A Kinder, Gentler Wal-Mart?

By DAVID MOON, Moon Capital Management
October 30, 2005

Wal-Mart, the company that redefined retailing and changed the way America shops, has once again proved its marketing prowess. Last week Wal-Mart CEO H. Lee Scott called on Congress to raise the minimum wage.

'[I]t's time for Congress to take a look at the minimum wage and other legislation that can help working families,' said Mr. Scott, sounding more like a political candidate than the head of a retailing juggernaut. He also promised to work toward improving the environment, by showing preference to suppliers that participate in the company's still-to-be-created 'green company program.'

Nowhere in his speech did Mr. Scott speak in favor of apple pie, babies or education, but I am sure the company officially supports all three.

Excuse me if I don't immediately nominate Wal-Mart for a Nobel human rights prize. In one speech, Mr. Scott scores PR points while putting even more pressure on his competitors. Isn't business fun?

While the minimum wage in the U.S. is currently $5.15 an hour, the average Wal-Mart sales associate earns over $10 an hour, excluding benefits. Increasing the minimum wage would have minimal impact on Wal-Mart, if any at all.

But it sure does help soften the image of those evil interlopers from Arkansas who swoop into towns, rape the land, build huge boxes and presumably put all the local retailers out of business.

Say hello to the new kinder, gentler Wal-Mart.

But also say hello to higher employee costs at many of the company's smaller competitors whose wages don't match those of Wal-Mart. These are the companies that will bear the brunt of any increase in the minimum wage, squeezing either these companies' margins or employment rolls.

Although I may sound cynical, I actually applaud Wal-Mart's stroke of genius.

Wal-Mart's detractors must first acknowledge that for an increase in the minimum wage to hurt small retailers, Wal-Mart must be paying higher wages than these mom-and-pop shops. That doesn't sound so evil to me.

Not only does Wal-Mart presumably pay higher wages in communities where it operates, but its lower prices also add to the general well-being of the local economies by keeping more discretionary dollars in the pockets of Wal-Mart customers.

There is a difference between a macro and micro impact. At the micro (smallest) level, Wal-Mart hurts many small, independent retailers who attempt to compete with the giant on price. Of course, superior entities tend to hurt those that are less competitive, much like Southwest Air hurts Delta or Peyton Manning hurt short-lived UT quarterback Branndon Stewart. That's how competition works.

At the macro (big picture) level, the Wal-Mart effect is enormously positive. The National Bureau of Economic Research (NBER) estimates that Wal-Mart is responsible for lowering the cost of retail goods in this country by about 15 percent. That is the equivalent is shaving about half a percentage point off the consumer price index each year. That may not sound like much, but stock markets react wildly to quarterly inflation statistics that differ from expectations by a lot less than that.

This 'Wal-Mart effect' isn't even reflected in the reported inflation statistics. The Bureau of Labor Statistics, the folks who compile and report inflation figures, doesn't take into account the lower costs offered by Wal-Mart. The NBER study found that from 1988 to 2001 ignoring Wal-Mart had caused the government to overstate annual increases in food prices by 14 to 18.3 percent - and this doesn't even consider all of the general retail items offered in the stores.

Wal-Mart's motives may not be altruistic at all. It may simply be trying to put a little softer face on the corporate image. If that puts it in a better competitive situation, well, I suppose the company can live with that. So can I.

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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