Economic Fetishes of “Modern” Retail Capitalism

Working Paper

Economic fetishes of “modern” retail capitalism

O'SULLIVAN, Mary

Abstract

In the early 21st century, controversy erupted about retail capitalism's implications for prosperity and equality in a debate about the so-called “Wal-Mart effect” in the United States. Since then, the debate has assumed global proportions as advocates and critics clash over the impact of prominent retailers on the societies in which they operate. Many voices have been raised in criticism of global retail companies but mainstream economists have rallied to the defence of Wal-Mart and other leading retailers in celebrating the economic achievements of “modern” retailing. Notwithstanding these economists' confidence, they are bluffing when it comes to the economics of retailing. They have made a fetish of retail capitalism, casting it in a fantastic form endowed with an autonomous and relentless economic logic, but their ostensible expertise in doing so relies on dubious models and measures of “modern” retailing's economics. To understand what makes retailing tick, we must grapple with how it operates as capitalism by studying how retail capitalists generate profits. Doing so shows how misguided economists are [...]

Reference

O'SULLIVAN, Mary. Economic fetishes of “modern” retail capitalism. Genève : Geneva school of Social Sciences, Department of History, Economics and Society, 2019, 30 p.

Available at: http://archive-ouverte.unige.ch/unige:129348

Disclaimer: layout of this document may differ from the published version.

1 / 1

Political Economy Working Papers | No. 2/2019

Economic Fetishes of “Modern” Retail Capitalism

Mary O'Sullivan

Working paper

Department of History, Economics and Society, University of Geneva, UniMail, bd du Pont-d'Arve 40, CH-1211 Genève 4. T: +41 22 379 81 92. Fax: +41 22 379 81 93

Economic Fetishes of “Modern” Retail Capitalism

Mary A. O’Sullivan University of Geneva

Department of History, Economics & Society Paul Bairoch Institute of Economic History

December 5th, 2019

In the early 21st century, controversy erupted about retail capitalism’s implications for prosperity and equality in a debate about the so-called “Wal-Mart effect” in the United States. Since then, the debate has assumed global proportions as advocates and critics clash over the impact of prominent retailers on the societies in which they operate. Many voices have been raised in criticism of global retail companies but mainstream economists have rallied to the defence of Wal-Mart and other leading retailers in celebrating the economic achievements of “modern” retailing. Notwithstanding these economists’ confidence, they are bluffing when it comes to the economics of retailing. They have made a fetish of retail capitalism, casting it in a fantastic form endowed with an autonomous and relentless economic logic, but their ostensible expertise in doing so relies on dubious models and measures of “modern” retailing’s economics. To understand what makes retailing tick, we must grapple with how it operates as capitalism by studying how retail capitalists generate profits. Doing so shows how misguided economists are in casting Wal-Mart as a poster child of economic efficiency for a post-industrial age. More important, it allows us to understand Wal-Mart’s own economic fetishes in running its business, as well as what is distinctive and banal about the Bentonville giant compared with leading retailers in the past and present. The crucial implication of this analysis is that we must confront the systemic logic of retail capitalism, rather than the particular ways in which it is applied, to limit its pernicious economic and social implications. Economic Fetishes of “Modern” Retail Capitalism

Mary A. O’Sullivan University of Geneva

December 5th, 2019

It is little wonder that the world’s largest retail companies have become a flashpoint for heated debate about the character and dynamics of contemporary capitalism given their prominence in the global economy. Shoppers in the rich world encounter these companies on a daily basis and globalisation has made them an increasingly visible presence in poorer countries too. Global retailers have accumulated profits on a scale that means that their founders -- Armancio Ortega of Zara, the Waltons of Wal-Mart, the Albrechts of Aldi fame, and Stefan Persson of H&M -- rank among the richest people in the world. At the same time, these companies exert a vital influence on the wellbeing of millions of people through the wages and working conditions they offer their employees, with their impact extending through their supply chains to influence working people around the world.

Notwithstanding these economists’ success in casting themselves as purveyors of truth and dispellers of myth, they are bluffing when it comes to the economics of retailing. They have made a fetish of retail capitalism, casting it in a fantastic form endowed with an autonomous and relentless economic logic, but their ostensible expertise in doing so relies on dubious models and measures of “modern” retailing’s economics. To understand what makes retailing tick, we must move away from the productivity analysis that is conventional in economics to grapple with how it operates as capitalism.

To that end, it is crucial to analyse how prominent retailers generate profits on their capital, a task that many economists, mainstream and heterodox, see as beneath them. Yet, studying the dynamics of retail capitalism through the lens of a history of profit shows how misguided economists are in casting Wal-Mart as a poster child of economic efficiency for a post-industrial age. More important still, it allows us to understand Wal-Mart’s own economic fetishes by revealing how the relationships that constitute its service business are transformed into measurable levers of profitability that are managed as if they had intrinsic value. Furthermore, an analysis of profit allows us to see what is distinctive and banal about the Bentonville giant, compared with leading retailers in the past and present, revealing certain fetishes as common across contemporary retail capitalism. The crucial implication of this analysis is that we must confront the systemic logic of retail capitalism, rather than the particular ways in which it is applied, to limit its pernicious economic and social implications.

1 1. The Conventional Economics of “Modern” Retailing”

With the pithy remark that “[p]roductivity isn’t everything, but in the long run it is almost everything”, Paul Krugman pinpointed the centrality of the concept of productivity to the study of economic prosperity.1 A country can raise output by applying more “inputs” – land, labour or capital -- to the production of goods and services but there is no reason to expect a prolonged expansion in the supply of these inputs over the long term. Therefore, to explain sustained improvement in material prosperity, economists look to increases in output generated with existing inputs, which they call productivity growth.2 The apparent simplicity of the notion of productivity growth is belied by the enormous complexity involved in attributing a precise economic meaning to it, not to speak of the challenges of operationalising it for the purposes of empirical analysis. However, mainstream economists have generated a plethora of conceptual and empirical norms to work around these complexities, allowing them to carry out empirical studies of productivity growth as if its meaning and measurement were unambiguous.3

For a long time, the manufacturing sector was the primary focus of these studies, since it was identified as the crucial source of measured productivity growth in rich economies. By the end of the 20th century, however, structural change in affluent economies had dramatically increased the economic significance of services relative to manufacturing. Since the historical record of productivity growth in services was weaker than for manufacturing, economists expressed concern about rich countries’ ability to sustain further increases in their living standards in a post-industrial age. That pessimism seemed to be borne out when data on productivity for the last quarter of the 20th century showed anaemic growth for many prosperous economies.

It came as a surprise, therefore, when growth in the United States picked up sufficient speed in the late 1990s to encourage talk of a “productivity miracle”. More striking still were the results of a study by consulting firm, McKinsey & Co., that highlighted the crucial role that retailing and wholesale services played in contributing to that supposed miracle. McKinsey went further still to pinpoint the contribution of a single company as decisive, claiming that: “Wal-Mart directly and indirectly caused the bulk of the productivity acceleration through ongoing managerial innovation that increased competitive intensity and drove the diffusion of best practice”.4 For the report’s authors, therefore, the “Wal-Mart effect” symbolized everything that was right with the US economy as it moved into the 21st century.5 McKinsey’s findings proved highly influential since they were the fruits of a major initiative that brought together some of the world’s leading economists to shift the focus of productivity analysis from nations to industries and firms. In their professional journals, prominent economists echoed McKinsey’s conclusions, conveying a similarly favourable view of the retail sector and celebrating Wal-Mart, in particular, for its contribution to the health of the US economy.6

These claims were widely reported in the US press at just the same time that Wal-Mart was attracting much less favourable attention. As it grew into the largest private employer in the United States, and then the world, Wal-Mart attracted a great deal of critical attention along the way. But the company drew particularly intense criticism from the early 2000s when it became

1 Paul Krugman, 1994, The Age of Diminished Expectations: US Economic Policy in the 1990s,. 2 Alexander J. Field, 2008. “Productivity”, in David Henderson, ed., Concise Encyclopedia of Economics, Liberty Fund, 417-19. 3 For some sense of the extent of these complexities, see Chad Syverson, 2011, “What Determines Productivity ?” Journal of Economic Literature, 49:2, 326–365. 4 McKinsey Global Institute, 2001 (http://www.mckinsey.com/global-themes/americas/us-productivity-growth- 1995-2000) 5 William Lewis, Vincent Palmede, Baudouin Regout, Allen Webb, “What’s Right with the US Economy”, McKinsey Quarterly, February 2002. 6 Martin Neil Baily and Robert Solow, 2001, "International Productivity Comparisons Built From the Firm Level", Journal of Economic Perspectives, 15 (3), 162.

2 the largest grocery chain in the United States and the leading grocer in some major US metropolitan markets. In a series of attacks that were widely reported in the US media, Wal- Mart’s critics assailed it for its stingy wages and benefits, its gender discrimination and anti- union stance, as well as its exacting demands on suppliers in the US and the developing world. Consequently, when the Los Angeles Times ran a series of articles on the “Wal-Mart effect” in 2003, it took a different line to that of McKinsey: “Wal-Mart is so powerful that it moves the economies of entire countries, bringing profit and pain. The prices can't be beat, but the wages can”.7

The newspaper drew a stark contrast between the unbeatably low prices that Wal-Mart offered its customers and the gruelling toll it took on retail workers. Noting that “[b]y the company's own admission, a full-time worker might not be able to support a family on a Wal-Mart paycheck”, the newspaper emphasized the downward pressure the company exerted on the living standards of working people. That pressure operated, it suggested, through the direct effect of Wal-Mart’s wage policy on the more than 1 million workers it employed as well as the company’s indirect impact on higher-paid union jobs in the stores it put out of business. There were other casualties of Wal-Mart capitalism too, the Los Angeles Times suggested, both in the US and overseas: “[b]y squeezing suppliers to cut wholesale costs, the company has hastened the flight of U.S. manufacturing jobs overseas. By scouring the globe for the cheapest goods, it has driven factory jobs from one poor nation to another”.8

Such criticisms were echoed elsewhere in the US media as well as among activists campaigning for change in Wal-Mart’s practices and policies. Academics soon joined the chorus of complaints with an extraordinary outpouring of critical studies on the “Wal-Mart effect” by specialists from history, sociology, geography, urban planning, logistics and marketing. These studies addressed various aspects of the company’s economic impact -- including its influence on employees, suppliers, competitors and consumers -- but it is notable how few economists joined in the barrage of criticism against Wal-Mart.9

The company soon came to its own defence, commissioning a study from consulting firm, Global Insight, which showcased the contributions it made to the US economy.10 Still, such claims could be dismissed as paid for by Wal-Mart until professional economists weighed in on its side with a slew of quantitative studies on the company’s economic impact. The results of these studies were brought together in a survey article on “The Causes and Consequences of Wal-Mart’s Growth” by Emek Basker in the Journal of Economic Perspectives in 2007. In her analysis, Basker promised: “to dispel some of the myths regarding Wal-Mart” by offering “a systematic accounting of what is known about Wal-Mart’s impact on the U.S. and global economy”. And she claimed that her accounting suggested a clear conclusion: Wal-Mart’s “technological prowess” had made it “a major contributor to the overall increase in productivity in the retail sector”.11

7 “The Wal-Mart Effect : An Empire Built on Bargains Remakes the Working World", Los Angeles Times, November 23, 2003. 8 Ibid. 9 See, for example, Brunn S, ed. Wal-MartWorld: The World’s Biggest Corporation in the Global Economy. New York: Routledge, 2006; Nelson Lichtenstein, ed., Wal-Mart: The Face of Twenty-First-Century Capitalism, 2006; idem., The Retail Revolution: How Wal-Mart Created a Brave New World of Business, The New Press, 2009; Bethany Moreton, To Serve God and Wal-Mart: The Making of Christian Free Enterprise, Harvard University Press, 2009; One notable exception among economists is Chris Tilly (see, for example, “Wal-Mart in Mexico: The Limits of Growth” in Lichtenstein, 2006, 83- 106). 10 Global Insight. 2005. Measuring the economic impact ofWal-Mart on the U.S. economy. http://www.globalinsight.com/walmart/2005study; The price impact of Wal-Mart: an update through 2006. http://www.globalinsight.com/MultiClientStudy/MultiClientStudyDetail2438.htm; Global Insight. 2007. 11 Emek Basker, 2007, “The Causes and Consequences of Wal-Mart’s Growth”, Journal of Economic Perspectives, 21(3), 177-198.

