Wal-Mart : Are There Negative Effects of Low Prices?

This is something I hear people complain about all the time – WalMart is too powerful. Besides the fact that they put smaller stores out of business, there are labor issues that make people angry.

However, Wal-Mart's seemingly simple and virtuous business model is fraught with complications and perverse consequences. To cite a particularly noteworthy one, this staunchly anti-union company, America's largest private employer, is widely blamed for the sorry state of retail wages in America. On average, Wal-Mart sales clerks — "associates" in company parlance — pulled in $8.23 an hour, or $13,861 a year, in 2001, according to documents filed in a lawsuit pending against the company. At the time, the federal poverty line for a family of three was $14,630. Wal-Mart insists that it pays competitively, citing a privately commissioned survey that found that it "meets or exceeds" the total remuneration paid by rival retailers in 50 U.S. markets. "This is a good place to work," says Coleman H. Peterson, executive vice-president for personnel, citing an employee turnover rate that has fallen below 45% from 70% in 1999.

This conundrum is interesting because low prices are definitely beneficial for the working poor, but at the same time the drive to keep costs down is part of the reason WalMart pays so lousy. CEO Lee Scott makes a good point about these social costs in relation to low prices:

CEO H. Lee Scott Jr. and other Wal-Mart executives are aware of the rising hostility the company faces and are trying to smooth its rough edges in dealing with the outside world. But they have no intention of tampering with its shopper-centric business model. "We don't turn a deaf ear to any criticism. We're most sensitive to what the customer has to say, though," says Vice-Chairman Thomas M. Coughlin. "Your customers will tell you when you're wrong."

He has a point. If WalMart is such a bad place, people could stop shopping there until they improved their labor and supplier relationships. But what normally happens in cases like this is that each of us individually wants everyone to stop shopping there, but we still go there ourselves for the lower prices. It reminds me of the movie "You've Got Mail" (which I watched last night for the 20th time because it has Meg Ryan in it). In that movie, everyone wants the Shop Around the Corner to stay in business, but ultimately they shop at Fox Books, the large superstore across the street.

Personally, I think the tide is beginning to turn against WalMart. For one thing, they seem to promote a southern Bible-belt, blue collar, family values atmosphere in their stores, which is fine, but doesn't appeal to everyone. They claim to stock products based on local demands but I wonder if they will really offer the best selection in their new stores in urban areas, or countries outside the U.S. Also, there is a growing demand for a higher quality shopping experience. Mrs. Businesspundit hates to go to WalMart because we have to park so far away, it is always crowded, the store is often messy, and if you need help with something you are unlikely to get it. Plus, we make enough money that we aren't as price sensitive as other families. So she would prefer to pay 10% more and have a better shopping experience. Many people we have talked to about this seem to agree – they are getting tired of WalMart.

And finally, their labor problems may eventually start to haunt them. Low wages lead to high turnover, and I wouldn't be surprised if employees someday unionize, or if people just don't like working there and WalMart has to raise wages to attract new hires.

I don't expect WalMart to go out of business any time soon, but I think the wealthier we become as a country, the less we will care about saving a little bit of money on basic necessities. My generation (generation X) doesn't worry about that as much as our grandparents did (who were raised during the Depression) and our parents do (who were taught to be cheap by our grandparents). Long term, I think the shift will be away from the type of thinking that drives customers to WalMart. Maybe they are prepared for that, but my guess is that they aren't. And if they begin to stumble, there is no doubt other retailers would jump at the chance to take advantage of WalMart's missteps.