Operation Rollback: Wal-Mart’s World of Business

Operation Rollback: Wal-Mart’s World of Business

Operation Rollback: Wal-Mart’s World of Business

How did Wal-Mart become so successful that its merciless economic model could threaten its own bottom line?


JAE C. HONG/AP IMAGESA Las Vegas Wal-Mart, 2006

In October 2003 employees at more than 800 chain supermarkets in California walked out of their jobs after management demanded pay cuts and a reduction in health insurance benefits. The ensuing strike and lockout were notable for the number of workers involved (59,000), the duration of the conflict (more than four months) and the defeat eventually suffered by the United Food and Commercial Workers Union, which represented the workers. Just as notable was what had ostensibly provoked the showdown. In 2002, the discount chain Wal-Mart announced that it would place at least forty new Supercenters, the largest of its big-box stores, in California. A nonunion company famous for expanding its market share by undercutting its competitors’ prices, Wal-Mart had proven hard to beat in the past. And in addition to offering a massive selection of housewares, toys and clothes, its Supercenters were outfitted with a full-service grocery. The mere prospect of losing customers to these new stores convinced Safeway, Albertsons and other large grocery chains that they could seek concessions from their workers on the pretext that wage cuts were a necessary measure for remaining competitive. Wal-Mart, it appeared, had changed the way the grocery business operated in California before it even entered the market.

In The Retail Revolution, Nelson Lichtenstein explains how Wal-Mart could shape, if not dictate, the agendas of so many third parties. And he suggests that the California grocery strike was just one particularly visible example of the profound impact of the Bentonville, Arkansas, chain on the broader economy. A labor historian best known for his biography of autoworkers leader Walter Reuther, Lichtenstein has become something of an authority on the discount Goliath. In 2006 he edited a collection of essays, published by the New Press, on the economics and historical circumstances of the Wal-Mart phenomenon. With The Retail Revolution, he provides a comprehensive story of the corporation’s awesome growth and expansion. Drawing on sociological scholarship and reporting about the experiences of Wal-Mart workers in the United States and around the world, as well as information made public by lawsuits involving the company, Lichtenstein describes Wal-Mart’s origins, expansion and current business practices, from its relationship with subcontracting manufacturers to its protocol for scheduling night shifts. He respects the company’s argument for its own social utility–that it brings an abundance of goods to consumers at the lowest possible price–and admires its ability to solve complex logistical problems that have long bedeviled discount retailers. But he is horrified by the dispiriting low-wage, part-time economy that Wal-Mart has helped create.

Forty years ago Wal-Mart was a small chain of stores concentrated in a sparsely populated patch of the American South. Today it employs 2.1 million people, more than twenty times as many as ExxonMobil, the largest oil company in the United States. Its total revenue exceeds that of Target, Home Depot, Sears, Safeway and Kroger combined. It has prospered, Lichtenstein argues, by mastering the art of moving household products from manufacturer to consumer in the most efficient way possible, and by using economies of scale and low labor costs to undersell other stores. Its size and its just-in-time business model are now imitated by numerous companies looking to hold down costs while manufacturing and selling consumer goods in a global economy. And its success has put immense economic pressure on its competition, not to mention labor unions, governments and many of its own suppliers. Indeed, Lichtenstein argues that by squeezing the resources of the small-town, lower-middle-class Americans who flock to its stores, Wal-Mart’s economic model also threatens its own bottom line. Global commerce in the twenty-first century is an uncertain, hyper-competitive affair–even for those companies that grow wealthy from perfecting it.

Wal-Mart was the brainchild of Sam Walton, the chain’s co-founder and co-namesake. Born in 1918, Walton grew up in Missouri, where his father, a former cotton farmer from Oklahoma, worked during the Depression as a debt collector for the Metropolitan Life Insurance Company of New York. After graduating from the University of Missouri, Walton moved to Oklahoma, where he was employed in a defense plant and married the daughter of a prominent rancher and politician. After serving in the military, Walton spent five years managing a Ben Franklin chain store in Newport, Arkansas, a cotton-processing town eighty miles from Memphis. After turning around the struggling franchise, he was pushed out of the job by his landlord, who wanted to give the flourishing business to his son. Walton started over in the northwestern part of the state, in a town called Bentonville, population 2,964. He was running several Ben Franklin franchises in the Arkansas countryside and was expanding into other states when he opened his first Wal-Mart, in nearby Rogers, in 1962.

