Sunday, December 11, 2011

Cheap by Ellen Ruppel Shell

Cheap: The High Cost of Discount Culture, by Ellen Ruppel Shell

Excellent and inexpensive (not cheap!) except for the isolated broadsides against capitalism and globalization

A very engaging journey through the history of cheap, from shops to malls to outlets to sales to IKEA to shrimps to globalization. Ignore the brief denunciations of capitalism and globalization and this is a five-star book. Thankfully much of the globalization phillipic is isolated at the beginning and end.

This book argues that cheap is different from a bargain. Cheap implies lack of longevity, lack of craftsmanship, and hidden costs that are sometimes not apparent till several years or decades after the purchase. Globalization is an imperative and inevitable but its costs are heavy. The book covers territory that is expected - the beginnings of the discount retail culture, but which requires a journey into the years following American independence to understand the underpinnings of cheap - standardization and industrialization. The insidious strategy behind outlet malls is an eye-opener. The psychology of sales, rebates, and coupons is also discussed by looking at how the mind works and responds to sales (answer: when confronted with sales we don't think much, and the little thinking that we do do is muddled and confused).  When you talk about cheap you have to talk about superstores, food, IKEA, and China. India too gets a mention, but it is China that is today the manufacturing outsourcer to the world. The book does not cover "cheap" in the context of software, else India would have received its share of, err, attention. The industrialization of food has been covered in the definitive classic of our times, "Fast Food Nation", but there is new and relevant information to be found here - shrimp farming in Thailand and the havoc it has wreaked on the economies and the environment in those countries for one. The author also argues that it is the expansion of the global and interconnected labor force that has actually done the American worker more harm than good. By flattening the world, and making outsourcing feasible and economical, the American worker has been shorn of bargaining power.

So what about my crib with the author's anti-globalization rant? Well, in the chapters (mostly the first and last) where the author opines and philosophizes, the narrative is hyper-critical of capitalism and globalization. To paraphrase the author, globalization is inevitable, but free trade has not been all that great. Worker wages in India and China are instrumental in enabling the exploitation of workers in the United States. Low wages may be better than nothing at all for those workers but it is an insidiously cheap bargain that we agree to. Thomas Friedman gets it wrong in The World Is Flat, the conservative economist and Harvard professor Greg Mankiw is wrong, Adam Smith is wrong because lived in a world that was different and his observations don't really hold true in today's hyper-globalized world, Schumpeter's Creative Destruction is more about destruction than creation today, and so on... You get the picture. The litany of criticisms however stops just as it about to tires. The author's points are well-taken, but the solutions are not that apparent, or practical. Better enforcement of regulations and laws in developing countries, perhaps.

The beginnings of the "cheap" revolution can be traced, it seems, to the years after the US revolutionary war, when, "In 1794, fretting over the possibility of yet another war with England, now President George Washington proposed a bill to create public facilities to manufacture and supply the military with reliable weapons." [location 258] There were two successful bidders, Eli Whitney and Simeon North. "North broke down the gun-building process into a series of basic tasks and distributed the work among a group of semiskilled laborers. This radical departure from traditional gun making led to a cheaper and more consistently reliable product." (p. 9) "The first contract known to stipulate interchangeable parts, it was a resounding step in the inexorable march toward low price" [location 277] As for Eli Whitney, his cotton engine (gin for short, hence the name cotton gin) separated cotton fibers from their seeds. "Once the gin made cleaning cotton fiber so cheap, the expectation grew that cotton itself would be cheap. The cotton gin reduced the labor required to extract and remove seeds, but planting and picking remained a distinctly human chore. To meet the expectation of low price, the farming and picking of cotton had to be cheap as well, and this meant cheap labor. There is no cheaper labor than the slave variety, and it makes sense that the cotton gin led to an emphatic boost to the slave trade." (p. 10)

When discount stores, or nickel-and-dime stores began to appear, they were derided and looked down upon by retailers. Derided as “low-priced trash . . . ugly, short-lived . . . abominations.”, and not without reason, these goods were after all cheaper and of lower quality. The stores also did not offer the kind of personalized service that traditional retailers offered. This was a sort of double-edged sword for the traditional retailers, because "By cutting back on customer service and most other frills, discounters not only saved money but created the impression that their merchandise was cheap due not to low quality but to low overhead. This was partially true." [location 714] "Discount customers liked not having to cope with a daunting array of high-end merchandise and stuck-up salesclerks. And there was comfort in the idea that shopping no longer required a wardrobe. Those who can remember the sixties may recall getting dressed up to go downtown; some older women even wore hats and gloves." [location 781]

To keep costs low discounters were open to importing goods. Thus began the outsourcing of manufacturing, the rise of imports, facilitated by containerized shipping.  "In 1965 the United States ran its first postwar trade deficit with Japan. The deficit was small, only $334 million, and largely traceable to the importation of cheap goods, primarily low-quality steel targeted at the bottom tier of the American steel market." As outsourcing caught on, the power of unions also began to decline, since jobs could now be dispensed with - by outsourcing more and more elements of manufacturing. The author argues that the power of unions is what kept the wages of workers in pace with inflation, allowing workers to not only earn living wages but also maintain a standard of living that allowed the middle class in America to have the best decades they had the past century. The American dream of home ownership was perhaps best realized in the city that was most unionized - Detroit. "As the car unions won successively larger concessions for their membership in the mid-1930s, Detroit ranked first in the nation in private home ownership." [location 514] Thereafter, as the pressure to keep prices low and to compete with the

The rise of discounters started the push of the American nation down the path of cheap. The offshoring of jobs to Asian countries was next. The introduction of what most people have at some time must have called the most wretched piece of plastic - the credit card - paid put to notions of savings. "Third-party universal credit cards, introduced in 1949, would in ten years’ time enable the conversion of frugal America to a nation in debt. Despite growing prosperity, the new middle class found it increasingly difficult to keep up, and, as many of us today, started to “trade down” to “trade up.” Middle-class consumers who wanted a showy car or a boat or a trip to Paris saved for these luxuries by cutting corners where they could on commodities such as children’s clothes, toiletries, hardware, and even food. As more and more respectable people sought low price, discount shopping lost its stigma. It would gradually become the norm." [location 593]

Outsourcing also meant that goods had to be mass-produced ahead of time. This meant that "consumers, although treated to what seemed like an ever-expanding variety of merchandise, were in fact being offered less variety and more variations on a theme."

