My question is only partly rhetorical. Just two days after I published my post “Vaccine Adventures,” I read in the Wall Street Journal that the federal and state governments had started allocating vaccines to large pharmacy chains, including Walmart (Sharon Terlep and Jaewon Kang, “CVS and Walmart Decide Who Gets Leftover Covid-19 Vaccine Doses,” February 11). After reading this story in the wee hours of February 12, I went on Walmart’s website and, in just a few minutes, made myself an appointment for six days later. Appointments are available at 20-minute intervals during the whole day.
The efficiency of Walmart is legendary despite its being a behemoth, just as the inefficiency of the government is legendary because it is a behemoth (and other reasons explored by the economics of public choice).
Yesterday, another Wall Street Journal story described the rollout of Walmart’s Covid-19 vaccination (Sarah Nassauer, “Walmart’s Covid-19 Vaccine Rollout Heads to Small Town,” February 14). To get an idea of “what the weather [is] really like on earth” (le vrai temps qu’il fait sur la terre) to borrow an expression from Saint-Exupéry (in his novel Southern Mail or Courrier Sud), a few quotes from this Wall Street Journal story are useful:
Skowhegan, Maine—Pat and John Thomas were watching the news one night last week when they saw that Walmart in this central Maine town of 8,000 people was taking appointments for the Covid-19 vaccination. They had signed up for shots at a hospital about a month ago but still hadn’t heard back. Ms. Thomas, a 74-year-old retiree, jumped on the computer.
On Friday the couple got the Skowhegan Walmart’s first doses …
Walmart Inc., the U.S.’s largest retailer and private employer, is set to become one of the biggest distributors of the Covid-19 vaccine as the federal government enlists retail pharmacies to accelerate what has been a choppy rollout. …
Walmart is likely to benefit in other ways. Many of the people getting the vaccine at the Skowhegan store Friday didn’t previously have patient profiles in Walmart’s system, said [regional Walmart manager] Mr. Tozier. “We are making relationships with new patients,” he said.
Ann Jackson and her husband, Norman Jackson, 73 and 76 years old respectively, arrived for their vaccine appointment midmorning after waiting for weeks to get an appointment at the local hospital, said Ms. Jackson. Later, she added chips, bananas and T-shirts to her cart. “You never want to waste the trip to Walmart,” she said.
Contrary to what I implied in my previous post, there seem to be incentives enough for private pharmacies, at least those with a Walmart sort of efficient logistics, to administer Covid-19 vaccines when Big Brother releases them.
Such recourse to private enterprise could partly protect us from the central planners in DC and the state capitals. But why give the vaccines to some private organizations but not others—say, to Walmart but not to Hannaford? Is it because the central planners know better where demand is most intense or where low-cost distribution is most likely? That would possibly be a first in the history of mankind.
It would have been much more efficient, from the beginning, if the government had sold the vaccines to whoever was willing to buy them in order to make a profit and had given vouchers to whoever wanted to be vaccinated. After this redistribution of purchasing power, the market—that is, individual demands—would have decided where the vaccines should go.
READER COMMENTS
Thomas Hutcheson
Feb 15 2021 at 8:25am
That’s an interesting idea and worth consideration. There is still the issue that the externalities of some people receiving the vaccine — the bus drive, the supermarket clerk — is greater than others. And those vouchers? How are they distributed and do they address the issue that the value to the 19 year old college student is less than to the 90 year old nursing home resident?
But in general you are doing what I’d like to see more Libertarians do, take their appreciation of markets (including issues with externalities) and self-organizing behavior, skepticism of central planning, and awareness of public choice problems, and turn them into policy proposals.
[Now to me that would make them Neo-liberals, not Libertarians, is a semantic issue. :)]
Pierre Lemieux
Feb 15 2021 at 12:54pm
@Thomas: Of the many aspects of your interesting comment I am tempted to comment on, let me just pick up one. You write:
Indeed my approach negates that. It supposes a basic moral principle (since value judgements are necessary for any policy evaluation) best summarized by James Buchanan: “Each man counts for one, and that is that.”
A major policy implication had already been formulated by John Hicks (who goes even farther): “The Manchester Liberals believed in Free Trade not only on the ground of Fairness among Englishmen, but also on the ground of Fairness between Englishmen and foreigners. The State, so they held, ought not to discriminate among its own citizens; also it ought not to discriminate between its own citizens and others.” (My underlines)
Jose Pablo
Feb 18 2021 at 1:46pm
Since we don’t even know (as of yet) if vaccinated people are contagious, what are, exactly, the externalities you are talking about?
And the reasoning does not work: “there are externalities like such and such so the government intervention is required”.
To define (letting apart to “evaluate”) externalities you need to compare the “real market solution” with a “textbook one” that exists only in your imagination.
Then, you concluded that this theoretical solution you can (barely) imagine is “better” than the “real market” solution using some ill explained, handpicked aspects of the problem (and keep in mind that even deciding the metric required to talk about “better” is a pretty useless theoretical discussion).
From this you jump (Olympic way!) to the conclusion that because of these “inferiorities on some particular aspects compare with a theoretical solution”, a government intervention would yield a “better” result.
This way of reasoning makes no sense … and yet you read it again and again everywhere. If the point is talking about myths, the Viking Sagas are much more interesting and entertaining.
Craig
Feb 15 2021 at 11:33am
“The efficiency of Walmart is legendary despite its being a behemoth”
I know this is widely believed of course and for sure, Walmart does have many strengths. Its not particularly efficient in the sense that for every dollar it sells, its net margin is absolutely awful. Its known for low pricing and from a consumer point of view that seems self-evident, right? I mean, since you can’t find a better price, one assumes Walmart must be the most efficient at this whole service.
