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A Brief History of Wal-Mart

by T.A. Frank Washington Monthly
April 1st, 2006


By
First published in the April, 2006 issue of Washington Monthly


In the late 1940s, when Sam Walton was franchising a Ben Franklin's variety store in Newport, Ark., he had a simple but momentous idea. Like any retailer, Walton was always looking for deals from suppliers. Typically, though, a retailer who managed to get a bargain from a wholesaler would leave his store prices unchanged and pocket the extra money. Walton, by contrast, realized he could do better by passing on the savings to his customers and earning his profits through volume. This insight would form a cornerstone of Walton's business strategy when he launched Wal-Mart in 1962.

The quest for low prices came naturally to Walton: He was freakishly cheap. Although he was ranked as the richest man in the United States by the 1980s, he continued, it is said, to have his hair cut by the local barber, a $5 expense that he never supplemented with a tip. (Perhaps he wasn't satisfied.) Cost-cutting was, as one might also expect, an obsession in the Wal-Mart culture, and Walton was almost as chintzy with his executives as he was with his cashiers. On business trips, everyone, including the boss, flew coach, and hotel rooms were always shared. Even a cup of coffee at the office required a 10-cent contribution to the tin.

But coffee taxes only went so far. Walton understood that a major requirement for keeping costs down was controlling the payroll. As he would write in his 1992 autobiography, Made in America, "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." Not only did Walton prefer to hire as few people as possible, but he also dreaded paying them more than he had to. Unions were particularly feared, and Walton did everything he could to fight them, almost always successfully.

If such a regimen seems stifling, Walton's employees nevertheless accepted it. In part, it was because Walton framed his cheapness as a crusade on behalf of the lowly consumer and as a quest for a better life for all Americans. It was also because he lived an outwardly modest life, driving an old truck with his hunting dogs in the back. Mostly, it was because he had charisma. Even when Wal-Mart grew outsized, Walton made a point of keeping in touch with his employees on the ground or, as he termed them, his "associates." This would often involve flying from store to store -- Walton had a pilot's license -- for impromptu visits.

But Walton's ability to keep his staff happy also relied on a sense of when to let penny-pinching take a backseat to other priorities. In 1985, amid anxiety about trade deficits and the loss of American manufacturing jobs, Walton launched a "Made in America" campaign that committed Wal-Mart to buying American-made products if suppliers could get within 5 percent of the price of a foreign competitor. This may have compromised the bottom line in the short term, but Walton understood the long-term benefit of convincing employees and customers that the company had a conscience as well as a calculator. He also made sure to give his staff a stake in the company. In 1971, he introduced a profit-sharing plan that allowed employees to put a certain percentage of their wages towards the purchase of subsidized Wal-Mart stock. For employees who stuck around, this could mean quite a bit of money. According to a truck driver named Bob Clark, quoted in Walton's autobiography: "[Walton] said, 'If you'll just stay with me for twenty years, I guarantee you'll have $100,000 in profit sharing' … Well, last time I checked, I had $707,000 in profit sharing, and I see no reason why it won't go up again."

Equally important was Walton's ability to sell employees on the notion that working at Wal-Mart meant limitless opportunity. Here, from Fortune, is a portrait of Walton at a Saturday-morning meeting in 1989:

[Walton] proposes that whenever customers approach, the associates should look them in the eye, greet them, and ask to help. Sam understands that some associates are shy, but if they do what he suggests, "It would, I'm sure, help you become a leader, it would help your personality develop, you would become more outgoing, and in time you might become manager of that store, you might become a department manager, you might become a district manager, or whatever you choose to be in the company…It will do wonders for you." He guarantees it.

And things could get downright cultish:

Then, just to make sure, Sam asks the associates to raise their right hands and execute a pledge, keeping in mind that "a promise we make is a promise we keep." The pledge: "From this day forward, I solemnly promise and declare that every customer that comes within ten feet of me, I will smile, look them in the eye, and greet them, so help me Sam."

Of course, Wal-Mart's success relied on more than just charisma and thrift. Technology, in particular, put the company ahead of its competitors. Already by the 1970s, Wal-Mart was using computers to link its stores and warehouses. Sales data allowed Wal-Mart to keep track of specific items and reduce inventory miscalculations. Only years later would Kmart realize how far it had fallen behind. Throughout Walton's career, a focus on innovation of this sort would make Wal-Mart a consistent leader in efficiency.