Walton’s exile to the Ozarks, Lichtenstein argues, was a great stroke of luck. Walton arrived there with a basic business model–keep prices low by ordering in bulk and minimizing his markup; count on rapid turnover of goods to make a profit–and northern Arkansas proved to be a perfect location to try it out. As late as the 1960s, the region’s predominantly rural economy was still undergoing modernization, and the small farmers who lived there appreciated the low prices offered by Walton. At the same time, car ownership and paved roads allowed a rural clientele to travel much farther than they had previously been willing to venture in order to shop. Walton located his stores in the mill towns and county seats of Arkansas, southern Missouri and Oklahoma–rarely choosing a community with a population of more than 10,000. But he made sure to build each store near an interstate so folks could drive to it from a nearby town or county. Other national chains, worried that rural America was not dense enough to support big stores, stayed away. (Kmart rarely built a store in a city with fewer than 50,000 residents.) Walton’s only competition came from the small, dusty mom-and-pop stores that dotted the old country roads but were unable to match Wal-Mart’s prices or selection.

Walton’s move to northern Arkansas was fortunate for several other reasons, Lichtenstein argues. Because of agricultural modernization, there were numerous farmers’ daughters and seasonal agricultural workers happy to earn a regular paycheck by working in retail. Organized labor had been notably unsuccessful in organizing the South, so Walton did not have to worry about unions. And both his workforce and clientele came from the same relatively homogeneous population. Most of the local black population had fled after a wave of brutal race riots in the 1910s and ’20s, so the Southern Plains were almost exclusively white when Walton began his business. Ironically, this troubled past meant that Wal-Mart was the rare major chain store to survive the 1960s without having been embroiled in protests over integration. The region was also overwhelmingly Protestant, and the store came to reflect the socially conservative, Christian culture of its home base. To this day, the company still recruits future executives from a network of small evangelical colleges in the South and nurtures them through the company hierarchy. It has banned from its magazine racks not only Playboy but also Rolling Stone because it was deemed inappropriate for children. And the store’s prominent displays were credited by the publishers of Left Behind, a series of apocalyptic Christian thrillers set in the immediate aftermath of the Rapture, with making the books bestsellers.

These accidents of geography would have made little difference had Walton not been able to tame the logistical jungle of general retailing and pass along some of the savings to the consumer. Walton faced the same problem as any other storekeeper. He needed to buy merchandise in a quantity large enough to be able to negotiate a discount from the manufacturer. But he also needed to minimize the costs of warehousing merchandise or stocking items that never sell. His solution was simple: minimize the opportunity for merchandise to sit around by eliminating warehouse space. He did not build “warehouses” but regional “distribution centers” with very little capacity to hold products over long periods of time. His employees have no choice but to unload a shipment from a wholesaler and immediately reload it for shipment to individual stores. Nor did he provide those stores with much room to hold products out of sight. Employees would have to unpack boxes and find room for the merchandise on the shelves as soon as possible.

To keep his stores supplied, Walton made early and extensive use of a now ubiquitous piece of technology: the Universal Product Code (UPC), the bar code that automatically identifies a product and, when scanned by a laser, allows a computer to look up its price. Originally designed for supermarket checkout counters, the UPC took a long time to migrate to the rest of the retail world. Walton, Lichtenstein explains, was an early adopter who “demanded that all Wal-Mart vendors slap a bar code on every product they shipped to his stores.” Then he invested in a satellite network that fed the computerized sales information of individual stores to a “digital warehouse” in Bentonville. This continuous stream of data allowed the company to track purchases in real time and largely automate the stocking and restocking process–an essential element of the company’s just-in-time approach to reordering. The satellite hookup also allowed Walton to broadcast live televised pep talks to the sales teams in his stores until his death in 1992.

