Tuesday, January 23, 2007

In Praise of Wal-Mart
Kiplinger's Magazine

[Editor: I neither shop at not own shares in Wal-Mart. However, not all of the criticisms of Wal-Mart are reasonable, and it is critical to get a picture of the whole story. This article isn't without flaws, but no article is.]

Wal-Mart is certainly a company that merits superlatives. It is the world's largest retailer, with more than 4,000 stores in the United States and nearly 2,300 abroad. Annual sales exceed $330 billion, a figure larger than the gross domestic product of all but 20 nations. Wal-Mart is the largest private employer in the United States and the second-largest employer overall, behind only the federal government. Its 1.3 million domestic workers would more than fill all of the stadiums in baseball's major leagues, and the number of Wal-Mart shoppers over two weeks exceeds the nation's population.

But few companies arouse as much animosity as Wal-Mart. Critics contend that the company treats its workers badly, denies them benefits and buys its products from sweatshops in developing countries. Criticism of the company mounted after author Barbara Ehrenreich went underground to "expose" Wal-Mart in her 2001 best seller, "Nickel and Dimed." On top of this, some urban scholars blame big-box retailers in general, and Wal-Mart in particular, for putting mom-and-pop stores out of business, hastening the decline of downtowns and depersonalizing the shopping experience.

Attacks on Wal-Mart almost surely contribute to its share price being lower than it ought to be. (In fact, Kiplinger thinks Wal-Mart's reinvention of itself is a great investment opportunity. We also consider it one of the best stocks to own for 2007.)

A different picture
But when I examine the facts surrounding Wal-Mart, a very different -- and far more favorable -- picture of the company emerges. For millions of people, Wal-Mart is a lifesaver that provides what they want at prices they can afford. I'm not saying that Wal-Mart is without fault. No large employer is. But if jobs at Wal-Mart are as bad as critics assert, why is it that 25,000 people applied last January for 325 job openings at the company's new store in the Chicago area?

This huge rush to get jobs at Wal-Mart is not because there are no jobs elsewhere. The current unemployment rate of 4.4% is well below recent levels and has been lower in only four of the past 35 years. Applicants want these jobs because Wal-Mart pays more than $10 an hour, on average, which is considerably higher than the U.S. and state minimum-wage rates.
Although Wal-Mart workers have lacked benefits in the past, this is changing. The company now offers as many as 18 health-care plans for as little as $11 a month in many locations. But critics would like to force Wal-Mart to pay even higher wages and offer even more benefits. Recently, the Chicago City Council voted to hold Wal-Mart and other large store operators to higher wage standards than other employers in the city.

Fortunately, Mayor Richard Daley vetoed the Wal-Mart bill. This type of legislation sends the wrong message to prospective employers -- namely, "We will penalize you for being a large, efficiently run company that offers consumers the lowest prices." Would Chicago prefer less-efficient companies with higher prices and fewer jobs? That would have been the outcome had the bill become law.

Impact on prices
Studies have shown that Wal-Mart's prices have a huge impact on consumers' purchasing power. Global Insight, an international research firm, found that Wal-Mart's growth between 1985 and 2004 resulted in food-at-home prices that were 9.1% lower and overall prices (as measured by the Consumer Price Index) that were 3.1% lower than they would otherwise have been.

These findings are stunning. Jerry Hausman and Ephraim Leibtag published a working paper for the National Bureau of Economic Research in 2004 titled "CPI Bias From Supercenters: Does the BLS (Bureau of Labor Statistics) Know That Wal-Mart Exists?" In it they showed that the BLS' inflation measure for food bought for home use is too high by about 0.32 to 0.42 percentage point per year because the agency improperly accounts for Wal-Mart's low prices, a mistake that leads to an upward bias in the overall inflation rate of about 15% per year.

In other words, if the government is reporting annual inflation of 3.45%, the real figure is closer to 3%. No other company makes such a favorable impact on such an important statistic. (Last year, Wal-Mart rolled out a headline-making generic-drug program.)

