Cheapening U.S. Values--Wal-Mart Leads the Race to the Bottom

An Empire Built on Bargains Remakes the Working World

Wal-Mart is so powerful that it moves the economies of entire countries,
bringing profit and pain. The prices can't be beat, but the wages can.

By Abigail Goldman and Nancy Cleeland

Los Angeles Times Staff Writers

November 23, 2003

LAS VEGAS -- Chastity Ferguson kept watch over four sleepy children late
one Friday as she flipped a pack of corn dogs into a cart at her new
favorite grocery store: Wal-Mart.

The Wal-Mart Supercenter, a pink stucco box twice as big as a Home Depot,
combines a full-scale supermarket with the usual discount mega-store. For
the 26-year-old Ferguson, the draw is simple.

"You can't beat the prices," said the hotel cashier, who makes $400 a week.
"I come here because it's cheap."

Across town, another mother also is familiar with the Supercenter's low
prices. Kelly Gray, the chief breadwinner for five children, lost her job as
a Raley's grocery clerk last December after Wal-Mart expanded into the
supermarket business here. California-based Raley's closed all 18 of its
stores in the area, laying off 1,400 workers.

Gray earned $14.68 an hour with a pension and family health insurance.
Wal-Mart grocery workers typically make less than $9 an hour.

"It's like somebody came and broke into your home and took something huge
and important away from you," said the 36-year-old. "I was scared. I cried.
I shook."

Wal-Mart gives. And Wal-Mart takes away.

>From a small-town five-and-dime, Wal-Mart Stores Inc. has grown over 50
years to become the world's largest corporation and a global economic force.

It posted $245 billion in sales in its most recent fiscal year < nearly
twice as much as General Electric Co. and almost eight times as much as
Microsoft Corp. It is the nation's largest seller of toys, furniture,
jewelry, dog food and scores of other consumer products. It is the largest
grocer in the United States.

Wal-Mart's decisions influence wages and working conditions across a wide
swath of the world economy, from the shopping centers of Las Vegas to the
factories of Honduras and South Asia. Its business is so vital to developing
countries that some send emissaries to the corporate headquarters in
Bentonville, Ark., almost as if Wal-Mart were a sovereign nation.

The company has prospered by elevating one goal above all others: cutting
prices relentlessly. U.S. economists say its tightfistedness has not only
boosted its own bottom line, but also helped hold down the inflation rate
for the entire country. Consumers reap the benefits every time they push a
cart through Wal-Mart's checkout lines.

Yet Wal-Mart's astonishing success exacts a heavy price.

By squeezing suppliers to cut wholesale costs, the company has hastened the
flight of U.S. manufacturing jobs overseas. By scouring the globe for the
cheapest goods, it has driven factory jobs from one poor nation to another.

Wal-Mart's penny-pinching extends to its own 1.2 million U.S. employees,
none of them unionized. By the company's own admission, a full-time worker
might not be able to support a family on a Wal-Mart paycheck.

Then there are casualties like Kelly Gray. As Wal-Mart expands rapidly into
groceries, it is causing upheaval in yet another corner of the economy. When
a Supercenter moves into town, competitors often are wiped out, taking
high-paying union jobs with them.

Wal-Mart's plans to enter the grocery business in California early next year
have thrown the state's supermarket industry into turmoil. Fearful of
Wal-Mart's ability to undercut them on price, the Ralphs, Vons and
Albertsons chains have sought concessions from their unionized workers in
Southern and Central California, leading to a work stoppage now entering its
seventh week.

Half a century ago, the nation's largest and most emulated employer was
General Motors Corp. "Today," said Nelson Lichtenstein, a history professor
at UC Santa Barbara, "for better or worse, it's Wal-Mart."

GM brought prosperity to factory towns and made American workers the envy of
the world. With a high-wage union job, an assembly-line worker could afford
a house, a decent car, maybe even a boat by the lake.

There was a bit of truth, Lichtenstein said, to the famous assertion by
Charles Wilson, General Motors chief from 1941 to 1953, that what was good
for GM was good for the country.

With Wal-Mart, the calculus is considerably more complex.

'We Have Split Brains'

Glenn Miraflor used to chide his wife for shopping at Wal-Mart.

As a member of Ironworkers Local 416, the 50-year-old father of four is well
aware of the retailer's anti-union stance. But when the family's credit card
debt topped $10,000, Wal-Mart's deals suddenly looked irresistible.

"Where else are you going to find a computer for $498?" he asked, looking
for a PC with his wife, Debbie, at the Supercenter on Serene Avenue, far
from the glitz of the Las Vegas Strip. "Everyone I work with shops here."

Surveys by the Teamsters and the United Food and Commercial Workers < the
two unions most threatened by Wal-Mart < show that many of their own members
shop at the discounter.

"We have split brains," said Robert Reich, U.S. secretary of Labor under
President Clinton and now a professor of economic and social policy at
Brandeis University in Waltham, Mass. "Most of the time, the half of our
brain that wants the best deal prevails."

