Miracle that ate Main Street

June 23, 2006

Howard Davies assesses the hidden costs of a voracious US retail empire

There are two Wal-Marts. One we might call the Wall Street Wal-Mart - a capital market behemoth that has made the Walton family rich beyond its wildest dreams and done very well by a lot of large and small investors. Writers on the financial pages drool over its market share and ever-growing profits. Then there is what we might call the Main Street Wal-Mart, which has come to dominate US retailing with devastating consequences for competitors and for many towns and cities.

Entire downtowns have become ghost towns, with wholesale closures of small family-owned shops. As the tentacles of the Walton empire have spread north and west from its Southern base, so middle America's concerns have grown.

Nelson Lichtenstein and his co-conspirators try to make sense of these competing images. They are largely business historians and industrial relations academics in US universities. The latter might be expected to begin with a jaundiced view, given Wal-Mart's aggressive policy of resisting all attempts to organise in its stores. Indeed, this volume could not be said to be a perfectly balanced account, but both the good and the threatening are on display to some degree. Furthermore, most of the pieces are clearly written, not a charge one can lay on all edited academic volumes of this kind.

Let us consider first the case for the defence. In the UK, Wal-Mart's entry vehicle has been Asda, which has never quite shaken off its downmarket image and which does not have it all its own way in the out-of-town retailing stakes, so it is hard for British readers to understand the sheer scale of the operation on the other side of the Atlantic. Wal-Mart now employs 1.3 million people in the US, a material proportion of the workforce and, in political terms, quite a sizeable electorate of its own.

As the authors here never tire of telling us: "If it were the independent republic of Wal-Mart, it would be China's 6th largest export market, and its economy would rank number 30 in the world." Wal-Mart, we are told, accounts for about 2.5 per cent of US gross domestic product, almost the same proportion as US Steel and General Motors in their respective heydays in the previous century. (These comparisons between company turnover and GDP are highly dubious, but let that pass.) Over here, we tend to think of Bill Gates as the Croesus of our time. But 20 years ago Sam Walton was by a distance the richest man in America. His inheritance was divided, on his death, among several family members. Walton was not a believer in primogeniture. But those fortunate family members, who still own 39 per cent of the company between them, are together twice as wealthy as the family of Bill Gates. And all of this wealth has been generated by a business founded in Bentonville, Arkansas, a monochrome Hicksville - in 1990 only 1 per cent of the population was non-white - in the Ozarks. All this did not happen by good luck or through the creation of a complex monopoly. (Not, of course, that Microsoft is any such thing.) There is plenty of evidence that Wal-Mart is a very well-managed business.

It has been an innovator in the techniques of purchasing, in stock control and, in particular, in logistics. Indeed, a study four years ago by McKinsey & Company argued that 25 per cent of all productivity improvements in the US economy in the period 1995-99 were due to Wal-Mart. "Thanks to the Arkansas company, retailing triumphed over the high-tech industry as a contributor to the late 20th-century productivity surge," McKinsey says breathlessly. I presume Wal-Mart is a client.

Furthermore, Wal-Mart's success has not been limited to the US market. It has triumphantly entered Mexico, where it has almost 700 stores and is the country's largest private employer, with sales larger than the combined total of its three closest competitors. The Mexican Office of Fair Trading seems to be asleep on the job if that is true. It is now expanding elsewhere, though not always so successfully, as its German and Brazilian experiences show. In Germany, the competition from super-discounters such as Aldi and Netto has proved tougher than expected. Nonetheless, the Wal-Mart business model appears to have a good way yet to run, and few retailing analysts would bet against Wal-Mart management's ability to colonise much of the rest of the globe in the next decade.

So where's the rub? Why should we not all celebrate this rags-to-riches success story? We may all be nostalgic for the little corner shop, but realistically can we expect a cottage industry retailing model to survive in the 21st century? Surely the Wal-Mart phenomenon is inevitable, and it is doing nothing more than providing a highly efficient mass-market experience, bringing considerable benefits to poorer consumers in the US in particular, offering them highly competitive prices, especially on imported goods? And there are many Third World suppliers who are thrilled by the scale on which they have been able to penetrate the US market, through their access to Wal-Mart's distribution network.

Most of the contributors to this volume do not share that rosy view of the Wal-Mart phenomenon. The case for the prosecution is forcefully put. One author argues that "Wal-Mart is well known as a viciously anti-union company that does not hesitate to stretch the limits of the law to eliminate employees who show any tendency whatsoever to get organised". There are plenty of examples cited here to prove the point. The most recent is a Canadian case, where the company closed a store in Jonquière, Québec, after its workforce unionised.

Others argue that although Wal-Mart typically creates about 100,000 new jobs a year, its "direct cannibalisation of other retailers has caused the loss of three jobs for every two created". Small towns have lost their entire main streets, with dramatic consequences for other businesses. Wal-Mart, on this analysis, has left a series of social problems in the wake of its expansion.

There is some evidence, too, that Wal-Mart's, shall we say, economical wages policies have exploited the availability of welfare safety nets. Researchers at the University of California at Berkeley found that Wal-Mart's low wages - about 30 per cent below those in other large retail establishments - have made it necessary for its employees to rely on food stamps, Medicare and subsidised housing. They estimate that California taxpayers were subsidising Wal-Mart workers to the tune of about $86 million a year. Another study, admittedly by the Democratic staff on the House of Representatives Committee on Education and the Workforce, who may be parti pris , calculated that in the US overall, taxpayers subsidise Wal-Mart to the tune of $2,103 per employee per year, which implies a total taxpayer subsidy for the company of nearly $3 billion a year. These may be spuriously precise estimates, but the direction of the argument is clear.

There is powerful evidence, too, of Wal-Mart's discriminatory pay practices in relation to women. Sam Walton's famously paternalistic and perhaps patronising attitude to female employees may now be a thing of the past, but there is evidence here that in the more senior occupations in Wal-Mart women are paid systematically less than men, and the company is now fighting a massive class action suit brought on behalf of its female employees. The outcome of that suit will not be known for some time, due to the glories of the American court system, but on the evidence presented here there is a powerful case to answer.

The class action suit is not the only sign of a fightback against the Bentonville bulldozer. Maryland recently passed legislation that requires all non-unionised retailers - and the target of this legislation was transparently clear - to provide some healthcare benefits to relieve the state's budget. It seems possible that other states may well adopt similar statutes, though perhaps not in Arkansas, where the Waltons remain popular heroes.

In the UK, of course, this particular public policy dimension of the expansion of mass retailing is not relevant. We do not, at least for now, run a means-tested healthcare system. But other dimensions of the problem, also carefully catalogued in this volume, certainly do have resonance on this side of the Atlantic: the impact on small towns, the impact on suppliers - Wal-Mart is a famously aggressive negotiator with suppliers of branded and non-branded goods - and the impact on competition.

Lichtenstein and his co-authors provide many insights into the ways these complex problems are presenting themselves in the US on the back of the Wal-Mart phenomenon. Some proposed remedies may look curious to the British reader. But since we face similar issues arising from the growing dominance of Tesco and other out-of-town retailers, The New Press has done well to make this collection of essays available in the UK at an attractive, nay, almost a Wal-Mart price. It is unlikely, though, that you will find it piled high at an Asda checkout.

Howard Davies is director, London School of Economics.

Wal-Mart: The Face of 21st-Century Capitalism

Editor - Nelson Lichtenstein
Publisher - The New Press
Pages - 349
Price - £40.00 and £12.99
ISBN - 1 59558 035 2 and 021 2

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