MINDING THE STORE, FORGETTING THE FACTORY
Fifty years ago, three Americans worked in manufacturing for every person who worked in retailing; today retailing jobs outnumber manufacturing ones. The largest American company, Walmart, is a retailer—and six members of its founder’s family have more wealth than the bottom 92 million Americans combined. Many of the best-known American brands—such as Apple, Nike, Dell, The Gap—belong to companies that design and market products but do no manufacturing, either in the United States or elsewhere. Meanwhile, East Asia has become, by some measures, the world’s biggest manufacturing region.
There are many stories behind these changes. One of the most surprising involves laws that seemed, at first, to favor American manufacturers—but that instead stimulated new partnerships between big US retailers and East Asian trading and manufacturing firms. To add to the irony, these were called “fair trade” laws—the same term now used by people who favor legislation (amending “free trade” agreements) restricting certain manufactured imports.
Fair trade laws allowed manufacturers to set minimum retail prices for their products, which stores were barred from undercutting. California passed the first ones, in 1931, and the idea caught on as a way of limiting cutthroat competition and deflationary pressures during the Depression. Some would-be discounters raised antitrust objections, but in 1936 the Supreme Court upheld fair trade laws as legitimate tools for protecting manufacturers; Congress followed suit the next year, amending antitrust law to remove any remaining ambiguity.
While the court mentioned helping manufacturers, legislators were probably at least as concerned with protecting small retailers. Their fear was that chain stores like Woolworth’s would promise to stock, say, huge numbers of one manufacturer’s toasters, but only if they were given a discount; once the manufacturer, needing to get its goods on the shelves, agreed, Woolworth could then sell toasters at a price that Joe’s Appliances (which had no leverage to demand a similar discount) could never match.
Actually, except under the peculiar circumstances of the Depression, most American manufacturers of the time probably needed no such protection. Generally speaking they were bigger than the retailers they dealt with, and in most fields a relatively few big firms called the tune. The auto industry, where General Motors had 45 percent of the market, Ford and Chrysler had most of the rest, and each controlled its own network of dealers, was the extreme case; but most electric appliances were produced by a few major manufacturers, such as General Electric, RCA and Westinghouse (which also had their own retail outlets). What economists call concentration ratios—the share of the market held by the largest four, eight, 20 and 50 companies—were much higher for most types of manufacturing than they were for retailing.
But in the 1950s, retailing began to get more concentrated, aided by the continued growth of the national fleet of autos, the construction of the Interstate highway system, suburbanization, tax code changes that favored investment in retailing, and the rise of the shopping mall. The United States had just 10 major shopping centers in 1953, but 440 of them (and, counting smaller commercial centers, 7,600 overall) by 1964; most of these malls wanted a famous department store like Sears, Penney’s, or Montgomery Ward as an “anchor.” And as growing retail chains looked for ways to take advantage of their size, they found fair trade laws restrictive. Some sued or lobbied at the state level to get rid of them; they had some successes, though most of these laws remained until the 1970s. Other chains found a way around the laws, using “store brands.”
Fair trade laws meant that Sears, for instance, could not get a special price on GE or Westinghouse appliances, but it could sell its own Kenmore brand of appliances. What it needed was somebody who would make them, someone with whom it could negotiate outside the framework of fair trade laws, and who had no vested interest in maintaining the prices charged by leading US manufacturers. Often that meant looking abroad.
For Japanese firms, seeking to rebuild after World War II, this was a golden opportunity. Hard though it may be to remember now, prewar Japanese firms had not been competitive in most consumer goods, except very labor-intensive ones such as textiles, Christmas tree ornaments and cheap toys; to the extent that they had a reputation for quality in Western markets, it was a negative one, and lingering hostility from the war years probably did not help. (Asked in 1947 what goods postwar Japan might be able to sell to the US, future secretary of state John Foster Dulles came up with only silk shirts, pajamas and cocktail napkins.) But contracts to manufacture store brands offered entrée to the world’s biggest market without requiring a huge investment in marketing campaigns: Americans would buy the goods because Sears or Penney’s stood behind them, and nobody even needed to know who made them. The American stores drove hard bargains on price and on quality control, so margins were thin (even though Japanese wages were then comparatively low), but the opportunity to learn the market, improve manufacturing techniques (often with help from the retailer) and expand the scale of production was too good to miss. In fact, many orders were large enough that no one Japanese manufacturer could handle them: Americans mostly dealt with big Japanese trading firms, especially Mitsui, who then farmed the order out to as many companies as necessary.
In time, of course, many Japanese firms would crack Western markets in their own names, and Japanese wages rose enough that cut-price contracts for store brands became unattractive. Gradually, the Japanese trading firms introduced Korean, Taiwanese and other contractors; by the mid-1970s, those countries had their own trading firms to manage these deals, and major US retailers had also set up their own buying offices in Taibei, Seoul and elsewhere. Meanwhile, American companies other than department stores, associated with some particular line of merchandise, were seeing the advantages of this strategy: Why not focus on the high profit-margin activities of product design and marketing, and leave manufacturing to others? As long as it was your brand name that the consumer trusted and lots of companies were available that could make the product to your specifications, you would have more bargaining power than your suppliers and could get the benefits of efficient, low-cost manufacturing without investing in the capacity to do it yourself. This was especially true for products whose styles changed frequently, so that flexibility, rather than huge production runs, held the key to success; these products could be farmed out to lots of small firms, any one of which could be dumped if it did not meet the retailer’s conditions. The world of roughly the 1880s to 1960s, in which giant manufacturers called the tune that retailers danced to, had been turned on its head. As one textile industry figure put it, “You don’t tell Walmart your price. Walmart tells you:” exactly the behavior fair trade laws had banned, even for the rare retailer who might have had the clout to try it.
More recently, of course, much of the production has moved to China, but the dynamic remains similar, as do many of the players. When Walmart started buying lots of Chinese goods, one executive explained that the company felt perfectly comfortable with the move because it was still dealing with the same Taiwanese suppliers as before; it was the Taiwanese, not the Americans, who were the ones figuring out how to make things work on the mainland. (Today, Walmart alone buys more Chinese exports than does all of the United Kingdom, or all of Russia.)
Store brands were not, of course, the only route by which East Asian manufacturers entered US markets, nor were they necessarily essential even to companies that got a big boost that way. And the most successful companies— such as Sony and Samsung— eventually became established name brands themselves. Combining design, marketing and manufacturing, a company like Samsung is more like the old GM or Westinghouse than either is like Apple. By contrast, consider Foxconn, the little-known Taiwanese company that makes brand-name goods for Apple, HP, Sony, Dell and many others. It had slightly higher sales than Apple in 2011, and has 15 times as many employees, but made less than one-tenth as much profit. In short, it is better—or at least more lucrative—to be cool than industrious.
Far too many changes were occurring simultaneously for any one story to explain how, at least in the US, selling things triumphed over making things. Still, the story of American retailers, store brands and contract manufacturers is suggestive—of how both public policies and private responses to them can have big, surprising consequences. By blocking big retailers from cutting special deals with big domestic manufacturers—and not anticipating that they might find other partners overseas—legislators probably hastened the loss of manufacturing jobs at home, while doing very little to stop the “retail revolution” against which they were trying to protect their small-business constituents. There were winners, too—but mostly across the Pacific.
From The World That Trade Created: Society, Culture and the World Economy, 1400 to the Present by Steven Topik and Kenneth Pomeranz.