Walmart – An Easy Target?

By Savita Gill, Michelle Leung, and Annie Xu

In January 2012, 150 workers at Foxconn threatened mass suicide in protest of their poor working conditions (Moore, 2012). In November 2012, over 112 workers died in fire at a factory operated by Tazreen Fashions Ltd. In Dhaka, Bangladesh (The Associated Press, 2012). What did these two incidents have in common? The companies involved were both suppliers to large and powerful American companies. Foxconn was a supplier to Apple, whereas Tazreen was a garment supplier to Walmart. Both Apple and Walmart were and continue to be heavily criticized for not taking a larger and more active role in ensuring the quality and safety of the working conditions at their suppliers, but is it really their responsibility? As the largest company by revenue in the world, Walmart is an easy target. In this blog post, we shall argue that Walmart should not be held responsible or accountable for what happens at its tens of thousands of suppliers.

The local government shall be held fully responsible for the working conditions and safety of its people and factories. The Rana Plaza tragedy in Bangladesh is one example where the government should have enforced its laws and regulations to protect its factory workers. The collapse of the building that took over 1100 lives was due to the extra two floors that were illegally added to the building. If government regulation and inspection were tightly in place, the tragedy would not have happened. Some argue that corporations such as Loblaws, Wal-Mart and JC Penny should be held accountable for the conditions and safety of the factories such as the Rana Plaza; but the truth is that this would never be possible as multiple layers of contractors are in place disconnecting the North American corporations from its source of goods. In addition, corporations cannot uphold their own laws and regulations in another country. Wal-Mart’s clothing line supplier contracts the production of the garment to a clothing company where it then contracts to a Bangladeshi manufacturer who then contracts to a local shop that makes clothes for multiple North American corporations. With so many levels of sub-contracting and the factories being half way around the world, Wal-Mart does not have the ability to have a say on how its clothing are made, nor could Wal-Mart walk into Bangladesh and start giving orders on how things should be done even if Wal-Mart wanted to. To make the change of safe working conditions to happen, it takes the local government, business alliances and pressure from the media. In 2002, China passed the bill on Child labour law after much criticism from the West and threads to move factories elsewhere. Now with local government enforcement, the condition has improved, children’s rights are being protected and maltreatment of children is prohibited. In 2001, US government and Cambodia government came into agreement that US would open more opportunities to Cambodia if the Cambodian factory working condition improves. It’s been 14 years since the founding of “Better Factories Cambodia”, both the government and the foundation are still working hard to ensure the factories comply with the rules and regulations of international labour standards. Local government intervention is absolutely necessary for the working conditions and safety to improve.

Secondly, international coherence on core labor standards is an issue much beyond the realm of Wal-Mart. Placing a developing country under the same lens as an economically developed country can be seen as a protectionist measure. It will impact country’s competitive advantage and hence net export and hence economic development. In addition, every Fortune 500 Company is leveraging low-cost manufacturing to improve bottom line. Wal-Mart is just one player in this ecosystem. So, nations and business communities across the world need to address these hard questions and balance diverse interests. WTO (World Trade Organization) has deferred negotiation of work standards to the International Labour Organization (ILO). WTO points that “it is not easy for member governments to agree on these issues and the question of international enforcement is a minefield” (WTO, 2015). If governments themselves are reluctant to protect their citizens then Wal-Mart faces an uphill task. As a publically listed company with multiple stakeholders, Wal-Mart has taken steps in the right direction with an alliance for Bangladesh and “Responsible Sourcing program”. Wal-Mart should continue to have dialogues around sustainability and better working conditions but cannot be hold accountable if something slips out.

There is no dispute that Walmart has the power to coerce their suppliers to comply with whatever conditions they demand, however, it should not be Walmart’s responsibility to govern the operations and policies of its suppliers. In the end, it is simply a basic business transaction. If Walmart becomes aware of illegal practices and unsafe conditions at its suppliers, they should terminate the relationship if the supplier is not willing to comply with the local laws and regulations. They should not be interfering with how another business operates. Walmart has taken steps to be socially responsible through various initiatives such as participation in the Alliance for Bangladesh Worker Safety. It is now up to local governments and pressure from the world stage to ensure the necessary laws and regulations are in place to guarantee the safety and well being of workers around the world.

References
Moore, M. (2012, January 11). ‘Mass suicide’ protest at Apple manufacturer Foxconn factory. Retrieved January 25, 2015, from The Telegraph: http://www.telegraph.co.uk/news/worldnews/asia/china/9006988/Mass-suicide-protest-at-Apple-manufacturer-Foxconn-factory.html

The Associated Press. (2012, November 25). Bangladesh fire kills 112 at Wal-Mart supplier. Retrieved January 25, 2015, from CBC News: http://www.cbc.ca/news/world/bangladesh-fire-kills-112-at-wal-mart-supplier-1.1179644

WTO. (2015). http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey5_e.htm. Retrieved from http://www.wto.org/: http://www.wto.org/english/thewto_e/whatis_e/tif_e/bey5_e.htm

BFC. (2015). http://betterfactories.org/?page_id=25. Retrieved January 25, 2015, from http://betterfactories.org/: http://betterfactories.org/?page_id=25

Bangladesh Worker Safety Org. (2015) http://www.bangladeshworkersafety.org/. Retrieved January 25, 2015, from: http://www.bangladeshworkersafety.org/

ILO. (2015). http://www.ilo.org/dyn/natlex/docs/WEBTEXT/63806/65269/E02CHN01.htm. Retrieved January 25, 2015, from: http://www.ilo.org/dyn/natlex/docs/WEBTEXT/63806/65269/E02CHN01.htm

Library of Congress. (2015). http://www.loc.gov/law/help/child-rights/china.php. Retrieved January 25, 2015, from: http://www.loc.gov/law/help/child-rights/china.php

Tyson, L. (2014, February 7). The Chalenges ofRunning Responsible Supply Chain. Retrieved January 25, 2015, from Econmix: http://economix.blogs.nytimes.com/2014/02/07/the-challenges-of-running-responsible-supply-chains/?_r=0

Cutting Head Office Jobs Is Right and Wal-Mart Should Do More

By Zhengyu (James) Fang and Peter Li

In January 2015, Wal-Mart announced that by the end the month it would open another 11 supercenters in Canada, realizing its expansion plan north of the boarder. In contrast with its ambitious footprints in Canada, the company cut 210 jobs last November, most of which was among head office headcounts in Mississauga Ontario, to “create a more efficient organizational structure as the company positions itself competitively for the future”, according to Andrew Pelletier, the company’s vice-president of corporate affairs and sustainability. The same thing is happening in both its home and international battlefields – the company shrank its regional office in China [1], and allegedly cut 700-800 jobs at Arkansas headquarters last year [2]. Facing stagnant growth in recent years and intense competition, Wal-Mart has spared little effort in decreasing operational expense to satisfy the shareholders. The retail giant’s high turnover rate of employees has been a sore point of criticism. This time, however, the company is doing the right thing to both cut operational costs and to solve its current public disputes on labor costs and employee welfare.

It is no secret that store managers of Wal-Mart are paid better than most of its competitors. According to National Bureau of Economic Research, average annual salary of a Wal-Mart store manager is about $92.5K, which is among the “highest paid in the nation”[3]. Same-level manager at Whole Foods and Starbucks are paid on average $76K and $45K. Although Costco store manager is paid about 15% more than Wal-Mart, it is noticeable that cashiers at Costco are making more than 40%, and Whole Foods more than 20% than those in Wal-Mart. On the other hand, senior executives of Wal-Mart are paying way higher than those of its major competitors, as illustrated below [4]. An average senior executive took home $12.6 million compensation, which almost doubled runner up Target. For each hour, a Wal-Mart senior executive earns over $6,000 dollars, comparing with less than $10 dollars of an associate. Middle management is also arguably enjoying a higher than average compensation package. District managers could earn more than $240K, and regional vice presidents could reach over $420K [5].

Cutting cost at manager and above levels, we believe, is both necessary and imperative through either cutting the headcounts in head offices around the world, or slashing the staggering high paychecks of senior management, or even both. Costs saved by such initiatives could be used to subsidize front-line associates to their pay increase and life-saving social welfare. By doing so, the company could also show the public its efforts to solve its notorious labor issues, saving millions of tax payers’ dollars. Wal-Mart is on the right track of slashing jobs in head office, but it needs to do more.

It is worth comparing Wal-Mart with its biggest competitor Costco here. As illustrated above and based on data compiled by Morningstar, Costco’s executive compensation totaled $21 million for 2013, actually a 6.68% decline from the previous year, while Wal-Mart’s executive compensation totaled $77 million in 2014, showing a 9.04% increase from 2013 [6]. In contrast, Wal-Mart pays $8.53 on average to its cashiers, but Costco pays $15.6. While Wal-Mart announces that “more than half” of its employees had health insurance coverage, Costco has 88% for the same statistics [7]. In terms of revenue growth, Costco had a soaring total 51.54% from 2010, while Wal-Mart only had 17.73%. When Costco announced a remarkable 10% growth in sales in August 2014, Wal-Mart struggled with a 2.8% increase for the same period [8]. One should be very curious about why Wal-Mart struggling in cutting every penny from store-level associates generously increased the compensation for their executives while Costco enjoyed vivid growth but shared more of their gains with their own employees.

Figures are more telling when we go beyond financials. Wal-Mart’s current low labor cost strategy is actually hurting its bottom line rather than helping it. If we consider “all-in costs” of such a strategy, it is actually paying its employers more in order to improve in-store performance, retain reputation, and reduce the cost from potential law suits, all of which are not reflected on its financial statements but could have been saved otherwise. Statistics shows that Wal-Mart’s overall employee turnover rate is about 44% in 2013 [9]; it could be as high as 70% at some stores. High turnover rates will not only hurt an organization’s productivity, but also damage the overall image of the employer. Costs associated with high turnover rate could include wasted employee training costs, additional time in recruiting, problematic team dynamics as well as low morale and productivity. Even though Wal-Mart tries to justify its human resource policy by stating that training and replacement costs are low for the work force at their stores, they could be completely wrong about it when they ignore the fact that the low wage has led to deteriorated service quality and employee satisfaction [10]. In 2013, Wal-Mart was ranked No.1 in the “10 worst retailers that have the lowest customer satisfaction” list [11]. From the news and media, things haven’t been improved much, if not becoming worse, in 2014. It is not surprising that the growth for Wal-Mart was only 1.5% in 2013-14 then. When Wal-Mart is suffering from low quality and drives away its customers, other retail stores are more than happy to welcome the outraged, anti-Wal-Mart force to join their customer base.

In conclusion, Wal-Mart is on the right track of redesigning its management structure in the head office, but that’s obviously not enough to fuel its long-term growth. It should revisit overall compensation scheme and must be well positioned to justify its staggering paychecks to those executives and senior management under stagnant period of business growth. Saved costs from these initiatives should be used to subsidize front-line associates, regardless of impending regulatory changes or not, so as to save its reputation, cut litigation costs and bring lost customers back to it.

