At its peak, nearly one thousand people worked here. But now the plant was an empty carcass. On this day, June 16, 2004, they were auctioning off all its equipment. A few small knots of men were inspecting the machinery, mentally calculating its age and utility—businessmen, engineers, and contractors, hunting for bargains among the tools and the top-of-the-line plastic injection machines, big as dinosaurs, made by Cincinnati Omicron.
“A lot of this stuff is going cheap,” gushed Larry Ptak, an equipment buyer for Beaver Excavating. “We picked up some real good deals.”
But if Ptak saw an upside, Harry Frank was crestfallen, watching the plant’s dying gasp. He had worked here for thirty-one years. Then one day, Frank and eight hundred others had been summoned by management to the plant floor and told: “ ‘We’re shutting it down.’ … You could see people crying…. What are you supposed to do? You have to make a living. You have to eat, and pay rent, buy a house, a car.”
The auctioneer was a sturdy young guy in his thirties from Cleveland named Scott Mihalic, embarrassed to admit that lately his business had been very good, with so many plants in Ohio closing down. I asked him where the equipment buyers were from.
“They’re from all over,” Mihalic replied. “We’ve got guys that flew in from all over the fifty states. We’ve got two guys in from South America, two guys from Italy, a guy from Spain, two guys from over in Japan or China…. They bought the one big machine today.”
“The Chinese guys bought the big machine?” I asked, to make sure.
“Right. You know, it’s an injection machine,” he said. “They bought it, I believe, for $850,000.”
The Rubbermaid shutdown was a body blow to the town of Wooster. “When you think of Wooster, you think of Rubbermaid,” Scott Mihalic explained. “I mean, this is what this town is all about…. There’s about a thousand jobs that were lost here.”
“It was the backbone of this community,” Larry Ptak agreed. “You’ve got a lot of home folks around here, their grandfathers, their fathers, their daughters, and their sons are working here, were working here. And you see a lot of houses for sale. You see a lot of people trying to figure out where they’re going to make a living. A lot of debt. It’s pretty devastating.”
The ripple effects were felt for half a dozen years. Town fathers worried about the loss of tax revenues. School bond issues had rough sledding. Stores like Hawkins Supermarket and Restaurant, long a favorite of Rubbermaid workers, went under. The real estate market froze. “You could have bought a home for nothing,” Ptak said. “Those houses just sat there for a long time. The bank took a lot of them over.”
Doing Business with Wal-Mart: A Double-Edged Sword
A couple of months later, filming in southern China for the PBS Frontline documentary “Is Wal-Mart Good for America?,” I came across a Rubbermaid plant in a huge industrial sprawl that the Chinese named Plastics City. The Chinese guard wouldn’t let me in, but one young woman emerging from the plant told me that it was churning out consumer goods for America—actually, more likely, for Wal-Mart to sell in America.
Wal-Mart had been Rubbermaid’s most important customer. Stanley Gault, Rubbermaid’s longtime CEO, had been prescient enough to sense in the 1980s that big-box retailers like Wal-Mart were the wave of the future. Gault shifted Rubbermaid from marketing to thousands of retail outlets to focusing mainly on five or six large chains. Wal-Mart was the big prize. It took 25 percent of Rubbermaid’s output and gave Rubbermaid products prime shelf space and prominent display. “They can take a new product and make it a success overnight,” Gault told me proudly.
They can also cut a supplier to ribbons. Forging a tight relationship with Wal-Mart was a double-edged sword because the heat was always on from Wal-Mart to cut costs—every year, cut product cost by 5 or 10 percent, or else bring out a new and better product for less. Rubbermaid had been skillful at that game until 1996, when it was hit by a skyrocketing 50 percent price hike for resin, a key component for plastic products. Wolfgang Schmitt, Rubbermaid’s new CEO, informed the big-box retailers that Rubbermaid would have to raise its prices. Target and Kmart agreed, but Wal-Mart said no.
A Clash of Cultures
It was a clash of corporate cultures and a microcosm of the power shift and changing strategies in U.S. business that would have a devastating impact on some of the best middle-class jobs in U.S. industry.
