In 1962, businessman Sam Walton had an entrepreneurial objective in mind: Offer shoppers the lowest prices possible. From forcing U.S. suppliers to slash costs to finding cheap imports abroad, Walmart became an iconic global brand, generating $500 billion in annual revenues because of its ability to enhance the consumer’s purchasing power, enabling the rise of the middle class.
The Federal Reserve may have depreciated the value of the greenback, but $100 at Walmart can get you quite far. With a single Benjamin, you can purchase a tea kettle, bed sheets, the latest bestselling novel, five pairs of underwear, and dinner for tonight. And, noticing an array of opportunities in the marketplace, Walmart is expanding its arsenal, specializing in walk-in care, ecommerce, and banking.
For all the flack that Walmart receives from the left for ostensibly destroying mom and pop shops, the company has a decent business model that appears to be satisfying the customer.
But those lowest prices guaranteed may come under threat. As the U.S. government embarks upon a bitter trade dispute with China, Walmart is warning that it may be forced to raise prices due to tariffs.
If Sam Walton were around today, he’d be apoplectic, staging a sit-in on Capitol Hill – or, perhaps sending his team of lobbyists to do it for him.
Walmart’s Trade Woes
President Donald Trump and his administration recently escalated the trade spat with the world’s second-largest economy by slapping 10% tariffs on approximately $200 billion worth of Chinese products, ranging from mattresses to Christmas items to travel bags. The first round of levies will go into effect on Monday, and the second round – 25% tariffs – will be instituted on January 1, 2019.
China immediately retaliated by announcing its own series of taxes on U.S. imports.
This has Walmart fearful of the repercussions, particularly in the form of price hikes for its customers.
In a letter to U.S. Trade Representative Robert Lighthizer, the Arkansas-based retailer said the tariffs would affect a wide selection of products, like food, personal care items, and transportation. The company urged both sides to come to an immediate resolution to avoid hurting consumers.
“As the largest retailer in the United States and a major buyer of U.S. manufactured goods, we are very concerned about the impacts these tariffs would have on our business, our customers, our suppliers and the U.S. economy as a whole.
Should the tariffs go into effect, Walmart customers will face cost increases for essential items like car seats, cribs, backpacks, hats, pet products and bicycles. Either consumers will pay more, suppliers will receive less, retail margins will be lower, or consumers will buy fewer products or forego purchases altogether.”
Other businesses have petitioned the White House to ditch the trade war. Ace Hardware, Joann fabric and craft stores, and Target have all warned that the taxes “will hurt American consumers,” especially working-class families, who will now be required to pay more for essential goods.
Rising Prices the New Norm
Since the president engaged in a trade fight earlier this year, a whole host of consumer prices have already started to rise. Months after Trump imposed 20% and 50% tariffs on washing machine imports, shoppers are paying as much as 17% more for laundry equipment.
A long list of businesses has confirmed they are raising prices to offset the ballooning costs from tariffs. Coca-Cola, Samuel Adams, and MillerCoors will increase the price of their beverages. Caterpillar will boost prices to limit freight costs. Newell Brands, the maker of Crock-Pot and other appliances, said consumers will pay more for its products. Polaris, the manufacturer of motorcycles, snowmobiles, and boats, confirmed its own hike.
The National Retail Federation (NRF), a trade organization, estimated in August that a 25% tariff on furniture would cost Americans an extra $4.5 billion per year.
Moreover, get ready for a more expensive Christmas because 91% of festive articles come from China.
It may not be surprising then to see the consumer price index (CPI) rise by 0.2% in August, the fifth consecutive monthly gain, though the annual rate slowed to 2.7%.
Mark Perry, an economist at the American Enterprise Institute (AEI), wrote in July:
“As simple economics tells us, the Trump tariffs on washing machines aren’t imposed on foreign appliance producers like Samsung and LG as much as they are imposed on Americans in the form of higher prices for consumers. Likewise, Trump’s ill-advised trade war, which started in January when he approved the tariffs on imported washing machines, is really largely a war on Americans.”
The Walmart-China “Joint Venture”
You cannot discuss Walmart’s incredible success without also talking about China.
In the early days of Walton’s entrepreneurial endeavors, he would drive around in a pickup truck and purchase inexpensive goods for his chain of discount stores. This pursuit for the lowest prices possible eventually extended to the Pacific, making imports an important part of Walmart’s prosperity.
In 1984, Asian imports – direct and indirect – represented about 6% of the company’s total sales. That figure spiked to roughly 50% a little more than a decade later.
While Walton and his executives launched a “Buy American” campaign, which did rescue many domestic manufacturing companies, the Walmart founder conceded that he was not ready to pay a premium to do so. Anytime he came across U.S. goods, he asked: “Is it good for our customers?” If they were not, then Walmart would go overseas and buy the same products at a cheaper cost.
And, thus, the joint venture with China has allowed Walmart to become one of the biggest companies in the world today. Despite the portrayal of Walmart as an odious corporate leviathan, the company is integral in communities, employing tens of thousands and offering shareholders a 2.17% dividend. The U.S.-China trade war might disrupt Walmart’s business model, but you can bet that the retail juggernaut will still try to stick to its moniker of “lowest prices guaranteed.”
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