References:

[1]. http://usa.chinadaily.com.cn/business/2014-12/03/content_19014719.htm
[2]. http://abcnews.go.com/Business/story?id=6850964
[3]. http://time.com/3026504/wal-mart-managers-average-salary-higher-than-starbucks/
[4]. Compiled by http://www1.salary.com from companies SEC filings
[5]. Always Low Wages, Lisa Featherstone, 2014
[6] http://blogs.wsj.com/corporate-intelligence/2014/07/23/pay-at-wal-mart-low-at-the-checkout-but-high-in-the-managers-office/
[7]. http://insiders.morningstar.com/trading/executive-compensation.action?t=COST
[8]. http://www.fool.com/investing/general/2014/09/05/why-costco-is-crushing-wal-mart.aspx
[9]. http://aattp.org/raising-employee-wages-could-actually-raise-walmarts-profit-margin/
[10]. http://www.forbes.com/sites/rickungar/2013/04/17/walmart-pays-workers-poorly-and-sinks-while-costco-pays-workers-well-and-sails-proof-that-you-get-what-you-pay-for/
[11]. http://www.washingtonpost.com/business/economy/these-10-retailers-had-the-worst-customer-satisfaction-ratings-for-2013/2014/02/27/a0860cb4-9f25-11e3-a050-dc3322a94fa7_story.html

Charlie visits Wal-Mart in the year 2020

By Peng Li, Alexander Melamed and Ali Yousaf

As Charlie Fisher walks into Walmart, he glares around what is a revolutionized shopping world. People no longer buy items such as lawnmowers, snow blowers, and microwaves at Walmart, they rent them. Everyone has the opportunity to have a life of better standard than they did in 2015 and everyone carries possessions of high quality and more sustainable than in the past. Charlie himself has come to rent products that he could only have dreamed to possess in the past. The market value of his new lawnmower, for instance is 3 times the lawnmower than he owned in the past, but thanks to Walmart’s “Easy to Rent” program, he is able to afford a premium lawnmower without paying too much extra in the long run (The table below shows what Charlie’s payments would look like)

Walmart has enticed its customers with the option of making smaller payments over longer periods of time and it is a strategy that has worked wonders for the company, allowing it to retain its spot as the top retailer on the planet.

Does this fictitious futuristic story sound completely absurd? Consider for a few moments, what will the future of retail need to look like in order to endure in the era of mobile internet, e-retail, global warming and the ever changing preferences of consumers ? What creative destructions do giants like Wal-Mart face today and how drastically do they need to adapt in order to stay in the game?

Wal-Mart made an astounding revenue of 483.79B billion in 2014. Consider the magnitude of this number. If Wal-Mart was a country it would be the 25^th largest country by GDP surpassing 157 other countries including Norway and many other advanced nations. They have grown to this size by leveraging a carefully crafted activity system of inter-operating capabilities that mutually reinforce one another to source, transport and sell more efficiently than any other retailer in history. The 4 pillars of this strategy are: (1) Wal-Mart’s iconic Every Day Low Prices Strategy which helps them win over the competition, motivate their employees, and keep their logistics smooth and efficient; ( 2) Their supply chain is highly optimized to reduce inventory and transportation costs. (3) Their IT system optimizes their supply chain, store operations and helps control their suppliers. (4) They can successfully leverage their size and economies of scope to negotiate favorable deals with suppliers and their host communities for prime real estate.

However, as powerful as they may seem today, the world is changing and they face changing consumer preferences, increasing pressures to reduce environmental impact and competition from even leaner discount retailers that dominate the online retail space such as Amazon and Alibaba.

In order to stay competitive Wal-Mart must offer value beyond low prices, because e-retail will continue to undercut their prices. At the same time Wal-Mart will need to improve their environmental impact and find ways to offer products that meet consumer demands.

Let’s revisit the idea of Wal-Mart as a rental service. In this new model, Wal-Mart’s current operation will support product rental on select products.

First lets consider the key stakeholders. For consumers this will mean that they can pay even less for the products they desire, access to higher quality products, and only pay per use. For Suppliers this would mean that they can optimize their products for durability, they will require less raw materials and they will need to develop the capability to refurbish their products before putting them back in circulation. The net effect will be a net value creation for communities by increasing utilization of products and reducing landfills.

Next let’s consider why Wal-Mart is the most likely to succeed in this strategy.

Wal-Mart is the expert in supply chain logistics. They can transform their existing system to supports more two ways transfers of goods between suppliers and stores and vice versa for returns. Products can be directed via Wal-Mart’s hub and spoke system to locations where they will be in demand. Higher inventory costs would be prohibitive for most competitors, but Wal-Mart can leverage their transportation network and IT system to forecasting and optimizing the supply and demand of rentable goods and minimize these costs. Wal-Mart can leverage their size to increase demand for higher quality goods at affordable prices. Demand for higher quality will also motivate Suppliers to produce more durable products that can be serviced and reused instead of recycled.

Finally, this strategy will give Wal-Mart several key differentiations that will be difficult for competitors to match. Wal-Mart can offer unmatched variety of high quality products for rent or to buy. For suppliers, Wal-Mart can differentiate by providing loans against the goods circulating in the rental pool and they can count on receiving a predictable revenue stream from the operations of the rental platform. Once a product has reached useful rental life, they can be sold at a discount.

Creative destruction is the process through which new companies emerge and overtake large incumbents that are too slow or blind to the changing environment. Wal-Mart is facing fierce competition from online retail, they are struggling to stay relevant in the face of changing consumer preferences and they find themselves in the mids of environmental controversies as the world’s most influential companies. In order to stay competitive Wal-Mart must offer value beyond low prices, they must do so responsibly and they must leverage their existing strengths. There are many ways that they might choose to reinvent their strategy. The future of the company rests on the decisions of management over the next several years.

Buying vs Renting

The table below shows what a world of renting products from Walmart may look like for Charlie and how it compares against the traditional buying world of today. In essence, by spending slightly more money over a 3 year period, Charlie is able to purchase products of much higher quality and ones that are more sustainable in the long run. A rental program also ties Charlie’s loyalty to Walmart, leading to more repeat business.

After a decade of trying – it still sucks to be a women at Walmart

By Shelly Rampersad and Rachel Steger

Gender discrimination scandals have plagued Walmart in the media for a number of years. In 2011, 1.5 million female employees attempted to launch a class action lawsuit against Walmart (Goudreau, 2011). Since then, another 2000 women in 48 states have initiated legal proceedings against Walmart for pay and promotion discrimination (Alice Hines, 2012). In her book Selling Women Short, Liza Featherstone (2005) highlights that on average, female hourly workers earn 30% less than their male counterparts.

Despite the negative press surrounding Walmart’s treatment of women, the organization has made significant strides when it comes to the number of female directors on their board. With 25% females on their board of 16 seats, Walmart effortlessly beats the 2013 national average in of 16% in United States (McKinsey & Company, 2013).

The Forum of Executive Women reports that 25% is the tipping point when women begin to make meaningful impact on governance (Goudreau, 2012) suggesting that Pamela Craig, Aida Alvarez, Linda Wolf and Marissa Mayer have the ability to make gender equality a priority for Walmart. If this is the case: Why aren’t the advances Walmart has made in the boardroom reflected in significant improvement throughout the rest of the organization?

[Figure 1: Walmart’s Female Directors. Top Left Counterclockwise: Craig, Alvarez, Wolf, Mayer (Source: Walmart.com)]

The answer is one that Walmart has heard time and time again: as the largest company in the world, affecting change takes much more than it does for others. For Walmart, change must be brought about with a multi-dimensional approach. To truly change the organization, Walmart needs to (1) bridge the gap between management and front-line staff, (2) avoid mini-me succession planning and (3) ensure the right opportunities are in place for women to travel through the pipeline.

The great divide

Given the media buzz around gender diversity at Walmart, the issue has a focus for Walmart in recent years. The 2013 Walmart Global Responsibility report shows some of Walmart’s successes in this area: female Senior Vice-Presidents have increased from 12% in 2003 to 33% in 2013. This promotional area is highly influenced by the executive team which may help explain the increase. Alternatively, at the store-level we see only 29% of promoted store managers being women, a relatively low number given that women make up 57% of the employee pool. Store manager and in-store promotions are less influenced by the executive team and are dictated by middle managers. This illustrates a poignant divide between the executive management and front-line managers that are responsible for executing these initiatives. The communications and values being heralded at the management level isn’t present at the front-line.

The Walton ‘mini-me’ syndrome

Every Walmart CEO since and including Sam Walton has been a male born and raised in Arkansas or surrounding states (Figure 1) with similar backgrounds and leadership styles. Having like-minded leadership over the years has perpetuated the Walmart ideology, which in turn, has reinforced the activity system that has made Walmart so successful. However, it also means that fresh and diverse perspectives have not been brought into the organization through the CEO. In fact, Walmart’s extreme similarities in CEOs highlights the mini-me syndrome (if you’re thinking Austin Powers, you’re not that far off!). Often referred to in succession planning, the mini-me syndrome states that executives may subconsciously choose successors with characteristics (including gender) similar to themselves (PwC, 2008). This puts females at a severe disadvantage in organizations where leadership positions are m ale dominant, such as Walmart. [Figure 2: Highlighted states where Walmart CEO’s were born., Figure 3: Austin Power’s Mini-Me, Source: Google Images]

In 2006, CEO Lee Scott reinvigorated the company under the premise sustainability. It only takes one CEO to do the same with gender: it would generate the excitement in the organization and influence real change. Instead, under every CEO, the mini-me syndrome and discrimination against women has persisted.

Walmart’s leaky pipeline

Women at Walmart disproportionately occupy the lowest ranked positions. They then become increasingly outnumbered at each respective upward rank – in other words, Walmart has a leaky pipeline (PwC, 2008). There simply isn’t enough emphasis put into keeping women in the ‘pipeline’. To achieve gender equality Walmart needs to address the cultural and personal barriers keeping women from advancing through the organization (PwC, 2008).

One such barrier is the mobilization of middle managers. In a recent study, 54% of men indicate that gender diversity initiatives are potentially unfair to men (McKinsey & Company, 2013). Furthermore, women are often unaware of the potential opportunities open to them because of the lack of female leaders as role models. Increasing awareness and education around these issues may fix part of the leakage in the pipeline. Particular emphasis should be placed on securing female role models and mentors within the organization that others can gain support and learn from.

Walmart isn’t that bad when it comes to gender …right?

Some may say that Walmart is already better than average on many key gender metrics. After all, 25% of the board is female, they have committed to spend $20 billion on sourcing from female-led companies and they have created the Walmart Global Women’s Economic Empowerment Initiative (Walmart, 2014). However, Walmart is not the average company, it is not facing average strategic challenges and it does not have a gender neutral customer base – so average simply isn’t good enough.

