The UK and the US Economies - Essay Example

?Compare and contrast the retail revolutions in the UK and US. What are the similarities and differences and who are the winners and the losers? Nowadays, international retailers are playing an increasingly more important role in the world economy (Alexander and Myers, 2007, p.6). While in the mid-twentieth century the world of commerce was dominated by the US and European multinational manufacturers, today?s international production is coordinated through the global networks that involve large retailers and marketers as well as brand-defined companies. (Appelbaum and Lichtenstein, 2006, pp.106-107). These global networks create buyer-driven commodity chains, which play the crucial role in shaping the world’s markets, setting the prices, and decide on the global distribution of labor. Both the UK and the US economies have undergone dramatic changes following the retail revolutions. The US is home to 7 out of 10 largest world retailers, which account for 30.1% of all sales of the 250 retailers(Campling,n.d). The most important US retailer is Wal-Mart, which owns nearly 4200 stores all over the world. In the UK, there are four big retail chains: Tesco, Asda, Safeway and Sainsbury, which possess 65% of the national market share (Burt and Sparks, 2003, p.239). Such market concentration, in the US case on international scale, has never taken place before. Thus, rapid rise of retail chains has benefited their shareholders and managers with enormous profits; Sam Walton, the founder of Wal-Mart, was ranked as the richest man in the United States from 1982 to 1988. Wal-Mart also created workplaces for 1.35 million associates all over the world. Thus, shareholders, managers and employees of large retail chains are definite winners of retail revolutions. However, there have been also waves of criticism regarding negative impact of retail concentration on suppliers, suppliers, and society in general (Seth and Randall, 2001, pp.256-257). Both the UK and the US economies have undergone dramatic changes following the retail revolutions. This paper focuses on the cases of Wal-Mart and the four leading UK retail leaders to contrast and compare the retail revolutions in both countries, their key factors, characteristics, and the winners and the losers of retail revolutions in the UK and US. To start with, while the changing structure of British retailing has affected the markets only on a national and local scale, the rise of large US retailers has had an enormous impact on the global economy (Burt and Sparks, 2001). In 2001, the world’s thirty largest retailers, most of them based in the USA or the European Union countries, reached the annual revenues of nearly 1.3 trillion dollars. The report by an international consulting group Deloitte from 2008 reveals that the economic concentration of the largest world retailers is growing continuously; in 2005 alone the market share of 10 largest retail companies increased 10 %, accounting for the 30.1% of all sales of the 250 top retailers (Campling, n.d). While 7 out of 10 the largest retailers are US-based companies, such as the world leader Wal-Mart or Home Depot, there is only one UK company, a grocery and general merchandising retailer, Tesco, in this ranking. Thus, the influence of the US leading retailers on the global economy is greater than of any other country; Wal-Mart alone operates nearly 4200 stores and employs nearly 1.35 million associates all over the world (Burt and Sparks, 2001). It owns over 386 million ft 2 of floor space in the US and 80 million ft2 abroad, with approximately 94 000 ft2 of sale space in each discount store and 182 000 ft2 per supercenter. In fiscal year 2000 Wal-Mart added 30 million ft2 to its floor space, planning to add further 40 million ft2 of space in 2001. In comparison, the British leading supermarket chain ASDA owns a total of only 18.8 million ft2, out of which 52% is sale space. That great difference in the scales of the UK and the US retail activities is also reflected through the overall share of world trade of these countries, with 4.7%, an all time low, in the UK and the 16.4% in the US in 1985 (Klein, 1996). These discrepancies explain thoroughly different characteristics of the retail revolutions in both countries and their impacts on national and international economies. The rapid expansion in global trade and investments and the great increase in the number of countries involved on the global economic stage in the 1970s and 1980s enabled the US to strengthen their dominant position on the global stage. Numerous US textile makers increased their imports from these countries, taking advantage of Asian cheap labor and sophisticated export manufacturers (Appelbaum and Lichtenstein, 2006, pp. 113-114). Furthermore, following the 45% revaluation of most East Asian currencies and a significant rise in real wages in 1985,numerous export platforms were built all along coastal China. Thus, many American