3 The primary evidence that Basker offered for her favourable characterisation of Wal-Mart as a productivity trailblazer can be found in Table 1 below, which shows stronger growth in labour productivity for the general merchandise sector, compared with the US economy as a whole, and even more rapid growth for Wal-Mart. Here we find direct echoes of McKinsey’s optimistic assessment of the Wal-Mart effect but economists went further to try to understand the impact of Wal-Mart’s productivity trailblazing on different stakeholders. A series of empirical studies suggested that Wal-Mart’s low prices were so beneficial for customers that they outweighed any damage that the company might do to retail workers through downward pressure on wages and conditions. Moreover, they suggested that even if the pressure that Wal-Mart exerted might hurt workers or suppliers or competitors, it made economic sense for the strong to prevail over the weak. Such a Darwinian process might seem regrettable to its victims, the argument went, but it was a salutary process for those who survived its discipline.12

Table 1 Labour Productivity Growth in the General Merchandise Sector and at Wal-Mart

Source: Basker, 2007.

Celebrating Wal-Mart’s economic impact in this fashion was far from the prerogative of right- wing economists. To the contrary, one of the strongest exponents of the economic virtues of the “Wal-Mart effect” was Jason Furman, an adviser to several Democratic administrations and president of the Council of Economic Advisers under President Barack Obama. For Furman the economic logic for characterising Wal-Mart as “a progressive success story” was clear: “Productivity is the principal driver of economic progress. It is the only force that can make everyone better off: workers, consumers, and owners of capital. Wal-Mart has indisputably made a tremendous contribution to productivity”. He insisted that: “Wal-Mart’s price reductions have benefited the 120 million American workers employed outside of the retail sector” and, at least for food, that “these benefits are distributed very progressively” since poor people spend much more of their income on food than rich people.13

It was true, Furman acknowledged, that Wal-Mart “like other retailers and employers of less- skilled workers, does not pay enough for a family to live the dignified life Americans have come to expect and demand”. But solving that problem, he contended, was a job for progressive government rather than capitalists. All he asked of Wal-Mart, and members of the Walton family,

12 “Inevitably, in a competitive environment, the emergence of a more-efficient firm will tend to edge out some less-efficient incumbents and is likely to prompt others to change some of their practices. This is, indeed, what we observe in the case of Wal-Mart.” (Basker, 2007, 195). 13 Jason Furman, “Wal-Mart: A Progressive Success Story”, mimeo, November 28, 2005, available at https://www.mackinac.org/archives/2006/walmart.pdf

4 was that they stop doing everything in their power to undermine public policies that would benefit Wal-Mart workers. Thus, the logic of Wal-Mart capitalism, at least as economists like Furman presented it, implied that the United States had to accept the “undignified” wages that the retailer paid its workers if it wanted the economic benefits it offered.14

Economic analysis of the “Wal-Mart effect” may have emerged in the context of a US debate about productivity but it was subsequently extended to other affluent economies to become a general analysis of “modern” retailing. Thus, in a recent survey article in the Journal of Economic Perspectives, Bart Bronnenberg and Paul Ellickson applauded the “retail revolution” that has occurred across developed economies on the grounds that “the adoption and diffusion of ‘modern retailing technology’ represents a substantial advance in productivity, providing greater product variety, enhanced convenience, and lower prices”.15 And, for the developing world too, economists have become cheerleaders for the modernizing impact of large retail chains, conjecturing that the retail revolution’s impact may be “even more profound” there.16

Economists have proven remarkably persuasive in vaunting the alleged efficiency gains of modern retailing and in marginalizing people who oppose its growing influence around the world. Those opponents include workers and unions who protest the poor working conditions and benefits of large retail chains. Opposition comes from other sources too, with French farmers blocking the entrance to hypermarkets to protest low milk prices; local merchants and street sellers in India campaigning against retail chains’ disastrous implications for their livelihoods; and US cities divesting their investment portfolios of large retailers’ stocks. Yet all of these protesters can be dismissed as Luddites or nationalists or hippies from the perspective of the economic logic of “modern” retailing, which coats with a scientific veneer the justifications that modern retailers offer of their own success.

2. Models and Measures of Retail Productivity

Mainstream economists exude a great deal of confidence in extolling the economic benefits of modern retailing. Yet, there is a pressing need to call their bluff since the models and measures on which they rely to make claims about the economics of retailing are webs of gossamer. Indeed, they are so flimsy that they offer hardly any assistance in penetrating the crucial economic dynamics of modern retailing. As a result, if we want to understand the stakes involved in retail capitalism we need to rethink the way its economic logic has been framed by mainstream economists.

Scholars who celebrate Wal-Mart as a model of efficiency present the trade-offs that its economic model implies as if they were inevitable but that claim is contested even on Wal-Mart’s home ground. Critics have pointed to the example of Costco Wholesale, one of Wal-Mart’s most important US competitors, to support their claim that it is possible to pay better wages to retail workers and still charge low prices to consumers.17 Indeed, Costco has been cast as the “anti- Wal-Mart” for the slightly higher wages it offers its employees, its unswerving commitment to low prices for its consumers, and its comparative restraint in the compensation it offers its executives.18 In terms of financial performance, moreover, Costco has managed to outdo Wal-

14 ibid. 15 Bart J. Bronnenberg and Paul B. Ellickson, 2015, “Adolescence and the Path to Maturity in Global Retail”, Journal of Economic Perspectives, 29(4), 113. 16 ibid. 17 For a critique of the claim that offering retail workers a more dignified life has to come at the expense of poor shoppers, see Ken Jacobs, Dave Graham-Squire and Stephanie Luce, "Living Wage Policies and Big-Box Retail : How a Higher Wage Standard Would Impact Walmart Workers and Shoppers", Research Brief, Center for Labor Research and Education, University of California, Berkeley, April 2011. 18 Marianne Lavelle, "Wal-Mart’s Most Wanted", US News and World Report, June 27, 2005; Steven Greenhouse, “How Costco Became the Anti-Wal-Mart”, New York Times, July 17, 2005; John Helyar, "The Only Company Wal-Mart Fears", Fortune, November 24, 2003.

5 Mart and many other US retailers, with its stock achieving “cult” status on Wall Street. For that reason, Costco’s chief executive, Jim Sinegal, is widely quoted as rejecting the idea that “companies must pay poorly and skimp on benefits, or must ratchet up prices to meet Wall Street’s profit demands”.19

In an article in the Harvard Business Review, Wayne Cascio, a professor of business, echoed that view, arguing that a comparison of Wal-Mart and Costco reveals “The High Cost of Low Wages”. Although Costco offered higher wages and benefits to its workers than Wal-Mart, Cascio emphasised that Costco’s relative generosity was repaid in higher employee retention and productivity: “Costco’s stable, productive workforce more than offsets its higher costs”.20 Other professors of business agreed that there were real economic costs of scrimping on employee costs and cited Wal-Mart as a case in point. Stock market analysts piled on too, pointing to empty shelves in Wal-Mart stores as evidence that stingy wages had pernicious effects on the company’s financial performance.21

Such criticisms of Wal-Mart’s business model sat uneasily alongside economists’ characterisation of the company as a productivity trailblazer and drew a reaction for that reason. Jason Furman, for example, claimed that Wal-Mart had little room for manoeuvre in the wages and benefits it paid its workers; since the company earned a “razor-thin profit margin”, he argued, “even a very small increase in its costs, without a corresponding increase in revenues, would wipe Wal-Mart’s profits out entirely”.22 However, the notion that Wal-Mart was constrained to pay low wages by the structural characteristics of its business took something of a beating with the company’s announcement in early 2015 that it would raise the wages of its lowest-paid staff. With classic understatement, the Economist explained that “[t]his change is curious, because in the past Walmart has paid notoriously little”, indeed “corner store wages while making megachain profits”.23 Especially striking was the way the company justified its policy change. Wal-Mart’s chief executive, Doug McMillon, explained that: “[s]ometimes we don’t get it all right. Sometimes we make policy changes or other decisions and they don’t result in what we thought they were going to. And when we don’t get it right, we adjust”.24 Wal-Mart’s pay increase brought the starting wages for Wal-Mart workers to only $10 an hour but the symbolic importance of its wage hike was unquestionable. And, shortly after Wal-Mart’s move, Costco bumped up wages for its entry-level workers in the US and Canada for the first time in nine years.

Given their symbolic importance, wage increases by leading retailers sparked a debate about the economic possibilities of retail capitalism in the United States. Labour activists suggested that if retail capitalists could raise wages by a dollar or so an hour, after arguing for years that such increases were economically inconceivable, maybe they could go higher still. Indeed, perhaps they could go as high as $15 an hour, which would allow them to pay what is deemed to be a “living wage” in the United States. Political pressure mounted when Bernie Sanders introduced a bill designed to force large companies to raise wages by taxing them when their workers turned to public benefits to get by.25 A few weeks later, Amazon announced that it would pay all

19 Greenhouse, 2005. 20 Wayne F. Cascio, "The High Cost of Low Wages", Harvard Business Review, December 2006. 21 "Customers Flee Wal-Mart Empty Shelves for Target, Costco”, Bloomberg News, March 26, 2013; "The Trouble Lurking on Walmart’s Empty Shelves", Time, April 9, 2013; "Empty Shelves Explained: Walmart’s Expansion Greatly Outpaced Its Hiring", Consumerist, November 20, 2015 22 Furman, 2005. 23 “High expectations: Wal-Mart and low-wage America”, The Economist, January 28, 2016 24 “How Did Walmart Get Cleaner Stores and Higher Sales? It Paid Its People More”, New York Times, October 16, 2016. 25 “Sanders, Khanna Introduce Bill to Get Billionaires Off Welfare”, September 5, 2018, https://www.sanders.senate.gov/newsroom/press-releases/sanders-khanna-introduce-bill-to-get-billionaires-off- welfare.