In 2015, Walmart faces unprecedented strategic challenges regarding future growth. As the U.S. market nears saturation, Walmart needs to become an agile company ready to pivot. Diverse perspectives will help facilitate this transition and having women contribute to the discussion will increase the likelihood of success. With women controlling 70% of global consumer spending decisions, the ability to leverage their insight is paramount (European Commission, 2013). Finally, Walmart’s executive team has been fighting the gender war for far too long, and it has substantially diverted managerial attention away from business issues. Seriously addressing the issue of gender equality will allow Walmart to refocus their attention on what they do best: selling products.

References:

Alice Hines. (2012, June 06). Retrieved from Huffington Post: http://www.huffingtonpost.com/2012/06/06/walmart-sex-discrimination-women-_n_1575859.html

European Commission. (2013). Women on boards – Factsheet 1. Retrieved from http://ec.europa.eu/justice/gender-equality/files/womenonboards/factsheet-general-1_en.pdf

Fairchild, C. (2015, January 16). The 23 Fortune 500 companies with all-male boards. Fortune.

Featherstone, L. (2005). Always Low Wages. In Selling Women Short: The Landmark Battle for Workers’ Rights at Wal-Mart (p. 129).

Goudreau, J. (2011, June 20). Wal-Mart Wins Supreme Court Ruling In Historic Sex Discrimination Suit. Forbes.

Goudreau, J. (2012). Will Google’s Marissa Mayer Help Solve Wal-Mart’s Woman Problem? Retrieved from Forbes: • http://www.forbes.com/sites/jennagoudreau/2012/04/18/google-marissa-mayer-walmart-woman-problem/

McKinsey & Company. (2013). Gender diversity in top management: Moving corporate culture, moving boundaries. Paris: McKinsey & Company.

PwC. (2008). The leaking pipeline: Where are our female leaders? Gender Advisory Council.

Walmart. (2014). 2014 Global Responsibility Report. Arkansas: Walmart.

Who benefits more from Obamacare: Wal-Mart or Employees?

By Katherine Fan, Shantanu Nigam and Sissi Yang

On October 7^th 2014, Wal-Mart announced it would discontinue health and other benefits starting 2015 for around 30,000 part-time employees who work 30 hours or less [1]. Not known as a particular employee friendly company, Wal-Mart has been criticized in the past for its low wages, gender and racial discrimination, and inadequate health insurance [2]. With the advent of the new Patient Protection and Affordable Care Act (a.k.a. Obamacare), Wal-Mart is once again at the center of public scrutiny for its latest move [3]. Wal-Mart has been a big supporter of Obamacare [4] and is being accused of taking advantage of new healthcare regulations to offload its own cost onto American taxpayers. However, looking digging further into Wal-Mart’s as well as government healthcare system in context of the Obamacare, we think that the employees, rather than Wal-Mart, would stand to gain more from this policy.

Part-time employees now qualify for financial subsidy for Medicaid healthcare insurance

Most part-time workers are forced to do so due to lack of sufficient full-time opportunities. They often work multiple part-time jobs to make sufficient living and seek every sponsorship and financial aid to help in expenses. One attraction of the employer sponsored healthcare plan for them is the tax-benefit on the premium paid towards the plan. However, most low-wage employees also qualify for the financial subsidy for government Medicaid healthcare plans at the exchange (known as Heath Insurance Marketplace) resulting in further savings. Employees weigh their healthcare options for the cheapest deal (tax benefit or financial subsidy) and make their choice. The new Affordable Care Act (Obamacare) has added a layer of complexity to it. Under the new provision, a low income individual may not qualify for subsidy if his/her employer offers health insurance at work even if the individual does not choose to buy it [5] [6]

For example, as calculated by Kaiser Family Foundation’s subsidy calculator [7], a low-wage employee at Wal-Mart with 2 kids and household earning of $22,000, which is below poverty line[8], would still not qualify for the government financial aid for private insurance at the state exchange (cheaper alternative) if he/she is offered healthcare by Wal-Mart; Even if he/she choose not to buy Wal-Mart insurance. By removing the healthcare provision for the same employee, Wal-Mart actually enables him/her for annual government financial aid of $5700.

Government offers better and more reliable Healthcare coverage than Wal-Mart

Another indirect benefit from Wal-Mart’s move, is that employees now access to better and more reliable healthcare coverage. As sited by ‘Walmart-Watch’, a Washington based non-profit organization, Wal-Mart healthcare is highly inadequate especially with the advent of Obamacare [9]. Wal-Mart’s insurance include high deductible compared to other public and private options; involve long waiting period before the worker becomes eligible for healthcare. Pre-existing conditions require further wait-period for employees to become eligible for healthcare; ambulance, and emergency services require extra charges while preventive care has prohibitively high deductible under Wal-Mart’s healthcare plan. In comparison government provided Medicaid covers ambulance service [10], preventive health service [11], include pre-existing conditions [12], and does not involve waiting period [13].

For part time employees eligible for subsidy, Wal-Mart’s healthcare plans are more expensive than comparable government plans. As sited in the Walmart Watch report, a $700 deductible healthcare plan with $4000 out-of-pocket expenses costs $700f0, something unaffordable for an employee earning $20,000. The recent hike to the premium [14] has made Wal-Mart’s healthcare plan even more undesirable. The case with part-time employees earning too high to qualify for subsidy is different as the premium for Wal-Mart Healthcare plan is relatively cheaper than unaided premium of the Medicaid [15]. However it is highly improbable for a minimum wage employee working less than 30 hours per week to not qualify for any subsidy.

Not only inadequate and expensive in case of Wal-Mart, an employer based healthcare program in general is inherently an unreliable mode of insuring oneself for the time of emergency. As Washington Post’s Paul Waldman mentions, the insurance coverage should not depend on the employer [16]. It should not be impacted with the loss or change of job/career; it should not designed based on the will of the employer such as which illnesses to cover and when to cover etc. There is no reason to outsource these choices to a middleman, the employer.

Wal-Mart saves on insurance cost. But how much?

Although Wal-Mart’s senior management has been shying away from disclosing the cost savings resulting from the change in plan [17], Bloomberg estimates Wal-Mart could save roughly $50 million in cost assuming 30,000 affected workers use lowest-cost plan [18].

Under the new plan, Wal-Mart’s lowest-cost health plan would cost an employee $21.90 per pay period [19]. Paying biweekly and covering 75% of the total premium, Wal-Mart incur an overhead of $66 per pay period per employee. Contrary to Bloomberg’s assumption that all 30000 part-time employees buy Wal-Mart health insurance, ADP Research Institute report showed that only 8% of total part-time workers (approx. 17000 of 210,000) actually bought the coverage in 2013 [20]. Hence under the conservative estimates Wal-Mart could save the annual insurance overhead of only about $29 million at current subscription rate. A meagre saving for a half trillion dollar company.

[Image Source: ADP Resource Institute; http://www.vox.com/2014/10/7/6939057/walmart-drops-insurance-good-news]

 Conclusion

Wal-Mart has openly stated its concerns about the rising healthcare costs and its recent action is no surprise. Obamacare mandates employer to provide a quality and affordable healthcare coverage to all full-time equivalent (FTE) employees. It also takes care of those left out of employer sponsored healthcare insurance. Looking at the opportunity to reduce cost, every firm including Wal-Mart, is now restructuring its workforce by cutting working hours of employees to reduce FTE workforce, as well as cutting benefits in compliance of the mandate. The change in its policies and benefit structure might save some costs for Wal-Mart, we believe it has done more good to the employees who could now avail government financial subsidy and a better more reliable healthcare program.

Reference

[1] Wal-Mart drops healthcare for some part-time employees http://www.wsj.com/articles/wal-mart-to-end-health-insurance-for-some-part-time-employees-1412694790
[2] Criticism of Wal-Mart http://en.wikipedia.org/wiki/Criticism_of_Walmart
[3] Obamacare Explained http://obamacarefacts.com/obamacare-explained/
[4] Wal-Mart supporter of Obamacare http://www.weeklystandard.com/blogs/walmart-obamacare-supporter-drops-coverage-another-30000-employees_810824.html
[5] Obamacare brings change in healthcare regulations http://www.vox.com/2014/10/7/6939057/walmart-drops-insurance-good-news
[6] Eligibility for Health Premium Subsidy http://www.zanebenefits.com/blog/bid/288577/ACA-Limits-Premium-Subsidies-For-Families-of-Covered-Employees
[7] Kaiser Family Foundation’s subsidy calculator
http://kff.org/interactive/subsidy-calculator/#state=&zip=&income-type=dollars&income=22000&employer-coverage=0&people=2&alternate-plan-family=individual&adult-count=1&adults%5B0%5D%5Bage%5D=36&adults%5B0%5D%5Btobacco%5D=0&child-count=2&child-tobacco=0
[8] Poverty Threshold http://www.irp.wisc.edu/faqs/faq1.htm#thresholds
[9] Wal-Mart Watch report – Wal-Mart healthcare is inadequate http://walmartwatch.com/wp-content/blogs.dir/2/files/pdf/medicaid_factsheet.pdf
[10] Medicaid covers ambulance service http://kff.org/medicaid/state-indicator/ambulance-services
[11] Medicaid covers preventive health service https://www.healthcare.gov/preventive-care-benefits/adults
[12] Medicaid covers include pre-existing conditions http://obamacarefacts.com/whatis-obamacare]
[13] Medicaid [http://en.wikipedia.org/wiki/Medicaid]
[14] Recent hike to Wal-Mart premium http://www.reuters.com/article/2012/11/12/walmart-healthcare-idUSL3E8MC18E20121112
[15] Wal-Mart Healthcare plan is cheaper than that under Medicaid http://www.washingtonexaminer.com/surprise-walmart-health-plan-is-cheaper-offers-more-coverage-than-obamacare/article/2541670
[16] Insurance coverage should be employer independent http://www.washingtonpost.com/blogs/plum-line/wp/2014/10/08/how-walmart-is-showing-that-obamacare-is-working/
[17] Wal-Mart will not disclose cost savings http://www.wsj.com/articles/wal-mart-to-end-health-insurance-for-some-part-time-employees-1412694790
[18] Bloomberg estimates Wal-Mart could save roughly $50 million in cost http://www.bloomberg.com/news/2014-10-07/wal-mart-will-cut-health-benefits-to-some-part-time-employees.html.
[19] Wal-Mart healthplan cost http://www.bloomberg.com/news/2014-10-08/wal-mart-health-cuts-reopen-debate-over-obamacare-costs-savings.html
[20] 8% of total part-time workers actually bought Wal-Mart coverage in 2013 – ADP Research Institute Report http://www.vox.com/2014/10/7/6939057/walmart-drops-insurance-good-news

The future of consumerism: Walmart is printing its way to success

By Julian Carrasco and Aristotle Solomon

In recent years, as Wal-Mart’s sales growth stagnates, one wonders whether it will continue to drive the future of consumerism as it has in the past. As Charles Fishman, the author of The Wal-Mart Effect stated, “in the future there is going to be a fundamental shift in the way products are manufactured, which will radically change consumption”. The emergence of 3D-printing can radically change the future of consumption, and it “presents both a threat and opportunity for Wal-Mart”[i]. However, it appears that Wal-Mart is poised to print its way to success in driving the future of consumerism.