But in many instances, the only reason its the low price is because it prevents competitiors from charging LOWER prices. Walmart’s gross margin is about 24-25%. That means it buys something for a $1 and it sells that item for $1.33
When it makes that sale, Walmart earns $.04788 in profit 3.6% net margin. But it is spending $.28212 in, mostly, opex (other expenses are material of course. But other more nimble competitors don’t need to spend that much and can operate more profitably on a tighter margin. Problem of course is that Walmart sells hundreds of billions of dollars and they insist to their suppliers that their competitors not, at least routinely, undercut the $1.33. Walmart must command a 33% markup, on average, to ensure it makes a lousy 3.6 cents off every dollar.
The basic problem with the box retailer is that each box needs to be stuffed with inventory. Of course pre-internet, what choice was there. And even today if you want it TODAY (and even this is changing) there needs to be a unit there to sell to you. Amazon net margin is 5.75% because it doesn’t need all of those box stores, it has one warehouse for x number of box stores. As a result Amazon can lower its inventory carrying costs and get you that item now basically by ‘tomorrow’
But even so all we need to do is to see Walmart and Amazon’s third party sellers, sellers who pay Amazon .15 off each dollar sold. And they make money doing this. If the reverse were the case, if I made a sale for Amazon or Walmart and they paid me $.15, they’d lose money.
You’re paying a premium for convenience but you are being denied the opportunity to buy at a discount and to wait 3-4 days for the item. It should be your choice. More often than not, its not.
Craig
Feb 15 2021 at 11:43am
Walmart and Amazon send out ‘bots’ that scour the internet for anybody who might be charging a lower price. When they find you you get a call, never an email because they don’t want it in writing, and they’ll say, “Sorry, but Amazon called and that’s it they can’t have you charging less than them, you have to raise your price.”
Garrett
Feb 15 2021 at 11:53am
Efficiency isn’t just about profit margin. Turnover and leverage matter as well. Walmart may have a net margin of only 3%, but it fully turns over its assets twice a year, for a return on assets of 7%. But then it’s able to leverage its assets nearly 3x for a return on equity of 20%. It’s able to do that because it’s cash conversion cycle is very fast and because it makes smart inventory decisions.
20% ROE is a great business, and Walmart is legendary because it was able to take share for so long. The last decade it’s fallen behind, but it still has a chance to get back out in front with good execution on online orders and in-store pickup.
Craig
Feb 15 2021 at 12:28pm
Walmart is an efficient box retailer. But box retailing isn’t efficient. Even look at revenue per employee. <$300k. That’s absolutely awful. Walmart had its day and it was definitely more efficient than the mall or Main Street. As a result, Walmart could get prices lower, but TODAY, prices TODAY are HIGHER because of Walmart.
Googling the ROE for Walmart yields a recent result of 7.2%. The problem with ROE is that you can fiddle with that number based on how you capitalize the business.
For instance let’s take 2 stores. Both sell $1mn and earn 10% margin for an EBIT of $100k. Both have 3 employees, the same exact square footage, the stores are, in every way shape or form twins of each other.
We will assume the stores trade at a 1 year multiple, just to keep the numbers simple. Let’s assume you bought that store by putting $100,000 down and borrowing the 900k at 5% (45k in interest per year). Let’s further assume I bought it all cash with $1mn.
Now of course once you pay interest your earnings are lower than 100k. You now earn 55k and I still earn 100k. We will ignore taxes. But still the simple return on equity there for me is 100k/1mn = 10%. For you, the ROE is 55k/100k = 55%
That’s because you’re leveraged.
In fact I could even pull an employee out of my expenses and make more money, say 150k and now I have an ROE of 15% and I would now be clearly MORE efficient than your store, but you would still have a higher ROE.
So, no, I’m not saying ROE isn’t an important metric if you’re investing your money. However, the professor is speaking from the point of view of an economist and the amount of resources necessary to perform whatever it is that Walmart does. Gross margin/net margin/operating margin/sales per employee/profit per employee are all very important ratios to consider when looking at how ‘efficient’ Walmart is.
From my point of view I would suggest that to sell a dollar, Walmart needs to utilize an inordinate amount of resources to be in business.
Pierre Lemieux
Feb 15 2021 at 1:03pm
Craig: A point that may look peripherical but which is important: mere accounting is not the “real” thing. Your $1 million (or $900 thousand) invested elsewhere would have brought the market return, say, 5%. This loss is an opportunity cost that diminishes your ROE, which then just equals that of Garrett’s investment (ignoring taxes). This, I gather, is implicit in the Modigliani-Miller Theorem: perhaps Garrett can enlighten us on that?
Pierre Lemieux
Feb 15 2021 at 1:14pm
Craig: There is always an economic reason why, on a free market, a competitor prevails on others. The reason or reasons are not necessarily obvious. But there is little doubt that the typical consumer puts a cost on receiving his good later rather than sooner. Time is money. (“In the long run, I may be able to have everything, but this gadget, I want now.”)
Craig
Feb 15 2021 at 2:30pm
True. In business there is the concept of the unattainable triangle. You can compete on any two: quality/service/price but you can’t attain all 3 (there are exceptions). Walmart differentiates based on SERVICE actually, NOT price. If they had to compete on price, they wouldn’t be out of business, but they wouldn’t sell $100bn.
Does this mean Walmart is inefficient at everything. No, they are efficient at many things, from my point of view bananas and the ‘Great Value’ and ‘Equate’ Walmart store brands are impressive.
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