When Walton died in 1992, the adjustment to a post-Sam environment proved difficult. Although Wal-Mart executives had emphasized for years that their company depended on a set of principles and habits more than it did on any one person, Walton's death wound up marking a fateful shift in how the company was perceived.

The first blow fell only months later when "Dateline NBC" produced an exposé on the company's sourcing practices. Although Wal-Mart's "Made in America" campaign was still nominally in effect, "Dateline" showed that store-level associates had posted "Made in America" signs over merchandise actually produced in far away sweatshops. This sort of exposure was new to a company that had been a press darling for many years, and Wal-Mart's stock immediately declined by 3 percent. While the "Dateline" flap was short-lived, Wall Street soon found other reasons to lose faith in the company. Profit margins were declining, yet David Glass, who was Wal-Mart's CEO at the time, chose to make ambitious investments in distribution, technology, and construction. Such risk-taking, while smart, scared off investors at the time, and, by 1996, Fortune was even mocking the company's "everyday low stock prices." It was no longer the feisty little chain out of Bentonville.

But it wasn't just Wal-Mart's image that began to change after Walton's death. It was also the way the company did business. Wal-Mart's new leaders took to heart one element of the founder's business philosophy -- the importance of reducing costs -- but they didn't show his intuition about the importance of making employees feel as though they had a stake in the company. They were already at a disadvantage as it was. Wal-Mart's rate of growth was impressive but slower than in its early years -- the inevitable result of becoming so big -- and this weakened the appeal of such incentives as stock ownership. But character also played a role. The company's focus on saving money was leading it to make unrealistic demands of local managers, particularly with regard to payroll, and this pressure would eventually lead to serious trouble.

For a while, though, it worked. Between 1997 and 2001, the company's stock value increased by over 500 percent, rising by 70 percent in 1997 alone. This undoubtedly helped to mollify employees who'd been unhappy with the slump earlier in the decade. Between 1996 and 1999, sales increased by 78 percent while inventory rose only 24 percent, a feat Fortune lauded as "mind-bending." Today, with $288 billion in annual revenues (more than Switzerland's GDP) and over $10 billion in profits, Wal-Mart is the world's largest corporation, according to 2005 Fortune 500 list. It operates over 5,000 stores worldwide and employs over 1.6 million people -- 1.3 million in the United States alone.

That growth has been accompanied by two distinct kinds of perceptions among the public. On the one hand, Wal-Mart has been celebrated for its business innovations, which have set a new global standard for efficiency. On the other, it has been condemned for its hard-charging business practices. One of the most prominent attacks came last November, when filmmaker Robert Greenwald released Wal-Mart: The High Cost of Low Price, a documentary that excoriated the company for its approach to unions, independent retailers, outsourcing, and wages and benefits.

Washington, too, has gotten involved. In 2003, in the run up to the primaries, Democrats began to make an issue of Wal-Mart's wages and benefits. In 2004, Rep. George Miller of California released a report called "Everyday Low Wages: The Hidden Price We All Pay for Wal-Mart." And last year, organized labor put together two Washington-based groups: Wake Up Wal-Mart, backed by the United Food and Commercial Workers (UFCW), and Wal-Mart Watch, supported by the Service Employees International Union (SEIU). Staffed by prominent veterans from the campaigns of Howard Dean and Wesley Clark, both groups are devoted to keeping the world, and Washington, informed of Wal-Mart's alleged misdeeds. For many progressives, the fight to change Wal-Mart represents a central organizing challenge for the 21st century.

There's evidence that the bad press has taken a toll on the company. A 2004 report prepared for Wal-Mart by McKinsey and Co. found that up to 8 percent of Wal-Mart customers no longer shop there because of "negative press they have heard." For the last two Christmas shopping seasons, the company has reported lower-than-expected sales. And in January, Maryland gave final approval to a "Wal-Mart bill," requiring large employers to spend at least 8 percent of their payroll on health benefits. Thirty other states are now considering similar bills. Developments of this sort have led the company to form a war room of political PR experts from both parties -- including Ronald Reagan's image-meister Michael Deaver, and Leslie Dach, a media consultant to Bill Clinton -- to generate more positive media coverage.