Walton and his successors also managed to save money by eschewing high fashion, special sales and creative marketing. From the beginning, the store has focused on offering consumers an “Every Day Low Price,” as the strategy was termed, on brand names and off-brand merchandise. This approach was made possible by the company’s effective logistics operation: with its inventory managed by computer, it was less likely to overbuy merchandise that it would later have to dump at clearance prices. The “Every Day Low Price” strategy also meant that Wal-Mart did not need to develop exclusive, “must-buy” items or lines of clothing in order to attract customers. Wal-Mart missed out on the home runs that rival Kmart has periodically hit, such as its line of signature houseware endorsed by lifestyle guru Martha Stewart. But unlike his rivals, Walton rarely bet significant company resources on a product with the potential to flop.

Finally, Walton succeeded at cutting out the middleman at every possible transaction. He had little patience for the wholesalers who traditionally stood between manufacturers and his distribution centers, and he bought straight from the source whenever possible. (Walton had even less use for salesmen, and he took their pervasiveness to be a sign of rampant poor management.) But by making the middleman redundant, Lichtenstein argues, Walton helped to change the power relationships between retail stores and manufacturers. As Wal-Mart computerized sales information and automated restocking, it obtained much more extensive knowledge about certain products than the companies that made them. As a result, manufacturers lost control of their product. Wal-Mart still sends buyers around the world to prospect for merchandise it might want to sell, but major consumer brands also have offices in Bentonville, where they meet with Wal-Mart executives, learn what the store wants to sell and try to produce it. Increasingly, the store stocks its aisles with off-brand merchandise manufactured especially for the chain.

The other component of the drive for low prices has been reducing labor costs. Though Walton originally conceived of Wal-Mart as a place where consumers could buy brand-name products at below-average prices, expansion and competition pushed the company to search for more and cheaper alternatives–a quest that took it to Central America and East Asia. The company does not own any factories abroad, but it contracts with numerous suppliers and foreign middlemen in order to obtain a continuous supply of inexpensive wares. Originally, this meant asking a contractor in Taipei or Hong Kong to produce knockoffs of popular items. “We would just take our best-selling U.S.-made items, send them to the Orient, and say, ‘See if you can make something like this,'” Sam Walton explained in his autobiography. “We could use 100,000 units of this, or more, if the quality holds up.” Today, Wal-Mart’s world buying headquarters is in Shenzhen, a bustling industrial city along the Pearl River Delta in Guangdong Province. In 1979 the Chinese government designated Shenzhen a “special economic zone” with low corporate taxes and few environmental regulations. Guangdong now produces a third of China’s exports, 10 percent of which end up on a Wal-Mart shelf somewhere in the United States.

According to Lichtenstein, labor costs get reduced further by Wal-Mart’s economies of scale. Because Wal-Mart orders are so large, he writes, “the company can demand a lower overall cost per unit than any of its competitors. This generates an excruciating squeeze on all of its suppliers, resulting in a cascade of social pathologies which corrupt and distort every supply chain relationship.” The pressure to meet the company’s deadline in a hyper-competitive, largely unregulated low-wage environment has led suppliers to cheat their workers and subject them to unsafe factory conditions. Some factories have instituted elaborate fines for absence or spoilage of raw materials; others make young women work eighteen-hour days, or house their workforce in makeshift dormitories above a humming factory. Such arrangements can prove deadly: in at least a half-dozen reported cases, a fire that started on the shop floor killed scores of young women who were sleeping above. Wal-Mart has rarely been singed by these practices. It neither owns nor operates Chinese factories and, for a combination of logistical and public relations purposes, is a step or two removed from the sausage-making process. (It even finds that the wholesalers it tried to cut out of its dealings with US corporations are quite useful in overseas markets.) Because Wal-Mart’s goods are largely “interchangeable” off-brand items, the store does not have the same investment in its brand image that has forced Nike, for example, to police its subcontractors better.

Wal-Mart also works hard to squeeze labor costs on the retail end. In its US stores, Wal-Mart “associates,” as the company calls its lowest rung of employees, are hired at around the minimum wage and receive health insurance only if they buy into a plan laden with co-payments and deductibles. The company uses automated scheduling software to ensure that nobody is recorded as working more than forty hours per week, and nobody is given overtime. The company has long promoted a paternalistic approach to labor relations. Before his death, low-level employees were expected to call Walton “Mr. Sam,” and the home office allowed individual store employees to go over the head of their manager or regional director and petition Bentonville about an issue at their store. Wal-Mart is unrelentingly hostile to labor unions. The company spends significant money on campaigns to discourage unionization; among other things, it suggests that organized labor would undermine the “open door” to headquarters by forcing every complaint through a shop steward. And it has been willing to play hardball–eliminating positions, closing distribution centers–when unions have appeared poised to gain a foothold in its North American operations. Its paternalistic labor policy is a selling point for some customers. “It doesn’t matter about the convenience,” a born-again Christian from Massachusetts told Discount Store News. “I like Wal-Mart because it’s friendly…. They are a different type of people.”

