The Bully of Bentonville

by Anthony Bianco

  In its attempts to prevent the case from broadening beyond the six original plaintiffs, Wal-Mart claimed that each store was “different” from the others and that at worst there were only a few “bad apples” among its store managers. Its own records tell a different story: Since 1997, female employees were paid 5 percent to 15 percent less than men working the same jobs in every part of the country, despite having higher performance ratings and more seniority on average. Women comprise two-thirds of all hourly workers but received only one-third of all promotions to management positions. At Wal-Mart, a mere 33 percent of managers are women, compared with 56 percent at the company’s top twenty competitors, according to a study commissioned by the plaintiffs. The depositions of hundreds of female employees filed in support of the case are liberally spiced with tales of good ol’ boys behaving badly: the home-office exec who routinely told mixed-gender groups of employees they should strive to make customers feel as if they could trust them “with their wife and their wallet”; the Midwestern district manager who liked to hold business meetings at Hooters; the “Spirit Committee” of a Wisconsin store that brought in a stripper to perform at a staff session in celebration of the manager’s birthday.

  Wal-Mart workers are quitting in far greater numbers than they are filing lawsuits or signing union representation cards. Turnover among hourly employees is nearly 50 percent a year, about double the rate of Costco, which long ago supplanted its much larger rival as America’s big-box employer of choice. To replace the workers who are voting with their feet and leaving, Wal-Mart must hire about 600,000 new employees a year in the United States alone—a figure without precedent in the annals of business. In addition, the company filled 125,000 new positions in 2005—a figure that will only grow as it continues to add 280 to 300 new stores a year.

  Viewed from the Olympian heights of Bentonville, high turnover in Wal-Mart’s stores is not all bad. The constant churn sharply reduces the number of employees eligible for raises and promotions—holding the average wage down—and also assures that the great majority of workers do not stick around long enough to have the chance to vote in a union election or file a discrimination suit. Still, an awful lot of warm bodies are needed to keep the Wal-Mart sales machine humming. How long can the company sustain its manic hiring pace before it cycles through the entire blue-collar population of America? And at what cost? Hiring and training a replacement worker costs Wal-Mart $2,500 on average, or about $2 billion a year.

  The reason Wal-Mart’s behavior toward its employees, the communities in which it operates, and its manufacturing suppliers is so important is that it casts such an enormous shadow over the American economy. In the business world, there is big, and then there is Wal-Mart Stores. The “shop” that Scott keeps will ring up more than $300 billion in revenue in 2005, more than any corporation in history. Wal-Mart’s sales are greater than the next five biggest U.S. retailers combined. 12 By itself, Wal-Mart is China’s fifth-largest trading partner, ahead of Germany and Great Britain. “If we were a country,” Scott has said, “we would be the twentieth largest in the world. If we were a city, we would be the fifth largest in America.” 13 Every week, 138 million shoppers visit Wal-Mart’s 3,750 stores in the United States and its 2,400 outlets in nine foreign countries. It employs 1.6 million people, four times as many as McDonald’s, the world’s second-largest private employer. Three hundred thousand more Americans now wear the Wal-Mart uniform than are currently on active duty in the Army, Navy, Air Force, and Marines combined.

  Wal-Mart is larger than any company has ever been. But the economic influence it wields is disproportionate even to its size. Because of the breadth of its product offerings, Wal-Mart is centrally positioned within the U.S. economy to a degree unmatched by any retailer in history. With a 25 to 35 percent share of the market in everything from toothpaste, dog food, and detergent to DVDs, jewelry, and toys, Wal-Mart dominates across the full spectrum of consumer goods and can make or break even the largest and most diversified of the manufacturers that supply it.

  Wal-Mart’s blue, gray, and rust color scheme is a familiar sight throughout the country, but the foundation of its dominance—the reason it is so damn big—is hidden from view. Wal-Mart can routinely underprice other discounters and still make big money because it pursues cost efficiency with a zeal bordering on the maniacal. In part, this is because Wal-Mart’s selling and general administration costs—wages mainly—are fully 25 percent below those of other big-box chains. Equally vital is Wal-Mart’s mastery of the technology-driven discipline of logistics: It moves merchandise from factory loading dock through to cash register with a speed and precision no one else comes close to equaling. The combination has made Wal-Mart the most formidable consumer-business machine in the history of capitalism.