Rubbermaid was intent on maintaining product quality, afraid that if it tried to save money by skimping on its plastics formula, its products would crack or crinkle. Wal-Mart’s focus was single-minded—price. Frictions had already developed over Wal-Mart’s pressures on Rubbermaid to shift some Rubbermaid operations to China.
In a last desperate effort, Wolfgang Schmitt flew to Wal-Mart headquarters in Bentonville, Arkansas, to meet with Bill Fields, then head of Wal-Mart stores. Schmitt made Rubbermaid’s case for price increases to offset higher raw material costs. But according to Carol Troyer, president of Rubbermaid’s Office Products Division, the session was ugly. Fields, she said, had told Schmitt: “We’re big enough that we can tell you that we’re not gonna take your price increase. We don’t care what it’s gonna do to Rubbermaid. We don’t care what kind of price increases you’ve had in your raw materials. We’re just not gonna take it.”
“They were very public in those days … about saying, ‘One of the advantages we as big-box retailers have is we can put the hammer to the manufacturers and we can give American consumers lower prices,’ ” Schmitt recalled.
Fields, who had retired, never returned my calls. But an insider told me that Schmitt and Fields actually stood nose to nose, jabbing fingers into each other’s chests. Even though Fields, at six feet six, towered over Schmitt, who was five feet ten, Schmitt could not contain his frustration. “You don’t understand,” he blurted out. But before he could finish, Fields thundered: “No, you don’t understand!”
That confrontation caused irreparable damage to Rubbermaid. Wal-Mart punished Rubbermaid by cutting back its purchases and giving a competitor, Sterilite, choice shelf space. “They dropped a number of our products for a couple of years,” Carol Troyer reported. “That impacts the company tremendously. To me, it was one of the first signs of the decline of Rubbermaid.”
Rubbermaid’s management scrambled for three more years, and then in 1999 it sold out to Newell, a major competitor. The plant closing in Wooster reflected cutbacks by Newell Rubbermaid, which, bowing to Wal-Mart, shut down U.S. plants and opened some in China.
The Power Shift Inside Our Economy
Wal-Mart’s ability to outgun Rubbermaid illustrates the pivotal shift of power in American business in the 1980s and ’90s. That shift now shapes supply lines that reach worldwide, especially from China to America. It reflects the globalized economy that has disrupted old ways and cost America the loss of an estimated 3.5 million jobs.
Before the rise of big-box retailers—specifically Wal-Mart—manufacturers were the kings of the hill. They decided what to produce and what retailers would offer consumers. Wal-Mart changed all that. Not right away. It took time for Wal-Mart to build muscle. But Sam Walton and Wal-Mart were aggressive and their ascent was steep. Wal-Mart grew from 38 stores in 1970, to 276 in 1980, to 1,400 by 1990. In 1991, less than three decades after Walton opened his first discount store, Wal-Mart overtook Sears and Kmart to become the nation’s biggest retailer. By 2011, it was a $260 billion-a-year behemoth, with 140 million customers shopping weekly in its 3,800 American stores.
With 1.2 million employees, Wal-Mart has become America’s largest employer, with power and influence over the whole economy. Consumers reap cost savings every time they push a shopping cart out of the checkout line. During the 1990s and early 2000s, economists credited Wal-Mart’s tightfisted low-price strategy with not only helping millions of American families on low budgets, but also helping to hold down the nation’s overall rate of inflation. By one Wal-Mart-friendly estimate, the retail giant cut America’s overall inflatio
n from 1995 to 2006 by about 3 percent, or roughly 0.15 percent a year, impressive for a single company.
The Impact of the Wal-Mart Model
Wal-Mart’s business model became the template for companies all across the corporate landscape. “In the nineteenth century, it was the Pennsylvania Railroad which called itself ‘the standard of the world,’ ” recalled economic historian Nelson Lichtenstein. “Early twentieth century, it might have been U.S. Steel. General Motors, of course, in the mid–twentieth century. But clearly, Wal-Mart … today is setting a new standard that other firms have to follow…. It’s setting standards for the nation as a whole.”
