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IsWalMartTooPowerful?Businessweek

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IsWalMartTooPowerful?
October05,2003
Inbusiness,thereisbig,andthereisWalMart.With$245billioninrevenuesin2002,WalMartStores(WMT)
Inc.istheworld'slargestcompany.ItisthreetimesthesizeoftheNo.2retailer,France'sCarrefour.Every
week,138millionshoppersvisitWalMart's4,750storeslastyear,82%ofAmericanhouseholdsmadeatleast
onepurchaseatWalMart."There'snothinglikeWalMart,"saysIraKalish,globaldirectorofDeloitte
Research."Theyaresomuchbiggerthananyretailerhaseverbeenthatit'snotpossibletocompare."
AtWalMart,"everydaylowprices"ismorethanasloganitisthefundamentaltenetofacultmasqueradingas
acompany.Overtheyears,WalMarthasrelentlesslywrungtensofbillionsofdollarsincostefficienciesoutof
theretailsupplychain,passingthelargerpartofthesavingsalongtoshoppersasbargainprices.NewEngland
ConsultingestimatesthatWalMartsaveditsU.S.customers$20billionlastyearalone.Factorinthepricecuts
otherretailersmustmaketocompete,andthetotalannualsavingsapproach$100billion.It'snowonderthat
economistsrefertoabroad"WalMarteffect"thathassuppressedinflationandrippledproductivitygains
throughtheeconomyyearafteryear.
However,WalMart'sseeminglysimpleandvirtuousbusinessmodelisfraughtwithcomplicationsandperverse
consequences.Tociteaparticularlynoteworthyone,thisstaunchlyantiunioncompany,America'slargest
privateemployer,iswidelyblamedforthesorrystateofretailwagesinAmerica.Onaverage,WalMartsales
clerks"associates"incompanyparlancepulledin$8.23anhour,or$13,861ayear,in2001,accordingto
documentsfiledinalawsuitpendingagainstthecompany.Atthetime,thefederalpovertylineforafamilyof
threewas$14,630.WalMartinsiststhatitpayscompetitively,citingaprivatelycommissionedsurveythat
foundthatit"meetsorexceeds"thetotalremunerationpaidbyrivalretailersin50U.S.markets."Thisisagood
placetowork,"saysColemanH.Peterson,executivevicepresidentforpersonnel,citinganemployeeturnover
ratethathasfallenbelow45%from70%in1999.
Criticscounterthatthisisevidencenotofimprovingmoralebutofalackofemploymentalternativesinaslow
growtheconomy."It'satickingtimebomb,"saysanexecutiveatonebigWalMartsupplier."Atsomepoint,do
thepeoplestandupandrevolt?"Indeed,thecompanynowfacesarevoltofsortsintheformofnearly40
lawsuitschargingitwithforcingemployeestoworkovertimewithoutpayandasexdiscriminationcasethat
couldrankasthelargestcivilrightsclassactionever.OnSept.24,afederaljudgeinCaliforniabegan
consideringaplaintiff'spetitiontoincludeallwomenwhohaveworkedatWalMartsincelate19981.6
millionalltoldinasuitallegingthatWalMartsystematicallydenieswomenequalpayandopportunitiesfor
promotion.WalMartisvigorouslycontestingallofthesesuits.
WalMartmightwellbebothAmerica'smostadmiredandmosthatedcompany."Theworldhasneverknowna
companywithsuchambition,capability,andmomentum,"marvelsaBostonConsultingGroupreport.OnWall
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Street,WalMarttradesatapremiumtomosteveryotherretailer.Butthemoresizeandpowerthat"theBeastof
Bentonville"amasses,thegreaterthebacklashitisstirringamongcompetingretailers,vendors,organizedlabor,
communityactivists,andculturalandpoliticalprogressives.Americahasalonghistoryofcontroversial
retailers,notesJamesE.Hoopes,ahistoryprofessoratBabsonCollege."What'snewaboutWalMartistheflak
it'sdrawnfromoutsidetheworldofitscompetition,"hesays."It'sbecomeasocialphenomenonthatpeople
resentandfear."
