The Real Conflict
by Pankaj Ghemawat and Ken A. Mark
BY PERMISSION OF JOHN DEERING AND CREATORS SYNDICATE, INC.
Nowadays, mighty Wal-Mart’s headquarters in Bentonville, Arkansas, must feel less like a hotbed of retailing and more like a war room. There is a groundswell of criticism of the company, largely focused on its treatment of its workers. Indeed, from low wages to limited health-care coverage, the company has a number of issues to tackle. But to characterize Wal-Mart’s success simply in terms of its exploitation of its workforce, as many of the company’s most ferocious critics do, is flawed for two reasons.
First, Wal-Mart has grown the economic pie available to be divided among its various stakeholders, instead of just slicing up a fixed pie in a way that favors one group over another. Consider, for example, the conclusions of the McKinsey Global Institute’s study of U.S. labor productivity growth between 1995 and 2000. In the words of Robert Solow, a Nobel laureate in economics and an adviser to the study, “By far the most important factor in that [growth] is Wal-Mart.”
Second, most of the value created by the company is actually pocketed by its customers in the form of lower prices. There is general agreement that Wal-Mart prices are significantly lower than its competitors. Assuming the company’s prices are 8 percent lower — at the low end of the estimates from various studies summarized in a recent report by Global Insight — and applying that to Wal-Mart’s domestic sales volume, U.S. consumers save on the order of $18 billion per year. And because Wal-Mart forces its competitors to charge lower prices as well, this figure is a fraction of the company’s real impact.
These kinds of savings to customers far exceed the costs that Wal-Mart allegedly imposes on society by securing subsidies, destroying jobs in competing operations, driving employees toward public welfare systems, and creating urban sprawl.
The savings to Wal-Mart customers appears large in relation to the surplus that it passes on to its stockholders. In recent years, the retailer has netted just 1.5 to 2 percent of revenues as surplus for its shareholders — compared with 8-plus percent for its customers.
It is worth adding that this shareholder surplus would be completely wiped out if Wal-Mart’s million-plus employees were to receive a $2-per-hour pay increase, modest though that sounds. This scenario would be unacceptable to Wal-Mart’s shareholders. Instead, millions of Americans who shop at Wal-Mart would likely end up paying higher prices.
This last point suggests that the debate around Wal-Mart isn’t really about a Marxist conflict between capital and labor. Instead, it is a conflict pitting consumers and efficiency-oriented intermediaries such as Wal-Mart against a combination of old-line retailers and labor, community, and development activists. Particularly in retailing, policies in the United States favor consumers and offer fewer protections to other interests than is par for the course elsewhere. Is such pro-consumerism a good thing?
The answer, at least in relation to Wal-Mart, depends on the identity of these “consumers” — the ones getting most of the benefits from the company’s low prices. Wal-Mart operates two-and-a-half times as much selling space per inhabitant in the poorest one-third of states as in the richest one-third.
In other words, without the much-maligned Wal-Mart, the rural poor, in particular, would pay several percentage points more for the food and nonfood merchandise that — after housing — is their second-largest household expense.
So with Wal-Mart, let’s keep in mind who’s reaping the benefits of those “everyday low prices” and, by extension, where the real conflict lies.
— Ghemawat is the Jaime and Josefina Chua Tiampo Professor of Business Administration at HBS. Mark is the managing director of the Martello Group, a consultancy in Toronto. A previous version of this article ran in the August 3, 2005, edition of the New York Times.
