05 December 2005

Wal-Mart & American Heritage

These last two weeks in American Heritage have found us discussing issues ranging from the progressive income tax to political correctness. In the middle of this discussion of the free market, capitalism, and government intervention has been a discussion of the value of Wal-Mart. As the largest retailer in America (the world) it shouldn't come as a surprise that they find themselves under the magnifiying glass. Most of the comments in class have been critical, taking issue with low wages and poor healthcare. As I was thinking about these critiques, I came across an op-ed piece in The Wall Street Journal that poses the question: Is Wal-Mart good for America? (click for WSJ subscribers)

I post this first for my American Heritage students who read my blog and think critical about these vexing issues and second for all the rest of you. As always I encourage my students (and other readers) to read this skeptically as they would anything else. However, I think it makes some good points.
Is Wal-Mart Good for America?
December 3, 2005; Page A10

It is a testament to the public-relations success of the anti-Wal-Mart campaign that the question above is even being asked.

By any normal measure, Wal-Mart's business ought to be noncontroversial. It sells at low cost, albeit in mind-boggling quantities, the quotidian products that huge numbers of Americans evidently want to buy -- from household goods to clothes to food.

Wal-Mart employs about 1.3 million people, about 1% of the American work force. Its sales, at around $300 billion a year, are equal to 2.5% of U.S. gross domestic product. It is not, however, an especially profitable company. Its net profit margins, at about 3.5% of revenue, are broadly in line with the rest of the retail industry. In fiscal 2004, Microsoft made more money than Wal-Mart on just one-eighth of the sales.

The company's success and size, then, do not rest on monopoly profits or price-gouging behavior. It simply sells things people will buy at small markups and, as in the old saw, makes it up on volume. We draw your attention to that total revenue number because, in a sense, it tells you most of what you need to know about Wal-Mart. You may believe, as do service-worker unions and a clutch of coastal elites -- many of whom, we'd wager, have never set foot in a Wal-Mart -- that Wal-Mart "exploits" workers who can't say no to low wages and poor benefits. You might also accept the canard that Wal-Mart drives good local businesses into the ground, although both of these allegations are more myth than reality.

But even if you buy into the myths, there's no getting around the fact that somewhere out there, millions of people are spending billions of dollars on what Wal-Mart puts on its shelves. No one is making them do it. To the extent that mom-and-pop stores are threatened by Wal-Mart, it's because the same people who supposedly so value their Main Street hardware store find that Wal-Mart's selection, or prices, or parking lot -- something about it -- is preferable. Wal-Mart can't make mom and pop shut down the shop any more than it can make customers walk through the doors or pull out their wallets. You don't sell $300 billion a year worth of anything without doing something right.

What about the workers? In response to long-running criticisms about its pay and benefits, Wal-Mart's CEO, Lee Scott, recently called on the government to raise the minimum wage. But as this page noted at the time, Wal-Mart's average starting wage is already nearly double the national minimum of $5.15 an hour.

So raising it would have little effect on Wal-Mart, but calling for it to be raised anyway must have struck someone in the company as a good way to appease its political critics. (Bad call: Senator Ted Kennedy quickly pocketed the concession and kept denouncing the company.) The fact is that the company's starting hourly wages not only aren't as bad as portrayed, but for many workers those wages are only a start. Some 70% of Wal-Mart's executives have worked their way up from the company's front lines.

The company has also recently increased its health-care options for employees on the bottom rungs of the corporate ladder. Starting in January, one of those options will be a high-deductible health-savings account, which is a great way to insure yourself if you're relatively young, relatively healthy and yet want to protect against the onset of some catastrophic illness. Mr. Kennedy, who recently called Wal-Mart one of the most "anti-worker" companies around, has been a chief opponent of these pro-worker, pro-market health insurance vehicles.

But suppose Wal-Mart did look more like the company its detractors would like it to be, with overpaid workers, union work rules, and correspondingly higher prices on goods. It would not only be a less attractive place to shop, and hence a considerably smaller company. It would drive up the cost of living for the millions who shop there, thus hurting those in the bottom half of the income-distribution tables that Wal-Mart's critics claim to be speaking for. One might expect this fact to trouble the anti-Wal-Mart forces, except that their agenda is very different from what they profess it to be.

As our Holman W. Jenkins Jr. pointed out in a recent column, the vanguard of the Wal-Mart haters is composed of unions that have for decades kept retail wages and prices artificially high, especially in the supermarket business. Those unions have had next to no success organizing Wal-Mart employees and see Wal-Mart's push into groceries as a direct threat to their market position. And on that one score, they may be right.

But seen it that light, it becomes clear that much of the criticism is simply a form of special-interest lobbying in socially conscious drag. And why an outside observer should favor the interests of unionized supermarket employees over those of Wal-Mart shoppers and employees is far from clear (unless you're a politician who gets union contributions).