  In the 1960s and 1970s, when mass discounting was young, Wal-Mart was welcomed almost everywhere it wanted to go. A shiny new Wal-Mart discount store at the edge of town became an emblem of economic progress throughout the South. It was not unusual for towns to send delegations to Wal-Mart headquarters bearing tax subsidies and other inducements to attract stores. Many got their money’s worth, for Wal-Mart put its first few hundred stores into small, remote communities that the dominant retail chains of the day either shunned or exploited through rip-off pricing. While a new Wal-Mart store was not the powerful economic engine that a new factory would have been, it did bring jobs and tax revenue to communities in desperate need of both while enabling shoppers to stretch each hard-earned dollar further than ever before. Let’s give Wal-Mart its due and concede that it is indeed the best, most sincerely devoted corporate friend that the budget-minded American shopper has ever had.

  Today, there still are plenty of communities across the country so keen to get their own Wal-Mart that they are willing to subsidize a giant now coining $10 billion a year in profits. But these days, the company has to fight its way into town as often as not. In cities big and small, Wal-Mart’s advance is sparking “site fights” that tend to escalate into the municipal equivalent of civil war. “I’ve been here forty-four years and I’ve never seen such division and intense passion on both sides,” says Kay McKay, a civic leader in Flagstaff, Arizona (population 50,000), where Wal-Mart won a referendum in 2005 by a margin of just 365 votes out of more than 17,100 cast. 14

  The growing resistance Wal-Mart faces is deeply rooted in a changing American landscape. In Sam Walton’s heyday, the consumer suffered because of a lack of real competition among merchants and the city was just beginning to burst its long-established boundaries and flood the surrounding landscape with new roads, housing subdivisions, and shopping centers. But by the 1990s, the country had sprawled its way from a shortage to a surplus of retail stores of most sorts. A new Wal-Mart still brought cheaper prices to Anytown U.S.A., but no longer was even a modest spur to economic growth, making the subsidies that the company continued to extract at every opportunity into a bad deal indeed for local taxpayers. For years now, Wal-Mart’s expansion has been essentially a zero-sum game: It grows by wresting business away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing Main Street shopping districts into intensive care and then ripped out the life-support system.

  Environmental objections also figure prominently in the growing grassroots backlash to Wal-Mart expansion. As the novelty allure of big-box bargain-hunting has faded, millions of affluent Americans have decided that they value the look and feel of their neighborhoods over the opportunity to buy cheap underwear closer to home. One particularly inflammatory issue throughout the country is the heavy auto traffic that a high-volume, low-margin operation like Wal-Mart is destined to attract. “What Wal-Mart has got to understand is that it’s not about low prices anymore—it’s about what people want in their neighborhoods,” contends David Birdsall, a developer who has run into intense opposition in building a half-dozen Wal-Mart stores in Ohio, Indiana, and Michigan. “It’s great to get low prices, but, frankly, am I g
oing to wipe out this, this, and this to save 50 cents on a gallon of milk?” 15

  What the various anti–Wal-Mart factions usually share by the end of a fight over a new site is resentment of the company’s heavy-handed intrusion into the affairs of local government. Heaven help any community that turns down a Wal-Mart building plan. America’s largest corporation does not hesitate to throw its weight around in even the smallest town to get what it wants, even if it means going over the heads of elected officials to wage referendum campaigns juiced by heavy ad spending.

  In 2004, when Wal-Mart tried to win support to build a Supercenter on a choice sixty-acre site in Inglewood, a black and Latino community in central Los Angeles, the company succeeded in putting on the ballot a highly technical seventy-one-page referendum designed to “throw out all the local planning laws and make themselves a little Wal-Mart city,” 16 as one critic put it. Despite outspending its opponents by 10 to 1, Wal-Mart’s ballot measure was crushed, 61 percent to 39 percent. From Bentonville, the company issued a defiant statement: “We are disappointed that a small group of Inglewood leaders together with representatives of outside special interests were able to a convince a majority of Inglewood voters that they don’t deserve the job opportunities and shopping choices that others in the L.A. area enjoy.” 17 Translation: “‘The people’ want what we say they want.” And where does a relentlessly for-profit corporation based in Arkansas get off demeaning any other party to a Los Angeles political battle as an “outside special interest”?