What is 3D Printing?

“3D-printing manufactures three dimensional solid objects from a digital file. A digital file is created in a 3D modeling program for printing. When the file is uploaded in a 3D-printer, the printer creates the object layer by layer. The 3D-printer proceeds to create the object by blending each layer together, resulting in one final three dimensional object”[ii]. Advocates of 3D-printing believe that it will change consumerism, because consumers will be able to do their own manufacturing rather than purchasing products from retailers, such as Wal-Mart. From “auto parts, to vacuum accessories, shower heads, light switch plates, holiday ornaments, phone cases, fishing gear and housewares, there is a lot that can be 3D-printed and the technology is evolving fast”[iii].

Is it the End of Wal-Mart and Every Day Low Prices?

Many would like to think that 3D-printing will sound the death knell for Wal-Mart. However, 3D-printing appears to be quite an opportunity. As current Wal-Mart CEO Doug McMillan stated “3D printing is interesting to me”[iv]. By 2017, the 3D-printing market is expected to total ~$6B in revenues, with the consumer market accounting for ~$1.5B[v], and “Wal-Mart could sell them at a colossal scale”[vi]. This technology could enhance Wal-Mart’s online strategy while reducing manufacturing and shrinkage costs. All of which could add up significantly to Wal-Mart’s bottom line.

 What Does 3D-Printing Mean for Wal-Mart’s Business?

E-Commerce

3D-printing can increase Wal-Mart’s online business not only through 3D-printer sales (which Wal-Mart currently does), but also through services. A 3D-printing service would require a web-based system to manage uploads, products, sales, deliveries and tracking. While some products could be ordered through the store, other products can be ordered online. Wal-Mart already has the e-commerce infrastructure in place, where consumers can order items online and have them delivered to their homes or pick them up at its “Grab & Go” lockers. 3D printing services will further enhance the consumers’ omni-channel experience with Wal-Mart to better compete against the likes of Amazon. As apps and games continue to flourish, “Wal-Mart would have the opportunity to integrate its services. For example, the “Lets Create! Pottery” app from Infinite Dreams allows users to design a piece of pottery and submit the design for 3D-printing[vii]. The opportunities are endless, and partnerships between Wal-Mart and app developers are a win-win situation.

Manufacturing   

Although 3D-printing may not completely eliminate manufacturing, the list of products that can be manufactured digitally is growing. Wal-Mart can leverage 3D-printing to manufacture products digitally at the introduction and decline stages of the product lifecycle[viii]. When products are in the growth and maturity stages Wal-Mart has the option of either stocking cheap, mass-produced versions or even utilizing 3D-printing. Leveraging 3D-printing in this way will allow Wal-Mart to further strengthen its strategic advantages in logistics, distribution and inventory management. Sustainability can improve if Wal-Mart creates a recycling policy where consumers return products which can be converted and reused into raw material input for printing future items. As indicated in their “2014 Global Responsibility Report” Wal-Mart is committed to improving their sustainability index, and a 3D-printing recycling program would be looked upon favourably.

Shrinkage

In his book “Made in America”, Sam Walton stated that “Shrinkage, or unaccounted-for inventory loss—theft, in other words—is one of the biggest enemies of profitability in the retail business”. In 2007, Wal-Mart’s estimated shrinkage cost was in excess of $3B[ix]. By leveraging 3D-printing, a product would only be produced and printed when ordered. Therefore many of the causes of shrinkage (e.g. employee theft, shoplifting and vendor fraud) would be greatly reduced or eliminated entirely.

Do the Numbers Make Sense?

The 3D-printing market is forecasted to be ~$10.8B by 2020[x]. About 80% of 3D-printing is forecasted to be for consumer use[xi]. Taken together, the consumer market is expected to be ~$8.6B. Currently, Wal-Mart gets 8% of every dollar spent in the US[xii]. Applying 8% to the consumer 3D-printing market would result in ~$700M in sales, which contributes significantly to Wal-Mart’s topline. It is reasonable to assume that the effect of online sales, 3D-printing services and collaborations with app developers will further increase sales in excess of $700M.

Challenges

3D-printing is still in its infancy, and has yet to be considered a part of mainstream consumerism. However, Wal-Mart needs to act now to reap the benefits of first mover advantage as Amazon, Best Buy, Home Depot, Staples and Dell are also taking similar steps. 3D-printing will further exacerbate Wal-Mart’s handling of returned merchandise. It is difficult for a retailer to track whether a mass-produced product was sold by it or someone else. Therefore security features will need to be incorporated to allow unique identification of a product to its respective retailer.

The Path to the Future

Doug McMillon recently stated that acquiring a 3D company might be the best solution. “Wal-Mart would likely acquire a company that builds printers capable of producing end use auto, or home repair parts. Having such machines at Wal-Mart’s disposal could reduce the need for costly shipments and give consumers the ability to order parts and pick them up after they are completed”[xiii]. The fact that Doug McMillon envisions 3D-printing in Wal-Mart’s future is promising. It might be the key to Wal-Mart printing its way to success in the future of consumerism.

References:

[i] Womack, B. (2014). Wal-Mart CEO Says Retailer May Consider Buying 3-D Printer Maker. [online] Bloomberg. Available at: http://www.bloomberg.com/news/2014-05-28/wal-mart-ceo-says-retailer-may-consider-buying-3-d-printer-maker.html [Accessed 17 Jan. 2015].

[ii] 3D Printing, (2015). What is 3D printing? How does 3D printing work?. [online] Available at: http://3dprinting.com/what-is-3d-printing/ [Accessed 17 Jan. 2015].

[iii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[iv] Womack, B. (2014). Wal-Mart CEO Says Retailer May Consider Buying 3-D Printer Maker. [online] Bloomberg. Available at: http://www.bloomberg.com/news/2014-05-28/wal-mart-ceo-says-retailer-may-consider-buying-3-d-printer-maker.html [Accessed 20 Jan. 2015].

[v] Columbus, L. (2014). Roundup Of 3D Printing Market Forecasts And Estimates, 2014. [online] Forbes. Available at: http://www.forbes.com/sites/louiscolumbus/2014/08/09/roundup-of-3d-printing-market-forecasts-and-estimates-2014/ [Accessed 20 Jan. 2015].

[vi] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[vii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[viii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[ix] Archive.azcentral.com, (2015). Wal-Mart losing $3 billion a year from thefts. [online] Available at: http://archive.azcentral.com/business/consumer/articles/0613biz-walmarttheft13-ON.html [Accessed 22 Jan. 2015].

[x] Columbus, L. (2014). Roundup Of 3D Printing Market Forecasts And Estimates, 2014. [online] Forbes. Available at: http://www.forbes.com/sites/louiscolumbus/2014/08/09/roundup-of-3d-printing-market-forecasts-and-estimates-2014/ [Accessed 20 Jan. 2015].

[xi] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[xii] Quartz, (2015). Walmart could own the retail 3D-printing business by 2020. [online] Available at: http://qz.com/145366/walmart-could-own-the-retail-3d-printing-business-by-2020/ [Accessed 18 Jan. 2015].

[xiii] Engineering.com, (2015). Walmart CEO Says Retail Giant May Buy 3D Printer Company > ENGINEERING.com. [online] Available at: http://www.engineering.com/3DPrinting/3DPrintingArticles/ArticleID/7659/Walmart-CEO-Says-Retail-Giant-May-Buy-3D-Printer-Company.aspx [Accessed 22 Jan. 2015].

India – A Platform for Wal-Mart to Leapfrog from Stores to Online Shopping

By Nikhil Mittal and Hitendra Patel

October, 2014 marked the first anniversary of Wal-Mart’s exit from India. In 2013, when its joint venture with Indian conglomerate Bharti dissolved, Wal-Mart was left with only its 20 Best Price stores that operate in the Sam’s Club format^[i]. While Wal-Mart is waiting for the Indian government to relax the foreign direct investment (FDI) rules in conventional retailing, Amazon is planning to benefit from the current regulations in e-commerce segment^[ii]. The newly elected Indian government has chosen to delay the FDI related developments in the multi-brand retail sector^[iii]. In such a situation, should Wal-Mart wait for the government to accept its conventional retail business model, or be flexible and try to become part of the growth story? We argue that Wal-Mart should reinvent its business model and enter India as an online player to strengthen its presence in the eastern part of the globe.

Need to Reinvent the Model through New Markets
E-commerce is favourably seen as the creative destruction of the conventional retailing model. Various innovation theories have argued that when an industry faces profound changes (technological discontinuity), an entrant usually wins over the incumbent. With the meteoric rise of Amazon and Wal-Mart’s consequently flat or shrinking base in the USA, handcuffing itself with the conventional business model may turn out to be a fatal mistake in the long-term. Globalization provides Wal-Mart a unique opportunity to participate in the shifting paradigm (towards online) of retailing. The emerging markets, and especially India, present an opportunity for Wal-Mart to be in the entrant’s shoes again and use this discontinuity in the industry to reinvent its business model.

The Opportunity in India
It would be unreasonable to expect retail in a developing country to pass through the phases that it went through the United States around 30 to 40 years ago. While only 8% to 10%^[iv] of the Indian retail market is organized, the e-commerce companies are becoming popular in the cities of India. It suggests that the country is about to skip major investments in organized retailing, and switch directly from the mom and pop stores to the e-commerce platforms. These newly evolved e-commerce companies are pushing the new business model in India, and the market is gradually preparing for large scale activities. For example, Flipkart, the largest online retailer in India, has ~ 22 million registered users and recently raised $1 billion for its development^[v]. Moreover, Amazon has committed US $2 billion for its expansion into India. None of these were strong players less than 2-years ago, and it would take another 3 to 5 years before they figure out the local logistic and supply chain. According to a report by A.T.Kearney, India is one of the most attractive and time critical markets^[vi]. Essentially, time is of great essence here, and wait and watch might not prove to be a fruitful strategy.

Some may argue that a country like India is not yet ready for online retailing, and Amazon and others may have to wait another decade before they realize any profit. Note that, the initial signs of organized retailing in India have been reasonably promising. For example, a few Indian retailers such as Big Bazaar, EasyDay, Shopper Stop and Reliance Fresh have expanded in the hope of changing consumer preferences^[vii]. They have made an impact and been moderately successful in the urban markets. Above all, like any other business, online retailing will require initial investments and a loyal customer base that will build over time to be successful.

Readiness of Customers
Approximately 30% of the Indian population, or 400 million people, live in the urban areas. A similar number of people are part of the organized workforce, and approximately 50% of them have access to the internet. According to a study by PwC, the Indian e-commerce market is growing at approximately 20% to 30% annually^[viii]. With approximately 50% population, or 500 million people, below the age of 21, this growth is unlikely to slow in the near future^[ix]. Along with the current population mix, the increasing penetration of internet and mobile users augurs well for e-commerce activities. Recent statistics also suggest that Indians spend 33% of their disposable income through the online channel^[x].

