Mart.
It's a tale he tells to illustrate an admiring point he makes about the
retailer. "They demand you do what you say you are going to do." But
it's also a classic example of the damned-if-you-do, damned-if-you-don't
Wal-Mart squeeze. When Mariotti was at Huffy throughout the 1980s, the
company sold a range of bikes to Wal-Mart, 20 or so models, in a spread
of prices and profitability. It was a leading manufacturer of bikes in
the United States, in places like Ponca City, Oklahoma; Celina, Ohio;
and Farmington, Missouri.

One year, Huffy had committed to supply Wal-Mart with an entry-level,
thin-margin bike--as many as Wal-Mart needed. Sales of the low-end bike
took off. "I woke up May 1"--the heart of the bike production cycle for
the summer--"and I needed 900,000 bikes," he says. "My factories could
only run 450,000." As it happened, that same year, Huffy's fancier,
more-profitable bikes were doing well, too, at Wal-Mart and other
places. Huffy found itself in a bind.

With other retailers, perhaps, Mariotti might have sat down,
renegotiated, tried to talk his way out of the corner. Not with
Wal-Mart. "I made the deal up front with them," he says. "I knew how
high was up. I was duty-bound to supply my customer." So he did
something extraordinary. To free up production in order to make
Wal-Mart's cheap bikes, he gave the designs for four of his higher-end,
higher-margin products to rival manufacturers. "I conceded business to
my competitors, because I just ran out of capacity," he says. Huffy
didn't just relinquish profits to keep Wal-Mart happy--it handed those
profits to its competition. "Wal-Mart didn't tell me what to do,"
Mariotti says. "They didn't have to." The retailer, he adds, "is tough
as nails. But they give you a chance to compete. If you can't compete,
that's your problem."

In the years since Mariotti left Huffy, the bike maker's relationship
with Wal-Mart has been vital (though Huffy Corp. has lost money in three
out of the last five years). It is the number-three seller of bikes in
the United States. And Wal-Mart is the number-one retailer of bikes. But
here's one last statistic about bicycles: Roughly 98% are now imported
from places such as China, Mexico, and Taiwan. Huffy made its last bike
in the United States in 1999.

As Mariotti says, Wal-Mart is tough as nails. But not every supplier
agrees that the toughness is always accompanied by fairness. The Lovable
Company was founded in 1926 by the grandfather of Frank Garson II, who
was Lovable's last president. It did business with Wal-Mart, Garson
says, from the earliest days of founder Sam Walton's first store in
Bentonville, Arkansas. Lovable made bras and lingerie, supplying
retailers that also included Sears and Victoria's Secret. At one point,
it was the sixth-largest maker of intimate apparel in the United States,
with 700 employees in this country and another 2,000 at eight factories
in Central America.

Eventually Wal-Mart became Lovable's biggest customer. "Wal-Mart has a
big pencil," says Garson. "They have such awesome purchasing power that
they write their own ticket. If they don't like your prices, they'll go
vertical and do it themselves--or they'll find someone that will meet
their terms."

In the summer of 1995, Garson asserts, Wal-Mart did just that. "They had
awarded us a contract, and in their wisdom, they changed the terms so
dramatically that they really reneged." Garson, still worried about
litigation, won't provide details. "But when you lose a customer that
size, they are irreplaceable."

Lovable was already feeling intense cost pressure. Less than three years
after Wal-Mart pulled its business, in its 72nd year, Lovable closed.
"They leave a lot to be desired in the way they treat people," says
Garson. "Their actions to pulverize people are unnecessary. Wal-Mart
chewed us up and spit us out."

Believe it or not, American business has been through this before. The
Great Atlantic & Pacific Tea Co., the grocery-store chain, stood astride
the U.S. market in the 1920s and 1930s with a dominance that has likely
never been duplicated. At its peak, A&P had five times the number of
stores Wal-Mart has now (although much smaller ones), and at one point,
it owned 80% of the supermarket business. Some of the
antipredatory-pricing laws in use today were inspired by A&P's attempts
to muscle its suppliers.

There is very little academic and statistical study of Wal-Mart's impact
on the health of its suppliers and virtually nothing in the last decade,
when Wal-Mart's size has increased by a factor of five. This while the
retail industry has become much more concentrated. In large part, that's
because it's nearly impossible to get meaningful data that would allow
researchers to track the influence of Wal-Mart's business on companies
over time. You'd need cooperation from the vendor companies or Wal-Mart
or both--and neither Wal-Mart nor its suppliers are interested in
sharing such intimate detail.

Bain & Co., the global management consulting firm, is in the midst of a
project that asks, How does a company have a healthy relationship with
Wal-Mart? How do you avoid being sucked into the vortex? How do you
maintain some standing, some leverage of your own?

This July, in a mating that had the relieved air of lovers who had too
long resisted embracing, Levi Strauss rolled blue jeans into every
Wal-Mart in the United States.

