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Inside the Leviathan

Wal-Mart: Template for 21st Century Capitalism?

edited by Nelson Lichtenstein
Papers presented at a conference on Wal-Mart held at the University of California, Santa Barbara, April 12, 2004.
New Press, forthcoming in 2005

US Productivity Growth, 1995–2000, Section VI: Retail Trade

a report by the McKinsey Global Institute
October 2001, at www.mckinsey.com/knowledge/mgi/productivity

Betty Dukes, Patricia Surgeson, Cleo Page et al., Plaintiff, vs. Wal-Mart Stores Inc., Defendant: Declarations in Support of Plaintiffs

United States District Court, Northern District of California, at www.walmartclass.com

Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart

a report by the Democratic Staff of the House Committee on Education and the Workforce
February 16, 2004, at edworkforce.house.gov/democrats/walmartreport.pdf

1.

Throughout the recent history of American capitalism there has always been one giant corporation whose size dwarfs that of all others, and whose power conveys to the world the strength and confidence of American capitalism itself. At mid-century General Motors was the undisputed occupant of this corporate throne. But from the late 1970s onward GM shrank in the face of superior Japanese competition and from having outsourced the manufacture of many car components to independent suppliers. By the millennium GM was struggling to maintain its lead over Ford, its longstanding rival.

With the technology boom of the 1990s, the business press began writing about Microsoft as if it were GM’s rightful heir as the dominant American corporation. But despite its worldwide monopoly as the provider of software for personal computers, Microsoft has lacked the essential qualification of size. In Fortune‘s 2004 listings of the largest US corporations, Microsoft ranks a mere forty-sixth, behind such falling stars as AT&T and J.C. Penney. However, Fortune‘s 2004 rankings also reveal the clear successor to GM, Wal-Mart. In 2003 Wal-Mart was also Fortune‘s “most admired company.”1

Wal-Mart is an improbable candidate for corporate gorilla because it belongs to a sector, retail, that has never before produced America’s most powerful companies. But Wal-Mart has grown into a business whose dominance of the corporate world rivals GM’s in its heyday. With 1.4 million employees worldwide, Wal-Mart’s workforce is now larger than that of GM, Ford, GE, and IBM combined. At $258 billion in 2003, Wal-Mart’s annual revenues are 2 percent of US GDP, and eight times the size of Microsoft’s. In fact, when ranked by its revenues, Wal-Mart is the world’s largest corporation.

One sign of its rising status is an academic conference devoted entirely to the subject of Wal-Mart that was held last April at the University of California, Santa Barbara. The range of subjects covered in the conference papers to be published early next year testifies to Wal-Mart’s impact both on the transfer of goods from third-world sweatshops to suburban shopping malls in the US and on local communities where its stores are located. At the conference the many class-action lawsuits against Wal-Mart’s employment practices were discussed, particularly its unfair treatment of women, whether by paying them extremely low wages or denying them promotions. The conference organizer, the labor historian Nelson Lichtenstein, asked Wal-Mart to send a representative, but Wal-Mart declined.

Within the corporate world Wal-Mart’s preeminence is not simply a matter of size. In its analysis of the growth of US productivity, or output per worker, between 1995 and 2000—the years of the “new economy” and the high-tech bubble on Wall Street—the McKinsey Global Institute has found that just over half that growth took place in two sectors, retail and wholesale, where, directly or indirectly, Wal-Mart “caused the bulk of the productivity acceleration through ongoing managerial innovation that increased competition intensity and drove the diffusion of best practice.” This is management-speak for Wal-Mart’s aggressive use of information technology and its skill in meeting the needs of its customers.

In its own category of “general merchandise,” Wal-Mart has taken a huge lead in productivity over its competitors, a lead of 44 percent in 1987, 48 percent in 1995, and still 41 percent in 1999, even as competitors began to copy Wal-Mart’s strategy. Thanks to the company’s superior productivity, Wal-Mart’s share of total sales among all the sellers of “general merchandise” rose from 9 percent in 1987 to 27 percent in 1995, and 30 percent in 1999, an astonishing rate of growth which recalls the rise of the Ford Motor Company nearly a century ago. McKinsey lists some of the leading causes of Wal-Mart’s success. For example, its huge, ugly box-shaped buildings enable Wal-Mart “to carry a wider range of goods than competitors” and to “enjoy labor economies of scale.”

McKinsey mentions Wal-Mart’s “efficiency in logistics,” which make it possible for the company to buy in bulk directly from producers of everything from toilet paper to refrigerators, allowing it to dispense with wholesalers. McKinsey also makes much of the company’s innovative use of information technology, for example its early use of computers and scanners to track inventory, and its use of satellite communications to link corporate headquarters in Arkansas with the nationwide network of Wal-Mart stores. Setting up and fine-tuning these tracking and distribution systems has been the special achievement of founder Sam Walton’s (the “Wal” of Wal-Mart) two successors as CEO, David Glass and the incumbent Lee Scott.

Throughout its forty-year existence Wal-Mart has also shown considerable skill in defining its core customers and catering to their needs. One of Sam Walton’s wisest decisions was to locate many of his earliest stores in towns with populations of fewer than five thousand people, communities largely ignored by his competitors. This strategy gave Wal-Mart a near monopoly in its local markets and enabled the company to ride out the recessions of the 1970s and 1980s more successfully than its then larger competitors such as K-Mart and Sears.2 Wal-Mart has also been skillful in providing products that appeal to women with low incomes.

