Posted 2/24/2014 12:00 am
Updated 6 months ago
Wal-Mart Stores Inc.’s announcement in January 2013 that it would help resuscitate the U.S. manufacturing industry by buying an additional $50 billion worth of American-made items during the next decade has been met with skepticism and cheers.
“This effort, it’s hard to see exactly how the economics will make itself sustaining,” said Charles Fishman, author the 2005 bestseller “The Wal-Mart Effect.”
The bottom line, he said, is consumers want to buy a quality product at the lowest price. “There’s no history of Americans buying American-made products because they’re American-made,” Fishman said.
And $50 billion over 10 years, which works out to be about $5 billion annually, is a small amount to Wal-Mart, which generates that much revenue in about three days, he said.
But others think the Bentonville retailer’s plan can work because it will encourage its suppliers to scrutinize their supply chain and search for ways to slash expenses, said Kathy Deck, director of the Center for Business & Economic Research at the University of Arkansas.
When a company looks at all the costs involved in manufacturing overseas — including, transportation, labor, the delay in receiving items and compliance costs — there will be examples where it makes sense for companies to manufacture in the United States.
“As the world’s largest retailer, Wal-Mart has … such scale that any decision that it makes just ripples through the entire economy,” Deck said. “Retailers always want to encourage their manufacturers to provide them with the lowest cost. And so I wouldn’t be surprised if there are some examples of this at other retailers.”
Some Arkansas companies are already benefiting from Wal-Mart’s initiative. Hanna’s Candle Co. of Fayetteville said its orders from Wal-Mart skyrocketed from about $4 million in 2012 to $30 million last year. By 2017, Wal-Mart said, it plans to order $45 million worth of merchandise from Hanna’s.
And Wal-Mart’s commitment also helped Redman & Associates of Rogers. In October, it announced it was investing $6.5 million in a 270,000-SF plant in Rogers to build six-volt battery-powered riding toys, which previously had been manufactured in China, said Redman President and CEO Mel Redman.
Redman said he has six employees working at the plant now and will have 19 when manufacturing starts in April. Redman & Associates expects to make 100,000 of the cars this year, 300,000 in 2015 and 600,000 in 2016, and by then expects to have 70 workers. The average pay is $18 an hour, Redman said. The cars will sell for $59.87 at Wal-Mart.
The manufacturing initiative won’t make or break Wal-Mart, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York. But the campaign might add jobs to the U.S. economy, which Wal-Mart hopes will mean people will have more money to spend at its stores, he said.
Wal-Mart’s same-store sales numbers have been slipping. On Thursday, the retailer reported its fourth consecutive quarter of declining sales at stores that have been open at least a year. Same-store sales are a key indicator of a retailer’s health because the metric compares sales to stores that have been open at least a year.
The same-store sales “trend is terrible,” Davidowitz said. “Well, one way to get the middle class going is to have more domestic manufacturing.”
Manufacturing employment slowly has been rising in the United States after years of decline. The Bureau of Labor Statistics preliminary count of manufacturing jobs in December was 12.1 million, up from 11.96 million in December 2012. The number, though, is still a long way from the 17 million domestic manufacturing jobs of the 1990s.
Made in America
In January 2013, Bill Simon, president and CEO of Wal-Mart U.S., said at a conference held by the National Retail Federation of Washington, D.C., that Wal-Mart and other retailers could create more American jobs and support U.S. manufacturers by pledging to buy more American-made goods.
“In previous decades, investment mainly went to Asia,” Simon said in the speech, a transcript of which is posted on Wal-Mart’s website. “Wages were low. The price of oil was low.”
Now labor costs in Asia are rising and oil and transportation costs are high “and increasingly uncertain,” he said.
For example, while 70 percent of the global supply of cotton is grown in the United States, it’s then shipped overseas, where it’s made into a towel or other item and then shipped back to the U.S., he said.
“We can cut out two shipments across the world and weeks on the water and cut our costs in the process,” Simon said. “We can save our customers money by employing more of their neighbors — why wouldn’t we do this?”