Despite all the positive signals, the proponents of a stable market may not like to invest in an emerging market for its political instability and economic changes. The recent changes in Indian politics have made it challenging to predict upcoming regulations. Moreover, the inflationary environment poses additional risk to the discount retailing business. These reasons highlight the high risks and probability of failure. As a result, Wal-Mart should use a risk-adjusted approach to evaluate the return on long-term investment in developing countries. Such a decision metric would account for the poor infrastructure and supply-chain problems.

To conclude, by venturing into the online retail channel in India, Wal-Mart has access to a large market where customers are ready for the plunge. Meanwhile, Wal-Mart’s competitors are aggressively investing to understand consumer preference, build their supply chain and develop local expertise. Facing a potential disruption in the conventional retailing, Wal-Mart needs to reinvent its business model. With its large customer base and moderately strong IT infrastructure, India is an ideal market for the Wal-Mart online retailing experiment.

Sources
Chart source: MarketingCharts.com. http://www.marketingcharts.com/uncategorized/us-online-shoppers-spend-23-of-disposable-income-online-21905/
^[i] http://news.walmart.com/news-archive/2013/10/09/bharti-enterprises-walmart-stores-inc-announce-agreement-to-independently-own-operate-separate-business-formats-in-india
^[ii] http://www.foxnews.com/tech/2014/08/07/amazon-sees-potential-in-india-but-faces-big-challenges/
^[iii] http://www.thehindu.com/business/india-to-disallow-fdi-in-multibrand-retail-nirmala/article6391737.ece
^[iv] http://www.ficci.com/sector/33/Project_docs/Sector-prof.pdf
^[v]http://timesofindia.indiatimes.com/tech/tech-news/Flipkart-Amazon-build-3-billion-war-chest-nearly-the-size-of-Indian-online-retail-market/articleshow/39379711.cms, http://data.worldbank.org/indicator/SP.RUR.TOTL
^[vi] http://www.atkearney.com/consumer-products-retail/global-retail-development-index/past-report/-/asset_publisher/r888rybcQxoK/content/2012-global-retail-development-index/10192
^[vii] http://articles.economictimes.indiatimes.com/2013-10-08/news/42829309_1_big-bazaar-direct-kishore-biyani-future-group
^[viii] https://list2.pwc.fr/assets/files/lettre_retail-and-consumer/pwc_winning_in_india_retail_sector_1.pdf
^[ix] http://censusindia.gov.in/(S(u3psu355n3hque454wwdoqzv))/Census_And_You/age_structure_and_marital_status.aspx
^[x] http://www.marketingcharts.com/uncategorized/us-online-shoppers-spend-23-of-disposable-income-online-21905/

Is Walmart the Galactic Empire?

By Udayan Nair and Joseph Pun

In 2008, Walmart reintroduced its logo to include a bright yellow spark besides the Walmart name. Since then, many clever online critics of Walmart have likened the new logo to that of the Galactic Empire of Star Wars fame. For those not so familiar with Star Wars references, the Galactic Empire is commonly referred to as the “Evil Empire”, an oppressive regime that was toppled by the heroic Jedi in the Star Wars trilogy from the 80’s. You can judge the similarities yourself in the figure below [1].

Walmart has received a lot of negative press ranging from paying extremely low wages to its negative impact on communities and destruction of small businesses. On the surface, Walmart does bear some semblance to an “Evil Empire”, but we will see that Walmart’s scale and business practices positively impact millions of consumers around the world and bring much needed innovation to the retail industry. As the world’s largest retailer, Walmart clearly has the target on its back, and in all fairness their track record is certainly not spotless. However a vote against Walmart is a vote against Western capitalism and against innovation in retail.

Walmart’s critics constantly point out that despite tremendous profits and generous executive wages, the company continues to squeeze its suppliers and nickel and dime its employees. In 2013, Walmart pulled in a staggering $14B of net income [2]. In comparison, Apple netted $31B last year. So why is it that Walmart is hated whereas Apple is beloved? Both companies leverage suppliers that have grossly violated labor laws – Apple with Foxconn and Walmart with textile workers in Bangladesh. Apple is famous for its arrogance with its consumers whereas Walmart unfailingly listens to its customers and delivers exactly what they demand. Walmart understands customers better than their competitors do – stocking Plus-Sizes, which they call “Real Sizes for Real Girls” is one such example [3]. Walmart provides a tremendous assortment of food and goods that enable low and middle income families to save both money and time. Every Day Low Prices means that a family does not have to wait for a product to go on sale or force them to traipse to another store. Since Walmart is the largest discount retailer, critics have singled them out for providing stingy hourly wages. Although very similar to its direct competitors such as Target, Walmart alone is vilified for increasing poverty and putting more families on social assistance. For the more than 100 million consumers who save money by shopping at Walmart EVERY week [4], the benefits that are gained by low income consumers far outweigh the potential wage reduction suffered by Walmart hourly employees. Perhaps Steve Jobs was right – maybe consumers do not know what they want.

Urban legend has it that in the long and ominous shadows that Walmart’s superstores cast, one can hear the shuttering of general merchandise and grocers for miles away. While this is likely the case, who stands to benefit from this new reality? Let us first consider the wider implications of competitive dynamics in the retail industry. As in any free market, competition drives innovation. Like an engine of the economy working behind the scenes, Walmart drives change both in competitors and in the entire supply chain. A very basic assertion that critics levy on Walmart is that it is “bad” for the economy as industry profits are merely re-allocated from shuttered businesses and supplier margins to Walmart’s coffers. However Walmart operates with some of the lowest profit margins in the industry and directly passes those savings to consumers. At the same time, Walmart forces its suppliers to think outside the box to reduce inefficiencies and wastage in their processes. For instance, Walmart has been able to push suppliers of deodorant to drop the cardboard box, to have Scott Paper remove the cardboard tube out of toilet paper [5], and to have wine bottle makers like Oak Leaf remove the dimple at the bottom of each bottle saving 6,700 tons of glass a year [6]. Walmart has also helped suppliers like Levi’s innovate by providing access to real-time sales data and instilling discipline to keep the shelves stocked with jeans that consumers want. Through working with Walmart, Levi’s on-time deliveries went from 65% to 95%! [7] The sheer volume of Walmart’s orders enable suppliers to make significant productivity investments. The benefits are then shared across the industry, including with Walmart’s competitors.

Not only is Walmart accused of destroying local communities and wringing out supplier margins, but they are also unfairly blamed for proliferating that which Western civilization holds dear – consumerism! To be fair, Walmart consumes 8 cents out of every U.S. dollar spent [4]. Consumerism is inherently driven by advertising that encourages people’s wants and desires for products and brand names. Walmart just happens to be one of the lowest price conduits for these products to go from the factory floor into peoples’ homes. Walmart’s proposition to a consumer is if you really want that new TV, then buy it at Walmart as opposed to a Target or Sears. They are not in the business of advertising TV’s or brand names.

But what if Walmart got TOO big? Would that not be detrimental to consumers as Walmart would become the de-facto shopping experience? Walmart does indeed need its size to lower overall production costs and to press their suppliers for reform. However, citing this argument does not acknowledge the limitations of Walmart’s reach. Consumers of all classes need Walmart, but all consumers do not need to shop at Walmart. Walmart’s core segment is value conscious consumers who need that one-stop shop convenience. If you want comprehensive service on a sophisticated hi-fi set for your living room, Walmart is not going to be your preferred destination. We liken Walmart to the Ikea of the furniture industry – ubiquitous, but never the only game in town.

Rather than a Galactic Empire, Walmart is really more of a Galactic Republic – a representative democracy. Whether one turns into the other is really is up to the general public who will help shape Walmart’s future impact on the retail landscape. More so than any other company or even country, Walmart has the power to improve sustainability and even to elevate the capabilities of entire countries. The “force” is indeed strong with Walmart and with the media spotlight shining brightly on these issues, it should spur Walmart to affect positive change. Walmart does always listen to its customers.

Photo source: http://thegeeksrepository.wordpress.com/2013/01/04/walmart-the-evil-empire

References

[1] The Geek’s Repository, “WalMart: The Evil Empire”, [Online]. Available: http://thegeeksrepository.wordpress.com/2013/01/04/walmart-the-evil-empire. [Accessed 14 November 2014].
[2] Financial data retrieved from S&P Capital IQ. [Accessed 13 November 2014].
[3] Featherstone, Liza. (2005) Selling Women Short. New York, NY: Basic Books.
[4] Statistic Brain, “Wal-Mart Company Statistics”, [Online]. Available: http://www.statisticbrain.com/wal-mart-company-statistics. [Accessed 13 November 2014].
[5] Mail Online, “Roll with the times…”, [Online]. Available: http://www.dailymail.co.uk/news/article-2735424/Roll-times-U-S-company-takes-cardboard-OUT-toilet-paper-time-century-cut-waste.html. [Accessed 13 November 2014].
[6] GreenBiz, “3 ways Walmart and its suppliers are reducing packaging”, [Online]. Available: http://www.greenbiz.com/blog/2012/06/04/3-ways-walmart-and-its-suppliers-are-reducing-packaging. [Accessed 15 November 2014].
[7] CIO, “Supply Chain Partnerships: How Levi’s Got Its Jeans into Wal-Mart”, [Online]. Available: http://www.cio.com/article/2439956/supply-chain-management/supply-chain-partnerships–how-levi-s-got-its-jeans-into-wal-mart.html. [Accessed 20 September 2014].

Cutting Benefits for its Part-time Workers Could Prove to be a Pyrrhic Victory for Wal-Mart

by Amy Cao, Pavan Kulkarni and Christy Xu

Nancy’s Story

In October 2014, Walmart decided to cut health benefits for most of its part-time employees and raise premiums for its full-time workers to counter the rising cost of benefits. Nancy Reynolds, a sixty seven year old woman who works part-time has struggled to balance doctors visits with associate duties over the last six years. She is now worried about her ability to afford diabetes and arthritis treatment. Nancy states, “I depend on the Wal-Mart’s health care. I’m not sure what I’m going to do” (Corey, 2014). Given Wal-Mart’s 2011 decision to cut benefits for employees working under 24 hours per week, Wal-Mart’s recent action affects part-time employees who work between 24 hours to 30 hours. Now, only part-time employees working 30 to 34 hours are covered. The move to remove benefits for Wal-Mart’s part-time employees is a fruitless effort at decreasing operating expenses while negatively affecting 30,000 others in precarious situations similar to Nancy’s.

Wal-Mart Employees Count on Benefits to Supplement Low Wages

Recent Current Population Surveys indicate that there has been an increase in the percentage of Americans involuntarily working part-time. This is an effect of the Affordable Care Act; businesses are trying to avoid penalties for not providing healthcare coverage to its full-time employees by pivoting towards a higher proportion of part-time workers. However, healthcare coverage is the benefit that provides highest utility to employees (Exhibit 1, Chambers, 2006). Part-time employees will now have to rely on insurance exchanges and government subsidies, thus struggling to afford expensive future coverage.

Although Wal-Mart is among the last of its peers (such as Target) to cut health insurance benefit for its part-time employees, the action will likely have more negative impact on Wal-Mart workers compared to the employees of its peers, because the wages offered to part-time employees at Walmart is approximately 12% less (Payscale, n.d.).

