Brave New World?

A rare decline in November sales, its first in a decade, last week landed Wal-Mart on the
front page of The New York Times, under the headline Wal-Mart Trips as it Changes a
Bit Too Fast. The stumbles seem to resurrect the perennial question, wrote Michael
Barbaro, Is Wal-Mart too big for its own good, making it impossible to achieve the
gravity-defying growth that Wall Street has counted on for four decades?
Not necessarily, he cautioned. [W]hat is happening now appears to be more complicated
than Wal-Mart hitting a wall. It may simply be changing too fast, acting more like a startup than a company with 6,000 stores, 1.3 million employees and sales of $312 billion.
Rapids shifts by competitors such as Target and Best Buy with trendier offerings seemed
to be drawing some customers away. Wal-Marts responses havent always worked.
Attempts to fix particular problems were underway. In a symbolically important
adjustment, Barbaro concluded, the company will slow the rate at which it expands US
floor space in 2007 to 7.5 percent, from the 8 percent of recent years.
What the Times story failed to mention was the news the paper had printed two days
before, that worlds biggest retailer had beat out a British supermarket chain, Tesco, to
become the first foreign firm to enter the booming Indian retail market, where, at the
moment, there are no large chain stores.
Bharti Enterprises, one of Indias biggest business groups, announced that it would open
several hundred Wal-Mart franchises during the next five years, stores owned by Bharti
but operated under the Wal-Mart names, with logistics, purchasing and support from the
American firm. Weve nothing against Tesco. They know their job. Bhartis Rajan
Mittal told the Financial Times (which played the story on its front page). But we felt
Wal-Mart, on a big scale, was more of a fit.
In other words, although it is already the largest company in the world, Wal-Mart still is
something of a start-up, seeking to become its dominant retailer. In 2004, it handled 8.8
percent of US retail sales (excluding automobiles) It operates, in many cases as the
biggest or second biggest retailer, in Argentina, Brazil, Canada, China, Costa Rica, El
Salvador, Guatemala., Honduras, Japan, Mexico, Nicaragua, Puerto Rico and the United
Kingdom. (It is not uniformly successful in these expansions: it recently sold its
operations in Germany and Southern Korea.)
Not since the 1920s, when chains like Sears & Roebuck and Montgomery Ward fanned
out along Americas railroad lines to change the face of retailing, has there been anything
like it. Wal-Mart has gone further, reshaping American commerce along its highways,
locating its stores on edges of towns, or equidistant between them, changing the very
landscape in the process. (Founder Sam Walton routinely scouted locations from a
helicopter, observing traffic flows.)

The retailer has gradually reshaped manufacturing, as well, through its enormous buying
power. Wal-Mart accounts for 28 percent of Playtexs sales, 25 percent of Cloroxs, 21
percent of Revlons, 13 percent of Kimberly-Clarks and 17 percent of Kelloggs. Last
years acquisition of Gillette by Procter and Gamble was largely a response to Wal-Marts
growing clout. More such combinations are sure to follow.
Now even flows among nations are affected. Wal-Mart purchases more than 15 percent of
all the consumer goods that the US imports from China $18 billion in 2004, or
something more than 10 percent of its cost of goods. Virtually all its apparel comes from
low-cost countries. Through its political action committee, it has become an influential
advocate of free trade policies, most recently the Central American Free Trade Act. (The
fraction of Wal-Mart political contributions to Republican Party candidates has declined
from 98 percent in 1996 to 80 percent in 2004.)
Meanwhile, the store has become the nations leading vendor of groceries, apparel and
music. It is not too far behind in pharmacy and auto services. Next it plans to offer
organic food and various banking services. Some 100 million consumers shop at WalMart every week, and 85 percent of all Americans shopped there at least once in 2005.
Not bad for a chain whose first store opened in Rogers, Arkansas, 1962.
Not surprisingly, Wal-Mart procedures have become a source of political friction along
nearly every axis of its interface with the rest of the world its wage and benefits
policies, impact on local businesses and suppliers, product-selection practices, zoning and
infrastructure requirements, design standards, and political influence.
Many of these facts are laid out coherently in a new article prepared for the Journal of
Economic Perspectives, by Emek Basker, of the University of Missouri, the
econometrician who, more than any other scholar, has studied the overall economic
significance of the explosive growth of the giant chain. An earlier paper with Pham
Hoang Van, Putting a Smiley Face on the Dragon: Wal-Mart as a Catalyst to US-China
Trade, brilliantly illuminated the surge in U.S. imports that occurred after Wal-Mart
abandoned its "Buy American" campaign in the 1990s. In the new study, she carefully
surveys the welter of work on various aspects Wal-Marts economic impact that has been
done, much of it narrowly framed, some of it highly partisan.
(In a book last year, The Wal-Mart Effect: How the World's Most Powerful Company
Really Works and How It's Transforming the American Economy, Charles Fishman, a
journalist, offered a parallax view. (The paperback edition has just appeared.) Fishman
wrote last week of the Bharti deal, Wal-Mart will be a sensation in India - as it has been
in China and in Mexico. At the moment, there is just a single hypermart in the whole
country, in Mumbai. Small individual US cities have more than that Topeka, Kansas,
has two Wal-Mart supercenters; Huntsville, Alabama, has four.)
Basker identifies two key advantages that have propelled Wal-Mart to the top: technology
and scale. She doesnt lay the same emphasis on automobiles and highways that I do, but
on the role of the computer she is dead right. The company installed a mainframe in 1969

