The High Cost of Low Prices

Shoppers love Wal-Mart Stores Inc. Its policy of "everyday low prices" saves consumers billions of dollars every year, helping to keep the nation's inflation rate low. But its methods of squeezing out those low prices -- paying salaries below the poverty line, building superstores that crush local mom-and-pop shops, and pushing manufacturers to the wall for savings are generating a strong backlash. So, too, is the exportation of the Bentonville (Ark.) behemoth's Southern-style cultural conservatism into big-city and suburban regions of America that hold different social values. There's a growing sense that Wal-Mart may be too powerful. If the company is to continue to succeed, it may have to focus more energy on dealing with these concerns.

By almost any measure, Wal-Mart is the best global benchmark for corporate efficiency. It is a master of information technology. It is a champion of global supply-chain management. It is also the nation's largest private employer and one of its biggest taxpayers.

But for those sales clerks trying to raise families, working for Wal-Mart often means hard times. The average salary in 2001 actually put them below the federal poverty line. This could soon mean hard times for the company as well. Wal-Mart estimates that 44% of its 1.4 million employees will leave in 2003, and it needs to hire 572,000 workers just to stay even. This may prove difficult, given its pay scale, once the recovery takes hold and the job market tightens up.

Wal-Mart's active participation in America's culture wars has also sparked concern. Citing "customer preferences," the giant retailer doesn't carry CDs or DVDs that bear a parental-warning sticker, and it obscures the covers of certain magazines. But Wal-Mart doesn't survey customers to get their opinions, and its censorship is often capricious. Maxim gets yanked, but Rolling Stone, with a nearly naked Britney Spears on the cover, doesn't. Hunting rifles may be sold, but X-rated songs may not. These choices, of course, reflect the values of Wal-Mart's Southern origins, and they are perfectly legitimate. But they are not the values of all of America, particularly those urban regions outside the South that Wal-Mart wants to enter. The company's cultural gatekeeping offends many people who see it as insulting and threatening to their choice of available entertainment.

Wal-Mart also terrifies many U.S. manufacturers. The giant chain is by far the largest purchaser in America. Coffeemakers, toasters, toothbrushes, TVs -- virtually anything that goes into a house must now be designed to meet specifications set by Wal-Mart. If American producers can't meet these specs, Chinese companies will. Last year, Wal-Mart imported $12 billion worth of Chinese goods, accounting for 10% of total U.S. imports from China. Was that good for American customers? You bet. And for U.S. suppliers? Many are hurting.

As an increasingly national powerhouse, Wal-Mart may find that it makes sense to move beyond its current practices. Raising workers' salaries above the poverty level, perhaps through profit-sharing, will help the company attract a more stable workforce in higher-income parts of the U.S. as well as in Europe and Japan. And accepting different cultural values of communities outside the chain's regional base would ease social and political resentment of the giant retailer. In Europe, Wal-Mart decided not to censor magazines, songs, and movies. And the chain has agreed not to sell guns in Los Angeles, the site of its first inner-city supercenter. This increased sensitivity to local values is a good start toward what could be Wal-Mart's evolution into an even more successful global corporation.

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