Bain's first insights are obvious, if not easy. "Year after year,"
Carey, a partner at Bain & Co., says, "for any product that is the same
as what you sold them last year, Wal-Mart will say, 'Here's the price
you gave me last year. Here's what I can get a competitor's product for.
Here's what I can get a private-label version for. I want to see a
better value that I can bring to my shopper this year. Or else I'm going
to use that shelf space differently.' "

Carey has a friend in the umbrella business who learned that. One year,
because of costs, he went to Wal-Mart and asked for a 5% price increase.
"Wal-Mart said, 'We were expecting a 5% decrease. We're off by 10%. Go
back and sharpen your pencil.' " The umbrella man scrimped and came back
with a 2% increase. "They said, 'We'll go with a Chinese
manufacturer'--and he was out entirely."

The Wal-Mart squeeze means vendors have to be as relentless and as
microscopic as Wal-Mart is at managing their own costs. They need, in
fact, to turn themselves into shadow versions of Wal-Mart itself.
"Wal-Mart won't necessarily say you have to reconfigure your
distribution system," says Carey. "But companies recognize they are not
going to maintain margins with growth in their Wal-Mart business without
doing it."

The way to avoid being trapped in a spiral of growing business and
shrinking profits, says Carey, is to innovate. "You need to bring
Wal-Mart new products--products consumers need. Because with those,
Wal-Mart doesn't have benchmarks to drive you down in price. They don't
have historical data, you don't have competitors, they haven't bid the
products out to private-label makers. That's how you can have higher
prices and higher margins."

Reasonable advice, but not universally useful. There has been an
explosion of "innovation" in toothbrushes and toothpastes in the past
five years, for instance; but a pickle is a pickle is a pickle.

Bain's other critical discovery is that consumers are often more loyal
to product companies than to Wal-Mart. With strongly branded items
people develop a preference for--things like toothpaste or laundry
detergent--Wal-Mart rarely forces shoppers to switch to a second choice.
It would simply punish itself by seeing sales fall, and it won't put up
with that for long.

But as Wal-Mart has grown in market reach and clout, even manufacturers
known for nurturing premium brands may find themselves overpowered. This
July, in a mating that had the relieved air of lovers who had too long
resisted embracing, Levi Strauss rolled blue jeans into every Wal-Mart
doorway in the United States: 2,864 stores. Wal-Mart, seeking to expand
its clothing business with more fashionable brands, promoted the clothes
on its in-store TV network and with banners slipped over the
security-tag detectors at exit doors.

Levi's launch into Wal-Mart came the same summer the clothes maker
celebrated its 150th birthday. For a century and a half, one of the most
recognizable names in American commerce had survived without Wal-Mart.
But in October 2002, when Levi Strauss and Wal-Mart announced their
engagement, Levi was shrinking rapidly. The pressure on Levi goes back
25 years--well before Wal-Mart was an influence. Between 1981 and 1990,
Levi closed 58 U.S. manufacturing plants, sending 25% of its sewing
overseas.

Sales for Levi peaked in 1996 at $7.1 billion. By last year, they had
spiraled down six years in a row, to $4.1 billion; through the first six
months of 2003, sales dropped another 3%. This one account--selling
jeans to Wal-Mart--could almost instantly revive Levi.

Last year, Wal-Mart sold more clothing than any other retailer in the
country. It also sold more pairs of jeans than any other store.
Wal-Mart's own inexpensive house brand of jeans, Faded Glory, is
estimated to do $3 billion in sales a year, a house brand nearly the
size of Levi Strauss. Perhaps most revealing in terms of Levi's
strategic blunders: In 2002, half the jeans sold in the United States
cost less than $20 a pair. That same year, Levi didn't offer jeans for
less than $30.

For much of the last decade, Levi couldn't have qualified to sell to
Wal-Mart. Its computer systems were antiquated, and it was notorious for
delivering clothes late to retailers. Levi admitted its on-time delivery
rate was 65%. When it announced the deal with Wal-Mart last year, one
fashion-industry analyst bluntly predicted Levi would simply fail to
deliver the jeans.

But Levi Strauss has taken to the Wal-Mart Way with the intensity of a
near-death religious conversion--and Levi's executives were happy to
talk about their experience getting ready to sell at Wal-Mart. One
hundred people at Levi's headquarters are devoted to the new business;
another 12 have set up in an office in Bentonville, near Wal-Mart's
headquarters, where the company has hired a respected veteran Wal-Mart
sales account manager.

Getting ready for Wal-Mart has been like putting Levi on the Atkins
diet. It has helped everything--customer focus, inventory management,
speed to market. It has even helped other retailers that buy Levis,
because Wal-Mart has forced the company to replenish stores within two
days instead of Levi's previous five-day cycle.

And so, Wal-Mart might rescue Levi Strauss. Except for one thing.