Wal-Mart plans to increase what it buys in the U.S. in categories such as sporting goods, storage products, games and paper products.
Simon said that some manufacturers have told Wal-Mart officials that manufacturing overseas doesn’t make sense for them anymore. “Let’s give them the nudge they need,” Simon said. “Through our buying power, we can give manufacturers confidence to invest capital here.”
About two-thirds of the merchandise Wal-Mart buys already comes from the United States, but most of that is tied to its grocery side, said Katie Cody, a Wal-Mart spokeswoman.
“But we knew there was room to do more,” she said. “And it really is a pivotal time right now where it’s starting to make more sense from an economic standpoint for this to happen.”
Mel Redman, the toy vehicle maker, said that by not building in China, his company would save primarily on shipping costs, but he declined to say exactly what those costs were.
“The No. 1 line expense item that we have is logistics cost, and a huge portion of that is ocean freight and container costs,” Redman said. “So that’s a great incentive to take that down as much as you can and put that back into the investment end of the manufacturing.”
Burt Hanna, CEO of Hanna’s Candle Co., said labor costs to make a candle are lower overseas. Competitors in India pay an employee $3 a day, while in China it’s $10, Hanna said. He pays between $100 and $120 per employee.
But he could trump the international competition on other fronts. “The way to beat them is to make sure you’re not doing the same … products as them,” Hanna said. “You’ve got to have innovation and you’ve got to be quicker to market to change.”
The multiyear commitment from Wal-Mart has meant that Hanna has added 60 jobs that pay between $8 and $18 an hour.
“It’s been great for our business and great for our employees because consistent, everyday work is really what we needed,” Hanna said.
Fishman, the author, said the items made in the United States will have to sell for a price that’s competitive, and not just with other retailers, but also with what’s already on Wal-Mart’s shelves.
“It’s hard to see how the economics of U.S. manufacturing catch fire,” he said.
One selling point might be quality and durability, Fishman said. If Wal-Mart can say the U.S.-made blender will cost $2 more but will last 10 years longer than a foreign-made blender, “Americans will pay more for that,” he said.
The Innovation Pledge
Last month, Wal-Mart and its Walmart Foundation pledged $10 million to foster innovation in American manufacturing.
The five-year program will start in March and award grants to innovators in the manufacturing sector “and seeks to create new processes, ideas, and jobs that support America’s growing manufacturing footprint,” Wal-Mart’s Simon said in a news release.
The details of how the grants will work and who could receive them are still being worked out. More details will be released in March, said Cody, the Wal-Mart spokeswoman.
In August, Wal-Mart also held its first manufacturing summit in Orlando, Fla., where more than 500 suppliers and representatives from 34 states attended.
“It was a meeting point for everyone to come together and discuss the best way to get this done,” Cody said.Ã¢©At the meeting, suppliers said they plan to invest more than $70 million in factory growth and create more than 1,000 jobs, according to an August Wal-Mart news release.
A PR Risk
Fishman said Wal-Mart doesn’t have a financial risk tied to the manufacturing initiative, only a public relations one.
If the push for more U.S. manufacturing puts the company at risk, or even puts the performance of the company at risk, Wal-Mart “would simply say it doesn’t work for our customers,” Fishman said.
The risk could be in a public relations headache as it was in the early 1990s.
In the years before Wal-Mart’s founder Sam Walton died in 1992, Wal-Mart had a “Made in the USA” section in stores and touted its “Made in the USA” products, Fishman said. “There was a huge publicity effort behind it,” Fishman said.
But it turned out that some of the products weren’t made in the USA. “That turned out to be a disaster,” Fishman said. And people still remember the failure two decades later.
“So that’s the hazard,” he said.
And 10 years from now, there will be news stories on the manufacturing program.
“The real danger is you will intensify the cynicism” if the effort fails, Fishman said.
Cody, Wal-Mart’s spokesman, said that Wal-Mart recognizes that it’s not going to jumpstart the manufacturing industry overnight. “But we’ve already made a lot of big steps toward making it work,” Cody said. “It’s not going away anytime soon.”