  Like politicians or four-star generals, a Wal-Mart boss never apologizes. But CEO Scott later came close in acknowledging the errors of Inglewood. “I think we came across as a bully who would get their way regardless,” Scott said a few days before his L.A. speech. “Our size causes us, when we do something inappropriate, which is usually done out of stupidity, to come across as being done out of arrogance. And people just won’t stand arrogance.” 18

  Wal-Mart set a new standard of stupidity in the referendum battle in Flagstaff three months later. One beautiful May morning, Flagstaff’s residents opened their newspapers to find a full-page ad paid for by Wal-Mart and featuring a 1933 photograph of a mob of Nazi supporters piling books onto a bonfire in Berlin. “Should we let government tell us what we can read? Of course not,” the copy read. “We can read what we choose because of the limits the Constitution places on government’s ability to restrict our freedoms. So why should we allow local government to limit where we can shop? Or how much of a store’s floor space can be used to sell groceries?”

  It’s hard to say which was more offensive: Wal-Mart comparing Flagstaff’s elected officials to Nazis or its equating freedom of speech with the freedom to shop.

  In 2004, the University of California at Santa Barbara convened a gathering of academics who made a persuasive case that Wal-Mart’s aggressively low-cost, low-wage business model has made it “the template business for world capitalism,” in the words of Nelson Lichtenstein, a labor historian who organized the conference. The enormous influence that Wal-Mart wields over even other megacorporations is rooted in part to its mastery of so many business fundamentals (labor and community relations excepted). In 2005, Wal-Mart ranked fifth on Fortune magazine’s annual survey of the American corporations most admired by other American corporations. Mainly, though, Wal-Mart coerces emulation. Its utter domination of the U.S. trade in consumer goods—the world’s richest market—leaves many competitors and suppliers alike with no real alternative but to adjust their business models to conform to Wal-Mart’s.

  The so-called Wal-Martization of the U.S. economy certainly has its pluses. In applying relentless pressure on its 61,000 vendors to make the manufacture and distribution of most everything we consume more cost-effective, it has done more to boost U.S. productivity—a key indicator of the nation’s economic vitality—than any other corporation. An oft-cited study by McKinsey Co. found that a remarkable one-eighth of the surge in U.S. productivity from 1995 to 1999 can be explained by only two syllables: Wal-Mart. 19 Similarly, in bringing their prices down to compete with Wal-Mart, rival retailers radiate the economic benefits of “Every Day Low Prices” throughout the ground floor of the U.S. economy. The net effect is to suppress inflation, making every dollar spent in America go further than it would otherwise.

  From 1985 through 2004, Wal-Mart’s expansion brought an overall decline of 3.1 percent in consumer prices in America, as measured by the Consumer Price Index, according to a study that the company commissioned from Global Insight, a prominent economics forecasting firm. In 2004 alone, Wal-Mart saved U.S. shoppers $263 billion, or about $895 per person. Even after adjusting for the decline in workers’ incomes also caused by the company’s growth, Americans still came out $118 billion ahead, substantially more even than the $100 billion boost in disposable income that Scott had cited in his speech in Los Angeles nearly two years before Global Insight released its findings at a Wal-Mart–sponsored economics conference in late 2005.

  But what Wal-Mart giveth, it also taketh away. What in an economist’s language sounds like a bloodless program of national self-improvement is in fact a brutal, Darwinian struggle spilling blood in every shopping mall and factory. Failure to measure up to the demanding efficiency standards set by Wal-Mart has crippled thousands of businesses—not just corner grocers and family hardware stores, but also the billion-dollar likes of Kmart, Toys ‘R’ Us, and Winn-Dixie. “The principal strategic question for every American retail and consumer goods manufacturer is ‘What’s my relationship to Wal-Mart?’” observes Peter J. Solomon, one of Wall Street’s top retail experts. 20