Exhibit 1 – Associate-Ranked Satisfaction and Importance Varies by Benefit (Chambers, 2006)

Part-time Employees Need Benefits more than Full-Time Employees

According to a Reuter’s report, Wal-Mart has been adopting a hiring policy to add more temporary workers while cutting the hours for all existing employees (Wohl, 2013). This policy negatively affects its existing part-time workers’ opportunity to be converted to a full-time position, which provides better income and benefit, because their hours are intentionally capped.

The part-time employees are often the ones who benefit most from the coverage because they don’t work enough hours to cover their expenses (in comparison to full-time employees). As Exhibit 2 shows (in 2006 dollars), on average, a part-time worker’s wage was $8.23. This is $0.19 lower than that of a full-time position. Assuming that on average, a full-time employee works 40 hours a week, 52 weeks a year, their annual income would be $17,514. A part-time worker who works 27 hours a week (the median between 24 and 30 hours) would only earn an annual income of $11,555. The almost $6000 gap makes the health insurance coverage more indispensable to the affected workers. Additionally, among those who worked in the labour force for more than 27 weeks, 14.4% of part-time workers were classified as working poor compared to 4.2% of full-time workers (BLS Reports, 2013).

Exhibit 2 – Comparison of Wages for Wal-Mart PT and FT Workers (2006) (Arindrajit Dube, 2007)

Part-time workers’ average wage = (137,189 * $7.69 + 99,382 * $8.98)/ (137,189 + 99,382) = $8.23
Full-time workers’ average wage = (238,872 * $7.68 + 294,223 * $9.02)/ (238,872 + 294,223) = $8.42

 Adverse Selection Results in a Costlier Full-Time Employee Pool in the Long Run

As Wal-Mart’s senior vice president, Greenhouse, argued, long-term employees are more expensive and not necessarily more productive and as such, a high turnover rate is targeted. While this may be true, high turnover rates are more a band-aid to the problem rather than a solution. It would be better to ask why Wal-Mart’s long-term employees are, on average, more expensive and less productive than its short-term, high turnover employees.

The answer may lie in Wal-Mart’s part-time and full-time benefits package. Research indicates that the least healthy and least productive employees are most likely to be satisfied with the benefits provided and therefore tend to plan longer careers at Wal-Mart. The effects of adverse selection can be observed because a high percentage of the turnover rate consists of healthier and more productive employees leaving due to dissatisfaction of benefits and less healthy and productive employees staying.

Noting that 24 to 30 hours translates to 71% to 88% of full-time working hours (Sherman, 2014). The part-time population is likely to include workers who want to convert to a full-time position. Walmart should provide benefits to part-time workers and align the package plan with that of its most valuable part-time and full-time associates such that these associates are more incentivized to plan longer careers at Wal-Mart. The result would be a group of full-time associates who are, on average, healthier and more productive.
 
Conclusion

While it is the case that moving to a consumer driven insurance exchange is more efficient in the long run, particularly when competitors have already made the move, a more prudent approach may be to move towards the same goal in a more staggered fashion. In the meantime, Wal-Mart should cater to its most valuable employees. As such, Wal-Mart’s newest strategy to lower costs negatively affects the employees to whom benefits are most essential and necessary. This decision is futile and will result in increased costs to wages resulting in little long run impact to the decrease in operating costs.

Works cited

Arindrajit Dube, D. G.-S. (2007, December). Living Wage Policies and Wal-Mart: How a higher wage standard would impact Wal-Mart workers and shoppers. Retrieved from laborcenter.berkeley.edu: http://laborcenter.berkeley.edu/retail/walmart_livingwage_policies07.pdf

(2013). BLS Reports. US Bureau of Labor Statistics.

Chambers, S. (2006). Reviewing and Revising Wal-Mart’s. http://www.nytimes.com/packages/pdf/business/26walmart.pdf: Walmart Memo.

Corey, E. (2014, July 30). How the ‘Schedules That Work’ Act Could Change the Lives of Millions of Workers. Retrieved from inthesetimes.com: http://inthesetimes.com/working/entry/17016/schedules_that_work_act

PayScale. (n.d.). Retrieved from payscale.com: http://www.payscale.com/

Sherman, E. (2014, October 09). Walmart Health Insurance Could Leave A Really Sick Worker Broke. Retrieved from forbes.com: http://www.forbes.com/sites/eriksherman/2014/10/09/walmart-health-insurance-could-leave-a-really-sick-worker-broke/

Traub, A. (2014, June 2). Retail’s Choice: How raising wages and improving schedules for women would benefit America. demos.org. Retrieved from http://www.demos.org/publication/retails-choice-how-raising-wages-and-improving-schedules-women-retail-industry-would-ben

Wohl, D. S. (2013, June 13). Wal-Mart’s everyday hiring strategy: Add new temps. Retrieved from reuters.com: http://www.reuters.com/article/2013/06/13/us-walmart-hires-temps-idUSBRE95C05820130613

Don’t Let This Black Friday be Your Last Friday

By Laurent Haccoun, Trishna Mahtani, and Kimberly Mac Tavish

This Thanksgiving, ask yourself before heading straight from the dinner table to the Black Friday deals how much the discounts are truly worth? Would you be willing to stake your life on a 40% savings for a big screen TV? Black Friday shopping has led to many deaths and injuries including a 2008 tragedy that involved a part-time worker who was trampled to death by a mob of customers at a Long Island Wal-Mart. Wal-Mart embraces the notion of consumerism being a competitive sport. Consumers are encouraged to emulate the buying behaviors of those who have more than them through Wal-Mart selection of product offerings, its pricing strategies and the design layout of its stores.

Wal-Mart literally creates demand by promoting products that customers don’t need and didn’t know about prior to entering the store. For example, in 1998 Wal-Mart began to sell a gallon of Vlasic’s jar of pickles for $2.97 [1]. In this case, customers were not able to eat all the pickles before the mold set in, and would end up throwing most of them out [2]. Wal-Mart has gotten its customers to buy more from it through its expansion of fresh product offerings which everyone needs. However, these items are not high margin. Therefore, Wal-Mart needs its customers to buy what they don’t need: jellybean flavored milk, pickle flavored popsicles, and apple pie flavored juice. Other must-have items include a bacon-scented pillow, an alligator toilet paper holder and decorative gangsta gnomes [3]. Wal-Mart plays on the psychological needs of consumers and promotes the idea that that the more you have, the more you are worth [4]. Even President Carter warned us of this impending danger: Consumers act to fulfill a psychological need. The more you buy, the happier you will be. But this happiness that consumption buys is only temporary. So in order to continue to feel happy, consumers need to continue to buy from Wal-Mart. Score: Wal-Mart 1. Consumer 0.

Wal-Mart’s aggressive pricing allows consumers to save on individual items; however, the prices are so low that spontaneous consumption is seemingly inevitable (i.e. “I didn’t know I wanted this, but now I MUST have it!”) and the savings are just plowed back into more items for budget-busting baskets. In fact, Wal-Mart has made shopping a guiltless pleasure for customers knowing that the ‘Every Day Low Prices’ in conjunction with the Wal-mart ‘Saving Catcher’ (an app comparing Wal-Mart prices against any local ad which reimburses customers for any difference) will spare them from any excess spending. Guilt, be gone! “Shopping at Wal-Mart means paying less for something than you otherwise have to. You can buy exactly the same product and spend less and you know it…..Wal-Mart feels good. You can feel proud of yourself. Shopping at Wal-Mart is, quite literally, a virtue.” [5]. In fact, it is such a virtue that despite a 2012 consumer report survey ranking it amongst the least favorite grocers, Wal-Mart was actually the number one grocer at the time [6,7]. Oh, the sacrifices we make! Meantime, the Wal-Mart mobile app letting customers know of nearby Wal-Marts and the local deals actually increased spending by 40% [8]. Ultimately it is clear that Wal-Mart will take any excuse to discount further to stimulate more and more shopping. “It used to be called Black Friday, then it became Thursday, now it’s a week long,” says Wal-Mart US Chief merchant Duncan MacNaughton. “Maybe we should just call it November” [9].

Like all savvy merchandisers, Wal-Mart uses all the tricks to make sure it exposes the greatest number of products to the greatest number of customers with the ultimate prize of getting as many as possible to the back of the store. From reflective surfaces which slow customers down to mid-aisle breaks designed to counteract the ‘boomerang’ effect of a customer turning back half-way down an aisle after they have pick up an item – these are all tactics to guide the customer through more and more of the store [10]. It’s no mistake that the dairy cases are against the back wall; this logistical coup is designed to have hurried shoppers pass by the cereal aisle, the coffee aisle, etc. Wal-Mart have been especially skilled at perfecting what is called ‘action alley – prime selling space where they can use large displays or pallets to reduce restocking costs and highlight that week’s deals [11]. But for some directionally-challenged shoppers, this bigger and bigger philosophy has led to challenges (and Wal-Mart’s worst nightmare!) – they can’t find the products they are looking for, resulting in about 20% of lost retail sales. Fortunately, in today’s technology driven world there’s an app for that too. Wal-Mart’s indoor navigation app lets customers locate a product and aisle [12]. What a great way to make sure the must-have items and associated savings are not lost on us in the immensity of the supercenter [13]. In the first two weeks following the app launch, it saw 15% of page views from in-store customers. In the end, Wal-Mart will make sure that not only do you find the item you are looking for, but that you leave with a few extras as well.

Many critics of this perspective, including Wal-Mart founder Sam Walton, would argue that Wal-Mart’s low prices translate directly into savings for the customer [14]. For a typical family of four, on average this amounts to an annual savings of $900 on groceries alone. However, since the average family in fact only saves about 1% of its income (about $500 per year), the $900 Wal-Mart grocery savings do not translate into actual savings [15]. It’s more likely that the difference in these savings goes right back into Wal-Mart as customers fall prey to the many techniques designed to have them spend more.

So, as we come upon another “Black Friday” shopping frenzy, which Wal-Mart has evolved into “Black Week”, consumers have to ask themselves what they really need and get their resolve ready. Because as we’ve seen, just your average resolve is no match for the tricks that Wal-Mart has up its sleeve.

