Friday, September 07, 2007

Of Wal-Mart, Lower Prices, and Toy Safety

The Toy Industry is asking the fed to issue some tighter regulations after the recent spat of toy recalls. They industry claims that this is to restore customer faith in their products, the customer, as the toy industry argues, will see that the government is acting and be reassured in their future purchases. I don’t think, however, that this is the only reason that the toy industry wants tighter regulations, they want the government to help protect their customers from the market, a market that the toy industry is powerless to standup to on their own.

Protecting customer from the market, you ask? Shouldn’t they be doing that, isn’t this the toymakers fault, how can you blame the market? Easy. Think Wal-Mart.

I’ve been surprised that Wal-Mart has escaped any press in latest toy scandal. The toy market is dominated by Wal-Mart, if you don’t believe me, just ask Toys-R-Us. And in toys, just like anything Wal-Mart does, it has one relentless pursuit, lower prices. I imagine the conversation in Bentonville goes something like this:

Wal-Mart to the toy industry: We need lower prices?
Mattel: How?
Wal-Mart: We don’t care, just find a way if you want to sell to us.
Mattel: Okay.

Mattel to supplier in china: We need lower costs?
Supplier: How?
Mattel: We don’t care, just find a way if you want to sell to us.
Supplier: Okay

Apparently, in China cutting cost means lead paint and shoddy parts. But this is nothing new, remember the dog food scare. If you went into a Wal-Mart during the crisis did you notice the dog food shelves, empty? Thus, we have the biggest buyer forcing the lowest production costs possible and the market responding, should we be surprised at the results. In a market obsessed with price and no regulatory enforcement, safety is apparently the first to go.

I’m not a huge Wal-Mart basher, I know there are those who rail against everything the store stands for. I will admit that Wal-Mart has a place in our economy as a growth engine and has brought a new level of efficiency to the consumer markets. These are things that the company should be lauded for. And I’m not really certain that we can place the blame on Wal-Mart for these recalls, Wal-Mart didn’t make the decision to hire these suppliers or use shoddy production materials. However, I think I’m safe in concluding that Wal-Mart is the strongest source of market pressure that resulted in the shoddy decision making at Mattel.

So, to bring this short diatribe full circle. Mattel should be seeking regulation. When there is one force in the market bringing so much pressure to bear that these type of cost cutting measure are the result, the only tool they have is regulation to rebut this force and level the playing field against a powerful, one sided consumer. This fact, coupled with the chance that regulation might help restore customer confidence a little, would make regulation worth it to save their struggling company. But, yet in this discussion we must not loose track of a bigger point. This is, nothing is free. Prices can not be reduced infinitum, something must give, and if market pressures are left to batter companies and consumers for the sake of profit than often consumer safety is that thing which gives.