The high cost of discounts

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Outlet malls are America’s number one travel destination. They get more visitors every year than Times Square, Disney World and the Grand Canyon combined. We definitely have a lust for low prices.

Ellen Ruppel Shell teaches journalism at Boston University and is the author of “Cheap: The High Cost of Discount Culture.” She says our discount culture come with a high cost.

The discounting of things is a relatively recent phenomenon, according to Shell. The industrial revolution made the mass manufacturing of goods available, but the heavy and ubiquitous discounting that we see today is only around 20 – 30 years old.

“In the 1950s, only about five percent of clothing, for example, was offered on discount,” said Shell. “Now that number is closer to 75 percent of clothing. So we buy more clothing on discount than we do not on discount … and we buy across the board about 33 percent of consumer goods at a discount. So discounting has become the marketing philosophy, the basic drive in business. It’s just become a pervasive phenomenon.”

The risks that come with our obsession with low prices are many, she says. For starters, cheap goods can only come from cheap manufacturing, which means cheap labor and materials. “At the same time that the cost of consumer goods has declined dramatically, simultaneously, the cost of the things we can’t live without — that is housing, healthcare, education, daycare — has skyrocketed. So the American worker, in particular the middle class, is in this pinch. We can get cheaper and cheaper t-shirts in part because our wages and benefits have either been frozen or have declined in the last 30 years.”

This has contributed to the stagnation of the wages and benefits in the United States argues Shell, and also to the increase of outsourcing as certain goods simply can’t be made in the US and still be sold at certain price points.

As multinationals scour the globe for the lowest possible manufacturing costs, they typically end up in countries where the enforcement of laws around workers rights and environmental issues is weakest. “At the same time that we’re cannibalizing our own workforce and threatening our own stability, we are contributing to this in the developing world,” said Shell.

And we may be getting fewer deals than we think. While outlet malls are the top travel destination for Americans, they don’t really offer the bargains that a lot of shoppers think they’re getting. This is because outlet malls employ what is called “reference pricing.”

“If you buy a sweater and the sweater is $50 dollars, but the original price was $250 dollars, that original price is what we call the reference price,” said Shell. “And that’s what you assume the object is worth.”

So the buyer believes they’ve gotten a great deal. But the products offered in the outlet malls are often times not the same products that are offered by the brands in their regular stores.

When it comes to one of the country’s premier bargain stores, Walmart, shoppers are also not getting the deals they think they’re getting. In her research, Shell found that up to a third of the items for sale at Walmart are actually more expensive than shoppers can find elsewhere.

“When you go into Walmart, you assume everything is going to be on deep discount,” said Shell. “You think it’s going to be the cheapest in the area, and Walmart takes advantage of that by offering about a third of its merchandise at a price higher than that in the region that it’s found.”

The fact that we tend to overbuy makes it all work in the favor of the discount stores. In outlet malls, for instance, shoppers spend 80 percent more than they do in a traditional mall. So while we might have visited a Walmart or outlet store for a couple of discounted items, we end up buying other items that actually cost more than they may elsewhere.

“As well, people should be aware that many discount stores, Walmart being one of them, acquire goods that are made specifically for that store,” said Shell. “So even though it may have a reliable brand name on it, the supplier is providing a special form of that good for Walmart, often times not to the standards that would be offered at other full price stores.”

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