“Save Money, Live Better”, that’s the Walmart motto. Their latest advertising campaign pimps their latest “rollbacks” which is their word for a price cut. These prices cuts are meant to save attract you to the store for the savings, and I would guess this is a successful strategy for Walmart, but it’s coming at the expense of our economy!
Okay, that’s an exaggeration. But it does give me the opportunity to talk about deflation and practice some new skills with photo editing. In the most recent release of data on inflation, prices decreased slightly when you include food and energy prices. Excluding those numbers (which tend move quite a bit), prices increased slightly. But the rate of increase is so small it’s almost statistically insignificant. Inflation has been so low, and sometimes negative (AKA deflation) that it remains a concern for economists.
Deflation occurs when people stop buying products and companies are forced to cut prices to get people back into stores. Economists are terrified of deflation because it can cause prices to get so low that companies just stop selling whatever it is they make. They lay off workers and then you have all the other issues with the economy you’re already aware of.
Deflation can better be explained in the context of Walmart (hence the title).
It’s well known that much of Walmart’s success has to do with their low prices. They get their prices so low by purchasing in bulk and negotiating really low prices from their suppliers. They don’t just negotiate, they are ruthless with these vendors and as such the vendors can only get slim margins in their products. When Walmart does a rollback on a product, it probably means they’ve managed to get the supplier to cut their costs even more. Walmart might be willing to take a loss on some of these products, but they have to be applying even more pressure on to get to the desired price level.
Walmart risks squeezing prices so low that suppliers, such as Heinz will cross a line where they just stop making their product and exit the industry. This hurts Walmart and the economy as a whole. For example, Heinz now sells ketchup for $1 at Walmart. I don’t know how much it costs them to make it (maybe 85 cents including administrative costs), but at some point Heinz will simply say they aren’t going to make it for Walmart anymore because they aren’t making enough money. People that love Heinz (such as myself) may stop going to Walmart since our favorite product is no longer carried. Even worse, Heinz could get out of the whole ketchup business because of this.
That doesn’t sound so bad when you talk about ketchup, but what if it happened to thousands of products and millions of layoffs, the economy literally shuts down. So while we can’t say it’s all Walmart’s fault, they are playing a part. And if deflation takes off, I’ll grab my pitchfork and head down to Walmart with the rest of the hypocrites that hate Walmart but shop there and own their stock.
 By The Weakonomist |
The Weakonomist is the founder of Weakonomics. Clicking the picture of the puppy will tell you more about him. If you like what you're reading consider subscribing to the blog, following him on Twitter, and checking out the related posts below. Please consider a donation if you really enjoy Weakonomics. Also keep in mind that nothing I say can be construed as financial advice. |
