The cost of low costs

A social audit of Wal-Mart at a time when the giant chain prepares to set up in India

Lars Myers Berlin

Wal-Mart prepares itself to open shop in India. It comes with a bipolar image of being a gift and curse at the same time. It is a recorded example of success in business school curricular, but the company stands equally condemned for its business strategies and their damaging effects. Indian consumers provide Foreign Direct Investment (FDI) in retail with a great opportunity.

Grown big through expansion rather than acquisitions, the company founded in Bentonville, Arkansas by Sam Walton in 1962, has become the world’s biggest enterprise by sales, earning US$ 312 billion in 2005. Wal-Mart accounts for 1.6 million employees worldwide and plans to add 300 new “super-centres” to its existing 3,800 stores this year. Measured by these figures, Wal-Mart is three times bigger than its main rival. Interestingly, however, the company’s success is mainly a result of the cultivation of an idea that is hardly new: If you sell things for less, you will sell more than others. In order to sustain its narrow margins and always provide the lowest prices, the Walton family established the most efficient logistics chain in the world, built close relationships with suppliers and distributors, and maintained a brilliantly lean distribution system. Today, Wal-Mart’s international business is growing faster than its US division, with sourcing and procurement drawing from all over the world, including India. However, the slogan of “Always low prices. Always,” comes at a price.

Wal-Mart has become the ugly face of aggressive and large-scale retailing. As communities are vigorously trying to bar the “Beast of Bentonville” from opening a store in their town, rallies all over the US demand higher wages and better healthcare benefits. Wal-Mart faces thousands of lawsuits every year challenging its business practices. Claims include gender discrimination, employment of illegal immigrants or undue pressurising of suppliers.

Then is the effect of Wal-Mart on the communities they serve, be they in the West or elsewhere. Critics maintain that Wal-Mart’s low wage policy (it pays its employees in the US an average of USD 9.70 per hour) and exiguous healthcare benefits (57 per cent of its employees in the U. S. do not have healthcare coverage) impair working conditions in areas where it opens shop even for those who don’t work at Wal-Mart. It is also argued that the company’s ceaseless competitiveness requires squeezing out suppliers and destroys small businesses and thus retail jobs in areas around new super-centres.

To which, Wal-Mart righteously stresses that it has created a record 2,25,000 new jobs in the US in 2005, and announced to cut premiums and add some 70,000 workers to the corporate healthcare scheme in 2006. Moreover, it has committed to greener packaging and a more open policy towards unions in the US.

Naturally, good deals for consumers come at the cost of workers’ benefits and suppliers’ revenues. What’s more, numerous studies indicate that what Wal-Mart saves on payrolls and sourcing, it actually passes on to its customers, whose shopping bills are estimated to be chopped by as much as 25 cents for every dollar compared to the time before the opening of a supercentre in a neighbourhood. Customers opt for Wal-Mart’s low prices over buying at the street corner shop. The structure of communities and the behaviour of its customers are critical to Wal-Mart’s success. Strong competition by established retailers and customers not always buying the cheapest has curbed Wal-Mart’s expansion in Continental Europe.

In India, Wal-Mart will have to strike a balance between ensuring its profits which are not at the cost of worker’s rights and small family owned shops in its vicinity, or it could get dragged in political differences between members of the ruling coalition.