retailers started to shift their production to East Asia, which enabled them to take advantage of lower material costs, labor force costs, and tax benefits. Wal-Mart established its world buying headquarters in the industrial city of Shenzen, located in the Pearl River Delta, the Chinese region which shortly afterwards became a free market, with low corporate taxes and the free movement of capital and goods abroad. Today, Wal-Mart is an important of ten percent of all exports of this region and cooperates with over 3.000 Chinese suppliers (Appelbaum and Lichtenstein, 2006, pp.109, 117). Sam Walton, one of the founders of Wal-Mart, and the team of his top executives, used all new generations of telecommunications hardware and communications software to exchange business information routinely and automatically with a large numbers of contractors all over the world. Such technological innovations as the lowly bar code, a portal that allows the flow of data into sophisticated computer networks and data storage banks gathered by all big stores, allows Wal-Mart to control and supervise their worldwide partners (Appelbaum, 2006, pp. 108, 114). On the contrary, the increase in globalization has significantly weakened the position of the United Kingdom on the global economic stage (Schenk, 2007, pp. 463-465). During the post-war years Britain kept the second strongest international currency, which was the unit of account for 50% of international trade. However, such factors as a shift of economic influence towards the US economy, an increase in participation of newly industrialized countries in international trade, and rapid recovery of European economies lead to diminishment of the position of Britain on the global stage. The rapid rise of large retailers has benefited their owners, shareholders, managers with higher incomes than ever before in the history of economy (Appelbaum and Lichtenstein, 2006, pp. 106-108). Wal-Mart reported the revenue of $408.21 billion in 2009, which makes it the world’s largest corporation, and its founder Sam Walton was ranked the richest man in United States from 1982 to 1988. Wal-Mart has also created workplaces for 1.35 million associates all over the world, benefitting especially the habitants of once remote areas, like Bentonville in Arkansas, or Guandong Province in South China, which are now home to Wal-Mart headquarters and, consequently, the most important centers of the global supply networks (Appelbaum and Lichtenstein, 2006, p.108). Today, Bentonville is one of the fastest growing metropolitan regions in the US, with over 500 offices of the Wal-Mart most important suppliers. In Guandong Province, 130 000 factories employ over 40 million migrant workers, which contributes to the development and growth of Chinese economy. Large retailers in the UK also contribute to the diminishment of unemployment. As large supermarkets increasingly offer other services such as pharmacies, post offices, or banks, more and more people are recruited to work in newly-opened departments. As an example, the opening of Tesco banking division in 2009 created over 1.000 workplaces in the UK (Merrison, 2009). Thus, the owners, the shareholders, the managers, and the employees of large retail chains are definite winners of the retail revolutions. On the contrary, the relations between leading retailers and suppliers have been the source of concern for economists and policy makers since the beginning of the retail revolutions both in the UK and in the US. In the UK case, this problem concerns mainly two groups who provide retailers with a large proportion of purchases: farmers and manufacturers. The large retail chains that sell fresh food have been accused several times of exploiting their market power over small farmers and horticulturalists, taking advantages from their unequal relation (Burt and Sparks, 2003, p. 237, Seth and Randall, 2001, pp.278-285). The Verdict Research from 1993 reveals that while the gross margin of fresh foods rose from 21% to 28% between 1986 and 1990, the statistics show that between 1982-92 the farm incomes decreased by 35%. Furthermore, while the prices received by farmers from supermarkets were decreasing so much that numerous farmers could not afford to sell their goods, supermarket prices did not drop at all. In many cases the cases of anti-competitive practices cannot be put under investigation due to the lack of written contracts between retailers and suppliers. Despite suppliers’ requests, retailers refuse to provide them with written contracts and, thus, deny responsibility for any accusations (Seth and Randall, 2001,p. 284). The shift of power from manufacturers to retailers was hard to accept for many suppliers. In the past the manufacturers had the size, the prestige, the money and the management needed to decide on the conditions of their sales transactions; today, the retailers have a deciding voice (Seth and Randall, 2001, pp.278-279). The reduction of the number of