The Wal-Mart Model

usnews ^ | 1 9 06 issue | Michael Barone

[flixxx]

The Wal-Mart Model

The American economy continues to surge ahead, though you won't read much about it in mainstream media. Economic growth in the third quarter was 4.1 percent--despite Hurricane Katrina!--the 10th consecutive quarter with growth over 3 percent. Unemployment is 5.0 percent--lower than the average for the 1970s, 1980s, or 1990s. Since April 2003 the economy has created a net 5.1 million new jobs. Core inflation is only 2.1 percent, and gas prices, which surged above $3 a gallon after Katrina, are now down around $2. Productivity growth for the five-year period of 2000-2005 is 3.4 percent, the highest of any five-year period in 50 years.

This is a remarkable performance and owes something surely to the Bush tax cuts and to Alan Greenspan's stewardship at the Federal Reserve. But it also tells us something broader about the American economy. Mainstream media coverage about the economy tends to be full of bad news, especially during Republican administrations, and to focus on economic problems. But over the longer term the story of the American economy is one of success. A quarter century ago many economic commentators said that the era of low-inflation, high-job-creation economic growth was over. In the ensuing 25 years it has come to be the norm.

The negative bias of economic coverage can be seen in stories about the current No. 1 private-sector employer in America, Wal-Mart, and the No. 1 employer back in the 1970s, General Motors. The GM story is genuinely grim: The company is laying off thousands of workers and closing plants and is threatened with bankruptcy. Stories about Wal-Mart tend to focus on allegedly low wages and healthcare benefits, and to say less about the company's continual profitability and the low prices that benefit consumers. These companies are not entirely comparable; they're in different businesses. But some of the differences between them illustrate why the American economy, which seemed to have run out of gas 25 years ago, is now doing so well.

One big difference is this: General Motors' business model was designed for a static economy; Wal-Mart's for a dynamic economy. From the 1930s, GM--as one of only three major automakers--was able to pass along to consumers the high costs imposed by wages, pensions, and health benefits negotiated with the United Auto Workers. When emerging foreign competition started to make life tougher for Detroit executives in the 1970s, they tried to insulate themselves with government tariffs and domestic-content requirements. More recently, they've tried to offload their high healthcare costs onto the government. Wal-Mart, in contrast, started off with many retail competitors and has sought more, by taking on supermarkets. It competes by holding down costs and prices for consumers.

Quick reaction. Wal-Mart has been much more skilled at adapting to market conditions. Its computers keep it instantly apprised of sales, and its distribution system keeps stores stocked with items consumers want. Someone making a 3-ton car cannot adapt so quickly, but even so it still takes GM years to get new models on the market--and often they're not what consumers turn out to want.

Then there are employment costs. Yes, Wal-Mart does not pay high wages or provide healthcare benefits to all employees. But not all workers today want full-time jobs (they may want to be home when kids return from school) or health insurance (many are covered by a spouse's policy or Medicare). And Wal-Mart promotes from within: You can work your way up from the store floor to management ranks. GM and the UAW, in contrast, insist on a sharp line between labor and management, with all employees working full time and getting full benefits. That made sense when almost all workers were men supporting families. But it is a poor fit with a labor market in which many workers are women, teenagers, or retirees seeking extra income.

In retrospect it's not so surprising that 25 years ago, when GM was deemed the prototypical firm, experts were pessimistic about the American economy. They failed to foresee that more nimble firms like Wal-Mart would rise and would supply the amazing resilience that has enabled the American economy to thrive, as Greenspan has observed, even when hit by calamities like September 11 and Katrina.

[RobbyS]

The Japanese have some of the flexibility of Walmart. The unions have been a dead weight around the neck of American companies. God point about erh lack of mobility. Vdery different from the oil business, where a guy COULD start as a roughnecks and end up as a superintedent or owner.

[Clemenza]

Tell that to my cousin who has health care and company stock after only a few years as a Wal Mart manager.

Costco is run by socialists and Democratic management. They are also unionized. They also just s-ck.

A business is a business. It is an amoral institution.

[Clemenza]

And why is it your concern how somebody should be running their business.

