Tuesday, February 08, 2005

You're the king!

In a piece in the New Yorker titled "The Customer is King", that excellent writer, James Suroweicki, gives us some perspective on Procter & Gamble's mega-acquisition of Gillette. The deal happened, he writes, "to create a manufacturing giant with enough bargaining clout to stand up to Wal-Mart." He elaborates:
The story goes something like this: once upon a time, companies that made things had the whip hand in the American economy. They could charge premium prices for their goods, and raise prices when costs went up, without losing their customers. In other words, they had pricing power. But in recent decades the rise of retailers like Wal-Mart and Target has changed all that. Today, the companies that sell things dictate the terms. The P. & G.-Gillette deal, in this rendering, is an attempt by a pair of manufacturers to take back a little of the power that they’ve lost.

But, Suroweicki continues, manufacturers lost that power not to Wal-Mart and Target, but to you and me, the consumers. He writes:
The real transformation of the past thirty years is the rise not of the American retailer but of the American consumer. That’s why Wal-Mart is so tough to negotiate with, and so relentless in its quest for lower prices and lower costs. American consumers now consider it their due to have access to a wide variety of cheap, reliable goods. Their allegiances are fickle; brand loyalty is in fast decline. Wal-Mart is often spoken of as the most powerful company in the world, but it earns less than four cents on every dollar of sales, and its profit margins have stayed roughly the same year after year—which means that when it cuts costs with suppliers it passes along those savings to the customers, instead of padding its own bottom line. Wal-Mart can’t charge more; if it does, its customers will go elsewhere. The same is true of Target and Costco. In a sense, Wal-Mart is the elected representative of tens of millions of hard-bargaining shoppers, and, like any representative, it serves only at their pleasure.

That is, of course, exactly as capitalism is meant to work: at our pleasure.

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