On the international front, those who criticize Wal-Mart for encouraging "sweatshops" in the developing world also fail to see the big picture. John Tierney, a columnist for The New York Times, recently wrote that Wal-Mart is as deserving of the Nobel Peace Prize as are Bangladeshi economist Muhammad Yunus and Grameen Bank, which he founded. Yunus and Grameen won the award in 2006 for their role in granting small loans to help poor villagers in Bangladesh start their own businesses. But, Tierney notes, Wal-Mart is responsible for the creation of far more jobs in developing nations.

Michael Strong, the head of a nonprofit group that promotes entrepreneurship abroad, says factories in developing countries that sell goods to U.S. retailers do a lot more to lift people out of poverty than virtually any governmental or private program, including the work of Grameen Bank.

Dynamic economy
Finally, those who fault large discounters for the decline of individual shopkeepers are ignoring trends that have been around for more than a half-century. Similar accusations were made after World War II, when the growth of supermarkets such as A&P contributed to the demise of locally owned butcher shops, vegetable stands and dry-goods stores. Yet today, the supermarket is a symbol of the American way of life, and specialty stores that cater to particular tastes, such as ethnic and gourmet foods, are still thriving.

Let me say that my family and I have not stepped into a Wal-Mart store for years. When one opened in Philadelphia a decade ago, we found the checkout lines far too long and personal service lacking. We prefer to shop at more "upscale" discount stores, such as Target.

But I vividly remember the people who shopped at Wal-Mart. Many were from Philadelphia's poorer neighborhoods, and they shopped as if every penny counted. When I see groups such as Acorn, the Association of Community Organizations for Reform Now, lead the battle against Wal-Mart by claiming to fight for "the disadvantaged classes," a thought comes to mind: Have any of their members ever spoken to any of the millions of Wal-Mart shoppers for whom the chain's "everyday low prices" are critical for making ends meet?

1) Wal-Mart has created many jobs in developing countries - but does it pay reasonable wages? Does it uphold environmental and labor standards? I suspect it's especially guilty of failing to uphold labor standards; they opposed their Chinese workers' unionization efforts even though Chinese unions are just lackeys of the government anyway. There is some evidence they're changing on the environmental standards, though. Also, Grameen allows people to start their own small businesses. Wal-Mart and other large retailers provide jobs with little autonomy, where you can't "steal time" from the company. Which one is more consonant with the mythical American dream?

2) Ehrenreich's book, referenced in the article, showed that at the wages Wal-Mart paid while she was working there, it could have been impossible to afford health care after paying for food, rent, transport, and other necessities. Wal-Mart may pay more than minimum wage, which is a good deal for a college student supported by family. But those wages are a joke for someone trying to raise a family. And for too many Americans, that's all they can aspire to.

3) The article says nothing about the fact that Wal-Mart pushes a lot of smaller businesses out, because they can't compete with Wal-Mart's prices. That having been said, the landscape of American business is changing, and it may be that small businesses are unsustainable. It may be a situation similar to that of agriculture, where government is subsidizing an unsustainable industry, impairing the ability of farmers in developing countries to compete, driving prices for Americans up, and violating WTO rules. We may be culturally disposed to want to keep small businesses and small farmers around, but that solution may not be just.

Then again, there is the problem that big business has far more power to lobby for tax breaks than small business, which is part of what inhibits the competitiveness of small business.]

1 comment:

Saint Pat said...

The local reaction in my little town was furious when Wal-Mart wanted to put in one of its super stores. The downtown merchants said Wal-Mart would try to drive them out of business (I don't see why -- they don't sell the same stuff at all -- no competition. And the store hasn't.

Still, I've read enough about Wal-Mart's corporate practices to feel uneasy.

when all the fuss started here, I dubbed Wal-Mart "the Evil Empire" and that's how everyone in my circle refers to the super store. As in, "Oh, I need to run to the Evil Empire to get ____(fill in the blank.)

Still, I limit my shopping at the EE, and give other discount stores and grocery stores my business too.

The other grocery chain in town tends to have better meats and produce, and the prices aren't much different.