The Supermarket Index
If you want a single concept to judge how successful a modern economy is you could do worse than look at the quality and quantity of supermarkets it supports. These days, some 70 or 80 years after they were first invented in the USA, just about every nation on earth has them, with the possible exception of a few socialist “paradises” and perhaps a couple of utterly undeveloped nations somewhere. Supermarkets are, I would venture to say, one of the most influential inventions of all time and they have radically improved the lot of millions, probably billions, of people because we all shop at supermarkets if we can and we wouldn’t do that if the alternatives made sense. In fact someone has done the sums about just one chain (Wal-Mart):
There is little dispute that Wal-Mart’s price reductions have benefited the 120 million American workers employed outside of the retail sector. Plausible estimates of the magnitude of the savings from Wal-Mart are enormous – a total of $263 billion in 2004, or $2,329 per household.
(source PDF )
However poorer nations tend to just a have a few, usually in the more middle class parts of major cities, whereas rich nations have them everywhere with different chains catering for the poor and various grades of wealthier individuals. Take the US. Most reasonably sized towns have a Wal-Mart and/or some other chain supermarket. Some will also have something more upscale like Whole Foods or Trader Joe’s and many have also more than one chain supermarket in addition to warehouse stores (Costco) and local convenience stores (7-11). The names will change and some of the offerings vary a bit, but the same is true of every country in the EU as well as Canada, Japan, Australia, New Zealand etc.
We take their offerings for granted but the successful supermarket has a lot of back end support. Each supermarket has hundreds if not thousands of different products in stock and they need to be refreshed every day, perhaps many times a day, so there must be constant feedback to warehouses and suppliers who must be able to supply more of the goods sold. And of course in most cases the goods must be fresh, hygienic etc. So the entire supply chain for every good has to be reliable in terms of both quality and availability. Moreover since no one is doing this as a charitable work, everyone has to be able to trust that they will be paid, that contracts will be honored and so on. This includes the employees, who need to be rewarded appropriately – enough so that they want to work, but not so much that the store goes bust – and need to be (in aggregate) reliable and trustworthy. In addition no supermarket will stay in business without customers who can buy things, so there’s a requirement for some level of wealth and reliability of the money supply. Finally if its customers (or employees) steal too much or loot it instead of buying its goods it will go out of business so there is a basic requirement for respect for the rule of law.
The better all these things work, the better the supermarket experience and hence the suitability of the supermarket as a proxy for economic health.
We can see plenty of evidence of the Supermarket Index as a decent proxy. Supermarkets were what most impressed every Russian who visited the west before the fall of the Soviet Union and the Iron Curtain from Yeltsin down. I saw something very similar at about the same time (late 1989 for me IIRC). I was part of a group hosting some Moscow University students for a week or so in the UK. The two things that absolutely blew them away were visiting the local Sainsbury’s supermarket, with all the varieties of everything, and the late night kebab stop on the way back from London. The supermarket so impressed them that they subsequently went into other supermarkets and convenience shops were passing just to marvel at the selection of goods on offer. They did wonder a bit at why the store had 101 varieties of a product like breakfast cereal and, particularly, why we had both Kellogg’s and Sainsbury’s own corn flakes. But, while they mumbled a certain amount about wasteful duplication and the stupidity of brandname premiums, they were very, very clear that they wanted this in Moscow. Going on this video of a Soviet food store of approximately that vintage I completely understand why they were impressed.
The same absolutely applies to developing nations in Africa, Asia and Latin America. For example, 20 years ago Kenya had a handful of supermarkets, now there are half a dozen supermarket chains with stores all over the place (and some chains have expanded to neighboring Uganda and Tanzania too). This increase in supermarkets goes hand in hand with the increase in wealth in the country and the consequent dramatic reduction in poverty. Kenya is not the only African nation to see a dramatic rise in supermarkets. As this Economist article from a couple of years ago explains, the general rise in prosperity in Africa is leading to the development of supermarkets and shopping malls all over the place.
More recently the lack of stuff in supermarkets has been a very clear indicator of a country on the skids. Venezuela is the most obvious current example though I believe I’ve seen similar articles about Argentina, Russia and Brazil in the last year or so. Just as the presence or absence of functioning supermarkets indicates the development of the country, it also suggests which regions, suburbs or neighborhoods are thriving or not. In almost all urban cases the lack of supermarkets suggests either idiotic levels of government interference/regulation or high crime or poverty (often all three). Take for example the lack of Wal-Marts in DC and the recent bitching about how Wal-Mart is going back on its committment to open some when the DC government decided to up labor costs.
Of course the minimum wage campaigners don’t really grasp the thin profit margins that the average supermarket has. They look at the gross numbers and see millions of dollars of sales per location without grasping that most of those millions of dollars go right out the door to buy stock, pay wages, rents, taxes and so on. In this article Tim Worstall does a reasonably good back of the envelope calculation to show that a minimum wage rise could take all of the profit out of a supermarket:
[T]he profit margin on sales (the net profit margin, not the gross) is some 3.2%, the return to investors is some 1.6% of sales. Another way to put this is that from each dollar spent in a Walmart the plutocratic capitalists are getting 1.6 cents. You can take that any way you want to. […]
Using that same net profit on sales we would thus say that the average Walmart store produces $2.6 million in profits to the company, or $1.3 million in payouts to the owners, the stockholders. […]
So, what’s the impact of a change in the minimum wage on that number? From Oakland again:
While most of the stores will close Jan. 28, Oakland was among those that will shutter Sunday, when the doors are locked for good at 7 p.m. When Oakland’s Walmart opened in 2005, 11,000 people applied for jobs. The store employed 400.
Again, just to keep the math simple, we’re going to be inaccurate. Assume that those 400 people all work 30 hours (to keep them part time) then that’s 12,000 hours a week or 624,000 hours a year. The difference between the California minimum wage and the Oakland one is $2.55 an hour according to that report so, the difference in the wage bill is $1.6 million.
Hmm. So, the company margin on that store in Oakland falls from 3.2% down to 1.2%. Which is going to make a bit of a difference, isn’t it? And the stockholders aren’t going to get any payout at all assuming that the company retains the same amount for reinvestment. Because the rise in that labour bill is higher than the total payout the investors can expect from that store if it is working to the average margins.
It doesn’t stop there either. Oakland is considering raising that local minimum wage to $15 an hour, another $2.45 raise on the current level. And that entirely wipes out the profit from the store altogether. And why would investors want their capital spent on doing something that makes them no return?
It is worth noting that the Wal-Mart employees at that store don’t seem to have been complaining about being underpaid but rather are upset about losing their jobs. In fact, the previously linked Wal-Mart research paper shows that even if workers are underpaid and hence harmed (a big if), then the hurt caused to them is miniscule compared to the overall benefits gained by Wal-Mart’s customers, who are generally also from the poorer strata of society. Recall that paper first estimated savings to consumers of some $263 billion. It then notes:
Even if you grant that Wal-Mart hurts workers in the retail sector – and the evidence for this is far from clear – the magnitude of any potential harm is small in comparison. One study, for example, found that the “Wal-Mart effect” lowered retail wages by $4.7 billion in 2000.
In other words the cost was some 2% of the benefit. So next time some anti capitalism campaigner or charity goes on about the evils of supermarket exploitation consider asking what the alternative is, and how much additional poverty they are willing to see by raising the prices in the shops. In the meantime pop down to your favorite local supermarket, buy a bottle of something fizzy (on special offer perhaps) and celebrate the supermarket and the success of the free market that gave it birth