Must be one of them social(ist) "conservatives."

[TheForceOfOne]

Here's another Wal-Mart model. lol

[Non-Sequitur]

Costco is run by socialists and Democratic management. They are also unionized.

And why is it your concern how somebody should be running their business?

[Clemenza]

Just pointing out the obvious.

Don't care how Costco chooses to run their company. I shop at Target anyway...

[durasell]

Thanks. I'll check it out.

The kid's best line to me, when I picked out a rather clunky looking model was, "I'd sell that to you, but not a teenager. I think it even comes loaded with Celine Dion and Tony Bennett." Ouch!

[saminfl]

And why is it your concern how somebody should be running their business.

I don't know why you posted this to me. All I did was reply to your assertion that all they sold was crap.

[durasell]

Sometimes I go to Circuit City and talk to the salesmen and THEN go to WM and pick up the same product for cheaper! HA!



I don't respect very much in this world, but I do respect hard work. If a salesman's going to spend time with me and has made the sale of a particular product, he's got my cash. Maybe I could find it 20 or 30 bucks cheaper a a WM or online, but he's still getting my money.

[wouldntbprudent]

So why the jumping on Wal-Mart?

[Gabz]

Happy New Year to you as well, Mrs. N!!!!!

I really did go to WalMart when I commented upon it earlier. I bought myself shoes and boots, and hubby got a pair of boots. Shoes was my main reason, but I also needed to do some comparison shopping on supplies I need for making jelly. The extra 10 miles to WalMart from the supermarket is well worth it just for sugar, pectin and vinegar.

Don't know about cutting cost on the jars yet........I had a bunch of associates totally stumped when I couldn't find them and asked. Everyone knew where they are SUPPOSED to be, but there weren't any.......we all had a good laugh when the housewares manager explained that it was a season item.....sigh.

BTW.........nothing I bought was made in China, although the software program I bought was made in the Czech Republic :)

[Gabz]

There are some people that just enjoy being on the currently PC bandwagon.

[Mase]

You're starting to sound like a viral/buzz marketer, many of whom are prone to the overuse of statistics.

Maybe if you followed suit you wouldn't be so inclined to make ridiculous statements like wal-mart most resembles a ghetto store that caters to people on highly restrictive budgets.

Every year Wal-Mart reports the average number of customers who visit their stores weekly. This, along with other valuable information, is included in their annual report. Currently, 138 million customers shop at their stores worldwide every week. Wal-Mart estimates that about 100 million of those weekly customers are from stores located in the USA.

You can find more fact about Wal-Mart and access their annual reports here.

Not having the stats in front of me..

LOL!

I'd say that there is a significant portion of the population that shops wal-mart for select commodity items.

Commodity is a word that takes on a wide variety of meanings on these threads. I'd say that there are a lot of people who live paycheck to paycheck relying on Wal-Mart to help them get the most out of every dollar they earn. Herein lies the major benefit Wal-Mart provides American consumers. However, people with money tend to have it because they're careful about how they spend it. To suggest that the majority of shoppers at Wal-Mart are on highly restrictive budgets is easily contradicted by the large number of $30,000 SUV's crowded into every Wal-Mart parking lot.

I can't provide a SKU by SKU breakdown.

The following information was provided by a FReeper, IIRC, who also happens to be a Wal-Mart store manager.

Sales by Categories (% of total revenue)

Grocery, candy and tobacco 28 %
Hardgoods 19 %
Softgoods and domestics 16 %
Pharmaceuticals 9 %
Electronics 9 %
Health and beauty aids 7 %
Sporting goods and toys 6 %
Stationery and books 3 %
Photo processing 1 %
Jewelry 1 %
Shoes 1 %

Now you possess a great deal more information and resources then when you started this thread. Hopefully, this will help you avoid making the same mistakes in the future. :^)

Then there are the highly profitable and lower priced independents

How do your "Ghetto" independents, operating without the efficiencies that large retailers enjoy from their sophisticated supply chains, manage to compete with the big guys by offering lower prices while remaining highly profitable? That equation doesn't add up. Do they not share the same problems with theft and all those other problems associated with being located in tough neighborhoods? Do they not have to pass these costs along to their consumers?