6 its US employees, including part-time, seasonal, and temporary workers, at least $15 an hour. More striking still was the gauntlet that Amazon’s CEO, Jeff Bezos, threw down in his letter to the company’s shareholders: “Today I challenge our top retail competitors (you know who you are!) to match our employee benefits and our $15 minimum wage. Do it! Better yet, go to $16 and throw the gauntlet back at us. It’s a kind of competition that will benefit everyone”. Amazon claimed that it raised wages because it was “the right thing to do” but whatever the truth of that claim, some of its competitors did follow its lead although not to surpass it.26

Clearly we need to think about the structural economic constraints that really bind leading retailers. What is certain, however, is that mainstream economists are poorly positioned to pronounce upon these constraints given serious problems with their understanding of the economics of retail capitalism. Indeed, Furman admitted that he had “no ability to judge” whether or not Wal-Mart could pay higher wages but claimed “I would trust Wal-Mart to know more about maximizing profits and shareholder value than its critics”.27 What Furman’s statement hints at, besides his unashamed bias, is that economists have been willing to celebrate Wal-Mart despite the fact that their expert knowledge offers little insight into what makes the company tick. Emek Basker clearly acknowledges as much in observing that: “While Wal-Mart’s advantage over other retailers has been undisputed for some time, the sources and magnitude of this advantage are not fully understood”.28

When economists try to explain Wal-Mart’s economic success, they typically appeal to a model in which technology plays a crucial role, as Basker does when she asserts that: “Wal-Mart’s technology has allowed it to grow, and this growth has lowered its operating costs through economies of scale”.29 Thus, “technology” is endowed with some autonomous, almost magical, ability to allow Wal-Mart to grow, with its expansion transformed into lower costs through the further sorcery of increasing returns to scale. What is never explained is how “technology” would allow some retailers, and not others, to surge ahead or the process through which their large investments in technology are recouped through the generation of high returns.

A lack of conceptual precision in defining the mechanisms that link technology to performance in the retail industry might be forgivable if there were ample empirical evidence to show that Wal-Mart or any other retailer derived a productivity advantage from “technology”. In fact, nothing could be further from the truth with empirical analysis of the economic impact of retail technologies still in its infancy. Even for scanning technology, which is about as basic to contemporary retailing as any technology, the only systematic evidence of its impact on labour productivity comes from an article published by Emek Basker as recently as 2012. Tellingly, she presents it as “a first step toward achieving a better understanding of the effect of technology on the retail sector” since it offers “the first systematic evidence on the impact of any specific innovation on worker productivity in the retail industry”.30 And what limited evidence there is on scanners suggests that we should not take it as given that technology has the capacity to boost retail productivity.31

26 “Why Amazon Really Raised Its Minimum Wage to $15”, Wired, October 2, 2018. 27 Furman, 2005. 28 Basker, 2007. 29 Ibid. 30 Basker, 2012, "Raising the Barcode Scanner : Technology and Productivity in the Retail Sector", American Economic Journal : Applied Economics, 4(3), 1-27; emphasis added. 31 Katja Girshik shows in her study of Swiss retailer, Migros, that some pioneers abandoned scanners precisely because they did not result in anticipated improvements in checkout speed (Katja Girschik, 2006, "Machine- Readable Codes: The Swiss retailer Migros and the quest for flow velocity since the mid 1960s", Entreprise et Histoire, 3(44), 55-65). So too Basker’s own study, which generates evidence on the early adoption of barcode scanners in the US in the 1970s and early 1980s, suggests that short-run improvements in labour productivity were small relative to the fixed costs of adopting scanners.

7 The challenge of linking technologies to retailers’ economic performance only increases as we move forward in time. After all, many of the technologies that Wal-Mart uses today – from scanning technology to warehouse management systems – are generic technologies for all the leading retailers with which it competes. Until now, no one has succeeded in showing that Wal- Mart uses these technologies so much better than its competitors that it would account for a “Wal-Mart effect”. Indeed, most of what we know about Wal-Mart’s alleged technological prowess emanates directly from the company’s communications department, and if you copied and pasted what it says on the matter into the annual report of Costco or Target, no analyst would be any the wiser.

Economists have made a fetish of the “Wal-Mart effect”, appealing to technology to account for it, without any evidence to show how it is mobilised by the Bentonville giant to generate an economic advantage over its rivals. To the extent that they offer support for their claims of Wal- Mart’s economic superiority, it comes from their analysis of productivity growth. We have seen such evidence in Table 1 but its simplified nature requires some explanation. Typically, to generate evidence on productivity growth, economists “decompose” growth in aggregate output into the contributions of the inputs used to produce it. Doing so depends on a conceptual representation of the inputs used in production and the relationship among them as well as measures of these inputs and outputs. Accounting for growth in this fashion may be standard fare in economics but it is dogged by a plethora of conceptual and empirical difficulties. And economists make so many compromises in dealing with these problems that their estimates of productivity growth end up being pretty distant cousins of anything that actually happens in the retail sector.

In characterising the relationship between outputs and inputs in empirical research on productivity growth, the use of a “production function” was pioneered nearly a century ago by Paul Douglas, a labour economist, and Charles Cobb, a mathematician.32 The significance of the Cobb-Douglas paper was not, as Jeff Biddle explained, their eponymous production function that is now so familiar to economists and characterised output a function of labour and capital. Rather, it was “the use of the function as the basis of a statistical procedure to estimate the relationship between inputs and output.” In “the ensuing decades”, as Biddle observed, “the procedure of regressing the log of a measure of output on the logs of measures of various inputs became a standard and accepted empirical procedure”.33

In principle, this procedure generates estimates the contributions by labour and capital to output growth with any residual being characterised as multifactor or total factor productivity. For this procedure to work, however, economists must be able to identify the distinct contributions made by different inputs to output growth. Put differently, they need to know the “elasticities” of different inputs, that is, the percentage change in output that results from the use of one percent more of an input, everything else being equal. Conceptually, input elasticities are close to returns to scale so we might expect them to vary both across and within industries. However, as Syverson notes, economists usually “make some additional but not innocuous assumptions—namely, perfect competition and constant returns to scale” to enhance the tractability of the production functions they use. Even at the level of a national economy, these assumptions are not innocuous but they are nothing short of egregious when used to estimate the sources of productivity growth in an industry such as retailing. After all, the claims that economists make about Wal-Mart’s superior economic performance suggest that the company exploits increasing returns to scale even if they do not explain them. To assume constant returns

32 Charles Cobb & Paul Douglas, “A Theory of Production”, American Economic Review, Vol. 18, No. 1, Supplement, Papers and Proceedings of the Fortieth Annual Meeting of the American Economic Association (Mar., 1928), pp. 139-165. 33 As Biddle notes, the function had been introduced already by Knut Wicksell (Jeff Biddle, 2012, "The Introduction of the Cobb-Douglas Regression", Journal of Economic Perspectives, 26(2)).

8 to scale and perfect competition, therefore, would be to deny everything economists believe they know about Wal-Mart as a modern retailer.

Yet, in practice, we rarely see the full-blown application of the methodology of growth accounting to the retail industry. That is due not so much to economists’ conceptual circumspection as to their empirical pragmatism given the challenges of measuring inputs. Measuring capital inputs is seen as especially difficult to the point that economists have given up on estimating capital productivity to rely exclusively, as Basker does in Table 1, on estimates of labour productivity.34 Of course, measuring labour inputs comes with challenges of its own -- whether to use the number of employees, the number of hours worked or some “quality- adjusted” measure of labour input that accounts for skills -- but such problems are seen as surmountable in contrast to the difficulties of measuring capital. Thus, we end up with ‘single- factor’ measures of productivity for the retail industry although they come with the obvious risk that ostensible measures of labour productivity are picking up output growth that reflects the utilisation of capital and other inputs excluded from the empirical analysis.35

If measuring inputs generates significant challenges, retail outputs create further headaches. As Baily and Solow observe: “The measured output of the retailing sector should be an index of the amount of retailing service being provided. This should reflect the range and type of merchandise being sold, the convenience of the store location, the nature of the surroundings, the information and help (or lack thereof) provided by the sales clerks, and the availability of special in-store services (such as salad bars or bakeries in groceries)”.36 Yet, standard measures of retail output do not take explicit account of any of these aspects of retail service, relying instead on the revenues of retail firms as a proxy for their output, as Table 1 shows.37

That makes it difficult, if not impossible, to generate meaningful comparisons across economic units or time periods when the quality of retail services varies. The problem can be seen in efforts to measure retail productivity across countries given systematic differences in the types of services offered to retail customers. In the United States, for example, it is standard practice for retail employees to pack groceries in shopping bags whereas in Europe retail customers perform that task themselves. Bagging groceries adds to the labour input required to generate retail services in the United States, as compared with Europe, but the difference in the retail service offered to customers on different sides of the Atlantic is not measured. For that reason, as Baily and Solow note, there is a systematic tendency for European retailers’ productivity to be overstated compared with their US counterparts.38

The general problem is that differences in retail output and, therefore, retail productivity across economic units and over time may be under- or over-stated if the quality of products and services provided is, respectively, higher or lower across them. The problem is not exclusive to retailing and it has fostered considerable experimentation with “hedonic” methods to adjust consumer price indices for changes in the quality of goods and services sold. However, these methods remain controversial and, when they are used, they are applied more extensively to goods-producing industries, especially high-technology industries, than service industries. Since

34 Syverson, 2011, 331. 35 If one gives up on calculating the productivity of any single input or “factor”, such as capital, multifactor productivity cannot be calculated since it is estimated as a residual once we have attributed some portion of productivity growth to individual inputs. 36 Martin Neil Baily and Robert Solow, 2001, "International Productivity Comparisons Built From the Firm Level", Journal of Economic Perspectives, 15 (3), 159-160. 37 Martin Neil Baily and Eric Zitzewitz, 2001, "Service Sector Productivity Comparisons : Lessons for Measurement", in Charles R. Hulten, Edwin R. Dean and Michael J. Harper, eds., New Developments in Productivity Analysis, University of Chicago Press, 419434-440. As Syverson notes, it is standard practice in economic analysis of productivity to use revenues to measure output. 38 Ibid.

9 “[r]etail distribution belongs to a sector of the economy often considered ‘hard’ or ‘impossible to measure’ by economists”, we are left with standard measures of output for retailing even though they are wholly inadequate for measuring the services that retail firms provide.39

The use of such inadequate measures is occasionally defended on the grounds that, even if they do not take explicit account of variations in quality across periods and units, they capture it implicitly through the quantities and prices of retail services that customers purchase. 40 However, that claim only makes sense if consumer choices are the key determinants of the character and pricing of retail services that are offered to them. Economists acknowledge that prices do not faithfully represent the quality of retail services if there are restrictions on retail competition but they argue that such restrictions are limited in most advanced economies.41 What they ignore, however, is that retail companies influence what is on offer to consumers not only through the prices they set for the goods and services they sell but also through the decisions they make about what goods and services to offer.42 Certainly, in making these decisions, retailers cannot ignore consumers but their primary concern is to generate a profit on their capital and the services they offer to consumers reflect strategic decisions they make in pursuit of that goal.

3. How Retailing Operates as Capitalism

Major retailers like Wal-Mart and Carrefour are just as preoccupied with their economic performance as economists but their overriding concern is their return on capital. As a result, as Reynolds et al. point out, there is a “real tension” between “economic approaches to the measurement of productivity within the retail sector” and the measurements used by retail enterprises themselves to assess their “efficiency and effectiveness”. Indeed, given the aforementioned problems with the standard measures of retail productivity, Reynolds and his colleagues suggest that economists pay closer attention to the way that retailers themselves track the performance of their businesses.43 Put differently, if we are interested in exploring the economic dynamics of retailing, it makes sense to start with what retailers care about.