The Wal-Mart model was built on the simple formula that “Mr. Sam,” as Sam Walton was widely known, trademarked in his early days: Buy cheap, sell for less, and make your profit on high volume and fast turnover. Sounds simple, but it required a revolution in marketing and distribution. Wal-Mart had to find out what products to stock in its stores. It had to anticipate the demands of tens of millions of shoppers daily, in different parts of the country where tastes differ—straight-leg jeans in the North, flared jeans in the Sun Belt; loose-fitting clothes for old folks in Florida and Arizona, tight-fitting for young folks near college towns; polka-dotted blouses here, striped over there.
Knowledge Is Power
The magic key to predicting the market was—the bar code. As Linda Dillman, Wal-Mart’s chief information officer, showed me, flashing a handheld “Telxon” gadget at the bar codes of several items: “It tells me the sales price of the item, how many I currently have. It knows what the history looks like and what we think it will do, going forward.” With supercomputers, Wal-Mart was able at the end of each shopping day to tote up sales and inventory, store by store, region by region, and nationwide, so that it could project future sales and order exactly the right resupplies. By now, the system is everywhere, but in the 1980s, Wal-Mart pioneered it and gained a competitive advantage.
In marketing, as in war or science, knowledge is power. The information that Wal-Mart teased out of bar codes enabled its buyers in Arkansas to tell its suppliers—companies like Rubbermaid, Procter & Gamble, Black & Decker, Huffy bicycles—what products it needed, how many, and what models, colors, and sizes, long before these companies heard from their own salespeople.
Jon Lehman, who managed six different Wal-Mart stores during seventeen years at Wal-Mart, described the blizzard of detail Wal-Mart got from the bar code, even on a simple item like pet food. “A can of 9Lives cat food has a bar code, and every flavor—chicken, liver, beef—they all have different bar codes,” Lehman explained. “And as the item is scanned through the front checkout, the item is tracked, and you’re able to determine what flavor’s sellin’, how much you’re makin’ on that item … and an order is automatically generated that evening at midnight and it’s sittin’ back on the shelf the next night or the following night…. It’s just really incredible.”
“Wal-Mart, as an efficiency machine, has just done better than any other U.S. retailer—or, perhaps, any other U.S. company in history,” observed Duke University professor Gary Gereffi, who studies global supply chains. “They were more single-minded in terms of global cost cutting and internal efficiency than any other U.S. retailer. And that helps us understand how and why they were able to pass companies like Kmart and Sears that were the early leaders in U.S. retailing and offshore sourcing.”
The Shift from “Push” to “Pull”
With its blinding informational efficiency, Wal-Mart became a world leader in logistics, number one in the science of just-in-time supply from a global network of suppliers. And it used its unprecedented informational power to turn the system of production upside down. With other mass retail chains such as Target and Kmart, Wal-Mart generated a revolution—a shift from “push production” to “pull production.”
“The push system involved manufacturers deciding what they’re going to produce and then trying to get retailers to buy it and sell it for them,” explained Edna Bonacich, a marketing sociologist with the University of California at Riverside. “The pull system involves retailers deciding what is being sold, collecting information on what is being sold, and then telling manufacturers what to produce and when to produce it, based on what is actually being sold…. There has been a power shift from manufacturers to retailers.”
In the new commercial solar system, Wal-Mart is the sun, holding suppliers in its orbit. Size and scale have given Wal-Mart gravitational magnetism. Its headquarters is located in rural northeast Arkansas, in Bentonville, but its pull is so powerful that hundreds of its suppliers have set up a village of satellite sales offices in several storefront malls, just to cater to Wal-Mart. They call it “Vendorville.” Mighty Fortune 500 companies such as Procter & Gamble and Disney gather like vassals to pay tribute to the inner kingdom of Wal-Mart, the retail Brahmins of Bentonville.