[Mase]

You're talking about a fraction of the work force.

Whatever are you talking about? Wal-Mart is the largest retailer in the world and has more employees classified as managers than any other business in the US. Think about how many managers they require to operate their existing stores (3,700 facilities), manage their massive and sophisticated supply chain as well as manage their expansion worldwide. Wal-Mart will add 550-600 stores this year alone. Wal-Mart is a labor intensive company that requires a large management team.

Last year alone, Wal-Mart promoted 10,700 hourly associates into salaried management positions. That's more managers in one year than most American companies have in total! For any company to say that 76% of all their managers came from the ranks of the hourly employees is incredible. For a company the size of Wal-Mart, with 1.3 million employees just in the US, to be able to make that claim is astounding.

According to the Chambers memo it's better to get rid of them after a year or two than to keep them.

The Chambers memo showed concern that workers were staying with the company longer (pretty funny for a company that treats their workers so bad, don't you think?), which pushes up wage costs. Nowhere in the memo did she call for efforts to push out more senior workers.

Companies are always discussing ideas about how do deal with rising costs, especially healthcare. Just because these ideas are discussed does not mean that they will be implemented. Wal-Mart has to attract and retain enough capable employees to effectively operate existing stores and staff for their incredible growth. Can't do that by not remaining competitive in wages and benefits.

even those that climb to the manager ranks, the company thinks that their compensation is too high and needs to be slashed.

Link please.

Why else would they propose cutting 401K matching by a third?

The Chambers memo suggested cutting 401(k) contributions to 3 percent of wages from 4 percent. Is that what you're referring to? If so, how does that equal a third?

Wal-Mart, like every other business in America, is trying to find ways to control the massive increases in healthcare costs. Wal-Mart's healthcare costs have been increasing 15% a year since 2002. Wal-Mart's benefit costs jumped to $4.2 billion last year, from $2.8 billion three years earlier. That's more than 13% of their net profit. Do you think they should be concerned about this?

Chambers offered one proposal that would reduce the amount of time, from two years to one, that part-time employees would have to wait before qualifying for health insurance. Another proposal said the company should put health clinics in stores, in part to reduce expensive employee visits to emergency rooms. Evil bastards!

Wal-Mart has also announced a new plan to increase participation in their healthcare plan by allowing some employees to pay just $11 a month in premiums. Wal-Mart spent $1.5 billion a year on health insurance, which amounts to $2,660 per insured worker. Not exactly chicken feed, is it?

The fact is, and will remain, that people who earn small incomes will have to pay a higher percentage of what they earn for healthcare coverage than those who make larger incomes. It's no different than at any other company, especially in retail. With healthcare costs skyrocketing, the problem will only get worse. At least at Wal-Mart these folks have an excellent opportunity to move up the ladder. If not, they're going to have to get educated or develop marketable skills if they want to earn more than what Wal-Mart is paying.

[Gabz]

I have to admit...I added to the groceries, hard goods, electronics, and shoes categories today!!!!

All kidding aside. You information and commentary on this subject is excellent.

[durasell]

Thanks for the information.

The ghetto independents Thrive through specialty items and unique supply chains. They are also able to respond more quickly to trends. So, you may have a store relying on "close outs" for basics as well as special, niche items, such as specialty spices or other products. Then you have the store owner who is able to spot trends on the street, such as fashion acessories. It might take a large chain six weeks to set up a supply chain to offer trendy items, a small independent can do it in six days. I've spoken at length with store owners in Washington Heights, Brooklyn, and the lower East Side. The guys are retailing acrobats.

[Non-Sequitur]

So why the jumping on Wal-Mart?

Why not?

[wouldntbprudent]

Thank you for excellent posts.

[Mase]

It might take a large chain six weeks to set up a supply chain to offer trendy items, a small independent can do it in six days.

Makes sense. The big guys are pretty good at acting as fast followers but rarely set trends. That's normally left to the more entrepreneurial operators. What I don't understand is why they won't demand higher margins for the trendier products. Is there more competition in these markets than I'm thinking?