For many economists, however, studying how major retailers generate profits on their capital would represent a plunge into the unknown. Mainstream economists are hampered in this regard by a theoretical vision of the economy that tried to systematically exclude the concept of profit at the moment of its conception.44 Sustaining that view proved impossible, given the economic importance of profits in the 20th century, but mainstream economists proffered only reluctant explanations that cast profits as the results of market imperfections. That view came under attack from the 1970s when the so-called Chicago school suggested that superior profit rates reflected the competitive superiority of dominant firms. To this day, as mainstream economists grapple with the profits of so-called superstar or frontier firms, they bounce back and forth between explanations based on market power and competitive superiority but without any serious analysis of the sources of these firms’ profits.

Perhaps more surprising is the fact that even among economists who take the concept of profit seriously – and that is true of every major school of heterodox economics -- they have proven reluctant to conduct empirical research on the sources of profits in capitalism. The closest we

39 Jonathan Reynolds , Elizabeth Howard , Dmitry Dragun , Bridget Rosewell & Paul Ormerod (2005) Assessing the Productivity of the UK Retail Sector, The International Review of Retail, Distribution and Consumer Research, 15:3, 237-280. 40 Rachel Griffith and Heike Harmgart, "Retail Productivity", The Institute for Fiscal Studies, WP05/07. 41 Ibid. 42 Ben Fine, "Elusive Consumers & the Theory of Demand,” Microeconomics: A Critical Companion, 2016. 43 Reynolds et al., 2005. 44 Walras, Léon. Elements of Pure Economics, or the Theory of Social Wealth, Homewood, IL.: Richard D. Irwin, Inc., 1954., 225.

10 get are studies of corporate profit rates but they focus largely on measuring rather than explaining profit rates. Moreover, since these studies focus on the nation as a unit of analysis, they typically do not address the considerable heterogeneity of profits that exists across industries and firms.45 The implications of this neglect of profit can be seen in heterodox economists’ efforts to synthesise what we know about the operation of contemporary capitalism. For example, in his recent book on Capitalism: Competition, Conflict, Crises, Anwar Shaikh makes hardly any mention of specific industries or firms despite the book’s advocacy of an economics that accords attention to the realities of competition, profit and capital. 46

From this perspective, the fact that we know so little about the sources of profits of retail capitalists like Wal-Mart is just one aspect of a more general ignorance. It is all the more regrettable since the few studies there are of profitmaking in the retail industry illustrate the potential of such an approach. The recent analysis by Cécile Baud and Cédric Durand of ten global retailers deserves particular mention as the most extensive and insightful one to date. Using retailers’ published financial statements, Baud and Durand explore the strategies they have pursued to increase their returns on capital in the face of growing shareholder demands upon them. Their study, which covers the period from the early 1990s until 2007, suggests that globalisation and financialisation have played a major role in boosting leading retailers’ returns on capital.47

Notwithstanding the insights offered by this study, there is more to be understood about the dynamics of leading retailers’ profitability as capitalist enterprises. Some of the leading retail enterprises in the world – with Wal-Mart and Aldi representing prominent examples – are relatively insulated from pressure from external shareholders by the enduring presence of their founding families. Nevertheless, they have made major changes in the operation of their businesses in recent decades and these changes have not been limited to overseas expansion or diversification into financial activities. In their pursuit of profits, the world’s leading retailers have dramatically transformed their core retail businesses and it is that transformation that we will try to understand in what follows.

Since economists have emphasised the “modernity” of leading retailers, it is important to bring an historical perspective to bear on contemporary retail capitalism. Merchants have been around for as long as business has existed but we know from the history of accounting that a preoccupation with profit on capital is a relatively recent one, at least for mercantile enterprises in Europe and United States. That does not mean that merchants ignored profit in the past, but when they discussed or measured it, they typically meant profit on sales. Doing business, therefore, was a matter of buying low and selling high, with a merchant’s success or failure being directly reflected in a higher or lower profit on sales.48

45 See, for example, Thomas Weisskopf, 1979, “Marxian crisis theory and the rate of profit in the postwar US economy”, Cambridge Journal of Economics, 3, 341-378; Duménil, Glick & Rangel, 1987, « The Rate of Profit in the United States, » Cambridge Journal of Economics, 4, 331-360 as well as the recent debate between Duménil & Levy, 2002 and Brenner, 2002. 46 Anwar Shaikh, Capitalism: Competition, Conflict, Crises, Oxford University Press, 2016. 47 See, especially, Cécile Baud and Cédric Durand, 2013, "Financialization, globalization and the making of profits by leading retailers", Socio-Economic Review, 10 (2), p. 241-266. They suggest too that globalisation and diversification enhanced these retailers' bargaining power vis-à-vis workers and suppliers, allowing them to force down wages and benefits as well as working capital requirements, in order to further enhance their returns on capital. 48 Yamey, Basil, “The ‘Particular Gain or Loss Upon Each Article We Deal In’: an Aspect of Mercantile Accounting, 1300-1800”, Accounting, Business & Financial History, 10 (1), 2000: 1-12; as Jonathan Levy notes: “In the United States, for well into the nineteenth century, in accounting terms profit meant the balance of commercial income and outgo” (Jonathan Levy, “Accounting for Profit and the History of Capital”, Critical Historical Studies, 1(2), 2014, 176).

11 We know that merchants in Europe continued to emphasise profit on sales, as they had for centuries, into the early 1800s. And in the United States too, the business practices of the traditional mercantile firm in the early 19th century were similar to those of European merchants operating centuries before.49 From the 1840s, however, the operation of US mercantile enterprises began to change as the country’s distribution system was transformed by the development of the railroad and telegraph networks. Evidence of such change, as business historian, Alfred D. Chandler Jr., emphasised, can be seen in the emergence of wholesale jobbers in the 1850s and 1860s.50

These jobbers purchased goods directly from manufacturers at home and abroad and sold them to general stores in rural areas and specialised retailers in urban centres. They built extensive purchasing and marketing organisations and the most successful of them -- firms like A.T. Stewart and Marshall Field -- grew into large-scale enterprises. In evaluating the performance of their operations, these wholesalers continued to emphasise the profit margins they generated on their sales -- merchant profit – but they also manifested a new concern with the utilisation of their stock or inventory.51 We can think of these wholesalers’ growing concern with the number of times they “turned” their inventories as evidence of their thinking not only as merchants but as capitalists too.

Mass retailers -- the department stores, mail order houses, and chain stores that purchased from manufacturers and sold to final consumers -- eventually replaced wholesale jobbers in the United States. These mass retailers were merchants and capitalists too, at least insofar as their working capital was concerned: as Chandler observed: “Like the jobber, their basic objective was to assure profits by maintaining a high velocity of stock turn”.52 The diffusion of capitalist principles in the US distribution sector generated major opposition as exemplified by the “store wars” of the 1880s and 1890s. As Vicki Howard explains: “[s]maller single-line merchants were unable to keep up with the velocity of department stores’ stock turn, which allowed mass retailers to accept lower margins and sell at lower prices, all the while making higher profits”.53

Far from being distinctive to the United States, such tensions were found in countries like France and Britain and other places where department stores challenged the economic logic of traditional retailers. Indeed, as early as 1883, when Emile Zola published his classic novel, Au Bonheur des Dames, he described that tension in vivid terms. In Zola’s story, one of his characters explains that the traditional shop’s objective to was to sell at high prices rather than in large quantities.54 The logic of the “grand magasin”, in contrast, was based “on the continual and rapid renewal of capital, which depended on turning the merchandise as many times as possible in the same year… thus we can be satisfied with a small profit… since it ends up making millions, when we work with considerable quantities of merchandise, that are constantly renewed”. 55 Zola knew well what he was talking about, his novel being based on careful observation of Le Bon Marché, which taught him that: “The business of these ‘grands magasins’ is based on the rapid

49 Alfred D. Chandler, Jr., The Visible Hand: The Managerial Revolution in American Business, Harvard University Press, 1977, 16, 38-40. 50 Ibid., 215-224. 51 Wholesalers defined inventory turnover as the number of times the inventory or stock on hand was sold within a specified time period, usually annually (ibid., 223). 52 Ibid., 224. 53 Vicki Howard, From Main Street to Mall: The Rise and Fall of the American Department Store, University of Pennsylvania Press, 2015, 31. 54 “L’art n’était pas de vendre beaucoup mais de vendre cher” (Emile Zola, Au Bonheur des Dames, Gallimard, 1980 (1883). 55 “sur le renouvellement continu et rapide du capital, qu’il s’agissait de faire passer en marchandises le plus de fois possible, dans la même année… de cette manière nous pouvons nous contenter d’un petit bénéfice… seulement cela finira par faire des millions, lorsqu’on opérera sur des quantités de marchandises considérables et sans cesse renouvelables” (ibid.).

12 renewal of capital”.56

In applying capitalist principles, mass retailers were preoccupied with inventories in the early decades of their operation. From the 1920s, however, there was a marked increase in the fixed capital they invested in their businesses. In parallel, we observe a growing preoccupation by leading retailers with the utilisation of their fixed, as well as their, working capital. That concern was exemplified in the increasing use of return on assets (ROA) for evaluating and managing their businesses. By then, some transportation and industrial enterprises in the United States had already turned in that direction. The DuPont Powder Company is typically cast as an industrial pioneer and one of its executives, F. Donaldson Brown, developed the so-called “DuPont formula” to help executives understand and manage the determinants of an enterprise’s return on assets. 57

Figure 1 The “DuPont formula”

Return on Assets = (Profit/ Sales) x (Sales/Assets) R P T

The “DuPont formula” explicitly evokes the turnover of capital that Marx emphasised decades before and it is likely, even it remains to be shown, that the intuition behind the formula was applied in capitalist enterprises long before it was made explicit. Nevertheless, to the extent that we attribute significance to managerial systems of measurement and control in the operation of capitalist enterprises, the spread of the DuPont formula signals an important development in the history of corporate capitalism. It diffused widely as a management tool in the 20th century, both in the United States and beyond, and it continues to serve many companies as the basis for identifying the determinants of their return on capital.58

If we apply the logic embodied in the DuPont formula to a retail business, we can see clearly the difference between functioning as a merchant and a capitalist. A retail company’s net profit on sales can be seen as a measure of its success as a merchant; the ratio of a company’s sales to its assets, in contrast, is a measure of the rapidity with which it “turns” its assets – its fixed assets and its working assets -- in the operation of its business. Taken together, these two components of ROA determine the success of a capitalist firm whereas a merchant enterprise relies only on the margin on its sales as a source of its profits.