WalMart'smarketplacecloutishardtooverstate.Inhouseholdstaplessuchastoothpaste,shampoo,andpaper
towels,thecompanycommandsabout30%oftheU.S.market,andanalystspredictthatitsshareofmanysuch
goodscouldhit50%beforedecade'send.WalMartalsoisHollywood'sbiggestoutlet,accountingfor15%to
20%ofallsalesofCDs,videos,andDVDs.Themegaretailerdidnotaddmagazinestoitsmixuntilthemid
1990s,butitnowmakes15%ofallsinglecopysalesintheU.S.Inbooks,too,WalMarthasquicklybecomea
force."Theypileupbestsellersliketoothpaste,"saysStephenRiggio,chiefexecutiveofBarnes&Noble(BKS)
Inc.,theworld'slargestbookseller.
WalMartcontrolsalargeandrapidlyincreasingshareofthebusinessdonebymosteverymajorU.S.consumer
productscompany:28%ofDial(DL)totalsales,24%ofDelMonteFoods(DLM)',23%ofClorox',23%of
Revlon(REV)'s,andondownthelist.Suppliers'growingdependenceonWalMartis"ahugeissue"notonlyfor
manufacturersbutalsofortheU.S.economy,saysTomRubel,CEOofconsultantRetailForwardInc."If[Wal
Mart]everstumbles,we'vegotapotentialnationalsecurityproblemonourhands.Theytouchalmost
everything....Iftheyeverreallywentintoatailspin,thedislocationwouldbesignificantandtraumatic."
Evenso,WalMartappearstobeinnoimminentdangerofrunningafouloffederalantitruststatutes.The
RobinsonPatmanActof1936waspassedinlargeparttoprotectmomandpopgrocersfromtheGreatAtlantic
&PacificTeaCo.,theWalMartofitsday.ButcontemporaryantitrustinterpretationseschewsuchDavidand
Goliathpopulism.GiantslikeWalMarthavewidelatitudetodoastheywishtorivalsandsupplierssolongas
theydeliverlowerpricestoconsumers."WhenWalMartcomesinandpeopledesertdowntownbecausethey
liketheselectionandthelowprices,it'shardforpeopleintheantitrustcommunitytosayweshouldnotletthem
dothat,"saysNewYorkUniversitylawprofessorHarryFirst.
CEOH.LeeScottJr.andotherWalMartexecutivesareawareoftherisinghostilitythecompanyfacesandare
tryingtosmoothitsroughedgesindealingwiththeoutsideworld.Buttheyhavenointentionoftamperingwith
itsshoppercentricbusinessmodel."Wedon'tturnadeafeartoanycriticism.We'remostsensitivetowhatthe
customerhastosay,though,"saysViceChairmanThomasM.Coughlin."Yourcustomerswilltellyouwhen
you'rewrong."
WalMartcitescustomerpreferencesasthereasonitdoesnotstockCDsorDVDswithparentalwarningstickers
andwhyitoccasionallyyanksitemsfromitsshelves.InMay,itremovedtheracy"lad"magazinesMaxim,
Stuff,andFHM.Amonthlater,itbeganobscuringthecoversofGlamour,Redbook,MarieClaire,and
Cosmopolitanwithbinders.WhydidWalMartcensorthesepublicationsandnotRollingStone,whichhas
featuredanearlynakedBritneySpearsandChristinaAguileraontwoofitsrecentcovers?"There'salotof
subjectivity,"concedesGarySeverson,aWalMartgeneralmerchandisemanager."There'salinebetween
provocativeandpornographic.Idon'tknowexactlywhereitis."
WalMartwastheonlyoneofthetop10drugchainstorefusetostockPrevenwhenGyneticsInc.introducedthe
morningaftercontraceptivein1999.RoderickL.Mackenzie,Gynetics'founderandnonexecutivechairman,
saysseniorWalMartexecutivestoldhisemployeesthattheydidnotwanttheirpharmacistsgrapplingwiththe
"moraldilemma"ofabortion.Mackenziewasincensedbuttriedtohideit."WhenyouspeaktoGodin
Bentonville,youspeakinhushedtones,"saysMackenzie,whoexplained,tonoavail,thatPrevendidnotinduce
abortionbutratherpreventedpregnancy.WalMartspokesmanJayAllensays"anumberoffactorswere
considered"inmakingthePrevendecision,buthedeniesthatoppositiontoabortionwasoneofthem."If
anybodyofanybeliefreadsanymoraldecision[into]that,that'snotright,"hesays.
