TCS Daily

Damned if They Do...

By Michael Rosen - May 14, 2007 12:00 AM

Wake me up the next time a journalist manages to churn out an interesting and/or fair article about Wal-Mart.

The New Yorker's Jeffrey Goldberg tries—but fails badly—in his latest offering. Like much of the mainstream media (the New York Times's Michael Barbaro has a dedicated Wal-Mart beat) he focuses exclusively on the massive retailer's well-worn demerits.

Goldberg is a fair-minded left-of-center writer whose New Yorker pieces on topics from Iraq to organized crime (he guest-hosted Slate's rapid-reaction reviews of "The Sopranos" in 2004) are generally characterized by nuance and a willingness to depart from the Left's conventional wisdom.

But in this piece, he spouts all the old anti-Wal-Mart talking points: the retailer's wages and employee benefits are meager; it wipes out local businesses while driving jobs overseas; it busts unions; it makes babies cry.

Goldberg does offer a new twist by examining Wal-Mart's recent decision to hire Edelman—a Democrat-leaning Washington PR firm—for $10 million per year to "renovate [a] reputation" that writers like Goldberg have worked so assiduously to trash. In one sense, of course, his reprimand of Democratic operatives flocking to Wal-Mart's payroll defies the fundamental narrative of Republicans favoring the retailer and Democrats combating it, as do Wal-Mart's recent crusades for the environment and health care.

But as it turns out, Goldberg merely uses these efforts and the hiring of Edelman as yet another bludgeon against the retailer. He depicts these half-measures as cynical attempts to "co-opt liberals" while suppressing the real truth about the company.

Goldberg just can't bring himself to evaluate Wal-Mart on its merits. He mentions that the retailer recently paired—improbably—with the Service Employees International Union (one of its biggest nemeses) to demand that "quality health care to be made available to all Americans by 2012." Yet he swiftly waves away this partnership as another example of Wal-Mart's invidious co-option strategy, quoting an SEIU rival's criticism.

Likewise, Goldberg dismisses as so much spin an Edelman executive's focus on the "more than one hundred and thirty million people who shop at Wal-Mart each week, who are saving money so they can live a better life." But rather than honestly reckon with the company's attempts to truly benefit millions of working-class Americans, Goldberg demeans one Wal-Mart executive as "angry" for complaining that "Wal-Mart is taking care of the people the Democratic Party says it represents—the poor, the middle class. The Democrats are not taking care of them. We're like Lyndon Johnson's Great Society."

The author likewise derides Wal-Mart's latest plan to provide generic drugs at $4 per prescription as a thinly-veiled stratagem to "take[] some public pressure off the company on the subject of its medical benefits."

And while Goldberg acknowledges being "impressed" by a new, environmentally-friendly store—featuring natural lighting, motion-sensitive freezers, and the now-ubiquitous (and truly innovative) compact fluorescent bulbs—he disparages the endeavor, in the words of a Sierra Club official, as a cost-cutting, "straight-out business call." The same Sierra Clubber goes on to say that "you can't be a good progressive and support Wal-Mart because Wal-Mart is saving money on energy—that's all they've done so far."

Here, perhaps, is the crux of the issue: nothing Wal-Mart does—no matter how praiseworthy—will ever find favor in the eyes of "progressives" since its motivations will always be assumed to be profit-driven.

But in fact, the very opposite conclusion should be drawn: the company deserves high marks for finding creative ways to make socially-beneficial changes profitable. Far better that the private sector devise efficient ways of improving our environment, ensuring health coverage, and providing affordable prescription drugs—all while furnishing goods at very low prices—than that unions, green activists, or government officials dictate the way they run their businesses.

An excellent example of this disconnect can be found here in San Diego, where the City Council is currently enmeshed in a high-stakes—yet narrow-minded—debate over allowing Wal-Mart and Target to open supercenters—their massive stores where groceries compose more than 10% of all items sold. These supercenters are immensely popular in Middle American towns and throughout the South. Wal-Mart has recently begun opening them in major suburban areas and it now seeks to bring them into urban centers as well.

Unions here have mounted an aggressive and comprehensive assault on the Council—which is divided 5-3 in favor of Democrats—imploring it to prevent supercenters from opening in the City of San Diego.

