Wal-Mart's Mega-Growth Continues, But Is its Image Getting a Bit Tarnished?Published: April 21, 2004 in Knowledge@Wharton
The company, based in Bentonville, Ark., has reached such enormous size that it has been compared to General Motors in the 1950s and Standard Oil in the early decades of the 20th century. As such, its influence in the U.S. economy is being reevaluated by politicians, economists and the media.
Wal-Mart’s overpowering presence in the retail industry has polarized public opinion about its impact. For example, W. Michael Cox, chief economist of the Federal Reserve Bank of Dallas, told the New York Times recently that "Wal-Mart is the greatest thing that ever happened to low-income Americans. They can stretch their dollars and afford things they otherwise couldn't." And a recent economic study in Los Angeles said that the benefits of Wal-Mart’s low-cost merchandise offset the economic damage done to workers in stores that could go out of business because of Wal-Mart’s presence.
But others see a dark side to Wal-Mart’s dominance, and question whether its success comes with too big a price tag. “I don’t want to say Wal-Mart is dangerous but it’s scary. It has made a lot of people afraid,” says James Hoopes, a business ethics professor at Babson College. “Wal-Mart is probably not as dangerous to the retail industry as the Standard Oil monopoly was to the oil industry. But what’s frightening about Wal-Mart is not just its size, but its symbolism … You look at Wal-Mart and you see there are a lot of people in low-wage entry-level jobs; it’s not clear how they will make the transition from working-class to middle-class that has been the success story of America.”
Wal-Mart ranked number one on the Fortune 500 list of America ’s largest companies because of its almost $259 billion in sales. The second-largest company on the list was oil giant Exxon Mobil Corp. with $213 billion in revenues, followed by car makers General Motors and Ford, whose revenues totaled $196 billion and $164 billion, respectively.
As a result of its latest growth spurt, the company with the “always low prices” market positioning has revenues that represent a stunning 2.3% of U.S. gross domestic product, says Stephen J. Hoch, professor of marketing at Wharton. This is not exactly unprecedented for a retailer. Hoch notes that Marshall Field’s represented 2% of the U.S. economy in 1880s and Sears in the early 1980s represented about 1%.
“It’s about operations,” Hoch says of Wal-Mart. “They have focused on driving costs down and giving money back to the customer rather than putting it in the bank.” As for selling themselves, Wal-Mart “has a very simple marketing strategy. Give people really cheap prices and have friendly employees.”
But he cautions that U.S. retailers are always vulnerable to competitors and Wal-Mart is no different. At least 25 major chain stores, including F.W. Woolworth, have closed their doors since 1980. According to Hoch, the forces that lead to trouble for retailers include: dramatic changes in customer buying tastes and behaviors, organized resistance from unions and government, the emergence of new competitors and the failure of internal corporate operations to handle company growth. So far Wal-Mart has been able to keep all these forces in check. “They execute a single business strategy and execute it successfully in multiple formats to increase reach,” Hoch wrote in a recent article in Advertising Age. “Although the jury is out as to whether Wal-Mart can be broadly successful on the global front, my judgment is that if anyone can be the 800-pound global retail gorilla, the home address is Bentonville, Ark.”
A $299 Dual-Screen DVD Player
Indeed, of all the retail sales in all the malls, strip centers, supermarkets and online outlets in America, 8% of them are made in a Wal-Mart. In 2003, the average American spent $761 in Wal-Mart stores, which accounts for 32% of all disposable diapers sold through mass market stores, 30% of all photographic film, 26% of toothpaste and 21% of pain remedies, according to published reports. Retail Forward, a consulting company in Columbus, Ohio, predicts that by 2007 Wal-Mart will control 35% of the supermarket and grocery store sales in the United States and 25% of the pharmacy and drug store sales.
Twelve years after founder Sam Walton’s death, some say the company is so powerful that the most pressing concerns of U.S. businesses are rising health care costs followed by China and Wal-Mart. The question is, just how big can Wal-Mart get? “What’s apparent to me is that there is a lot more room for them to grow,” says William Cody, managing director of the Jay H. Baker Retailing Initiative at Wharton. Wal-Mart could easily reach $500 billion in revenues in the next four to five years, he adds.
How? Even though Wal-Mart has conquered rural and middle America, there are vast urban markets to saturate in places like New Jersey, California and New York. In addition, Wal-Mart is reaching into global markets with stores in Brazil, Canada, Germany, South Korea, Mexico, Puerto Rico, the United Kingdom and China (where it has a joint venture).
In the United States, Wal-Mart is experimenting with renovating and opening anchor stores abandoned by department stores in malls, and trying out the concept of small grocery stores called Neighborhood Markets, Cody says. It is offering services, such as tax preparation. Some Wal-Mart stores come with gas stations. The company recently launched an online music store. “They have enough money to go into just about any consumer market they want,” Cody adds, noting that Wal-Mart has announced it will offer a dual-screen DVD player for $299, about 40% below its competition. “If Wal-Mart wanted to sell a $200 PC, it could. It could dominate the lower-end of the market because it has so many stores.”