CULTURALGATEKEEPER
Thereisnoquestionthatthecompanyhasthelegalrighttosellonlywhatitchoosestosell,eveninthecaseof
FirstAmendmentprotectedmaterialsuchasmagazines.Bymostaccounts,though,WalMart'scultural
gatekeepinghasservedtonarrowthemainstreamforentertainmentofferingswhileimpartingtoitarightward
tilt.ThebigmusiccompanieshavestoppedgrousingaboutWalMartandareeagerlysupplyingthechainwith
thesamesanitizedversionsofexplicitCDsthattheyprovidetoradiostations."Youcan'thave100%impact
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IsWalMartTooPowerful?Businessweek

whenyouaretakinganartisttoamainstreamaudienceifyoudon'thavethebiggestplayer,WalMart,"says
EMIMusicNorthAmericaExecutiveVicePresidentPhilQuartararo.
Thisyearalone,WalMarthopestoopenasmanyas335newstoresintheU.S.:55discountstores,210
supercenters,45Sam'sClubs(UBS),and25Neighborhoodmarkets.Anadditional130newstoresareonthe
boardsforforeignmarkets.WalMartcurrentlyoperates1,309storesin10countries,rankingasthelargest
retailerinMexicoandCanada.Ifthecompanycanmaintainitscurrent15%growthrate,itwilldoubleits
revenuesoverthenextfiveyearsandtop$600billionin2011.
That'saverybigifevenforWalMart.ViceChairmanCoughlin'sbiggestworryisfindingenoughwarm
bodiestostaffallthosenewstores.ByWalMart'sownestimate,about44%ofits1.4millionemployeeswill
leavein2003,meaningthecompanywillneedtohire616,000workersjusttostayeven.Inaddition,from2004
to2008,thecompanywantstoadd800,000newpositions,including47,000managementslots."That'swhat
causesmethemostsleeplessnights,"Coughlinsays.
Atthesametime,WalMartwillhavetocopewithintensifyinggrassrootsopposition.Thecompany'shugely
ambitiousexpansionplanshingeoncontinuingitsmoveoutofitsstrongholdintheruralSouthandMidwest
intourbanAmerica.Thisyear,thecompanyopenedwhatitdescribesas"oneofitsfirsttrulyurbanstores"in
LosAngeles,notfarfromWatts.Everydaylowpricesnodoubtappealtocitydwellersnolessthantotheir
countrycousins.ButWalMart'ssenseofitselfasdefinitivelyAmerican("WalMartisAmerica,"boastsonetop
executive)islikelytobeseverelytestedbythemetropolis'highlandcosts,restrictivezoningcodes,and
combativelaborunionsnottomentionitsgreatereconomicandculturaldiversity.
AZEROSUMGAME?
Certainly,WalMartwillbehardpressedtocontinuecensoringitsproductlinesusingthejustificationof
customerpreference.ThemarketforprofanitylacedhiphopmaybetinyinBentonville,Ark.,butitisbigin
LosAngeles.Overseas,thecompanydoesnotpresumetoimposeasmalltown,BibleBeltmoralagendaon
shoppers."Weadoptlocalstandards,"saysJohnB.Menzer,CEOofWalMart'sinternationaldivision.Why,
then,shouldLosAngelesbeanydifferent?
Thefactis,WalMartdoesn'tknowforcertainhowthemajorityofitscustomersfeelaboutMaxim,oranyother
magazine,forthatmatter.Itappearsthatthecompanymakesnoscientificattempttosurveyshoppersabout
entertainmentcontentbutrespondsinadhocfashiontocomplaintslodgedbyarelativehandfulofcustomers
andbyoutsidegroups,whichareusuallybutnotalwaysoftheconservativepersuasion.
Ontheotherhand,thecompanyseldomsubmitstocommunitygroupsthatopposeitsplanstobuildnewstores.
Thenumberofsuchchallengeshasincreasedsteadilyandisnowrunningatabout100ayear.WalMart's
"biggestbarriertogrowthis....oppositionatthelocallevel,"saysCarlSteidtmann,DeloitteResearch'sretail
economist.TheStopWalMartmovementhasbeenbolsteredoflatebyaseriesofacademicstudiesthathave
debunkedthenotionthatanewbigboxstoreboostsemploymentandsalesandpropertytaxreceipts."Thenet
increasesareminimalasthenewbigboxstoresmerelycapturesalesfromexistingbusinessinthearea,"
concludesanewstudyofWalMart'simpactinMississippi."Iseeitprettymuchasazerosumgame,"saysco
authorKennethE.Stone,aneconomicsprofessoratIowaStateUniversity.
