Daniel Sutter: Walmart, greeters and an economics lesson

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Walmart is bringing back greeters. This story illustrates the difficult decisions businesses face in a market economy, and should caution anyone against thinking that they know too much about the economy.

Walmart phased out greeters in 2012 as a cost-cutting measure. Cost control and efficient management of its supply chain have been keys to Walmart’s great success. But no company ever succeeds for long by keeping costs as low as possible. A successful business will incur costs to generate value in terms of performance, product quality, and customer satisfaction.

All retailers must guard against theft by customers and employees; Walmart’s losses to theft total about one percent of sales annually. But in controlling theft, retailers must not offend honest customers and employees by treating them like thieves.

Walmart instituted greeters across the company after founder Sam Walton observed them at a store in Louisiana in 1980. The store used greeters to control theft: the greeters both welcomed shoppers and watched for customers trying to exit without paying for merchandise. Mr. Walton thought that this was more customer-friendly than security guards at the exits, and adopted greeters company-wide, despite the additional labor costs.

Was Walmart’s decision to drop greeters in 2012 a mistake? Perhaps, but businesses must balance costs and value creation using the best available information, and with recognition that what worked yesterday may not work today. Greeters might have been an effective way to control theft in the 1980s but not 2012. Documenting the value created by any one element of a business’ operations is extremely difficult. If Walmart had evidence that greeters were no longer cost effective, I would hesitate to label their phase out a mistake.

Greeters provide a concrete illustration of the enormous role of discovery in economics. Economic knowledge is very different from knowledge in the physical or natural sciences. Scientists can uncover “laws” of nature, which we know are true generally. By contrast, economic knowledge is not general and depends on local circumstances, as economist Friedrich Hayek first recognized. Economic knowledge concerns the types of products or quality of service that millions of people want and expect. Our likes and dislikes are not always logical or consistent. And because we differ, what one person perceives as reasonable security another might consider an intolerable insult. Typically we discover what creates value for people through trial and error. No scientific formula will tell a retailer that a search by security guards might offend customers and make them shop elsewhere.

Wise business managers are aware that they may always discover something new and valuable even if they haven’t studied economics. Mr. Walton exhibited such an awareness when he quickly recognized how something he hadn’t thought of – greeters – could create value for his company. The pervasiveness of discovery also suggests that we should be relatively forgiving of mistakes. No business is perfect, so correcting and learning from mistakes ends up being crucial.

Greeters illustrate the difficulty government experiences in controlling the costs of its programs. Cost data reveal far less than one might imagine. Consider some of the different measures retailers take to control shoplifting: security devices in the packaging, locked display cases, searches of customers’ purses and bags, security cameras, and guards. Walmart can say how much they spent on security last year, but the cost data does not reveal how much different measures reduce losses or offend customers.

What is true about greeters applies throughout the economy. Choosing between greeters, security guards and security cameras may appear hard, but is child’s play compared to balancing doctors, nurses, laboratories, home health care, and the hundreds of components of our health care system. In an election year, politicians of both parties will tell us that they know how to manage the economy. But Walmart’s greeters help us understand why government struggles to control the cost of programs like Medicare and Medicaid.

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Daniel Sutter is the Charles G. Koch professor of economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.

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