suppliers by large retail chains through the choice of preferential suppliers and the delisting of certain products lead to increased supplier dependency and an increase in costs for those suppliers who lose an economics of scale. As in the case of farmers, large retailers are accused of anti-competitive practices, such as demanding overriders, discounts based on the quantity of a good sold over a period. However, due to the suppliers’ dependency on all the big four retailers and, consequently, fear of losing their customers, many of these cases are not even reported, especially in the cases of small suppliers (Seth and Randall,2001, p.279; Burt and Randall, 2003, p.246). Another factor that diminishes the power held traditionally by the manufacturers is the growth of retail brands (Burt and Sparks, 2003, pp. 242, 247 ; Seth and Randall, 2001, pp. 280-282). A retail brand is a very important tool in the retailers’ positioning as it provides a source of differentiation from competition, it emphasizes continued product development and innovation. The UK retailers are the world leaders in their use and sophistication of their retail brands, which accounted for 40-50% of sales in all the big four retailers’ stores. Manufacturers are concerned that due to the popularity of retail brands among customers their own brands may not survive. Another common problem occurs when retailers take revenue from original brands, without the same costs of innovation, development and launch (Seth and Randall, 2001, p.283). Due to weak legal protection against anti-competitive practices and the fear of deteriorating relations with the four most important retailers, most manufacturers do not even report such cases. The only solution available for the manufacturers is continuous investment and product development so that they can prove that their brands, due to their unique qualities, provide customers with real benefits. Despite the strict public regulation protecting US suppliers against anti-competitive market practices, the US manufacturers were also affected by the large retailers’ policy aimed to reduce labor costs. Wal-Mart claimed officially that one of its main goals was “to put the heat on American manufacturers to lower their prices” through freezing their wages and forcing logistic and production efficiencies on its suppliers (Appelbaum and Lichtenstein, 2006, p.116). Furthermore, following a continuous increase in imports from Asia and shift of production abroad in the mid 1980s, Wal-Mart decreased the amount of goods bought from some American suppliers and replaced others with foreign producers, which created an increased unemployment. As an example, the shift of textile production to Asia resulted in closure of several companies in Arkansas, where Wal-Mart has its world headquarters. Thus, the import practices of Wal-Mart met with severe criticism from economists and politicians, such as Bill Clinton, who appealed to Wal-Mart to save Arkansas jobs by keeping production at home. The Wal-Mart abroad suppliers are also affected by the company policies, aimed to lower production and labor costs (Appelbaum and Lichtenstein, 2006, pp. 117-119. Even though many East Asian suppliers, the owners of large factories, possess the size, the prestige and the resources that would enable them to become oligopolistic price administrators, Wal-Mart treats its 3000 Chinese suppliers as powerless price-takers. Furthermore, there is evidence on the use of children and prison laborers by the Wal-Mart suppliers in China. A study by the Hong Kong Confederation of Trade Union documents reveals several cases of protests over hard working conditions, unfair treatment, lack of compensation, and severance pay by the workers of export-processing factories. In Guangzhou city alone, one of the most important industrial centers of the Pearl River Delta, nearly 900 protests involving 50,000 workers were reported in 2004. However, as Wal-Mart imports 10% of all goods produced in this region, the protests are often suppressed as the owners of big factories prefer to maintain good relations with their most important customer. Furthermore, the protests, which are directed towards local authorities and specific employers, are unlikely to achieve the national government and lead to a possible change in labor law (Appelbaum and Lichtenstein, 2006, p.122). Thus, little can be done to improve the situation of Wal-Mart overseas suppliers and workers. Apparently, the large retail chains seem to benefit customers, providing them with a wide range of goods from all over the world gathered in one place, increasingly with other services, such as post office, pharmacy, or dry cleaning (Seth and Randall, 2001, p.258). Furthermore, they can choose from a few competing stores, all of which have a wide range of products, low prices, and long opening hours. These characteristics of big supermarkets are very appealing to today’s customers with their busy schedules, who appreciate saving