ThemosthotlycontestedbattlegroundatthemomentisContraCostaCounty,nearSanFrancisco.InJune,
countysupervisorsenactedanordinancethatprohibitsanyretailoutletlargerthan90,000squarefeetfrom
devotingmorethan5%ofitsfloorspacetofoodorothernontaxablegoods.WalMartpromptlygathered
enoughsignaturestoforceareferendum,scheduledforMarch.ComplainsCountySupervisorJohnGioia:
"LocalplanningshouldbedonebyourlocallyelectedboardandnotbyacorporateofficeinBentonville,
Arkansas."RobertS.McAdam,WalMart'svicepresidentforgovernmentrelations,sayscorporatesponsored
referenda,whichWalMarthaspromotedelsewhereinCalifornia,are"aperfectlylegitimatepartoftheprocess."
SUPERCENTERNATION
Meanwhile,theUnitedFood&CommercialWorkersunionissteppingupitslongstandingattemptstoorganize
WalMartstores,withcurrentcampaignsin45locations.ForUFCWlocalsthatrepresentgroceryworkers,the
issueisnothinglessthansurvival.TheWalMartsupercentertheprincipalvehicleofthecompany'sexpansion
isanonuniondaggeraimedattheheartofthetraditionalAmericansupermarket,nearly13,000ofwhichhave
closedsince1992.
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PatternedaftertheEuropeanhypermarket,thesupercenterisacombinationsupermarketandgeneral
merchandisediscounterbuilttocolossalscale.WalMartdidn'tintroducethesupercentertoAmerica,butithas
amasseda79%shareofthecategorysinceitmovedintofoodanddrugretailingbyopeningitsfirstsuchstorein
1988.Today,WalMartoperates1,386supercentersandisthenation'slargestgrocer,witha19%marketshare,
anditsthirdlargestpharmacy,with16%.
WalMartplanstoopen1,000moresupercentersintheU.S.aloneoverthenextfiveyears.RetailForward
estimatesthatthissupercenterblitzkriegwillboostWalMart'sgroceryandrelatedrevenuesto$162billionfrom
thecurrent$82billion,givingitcontrolover35%ofU.S.foodsalesand25%ofdrugstoresales.Marketshare
gainsofsuchmagnitudeinaslowgrowthbusinessnecessarilywillcomeattheexpenseofestablished
competitorsespeciallytheunionizedones,whichpaytheirworkers30%moreonaveragethanWalMart
does,accordingtotheUFCW.RetailForwardpredictsthatforeverynewsupercenterthatWalMartopens,two
supermarketswillclose,or2,000alltold.
Tothelowprice,lowcostoperatorgothespoils.Isn'tthathowcapitalismissupposedtowork?Certainly,the
supercenteringofAmericacanbeexpectedtoresultinhugesavingsatthecashregister.Onaverage,aWalMart
supercenteroffersprices14%belowitsrivals',accordingtoa2002studybyUBSWarburg.
However,thoseeverydaylowpricescomeatacost.Asthenumberofsupermarketsshrinks,moreshopperswill
havetotravelfartherfromhomeandwillfindtheirbuyingincreasinglyrestrictedtomerchandisethatWalMart
choosestosellagrowingpercentageofwhichmaybetheretailer'sprivatelabelgoods,whichnowaccountfor
nearly20%ofsales.Meanwhile,thefailureofhundredsofstoreswillcosttheirownersdearlyandputthousands
outofwork,onlysomeofwhomwillfindjobsatWalMart,mostlikelyatlowerpay."Itwillbeasaddayinthis
countryifwewakeuponemorningandallwefindisaWalMartoneverycorner,"saysGaryE.Hawkins,CEO
ofGreenHills,afamilyownedsupermarketinSyracuse,N.Y.
Forsuppliers,too,WalMart'srelentlesspricingpressureisamixedblessing."Ifyouaregoodwithdata,are
sophisticated,andhavescale,WalMartshouldbeoneofyourmostprofitablecustomers,"saysaretired
consumerproductsexecutive.Unlikemanyretailers,thecompanydoesnotcharge"slottingfees"foraccessto
itsshelvesandisunusuallygenerousinsharingsalesdatawithmanufacturers.Inreturn,though,WalMartnot
onlydictatesdeliveryschedulesandinventorylevelsbutalsoheavilyinfluencesproductspecifications.Inthe
end,manysuppliershavetochoosebetweendesigninggoodstheirwayortheWalMartway."WalMartreally
isaboutdrivingthecostofaproductdown,"saysJamesA.Wier,CEOofSimplicityManufacturing,alawn
mowermakerthatdecidedtostopsellingtoWalMartlastfall."Whenyoudrivethecostofaproductdown,you
reallycan'tdeliverthehighqualityproductlikewehave."