  Although Wal-Mart does not gain from putting suppliers out of business, it enfolds them in a bear hug so powerful that it can suffocate them just the same. A classic example is pickle-maker Vlasic Foods, which came to grief agreeing to Wal-Mart’s demand for a gallon jar of dills that it could sell for $2.97, or for less than most grocers sell a quart. In no time, Wal-Mart was selling 240,000 jars a week, monopolizing Vlasic’s production. The problem was not only that Vlasic made just a penny or two of profit per jar, but also that demand plunged for spears and chips, its most lucrative items. The more Wal-Mart sold, the less Vlasic made. When Vlasic begged Wal-Mart to let it raise the price, Wal-Mart stubbornly refused, threatening to stop carrying all Vlasic products if it discontinued producing the economy jar. Finally, Wal-Mart relented and allowed Vlasic to switch to a half-gallon size priced at $2.79. “The Wal-Mart guy’s response was classic,” recalled Steve Young, a former Vlasic executive. “He said, ‘Well, we’ve done to pickles what we did to orange juice. We’ve killed it. We can back off.’” Wal-Mart’s reprieve came too late for Vlasic, which filed for bankruptcy protection in 2001. 21

  The biggest category of business cost suppressed by the Wal-Mart Effect is the wages and benefits of the very blue-collar workers who are the company’s best customers. Naturally, this painfully ironic impact is most pronounced in Wal-Mart’s own industry, retailing. Adjusted for inflation, the wages paid by Wal-Mart have declined by about 35 percent since 1970, about in line with the decline in the real value of the minimum wage over this period. Overall, U.S. retail wages today are only about one-third of those earned by union workers in manufacturing, compared to one-half in 1960, before Wal-Mart began its rise to economic preeminence.

  The extreme pricing pressure that Wal-Mart applies to its vendors also hurts industrial workers everywhere by greasing the free-trade skids by which tens of thousands of U.S. manufacturing jobs a year are moving offshore to China and other low-wage countries. Wal-Mart certainly cannot be blamed for the huge wage disparity that exists between the United States and China, where the average industrial worker earns about 40 cents an hour and loosely regulated sweatshops still abound. However, as China’s largest corporate trading partner, Wal-Mart has done more than any company in the world to establish the “China price” as the price American suppliers must beat. Consumer goods manufacturers that are unable to deliver the
China price to Wal-Mart (and, in many product lines, few can) face three choices: shrink, close, or set up shop in China to exploit all that cheap labor.

  By some estimates, more than 80 percent of the 6,000 factories in Wal-Mart’s current database of suppliers are located in China and 70 percent of the nongrocery goods it sells today are made in China. Wal-Mart alone accounted for more than 11 percent of the United States’ $162 billion trade deficit with China in 2004. 22 “Wal-Mart’s growth as an economic force is inseparable from China’s rise as a manufacturing giant,” concludes Ted C. Fishman, author of China Inc. “No company in the world has embraced China’s potential more vigorously than Wal-Mart, and no company has been a bigger catalyst in pushing American, European, and Japanese manufacturers to China.” 23

  As enormous as Wal-Mart is, it is getting bigger—and fast. At its current pace of growth, it will double in size in the next five years, becoming the first half-trillion-dollar corporation by 2010. It will reach this milestone even sooner if it makes a large acquisition overseas or if it finally is allowed to enter consumer banking in a big way at home, as it has been lobbying to do. Its main growth vehicle, the Supercenter, combines a full-size supermarket and a regular-size discount store under one roof covering 200,000 square feet, or about seventeen football fields. Over the last decade, Wal-Mart has built 1,750 of these colossal combination stores, and the company sees room for at least 4,000 more in the United States alone. This would entail ringing every major city in the country with a suburban fringe of Supercenters situated just a few miles apart.

  Wal-Mart acknowledges no theoretical limit to its growth, except perhaps the sum total of humankind’s disposable income. In his 2005 annual letter to shareholders, CEO Scott estimated the company’s share of the global retail market at a mere 3 percent. “In other words,” he added portentously, “about 97 percent of the retail business around the world is not being done at Wal-Mart today.” And tomorrow? “Could we be two times larger? Sure,” Scott said in 2003. “Could we be three times larger? I think so.” 24