time and money when shopping. However, there have also been some critics regarding the impact of large retail chains on customers. To start with, a wide range of goods is only apparent as both the goods and the price level are very similar among the main competitors. Furthermore, despite a low-price range and numerous promotions on specific products proposed by supermarket chains, British food retailers put higher prices than small independent shops. As an example, the fruit sold by an independent greengrocer for 1.39 pounds costs 2.61 pounds in Sainsbury’s (Seth and Randall, 2001, p.260). What is more, following the openings of large out-of-town supermarkets and closures of small, local shops in town centers have deprived low-income customers of access to cheap, quality food. In London, where 40% of households do not own a car, many customers are limited to few local shops, which offer higher prices than supermarkets. Moreover, there were several cases of closures of large supermarkets in poor districts, while new stores were opened in affluent areas. In both the UK and the US, there is evidence on growing inequality of wealth, which leads to great discrepancies in all health indicators (Seth and Randall, 2001, pp.266-267). The poorest consumers have lower life expectancy, higher incidence of diseases, and in general a lower quality of life. Many of these problems are due to a poor diet; the research from 1997 reveals that 21% of the British population cannot afford to buy food that would provide them with the basic nutrients at the cheapest price. Even though large retailers apparently benefit customers, the evidence reveals that low-cost goods are not available to all customers. Furthermore, due to the closures of local shops, many customers were deprived of cheap, nutritive products. Thus, a wide range of low-cost products did not contribute to reduce poverty; on the contrary, following the retail revolution, the discrepancies between the wealth and the poor are increasing continuously. The dominance of the national markets by the largest retailing suppliers has resulted in several conflicts with traditional retail and supermarket suppliers. (Reardon and Hopkins, 2006, pp. 533-537). Therefore, it is necessary to establish policy measures aimed to address the sources of conflict. While in the United States the most common approach used to regulate relations among retailers, suppliers and consumers, the United Kingdom uses a mix of public regulation policies and private codes of contact to deal with these issues. In the US, there have been three different series of public regulations that address the main issues of the retail revolution (Reardon and Hopkins, 2006, p. 534). First, following the Food and Drug Act of 1906, several laws have been issued regarding product labeling and food safety practices in food manufacturing. Furthermore, the US national regulatory authorities have developed a series of regulations addressing the relation among producers, transporters wholesalers and retailers, particularly conflicts concerning contract enforcement, quality standards, and dispute resolution. A key regulation is the Perishable Agricultural Commodities Act of 1930 (PACA), which aims to regulate quality claims, requires compliance of contacts, and establishes payment periods for buyers. Finally, the competition in the retail sector at a national level is regulated with such acts as the Board of Corporation (1903), the Federal Trade Commission Act (1914) and the Clayton Act (1914). In comparison with the UK, historically the concentration in US retail has always been relatively low. Due to such factors as strict public regulations, tendencies of glomeration and deconcentration in the UK economy, a food retail industry that emerged by 1980 was far less consolidated than it may have been expected. Thus, less shift in power from manufacturers to retailers was observed in the US than in the UK (Wrigley, 2001, pp. 496-497). However, in the late 1990s there was a sudden surge of regional concentration, fastened by such factors as the relaxation and then retightening of previously strict regulations, the scale-related pricing power advantages of the major operators, and the response of the leading retail chains to the rapid increase of Wal-Mart (Reardon and Hopkins, 2006, p.535). The largest companies retaliated to Wal-Mart’s entry with increased capital expenditure, thus gaining increased market share, and obtained some of the market share of smaller companies which did not survive Wal-Marts’ entry. As a result, there was an increase in a four –firm concentration level in the US market (Wrigley, 2001, p. 502). States and municipalities have tried to protect small retailers against this sudden market concentration with specific zone and opening-hours regulations, such as the restriction of entry of Wal-Mart supermarkets into several locations in California. As a result, despite the great impact of the UK retail revolutions on the