CriticsalsoarguethatWalMart'sintensifyingglobalpursuitoflowcostgoodsispartlytoblameforthe
acceleratinglossofU.S.manufacturingjobstoChinaandotherlowwagenations."It'shardtoteaseout,but
WalMartisdefinitelypartofthedynamic,andgivenitsmarketshareandpower,probablyasignificantpart,"
saysJaredBernstein,alaboreconomistattheliberalEconomicPolicyInstitute.The$12billionworthof
ChinesegoodsWalMartboughtin2002represented10%ofallU.S.importsfromChina.
Forobviousreasons,WalMarthasdeemphasizedthe"MadeinAmerica"campaignthatfounderSamWalton
startedinthemid1980stogreatpromotionaleffect."Wherewehavetheoptiontosourcedomesticallywedo,"
saysKenEaton,WalMart'sseniorvicepresidentforglobalprocurement.However,headds,"therearecertain
businesses,particularlyintheU.S.,whereyoujustcan'tbuydomesticallyanymoretothescaleandvaluewe
need."Inrecentyears,WalMartincreasinglyhassoughtadditionalcostadvantagesbybypassingmiddlemen
andbuyingfinishedgoodsandrawmaterialsfromforeignmanufacturers.Bycontractingdirectlywithahandful
ofdenimmanufacturersinSoutheastAsia,thecompanyhasdrivendowntheretailpriceoftheGeorgebrand
jeansitsellsinBritainandGermanyto$7.85from$26.67.SaysEaton:"Themindsetaroundhereis,we're
agentsforourcustomers."
"THEWALMARTPHENOMENON"
WalMart'sphilosophydoesn'tcutanyicewithWilburL.RossJr.,afinancierandsteeltycoonwhosoonwill
closeonthepurchaseofbeleagueredtextilemanufacturerBurlingtonIndustriesInc.RosscontendsthatWal
MartiscostingAmericansjobs"notonlyasabusinessstrategy,butasalobbyingstrategy"thatis,byusingits
influenceinWashingtontoopposeimporttariffsandquotasandpromotefreetradepactswithThirdWorld
countries,includingtheSoutheastAsiancountriesthatsupplyWalMartwithdenim."Everybodyisnow
scurryingaroundtryingtofindthelowestpricepoints,"Rosscomplains."It'stheWalMartphenomenon."
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HighonawallinsideWalMartheadquartersisapaperbannerwithaprovocativequestioninbigblockletters:
"Who'stakingyourcustomers?"Beneathit,"Wanted"posterstyle,hangphotosoftheCEOsoftwodozenof
America'slargestretailersTarget(TGT)Kroger(KR)WinnDixieStores(WIN)Walgreen(WAG),andsoon.
Nonelooksveryhappy,perhapsbecausetheyknowthattheonlywaytogetoffthewallistofailutterly.
AlthoughKmart(KMRT)isreorganizingunderthefederalbankruptcycode,aphotoofitsCEOcontinuesto
hanginWalMart'srogues'galleryandnodoubtwillremainthereforaslongasKmartoperatesevenasingle
store.
GrowthwillonlyaddtothecloutthattheBentonvillecolossusnowwields.Theremightwellcomeatime,
though,whenWalMart'ssizeposesasmuchofathreattothecompanyitselfasitdoestooutsiders."Their
biggestdangerisjustmanagingsize,"observesalongtimesupplier.AddsBabsonCollege'sHoopes:"The
historyofthelast150yearsinretailingwouldsaythatifyoudon'tlikeWalMart,bepatient.Therewillbenew
modelseventuallythatwilldoWalMartin,andWalMartwon'tseeitcoming."Rightnow,though,WalMart's
dayofreckoningseemsaverylongwayoff.ByAnthonyBiancoandWendyZellner
WithDianeBrady,MikeFrance,TomLowry,NanetteByrnes,andSusanZegelinNewYorkMichaelArndt,
RobertBerner,andAnnTheresePalmerinChicagoandbureaureports

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