Sears/K-Mart Merger

[Late]

There's just something not right about Wal-Mart selling Sun Ra cd's ... ugh.

[Dr. Rat]

Just noticed Dan's reply, and just to clarify:

The gravy in this market is going to be with the middle & upper middle classes, and Walmart is very poorly positioned to get much market share there. Walmart/ Sears? Maybe.

Walmart STARTED in the hinterlands.  For many years now, they've moved very aggressively into the suburbs where the middle and upper middle classes are.  And they get a lot of their dollars already.

Well, yes, Walmart started in the hinterlands and now have stores in all the major suburbs, BUT if you look at who shops there (if you look at their demos) it is highly skewed toward the (broadly defined) proletariat (service workers, manufacturing workers). Though some of these folks make pretty good money, most of those good-paying job sectors are in steep decline (manufacturing), and the outlook for service workers over the next couple of decades is a decline in real earnings as the collective shit starts hitting the collective fan on US trade and fiscal deficits.

Though real earnings for American workers have stagnated, there are far more cheap goods on the market (Krugman has written on this a few times). Walmart has specialized in bringing these cheap goods at absolutely minimal overhead cost to the American prole and getting a huge share of proletarian disposible income.

Now, if proletarian income goes down, Walmart gets hurt badly. Their hold on other market sectors--middle and upper-middle classes--is very weak. They are actually in much the same position as McDonald's was ten years ago, apparently dominant, but heading for problems. McDonald's simply couldn't thrive in a culture where parents increasingly thought of McDonalds food in the same way they thought about drugs--an addictive product that would harm their children.

It doesn't matter one bit that Walmart has stores in the suburbs: just go to a Walmart and tell me about their strong appeal to the middle class. This, from American Demographics backs up what everyone's immediate impression of Walmart is when they go there:

Consumers who prefer Target do so on a sliding scale upward, depending on their income. Only 16 percent of those with incomes of $20,000 or less choose Target, but that climbs to 23 percent for those with incomes of $20,000 to $29,000, 26 percent for those earning $30,000 to $39,000, 29 percent for $40,000 to $74,000 and 47 percent among those with annual earnings of $75,000 or more. An expectedly proportionate curve applies to education levels. Wal-Mart preferences cycle the other way, with 59 percent of those making less than $20,000 and just 41 percent of those making $75,000 or more preferring Wal-Mart.

It's far from ludicrous (though certainly disputable) to predict that the real profits in retailing are going to be made from the higher end of this scale. It's far from ludicrous to suggest that Walmart's entire corporate identity are going to make it tough for them to compete there. The fact that Target was able to carve out its niche at all is a sign of serious softness in Walmart's appeal.

Thus the move to food markets. Walmart is really good at working small margins into bigger ones--just what you need in the grocery store market.

"Thus"? Walmart leveraged their big boxes to apply the same concepts to food shopping. It had nothing to do with being "poorly positioned to get" the market share of the middle and upper middle classes. You make it sound as if they were in a weak position and just trying to find some new way to hang on.

No, I'm saying they are looking ahead and moving into a market that has always been driven by price and has always worked on low margins. This is the kind of market where Walmart thrives.

And, yes, I still say they are poorly positioned to get very much of the profit from the upscale, image- and service-driven market. Anybody who has been to Walmart would say the same, I think.

I wouldn't be surprised if Walmart weren't essentially an enhanced grocery store chain in ten years, with other players dominating the "department store" market.

Yeah, a company that's a bigger economy than a lot of countries is just going to be a grocery store chain.

Well, Walmart's history proves one thing: change can happen very fast and very big in retail. In 1990 Walmart became America's biggest retailer. Where were they ten years earlier? That gives you a sense of how much things can change.

Sears and K-Mart used to be pretty big players, too. Now they are bit players.

I might be wrong in predicting that Walmart may be a big loser over the next ten years, but what is ludicrous is denying that such change can happen when it already has.

You build your business around extracting a huge share of lower-class disposable income, you are hugely successful, but that very success makes it rather doubtful that you'll be able to adapt well when lower-class disposable income drops significantly. As the profit center of the market shifts upwards, Walmart is weaker. Pretty simple really.

--eric

Edited December 13, 2004 by Dr. Rat

[Dan Gould]

Just noticed Dan's reply, and just to clarify:

The gravy in this market is going to be with the middle & upper middle classes, and Walmart is very poorly positioned to get much market share there. Walmart/ Sears? Maybe.