Wal-Mart associates suffer not only from low pay but also irregular work hours. The company frequently readjusts shifts, sometimes on a weekly basis, to accommodate store needs and employee availability. This tends to favor those employees who have the fewest demands on their time, while making it extremely difficult for anyone with children or other dependents to accumulate enough hours to earn a decent living. Staff turnover is frequent, reaching a rate of 70 percent in 1999; among entry-level employees, 67 percent quit within their first ninety days. Store managers and their assistants do not have it much easier. Though better paid, they are expected to work long hours and cover any staffing gaps themselves. The company frequently reassigns young managers from store to store and region to region–an itinerant schedule that can wreak havoc on marriages. Because Wal-Mart has expanded so extensively, many managers find themselves in ruthless competition with other Wal-Marts within the same driving radius–with bonus money and future employment prospects riding on intramural cost competition. Many ambitious store managers seize the challenge, but others end up burned out.

Over the years, the chain has faced its share of lawsuits and investigations challenging its labor practices. Employees have sued Wal-Mart, charging that it has practiced pervasive sex discrimination in promoting staff to management positions, either because of traditionalist ideas about who makes a good manager or because of an economic calculation that young, unattached men would best handle the long hours and reassignments. Store managers have been accused of forcing employees to work off the clock in order to finish a job without earning overtime. One assistant store manager admitted in a deposition that he doctored employees’ timecards in order to cut their weekly pay. In 2003 federal immigration officials launched an investigation of the company, code-named Operation Rollback in honor of Wal-Mart’s pricing slogan. They discovered that sixty-one Wal-Mart stores in twenty-one states had subcontracted nighttime cleaning work to crews of undocumented Eastern European immigrants with ties to the Russian underworld. Lichtenstein argues that the most egregious violations are committed by harried store managers who face an ultracompetitive business environment. With reordering, stocking and pricing decisions semi-automated and controlled by the home office–Bentonville even controls the thermostat settings at most of its stores–store managers can earn a bonus only by trimming labor costs. But Lichtenstein believes that the vocal opposition at the home office to government regulation of the workplace probably contributes to some of the corner-cutting.

Lichtenstein has a lucid, plain-speaking prose style, and his book manages to be comprehensive without being repetitive or overlong. The narrative is sometimes hampered by his irritating tendency to pause and note historical parallels that do not enrich the analysis of Wal-Mart. It is unclear why a fatal fire in a Chinese factory needs a side note about the Triangle Shirtwaist tragedy, or how Wal-Mart’s system of moving goods around the world is supposed to have “evoked the iron shackles subordinating slave to master,” unless it is simply because Lichtenstein calls this a “supply chain.” Nonetheless, he does an excellent job of covering a wide range of information from several different fields. The Retail Revolution is simultaneously about industrial organization, corporate strategy, labor history, political science and the sociology of mass consumption, and it weaves these subjects together seamlessly. And though on most matters Lichtenstein would side with Wal-Mart’s critics, he gives the management its due. In light of what it set out to accomplish, the company has been extremely effective at making its business model work, and he is critical of those who express a hatred of Wal-Mart while giving low-wage copycats such as Target a free pass.