Wal-Mart's defenders argue that the chain saves lower-income workers billions through its low prices. This is undeniably true, but it's not a virtue unique to Wal-Mart. The entire sector of discount retailers -- from Target to Costco to Best Buy to Home Depot -- does much the same thing. Meanwhile, Wal-Mart's critics tend to focus on the company's low wages and paltry benefits, or its effect on small towns, or its reliance on outsourcing. But these, too, are by and large sins of the entire discount retail sector. So why pick on Wal-Mart?

The answer is that Wal-Mart really is different. In terms of annual revenue, Wal-Mart is nearly four times the size of The Home Depot, the country's second largest retailer, and almost twice the size of Target, Costco, and Sears (which includes Kmart) combined. That means the company exerts pressure on the entire sector to imitate its methods -- including its treatment of workers. That would be less worrisome if Wal-Mart's record didn't stand out within the sector. But there are strong indications that, when it comes to how it treats its employees, Wal-Mart really is worse than the rest. The company finds itself in trouble because, since the death of Sam Walton 14 years ago, something ugly has happened to the way it does business.

Work off the clock
In a comparison of Wal-Mart with its peers, the obvious place to start would be wages and benefits. But neither Wal-Mart, Target, nor Costco make public their median wage, which many economists argue is the most accurate measure of how a company pays its employees. A 2005 study (pdf) by Arindrajit Dube and Steve Wertheim of the University of California's Berkeley Labor Center, however, sheds some light. Using figures for Wal-Mart released through a sex-discrimination lawsuit, and relying for the rest of the large retail sector on numbers from the March 2005 "Current Population Survey," the study finds that Wal-Mart pays its hourly workers an average hourly wage of $9.68, while other large retailers average $11.08. (The study adjusts for the fact that Wal-Mart stores tend to be in lower-income areas.) As for health benefits, Dube and Wertheim found that Wal-Mart offers its hourly workers benefits worth 73 cents per hour, while other large retailers offer $1.

The study suggests that Wal-Mart is significantly less generous than other large retailers. In response, Wal-Mart has noted that the Berkeley Labor Center receives 10 percent of its funds from organized labor. The company instead cites a study that it commissioned from the consulting group Global Insight, which found that Wal-Mart's wages are on par with those of other retailers. But whichever study comes closer to the truth, comparisons between Wal-Mart and the large retail sector as a whole don't tell the full story. After all, discount retailers like Wal-Mart will inevitably pay less than many other large retailers, and why shouldn't they? Doing so allows them to offer lower prices. Only by focusing exclusively on other discount retailers like Costco and Target can we meaningfully compare Wal-Mart's wages and benefits to those of its competitors, but we simply lack the hard data on most other outlets to do this.

But there are myriad other ways that employers can cut costs at the expense of workers. And it's in these areas that we can gather more satisfactory information to compare Wal-Mart to its competitors. The simplest way to save money is to avoid paying people for all the hours that they've worked -- a practice called off-the-clock work. Of course, Wal-Mart can't explicitly force employees to work off-the-clock. But it can set payroll targets that are nearly impossible to achieve without doing just that. As one manager explained to The New York Times in 2002, "You got to hit the payroll budget they set for you, but if you're over, they discipline you." Plausible deniability, then, becomes essential. Workers get assigned more work than they can possibly complete on their shifts -- while being warned that overtime is out of the question. No intelligent employee would fail to get the message: Finish the job by whatever means necessary. "We worked off the clock pretty much every shift," one employee told the Times. "The manager said if our jobs were not finished, we had to clock out and finish our jobs so no overtime would show up."

Wal-Mart insists that these cases are unrepresentative of the company as a whole, and that any enterprise of their size is bound to have a few rogue managers. But the verdicts so far suggest a widespread problem. In 2000, Wal-Mart paid $50 million to settle an off-the-clock suit involving 69,000 Wal-Mart employees in Colorado. Two years later, a federal jury ordered Wal-Mart to pay back wages to 83 workers in Oregon for off-the-clock work. Some 40 similar class actions are pending, and in 2002, The New York Times reported on a "wide-ranging legal battle between Wal-Mart and employees or former employees in 28 states" over off-the-clock work. Last December, a California jury awarded $172 million to thousands of Wal-Mart employees who had been illegally denied lunch breaks.

