Wal-Mart’s Profit Margin Up for Scrutiny in Economic Impact Debate

Discussion
Jun 19, 2006
Rick Moss

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

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14 Comments on "Wal-Mart’s Profit Margin Up for Scrutiny in Economic Impact Debate"


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David Livingston
Guest
14 years 8 months ago

As long as there are 4,000 people lining up to take 400 low paying jobs at each new Wal-Mart that opens, why should Wal-Mart raise wages? EPI is flawed comparing Wal-Mart to Costco. They are assuming that Wal-Mart and Costco are hiring the same class of person and that Costco is just handing out extra wages to be nice. Not all retail workers are created equal. Costco pays more because they hire employees who are a step up in class compared to the normal retail worker. If Wal-Mart did raise wages, in order to balance out the supply and demand for workers, the “less than ordinary” employee at Wal-Mart will be on the street and replaced by a recruit from Costco.

Mark Lilien
Guest
14 years 8 months ago

Even without federal intervention, local and state intervention will definitely impact Wal-Mart more and more. It’s obvious that the best argument for better compensation in retailing is Costco, since their finances are strong, and their nonunion compensation is superior. When Wal-Mart spokespeople describe their compensation policies, they always use the word “competitive”. Since retailing is largely a poorly-paid, high turnover, low skill business, being “competitive” means being “mediocre” (like most retailers). It’s hard to argue with success. Both Costco and Wal-Mart are successful. So retailers can be financially strong regardless of how they compensate their people.

Paula Rosenblum
Guest
14 years 8 months ago

Well, the real question here is, “Will Wal-Mart continue its untrammeled expansion in the next few years, to a point where it needs to be regulated?”

My opinion? Wal-Mart’s US growth will plateau over the coming years. I’m not always a believer in market forces uber alles, but in this case, I am. Target has proven that commodities can be sexy. Wal-Mart has not. I don’t see Wal-Mart running GOB sales any time soon, but I also don’t see them hiring larger and larger proportions of the workforce. Sooner or later, if other retailers are more competitive on salaries and benefits, Wal-Mart will have to change.

Bob Bridwell
Guest
Bob Bridwell
14 years 8 months ago
You can’t argue with the potential employees standing in line to apply for a limited number of jobs. “Competitive wages” can be just that. W-M has already thought of reducing the cannibalization-effect by not building super centers on top of each other as a matter of routine. The recent eminent domain case in California is unique in its approach. One argument put forth was that it was going to block the view of the Bay. Using Google Earth and the address, it is hard to comprehend how a building that will certainly be less than 25 feet tall is going to block the view, especially when it is located nearly a mile from the Bay. Telescopes and binoculars would be required. If it were me, I’d take the fair market value that the city will have to pay and open a couple of stores in the area and see how well the city can promote re-vitalization without sales tax and property tax income. Right now W-M has the “people” (lower prices rule) on their side… Read more »
Gary Hoover
Guest
Gary Hoover
14 years 8 months ago
I would remind everyone that Sam Walton, in his book, suggests that the company might need to break into several smaller companies in order to remain fleet of foot and flexible. History shows that both Standard Oil and AT&T stockholders were enriched by the government-forced breakups of their companies. However, most executives today have too much ego tied up in the size of their company to be as wise (or as humble) as Sam. As to ultimate government action, there is also a pattern of how it puts the chill on competitive impulses. By the mid-50s it was clear the Feds would break up GM if it got above and stayed above 50% market share. When it looked like Ford might go away, rumors abounded that GM chief Alfred P. Sloan was talking to bankers about how to save it as a viable competitor. I can make the case that the loss of GM’s fundamental hunger to please customers and innovate was stifled by the regulatory cloud over their head, although certainly the rise to… Read more »
John Lofstock
Guest
John Lofstock
14 years 8 months ago

I don’t think you can simply discount Wal-Mart’s benefits package. This is one area convenience store and petroleum marketers have struggled with especially as fuel and tobacco margins have suffered. Health benefits give employees peace of mind (and body) and that in turn, many say, is a much bigger advantage than a few extra cents per hour. Plus, give employees the benefit of the doubt. In this job market, employees are in demand and certainly have their choice of where they want to work. If a better deal presented itself, they would take it. Wal-Mart will be forced to bend their pay scale if employees start taking some of the other offers that exist.

Retailers have a responsibility to obey the laws of the markets where they operate and to be good corporate citizens. Beyond that, their priority is to make money. I’m not saying Wal-Mart isn’t a little bit of a bully because they are. But that doesn’t necessarily mean they are treating employees poorly.

jack flanagan
Guest
14 years 8 months ago

EPI’s study commits the same sin it has accused Global Insight of…flawed methodology.