Photo sources: http://centsibletreasures.biz/?p=502; https://storify.com/qma4/walmart-store-layouts

References

[1] Charles Fishman, The Wal-Mart Effect – How the World’s Most Powerful Company Really Works – and How It’s Transforming the American Economy, Penguin Books: 2011, 80.
[2] Charles Fishman, The Wal-Mart Effect – How the World’s Most Powerful Company Really Works – and How It’s Transforming the American Economy, Penguin Books: 2011, 81.
[3] Brian Galindo, “31 Products You Won’t Believe You Can Actually Buy At Walmart,” Buzzfeed.com, 30 June, 2014.   http://www.buzzfeed.com/briangalindo/oh-walmart-never-stop (Accessed November 12, 2014)
[4] Juliet Schor, “The New Politics of Consumption – Why Americans want so much more than they need,” BostonReview.net, Summer 1999. http://new.bostonreview.net/BR24.3/schor.html (Accessed November 12, 2014)
[5] Charles Fishman, The Wal-Mart Effect – How the World’s Most Powerful Company Really Works – and How It’s Transforming the American Economy, Penguin Books: 2011, 218.
[6] Allison Linn, “We love Whole Foods but shop at Wal-Mart,” Today.com, 4 April, 2012   http://www.today.com/money/we-love-whole-foods-shop-wal-mart-649289 (Accessed November 13, 2014)
[7] Allison Linn, “Best and worst supermarkets — shoppers tell all,” Today.com, 3 April, 2012   http://www.today.com/money/best-worst-supermarkets-shoppers-tell-all-636185?franchiseSlug=todaymoneymain (Accessed November 13, 2014)
[8] Lauren Johnson, “Walmart app users spend 40pc more than average shopper,” Mobilecommercedaily.com, 26 September 2013. http://www.mobilecommercedaily.com/walmart-app-users-spend-40-percent-more-than-average-shopper (Accessed November 13, 2014)
[9] Yoel Minkoff, “Wal-Mart announces ‘Black Week’,” Seekingalpha.com, 12 November 2014. http://seekingalpha.com/news/2117425-wal-mart-announces-black-week (Accessed November 13, 2014)
[10] Paco Underhill, “Shoppers Move Like People,” Why We Buy- The Science of Shopping, Simon & Schuster Paperbacks, pages 78, 84.
[11] Charles Fishman, The Wal-Mart Effect – How the World’s Most Powerful Company Really Works – and How It’s Transforming the American Economy, Penguin Books: 2011, 67.
[12] Roger Yu, “Retailers introduce indoor navigation in apps,” usatoday.com. 28 August, 2012. http://usatoday30.usatoday.com/tech/news/story/2012-08-27/big-retailer-mobile-apps/57381210/1 (Accessed November 13, 2014)
[13] Walmart.com. http://www.walmart.com/cp/Walmart-Mobile-App/1087865 (Accessed November 13, 2014)
[14] Sam Walton with John Huey, Sam Walton Made in America, My Story, Bantam Books: 1993, 12-13.
[15] Charles Fishman, The Wal-Mart Effect – How the World’s Most Powerful Company Really Works – and How It’s Transforming the American Economy, Penguin Books: 2011, 200-205.

Improving Wal-Mart’s Bottom Line by Reducing Customers’ Waistlines

By Erin Marcotte, Dejan Knezevic and Dimitrije Jankovic

Recent research findings out of Memorial University indicate that Canada’s obesity rate has tripled in the past 30 years [1]. This is a worrisome trend with far-reaching health implications, but it also has important implications for the grocery industry. It is commonly understood that a healthy diet is an essential part of obesity prevention. With Wal-Mart being the largest grocery retailer in North America [2], the company is uniquely positioned to help make a healthy diet accessible to more people. While Wal-Mart’s website does pay lip service to commitments of providing healthier food options, these commitments have not translated into real changes in terms of the in-store buying experience. In fact, research out of University of North Carolina [3] claims that “the proliferation of Wal-Mart Supercenters explains 10.5% of the rise in obesity since the late 1980s.”

In addition to the health-related benefits to shoppers, an increased focus on marketing health food products would also likely create a large financial benefit for Wal-Mart. The primary reasons for this are that the current health food trend will increase sales of related products, private-label health food items can increase margins, and the health benefits resulting from Wal-Mart’s employees (who are often Wal-Mart shoppers) being healthier will decrease Wal-Mart’s health insurance expenditures.

Health Food Trend

Juxtaposed with the trend of increasing obesity is the rise of the health food industry. The greater interest in health food is so prevailing that it is described as a “secular shift” [4] rather than a “trend”. Over the past few years, the number of listings for “better for you” products has more than doubled, and grocery categories related to health and diet continue to see large growth [5]. The idea of “food as medicine” is also gaining traction [6]. As such, North America’s large (and growing) aging population is expected to increasingly seek foods with health benefits, as the reliance on food to improve health is strengthening [6]. Wal-Mart can capitalize on this trend to increase sales at the same time as they help decrease customers’ waistlines.

High-margin Health Food Products

Following the health food trend by carrying and marketing related grocery products will likely increase customers’ basket size. But to further capitalize on this trend, Wal-Mart should also focus on healthy private label products*. Private label products have an approximately 10% higher margin than branded products [7], provided that the retailer can achieve sufficient economies of scale. Wal-Mart has proven that it is able to achieve this with the success of its existing private labels, Great Value and Our Finest. An additional health-focused private label would be analogous to Loblaw’s President’s Choice Blue Menu. The private label market has seen large growth in recent years [6] and the US market is set to double in 5-6 years [8]. Furthermore, private labels can increase customer loyalty [8]. Because of all of these factors, if Wal-Mart can ensure that it has private label products that meet the need of the growing health-food market, the financial benefit from an increased focus on health food sales could be even greater.

Employee Health

Sales of health food products are not the only way that Wal-Mart could benefit from getting on board with the health food trend. We know that many Wal-Mart associates are also Wal-Mart customers, and that a large percentage belongs to the low-income female demographic. As such, they are susceptible to the factors driving obesity. A 2011 report on obesity by the Canadian Institute for Health Information shows a strong link between socio-economic status and diet with obesity rates [9]. In fact, these are the second and third largest contributing factors to obesity after physical activity. Furthermore, the low-income factor is far more prevalent in females [9].

High obesity rates among Wal-Mart associates could cost the company money for several reasons. Firstly, there are several serious health conditions directly associated with obesity (e.g. type 2 diabetes, types of cancer, and cardiovascular disease) [5] that have a direct economic effect in terms of insurance claims for needs such as hospital care or pharmaceuticals. There are also indirect economic effects of obesity such as lost productivity. To give a sense of the magnitude of the issue, the overall economic impacts of obesity in Canada are projected to around $7 billion and are steadily rising [9].

The leaked 2006 “Supplemental Benefits Documentation” memorandum from Wal-Mart’s Executive VP Susan Chambers highlights the growing healthcare benefit cost as one of the key challenges faced by the company [10]. While the McKinsey-produced recommendation focuses primarily on curtailing the costs through ethically-questionable human capital practices, a renewed focus on healthy eating has the potential to create a positive effect on Wal-Mart’s healthcare spending, its reputation, and its employees/customer’s well-being.

Killing the Golden Goose?

Because Wal-Mart is not currently recognized as a go-to venue for health food or related products, some might argue that a focus on health food would not jibe with the perception and positioning of Wal-Mart as a low-cost retailer. In response to this, however, Wal-Mart would not be changing its target demographic, but would rather be seeking to change the current demographics’ eating habits and cater to a widespread shift in grocery purchasing behaviour. Wal-Mart’s ability to cater to the demographic most at risk of obesity makes it the right company to target this problem. Wal-Mart reaches the largest volume of consumers who need affordable health food the most, and they would be rewarded financially for acting on this.

* Although Wal-Mart’s website indicates that they use a “Great for you” seal on qualifying private label products to indicate healthier options, we saw no such seals upon multiple visits to local Wal-Mart stores.

Chart source: Public Health Agency of Canada, “Obesity in Canada, A Joint Report From the Public Health Agency of Canada and the Canadian Institute for Health Information,” 2011.
[1] CBC/Radio-Canada, “Canada’s obesity rates triple in less than 30 years,” 4 March 2014. [Online]. Available: http://www.cbc.ca/news/health/canada-s-obesity-rates-triple-in-less-than-30-years-1.2558365.
[2] M. Lepore, “Here’s How Walmart Became The #1 Grocery Store In The Country,” 11 February 2011. [Online]. Available: http://www.businessinsider.com/walmart-biggest-supermarket-2011-2?op=1.
[3] C. Courtemanche and A. Carden, “Supersizing Supercenters? The Impact of Wal-Mart Supercenters on Body Mass Index and Obesity,” 10 September 2010. [Online]. Available: SSRN: http://ssrn.com/abstract=1263316 or http://dx.doi.org/10.2139/ssrn.1263316.
[4] S. Krashinsky, “Healthy food trend sees McDonald’s, Coca-Cola’s profits slim down,” 21 October 2014. [Online]. Available: http://www.theglobeandmail.com/report-on-business/healthy-food-trend-sees-mcdonalds-coco-colas-profits-slim-down/article21209076/.
[5] Serecon Management Consulting Inc., “Canadian Food Trends to 2020, A Long Range Consumer Outlook,” July 2005. [Online]. Available: http://www.stayactiveeathealthy.ca/files/Canadian_Food_Trends_2020_0.pdf.
[6] Agriculture and Agri-Food Canada, “Health and Welness Trends, U.S. Market,” May 2010. [Online]. Available: http://www.gov.mb.ca/agriculture/market-prices-and-statistics/trade-statistics/pubs/us_health_wellness_en.pdf.
[7] Tuck Communications, “Private-Label Products in the Manufacturer-Retailer Power Balance,” 19 August 2010. [Online]. Available: http://www.tuck.dartmouth.edu/newsroom/articles/private-label-products-in-the-manufacturer-retailer-power-balance.
[8] E. Watson, “US private label market could double in five to six years, predicts PLM boss,” 13 September 2012. [Online]. Available: http://www.foodnavigator-usa.com/Markets/US-private-label-market-could-double-in-five-to-six-years-predicts-PLM-boss.
[9] Public Health Agency of Canada, “Obesity in Canada, A Joint Report From the Public Health Agency of Canada and the Canadian Institute for Health Information,” 2011.
[10] “Supplemental Benefits Documentation” Board of Directors Retreat, FY06, Wal-Mart Stores, Inc. internal document, http://www.nytimes.com/packages/pdf/business/26walmart.pdf

Is Walmart Improving Working Conditions Today for Jobs It Will Destroy Tomorrow?

By Ian Cummins, Ron French and Soumik Sen

Following the April 2013 garment factory disaster in Bangladesh that killed over 1,200 workers, the International Labor Organization (ILO) brokered an Accord on Fire and Building Safety that has been signed by over 170 international retailers and brands, as well as prominent trade unions [i]. The Agreement will implement reasonable health and safety measures in the ready-made garment industry, monitored by independent inspectors, over a five-year period.

The signature of one retailer was conspicuously absent from this ambitious agreement: Walmart. The retail giant has also refused to contribute to an ILO compensation fund created to help the victims of the tragedy [ii]. Instead, the retail giant announced in 2013 that it was joining the Alliance for Bangladesh Worker Safety, along with 25 other North American retailers [iii].

Despite its stated commitment to ethical sourcing, Walmart’s refusal to join a multilateral initiative with government and not-for-profit partners speaks volumes about the company’s lack of commitment towards the communities where it sources goods. The ILO Accord was intended to affirm that retailers, suppliers, governments, trade unions and civil society groups have a joint obligation to create safe working conditions for all garment workers. By opting instead for a business-led initiative, Walmart has signaled that it views itself as being accountable only to its shareholders and consumers.