shape of the world’s market, the prices, and the global distribution of labor (Appelbaum and Lichtenstein, 2006, pp.106-107), due to strict public regulation the retail consolidation was relatively slow in comparison with other countries. The US policy measures have dealt effectively with anti-competitive practices and have regulated the issues regarding contract enforcement and quality standards, thus protecting suppliers, small retailers and customers. The UK has used both public measures and private codes of conduct when addressing the relations among retailers, consumers, and suppliers. Several UK regulations are similar to the US ones, such as the laws regarding quality and safety of food products supplied by farmers (e.g. the Food Safety Act of 1990), zone and opening-hours regulations, and regulations regarding the issues of competition in the national market. However, the latter, when compared with the US competition laws, were found inaccurate and oblivious, which resulted in a rapid consolidation of the retail sector (Reardon and Hopkins, 2006, p.536). Following the wave of criticism, in 1973 the primary competition regulation was issued; the Fair Trading Act(FTA), which created an independent agency to control competition issues. Under the FTA, the retail sector was investigated several times. Such factors as the concerns about increasing power and market dominance of the leading UK retailers, the deterioration of the relations between large supermarkets and their suppliers, and the wave of strong legislation restricting the power of large retailers in continental Europe, several amendments were introduced to the Fair Trading Act (Reardon and Hopkins, 2006, pp.536-537). These amendments restricted the market power of large retailers, regulated relations between retailers and suppliers, and strengthened the position of small supermarkets. Furthermore, since 2002 all supply chains with more than eight per cent of the market have had to follow a Code of Contact that regulates supermarket-supplier relations. The examples of the UK and US reveal that adequate policy measures play very important role in determining the nature and the outcomes of the retail revolution. Despite the rapid increase of such US supply chains as Wal Mart or Home Depot, due to the strict regulations the US has managed to keep the level of concentration in the national market relatively low. On the contrary, the UK retail transformation has raised several concerns about the use of power by the leading retailers and many UK retail markets are widely recognized as oligopolistic (Burt and Sparks, 2003). Thus, it is important for the national regulatory organizations to monitor continuously the activity of large retailers and respond to any anti-competitive practices with adequate policies. In conclusion, despite a great discrepancy between the scales of retail revolutions in the UK and the US, both share several common characteristics. While retailing in the UK has mainly a local and a national impact, the US companies, which account for 7 out of 10 largest world retailers, shape the markets, affect the prices and decide on the share of workforce all over the world. While globalization allowed the US leading retailers to benefit from low-cost imports and, thus, strengthen their dominant position on the global economic stage, such factors the rapid rise of newly industrialized countries and the shift of economic influence towards the US have weakened the position of Britain. However, despite the leading role of the US retailers, the level of concentration in the national market has remained relatively low. Even though several US manufacturers were affected by the large retailers’ anti-competitive practices, this problem was far more common in the UK due to lack of adequate policies to protect suppliers. The retail revolution in the US has affected suppliers all over the world, who import for the large retailers. While the suppliers of Wal-Mart in Asia create employment for many people, there are also many cases of protests over hard working conditions, unfair treatment, the use of children and prison laborers. Furthermore, the Asian suppliers cannot fully benefit from their resources and exports as they are treated by Wal-Mart as powerless price-takers. Despite a common view that the retail revolution benefits customers, both the UK and the US, there have been several critics of large supply chains and their relation with the increase of the discrepancy between the wealthy and the poor. Due to the closures of local shops, which did not survive the competition, many low-income customers are deprived of access to cheap, nutritive food. While the retail revolutions have created many workplaces worldwide and have provided customers with a wide range of goods, anti-competitive practices of large retailers affect suppliers, manufacturers, and customers both on a national and international scale. 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