Wal-Mart (w/ the notable exception of its Sam’s Club operations) and Costco operate on two distinctly different business models.

EPI’s glossing over of these significant differences (e.g. assortment, # of locations, hours of operation, to name just a few) while calling out a couple of operating percentages on the P&L (e.g. profit margin and non-supervisory payroll) makes their analysis less than credible.

EPI COULD be on to something. However, the case they’ve made in this Issue Brief will not stand up to any real scrutiny.

Craig Sundstrom
Guest
14 years 8 months ago

I agree with Paula: at some point saturation will be reached in Wal-Mart’s sector (admittedly a rather vaguely defined one) and it will have to seek growth in other fields (banking, soft goods, foreign expansion, etc.) where the rules are different and the competitors/opponents are better organized. That having been said, by virtue of its size – among other factors – it will also be the first point of attack for those seeking to force (and I don’t think there’s really any other word for it but “force”) employer paid healthcare, and whatever other fringes are deemed to be what a “responsible” employer “should” give.

Don Delzell
Guest
Don Delzell
14 years 8 months ago
Regulation of business profits based on some paradigm of “fair” does not work. Society has an obligation to insure that safe working conditions and fair employment practices are delivered by business. The rationale for this is that simply trusting business to behave in ethical and moral ways doesn’t work. The profit motive is too strong and the commitment to decency to weak in enough people. Sad, but true. How can society regulate a “fair” wage? How can society regulate a “fair” profit? Why Wal->art? Is Microsoft making too much money? Are the oil companies making too much money? Or is it simply because the vast majority of WM employees fall into the lowest wage earner group? And that there is an obligation to “protect” this group? I agree with others. WM will bow to public opinion because in the long run it is good business sense. Yet understand, no matter what WM does, it will not be enough. $2100 a year on the average is a wonderful and useful addition to income for the average… Read more »
James Tenser
Guest
14 years 8 months ago

Regulating any company’s profit margins – even the largest company on earth – seems foolish. Regulating a company’s behavior (limiting anti-competitive practices, for example) is sometimes necessary and with in the purview of a democratically elected government.

Even though I think Wal-Mart needs to be watched as by a hawk, I don’t buy the arguments in this EPI paper that suggest it should commit a particular amount toward employee pay. To some extent, we must allow market forces to operate. Wal-Mart would certainly pay its workers more if that led to greater profitability, as Costco does.

As an economic entity, Wal-Mart is large enough that its actions have detectable impact on our nation’s economy. It also represents a cause celebre for labor unions, who understandably resent being shut out.

Ironically, it’s Wal-Mart that has a target on its forehead. It present strategy will certainly plateau one day. Then it may modify its business model, spin off entities or face down government regulators if its share becomes too great.

David Zahn
Guest
14 years 8 months ago

I think the comments made above that are consistent with basic economic principles of supply and demand, impact of government intervention, and market conditions are correct. W-M need not change until confronted with a business reason to do so. As long as there is no purpose served by doing so to shareholders, changing the likelihood of the shopper to purchase, or detriment to the employee pool – it shall remain as is (something most of us would do if we were tasked with making that decision ourselves).

Edward Herrera
Guest
Edward Herrera
14 years 8 months ago

The future is changing quickly. I don’t think in a global economy you can regulate a company the way AT&T was regulated. You can’t take the chance that an American company would be disadvantaged by regulation and overcome by a foreign retailer. A world council would have to declare that a world company was a threat to free enterprise. No way does the American government slow down Wal-Mart.

Camille P. Schuster, PhD.
Guest
14 years 8 months ago

Wal-Mart chose to give part of its profit back to consumers in the former of lower prices. No one said they had to but Sam’s assumption was that this would make consumers happy and they would buy more. This has certainly been a correct assumption.

A major challenge that the executive team of any company needs to consider is how to balance the demands of consumers, shareholders, communities, business partners, and employees. They are not all equally important but attention must be paid to all of them. When one of them is out of balance, negative attention to it will make the organization unstable.

Maybe Wal-Mart is facing that situation in terms of employees? Maybe not if there are more applicants than available positions. However, are the employees productive and loyal to the company?

Ed Dennis
Guest
Ed Dennis
14 years 8 months ago

Should anyone wish to “improve” the Wal-Mart business model in any way, I would suggest that they buy stock, gain seats on the board and make changes in a manner that reflects the wishes of ownership. As a Wal-Mart stockholder, I do not believe that any activist group has a right to make any demands until they put their money where their mouth is. Every employee at Wal-Mart has the opportunity to advance. Advancement is based on effort and accomplishment with a huge dose of attitude. I would ask those who make a profession of whining how many people they employ and what kind of benefits they provide.

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