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Wednesday, May 26, 2010

The Wal-Mart Conundrum

Wal-Mart is the world’s largest retailer. Current projections are that they have over 2.1 million employees globally. Their original claim to fame remains very much intact—“everyday low pricing.” The company grew rapidly from its beginnings in 1962 where Sam Walton and his brother made sure that their markup was always less than their competitors. In the early days, they would drive all night in a rented truck to Tennessee and pick up a load of shirts. The next day they would display them prominently in their store(s) and after a week or two put them back in the storeroom for another try several weeks later. They stubbornly refused to be undersold on almost any item.

The company grew like crazy as Sam developed a unique strategy. They would invade a Nielsen DMA (media market) and build stores in smaller towns not near the major city. Slowly, they would circle the metropolitan area and then move in closer and closer to the center city but rarely would move in to highly congested and competitive areas with high real estate prices for a number of years.

Our advertising and media industries did not give then much attention as they were never significant advertisers. They relied on “everyday low pricing” to carry the day and eventually had a monopoly loyalty in some rural areas. Even today, their advertising to sales ratio is probably one fourth of that of a competitor such as Target.

Sam was not simply a great merchant. Internally, he and his team developed systems that were light years ahead of the rest of the industry. They computerized before others and had tighter inventory control than anyone. Eventually, manufacturers wound up managing Wal-Mart’s inventory for them. If Wal-Mart sold 5,000 lawn mowers on an April Tuesday, the manufacturer had to re-order and get mowers to appropriate Wal-Mart warehouses very quickly.

As they grew larger, they really put the squeeze on suppliers. The big package goods companies such as P&G, Colgate-Palmolive, Nestle, Kraft, and Kellogg among others historically strong armed retail stores regarding pricing, promotion, co-op advertising, and shelf space. Wal-Mart turned that around, often set pricing (lower than the manufacturer wanted), set minimum sales thresholds, and even made sure packaging fits their needs. Wal-Mart claims part of their green initiative is forcing companies to use less plastic in their packaging. Is it? Or does it give them more shelf space? The manufacturers soon sang and continue to dance to Wal-Mart’s tune as 25% of their volume may have come from the Bentonville wizards.

Eventually, the company branched out into groceries and did well there and soon added drugstores. They continue to try to get into banking for the underclass. Soon they had another concept—Sam’s Club, a membership club in competition with Costco and BJ’s among others.

They also keep playing the green card and are constantly adding solar panels to most new and existing stores as well as energy saving lighting. Is this all self serving? One would think so but they are probably the largest private user of solar energy in the world.

Globally, they have invaded Europe, South America and have vibrant growth in China. It appears other cultures enjoy saving money, too.

Wal-Mart is widely credited with fighting inflation, particularly in the U.S. There has been little evidence of price gouging and they buy in such volume that consumers benefit. And, in rural areas where they have put most serious competitors out of business, they are careful not to raise prices to avoid antitrust action from the Federal Trade Commission. Loyola University, Chicago found that Wal-Mart low prices saved the average working family $2,500 per year and creates 210,000 new jobs.

Is Wal-Mart really cheaper? Going back to my young days as a budding economist, I put together a representative market basket of goods (my basket may be different from yours!). In the grocery aisle, I went to Whole Foods (often called Whole Paycheck), a large local grocer, and a national chain. For OTC drugs and personal care products, I went to CVS and Walgreen’s. Without exception, I ignored sale items and found Wal-Mart 16% less expensive than all competitors for my basket of goods. Was the shopping experience pleasant? Nope. But, the savings were very real.

There are several large issues out there:

1) Professor Ken Stone, an economist at Iowa State University has written extensively on Wal-Mart. He says small towns lose their character a few years after a Wal-Mart opens. Shop owners have to adapt if they want to thrive with a Wal-Mart nearby. After several years, approximately half of local retailers shut down. The shop owners that they effectively shut down were often pillars of the community and without them, charities suffered as well as some good jobs. Wal-Mart is not famous for paying well (I grew up in a Norman Rockwell style New England village with small business owners the glue that held all the local institutions together. They were soft touches for school fundraisers and they served on school boards, town council, church committees and encouraged their employees to be part of the volunteer fire department). The shrinking pool of local leadership has also caused there to be more lower paying jobs as the closed businesses often paid better than Wal-Mart does.
2) The libertarian leaning Ludwig von Mises Institute argues the opposite stating that Wal-Mart has a positive effect on new business development. They see local retail closings as merely part of the process of “creative destruction” that takes place in a free market economy when innovation sweeps away the old and inefficient. Wal-Mart, to them is simply a living embodiment of the concept of Consumer Sovereignty where the consumer is king. The consumers feel Wal-Mart has listened to their needs via low prices so they continue to grow.
3) Labor unions often harp that Wal-Mart in the U.S. is hostile. Employees are unionized in other countries but not at home. Also, employee turnover is 70% per year implying that pay and benefits are weak.
4) Some say that Wal-Mart has worked hard and successfully on ethnic balance but claim that there is evidence of discrimination against women and gays in terms of promotion. Finally, their health coverage is considered problematic in many states. Claims have been made but are as yet unproven that they keep hours low for many employees so they do not have to provide healthcare.

The more you dig into Wal-Mart it is easy to see why views on the company are so polarized. Some commentators attack Wal-Mart as all that is evil in big business. Others say that the company is a lightning rod for criticism due to jealousy. They are a free market success story, the largest employer in the U.S. retail and people begrudge them their success.

Over the last couple of years I have lectured on Wal-Mart and used them as a case study. A few weeks ago, I outlined many of the ideas presented in this post to a group of young adults. The discussion that ensued was long and lively. Only one person admitted they liked Wal-Mart. Most said they hated the appearance of the stores, as well as the surly or invisible service but they came back again and again because the prices were excellent.

A few days letter I received a long message from someone who stayed quiet during the Wal-Mart discussion. She said her Mom was single and struggling. Wal-Mart put food on the table and truly lived up to their theme line—“Save money, live better.” To those of us who live comfortable lives, the point is well made. If Loyola is correct with the $2500 annual savings, blue collar families almost HAVE to go to Wal-Mart. Friends have told me they will not go there and admit it is for purely political reasons. They can afford to do that but a great many Americans cannot.

So what do you think?

Is it more important to lower costs for all or is it better to be a better corporate citizen in each market that the company enters? As a society are we better or worse off due to Wal-Mart’s growth and increasing dominance?

Is Wal-Mart simply a case of Consumer Sovereignty from a Consumer Behavior standpoint or is there something more sinister afoot?

To me, it remains various shades of gray and I will continue to monitor it and study it carefully.

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

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