The Long-Term Effects of Discounting

I read another tiresome diatribe against Walmart's cost-cutting strategies and the way in which they drive down product quality and sell goods that are cheap and shabby in order to offer consumers low prices.   I don't disagree at all that this is exactly what has happened - but I would disagree with the suggestion that it is unilateral, or even the suggestion that this idea originated on the supply side.   Retailers seek to gain business by giving customers what they want and the price they are willing to pay - and their commercial success (profit) is the measure by which they have been successful in doing so.

That is to say that a customer who demands a low price is in the first place unwilling to pay for quality.  It's a garbage-in-garbage-out situation, in that if you are only willing to pay so much, the retailer (and manufacturers as well) can only put that much effort (and quality) into providing what you demand. So if you are willing to pay only $7.50 for a shirt, the manufacturer can pay only $7.50 on the materials and labor to manufacture that shirt - and that is if the manufacture has no overhead, no transportation costs, no general and administrative costs, and takes no profit at all from the transaction.  But if you are willing to pay $15.00 for the same shirt, the manufacturer can spend double the amount to create it - which enables them to use better materials, hire more skilled laborers (and compensate them fairly), and undertake necessary expenses in order to make a garment that has twice the quality.

The problem is that many customers are unwilling to do that: in seeking the lowest price possible, they provide insufficient resources to the manufacturer (and the entire supply chain) to provide more than the lowest quality possible.   The demand for high quality at bargain prices is self-contradictory and self-defeating.

And when this occurs on a widespread basis, the quality of all options to the consumer is diminished.   While there is still a broad choice in retail, such that a customer who genuinely values quality (and demonstrates with their actions rather than merely their words) has the option to shop at retailers in the quality, premium, and even luxury ranges.   They don't have to accept the low quality of a $7.50 shirt but can get better quality by going elsewhere to purchase a $15 or $50 shirt if they are willing to pay to have quality.

But consider the effects on cost-cutting on industries in which there are not that many options.   Domestic airlines are an excellent example, one about which customers frequently complain, and one in which the quality of service has diminished greatly over the past few decades such that some travellers still remember - and long for - the way things used to be when travel was a pleasant experience but came at a much higher price.

There are still a few international airlines (Singapore, Cathay Pacific, and the like) that undertake effort to make travel a more pleasant or at least less onerous experience.  But domestically, there seems to be no premium option.   Online travel agencies cater to the customer demand for the cheapest available flights, diminishing the revenue to the airlines, diminishing their ability to pay for the goods and services that reduce the unpleasantness of the travel experience.   And as such, I have not experienced nor heard of an airline that offers anything but a cattle-car level of quality to domestic travellers.

The original argument erroneously claimed that quality is reduced because corporations cut quality and maintain high prices in order to boost their profits - but I don't think that the fellow who made this argument took the time to glance at the income statement of the company he was criticizing.    Walmart runs at a profit margin of less than five percent (and closer to three) and has done so for decades.    Most domestic airlines are presently running at a loss, and must either raise prices or reduce quality further in order to be sustainable.

Moreover, many of those who whine about the situation continue to patronize the very brands they criticize: they castigate Walmart for the low quality of its merchandise, the low wages they offer their employees, and the low margins they offer their suppliers.   But they don't complain about the low prices they are getting.   And in so doing, the only thing that can be learned from their arguments is that such people simply do not have a good grasp of cause and effect.