Walmart is the nation’s largest retail employer. Walmart’s competitive advantage is no secret; by providing goods at prices lower than competitors, it has been able to capture market share by driving competitors out of business. This translates into savings for customers. But looking further into the specifics of how Walmart keeps its costs down, it may also translate into higher costs for consumers in the long run. As is often the case, the “devil is in the details”.
Take, for example, the fact that Wal-Mart systematically underpays their employees. The average Walmart associate makes $15,500 per year ($8.81 per hour). Walmart’s CEO Mike Duke will bring home over $23 million in salary and performance based benefits in 2012, a whopping 1034:1 CEO to employee pay ratio (by far the highest, the next being Target at 597:1, also this figure is based on a median Wal-Mart salary of $22,400, so based on which figure you use the ratio could be much higher). It is estimated that it would cost Wal-Mart shoppers on average another $0.46 per visit to if the company offered a minimum wage of $12 / hour.
On the flip side of this, it costs the nation an estimated $1 billion a year in social safety net use. Essentially, the U.S. taxpayer is subsidizing Walmart’s low wages, which systematically produce full-time workers living below the poverty line.
Next, consider environmental degradation. One common way to keep costs down is through “supply chain fractionalization”, producing certain products in low wage countries. This leads to increased greenhouse gas emissions, as goods are transported all over the world; without a system of taxing carbon, nobody pays for these emissions. “In the U.S. Walmart’s reported emissions grew by roughly 7% between 2005-2009. In Asia, its greenhouse gas emissions have doubled. The company expects 13 million metric tons of cumulative growth in emissions by 2015”. For all the lip service Walmart pays to environmental sustainability, this amounts to little more than a PR move.
Supply chain fractionalization—or outsourcing—has cost the U.S. an estimated 196,000 jobs from 2001-2006 due to Chinese Imports. This number has probably continued to grow, and represents jobs lost to production in other countries (outsourcing), and smaller domestic firms who were priced out of the market by Walmart’s business practices.
How is Walmart a microcosm of the current U.S. economy? This issue is highlighted in a recent New York Times article. According to the article, “Walmart, the nation’s largest retailer and grocer, has cut so many employees that it no longer has enough workers to stock its shelves properly, according to some employees and industry analysts.”
“Labor groups and some employees say the low staffing levels are hurting the in-store experience.”
Like America in general, Walmart appears to be producing under capacity because of it’s reluctance to hire workers.
In an attempt to save money, Walmart has undermined consumer confidence in its produce—one of the bulwarks of Walmart’s profitability (“Grocery made up 55 percent of Walmart’s United States sales in 2012”). Does the concept of low consumer confidence sound familiar? It should, it is one of the things depressing aggregate demand and is related to stagnant wages, unemployment, and general pessimism of peoples belief in the economy.
“Before the recession, at the start of 2007, Walmart had an average of 338 employees per store at its United States stores and Sam’s Club locations. Now, it has 281 per store, having cut the number of United States employees while adding hundreds of stores.”
Walmart has undermined its consumer confidence, which threatens to hurt its bottom line in the long run (it has not in the short run, which I will address shortly). However, when questioned about the possibility of hiring more workers, “Ms. Scott [a manager at a Los Angeles Walmart] says she has pushed for additional staff or for more hours for existing staff, ‘and the answer that I receive is they want to focus on productivity with the workers that we do have.’”
Does this sound eerily familiar to an overall justification for stubbornly high unemployment in the U.S.? It should. Corporations (including Walmart) are sitting on record profits, yet have not increased hiring to post recession levels. Compounding the issue is that employee productivity and wages have diverged greatly. Employers, Walmart being the largest, are systematically relying on higher worker productivity to make up for a smaller labor force, with no inclination that the higher productivity they seek will result in higher wages.
Walmart, like many other large corporations, is answerable to its stockholders and high level executives. Executive pay is incredibly high, profit’s continue to rise, and stock prices are now well above their pre-recession levels. With all this positive reinforcement, why would Walmart change its practices?
Ultimately, market forces determine the success of a business. No-one is forcing people to shop at Walmart, they go there for low prices and good selection. However, there are systematic issues with how Walmart keeps its costs down—most notably paying low wages and increasingly relying on practices which damage the environment.
Some of these issues, such as minimum wage and environmental regulation, need to be addressed by government policy. People need to be aware of the facts, so they can vote for policies that hold large corporations responsible for the negative externalities they cause. More immediately, people can vote with their wallets, by shopping at Wal-Mart’s competitors (which, based on the breadth of their operations, can include almost all retailers).
If Walmart can post hundred-billion dollar profit margins, and pay its CEO over 1000x the median employee salary, it can afford a more sustainable and egalitarian business model. Walmart’s primary competitive advantage is taking advantage of economies of scale—there is nothing wrong with this. However, cutting corners in other ways unfairly shifts the burden of Walmart’s costs onto taxpayers and the environment. If Walmart’s profits begin to fall, they will rethink their corporate strategy. Until then, we can expect business as usual.
For the sake of it’s own profitability and the U.S. economy, Walmart should hire more workers at more livable wages.