Underlying these decisions is Walmart’s desire to preserve its ability to source goods at the lowest cost possible and to provide consumers with Everyday Low Prices (EDLP). While the company has committed to ensuring its suppliers in Bangladesh meet basic safety conditions, it has made no commitments to a long-term sourcing relationship with the country’s garment industry. If efforts to improve working conditions increase costs for suppliers, Walmart’s history of prioritizing cost suggests the company would simply shift production to the next low cost destination.

Indeed, the growth of Bangladesh’s large garment industry has been fuelled by the increased costs of producing goods in Southern China, which has been partly driven by worker demands for higher salaries and better working conditions [iv]. A 2013 survey of Chief Purchasing Officers (CPOs) for 29 apparel retailers revealed that 77% were planning to reduce their share of goods sourced from China [v]. The CPOs cited rising labour expenses as the main driver of their increased sourcing costs, particularly in China where labour costs are estimated to be growing roughly 20% per year [vi].

Granted, this survey also reveals that Walmart is not alone in basing its sourcing decisions primarily on cost. However, given its size, scale and powerful leverage over suppliers, Walmart has a unique capacity to play a leadership role with respect to ethical sourcing, a reality acknowledged by CEO Doug McMillon in the company’s most recent Global Sustainability Reportvii. Walmart could use its supplier leverage to help bring about meaningful improvements for Bangladeshi workers simply by committing not to exit the country as it is taking concrete steps to strengthen working conditions. Sadly, by not signing the ILO Accord, the company has sent its suppliers and workers a clear signal that it is not willing to make any direct commitments to Bangladeshi governments, labour unions or civil groups.

There may be consequences for Bangladeshi workers sooner rather than later. Following the garment factory tragedy, the Bangladeshi government took steps to raise the monthly minimum wage for garment workers by 77% (approximately $68) [viii]. This type of policy change should be welcomed as it creates a level playing field for workers, suppliers and retailers without seriously affecting the country’s low cost advantage relative to other middle to high-income countries. However, this type of change will more likely push Walmart to begin its search for the next low-cost destination for sourcing goods. Indeed, there are signals this process may already be underway.

In 2012, Walmart increased its presence in Africa through the acquisition of South African retailer Massmart [ix]. The company’s expansion plans for the continent include countries that offer significantly worse legal protections for workers than either China or Bangladesh. For example, Nigeria, cited by Walmart as a “priority market”, has been rated by the International Trade Union Confederation as one of the world’s worst places for workers [x][xi]. The country also scores among the worst countries in the world on indexes measuring democracy, human rights protection and corruption [xii]. While it remains to be seen whether sub-Saharan African countries will ever replace Bangladesh or China as global sourcing destinations, the simple fact that Walmart has prioritized growth in a country like Nigeria where there is a risk of even greater abuses demonstrates that ethical sourcing considerations remain marginal when the company is making business decisions.

The signatures of over 170 retailers and brands on the ILO Accord suggest there are companies that disagree with Walmart’s approach. These companies may be betting that building longer term partnerships with suppliers, governments, trade unions and civil society groups in order to collectively improve working conditions will pay dividends by increasing productivity, building a loyal customer bases in emerging markets and reducing the risk of future tragedies that have given discount retailers such a bad image. Given Walmart International’s poor performance recently, it might be time for the company to reconsider its approach [xiii].

i Accord on Fire and Building Safety in Bangladesh. http://bangladeshaccord.org/ (Accessed October 31, 2014).
ii “U.S. Retailers Decline to Aid Factory Victims in Bangladesh.” New York Times. Nov 22, 2103. http://www.nytimes.com/2013/11/23/business/international/us-retailers-decline-to-aid-factory-victims-in- bangladesh.html?pagewanted=all&_r=0
iii Alliance for Bangladesh Worker Safety. http://www.bangladeshworkersafety.org/. (Accessed October 31, 2014).
iv “Exporters Leave China But Find Rising Costs Elsewhere.” Bloomberg Businessweek. January 9, 2014. http://www.businessweek.com/articles/2014-01-09/exporters-leave-china-but-find-rising-costs-elsewhere
v McKinsey and Company. “The Global Sourcing Map – Balancing Cost, Compliance and Capacity.” October 2013. Pg 3
vi Ibid. Pgs 2-3.
vii Walmart. 2014 Global Responsibility Report. Pg 3.
viii “Bangladesh Raises Minimum Wage for Garment Workers After Unrest.” Bloomberg. November 14, 2013. http://www.bloomberg.com/news/2013-11-13/bangladesh-garment-factories-to-stay-shut-amid-worker- protests.html .
ix Walmart acquired a majority stake in Massmart Holdings Ltd. in 2011. Massmart operates more than 350 stores in South Africa and 11 other sub-Saharan countries. See: http://corporate.walmart.com/our-story/our- business/international/africa.
x As a condition for approving the acquisition, the South African government required Walmart to contribute to a fund to help local suppliers adjust to Walmart’s new sourcing requirements. The court that approved the acquisition lowered the amount of the fund, arguing that integrating local African suppliers into Walmart’s supply chain was a more critical policy objective. See: “Walmart-Massmart Commercializes the Local Supply Chain.” Consultancy Africa Intelligence. http://www.consultancyafrica.com/index.php?option=com_content&view=article&id=1244:walmart- massmart-commercialises-the-local-supply-chain-a-step-in-the-right-direction-&catid=82:african-industry-a- business&Itemid=266.
xi International Trade Union Confederation. “2014 ITUC Global Rights Index: The World’s Worst Countries for Workers.” http://www.ituc-csi.org/IMG/pdf/survey_ra_2014_eng_v2.pdf. Pgs 38-39
xii International Human Rights Rank Indicator. http://www.ihrri.com/index.php?iso=NG
xiii “Why Walmart is Failing in Emerging Markets.” The Motley Fool. http://www.fool.com/investing/general/2014/04/28/why-is-wal-mart-failing-in-emerging-markets.aspx.

Photo Credit: James Strock, Serve to Lead.

Wal-Mart’s commitment to American jobs: A Pebble or a Rock?

By Tanner Erickson, Isac Lima and Steven Zhao

People will remember the 2010s as the decade when the middle class collapsed. The zeitgeist is perfectly captured by the frustration and criticism towards mega corporations that have relocated their manufacturing elsewhere. To gain public favor, Wal-Mart has announced in 2013 of its commitment to “American renewal”, publicly   stating their support to creating more American jobs through domestic manufacturing [1], [2]. With what seemed like an immaterial effort against a major economic tide, the past year has proven that economic shifts, efforts of the government, and actions taken by Wal-Mart have been able to sway jobs back inland. A recent example of Kent International, Inc. shows us that success is very possible when all three of these forces unite.

The tides are turning in the manufacturing world: With rising costs in China, many manufacturers are looking to find new supply sources. Though China used to be a haven for low-cost manufacturing, alarm bells have been ringing for quite some time in the offices of North American companies reliant on their cheap manufactured goods. In the past 3-5 years the Chinese government has realized the vulnerability of its economy due to its dependence on the overseas market demand and the poor health of its working population. As a result, it has raised minimum wages and reduced its currency manipulation practices [3]. The consequence for companies that rely on China has been massive – with rising real estate and energy costs, and labor costs rising by over 20% per year, overall manufacturing costs have skyrocketed [4].

A prime example of a North American manufacturer that has been impacted by these trends is Kent International Inc., a company based in New Jersey. Since 1958 Kent has been producing bicycles, but eventually it started purchasing them fully-assembled from China to save costs. However, with their supplier now paying $600-800 per worker per month, compared to the $30-40 they paid in 1987, the passed-on costs have driven Kent’s bicycle business to the brink of bankruptcy [5]. Like other firms in similar circumstances, they were hesitant to build a manufacturing facility back in the United States due to large capital requirements and risk of insufficient demand. Luckily for Kent, the efforts of the domestic government and Wal-Mart have contributed towards a successful reentry into the U.S.

At the State level, the U.S. Government has been extremely responsive to American companies seeking to relocate their manufacturing domestically with a number of States wooing manufacturers with tax breaks, subsidies, and other incentives. For example, General Electric, Airbus, and Hyundai have all received state subsidies to either relocate or expand their domestic operations [6]. Kent was similarly courted by South Carolina ultimately with a deal to get a natural gas line extended to the proposed plant site [5]. With an uncertain demand for their product however, Kent still held reservations with building a new factory. In the words of Arnold Kamler, Kent’s CEO, “The biggest problem a new factory has is not having any orders” [5]. Solving the issue once and for all, Wal-Mart stepped in to seal the deal.

Giant retailers like Wal-Mart are able to remove the risks that the small to mid-sized companies have with their expected demand through stabilizing both volumes and prices. Without such stabilization, many of these companies are doomed. Four years ago crib maker Stanley Furniture Co. made a gamble by moving its production from China to North Carolina. However, unexpected cost increases specific to North America, unexpected variations in demand, and unwillingness of their customers to pay a premium, left them with no other option but to shut down their plant and lay off its workers [7]. For Kent, Wal-Mart served as its saving grace. With a 6-month supply contract with Wal-Mart, Kent has been able to invest in a $4.5 million plant over the next three years. This plant will provide jobs for 175 workers who will churn out roughly 500,000 bikers per year [4], all in thanks to Wal-Mart’s 2013 commitment to “American Renewal”. The renewal program, aimed at creating more domestic jobs through supporting American manufacturing, came with a commitment to buy an additional $50 billion in U.S. products over the next 10 years (on top of the $200 billion that it already spends) and re-shore the manufacturing of goods they currently buy. Kent is not the only recipient of Wal-Mart’s efforts, as over the past year they have been making significant moves to support their goal. Wal-Mart committed to purchase light bulbs from General Electric that are exclusively made in the U.S. (creating 150 domestic jobs), enabled Element Electronics Corp. to open a new TV assembly facility in South Carolina (500 jobs), and committed to source from Elan-Polo’s new footwear plant in Georgia (250 jobs), to name a few [7].

There are some caveats to the trinity of forces, of course. Reshoring production to the U.S. may be hampered by other low-cost alternatives such as Cambodia or Vietnam, however those countries face the same challenges with skills and productivity, and upward trends for worker wages [8] . Finding enough skilled labour may also be a challenge given the long drought of manufacturing in the U.S. and especially if the desired skills are highly specialized. The skills gap is certainly a paradoxical challenge as skills and training follows demand, but no demand will be brought back if there is insufficient supply of skills. According to an A.T. Kearney report, the skills gap could potentially be met in the short term through strategically choosing reshoring locations and investing in training and standard operating practices by manufacturers [9].

Wal-Mart has had immense success with its “American Renewal” program. While $25 Billion a year may be just a ripple now, it may create momentum to tip a wave. There are no projects without pilots, and adopters without innovators. Together with the forces of economics and government, Wal-Mart may promise companies like Kent a fighting chance at staying afloat and finally coming home.

References 

[1] Wal-Mart Stores, Inc., “U.S. Manufacturing,” [Online]. Available: http://corporate.walmart.com/global-responsibility/us-manufacturing. [Accessed 28 October 2014].
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