Ideas Emerging

There is a story in the current issue of BusinessWeek about the Wal-Mart effect. This week, earning reports from the last quarter come out, and some of the retailer’s competitors have some bad news for their investors.

But it’s not because of what you might expect – on Black Friday, after Thanksgiving, Wal-Mart decided to cut the price of its 42-inch flat screen TV to $988. In doing so, it started a free-fall in the flat screen market.

Best Buy, Tweeter, Circuit City and other major electronic stores were forced to follow suit. And they did so right at a time when other retailers like CompUSA and Sears were getting into the business and the major manufacturers were flooding the US market with new models. There were more products available, there was more competition in the industry, and the market responded exactly like it was supposed to. Textbook case.

But 1000 bucks used to be the ground floor, and when Wal-Mart shattered that, it hit the entire industry hard:

After closing 70 stores in February, Circuit City Stores (CC) on Mar. 28 laid off 3,400 employees and put its 800 Canadian stores on the block. Tweeter Home Entertainment Group (TWTR), the high-end home entertainment store, is shuttering 49 of its 153 stores and dismissed 650 workers. Dallas-based CompUSA is closing 126 of its 229 stores, and regional retailer Rex Stores (RSC) is boarding up dozens of outlets, as well as selling 94 of its 211 stores.

As BusinessWeek reports, Wal-Mart isn’t even really a player in the high-end TV market. It doesn’t have the inventory of the electronic stores and it doesn’t depend on the profit margins from these luxury products to meet its bottom line. Cutting the price was an easy decision and one that didn’t have much effect on the company – their stock of Panasonic sold out almost instantly. But the other stores were stuck playing a losing hand:

[Circuit City] lost $12.2 million in its fiscal fourth quarter ended Feb. 28, compared to a net income of $141.4 million in the same period last year. At Tweeter, where flat-panel TVs make up more than 51% of sales, the price declines hurt badly. Sales in its fiscal second quarter ended Mar. 31 declined 12%, to $139 million.

All of that is interesting, particularly because I’m in the market for a flat-screen. But I don’t know that I’ve ever read another example, generally, that shows the incredible power that Wal-Mart has on the economy. It makes a relatively minor decision, and its competitors are stretched to the very limits as they try to reply, even when Wal-Mart doesn’t feel the need to be a major player. TV prices are still falling.

Now think back to earlier this year, when Wal-Mart announced that it was making a conscious decision to put all its power into transforming the business of energy-efficient light bulbs and other green-friendly products. Already, Home Depot has announced a similar initiative, and surely, manufacturers will soon start feeling the pressure to produce more of these goods at cheaper prices. Where Wal-Mart goes, so goes the nation. Will that mean the end of the incandescent light bulb?

Now think back to the end of last year, when Wal-Mart announced that it was going to start selling organic food in its grocery departments. Think about what that will mean to the farmers who grow vegetables and raise livestock using these methods. Will they be forced to do everything they can in a race for lower prices? Or will the companies that grow crops and raise livestock on massive factory farms be forced to adopt organic standards to meet the Wal-Mart demand?

I don’t know the answer, but I’m certainly curious to hear your thoughts?

– mc