Wal-Mart’s Profit Margin Up for Scrutiny in Economic Impact Debate
By Rick Moss
The interplay of charges and counter-charges concerning Wal-Mart’s depressing effect on local economies continues, but to date, no challenges have yet led to any significant legal
restrictions to the chain’s expansion. However, Friday’s release of study results by the Economic Policy Institute (EPI) attempts to ratchet the Wal-Mart economic impact debate
up a notch, and the self-described “non-profit, nonpartisan think tank” is applying its considerable intellectual resources to convince the public that Wal-Mart has a bigger responsibility
to society than it is willing to accept.
EPI’s basic argument is with Wal-Mart supporters’ claim that the lower prices the chain offers more than compensates consumers for the downward pressure imposed on wages. EPI
takes on one of the most oft-cited statistics defending Wal-Mart’s position; that the chain has saved U.S. consumers $263 billion through low prices. That conclusion was made
by Global Insight in a study commissioned by Wal-Mart. EPI calls the stat “deeply flawed,” in short, because Global Insight based its price analysis on the overall Consumer
Price Index (CPI), 60 percent of which is made up of services, not commodity prices – i.e. “improper methodology.”
However, the headline-making challenge by EPI comes in their premise that Wal-Mart “could raise wages and benefits significantly without raising prices, yet still earn a healthy
profit.” Countering the assumption that raising employee compensation would lead to higher prices, EPI holds up Costco as an example, showing that Wal-Mart’s competitor maintains
about a 2.0 percent profit margin while paying its workers enviably high salaries and providing relatively comfortable benefits packages. EPI proposes that, by allowing for a
reduction in their profits from (last year’s) 3.6 percent to about 2.9 percent, Wal-Mart could boost salaries “significantly.”
“We calculate that this would translate into just under $2,100 per non-managerial employee. Simply returning to its 1997 net profit margins, Wal-Mart could give its non-supervisory
workers 13 percent pay increases without raising prices, while maintaining higher profit margins than a main competitor,” say Jared Bernstein and L. Josh Bivens in the EPI news
release entitled “The Wal-Mart debate: A False choice between prices and wages.”
A Reuters article on Friday was quick to point out that Target, arguably Wal-Mart’s biggest rival, enjoyed a profit margin of 4.7 percent last year.
A Wal-Mart spokesman discounted EPI’s findings, referring to the organization’s backing by organized labor. Defending their contribution to local economies, Kevin Thornton of
Wal-Mart described how they do market analysis to ensure competitive wages, resulting in average full-time pay of $10.11 per hour, and that workers are able to select from 18
different health care plans, starting as low as $11 per month.
Moderator’s Comment: Do you believe EPI’s tactic of putting Wal-Mart’s profit margin up for scrutiny will increase pressure on the chain to increase worker
compensation? Does this appear to be a step forward in pressuring government for regulatory action?
In our discussion today, we’d like to begin with an “agreement to disagree” on the question of whether Wal-Mart negatively or positively affects the U.S. economy. No amount of
arguing in this space or others, it seems, will have much of an influence on the positions of Wal-Mart; local, state and federal legislators; organized labor; or the more powerful
consumer advocacy groups. The last five years have only served to clarify the battle lines in what will undoubtedly be a long, protracted war.
In my estimation, Wal-Mart will, in it’s own inimitable fashion, slowly bend to the will of society, but remain competitive by continuing to do things better than anyone else
has the resources to do. They will become much stronger, as a result, ironically making government intervention inevitable. Seems that, if Wal-Mart’s thought-leaders are able
to look far enough down the road, they’ll begin planning now for their own diversification, before the government makes that decision for them. –
Rick Moss – Moderator
- The Wal-Mart debate: A false choice between
prices and wages – Economic Policy Institute
- Wal-Mart could raise pay and keep prices low, study says – Reuters/USA