Levi didn't actually have any clothes it could sell at Wal-Mart.
Everything was too expensive. It had to develop a fresh line for mass
retailers: the Levi Strauss Signature brand, featuring Levi Strauss's
name on the back of the jeans.

Two months after the launch, Levi basked in the honeymoon glow. Overall
sales, after falling for the first six months of 2003, rose 6% in the
third quarter; profits in the summer quarter nearly doubled. All, Levi's
CEO said, because of Signature.

"They are all very rational people. And they had a good point. Everyone
was willing to pay more for a Master Lock. But how much more can they
justify?"

But the low-end business isn't a business Levi is known for, or one it
had been particularly interested in. It's also a business in which Levi
will find itself competing with lean, experienced players such as VF and
Faded Glory. Levi's makeover might so improve its performance with its
non-Wal-Mart suppliers that its established business will thrive, too.
It is just as likely that any gains will be offset by the competitive
pressures already dissolving Levi's premium brands, and by the
cannibalization of its own sales. "It's hard to see how this
relationship will boost Levi's higher-end business," says Paul Farris, a
professor at the University of Virginia's Darden Graduate School of
Business Administration. "It's easy to see how this will hurt the
higher-end business."

If Levi clothing is a runaway hit at Wal-Mart, that may indeed rescue
Levi as a business. But what will have been rescued? The Signature
line--it includes clothing for girls, boys, men, and women--is an odd
departure for a company whose brand has long been an American icon. Some
of the jeans have the look, the fingertip feel, of pricier Levis. But
much of the clothing has the look and feel it must have, given its price
(around $23 for adult pants): cheap. Cheap and disappointing to find
labeled with Levi Strauss's name. And just five days before the cheery
profit news, Levi had another announcement: It is closing its last two
U.S. factories, both in San Antonio, and laying off more than 2,500
workers, or 21% of its workforce. A company that 22 years ago had 60
clothing plants in the United States--and that was known as one of the
most socially reponsible corporations on the planet--will, by 2004, not
make any clothes at all. It will just import them.

In the end, of course, it is we as shoppers who have the power, and who
have given that power to Wal-Mart. Part of Wal-Mart's dominance, part of
its insight, and part of its arrogance, is that it presumes to speak for
American shoppers.

If Wal-Mart doesn't like the pricing on something, says Andrew Whitman,
who helped service Wal-Mart for years when he worked at General Foods
and Kraft, they simply say, "At that price we no longer think it's a
good value to our shopper. Therefore, we don't think we should carry it."

Wal-Mart has also lulled shoppers into ignoring the difference between
the price of something and the cost. Its unending focus on price
underscores something that Americans are only starting to realize about
globalization: Ever-cheaper prices have consequences. Says Steve
Dobbins, president of thread maker Carolina Mills: "We want clean air,
clear water, good living conditions, the best health care in the
world--yet we aren't willing to pay for anything manufactured under
those restrictions."

Randall Larrimore, a former CEO of MasterBrand Industries, the parent
company of Master Lock, understands that contradiction too well. For
years, he says, as manufacturing costs in the United States rose, Master
Lock was able to pass them along. But at some point in the 1990s, Asian
manufacturers started producing locks for much less. "When the
difference is $1, retailers like Wal-Mart would prefer to have the
brand-name padlock or faucet or hammer," Larrimore says. "But as the
spread becomes greater, when our padlock was $9, and the import was $6,
then they can offer the consumer a real discount by carrying two lines.
Ultimately, they may only carry one line."

In January 1997, Master Lock announced that, after 75 years making locks
in Milwaukee, it would begin importing more products from Asia. Not too
long after, Master Lock opened a factory of its own in Nogales, Mexico.
Today, it makes just 10% to 15% of its locks in Milwaukee--its 300
employees there mostly make parts that are sent to Nogales, where there
are now 800 factory workers.

Larrimore did the first manufacturing layoffs at Master Lock. He
negotiated with Master Lock's unions himself. He went to Bentonville. "I
loved dealing with Wal-Mart, with Home Depot," he says. "They are all
very rational people. There wasn't a whole lot of room for negotiation.
And they had a good point. Everyone was willing to pay more for a Master
Lock. But how much more can they justify? If they can buy a lock that
has arguably similar qual-ity, at a cheaper price, well, they can get
their consumers a deal."

It's Wal-Mart in the role of Adam Smith's invisible hand. And the
Milwaukee employees of Master Lock who shopped at Wal-Mart to save money
helped that hand shove their own jobs right to Nogales. Not consciously,
not directly, but inevitably. "Do we as consumers appreciate what we're
doing?" Larrimore asks. "I don't think so. But even if we do, I think we
say, Here's a Master Lock for $9, here's another lock for $6--let the
other guy pay $9."

Charles Fishman (cnfish@mindspring.com ) is a senior writer at Fast
Company . Andrew Moesel provided research assistance for this story.

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