4. Myths & Realities of Wal-Mart Capitalism

A similar capitalist logic continues to shape the way that many “modern” retailers think about the performance of their business into the early 21st century. In Wal-Mart’s annual report for 2017, for example, the management notes that “[w]e generate returns by efficiently deploying assets and effectively managing working capital” and explains that these efforts are monitored through its return on assets. Indeed, throughout the annual report, whenever the company’s return on capital is evoked, it refers to the return on assets.59 Moreover, as its earlier annual

56 “Le commerce de ces grands magasins est basé sur le renouvellement rapide du capital”, notably “un roulement des marchandises assez grand pour que le capital, représenté par elles, passe trois et quatre fois dans le magasin. Donc il faut vendre beaucoup, et pour cela vendre bon marché” (idem., Carnets d’enquête, 1881). 57 Dale L. Flesher and Gary John Previts, “Donaldson Brown (1885-1965): The Power of an Individual and his Ideas over Time”, Accounting Historians Journal, 40(1), 2013, 82. 58 As Flesher and Previts (79) observe, Scientific American ran an article in 1996 on the timelessness of the DuPont formula. 59 To be precise, the term that Wal-Mart uses is “return on investment” but, as it explains, that is equivalent to the return on assets according to standard accounting practice: “We consider ROA to be the financial measure computed in accordance with GAAP that is the most directly comparable financial measure to our calculation of ROI.” (Wal-Mart, 2017, Annual Report, 22).

13 reports show, Wal-Mart has paid close attention to its return on assets over the entire period of nearly 50 years since it went public.60 Since Wal-Mart features so prominently in recent discussions as an exemplar of a new and improved retail capitalism, it is worth analysing its return on assets over the 50 years for which we have data to understand how the company evolved.

Wal-Mart was founded by Sam Walton in 1962, the same year that S. S. Kresge launched its discount chain, K-Mart, and a third counterpart, Target, was established by Dayton Hudson.61 Together these three chains were to transform discounting into a powerful competitive threat for US department stores and, eventually, the entire US retailing industry, but their success was not immediate. In fact, in the 1965 data shown for a sample of leading US retailers in Table 2 – a sample that includes top-end, full-service retailers like Macy’s and middle-end, full-service retailers like J.C. Penney and Sears -- K-Mart and Target do not really stand out.

Certainly, they were not the most profitable in terms of their return on assets with that honour going to J. C. Penney. Its relatively high return on assets was driven not so much by its merchant profit – since its net profit as a percentage of sales was about average for a large US retailer – as by its relative advantage in terms of capital utilisation. As Table 2 suggests, that advantage stemmed largely from the extraordinary capital turnover of the Penney’s stores, a dimension along which it far surpassed other leading US retailers. Indeed, so great was its advantage in this regard that it compensated for J. C. Penney’s disadvantage in turning its inventories, a dimension of capital turnover on which old-line department stores like R.H. Macy, as well as discount stores like Dayton (Target), performed better.

Table 2 Constituent Elements of ROA in the US Retail Industry, 1965

Source: author’s analysis based on annual reports

When we focus our attention on Wal-Mart, however, we discover a potentially more formidable contender for J. C. Penney. Data for Wal-Mart are available only from 1969 but there was little change in the position of its counterparts by then. The most striking feature of Wal-Mart’s performance is that it generated an even higher return on its assets than J. C. Penney. It did

60 Notwithstanding the growing pressures of “financialisation” on the US corporate sector from the late 20th century, there is no mention of the company’s return on equity or its ilk anywhere in the company’s 2017 report. To the extent that the company’s return on equity is accorded any prominence in earlier annual reports, it is measured using book rather than market value of stockholders’ equity, so that it is really a variant on the company’s return on assets rather than a return on financial capital. 61 By then, Walton was a seasoned operator in the retail industry. His career in retailing began in 1940 when he was a management trainee with J. C. Penney, which had 1,500 stores operating in small towns across the US at that time. After serving in the US Army during World War 2, Walton opened a franchised Ben Franklin five- and-ten-cent variety store in Arkansas, Kansas and, as he gained retail experience, he tried to persuade Ben Franklin executives to launch a discount model for the urban market. When they refused, Walton left the company and set up his own discount chain as Wal-Mart. “Walton, Sam” in Morgen Witzel, ed., 2005, Encyclopedia of the History of American Management, Thoemmes.

14 somewhat better than the long-established chain in terms of merchant profit but what really allowed it to surpass Penney’s ROA, as Table 2 suggests, was the fact that it generated higher sales on every dollar it invested in its retail stores. With respect to other dimensions of capital turnover, however, Wal-Mart was a laggard in its early years with inventory turns that were lower than K-Mart and Target as well as established US retailers.

Of course, it is one thing to be extremely profitable when you are a midget in the industry -- as Wal-Mart was in 1969 – and quite another matter to operate successfully at a scale comparable to J. C. Penney, which had revenues of 75 times more than Wal-Mart at that time. It is interesting, therefore, to look at Wal-Mart’s return on assets over the long run to determine what happened after it made its initial splash. Sure enough, as Figure 2 makes clear, a great deal changed at Wal- Mart over the half century for which we have data. The company was unable to maintain the extremely high return on assets of its initial years. Indeed, Wal-Mart’s debut on the stock market in 1970 was followed by a sharp decrease in its ROA to a low of 6 per cent. By the late 1980s, it had rebounded, almost to its previous level, but plummeted again to below 8 per cent. Since the mid-1990s, Wal-Mart’s ROA has proven more stable, oscillating around 8 per cent for nearly two decades, albeit with some decline in the recent past.

In historical perspective, therefore, the variability of Wal-Mart’s profit on capital is striking and its ebbs and flows find no obvious explanation in the existing literature on the company. In most accounts of Wal-Mart's economic performance, the retailer’s success is attributed to explanatory factors that are presented as constants in the company’s history. Mainstream economists, as we have seen, point to Wal-Mart’s alleged mastery of technology, which they trace to the company’s beginnings, as the secret of its success. More jaundiced accounts also emphasise factors that are constants in the company’s history with Bethany Moreton emphasising “the fundamentalist Christian teachings embraced by many of its employees” and Nelson Lichtenstein’s pointing to the company’s exploitative labour practices that have defined Wal-Mart from the start.62 Clearly, there is little scope in such accounts of Wal-Mart’s success for explaining, or even guessing, what might account for the vagaries in Wal-Mart’s ROA .

Figure 2 Return on Assets (ROA) for Wal-Mart, 1970-2017

4.1 The Myth of Wal-Mart’s Economics

To understand the history of Wal-Mart’s profits, it is helpful to identify the constituent elements of the company’s return on assets over the last 50 years. Given the company’s early success in terms of capital utilisation, notably with respect to fixed capital, it makes sense to look there and what we find, as Figure 3 shows, is a record of dramatic change since Wal-Mart’s establishment.

62 Moreton, 2009 ; Lichtenstein, 2009.

15 We observe a sharp decline in fixed asset turns from the company’s early days, followed by a modest rebound in the 1980s. More striking still is what happened then, notably the steady and dramatic decline in the turnover of Wal-Mart’s fixed assets from the late 1980s that persisted for a thirty-year period.

An explanation for this dramatic deterioration in Wal-Mart’s fixed capital utilisation can be found in the character of the retailer’s expansion. In the company’s early years, as Sam Walton explained: “Our key strategy was to put good-sized stores into little one-horse towns which everybody else was ignoring”. In opening stores, moreover, Wal-Mart had “a well-defined strategy to saturate the market areas”.63 The advantage of this strategy was low investment for each square foot of new retail space and, as long as sales per square foot rose, the result was improvement in the company’s fixed asset efficiency. After 20 years of this strategy, however, Wal-Mart had saturated its markets and sales per square foot began to decline, and in the early 1980s the company changed tack. As Wal-Mart’s annual report for 1985 observed: “In recent years… an increasing number of stores are being opened in and around metropolitan areas within the chain’s regional trade territory”.64 The company’s fixed assets per square foot rose as it pursued this new strategy but sales per square foot climbed even faster, with the result that the turnover of its fixed capital rose too (see Figures 3 & 4).

Beginning in the late 1980s, however, we see a more ominous shift in Wal-Mart’s economic model after Walton stepped from active management. Under its new CEO, David Glass, Wal-Mart embarked on a programme of national expansion, tripling the number of stores it operated in just over a decade and increasing their square footage nearly four times. Moreover, the company placed greater emphasis on opening stores and distribution centres in suburban and metropolitan locations and as it moved into more densely populated places, as Thomas Holmes showed, its fixed investment per square foot increased.65 Initially, sales per square foot rose too, but not enough to compensate for increased investment costs, and the situation deteriorated from the late 1990s as sales per square foot started to decline even as fixed assets per square foot remained high. As a result, Wal-Mart’s fixed asset utilisation plummeted to weigh heavily on the retailer’s overall asset turnover (see Figures 3 & 4).

Figure 3 Wal-Mart’s Fixed Capital Turns Sales/Fixed Assets, 1970-2017

63 Sam Walton with John Huey, 1992, Made in America : My Story, New York : Doubleday, 109. 64 Wal-Mart, Annual Report, 1985, 10. 65 Wal-Mart, Annual Report, 2001, 6; Thomas Holmes, 2011, “The Diffusion of Wal-Mart & Economies of Density”, Econometrica, 79(1), 254.

Figure 4 Wal-Mart’s Fixed Assets & Sales per Square Foot, in real terms

The downward trend in the company’s fixed capital utilisation confronts the widespread view of Wal-Mart as a poster child for post-industrial capitalism. That view, as we have seen, is based on the types of statistics shown in Table 1. Compiled along conventional lines, these figures estimate labour productivity and completely ignore fixed capital utilisation, which makes no sense for Wal-Mart, given how much money it has invested in the operation of its business. In fact, there is no mystery to the rising sales per employee shown for Wal-Mart in Table 1: it reflects the increased sales that Wal-Mart generated from operating in more densely populated places. The fact that Wal-Mart had to pay dearly for that opportunity in higher costs of real estate makes it extremely misleading to focus on sales per employee as a primary, even exclusive, indicator of Wal-Mart’s performance, as mainstream economists have been willing to do. Doing so ignores the sizeable capital investments that the company made in the course of its expansion strategy that were essential to Wal-Mart’s access to denser populations.66

In fact the problem with standard measures of Wal-Mart’s productivity growth goes even further given their shortcomings even as estimates of labour productivity. In focussing on sales per employee as their key measure, economists implicitly assume that hiring one employee costs much the same as hiring any other. However, as Holmes’ analysis showed, Wal-Mart’s expansion into more densely populated places implied not only rising capital costs per square foot but also higher wages per employee.67 It is difficult to generate precise estimates of these rising labour costs for Wal-Mart, since it does not disclose the wages and salaries its pays its employees and includes them only in the broader category of selling, general and administrative expenses (SG&A). Still, since wages and salaries are the largest component of retailers’ SG&A expenses, we can use them as a proxy to estimate the rising labour costs associated with Wal-Mart’s expansion. As Figure 5 shows, there was a sharp rise in real SG&A expenses per employee at Wal-Mart over the last two decades and, of crucial importance, they grew much faster than real sales per employee. Once one takes account of the fact that each extra dollar in sales per employee was generated only at the expense of extra dollars spent on hiring employees, the rising labour productivity that economists attribute to Wal-Mart can be called into question. Indeed, if we calculate the dollars in sales generated per dollar spent on SG&A by Wal-Mart, the result suggests a steady decline, rather than an increase, in labour productivity from the early 1990s.