The drawback of this evenhanded approach is that pro-Wal-Mart and anti-Wal-Mart arguments appear side-by-side or in alternate chapters, without the sort of analytical framework that would help one make sense of both. Lichtenstein notes how competition from Wal-Mart and other big-box stores has decimated the main streets of small-town and rural America. According to one study, during the first decade after Wal-Mart’s arrival in Iowa in the early 1980s, the state lost 555 groceries, 298 hardware stores, 293 building supply stores, 158 women’s apparel shops, 116 drugstores and 153 shoe stores. But he does not explain how, exactly, this impacted the median wage or the price of household essentials, or whether Iowa shoppers were worse off without all those stores. Lichtenstein points out that in many rural settings Wal-Mart stores seem to have replaced Main Street not only as a retail center and major employer but as a community meeting place. “We cry together, laugh together, and share our lives together,” explains a testimonial on the company’s website. Billie Letts captured this quality of Wal-Mart as what Lichtenstein calls a “de facto town square” in her bestselling novel Where the Heart Is, the story of a pregnant teen who finds an extended family and redemption after being abandoned in an Oklahoma store. Indeed, shoppers from the South and West often say they shop at Wal-Mart because it seems “concerned about and actively involved in the community at large.”

The analysis is sharper when Lichtenstein moves from home economics to political economy. He describes how Wal-Mart donates money to nonprofit groups and educational institutions that promote free-market public policies, and sponsors a “Students in Free Enterprise” program for students of Southern evangelical colleges. But he also shows how the company lobbies governments to rezone potential store sites and extracts millions of dollars in subsidies in the process. And he details how Wal-Mart employees make considerable use of federal and state welfare provisions. To help them make ends meet, store managers have been known to give their employees directions about how to apply for food stamps, the Children’s Health Insurance Program or the Earned Income Tax Credit. Frustrated by the costs that Wal-Mart seemed to be transferring to taxpayers, Maryland passed a bill in 2006 requiring large companies to spend more on healthcare. (The so-called Wal-Mart bill was struck down by a federal court, which argued that it would “preempt” an existing federal law.) Of course, it is hardly unusual for a corporation or its executives to defend free enterprise in theory while taking advantage of whatever opportunities government offers. For his part, former Wal-Mart CEO H. Lee Scott blames the lavishness of welfare benefits themselves for his employees’ interest in them: “There are government assistance programs out there that are so lucrative, it’s hard to be competitive, and it’s expensive to be competitive.”

Lichtenstein concludes that the chain may be facing the limits of its expansion and the internal contradictions of its business model. Its move into the Northeast and Pacific Coast has faced significant resistance. Opponents of big-box stores worry that Wal-Mart’s huge operations will drive small-town merchants out of business, snarl traffic and despoil the environment. Others consider the store to be the flagship of red-state cultural imperialism. At the same time, the “relentless growth and Darwinian competitiveness” of the big stores “created a world that is increasingly inhospitable to their own success.” As other corporations follow the Wal-Mart way, its own customers are increasingly squeezed by the low-wage, part-time economy that Wal-Mart helped to create. The main stress on American family budgets now comes from transportation, healthcare and education–none of which can be reliably purchased at a Supercenter. The squeeze on discretionary consumables was substantial enough that in 2005, CEO Scott hinted that he might even support a higher federally mandated minimum wage so that his customers could afford to buy more stuff. (Though when Congress debated a raise the following year, the company lobbied to kill it.)

We shall see. The expansion of international “supply chains” from Asian factories to American consumers has certainly created global trade imbalances and international currency flows that are not necessarily sustainable over the long run. A readjustment of the world economy, not a slackening demand for inexpensive consumer products, strikes me as the greatest threat to the Wal-Mart business model. And, for its part, the chain is already adapting to new circumstances. In recent years, Wal-Mart has expanded well beyond the borders of North America into Europe, Mexico and Asia. It imports factory goods from China and also operates its own retail stores there. But the stores look very different from their American counterparts. In Kunming, near the border with Myanmar, Wal-Mart rents space inside its store to independent vendors, who pay $1.20 per day to hawk Yunnan coffee, tobacco bongs filled with local rice wine and condiments made from eggplant, soybeans and ginger. The atmosphere is “festival-like, even chaotic,” as vendors shout out their wares, sometimes through loudspeakers or while pounding on drums, and customers crowd a stall to fish pears out of a solution of sugar, salt and licorice root–“a Wal-Mart store sans Wal-Martism,” according to sociologist Eileen Otis. Another Chinese employee explains his loyalty to the company by suggesting that Sam Walton was, in fact, a student of Chairman Mao who “adopted the revolutionary strategy of ‘the countryside encircling the city.’&nthinsp;” And so the revolution continues.

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