The connection may be lost on many, Reich said, but consumers' addiction to
low prices is accelerating a shift toward a two-tiered U.S. economy, with a
shrinking middle class and a growing pool of low-wage workers.

"Wal-Mart's prices may be lower," he said, "but that's small consolation to
a lot of people who end up with less money to spend."

Others insist there is a net benefit whenever consumers can get more for
less. "If you have lower real prices, you're saving money," said Arthur
Laffer, a key advisor to President Reagan who is now an economic consultant
in San Diego. "The prices' falling, in effect, raises the wages of everyone
who buys their products."

That's basically the way the Miraflors saw it as they cruised the aisles of
the Supercenter < Wal-Mart Store No. 2593 < and snapped up deals: Ragu pasta
sauce for 89 cents, Aunt Jemima pancake mix for 48 cents, pork shoulder
steaks for $1.49 a pound and five cans of Del Monte vegetables for $2.

After making their way through the groceries, the Miraflors turned their
attention to the housewares section, stopping in front of a 20-inch box fan.
Glenn Miraflor checked the price and made room for it in their cart.

"Ten bucks," he said. "You can't beat that. That's why we come here."

Vendors' Alley

The fan was made 1,700 miles away in Chicago at Lakewood Engineering &
Manufacturing Co. A decade ago, the same fan carried a $20 price tag.

But that wasn't low enough for Wal-Mart. So Lakewood owner Carl Krauss cut
costs at every turn. He automated production at the red-brick factory built
by his grandfather on the city's West Side. Where it once took 22 people to
put together a product, it now takes seven. Krauss also badgered his
suppliers to knock down their prices for parts.

In 2000, he took the hardest step of all: He opened a factory in Shenzhen,
China, where workers earn 25 cents an hour, compared with $13 in Chicago.
About 40% of his products now are made in China, including most heaters and
desktop fans. The Miraflors' box fan was assembled in Chicago, but its
electronic guts were imported.

"My father was dead set against it," Krauss said of the move overseas. "I
have the same respect for American workers, but I'm going to do what I have
to do to survive."

Survival in an age when consumers are hyper-vigilant about prices means
shaving expenses again and again. "Nobody wants to be on the shelf with the
same item for $1 more," Krauss said.

All the retailers he supplies < including Home Depot Inc. and Target Corp. <
drive a hard bargain with manufacturers. But none is as tough as Wal-Mart,
Krauss said.

Twice a year, his sales representatives travel to Wal-Mart headquarters to
pitch their products. There, competitors sit side by side, waiting to be
ushered into one of 60 glass-sided cubicles < a space some call Vendors'
Alley.

Then the haggling begins. "You give them your price," Krauss said. "If they
don't like it, they give you theirs."

The suppliers are at a disadvantage. The Wal-Mart buyer can always go out to
the waiting room and find someone who will go lower. "Your price is going to
be whittled down like you never thought possible," Krauss said.

After moving much of his manufacturing abroad, Krauss doesn't see any way to
push costs lower. "If you're doing things legally, you can't," he said.

He may have to find a way.

At the Serene Avenue store, shopper Sarah Saxon, 17, pulled a $40 Lakewood
heater off the shelf. She looked it over, then put it back in favor of an
AirTech model selling for $34.88. She said it looked better than the
Lakewood.

"Besides," she said, "it's cheaper."

Wal-Mart's culture of cheap emanates from Bentonville, a town of 20,000
tucked into the low green hills of northwest Arkansas, where a young Sam
Walton opened his first five-and-dime in 1950. Even then, Walton had a
vision of a different kind of retail.

Rather than charging a little less than his competitors, Walton wanted to
slash prices as much as he could and still make a profit. Other stores would
use price breaks from manufacturers as a way to boost their bottom lines,
paying less at wholesale while leaving retail prices untouched.

Walton passed such savings on to his customers as his discount business
evolved into Wal-Mart stores in 1962. He figured he would make up the
difference in volume. He was right.

By the mid-1980s, Wal-Mart's success had catapulted Walton to No. 1 on the
Forbes list of richest Americans. Still, he drove an old pickup truck to
haul around his bird dogs, refused to fly first class and shared hotel rooms
with colleagues on business trips.

Bentonville, like the man who put it on the map, is a combination of
Southern charm and Midwestern practicality. The town square is anchored by
the original Walton's five-and-dime (now a visitors' center) and dotted with
small shops. But the real action is down Business Route 71, where the
Wal-Mart Supercenter rises up, big enough to fit three 747s with room to
spare.

Across the street is the base of Wal-Mart operations: the Home Office. The
world's biggest company occupies an industrial-looking hodgepodge of
windowless work spaces, connected by bunker-like hallways. The drab
gray-and-blue walls display the visage and sayings of Sam Walton, who died
in 1992:

"Listen to your associatesS. They're the best idea generators."

"To succeed, stay out in front of change."

"Swim upstream. Go the other way. Ignore the conventional wisdom."

