Here’s Why Amazon Is More Ruthless Than Walmart

This December 9, 2010 photo shows the in
KAREN BLEIER—AFP/Getty Images This December 9, 2010 photo shows the internet site of Amazon.com.

With no stores and an IT infrastructure that makes the cost of adding inventory close to zero, Amazon doesn't have to care about its suppliers

The recent dustup between Amazon and publisher Hachette reminds us that retail is a brutal business — tough on employees, really hard on suppliers. Walmart, the largest physical retailer, and Amazon, the largest retailer online, illustrate the pain produced in the effort to make consumers’ prices as low as possible.

Consider the plight of those working in retail. According to the Bureau of Labor Statistics, retail salespeople and cashiers were the two largest occupations in the U.S. in 2013, together employing almost 8 million people. These are low-paid occupations under the best of circumstances. While the median hourly wage for all employed people was $16.87, cashiers made just 58% of the median, and sales clerks just 60%.

Numerous news articles document the tough working conditions for both Amazon and Walmart employees. Both employers face suits for not paying employees for all their required time at work, including time waiting to go through a security check at Amazon’s warehouses to guard against shoplifting. Amazon’s German employees have been striking over wages since last year. A homeless shelter in Jeffersonville, Ind., has had between two and six Amazon distribution-center employees living there at all times. Many articles describe the harsh work culture at Amazon, some calling it a “soul-crushing experience.”

Walmart is scarcely better. Fifteen percent of Walmart’s Ohio employees are on food stamps. Employees receive $2.66 billion in government assistance annually. A study by the University of California, Berkeley’s Center for Labor Research and Education noted that, even after statistically controlling for differences in geography, “Wal-Mart workers earn an estimated … 14.5 percent less than workers in large retail” and that “several recent studies have found that the entry of Wal-Mart into a county reduces both average and aggregate earnings of retail workers and reduces the share of retail workers with health coverage on the job.”

But it’s Amazon’s relationship with its suppliers that makes the company worse than Walmart. There’s no doubt that Walmart pressures suppliers for the lowest possible price. But once the products are in the stores, both Walmart and the chosen suppliers’ interests are well aligned — to sell as much as possible of the stocked items. It costs money to build stores and ship products to them. More important, choices are necessarily limited in a physical store. So Walmart wants to move as much of the merchandise it decides to sell as possible. Having chosen a supplier and negotiated a deal, there is at least some degree of temporary commitment by Walmart to the vendor.

By contrast, Amazon — with no stores and an IT infrastructure that makes the cost of adding items to sell close to zero — doesn’t care what you buy, or even which of their online partners you use, as long as you buy the product through Amazon. Take books, the focus of the recent conflict. Walmart stocks a relatively small selection, so it wants to move the specific books it offers. Walmart’s interests line up quite nicely with the authors and publishers it promotes. Amazon stocks everything (except apparently now books published by Hachette), so it doesn’t care which particular book you buy. Simply put, Amazon has less incentive to make any specific supplier successful. To Walmart, for books or anything else, selling a million units of one item is great; selling one unit of a million items is impossible in its physical stores. For Amazon, who cares? That’s why relationships with suppliers, always contentious, will be particularly problematic at Amazon, especially when Amazon controls so much of the retail market share.

Some believe that low-paid, overworked, unhappy employees are the new model in an Internet age of offshoring, outsourcing and computer-monitored work. It’s quite possible that online retailing is also creating a new model of retailer-supplier relationships, with much less sense of partnership and shared fate than in the past. If so, Amazon’s fight with Hachette presages trouble for lots of suppliers, not just book publishers, in the very near future — at least if Amazon’s market dominance persists.


Underpaying Employees Can Hurt a Company’s Bottom Line

Fast-Food Strikes in 50 U.S. Cities Seeking $15 Per Hour
Bloomberg—Bloomberg via Getty Images Fast-food workers and supporters organized by the Service Employees International Union (SEIU) protest outside of a Burger King Worldwide Inc. restaurant in Los Angeles, California, U.S., on Thursday, Aug. 29, 2013.

There's little evidence to indicate that raising wages will lead to job losses, and studies show that high-wage companies fare better than lower-wage ones.

Just this week, Seattle workers won a significant battle when the city raised its minimum wage to $15 an hour. Richmond, Calif, recently voted to hike theirs to $13 by 2018, while polls indicate San Francisco voters favor a $15 minimum. Even the CEO of McDonalds is somewhere between neutral and positive on raising the minimum wage.

People continue to argue that increasing the price of labor will reduce the number of jobs. However, the oft-cited study in the fast-food industry by economists David Card and Alan Krueger show small to no negative employment effects. And a comprehensive study of minimum wages in European countries concludes that there is “no general evidence that minimum wages reduced employment.” But even if higher minimum wages do cost jobs, should U.S. policymakers care? Maybe not.

Contrary to what you may think, the U.S. is actually a comparatively low-wage country. According to data from the Organisation for Economic Co-operation and Development, in 2013 the U.S. ranked 23rd out of 28 industrialized countries in terms of hourly earnings. These data suggest that the U.S. can easily afford to pay more and not jeopardize its competitive standing.

Moreover–and this is important–there is essentially no relationship between average hourly earnings and that country’s competitiveness as measured, for instance, by balance of trade statistics. In 2012, countries with high wages—such as Germany, the Netherlands, Sweden and Denmark, to take a few examples—ran a large balance of trade surpluses, while low-wage countries such as Portugal, Iceland and the U.S. ran a balance of trade deficits.

Nor, for that matter, do high-wage companies invariably suffer, as University of Colorado Denver management professor Wayne Cascio’s comparison of higher-wage (and benefits) Costco with lower-wage (and benefits) Sam’s Club so nicely illustrated. The issue is not what people cost, but what they can do, their innovativeness, and their productivity. Poorly paid people are more likely to quit, and turnover is costly. Underpaid people are unlikely to be engaged with their work or to exert discretionary effort. There is simply little reason to believe that raising wage rates will unduly harm country or company competitiveness.

But most fundamentally, policymakers need to ask what sort of economy they want to create: a) an economy with low-wage jobs—and maybe one with few environmental or safety protections as well—such as Bangladesh, or b) an economy with high-wage employment and working conditions that do not sicken and kill people—think Denmark or Singapore.

Some years ago I had the privilege of working with the Ministry of Manpower in Singapore. Although Singapore has no national minimum wage, the government has consistently pursued policies to raise not just the education and training levels of the workforce, but also income. Early in Singapore’s history, it was a hub for low-cost manufacturing. When low-wage manufacturers complained they would be forced to move their operations out of Singapore as wage levels rose, the government’s response was: learn to be more efficient and productive, or go. Why would the government want to encourage the preservation of low-wage work—a policy that would also retard the growth in national median income?

Missing from the minimum wage discussion are the effects of wages and other job conditions on people’s physical, psychological and economic well being. And what about the “social pollution” caused by companies who pay people so little that their food and health care must then be subsidized by the public? Many advanced industrialized economies have chosen a “high road” policy path that has produced higher incomes and, not coincidentally, much better health outcomes such as longer life expectancy and lower rates of infant mortality. Economics teaches us that trade-offs are inevitable. Trading off job quality for job quantity might be a poor choice.

Jeffrey Pfeffer is Thomas D. Dee II Professor of Organizational Behavior at the Graduate School of Business, Stanford University.

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