66 Thomas Holmes, 2011, “The Diffusion of Wal-Mart & Economies of Density”, Econometrica, 79(1), 254. 67 Ibid.

17 Figure 5 Wal-Mart’s Evolving Workforce

It is clear, therefore, that the measures on which economists rely to assess the economic performance of Wal-Mart are deeply flawed. A careful analysis of the historical trends in the company’s utilisation of the fixed capital and labour at its disposal confronts the widespread perception of Wal-Mart as a boon to economic efficiency. But if my analysis confronts a myth about Wal-Mart’s economics, it also suggests a puzzle about the company’s performance: how can a company that registers sustained declines in the productivity of its fixed capital and labour be such a successful capitalist?

4.2 The Levers of Wal-Mart’s Capitalism

To resolve that puzzle, we need to go further in our analysis of the sources of Wal-Mart’s profits on capital. Insofar as capital utilisation is concerned, we have focussed so far on fixed capital but as Wal-Mart’s balance sheet shows, the company’s capital is tied up not only in property, plant and equipment but in working capital too and, especially, inventories (see Table 3). For a complete analysis of Wal-Mart’s capital utilisation, therefore, we need to look at how it uses its inventories and what we discover is revealing indeed.

Table 3 Where is Wal-Mart’s Capital?

Source: Walmart, 2016, Annual Report, 37

We have seen that Wal-Mart did not perform especially well on this dimension in its early years. The company achieved some initial success in pushing up its inventory turns from the mid- 1970s, as Figure 6 shows, but that was largely because Wal-Mart was catching up on other mass retailers, especially its rival discounters. Even then it took Wal-Mart nearly two decades to bring

18 its inventory turns from 4 to 6 times and that increase was still not sufficient to match the performance of Target, its closest competitor at the time.

From the mid-1990s, however, something radically different happened. Wal-Mart enjoyed a spectacular rise in its inventory turnover that brought it to more than 12 times at its peak in 2010. The company’s inventory turns have somewhat diminished since then but they are still nearly double what they were in the mid-1990s. It is worth emphasising that such spectacular improvements in inventory turns are uncommon in the history of retail capitalism. There have been times when inventory turns have risen but they have resembled the early period of improvement for Wal-Mart in the relatively slow pace and extent of change observed. Thus, evidence that Wal-Mart has doubled inventory since the mid-1990s should make us attentive to the possibility that it reflects something more than an improvement in the retailer’s operating efficiency.

Figure 6 Wal-Mart’s Capital Utilisation

The fact that inventory turns are typically more than twice as high for grocery stores, compared with variety or general merchandise stores, gives us a hint of what happened.68 A major shift in Wal-Mart’s economic model took place from the late 1980s following the launch of its new “supercentre” format, which made general merchandise and groceries available in one giant store. In pursuing this strategy, Wal-Mart was clear that it was trying to improve the utilisation of its capital as a lever to boost its ROA. Since grocery retailers turn over their inventories much faster than retailers of general merchandise, Wal-Mart planned to use groceries as loss leaders to lure customers into its stores in order to increase sales of its higher-margin products. On average, US households shop for groceries 1.5 times a week and Wal-Mart hoped to capitalise on such frequent visits by becoming a one-stop shop for groceries and general merchandise.69 As William Simon put it, when he was President and CEO of Wal-Mart US: “the velocity of a pillow is one time every year or two years… The velocity of bananas or milk is once a week or twice a week. You have to drive velocity through food… And with the traffic… we’re able to leverage [it] on the other side”.70

68 This estimate is based on a study of inventory turns in the US retail industry from 1985 to 2000 (Vishal Gaur, Marshall L. Fisher and Ananth Raman, 2005, “An Econometric Analysis of Inventory Turnover Performance in Retail Services”, Management Science, 51 (2), 181-194). 69 Food Marketing Institute, U.S. Grocery Shopper Trends 2015, Arlington, VA, 2015. 70 R. Dennis Olson, “Lessons from the Food System : Borkian Paradoxes, Plutocracy, and the Rise of Walmart’s Buying Power”, in William Schanbacher, ed., The Global Food System : Issues and Solutions, ABC-CLIO, 2014, 88.

19 There was nothing particularly new about Wal-Mart’s idea but implementing it successfully was another matter. When French retailer, Carrefour, sought to apply its hypermarché model in the United States around the same time, it was advised “to build a wall between our produce area and the rest of the store because Americans were not used to shopping for these items at the same time”.71 It turned out that Americans could be convinced to do that if they were offered a sufficient range of groceries and general merchandise to make one-stop shopping feasible. To do that, however, retailers had to have a distribution network that could handle a full line of groceries as well as general merchandise. Carrefour had done that successfully in France but it struggled in the United States and eventually exited the market. But Wal-Mart also faced problems in realising the benefits it anticipated from its diversification even though it knew its home market well and had an established distribution network there.

As the importance of groceries increased for Wal-Mart’s sales, inventory turnover did not rise as anticipated. The major obstacle that Wal-Mart confronted in increasing turnover was in adapting the company’s existing distribution system to the challenges of selling groceries as well as general merchandise. The company had planned to build a single distribution system, capable of handling the demands of both fast-moving perishables and durable goods, but it struggled to make such a streamlined approach work and for a time ended up maintaining parallel distribution systems. It is quite clear from Wal-Mart’s annual reports in the early 1990s that the company knew what was wrong but solving the problem proved to be difficult. Eventually, it required a complete overhaul of Wal-Mart’s distribution system, to integrate grocery products with longer shelf lives with its existing distribution system, and build a more responsive distribution system for fresh foods and other faster-moving products. That solution proved expensive in terms of fixed capital investment but eventually it allowed Wal-Mart to drive inventory turns up in the second half of the 1990s. Management trumpeted the “dramatic improvement in inventory management” to shareholders in the company’s annual reports, emphasising that “[t]his makes more capital available for productive uses”.72

Once its efforts at improving inventory turns showed signs of success, Wal-Mart sharpened its focus on the other important lever of its return on capital: its profit on sales. Inventory turns may have been higher in grocery retailing than for variety stores but they typically came at the expense of lower margins. Before its diversification into groceries, Wal-Mart generated margins of 4 per cent or more on its sales, reflecting its focus on a retail segment -- general merchandise – where margins were relatively high in the United States. With the company’s diversification into groceries, the implications seemed predictable. As an article in the New York Times emphasised: “[s]upermarkets have learned to live with exceptionally narrow profit margins, often less than 2 percent. If Wal-Mart seeks to offer even lower prices, profits will be thin indeed”.73

Sure enough, as the grocery business made its presence felt, Wal-Mart’s cost of goods sold (COGS) increased, driving down its gross margins (see Figure 7). At just the same time, Wal- Mart’s aggressive expansion was driving up its SG&A expenses, putting further downward pressure on its net margins. By the late 1990s, as Figure 8 shows, the net profit that Wal-Mart generated on its sales had fallen by an entire percentage point from where it had been a decade earlier. Either Wal-Mart had to accept a lower return on capital or find some way to boost its margins on sales.

71 “French Hypermarket adjusts to U.S.”, New York Times, February 20, 1989, D6. 72 Wal-Mart, Annual Report, 1998, 14, 15. 73 “Wal-Mart falls out of Wall Street’s favour”, New York Times, April 15, 1993.

20 Figure 7 Wal-Mart as Merchant

Given its commitment to expansion, the only way to do that was to generate higher gross margins on the goods it sold. And, as Figure 8 shows, it was to prove extraordinarily successful in this regard, driving its cost of goods sold down from nearly 80 per cent to only 65 per cent of its revenues, thereby adding nearly 15 percentage points to its gross margin. As a result, and despite its growing operating expenses, Wal-Mart was able to bring its net margins back up to close to 4 per cent even as grocery sales grew to nearly 60 per cent of Wal-Mart’s total revenues.

Figure 8 Primary Components of Wal-Mart’s ROA, 1970-2017

As for inventory turns, the dramatic improvement in Wal-Mart’s gross margins is so unusual as to beg the question of how the retailer achieved it. A retailer’s gross margin reflects the prices it pay its suppliers, the costs of shipping the goods to its stores, as well as the retailer’s pricing policy. It is worth emphasising that despite all of the laudatory ink spilled on Wal-Mart’s distribution system there is hardly any evidence to assess the extent of Wal-Mart’s efficiency or how it has evolved over time. Still, given that Wal-Mart was celebrated for its distribution system by the late 1990s, it seems implausible that it could have improved its efficiency sufficiently to explain a decline in its cost of goods sold on the order of 15 percentage points of sales. It seems more likely, therefore, that Wal-Mart’s sourcing and pricing policies account for the improvement in its gross margins.

Insofar as Wal-Mart’s sourcing is concerned, it proved highly successful in leveraging its

21 increasing scale to drive harder bargains with its suppliers. Wal-Mart has long been notorious for its tough negotiations with suppliers in its general merchandise business and from the late 1990s it took advantage of US trade agreements to put further downward pressure on the cost of the goods it sells. Indeed, global sourcing has proven to be such a valuable lever for Wal-Mart in securing lower prices for goods sourced from abroad that it is by far the largest importer of goods by ocean container into the United States.74

Although Wal-Mart pioneered its hard-nosed sourcing in the general merchandise business, it adopted a similar approach to its suppliers in the grocery business. By 2016, with 21 per cent of the US grocery business, Wal-Mart had enormous weight to throw around, compared to its closest competitor, Kroger, with a 9 per cent market share, or Costco with only 5 per cent.75 Indeed, to the extent that there is an economic rationale behind Wal-Mart’s expensive expansion, it is for the benefit it derives from bulking up in squeezing suppliers. Given how loosely the term “economies of scale” is invoked, it is worth being explicit that there are no “economies” involved when a company uses its market power to pressure its suppliers to accept lower prices for the goods they sell.

Crucial to the improvement in Wal-Mart’s gross margins, in addition to the increasingly favourable deals it wrung from its suppliers, was a pricing policy that ensured that it retained some of the benefits rather than passing them on to consumers. For a company that has cultivated a reputation for everyday low prices, striking a balance between the image it presents to its customers and its efforts to boost its profits depends on a sophisticated pricing strategy. We have seen that Wal-Mart used products that are frequently purchased by customers as loss leaders to drive customer traffic through its stores. For this policy to generate profits, however, it was crucial that the downward pressure on Wal-Mart margins that “everyday low prices” created were more than counterbalanced by higher margins on other products.

Wal-Mart slashed prices on certain products to lure customers into its stores. Just how far it was willing to go in this regard became clear in legal charges of predatory pricing against the company in the United States that suggested that Wal-Mart was charging as much as 30 per cent below its own cost of goods for certain products.76 Further evidence came from Germany, which has stricter legal controls against predatory pricing, and showed that Wal-Mart took the lead in slashing prices in “selling certain basic foods such as milk, butter, sugar, flour, rice and vegetable fat” not only below the sales prices of its competitors but below the cost that Wal-Mart was paying for these goods.

