Puerto Rico Warns: Raise Your Prices!
By Al Norman
It must sound strange to American consumers to hear that the government of Puerto Rico this week "warned" Wal-Mart to raise its prices on milk---and that Wal-Mart agreed!
Government regulators said that Wal-Mart de Puerto Rico was selling its Great Value branded milk at $1.46 a quart---or 36 cents below the legal price. That sort of thing could never happen in, say, Oklahoma or Wisconsin. Right?
But it has.
In 1998, a pharmacist in West Bend, Wisconsin charged that Wal-Mart was selling milk below cost, in violation of a Wisconsin state law. In September of 2000, state officials filed a formal complaint against Wal-Mart, charging that the company sold milk, butter, cigarettes, laundry detergent and other items below cost in West Bend, Racine, Beloit, Tomah and Oshkosh, Wisconsin. "There's no way they could be buying it that cheap and turning a profit," the pharmacist said.
Three years later, the Wisconsin Division of Trade and Consumer Protection reached a "settlement" with Wal-Mart in this case. Wisconsin law allows a retailer to sell an item below cost---but only as a response to below cost prices at their competitors. Wal-Mart would have had to document sales receipts from merchandise purchased below cost at competitors, or clipped ads running below cost prices to show they were responding to other merchants' prices. That's what the pharmacist did to nail Wal-Mart: she bought milk at Wal-Mart and kept her receipts. Similar claims against Wal-Mart pricing were filed by at least 4 other merchants in the area.
The West Bend pharmacist said that when Wal-Mart opened one block from her pharmacy, she had to remove the milk cooler in her store, because sales fell by 80%. This caused her to lose "cross-traffic" sales for other items in her store.
Wal-Mart faced up to $175,000 in fines, but got off easy in Wisconsin with only a $15,000 payment to cover the state's cost of investigating the retailer. "They did a number on us," the West Bend pharmacist admitted.
At least 17 states have below-cost pricing laws, but as in the Wisconsin case, you have to show that the pricing has been done to unfairly take business away from competitors. Such cases are not easy to prove, and often take years--and a large bankroll--- to investigate.
Fair competition is predicated on a diverse marketplace with many players. As more and more market share falls into the hands of a few large players, the diversity in the marketplace disappears, which has a negative impact on prices, and ultimately on consumers.
In 2003, a federal judge ordered Sam's Club to stop selling gas for below cost in Oklahoma. The court determined that Sam's club had lost $250,000 to $300,000 on gas sales at three stores in Oklahoma City, OK., over an eight month period. Oklahoma's Unfair Sales Act requires marketers to markup gas sales at least 6% over "laid-in costs". The court case proved that Sam's gross margin was less than 6%. The company's pricing caused a competitor to lose a large volume of its business. The Oklahoma Petroleum Marketers said the court's decision showed "that selling gasoline at a loss in order to lure customers" was unfair and unethical.
In May of 2002, when New Hampshire passed its own law prohibiting predatory pricing and unfair competition, one of its chief sponsors, State Representative Marshall Quandt said, "People usually think the consumer protection laws only protect individuals against big business. They also serve to protect small business against big business. New Hampshire's economy relies on the successes of our small businesses. To allow large corporations to bully small operators out of the market is contrary to New Hampshire's ideology and contrary to the goals of consumer protection. If small businesses fail, there will be no competition and consumers will pay more."
In September of 2000, the Germans busted Wal-Mart for selling milk, butter, flour, cooking oil and other products below cost on a regular, sustained basis. The German Cartel office said: "The material benefit (of below cost pricing) to consumers is marginal and temporary, but the restriction of competition by placing unfair obstacles before medium-sized retailers is clear and lasting."
Puerto Rico could have fined Wal-Mart for illegal pricing---but they didn't. When they got nabbed, Wal-Mart agreed immediately to raise their milk prices. The company put out the standard press release saying it was committed to adhering to all local laws, and that it corrected the price as soon as it learned of the problem.
When I first visited Puerto Rico in 1995 at the request of local detallistas, there were no Wal-Mart supercenters on the island. Already small merchants were worried that the giant retailer would push them into the ocean. They were right. Today, there are 7 Wal-Mart discount stores, 8 supercenters, and 9 Sam's Clubs. Five years ago, Wal-Mart bought up the Supermercados Amigo chain, to add another 31 stores. Wal-Mart now dominates Puerto Rican retailing, and its use of below cost pricing is just another way to drive its competitors out of business.
When competition suffers, consumers suffer. Shoppers love below cost prices, because consumers behave as if there's no tomorrow. But unfortunately, tomorrow is here. Wal-Mart is the end of competition, not the beginning. "We make dust," one Wal-Mart official has bragged. "Our competitors eat dust."
There is a lot of spilt milk in Puerto Rico, but Wal-Mart isn't crying over it. Their new slogan should be: Save Money. Exploit Better. In any language, Wal-Mart is a predator.
Al Norman is the founder of Sprawl-Busters, and the author of The Case Against Wal-Mart. His website is http://sprawl-busters.com