Walmart STARTED in the hinterlands.  For many years now, they've moved very aggressively into the suburbs where the middle and upper middle classes are.  And they get a lot of their dollars already.

Well, yes, Walmart started in the hinterlands and now have stores in all the major suburbs, BUT if you look at who shops there (if you look at their demos) it is highly skewed toward the (broadly defined) proletariat (service workers, manufacturing workers). Though some of these folks make pretty good money, most of those good-paying job sectors are in steep decline (manufacturing), and the outlook for service workers over the next couple of decades is a decline in real earnings as the collective shit starts hitting the collective fan on US trade and fiscal deficits.

Though real earnings for American workers have stagnated, there are far more cheap goods on the market (Krugman has written on this a few times). Walmart has specialized in bringing these cheap goods at absolutely minimal overhead cost to the American prole and getting a huge share of proletarian disposible income.

Now, if proletarian income goes down, Walmart gets hurt badly.

This is where your argument completely jumps the track.

So ... Walmart only gets "proletarian" income, and Target gets the income of what I guess might be described as the middle class and those who really aspire to it.

What is going to happen to all those poor proletariat people? Are they going to just disappear from the face of the Earth? Or will they all get fabulous job training and wonderful new jobs that take them straight into the middle class and the clutches of Target? Will they all just die off?

Or maybe, IF the shit hits the fan, the incomes of a helluva lot of people, not just the proletarian income, is going to go down, and maybe all of a sudden Walmart's prices might look better and better.

Another factor to consider:

Walmart is, I believe, swimming in cash. It is more likely that they improve the appearance of their stores, at a tiny cost to their bottom line, in order to compete with Target for these higher income people.

********************

You mention Paul Krugman, and I know everyone around here thinks Krugman is the greatest economic analyst since Keynes, so here's a little corrective to that perception.

by Donald Luskin

My colleague Bruce Bartlett has liberated a copy of the first page of a smoking-gun memo that Krugman wrote in 1982 with Larry Summers (who would 15 years later be Treasury secretary under Bill Clinton). I’ve already mentioned this memo — titled “The Inflation Time Bomb?” — in my column rebutting Krugman’s most recent attack on Ronald Reagan’s economic record. But now I’ve got the actual memo. And it’s a doozy. 

The memo can be found HERE

I’ve seen Paul Krugman make lousy predictions about the economy before — lots of times (actually, every time). But until I read this memo, I had no idea that he could be so thoroughly, spectacularly, awesomely, shockingly wrong. And this is no mere Krugman jeremiad on the op-ed pages of the New York Times. This is a document on United States Government letterhead, written in order to guide national economic policy. Thank God Ronald Reagan was smart enough not to believe one word of it.

This September 9, 1982, memo addressed to CEA chair Martin Feldstein and member William Poole must have been among the first Krugman wrote upon arriving at the CEA. In it, Krugman warns that the dramatic drop in consumer price inflation from its double-digit levels in 1979, 1980, and 1981 was a temporary aberration, and that inflation would soon come back with a vengeance. He wrote,

We believe that it is reasonable to expect a significant reacceleration of inflation in the near future. Much of the apparent progress against inflation has resulted from the temporary side effects of tight money and high real interest rates. These side effects must be expected to reverse themselves as real interest rates decline and the economy expands. … Our very rough guess is that correction of … distorted relative prices will add at least 5 percentage points to future increases in consumer prices … This estimate is conservative …

Before we drill down to understand exactly how and why Krugman was wrong, let’s look at the sheer magnitude of his wrongness. In the top panel of the chart below, you can see the history of consumer price inflation in the years before Krugman wrote his memo, and for the rest of the Reagan presidency. When Krugman wrote his memo, inflation was running at an annual rate of 5.97 percent — “at least 5 percentage points” higher would be a minimum of 10.97 percent. Krugman wasn’t even close. In fact, if anything, the right number was closer to 5 percent in the other direction.

The bottom panel of the chart below shows, month by month, just how wrong Krugman was. In the very next month after the memo appeared, inflation dropped by more than one full percentage point, and for the rest of the Reagan presidency it was never even close to the same level as when the message was written — never mind being “at least 5 percentage points” higher than that. Krugman was never less wrong than about 6 percentage points of inflation. At his worst, he was almost 10 percentage points wrong.

These days, however, Krugman flat out lies about his inflation-forecasting record. Instead of admitting he got it wrong, in his New York Times column last Friday (this was written in June, 2004), he bragged that the collapse of inflation in the 1980s “played out just as ‘left-wing Keynesian economics’ predicted.”

