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Gifts for all occasions in the Galleria! Subscribe to the "What is the Deal?" mailing list. October 26, 2003 What is the Deal with Capitalism? By Jan A. Larson No one ever said that capitalism was pretty, painless or polite. Capitalism works because consumers seek maximum value for minimum price when purchasing goods or services. Producers, on the other side of the equation, seek to maximize the difference between their costs and the price they receive for the goods and services they produce. Many factors affect the price versus value equation, not the least of which is competition. If a competing company can provide the same value (or perceived value) to consumers at a lower price and still maintain an acceptable profit margin, it causes a cascading effect for the inefficient producer. An inefficient producer, especially in an industry in which the products are viewed as commodities, must compete on price or risk losing market share. If they cannot, they will enter an inevitable death spiral. Price competition for the inefficient producer results in the loss of profitability and that may saddle a very inefficient producer with a losing business proposition. A loss of market share results in reduced pricing power for a company over its suppliers and can lead to the inability for the company to cover fixed costs (overhead). The above scenarios are being played out today in the grocery business. As reported in a recent FOX News article, several labor strikes around the country against traditional chain grocery stores are being attributed to the increased competition by Wal-Mart. With labor costs running anywhere from $6 to $14 per hour more for full-time workers at the traditional stores as compared to Wal-Mart, the companies are asking their unionized workers to assume a greater percentage of their health care costs. Naturally workers are not thrilled by this idea. Wal-Mart, along with Dell, are widely considered to be two of the most efficient companies in terms of delivering the most value at the lowest cost. With efficiencies built into all of their processes, it is virtually impossible for competitors with entrenched, inefficient processes to compete effectively. Wal-Mart does not suffer from labor shortages despite offering lower wages than national grocery chains such as Albertson's and Kroger. This is an indication that those chains are paying too much for labor and is just one example of how unionized labor negatively impacts productivity. If the striking union workers were really worth what they are being paid, they should have no problems finding other jobs if they are unhappy with the idea of paying a larger share of their health care costs. The fact that this is not the case, demonstrates that these unionized workers have been, in essence, getting something for nothing. That is, their compensation is excessive with respect to their collective productivity. Union workers naturally do not want to give up what they have although in unless they do, they may eventually find that they no longer have jobs at all, never mind jobs at union scale. In the face of competition from one of the most efficient companies in history, the grocery chains must lower costs or their inefficiencies will eventually result in one or more of them ceasing to exist. Of course some will say that Wal-Mart exploits their labor force and unions are needed to prevent unscrupulous businesses from taking advantage of the hapless, indentured labor force. To that I say, "poppycock." No one is forced to work at Wal-Mart and with few isolated exceptions, Wal-Mart has traditionally enjoyed good labor relations and most Wal-Mart employees are satisfied with their jobs. Capitalism results in the survival of the fittest and, in the long run, that benefits everyone by eliminating waste. When union workers are excessively compensated relative to their productivity and relative to the compensation received by comparable non-union workers, they are wasteful in terms of maximizing the profitability equation. When an efficient producer, such as Wal-Mart, enters the industry, the inefficiencies are magnified and the existence of the inefficient competitors is threatened. Wal-Mart's entry into the grocery industry several years ago and subsequent capture of upwards of 15% market share has simply accelerated the process of weeding out the weaker competitors in the grocery industry. Kroger, Albertson's and the other chains that are suffering under the competition from Wal-Mart may not go out of business in the near term, of course, but they may not be able to survive without major changes in their cost structures in the long run. Such major changes will not be pleasant for anyone employed by these companies. In the meantime, consumers will benefit. Wal-Mart will be there delivering high value at a low cost while the competitors will be forced to do the same or die. -- Send feedback to the author. The "What is the Deal?" column will appears weekly on the Pie of Knowledge website. Guest submissions are welcome and encouraged. To submit an article to "What is the Deal?" click here. To subscribe to the "What is the Deal?" mailing list and receive early notification when a new column is available, click here. The Pie of Knowledge will never, ever divulge email addresses to any third party for any reason unless so ordered by a court of law. Contributions to the Pie of Knowledge are greatly appreciated. 
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