Free-market advocates who defend the company argue that squeezing workers is an unavoidable reality of the discount retail business. But a look at the annual reports of Wal-Mart and its competitors points up a glaring difference between the companies. Target's and Costco's annual reports for 2004-2005 include no cases of off-the-clock work. Wal-Mart's lists 44 in the last 10 years.

No girls allowed
In 1986, Walton was sensing some pressure to appoint a woman to Wal-Mart's all-male board. So he offered the job to Arkansas' first lady, one Hillary Clinton, who accepted. She would later quote Walton's pitch: "I think I need a woman; would you like to be her?" Today, Wal-Mart's challenges in the field of gender equality are not so easily addressed. The company keeps its payroll costs down by paying women less than their male counterparts for performing the same work. Evidence also exists that it fails to promote women at the same rate as men.

In 2000, a female employee at a California Wal-Mart who found herself denied promotions filed a sex-discrimination suit. That case now involves nearly two million women, and, in 2004, it was certified by Judge Martin J. Jenkins, of the United States District Court in San Francisco as a class action. Discrimination is a difficult thing to prove, but the figures in the case do not look good. According to numbers compiled in 2003 by the plaintiffs, female store managers average slightly under $90,000 in annual income, while their male counterparts average slightly over $100,000. And while women make up 79 percent of the store's department heads (an hourly position), only 15.5 percent are store managers. Judge Jenkins offered a strongly-worded assessment of the evidence:

"Plaintiffs present largely uncontested descriptive statistics which show that women working at Wal-Mart stores are paid less than men in every region, that pay disparities exist in most job categories, that the salary gap widens over time, that women take longer to enter management positions, and that the higher one looks in the organization the lower the percentage of women."

Wal-Mart has argued that most of the decisions about hiring and promotion are decentralized. The plaintiffs contend, however, that a company in which headquarters chooses to regulate certain regional minutiae, such as individual store temperatures, also has the capacity to keep an eye on gender issues.

But is Wal-Mart really any different from its competitors when it comes to treating its female employees fairly? An extensive search of cases against Target doesn't turn up any similar accusations, and while Costco does face a gender discrimination class action, it involves hundreds of women, not millions. Brad Seligman, who is lead counsel on the gender discrimination cases against both Wal-Mart and Costco, stresses that, even accounting for differences in size, Wal-Mart is exceptional. "I'm the first to concede that the Costco case is nowhere in the same league as the Wal-Mart case," says Seligman. "I've done 50 class actions in my time, and Wal-Mart stands out above all of them, both in terms of the depth and pattern of discrimination and in their reaction to the charges."

We care, but not that much
Few discount retailers make it easy for workers to unionize. But it's hard to find one that has been more aggressive, brutal, and openly hostile to unions than Wal-Mart. Sam Walton faced his first major union challenge in the 1960s. Two Wal-Marts in Missouri were on the verge of organizing, and Walton called in a lawyer named John Tate to stop them. In 1989, Tate, by then an executive vice president of the company, described the events to Fortune: "I told [Walton], 'You can approach this one of two ways: hold people down, and pay me or some other lawyer to make it work. Or devote time and attention to proving to people that you care.'" Walton soon followed up with a management seminar called "We Care," began to call employees "associates," and introduced a widely-praised profit-sharing plan. Whether satisfaction or fear was at play, no union ever formed.

Since Walton's death, however, the "hold people down and pay me or some other lawyer to make it work" method appears to have gained favor. In 2000, when workers in a Jacksonville, Texas, meat-cutting department successfully voted to unionize, Wal-Mart announced two weeks later that it would be closing its meat-cutting departments nationwide and switching to pre-cut meat. Four of the employees who voted in favor of the union were fired. (The company claims that the timing was coincidental and that the dismissals were unrelated, but a National Labor Relations Board judge disagreed. Wal-Mart is appealing the case.)

A year ago, employees at a Wal-Mart tire and lube shop thought they had enough votes to unionize, but the company fired one of the likely yes-voters and transferred in six likely no-voters. Again, an administrative judge ruled that Wal-Mart's conduct had been illegal, but the goal of blocking the union had been achieved.

And in February 2005, the company announced that it would be closing a Wal-Mart in Quebec, one of only two unionized Wal-Marts in North America (the other is also in Quebec). Wal-Mart claimed the store was losing money, but it refused to release numbers.