Although her book Selling Women Short is a powerful indictment of how Wal-Mart has treated its female employees, Liza Featherstone nonetheless acknowledges the lure of the Wal-Mart store for female shoppers, who delight “in spending as little as possible, all in one place.” At a Wal-Mart “supercenter”

you can change a tire, buy groceries for dinner, and get a new pair of shoes and some yard furniture—a set of errands that once would have required a long afternoon of visits to far-flung merchants.

All these innovations contribute to Wal-Mart’s remarkable productivity record, and this in turn has opened up another major source of competitive advantage for the company, its policy of “Every Day Low Prices” (“EDLP”), which makes it possible for it to undersell its competitors by an average of as much as 14 percent.3 Here the picture darkens because Wal-Mart’s ability to keep prices low depends not just on its productivity but also on its ability to contain, or even reduce, costs, above all labor costs. As Sam Walton wrote in his memoirs:

You see: no matter how you slice it in the retail business, payroll is one of the most important parts of overhead, and overhead is one of the most crucial things you have to fight to maintain your profit margin.

One of the ways to win this particular fight is to make sure that the growth of labor’s productivity well exceeds the growth of its wages and benefits, which has in fact been the dominant pattern for US corporations during the past decade.

From a corporate perspective, this is a rosy outcome. When the productivity of labor rises and its compensation stagnates, then, other things being equal, the cost of labor per unit of output will fall and profit margins will rise. Wal-Mart has carried this strategy to extremes. While its workforce has one of the best productivity records of any US corporation, it has kept the compensation of its rank-and-file workers at or barely above the poverty line. As of last spring, the average pay of a sales clerk at Wal-Mart was $8.50 an hour, or about $14,000 a year, $1,000 below the government’s definition of the poverty level for a family of three.4 Despite the implied claims of Wal-Mart’s current TV advertising campaign, fewer than half—between 41 and 46 percent—of Wal-Mart employees can afford even the least-expensive health care benefits offered by the company. To keep the growth of productivity and real wages far apart, Wal-Mart has reached back beyond the New Deal to the harsh, abrasive capitalism of the 1920s.

At a retail business such as Wal-Mart the methods used to increase employee productivity differ from those used “on the line” at a manufacturing plant producing automobiles or computers, where work can be rigorously defined, and higher productivity can be achieved by simplifying tasks so that they are performed more quickly. At Wal-Mart most employees are not engaged in single, repetitive tasks. The location and timing of work at a Wal-Mart store is determined by the flow of goods entering the store through the back entrance, and the flow of customers entering the store through the front.

Neither of these flows is constant or entirely predictable, and workers may have to be moved from one task to another as the flows change. An employee may begin the day by unloading and unpacking goods at the receiving dock; she may then transfer to shifting goods from the dock into the store; then to stacking goods on shelves or in special displays; and then finally to registering the sale of goods at one of the many checkout counters and making change. (At a Wal-Mart “supercenter” I recently visited in suburban Columbus, Ohio, there were two rows of checkout counters, each row with eighteen cash registers.)

Since there is no assembly line at Wal-Mart its senior management uses blunter methods to achieve higher levels of productivity from the workforce. These methods are governed by a simple principle: when deciding how many workers to employ, Wal-Mart management relies on a formula guaranteeing that the growth of the labor budget will lag behind the growth in store sales, so that every year there will be more work for each employee to do. In her paper “The Quality of Work at Wal-Mart,” presented at the conference in Santa Barbara, Ellen Rosen of the Women’s Studies Research Center at Brandeis described in detail how this squeeze on labor works. Each year Wal-Mart provides its store managers with a “preferred budget” for employment, which would allow managers to staff their stores at adequate levels. But the actual budget imposed on the store managers always falls short of the preferred budget, so that most Wal-Mart stores are permanently understaffed. The gap between the preferred and actual budgets gives store managers an idea of how much extra work they must try to extract from their workforce.

Jed Stone, a store manager at Wal-Mart between 1983 and 1991, explained to Rosen the practical consequences of this understaffing:

With the meager staff he was allowed, it had always been a struggle to keep the shelves stacked and the floors shiny, or to get hourly workers to help customers.

To get the work done Stone had to break the company rules by having employees work more than fifty hours a week—an “offense” for which a manager can be fired at Wal-Mart. Rosen also interviewed Katie Mitchell, a shop floor employee who worked night shifts at the unloading dock. Her task was to move goods from the dock to the store aisles where they could be stacked. She also had to count the goods with her handheld computer: “There was always too much work to be done and no one to help her,” and at the end of the shift the supervisor was always at hand to issue a reprimand if the work had not been done.

  1. 1

    The Fortune 500 Largest US Corporations,” Fortune, April 5, 2004, p. B-1; see also Jerry Useem, “America’s Most Admired Companies: One Nation Under Wal-Mart,” Fortune, March 3, 2003.

  2. 2

    Sam Walton with John Huey, Made in America: My Story (Bantam, 1993), pp. 139–141.

  3. 3

    Steven Greenhouse, “Wal-Mart, Driving Workers and Supermarkets Crazy,” The New York Times, October 19, 2003.

  4. 4

    See Greenhouse, “Wal-Mart, Driving Workers and Supermarkets Crazy.”

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