As Oil Prices Rise, Wal-Mart Rethinks its Global Food Sourcing Tactics

Wal-Mart, one of the largest food retailers in the United States, is known for its inexpensive food due to its incredible network of global suppliers. Traditionally Wal-Mart has been successful at finding the cheapest products anywhere in the world and importing them to its stores nationwide using various modes of transportation while taking advantage of inexpensive oil prices. Now, with the price of oil and transportation skyrocketing, Wal-Mart is being forced to rethink its food supply chain, and is beginning to purchase locally grown products instead (Philpott, 2008).

Because ease and affordability of transportation have been major contributing factors to globalization, the financial strain of keeping those established trade routes open is beginning to show. This could be very good news for many local businesses that have been threatened in the past by foreign sourcing competition as well as large chain stores. In the case of Wal-Mart, small farmers that can not compete are joining the giant in order to remain profitable. Linking with larger corporations is a well established method of protecting a company’s domestic niche (Bartlett et al., 2004, 215). It seems many local farmers are taking advantage of this opportunity. Since 2006 Wal-Mart has expanded its local sourcing by 50% so that at least one-fifth of all produce in their stores is grown and sold within the state. And aside from the support local communities are getting because of this shift, Wal-Mart has cut its costs by million of dollars. For example, by locally sourcing peaches alone Wal-Mart saves $1.4 million every year and uses 112,000 gallons less of diesel (Maestri, 2008). Sourcing locally seems to be beneficial to everyone involved - Wal-Mart, local farmers, and the environment. The only remaining question is whether or not Wal-Mart will actually be able to maintain its trademark low prices by cutting down its oil/transportation costs, but at least they are trying.

References:

Bartlett, Christopher A. Ghoshal, Sumantra. Birkinshaw, Julian. (2004). Transnational Management. Fourth Edition. McGrawHill Irwin. USA.

Maestri, Nicole. (July 1, 2008). “Wal-Mart to Source More Fruits and Veggies Locally.” Reuters UK. Reference URL: http://uk.reuters.com/article/rbssConsumerGoodsAndRetailNews/idUKN2730901520080701?sp=true

Philpott, Tom. (July 11, 2008). “Wal-Mart Comes to the Farmer’s Market.” Grist - Environmental News and Commentary. Reference URL: http://www.grist.org/comments/food/2008/07/11/index.html

US Consumer Pessimism May Lead to Economic Downturn

According to an article published in the April 11th edition of Business Week Online, there is a general pessimism among U.S. consumers concerning the future of the economy despite moderate growth trends that imply economic stability for the remainder of 2007. Although unemployment is currently at 4.4% nationwide, a low since 2001, and 180,000 new jobs were created in March alone, the public still feels shaky about what the coming months will bring. Some obvious reasons for their uncertainty is the Iraq war and the continually changing price of oil. Just how pessimistic one is seems to be related to one’s annual income, namely the wealthy are the least pessimistic of all, while the poor hold the most doubts. (Coy, 2007)

The discrepancy between analytic forecasts and general public opinion should not be taken lightly. Consumer pessimism has the potential to become a self-fulfilling prophecy. Greater pessimism leads to less consumption because people are worried about what the future might bring so decide to save more, which lowers aggregate demand for goods and services. In turn, less demand means less revenue for firms, which will eventually lead to less job creation, and an overall downturn in the economy. In essence, what the public expects to happen, will indeed happen. Their expectations will become their reality due to the self-protective actions (ie less consumption) they take today. In fact, less consumption could cause a significant fall in GDP, as consumers make up roughly 70% of all U.S. GDP. (Coy, 2007) So despite a rather optimistic outlook among forecasters for 2007, public uncertainty and fears for the future may sway the economy downward in very real terms.

Source: Coy, Peter. “The Economy: Why So Gloomy?” Business Week Online. April 11, 2007. Reference URL: http://www.businessweek.com/investor/content/apr2007/pi20070411_639834.htm?
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Interest Rates Up in Europe

In the March 8th online edition of Business Week, Moore reported that the European Central Bank raised its interest rate by .25% to 3.75% in order to keep inflation at bay. This move was heavily criticized, however, since the overall inflation rate was less than the ECB’s recommended 2% for the last six months. Many, including the Association of European Chambers of Commerce, felt the interest raise was unnecessary and would discourage business growth in the coming quarters within the 13 European Countries that use the Euro. (Moore, 2007)

The European Central Bank is the European equivalent of the Federal Reserve Bank in the United States. By raising the interest rate by .25%, the ECB is affecting the discount rate, or the rate at which European banks can borrow money from the ECB. A higher interest rate means banks will have to pay more to borrow money, and will cause a decrease in the amount of money borrowed. In turn, banks will have less money to give investors, and the amount of people investing - starting new businesses, etc. - will drop. This is exactly why groups such as the Association of European Chambers of Commerce looks unfavorably upon the higher interest rates.

On the other hand, higher interest rates help to keep inflation down because there is less money supplied to the economy. As the quantity theory of money states; the more money in circulation, the higher prices will be for goods and services, which leads to inflation.

When the European Union was first formed, the ECB lowered interest rates to stimulate the growth and development of the new, larger economy. Now that the EU’s economy is relatively stable and healthy, the ECB believes higher interest rates will not have a substantial negative effect on the EU’s continued growth in the near future.

Even with the recent rise in interest rates, the ECBs rate at 3.75% is still lower than the Fed’s rate of 5.25%.

Source: Moore, Matt. “European Central Bank Raises Rates.” Business Week Online. March 8, 2007.
Reference URL: http://www.businessweek.com/ap/financialnews/D8NO6L000.htm?chan=search