Connecting the Dots

by JDH on November 30, 2013

Since my American friends have just completed their Thanksgiving holiday and are probably still out shopping (Black Saturday, Cyber Monday, etc.) I will dispense with market commentary this week, and instead give a rambling, disjointed, tryptophan induced diatribe on the state of the world (for which I have no justification for doing, since as a Canadian the turkey meat passed through my gullet over a month ago).  If you want market thoughts, re-read what I said last week when I discussed the need to capitulate, or double down.

Dot #1: Shopping = Violence

Do a search on the interwebs and you can find lots of stories of Black Friday violence as shoppers crowd into their local Walmarts to fight their fellow citizens to buy cheap crap made in China that they don’t really need.  Black Friday has morphed into “Grey Thursday”, with many stores now actually opening on Thanksgiving Day.  Is it really that important to inflict violence to buy that thing that will be broken and forgotten by the time “White Wednesday” rolls around next year?

Dot #2: Walmart

I am a capitalist (the old fashioned kind, not the new-fangled “crony capitalist let the government do everything for you” kind). If you want to shop, and work, on Thanksgiving Day, so be it.  Walmart sees the money, so they open.  Presumably their employees want to earn money, so they show up at work.

It would appear that a Department Manager at Walmart earns $11.22 per hour, and a Sales Associates earns $8.86 per hour, according to this website.  The median Walmart worker earns $22,400 per year, but the CRO earns over $23 million, for a top to median pay ratio of over 1,000 : 1.

Based on estimates done by Bloomberg BusinessWeek, $18 billion of purchases each year are made with food stamps.  Walmart, which purchases vast quantities of goods made outside of the USA, is a major beneficiary of government spending.  Low paid Walmart employees are disproportionately enrolled in government medical insurance programs.  It appears that some Walmart employees themselves are on food stamps, and even need food drives and food banks to make ends meet.

Dot #3: Sales are not really sales

As reported in The Wall Street Journal, retailers inflate prices leading in to the shopping season, and then discount them to create the illusion of great savings:

Here’s how it works, according to one industry consultant describing an actual sweater sold at a major retailer. A supplier sells the sweater to a retailer for roughly $14.50. The suggested retail price is $50, which gives the retailer a roughly 70% markup. A few sweaters sell at that price, but more sell at the first markdown of $44.99, and the bulk sell at the final discount price of $21.99. That produces an average unit retail price of $28 and gives the store about a 45% gross margin on the product.

Retailers didn’t always price this way. It used to be that most items were sold at full price, with a limited number of sales to clear unsold inventory. That began to change in the 1970s and 1980s, when a rash of store openings intensified competition and forced retailers to look for new ways to stand out.

Double the price, then sell it for half off, and everyone thinks they are getting a deal.

Dot #4: Debt is High

Personal debt levels remain very high.  The only factor that has prevented a massive depression is that interest rates remain low, so debt service obligations remain contained.

Connecting the Dots

So here is where we are at:

We are willing to

  • get up at the crack of dawn on a holiday to
  • stand in line for hours to
  • use borrowed money, or food stamps to
  • buy over-priced, largely foreign made goods.

What’s up with that?

Of course I am over-generalizing.  Many people who shop at big box stores are paying cash, and they are not on government assistance.  Many consumers are conscious price shoppers who know the true value of goods and can spot a great bargain.  Many people enjoy the boisterous shopping season.

However, I can’t help buy wonder, what would America look like if Walmart absorbed the cost of employee medical insurance, and if Walmart paid wages high enough that employees didn’t need food drives?  What if Walmart committed to sourcing locally made goods where possible?

Obviously prices would increase, which would perhaps allow the local retailer who was crushed when Walmart (or Target, or whomever) entered the market to re-enter the market.  Perhaps better paying retail and manufacturing jobs would bring about the return of the middle class, far less reliant on government.

Perhaps we could all stay home and eat turkey on Thanksgiving.

Sorry for my ramblings.  My regularly scheduled market commentary will return next week.