Any company as successful as Wal-Mart will invariably run afoul of such vested interests. It is in the nature of the rise of a new giant on the scene that it disrupts established ways of doing things and in the process upsets established players. So it was with Standard Oil at the beginning of the 20th century, IBM in the middle and Microsoft at the end of the century. Wal-Mart, perhaps because it restricted itself to towns of less than 15,000 people as a matter of policy into the 1990s, at first avoided and later seemed blindsided by the attacks that have come its way.
What do you think?


morgan said...

Here is what I think-

Thought #1- I want to share a new website that I found. It in no shape or form relates to the Wal-Mart discussion but I wanted to share it and did not want this post to be buried down the page where nobody sees it. The website is www.pandora.com and is the coolest thing I have found on the internet since Chester Voltaire. The site is an internet radio of sorts but is customizable to your preferences. The user creates "stations" by entering an artist, group of artists, or song and the website selects and plays similar songs that are similar to the artist or song you programmed. The user can subsequently rate the songs played so that the station becomes even more customizable. I currently have a Gorillaz station, a G Unit station, and a Shins station. Check it out. You won't regret it.

Thought #2-

Wal-Mart is not evil. Unless you are a manufacturer who is forced to streamline operations in order to make a profit. Or you are a retailer who is forced to modify operations in order develop or maintain a competetive advantage. Or you are a person who prefers spend your Saturday traversing the city in order to take care of all your errands.

Also, the struggling "Mom and Pop" stores don't pay higher wages nor do they provide health care. I worked at a "locally owned and operated" grocery store in high school and made $5.25/hour. I also currently pay over $4/gallon for milk even though the Alta Dena dairy is 45 minutes from the grocery store. The price is attributable in part to the grocery store workers union which ensures that a cashier makes about $15/hour depending on tenure.

Another obeservation is that many employees that work at Wal-mart work part time and therefore are not eligible for benefits. That is how virtually every company in America works.

Why should a company be penalized for innovation? What is wrong with developing a competetive advantage (JIT inventory tracking through POS IT interfaces between Wal-Mart and Manufacturers)and exploiting it? Is Dell bad for America? How about Honda? McDonalds? Ebay?

Ayn Rand expresses an interesting view on this issue in her book Atlas Shrugged. It may be a little extreme yet it still makes some good points with regards to the stifling of innovation.

I feel that businesses do have a certain level of social responsibility yet they should not be expected to operate at a loss or sacrifice innovation because people are not able "govern themselves."

Wal-Mart and similar companies make my life easier and for that I am grateful. I don't have the time nor the energy to change my own oil and grow my own food etc. Nor do I have the money to pay somebody who is not operating efficiently to do it for me.

Anonymous said...

Wal-mart hires illegal aliens. 'Nuff said.

Matt said...

Anon: Are you sure that Wal-Mart hires them knowingly? Is that the only rebuttal you can make? I really don't think that "nuff" was said.

morgan said...

Crystal Sugar and C&H Sugar hire illegal aliens to pick sugar beats. That is why I only sprinkle Equal on my strawberries.

Marc said...

In a December 6, 2005 op ed article written in what many consider to be liberal newspaper, the New York Times, there is quite the interesting article regarding Wal Mart and their management and operating style. If you are willing to call yourself a liberal and follow liberal writings then you will find it most interesting to see that the Times is actually quite supportive of Wal-mart and their practices as the #1 retailer. Just a little food for tought. P.S. Morgan is going down this week.

morgan said...

Marc- please link to the New York Times article. Thanks.

Matt said...

Fellow comment-leaving semi-anonymous posters: What is worse? Using sugar produced by companies that employ illegal aliens, or eating strawberries picked by illegal aliens or worse yet (gasp), imported strawberries picked by someone earning a wage of a dollar a day ? This describes the moral dilemma that haunts me every single day of my life.

Truth be told, it is pretty much unavoidable to consume SOMETHING which used illegal labor in the process, especially agricultural products. It is a serious challenge that the ag industry faces.

As for C&H, while they may be a sugar "dead"beat, their sugar production comes from sugarcane, not beets.

morgan said...

The C&H reference was made in homage to my good friend Carl "The Swiveled One" Hardie and should have been left out of my sugar example. Crystal Sugar on the other hand is in fact produced from sugar beats grown in the Red River Valley and the surrounding areas such as Crookston MN. The sugar is processed on the outskirts of Fargo ND.

morgan said...

PS Matt, it may ease your troubled conscious if you simply purchase your produce from hippie street vendors who congregate to hawk their "organic" produce which they grow and pick themselves in the local farmer's market. I am pretty sure that there is one held quite regularly near the Gateway in Salt Lake.

Matt said...