Wal-Mart's strong-arm approach is the product of a simple cost-benefit analysis. As Thomas Cochan, a professor at MIT's Sloan School of Management, explains, "we have a law that is no longer serving its basic objective of providing people with the ability to organize. The incentives are too weak to keep companies from violating the law if they don't want to comply." The National Labor Relations Board can order an employer to rehire a terminated employee and to pay back wages, but it can't impose criminal penalties or punitive damages. This is rather like telling a bank robber that the penalty for a failed heist is being required to return the money to the bank. And Wal-Mart takes full advantage of such laxity. Store managers are equipped with 56-page pamphlets titled "The Manager's Toolbox to Remaining Union Free," and representatives from the "People Division" in Bentonville are flown out at a moment's notice if there are any signs of union activity. According to a 2004 report in The Nation, stores even administer personality tests to applicants to screen out potential union sympathizers.

Although Target and Kmart both take pains to head off workers who might organize a union -- Costco, by contrast, has some unionized employees -- Wal-Mart still leads the competition. Over the past 10 years, the NLRB or its administrative law judges have determined in at least 11 cases that Wal-Mart or individual Wal-Mart stores were engaging in unfair labor practices to prevent unionization, according to the agency's website. In that same period, both Target's and Costco's records appear to have remained clean. An excerpt from one of the decisions against Wal-Mart gives a sense of the extent of the violations:

The Respondent, Wal-Mart Stores, Inc., its officers, agents, successors, and assigns, shall:

1. Cease and desist from
(a) Promising to remedy employee concerns in an effort to undermine support for the Union.
(b) Removing supervisors from their position in an effort to undermine support for the Union.
(c) Engaging in surveillance of the union activities of employees.
(d) Coercively interrogating employees concerning the union sympathies and support of other employees.
(e) Installing new equipment to remedy employee complaints in order to undermine support for the Union.
(f) Transferring employees into the TLE [Tire Lube and Express division] to dilute the support for the Union.
(g) Transferring employees into the TLE to remedy employee complaints about inadequate staffing in order to undermine support for the Union.
(h) Transferring employees out of the TLE in order to dilute the support for the Union.

The post-Sam era
"Sam would have been proud" is the highest tribute that can be paid at the company Walton left behind. Increasingly, though, it's also clear that what the writer Barbara Ehrenreich termed the "Cult of Sam" has played a large role in its current woes. Walton, in his day, played a hard game, but he knew when to hold back. Unions were fiercely resisted, but employees were treated respectfully. Wages were low, but people were made to feel they had a stake in the company. Bargaining with suppliers would be tough, but some holds would be barred. Walton's instincts, in short, helped to keep the company's foibles in check. Absent Walton, the redeeming features of Wal-Mart began to disappear. What remained were the relentlessness, the chauvinism, and, above all, the cheapness. As so often happens, the leader wasn't doctrinaire; but the followers are. A Fortune article from 2003 notes how, at Wal-Mart headquarters, "nothing backs up a point better than a quotation from Walton scripture."

It won't be easy for Wal-Mart to change its ways. Wake Up Wal-Mart likes to point out that Wal-Mart could raise its average wages by two dollars an hour if it raised prices by only a penny on the dollar. But Wal-Mart is led by people whose lives are devoted to coming up with ways to shave a penny -- or a half penny, or a quarter penny -- off of a dollar. Wal-Mart's chief spokesman summed up the difficulty in an interview with The New York Times. Change might be necessary, he admitted, but, "at the same time, we can't change who we are -- we can't change what makes Wal-Mart Wal-Mart."

But they may have to. Union-busting, gender discrimination, and off-the-clock work aren't innovative; they're illegal. And there are signs that the company is beginning to recognize the need for change. In a message to company managers posted on Wal-Mart's internal website and published by The New York Times in February, CEO Lee Scott wrote: "If you choose to do the wrong thing… if you choose to take a shortcut on payroll, if you choose to take a shortcut on a raise for someone, you hurt this company. And it's not unlikely in today's environment that your shortcut is going to end up on the front page of the newspaper." With any luck, Wal-Mart will work through its identity crisis and produce a company that's a model for the industry. With even more luck, Americans will begin a thoughtful debate about balancing our needs as consumers and our needs as producers. Until then, we can focus on getting Wal-Mart employers to abide by the laws we have. In many instances, that alone would be a significant improvement.