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Jeff Milchen

Jeff Milchen

Posted: November 17, 2010 11:58 AM

Shun the Mega-Retailers


As the surging demand for locally-sourced and organic food demonstrates, many of us are willing to pay a bit more for items made or grown close to home when the choices are easy to find. Just as many people consider a fresh, locally grown tomato a far better value, even at a higher cost, American-made products often provide better value than cheap imports.

But across a wide range of goods -- clothing, electronics, housewares and more -- those choices have vanished or are limited to premium items affordable only to the wealthy. Not coincidentally, the decline of American-made products has mirrored the growth of big box merchants, "category killers" and online discounters that have displaced independent competitors in the U.S.

The shift has not been merely economic, but cultural, too. We've become a nation obsessed with cheapness.

U.S. manufacturers can compete successfully when innovation, quality and customization are key factors, but the mega-retailers' business model intrinsically elevates the importance of price over other qualities. Innovative or higher-quality products will struggle to gain market share unless they are sold where a sufficient number of knowledgeable employees can educate customers about their value.

Many manufacturers learned too late that distributing through a mega-retailer involves huge trade-offs. While sales volume may multiply overnight, the pressure to lower wholesale prices is unrelenting, necessitating compromises in quality, the outsourcing of jobs and other cost-cutting.

While this pressure has driven down some price tags, it's also diminished manufacturer warranties and product life-spans. The transformation of durable goods into throw-away products has imposed costs on all of us in the form of pollution, landfill expansions, and the elimination of thousands of repair businesses and the accompanying jobs. For example, the Professional Service Association noted more than 20,000 U.S. shops providing consumer electronics repairs in 1992. By last year their ranks had plummeted to about just 6,000.

The mega-retailers share none of those costs. They simply generate a profit opportunity that didn't exist when value meant more than mere cheapness.

Perhaps more harmful to many manufacturers, especially those with innovative ideas, is that a space on a mass merchant's shelf or website puts a product on the fast-track to becoming a commodity (i.e. interchangeable in consumers' minds with other similar products). For example, Levi Strauss Co.'s embrace of big-box stores quickly transformed their jeans from a high-quality American icon to just another brand.

As a result, most companies should shun the mega-retailers and maintain control of their distribution, say marketing professors Andrew Thomas and Timothy Wilkinson. In The Distribution Trap, Thomas and Wilkinson describe how several once-renowned manufacturers lost their reputation, profit margins and, sometimes, their entire business through the trap of selling through mass merchants.

They also highlight manufacturers thriving by prioritizing innovation, quality and personal service over volume. The power equipment manufacturer Stihl, for example, insists on selling their products only through specialty retailers who service Stihl products, and the company has publicly sworn off doing business with Lowe's, Home Depot and other giants. Stihl's approach has enabled them to continually expand their manufacturing facilities and headquarters in Virginia, employing almost 2,000 people to serve its U.S. markets, rather than outsourcing. Stihl customers are unusually loyal to the company, as are Stihl equipment dealers.

Of course, this high-road approach of manufacturing at home and selling through independent businesses is a rarity these days. But don't blame the "free market." Just as the U.S. government has subsidized the largest global banks at the expense of smaller competitors and taxpayers, the rise of the mega-retailers owes partial thanks to the invisible hand of Uncle Sam.

For decades, non-enforcement of anti-trust law, tax policy favoritism, and other government choices have stacked the deck in favor of multinational chains and internet giants. As independent retailers harmed by such favoritism have largely disappeared, so too have the U.S. manufacturers which depended on them. Those government policies should promptly be reversed.

We should also explore some of the actions used in Europe to promote high-quality manufacturing and prevent the socialization of costs, such as building life-cycle costs into the purchase price.

President Obama's tour of Asia generated additional publicity for the always-popular idea of increasing U.S. exports, which indeed are an important part of a sound economy. But if we aim to create jobs at home and a more stable economy, let's enhance our capacity for self-reliance and make more American products available to Americans.