Yet, charging predatory prices on high “velocity” products is only one aspect of Wal-Mart’s pricing strategy. After all, setting prices below your own costs would be economically irrational were it not compensated by higher margins on the sales of other products. As to how Wal-Mart gets away with this strategy, we might look to the substantial literature in marketing that shows a striking degree of ignorance or misunderstanding among consumers about the prices that retailers charge. Sure enough, a series of price comparisons undertaken between 2017 and 2019 suggested that Wal-Mart was using only a certain number of grocery products as loss leaders while charging substantially higher prices on many grocery products than some of its rivals.77

74 Indeed, the top four importers to the United States via ocean container transport were all mass retailers in 2013 and 2018 with Wal-Mart importing 731,500 and 940,410 twenty-foot equivalent units (TEUs) respectively; Target (511,600 & 631,621) ; Home Depot (325,200 & 417,100) ; and Lowe’s (236,500 & 307,625) (“Top 100 Importers in 2013: U.S. Foreign Trade via Ocean Container Transport,” Journal of Commerce). 75 https://www.fool.com/investing/2017/12/04/kroger-proves-theres-life-after-amazonwhole-foods.aspx 76 Norman W. Hawker, 1996, “Wal-Mart and the Divergence of State and Federal Predatory Pricing Law”, Journal of Public Policy & Marketing, 15(1). 77 “How a cheap, brutally efficient grocery chain is upending America's supermarkets”, CNN Business, May 17, 2019.

22 What we see in this analysis of the levers of Wal-Mart’s capitalism is the extent to which inventory turns and sales margins have become economic fetishes for the retailer. In conceiving of sales of milk as a means of generating a higher “velocity” of pillows, the retailer completely abstracts from its relationships with the customers who buy these products. Customers become “traffic”, featuring in Wal-Mart’s strategic calculus as mere instruments of its efforts to drive its inventory “velocity”. What consumers are willing to buy matters for this calculus and, for that reason, Wal-Mart has become a notoriously assiduous student of consumer behaviour. Still, the company’s main preoccupation is not to give consumers what they want but to sell them as much stuff as they can bear. Similarly, insofar as its pricing policies are concerned, what matters to Wal-Mart is not that it actually offers everyday low prices to its customers. It is the image of such a retailer that it seeks to project although in reality it generates profits on its capital by not passing through to customers the benefits it wrings from its suppliers.

5. The Systemic Logic of Retail Capitalism

An analysis of the historical trends in, and determinants of, Wal-Mart’s profit on capital reveals a much more complex and intriguing image than the bland representations of steady and sustained success that we are accustomed to hearing. For all of the talk of “modern” retailing, we have seen that Wal-Mart operates according to a systemic logic that has operated in the US, and elsewhere, since at least the 1920s. Wal-Mart has distinguished itself from its rivals not by reinventing the logic of retail capitalism but by applying it in a distinctive way to generate, as Figure 9 shows, a higher profit on capital than its competitors over a sustained period.

Figure 9 ROA for Wal-Mart & its US Competitors

In the United States, its closest competitors are Costco and Kroger in the grocery business and Target in general merchandise retailing. The gap between Wal-Mart and its US competitors has varied, and narrowed recently insofar as Costco is concerned, but there is no denying that Wal- Mart has outdone its leading US competitors for a long time. Comparing the sources of Wal- Mart’s profits on capital with those of other leading retailers can help us to pinpoint what accounts for its relative success. The results of such a comparison, based on data for 2016, are shown in Table 4 and allow us to highlight how Wal-Mart generates profits compared to its rivals.

Given the structural transformation of Wal-Mart’s business to become the largest grocer in the United States, a comparison with other leading grocery retailers is especially interesting. Costco is a major player in US grocery retailing and it pursues a distinctive approach to Wal-Mart in its relationships with its customers. Customers must pay an annual membership fee to shop in Costco stores and, in return, the retailer promises to pass on the cost savings it makes from

23 buying in bulk to its customers. To make good on its promise, Costco caps the gross margin it generates on its sales to ensure that the prices it charges for its goods keep pace with the costs of purchasing them. The implication, as Costco emphasises in its annual report, is that it operates “at significantly lower gross margins (net sales less merchandise costs) than most other retailers”.78 Sure enough, Costco’s gross margin averaged only 11 per cent between 2013 and 2017, less than half the 25 per cent recorded by Wal-Mart for the same period.

Table 4 Wal-Mart in US Perspective, 2016

Source: author’s analysis based on annual reports * Approximately 56% of its revenues come from grocery sales ** Approximately 22% of its revenues come from grocery sales *** 2015

Consequently, Costco is even more dependent than Wal-Mart on driving its assets intensively to sustain its return on capital.79 It has done so by limiting the range of merchandise it offers to 3,000 or so distinct items, compared to 140,000 for a Wal-Mart supercentre. As a result, as Table 4 shows, Costco has achieved even higher rates of asset utilisation than Wal-Mart, both for the fixed assets represented by its stores and warehouses as well as the inventory that it moves through them, allowing it to compensate to some extent for its lower margins on sales. Indeed, in the recent past, even as its margins remained well below those of Wal-Mart, it was able to approach its larger rival in terms of ROA by driving its asset utilisation still higher.

What the comparison with Costco suggests is that Wal-Mart does not achieve a higher ROA than its rivals by outperforming them across the board. What matters is that Wal-Mart’s advantage in terms of profit margins is sufficient to outweigh its disadvantage in terms of asset turns. Extending the comparison to include Target takes us closer to pinpointing what makes Wal-Mart distinctive since Wal-Mart remains a major retailer of clothing, household goods and electronics, alongside food. What Table 4 shows is that Wal-Mart’s profit on sales, which may be impressive compared with Costco and other grocery chains, is lower than Target’s net margin; conversely, even if Wal-Mart’s asset turns do not look high compared with Costco and Kroger, they are better than Target’s turns.

Therefore, the key to Wal-Mart’s success in retail capitalism is the way it combines sales margins and asset turnover in a mix that none of its closest competitors replicates to generate a higher ROA than any of them. That distinctive combination stems from Wal-Mart’s success in combining groceries and general merchandise in a single retail business to create a formidable competitive challenge for its leading rivals. Wal-Mart’s use of groceries as loss leaders has increased price competition for grocery retailers, cutting into profit margins that were already thin, and inducing them to try to compensate by driving up their asset turns. Wal-Mart’s success has also put pressure on retailers of general merchandise with Target being criticised for its

78 The cap varies by category of product sold but Costco’s overall gross margin oscillated between 10.6 per cent and 11.4 per cent between 2013 and 2017. 79 See Costco, Annual Report, 2017, especially 6, 44.

24 failure to match its competitor’s returns on capital, and urged to take better advantage of its grocery business to rival Wal-Mart’s inventory turns.80

Certainly, Wal-Mart has achieved considerable success, compared to its traditional competitors, in generating profits on capital but it faces new competitors today that may prove to be more formidable threats. Of particular interest is the challenge from some German retailers that proved to be Wal-Mart’s undoing when it tried to break into their home market. Having lost a huge amount of money in Germany, Wal-Mart finally withdrew in defeat but leading German discounters, Aldi and Lidl, have announced their intention to carve out a larger share of the US market. Although their secretiveness precludes any real understanding of how they operate, Aldi and Lidl are believed to compensate for lower profit margins than Wal-Mart with much higher asset turns.81 It is striking, therefore, that Aldi inaugurated its assault on the US market with a price war against Wal-Mart in groceries, calling into question Wal-Mart’s reputation for low prices. By 2019, the claim that Aldi was beating Wal-Mart on price had hit the national news in the United States.82 There were signs that Wal-Mart was fighting back by slashing some of its prices but if it continues in this vein it will eat into its margins. It is no surprise, therefore, that Wal-Mart seems to be focussed even more intensely on improving its asset utilisation not only by raising inventory turns but even to the point of closing some of its stores.

Whether the German discounters will succeed in dethroning Wal-Mart in the US retail market, a notorious graveyard for European retail capitalists, is not the important issue here. What is significant about the competitive challenge they have mounted is that it is an expression of the same systemic logic of retail capitalism that drives Wal-Mart. As such, it depends on the same levers that Wal-Mart uses to generate profits on capital even if Aldi and Lidl manipulate these levers in their own distinctive ways. Much the same can be said of the competitive threat that Wal-Mart faces from Amazon, despite all of the talk of the online giant changing the rules of the game in retailing.

It is true that in Amazon’s early years, it operated according to performance criteria that deviated from the norms that defined the operation of US retail capitalism for nearly a century. The online retailer’s phenomenal growth came at the expense of its return on assets, as Table 4 suggests, and it survived long enough to disrupt the US retail industry only due to the financial largesse of Wall Street. Financial support was extended to Amazon based on the promise of fabulous rewards in the future, with profits on capital being calibrated in terms of the implied returns to shareholders embedded in its soaring stock price. Had Amazon continued to function according to that logic – one that privileges a financial concept of capital and expected, rather than realised profits -- it might have posed an existential threat to the traditional logic of US retail capitalism. In recent years, however, Amazon has been pushed to run its business along more traditional lines to generate profits in the present.

What that implies for Amazon is boosting its return on assets using the levers of sales margins and asset utilisation that other retail capitalists manipulate. As one financial analyst pointed out, and Table 4 suggests, inventory turnover “has tumbled at Amazon over the past decade. Despite the benefit of not having thousands of stores spread across the country, Amazon now moves

80 Despite several high-profile attempts to strengthen its grocery business, Target still generates only 20 per cent of its sales from groceries. 81 Aldi is particularly notorious for its application of the principle that “Schnelldreherprinzip sorgt fur hohe Renditen”: “Das Ziel von Aldi ist, dass die bestellte Ware in möglichst kurzer Zeit wieder verkauft wird. Entscheidend als Kennzahl ist somit die Lagerumschlagshäufigkeit. Umso schneller die Produkte „drehen“, umso mehr verdient man pro Tag pro Quadratmeter Verkaufsfläche. ... “Lessons learned: Aldi”, August 30, 2010, https://www.best-practice-business.de/blog/erfolgsfaktoren/2010/08/30/lessons-learned-aldi/ see 82 See footnote 74 above.

25 inventory barely faster than Wal-Mart and substantially slower than Costco”.83 Amazon’s recent high-profile acquisition of the Whole Foods grocery chain for nearly $14 billion may well be an effort to improve its performance in this regard -- Whole Foods turns its inventory much faster than any major US grocery retailer as Table 4 illustrates -- but whether Amazon can figure out a way to leverage Whole Foods’ strength to its own advantage is a decidedly open question. Yet, once again, the important issue here is not about what happens to Amazon but rather what the company’s efforts signal about the systemic character of the logic of retail capitalism.

It is the banality of the logic of retail capitalism, much more than the distinctive ways it is applied, that is crucial to understanding its broader economic and social implications. That logic means that certain economic fetishes -- sales margins and asset turns – are common across contemporary retailing capitalism rather than being the prerogative of Wal-Mart or any other leading retailer. There is no question that “tweaking” the basic economic model of retail capitalism to generate high returns on capital is a complex and expensive organisational process whose success is far from assured. Yet, for all of that, there is no denying that leading retailers’ business models represent variations on the same economic theme.

That is true not only in the United States but everywhere that retail capitalists have gained a strong hold. Indeed, as the leading German discount retailers suggest, the United States has no particular lock on the logic of retail capitalism. To the contrary, it has been applied with just as much assiduity in other rich economies like Germany, France, Britain and the Netherlands. Particularly striking is the fact that some European retailers drive their assets, and especially their inventories, even harder than their US counterparts.84 If their success in this regard does not translate into the kind of success that Wal-Mart has had as a capitalist, it is because their sales margins are much thinner. Their relatively low profitability on sales, in turn, pushes them to drive assets still harder, in a relentless push to generate higher returns on capital.