in its first distribution center. By the late 1970s, it had connected all stores, distribution
centers, and corporate headquarters in a network. It was among the first to recognize the
logistical importance of bar-codes, and by the late 1980s had installed bar-code readers in
all its distribution centers. In 1990, it brought suppliers into the network with real-time
inventory software (which migrated quickly enough to the Web). Today Wal-Mart is a
leader in radio frequency identification tags.
What about the effect on employment? A new Wal-Mart store hires several hundred
employees, according to Basker. The number of applicants can be 5, 10, or even 25 times
the number of positions offered. (When a new store opened in Oakland, Calif., last year,
more than 11,000 people applied for 400 jobs.) Some local retailers contract or go out of
business; others open for business. On balance, she says, the effect on local employment
appears to be positive, even five years after Wal-Marts entry, but it is small.
So keeping Wal-Mart out of the market, as France has done, apparently costs jobs; letting
it in, however, is no magic elixir of growth. Nor is there any reason to think that the
company has yet exhausted the advantages that come from opening stores in relative
proximity to one another. The technique, dubbed contagious diffusion, takes advantage
of economies of density in distribution, training and advertising, and probably aids WalMart at the expense of rivals such as Kmart and Target, which pursue different strategies.
And since there is no definitive data on hours worked or wages at Wal-Mart compared to
other retail stores, it is not possible yet to evaluate the effect of Wal-Marts reliance
on more part-timers than the stores it replaces.
Consumers gain from the stores low prices. The poor apparently gain the most. In one
survey, 53 percent of those whose annual earnings were less than $20,000 said they
shopped at Wal-Mart regularly, compared with a third of those who made more than
$50,000. The average annual household income of Wal-Mart shoppers is around $40$45,000, roughly that of the US median; Target shoppers have incomes of around
$60,000 and Costco customers around $74,000. Between them, these "big-box" retailers
have fundamentally altered buying habits in nations around the world.
In short, Basker writes, Though the identity of the large retailers has changed over time,
the criticisms leveled against them do not. Retail chains have been accused of paying low
wages, not contributing to their communities, taking money out of communities, paying
fewer taxes than local merchants, and turning America into a nation of clerks as far back
as the 1920s almost word for word the accusations that are leveled against Wal-Mart
today.
What has changed with Wal-Mart, perhaps, is the sheer degree of political influence the
giant retailer now enjoys. Wal-Mart hired its first lobbyist in Washington DC in 1998, but
long before that it was expert in dealing with local governments to negotiate for zoning
easements, infrastructure requirements, and other subsidies, or to resist attempts to limit
access to local markets through zoning requirements, to impose minimum wages, or to
mandate health care benefits.

With its aggressive expansion into global markets, both as purchaser and vendor, the
company has taken its place at the political table along with other great multinationals
energy companies, metals manufacturers, software houses, aerospace firms, arms dealers,
chemical and pharmaceutical companies, auto giants, and consumer product companies.
Nor is it just Wal-Mart that has gone transnational. Ikea, McDonalds, and Starbucks are
other firms whose economies of scale have permanently altered the retail landscape.
So Wal-Mart and Costco have replaced Sears and Wards, just as highways replaced the
railroads as our primary transportation network. But the railroads are still there. So are
the rivers and the ports whose economic primacy the railroads usurped. Cable and the
Internet have preempted television, but television is still there. So is radio. And so is the
tendency of competitors to combine into a few giant firms, producing industrial structure
we know as oligopoly.
Where there are oligopolies, historically, at least, there have been labor unions. The last
quarter century has seen a period of unprecedented competition. Unions have suffered
greatly as a result. There are no unionized Wal-Mart stores today in North America.
When butchers at a store in Texas voted to affiliate a few years ago, Wal-Mart bought
pre-packaged meat and shut the department. When workers at a store in Quebec last year
voted to organize, the company closed the store.
The rise of Wal-Mart is a story of canny entrepreneurs taking advantage of technological
change a saga of cars, computers and globalization. Want to bet that the rate of
fundamental innovation continues at the same rapid rate? That the level of intense
competition of the past 25 years continues for another quarter-century? Or that there will
be no unions in Wal-Mart stores 25 years from now?