When their moment comes, vendors are led one by one into tight little cubicles for tough bargaining with Wal-Mart buyers. Wal-Mart officials describe these sessions as normal business give-and-take, ignoring the vast power disparity between a $260 billion-a-year colossus like Wal-Mart and small producers who are dependent on Wal-Mart for survival. Wal-Mart’s incentive bonuses richly reward buyers for arm-twisting every last cent out of suppliers, according to former Rubbermaid CEO Wolfgang Schmitt. “In a large organization,” Schmitt said, “you’re going to have buyers who overdrive that part and will step over the line.”
Former Wal-Mart managers concede that it played hardball. “It’s very one-sided,” former Wal-Mart store manager Jon Lehman told me. “I’ve been in these little cubicles…. The manufacturer walks in … and the buyer says, ‘… We want you to sell it to us for 5 percent … lower this year than you did last year.’ … They know every fact and figure that these manufacturers have. They know their costs. They know their business practices—everything. So, what’s a manufacturer left to do? They sit naked in front of Wal-Mart. Wal-Mart calls the shots: ‘If you want to do business with us, if you want to stay in business, then you’re going to do it our way.’ It’s all about driving down the cost of goods.”
The “Opening Price Point”
The key to Wal-Mart’s marketing strategy—and one big reason that its supply lines from China have become so all-important—is what Wal-Mart calls its “opening price point.” That is the rock-bottom price that Wal-Mart showcases on each aisle, like the $29.97 microwave oven, the $19.14 saucepan, or the trick-or-treat jack-o’-lanterns for 78 cents. Every line of goods has an opening price point—the bait to lure customers to that line of goods.
“It’s the heart of Wal-Mart’s pricing strategy. Wal-Mart puts [a] tremendous amount of planning, organization, and thinking into what their opening price points are going to be, based on last year’s sales, based on customer requests …,” Jon Lehman explained. “[It’s] to get you in. You look at that, and you think, ‘Wow! What a great price!’ … Then they’ve got you, because you walk about ten more feet, and you see the item you really want in that same category. Then you buy that item. But it’s not going to be, probably, the lowest price in town…. Once you walk past that opening price point, they’ve got you, because you’ve already formed the perception that everything in that department is the lowest price in town.”
“And maybe it’s not?” I queried.
“No, it’s not—No.” Lehman flashed a knowing smile. “I can tell you from experience, it’s not.”
“If You Want to Play, Go to China”
To hit those all-important opening price points, Wal-Mart reached increasingly for suppliers in Asia and especially China, where costs were practically subterranean. Soon, Wal-Mart was pressuring American suppliers to move production to China. In one meeting in Bentonville, I was told, a Wal-Mart vice president bluntly advised a group of two hundred suppliers that if they wanted a good chunk of Wal-Mart business, especially at the opening price point, they had to shift at least 25 percent of their productive capacity to China.
“Their message to us is, ‘There’s a broad market out there. If you want to focus on the lowest-cost part of the market, it’s obvious that you can’t do that in the United States,’ ” Bill Nichol, CEO of Kentucky Derby Hosiery, reported to me.
“So, if you want to play in that 25 percent of the Wal-Mart market, you’ve got to be in a very low-cost place—China or someplace like China?” I asked.
“That’s correct,” Nichol replied. “But China, practically speaking, is it.”
To Kentucky Derby Hosiery, Wal-Mart was so vital a customer that Bill Nichol felt he had no choice. “We will open those facilities and buy product or make product, or both, in China as soon as possible,” he told me.
Wal-Mart’s “Move offshore or die” message cropped up in my conversations with other suppliers, but they shied away from being quoted out of fear of angering Wal-Mart. But back in Circleville, Ohio, people said point-blank that Wal-Mart’s guillotine had killed the RCA-Thomson television tube plant where Pam Scholl and Mike Hughes had worked. The plant had been highly profitable through the 1990s, former plant manager Ray Strutz said. They were supplying not only RCA-Thomson television plants in Arkansas and Mexico, but also Sanyo, the big Japanese electronic firm, which was selling low-end television sets to Wal-Mart.
Who Stole the American Dream? Page 26