So I consulted City Councilmember Brian Maienschein to get his impressions on the brouhaha. Maienschein is a young, two-term representative of one of the wealthier and more conservative of San Diego's eight council districts. His stellar reputation for providing excellent constituent services uniquely qualifies him to comment on a proposal that will affect most San Diegans.

Maienschein makes clear that, from a city planning perspective, Wal-Mart's benefits outweigh its costs. He notes that "these stores save shoppers money by providing desirable goods at lower costs. They also provide jobs. By considering many issues such as zoning and traffic, the balance can be preserved." In other words, there's an appropriate role for city government to play, but shutting down supercenters isn't it.

The councilman finds Wal-Mart's "numerous benefits to be more persuasive than any criticisms. They provide goods such as diapers and milk at affordable prices, particularly for those with lower incomes." Fundamentally, he adds, "if someone doesn't like Wal-Mart they can choose to shop somewhere else."

Complicating the matter, according to the councilman, is the alliance between the unions and the traditional supermarkets (here, in Southern California, the big three are Albertson's, Safeway (Vons), and Kroger (Ralph's)). "Each of these groups has its own strong interests and concerns," says Maienschein, yet they've made common-cause against Wal-Mart. The traditional supermarkets—which are unionized and, thus, suffer from higher prices and contentious labor-management struggles (a prolonged strike-and-lockout combination disaffected many San Diego shoppers in 2003-04)—stand to lose significant market share if the big box stores are permitted to sell groceries.

Maienschein describes the struggle as "a complex issue that touches on many competing interests," involving "strong emotions and possible misconceptions . . . that influence how the facts are viewed." Paradoxically, and unfortunately, those councilmembers who represent the city's poorest districts, and whose constituents would most benefit from Wal-Mart's low prices, find themselves in thrall to the unions. For his part, Maienschein politely says of his colleagues "I believe many of them are doing what they think is right. I just happen to disagree with their position."

The councilman also correctly notes the unintended—but highly predictable—consequences of a decision to exclude supercenters from San Diego city limits. As Wal-Mart opens its stores elsewhere in the metropolitan region, "there will actually be more traffic as people have to drive farther to get to Wal-Mart." What's more, all of the "tax revenue [generated by the stores] would be outside of the City's jurisdiction. So the City would get all the traffic and none of the revenue!"

Much to Maienschein's chagrin, when the anti-Wal-Mart ordinance returns to the Council for a second reading in early June, it will likely pass along party lines. Wal-Mart and its supporters will then have to turn to the local initiative process, where the voting public can directly show the unions and the big supermarkets what it thinks of their tactics.

I asked the councilman whether he would support such an initiative. His answer: it would "depend on what [the measure] proposed to do and how it proposed to do it. But of course, based on my vote at the City Council, I would be highly inclined to support it."

If only more lawmakers thought (and acted) more like Brian Maienschein and less like Jeffrey Goldberg...

Michael M. Rosen, TCS Daily's Intellectual Property Columnist, is an attorney in San Diego.



Ain't no way to please a Lib...
"...The company deserves high marks for finding creative ways to make socially-beneficial changes profitable. Far better that the private sector devise efficient ways of improving our environment, ensuring health coverage, and providing affordable prescription drugs—all while furnishing goods at very low prices—than that unions, green activists, or government officials dictate the way they run their businesses..."

But Michael, CONTROL is what the unions, green activists and leftist government are all about. Of course they'll criticize Walmart and any other business or individual who show that the environment can be proptected, the poor can be served and the economy can be nourished without the heavy hand of the Left hammering them into submission.

Until you kneel down to the Left, there just ain't no way to please a Lib.

Only Wal-Mart?...
Wal-Mart has developed a business model that absolutely works. They are way past the point where raw purchasing power and scale economies are necessary to accomplish their goals. Lots of smaller players should be able to do this same thing.

The discount retail market serving their chosen demographic favors large volumes over unit margins. Such products sell themselves. Sales associates stock shelves, point to isles and scan items at checkout. Low skill jobs with rapid learning curves. There should be little premium paid to senior stock boys. Should there?

With an understanding of manufacturing fundamentals, Wal-Mart's buyers insist on high quality goods. The margins generated by "going out of your way" to create unnecessarily cheap products constitute "false economies". This ultimately leads to unhappy customers and decline. We see this sort of behavior in retail all the time.