Mark Zandi, chief economist with Economy.com, a consulting firm in West Chester, Pa., says Wal-Mart can expand more aggressively into groceries and durable goods, including autos. “It can take its formula and apply it to any product.” Zandi suggests, however, that Wal-Mart’s greatest opportunities are in mining retail markets overseas.
Friends in High Places
In Wal-Mart’s case, there is nothing on the scene to immediately challenge the company’s retail supremacy. But hundreds of dollar stores are opening each year, particularly in towns where Wal-Mart has driven out competition. Products in dollar stores are cheap, the stores are small and the check-out lines are short – a format some former Wal-Mart shoppers find inviting.
Two big box competitors, Target and Costco Wholesale, already offer low prices and appealing products that draw customers away from Wal-Mart, especially the more affluent ones. Some believe that Sam’s Clubs – a relatively weak performer in the Wal-Mart corporate empire – is strategically positioned in an attempt to protect the company from attack by Costco.
Meanwhile, as Wal-Mart reaches into New York, Los Angeles and other large metropolitan areas, it is attracting new and unwelcome attention in state capitals and from the media. Wal-Mart has been criticized for its low wages and meager health benefits. On Monday (April 5), the Los Angeles Times won a Pulitzer for a series of stories on the often hardball tactics that Wal-Mart used in becoming the world’s largest company. City councils in states like California and Illinois have recently passed laws to block or delay the opening of Wal-Mart stores because of concerns over the company’s labor practices, pay scales and the impact its stores have on traffic congestion, competition and other concerns.
In the latest display of opposition to Wal-Mart expansion, on Tuesday, April 6, voters in Inglewood, Ca., rejected a Wal-Mart-sponsored initiative to exempt the company from certain zoning and environmental restrictions in its attempt to build a ‘big box’ shopping center in this Los Angeles suburb. Opponents got 60.6% of the 11,649 votes. The Wal-Mart complex was slated for a piece of land the size of 17 football fields.
Sensing it may need friends in high places, Wal-Mart has embarked on a campaign to boost its own political influence. According to the Center for Responsive Politics, Wal-Mart’s political action committee was the biggest corporate donor to federal parties and candidates in 2003, with more than $1 million in contributions – up from $182,000 during the 1997-1998 election cycle. In several states, including Pennsylvania, Wal-Mart is the largest employer, giving it a powerful political base that can help the company get tax breaks and speed up the usually burdensome approval process for stores or distribution centers.
In addition, Wal-Mart has hired five lobbyists in Washington, according to the Wall Street Journal, although the lobbying effort has had both successes and failures. Wal-Mart has been thwarted in its plans to expand into banking because of opposition by community bankers. But it has successfully negotiated to increase its stores in China. These types of efforts have been a sharp departure from the practices of founder Sam Walton, who shunned politics.
According to Zandi, Wal-Mart has to be aware of the issues created by its huge size or it may run into the same opposition from competitors and the government that Microsoft Corp. encountered. Anti-trust regulators in the Justice Department, as well as those in Europe, have repeatedly investigated Microsoft for monopolistic behavior in its Windows operating system over the years. The investigations have been costly for the company and exposed it to widespread unfavorable media attention. In late March, the European Union slapped Microsoft Corp. with a $613 million fine for abusively wielding its Windows software monopoly and ordered sanctions that went beyond a U.S. antitrust settlement.
So far Wal-Mart has avoided the Microsoft experience, Zandi says. “There is a sense that Microsoft is squelching innovation and charging significantly higher prices than they should. This is why Microsoft is on the Justice Department’s radar and Wal-Mart is not … As long as prices are falling it would be hard for the Justice Department to argue that they are abusing market power and heft.” It’s important “not to lose sight of the fact that a lot of people benefit from Wal-Mart,” adds Hoopes.
But the company also has been sued repeatedly by employees for mistreatment, including discrimination and forcing employees to work unpaid overtime. Wal-Mart is under federal investigation for hiring illegal immigrants to clean its stores. Over time, the lawsuits and bad publicity can take a toll on the company as it comes to reflect the “helplessness that ordinary working people feel in the global economy,” Hoopes says. “It’s certainly possible that Wal-Mart could become a political target as Standard Oil did 100 years ago.”
Hoch, who also is director of the Baker Retailing Initiative, says the U.S. retail market is still fragmented enough that Wal-Mart should not run into charges from the Justice Department that it is a monopoly. “I don’t know anybody who would say we are under-retailed,” he notes.
Hoch praises Wal-Mart for avoiding the destructive cycle that’s referred to in business schools as “the wheel of retailing.” In the wheel of retailing, a retail company is successful with a strategy and grows big and builds its shopper base. Competitors copy it, improve upon it and eventually do a better job. “Once you get too big you forget who you are and you get bloated and somebody can come up beneath you and beat you at your own game,” Hoch says. But Wal-Mart has avoided that because “they are not just about being big.”