In thinking about the implications of contemporary retail capitalism, therefore, we should focus on what this banality implies for leading retailers’ impact on their customers, suppliers and employees. That requires us to take seriously the economic fetishes of contemporary retail capitalists rather than treating these retailers as if they were in business to enhance some abstract notion of economic efficiency. When we take these fetishes seriously, it becomes clear that the economic and social consequences of retail capitalism are nothing like as benign as mainstream economists would have us believe.

The importance of breaking with naïve idealism in analysing the economics of retail capitalism can be seen when we think about how economists cast Wal-Mart’s pricing strategy. For years, they have uncritically repeated the company’s slogans about its “everyday low prices” without ever analysing how Wal-Mart could have operated such a profitable business on this basis. Indeed, some economists allude to “Wal-Mart’s “razor-thin margins” despite evidence that its relatively fat margins have allowed it to stabilise its return on assets at higher levels than its competitors for nearly two decades. Such economic thinking has penetrated legal circles in the United States to generate a presumption, as Khan put it, that predatory pricing is “irrational and therefore implausible”.85 In fact, if we are willing to study how Wal-Mart generates profits, it becomes clear that predatory pricing is quite consistent with the economic logic that drives the giant retailer.

Wal-Mart has used predatory pricing quite deliberately to lure customers away from its competitors to drive higher traffic through its stores. It can afford to do so because it relies on

83 https://seekingalpha.com/article/4086428-genius-amazons-whole-foods-acquisition?page=2; analysis of Amazon’s annual reports shows that its inventory turns fell from 14 to 10.5 times between 2008 and 2015. 84 Baud & Durand, 2012, net inventories (days of revenue) in online supplementary data file. 85 Lina M. Khan, “Amazon’s Antitrust Paradox”, Yale Law Journal, 2017, 710.

26 compensating for the money it loses on sales of milk, butter, sugar and the like with the money it makes on other groceries as well as pillows and microwaves. The implications for its competitors are pernicious and especially so for retailers that specialise in groceries or other products that Wal-Mart uses as loss leaders. Economists have not only stood by and watched this behaviour but have actively celebrated it while utterly failing to comprehend how it has served Wal-Mart so well.

Unfortunately, the devastating effects of Wal-Mart’s strategy are not limited to its competitors. Pressuring suppliers to supply goods at lower and lower prices is centrally important to retail capitalists’ efforts to generate attractive margins on their sales, and when products are used as loss leaders, the pressure can become unbearable. As one representative of UK milk producers put it: “Talk to any business and they will tell you that if you continually keep cutting the price of something until it is seen as a throwaway product, there is only one thing that is ultimately going to happen to those who produce it.”86 These pressures certainly create incentives for suppliers to engage in cost-cutting but, as these pressures intensify, it is hardly surprising if suppliers go beyond cost-cutting to adulterate the quality of the goods being sold. Moreover, in addition to the price pressures they face, suppliers are required by leading retailers to carry inventories and then to churn and renew them to suit these retailers’ sales rhythm. In the face of these manifold pressures, many producers, especially in the developing world, get locked into a destructive cycle that is an invitation to oppressive practices and a barrier to any kind of economic upgrading.

Understanding the logic of retail capitalism also encourages us to think about the other economic fetish that is so central to the profits of leading retailers and the broader implications of their churning product to generate high rates of asset utilisation. This is a feature of retail capitalism that is completely obscured in the standard economic account. Mainstream economists talk about retail capitalism as if consumers were sovereign and "pulled" the goods and services they want through retail channels to satisfy their needs. In fact, retail capitalism is much closer to a "push" model in which retailers drive goods and services toward the consumers to induce them to buy them.

The implications of retail capitalism’s relentless emphasis on churning product are beginning to be understood in the realm of “fast fashion”. As leading clothing chains emphasised turning their assets at higher and higher rates, the quantity of clothes sold to the average customer rose and rose. To lure customers in, stores sold clothes of decreasing quality at lower and lower prices. Most of these clothes, many of them made of synthetic fibres that are difficult to break down, would not be worth recycling even if the infrastructure was in place to so. Instead, charity shops are overwhelmed by the volume of clothing donations, receiving so much discarded clothing that it ends up being shipped back to the developing world where much of it was produced.87 The sheer waste involved in fast fashion is now a focus of considerable attention but there is a tendency to blame consumers for creating the problem. Yet, it stems not from the appetites of consumers so much as the relentless drive of fashion capitalism to feed them.

Similar problems have emerged in the types of retail businesses that are the focus of this paper. In the grocery trade, in particular, we observe heightened awareness of the scale of food waste in the affluent world but here again we see that recent studies of the sources of food waste pinpoint consumers as the major culprits. However, if retail capitalists deliberately target certain high-volume groceries to lure customers to their stores, why are we surprised if customers think of food and drink on promotion as disposable? When we look more closely at

86 David Handley, chairman of Farmers for Action in the UK, cited in Source: ‘Real price of your 22p pint of milk: Cows that never see a field, 10,000 farmers out of business and the countryside changed for ever’, Daily Mail, January 21, 2015. 87 “Fast Fashion is Creating an Environmental Crisis”, Newsweek, September 1, 2016.

27 the pressures that encourage customers to buy so much food, more than they need, we find that they are inherent in the logic of retail capitalism and its relentless focus on driving asset turns as high as they will go.88

If understanding the logic of retail capitalism sheds new light on retailers’ relationships with competitors, suppliers and consumers, it also encourages us to think anew about the relationship of retailers to their employees. As we have seen, wages and benefits have been the predominant focus of discussion about the conditions of employment offered by leading retailers. In this regard, especially in the United States, there has been a tendency to distinguish between the bad guys like Wal-Mart and the good guys like Costco. In truth, the distinction between them in terms of their relationship with employees stems not so much from any moral or social responsibility as much as the distinctive ways in which they pursue the logic of retail capitalism.

To crystallise that difference, it is useful to compare Wal-Mart and Costco in terms of their staffing and activity levels as shown in Table 5. What we see is that the two retailers employ similar numbers of employees per square foot but that Costco generates much higher sales per employee than Wal-Mart. Even when we allow for the fact that Costco has lower gross margins as a percentage of sales than Wal-Mart, the implication of the difference in sales per employee is that Costco generates somewhat more money than Wal-Mart for every worker it employs that is then available to be spent on employee wages and other selling and administrative costs.

Table 5 Staffing & Activity Levels at Wal-Mart & Costco, 2015

Source: author’s analysis based on data in both companies’ annual reports

What the data in Table 5 suggest, however, is that the potential benefit that this offers to Costco employees -- in slightly higher wages than their counterparts at Wal-Mart -- comes at whatever it costs them to generate such high sales. That hints at the fact that when it comes to employees, low wages are only the tip of iceberg in understanding the problems created by contemporary retail capitalism. The extraordinary intensification of work for retail employees – whether on the shop floor or hidden from customers’ view in distribution centres -- is directly linked to the relentless pursuit of “turns” to enhance returns on capital. Such intensification creates all kinds of hidden costs for employees -- retail capitalism has been described by one ergonomist as “a machine for the production of long-term unemployment” -- that deserve a great deal more attention. Indeed, it is only when these costs are understood that it is possible to understand just how pitiful are the financial conditions that retail capitalists offer their employees.

6. Conclusion

Mainstream economists use their own particular language of productivity and efficiency but their interpretation of the triumph of leading contemporary retailers is disconcertingly close to that offered by the founder of Wal-Mart: “What happened was absolutely a necessary and inevitable evolution in retailing, as inevitable as the replacement of the buggy by the car and the disappearance of the buggy

88 Food & Agriculture Organisation, 2011, Global food losses and food waste – Extent, causes and prevention. Rome, (data are for 2007)

28 whip makers. The small stores were just destined to disappear, at least in the numbers that once existed, because the whole thing is driven by customers, who are free to choose where they shop”.89 When economists celebrate the economic contributions of Walton’s company and other capitalist retailers, we hear the same echoes of an inevitable drive towards “modernity” to promote the freedom of choice of individual consumers. Yet, the conviction that economists express in placing their scientific credibility at the service of modern retail capitalists stands in stark contrast to the flimsiness of the models and measures they invoke to justify it.

To challenge the way in which economists have fetishized contemporary retail capitalism, it is not enough to criticise their representation of its economic logic. We must go further to shift the economic analysis away from the conventional focus on productivity to study how contemporary retailing operates as capitalism. In this regard, an analysis of how prominent retailers like Wal-Mart generate profits on their capital is essential. It allows us to debunk the myths that economists have disseminated about these companies. And it offers us something even more valuable in allowing us to pinpoint what it is that these retailers really care about in operating their businesses to generate profits.

It shows us how retail capitalists construe the levers that drive their returns on capital in ways that abstract from the relationships with customers, suppliers and employees that are the foundations of their day-to-day activities. In so doing, leading retailers have created fetishes of their own that preoccupy them in their drive for profits on their capital. Some of them are more successful in this regard than others but the most important insight to be derived from this study of profit is about the banality of the economic fetishes that drive contemporary retail capitalism.

From a historical perspective, that banality means that to attach the label of “modern” retailing to Wal-Mart and its ilk is misleading. As we have seen, crucial aspects of the logic of retail capitalism can be traced back to the late 19th and early 20th centuries, and its penetration of the retail sector in advanced economies was more or less complete by the end of the 20th century. In high-income countries, as a result, independent shops’ share of retail sales fell to derisory levels; if we focus on grocery retailing, for example, it was 6.6 per cent or lower in the US, the UK and Germany by 1990.90 As a result, retail competition in recent decades has been reduced to a struggle among variations on the same basic logic of retail capitalism. It is especially vicious competition since it takes place against a background of structural economic conditions that are about as unfavourable as they have ever been for retail capitalism. In the US, indeed, some analysts are predicting a “retail apocalypse” as leading retailers are forced to confront the incoherence of their continued expansion in the face of the secular decline in their industry’s overall economic significance.91 What is certainly true is that such conditions are unlikely to allow for any abatement of retail capitalists’ fervour in driving margins and turns.

The fact that leading retailers are preoccupied with similar levers in pursuing profits on their capital – the banality of retail capitalism in contemporary perspective – is a crucial insight. It suggests that critics of retail capitalists have paid too much attention to the distinction between good and bad practices among leading retailers and too little to the common practices that derive from the relentless logic of profit that drives them all. To understand that logic is enough to appreciate that it is driving our societies in predictable and disconcerting directions in the realms of consumer behaviour, productive practices and workplace standards. To overcome it is a different matter since it is so assiduously applied by retail capitalists and so firmly ensconced in our societies. Certainly, it is not easy to be optimistic about contemporary talk of consumer movements and alternative organisational

89 Walton & Huey, 1992, 228. 90 Bronnenberg & Ellickson, 2015, 116. 91 In the US, the retail industry’s share of US value added has been in secular decline since the 1950s but it has been especially sharp since 1980 (Ali Hortaçsu and Chad Syverson, “The Ongoing Evolution of US Retail: A Format Tug-of-War”, Journal of Economic Perspectives, 29(4), 2015, 92).

29 forms that challenge the logic of retail capitalism when the historical record is replete with failed examples of similar efforts. Still, if we fail to confront the systemic logic of retail capitalism we must accept its pernicious economic and social implications in exchange for the illusion of consumers’ freedom to choose.