Today he explains the collapse of inflation as being solely due to Federal Reserve chair Paul Volcker and his “tight money policy.” Is that because he recognizes the reality that inflation is strictly a monetary phenomenon? Or does he credit the Fed with inflation’s collapse in the 1980s just so Ronald Reagan gets no share of the glory? Either way, it’s a stark contradiction to his position in the 1982 memo that the Fed’s policies produce only “temporary side effects.”

In 1982 Krugman thought inflation was caused by the exchange rate of the U.S. dollar, the price of commodities, and the price of oil. But as anybody with a lick of common sense could tell him, he had it completely backward — these things are the effect of inflation, not the cause.

Krugman noted that in 1982 the real foreign-exchange rate of the U.S. dollar was sharply higher — and real commodity prices were sharply lower — than they had been over the last decade. He concluded from this that as “the economy recovers, we can expect the real exchange rate and real commodity prices to return to approximately their historical levels.” He couldn’t have been more wrong in both cases.

The chart below shows the real exchange rate of the U.S. dollar for a decade before the 1982 memo, and then through the end of the Reagan presidency. It did drift slightly lower in the first couple of years after the memo. But then it took off to new highs — resembling nothing like a “return to approximately their historical levels.”

Same thing for commodities — but here Krugman spent an even shorter time being slightly and temporarily right. By early 1985 commodity prices had broken to new lows. Again, nothing that could even charitably be called a “return to approximately their historical levels.”

How about oil? Wrong again. In the 1982 memo, Krugman had said that his “at least 5 percentage points” was “conservative in that it assumes stable oil prices.” Of course, what Krugman meant was that it assumes oil prices don’t go up — after all, downward instability would present no problem. As the chart below shows, downward instability is exactly what we got. Other than for a month or two, oil never traded higher during Reagan’s presidency than its price when the 1982 memo was written. At the end of the Reagan presidency, its price had been cut in half.

So let’s review. In September 1982, Krugman forecasted that inflation would rise by “at least” 5 percent, that the real exchange rate of the dollar would fall, and that real commodity prices would rise. And he also worried that oil prices would rise. Inflation didn’t rise at all — it fell by close to 5 percent. The real exchange rate of the dollar rose. Commodity prices fell. The price of oil was cut in half.

In fact, about the only good piece of advice in the whole Krugman-Summers memo was the little slogan that was printed on the bottom of the page — “Buy U.S. Savings Bonds Regularly on the Payroll Savings Plan.”

The moral of the story? Y'all should learn to take what Krugman says with more than a few grains of salt.

[Dr. Rat]

The moral of the story? Y'all should learn to take what Krugman says with more than a few grains of salt.

Well, I was referring to Krugman's analysis of the buying power figures, which is actually one that more or less defends conservatives against the impoevrishment arguments made by the likes of James Carville circa 1992. He says, yes, working-class incomes have stagnated, but in terms of the consumer goods they can buy, working class incomes have increased, because of places like Wal-Mart.

Predicting economic trends is a game for fools like me. People like Krugman ought to stick to wise retrospective analysis!

Walmart is swimming in cash, yes, but it isn't just a matter of sprucing up the stores, it's a matter of an image that they have branded on our brains over the course of the last 15 years. Not to mention the corporate culture they've built around their current market strategy.

They'd have to establish a new store and a new brand, and if they did that they'd be sacrificing a lot of their built-in advantages. Not to say they couldn't do it.

The idea that Walmart might become even stronger if the economy takes a dip is definitely a strong counter-possibility to my speculations. But my feeling is that the shit flying off fan will disproportionately hurt those nearer the bottom of the socio-economic scale, and that rather than having an overall turn toward bargain-seeking, we may see a further increase in economic stratification and even greater emphasis being placed on the sorts of prestige buys that make one's status plainly visable.

I don't think the working and lower-service classes will die off. I just think they're going to have far less money to buy stuff at WalMart, no matter how cheap it is.

Just one possibility, of course.

--eric

[JSngry]

Now, if proletarian income goes down, Walmart gets hurt badly.

So ... Walmart only gets "proletarian" income, and Target gets the income of what I guess might be described as the middle class and those who really aspire to it.

What is going to happen to all those poor proletariat people?

They start shoplifting from Wal-Mart?

[rockefeller center]

Evil stuff:

http://community.ca.com/blogs/securityadvi...et-spyware.aspx

Edited January 4, 2008 by rockefeller center