Wal-Mart is rough on its suppliers. Such low cost manufacturers working in the consumer goods market are very inclined to produce "junk". They will purchase sub-standard raw materials, odd-lots, over-runs and scrap. They will attempt to substitute and bury such material into the normal production flow. To save a few pennies.

Such shops might assign low paid, poorly trained, new-hires to manufacturing tasks they are not ready for. The resulting products will often have quality flaws that the company is very inclined to ship "as is".

Manufacturers will sometimes underbid a job, create confusion regarding specifications and try to justify price increases before releasing a shipment. Wal-Mart must not tolerate any such foolishness. The company quickly gets a reputation for beating up on its suppliers.

Wal-Mart provides "above minimum wage" jobs to people who need the work. The fact that many of these folks are living close to the poverty line suggests that their Wal-Mart job is particularly important to them. If they want to go get a better job at a company that pays better then they should prepare themselves to do just that. If they like their low paying jobs then they might want to go flip hamburgers, etc.

Wal-Mart and McDonald's might be seen as the entry level into the retail industry and into the restaurant business. There are lots of high paid career opportunities in both of these fields. Folks who don't move up in the local market are probably not motivated to improve themselves professionally.

What seems incredible is that no one else in America has been able to duplicate the Wal-Mart model and execute the same tasks. This is not rocket science. Compete with Wal-Mart! It is simply hard work. Of course, if Wal-Mart is the only player able to do this successfully then they must continue to grow unopposed.

What would really be unfair? If the Wal-Mart's owners were not the richest people on Earth.

Apocolypse NOT
People and companies that succeed by hard work and meeting the needs of the customer are typically labeled as "cheaters" or "evil" by the competitors.
Microsoft and Exxon are on that list and I will suggest Toyota will soon be added.

I think it is more complicated than that...
Wal-Mart is an industrial vehicle. Its asset base allows labor to process raw materials across capital equipment to create wealth in the form of finished goods. These finished goods are converted into cash to pay for that labor, those raw materials and to be invested into more capital goods so the entity is able to continue working.

A look at the current Wal-Mart financial documents is informative. Out or its total revenues of $349 billion $264 billion went to their cost of goods sold (items they purchased). Therefore, they had a 75.8% material cost.

Selling expense was $64 billion of which $5.5 billion was depreciation expense.

Now let's calculate numbers that are not broken out in the summaries. If non-labor operational expenses equaled depreciation then this total number becomes $11 billion. Subtracting that number from the $64 billion leaves us $53 billion as labor expense. That number is about 15% of the total revenue line and this seems reasonable.

If we assume that 20% of the $264 billion for goods purchased constitutes direct labor inputs at those vendors then that number is coincidentally $53 billion and the total labor content (for Wal-Mart itself and for its vendors) is $106 billion or 30% of revenue. Again, this seems reasonable.

Wal-Mart earned $11.3 billion after taxes. 3.2% of total revenues. About right for a large retailer. Then $2.8 billion was distributed to shareholders. Only 0.8%. The rest went back into building this vehicle for the future.

What the public does not seem to understand is that some 30% of Wal-Mart's revenues went directly into payrolls around the world while less than 1% went to its shareholders. Nearly 2% went to the government in the form of income taxes. Lots more went out as property taxes.

In actual fact this entity is deployed by society to create wealth. And far more of the benefit of this process accrues directly to labor (30%) than to the capitalists themselves (less than 1%). For granting this privilege to those capitalists our government extracts at least three times more of the cash flow than is available for the (shareholder) owners themselves.

When society beats up on the Wal-Marts of the world it is genuinely biting the hand that feeds it.

These numbers don't lie.

You just made it more complicated.
Successful companies and people are routinely condemned as achieving their success on the backs of someone.

It's called envy, greed and sloth.

Nice one Forest
I'm really appreciating your recent posts in this and other threads - thoughtful, reasonable and well-argued.

Nice one, thank you!

Actually, I very much appreciate the opportunity to work here. I am too busy and otherwise committed to change my professional direction and write full time. I literally walked away from that possibility 30 years ago when I decided not to do the PhD.

So I am really not allowed to have an official opinion. Those of us who went into management of the various industries only get to comment about the scholarship (regarding financial capitalism) of other people. There is, indeed, a certain sadness in that.

Therefore, it is a wonderful thing for me to have this vehicle. Your kind and supportive words are deeply felt. Thanks, very much.

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