The price-tag, now considered as integral a part of any item sold in any store as the good being sold itself, was the invention of Philadelphia haberdasher John Wanamaker, who is also credited with the first January White sale.

Then there is the bar code - the Uniform Product Code (UPC), that became ubiquitous once "Kmart adopted bar codes in the early 1980s ... pressuring suppliers to tag all their products with the little black bars before delivering them to stores or warehouses." Bar codes basically made it possible to record and analyze customer preferences in real-time, or near real-time.

Chapter Four, "The Outlet Gambit" was an eye-opener. At least for me. Outlets are where the smart shopper goes to get a great bargain on premium goods. Bargain prices for luxury goods. And outlet malls are typically located 50 miles or sohi from towns, where "shadows, where real estate is cheap and the tax incentives sweet." Or so goes the marketing. Ok, so let's pop the bubble. First, the location of outlets is very, very strategic, and the location meant to convey bargains. "In the public mind, convenience is a trade-off for price, and price is traded off for convenience. Inconvenience connotes cheap, while convenience connotes pricey." Second, in addition to premium outlets you have discounters at outlet malls, like "Crescent succeed by offering the perception of value using two signals: one, being situated in an outlet mall associated with so-called premium brands, and two, setting very high reference prices". Third, luxury brands sometimes derive most of their revenues from outlet stores! Coach for example, a $2 billion company, is said to earn most of its profits from its factory outlet stores. So, while some brands sell slightly imperfect or damaged goods at steeply discounted prices at outlets - at least that was the original thinking behind outlets: to sell slightly defective or out-of-fashion goods at factory outlet stores so as to not dilute the brand of the store's marquee stores, some other brands "add to their mix items made explicitly for the outlets. Generally these items are cheaper to produce, have fewer details, and are of lesser quality. Still, they carry the brand name, and therefore seem to be worth if not the reference price, then certainly more than the asking price. Lichtenstein put it this way: “Outlet malls today are the absolute epitome of the reference pricing scam.”"

Chapter Five, "Markdown Madness" looks at the madness of radical price cuts. Once you have a sale, you can't stop. You can't stop shopping at sales, and retailers cannot stop offering sales. Symbiotic relationship. Or a desperate slide to the bottom, that feeds upon itself, ad infinitum. "In 1955 the dollar value of total markdowns as a percentage of department store sales was a paltry 5.2 percent. ... in 2001 the dollar percentage of marked-down goods across all sectors—toys, electronics, clothing—had grown to an astonishing 33 percent."
One way to have a sale is to have a sale but not offer discounts. You do that by offering rebates. Not instant rebates, but the kind that need to be filled out and mailed. The best rebate is the one that is never redeemed. "But, as a rule, rebate redemption rates are very low, hovering in the 5 to 10 percent range for many items. ... Promotions that generate redemption rates greater than 35 percent are considered marginal by manufacturers and retailers; and a 50 percent redemption rate is considered an abject failure."

The chapter also looks at the madness, or the psychology of the human mind, that drives us to make purchases of things we probably do not need. "When setting discounts, marketers aim to activate the primary process in the brain, the emotional, impulsive side. In technical terms, their goal is to “spike the affective response to block the cognitive assessment.” In layperson’s terms, their goal is to distract customers from thinking hard about a purchase or, for that matter, thinking hard about anything at all."
Damasio argued that both logic and emotion are required for decision making, and that systems that control these functions, while separate, communicate with one another to jointly affect our behavior. That said, the emotional system—the older of the two in evolutionary terms—typically exerts the first and more powerful force on our thinking and behavior. If we sense we are getting the short end of the stick, we balk, even if not grabbing the short end makes us tumble back into the lake.
The inexorable drive towards cheap food and fast-food has driven down prices of food to ridiculously low levels. However, as Michael Pollan points out, it is not really food but food-like edible substances that we eat nowadays. The cheap food we eat today also means that "scientists writing in the New England Journal of Medicine linked cheap food to a startling prediction: that the next generation of Americans will be the first in human history to die younger than their parents." And  this is not just because the byproduct of fast-food, mostly meat, is excrement. "Two feedlots outside Greeley, Colorado, together produce more excrement than the cities of Atlanta, Boston, Denver, and St. Louis combined. combined. Trucking the stuff off is impractical. One alternative popular among big companies is to spray liquefied manure into the air and let it fall where it may, coating trees and anything else that happens to be in its path." As for the animals that are bred to be slaughtered at these feedlots, the less said the better. For them as well as for the people who consume that meat. "Factory pigs are bred to be lean, so lean that producers sometimes inject their flesh with saline marinades to make it palatable. Stressful lives tend to make factory-grown pork acidic, bleaching it pale and breaking the tissue down to something flaccid, watery, and limp..."

This book is an inexpensive, not cheap, way to get familiarized with the complex world of cheap. Excellent book.


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© 2011, Abhinav Agarwal. All rights reserved.