Lists abound. The best-performing stores. The worst-performing stores. Under
a picture of the founder asking, "Who's taking your customers?" is a roster
of competing retailers, including Costco Wholesale Corp., Circuit City
Stores Inc. and Target, with the name and picture of each company's chief
executive.

It's all part of the Wal-Mart culture: a zealous attention to competition,
customers and costs.

Wal-Mart employees, unlike their counterparts at other retailers, are
forbidden to accept so much as a soda from vendors < or anybody else the
company does business with < on the theory that such frills ultimately are
paid for by consumers. The company's meticulous management of the flow of
goods, from the factory floor to the store shelf, has shaved shipping and
inventory costs to a degree that retailing experts say is unprecedented.

"You could argue that some of what Wal-Mart does to cut costs has been
win-win," said Richard S. Tedlow, a professor of business administration at
Harvard Business School. "What's being squeezed out is waste."

The company is so ruthlessly efficient that 4% of the growth in the U.S.
economy's productivity from 1995 to 1999 was due to Wal-Mart alone,
researchers at the McKinsey Global Institute estimated last year. No other
single company had a measurable impact. Wal-Mart also has forced competitors
to become more efficient, driving the nation's productivity < output per
hour of work < even higher.

Walton, who still is referred to as Mr. Sam throughout the corporation,
worked in a ground-floor office barely big enough for a conference table.
The current occupant, Chief Executive H. Lee Scott Jr., is the keeper of Mr.
Sam's vision. Like all Wal-Mart executives, he empties his own trash and
shares budget hotel rooms when traveling. Everyone flies coach.

"We do not have limousines," said Scott, who certainly could afford one,
having made nearly $18 million last year in salary, bonus and stock, plus
options with an estimated value of $11.3 million. "I drive a Volkswagen
Bug."

Wal-Mart's stinginess reaches from the executive suite to the loading dock.

Some truckers complain that they must unload their own cargo < or pay
Wal-Mart to do it. Other big retail chains absorb that cost themselves.
"They're awful," said independent driver George Hauschild of Palm Springs.
"They don't even let you use the bathroom."

At every one of the 2,966 Wal-Marts in the U.S., thermostats are kept at a
steady 73 degrees in summer, 70 degrees in winter; raising or lowering the
temperature is considered a waste of money.

Such measures seem mild compared with what Wal-Mart has done to cut payroll
costs. In one case, a jury in Oregon last year found that company managers
had coerced hundreds of employees to work overtime without pay.

The managers were driven by intense pressure from Bentonville, witnesses
said. Managers whose labor costs were considered too high were singled out
during the company's weekly in-house satellite broadcasts. In response,
managers tampered with electronic time cards or bullied employees to work
off the clock, according to trial testimony.

The Oregon jury found last December that Wal-Mart's behavior was illegal and
willful. A separate trial to determine damages for the 290 plaintiffs is set
for early next year.

Wal-Mart settled similar overtime suits in Colorado and New Mexico for
undisclosed amounts. More than 40 other cases are awaiting trial.

The company says it prohibits off-the-clock work and blames the problems on
a small number of rogue managers.

Last month, Wal-Mart ran into trouble because of another cost-cutting
practice: using dirt-cheap janitorial services.

A grand jury is investigating whether Wal-Mart knew that janitors provided
by subcontractors were illegal immigrants cheated out of overtime pay.
Federal agents raided 61 Wal-Marts across the country and seized boxes of
documents from the Bentonville headquarters. Wal-Mart has denied wrongdoing.

Scott, the CEO, lauded Wal-Mart's employment record. Even in tight labor
markets, he said, the company never has trouble finding workers.

"It is not forced labor," he said. "The truth is, I go to the stores and
shake hands with the associates, and they like working at Wal-Mart."

On the Fast Track

Aaron Rios liked working at Wal-Mart so much that he decided to make his
career there.

Like two-thirds of Wal-Mart's store managers, Rios started off as an hourly
worker < in his case, stocking shoes on the graveyard shift at the Wal-Mart
in his hometown of Hanford in the San Joaquin Valley.

After two years, Rios was recommended for management training < the
company's fast track < leading him to quit community college and pursue a
climb through the Wal-Mart ranks.

"There's just something about a Wal-Mart environment," said Rios, who became
manager of the Serene Avenue Supercenter in Las Vegas at age 26. "It changed
who I am, where I was going and what my career goals were."

Wal-Mart store managers earn about $95,000 annually, including bonuses,
according to the company. Supercenter managers earn $130,000.

A management position requires long hours < as many as 80 a week < and,
often, a willingness to relocate. Rios worked at six California Wal-Mart
stores before taking the helm at Serene Avenue.

"It doesn't come free," said Rios, a divorced father who shares custody of
his 2-year-old son.

Still, he said, the benefits outweigh the sacrifices.

"I have an open opportunity. I could go into real estate for Wal-Mart. I
could do systems, analysis, accounting. It's endless," Rios said. "If I
wanted to go to Germany or Japan or Brazil or any of the markets we have, I
believe I could go."

A few weeks later, Rios snared another promotion, moving back to California
as a district manager in the Antelope Valley, overseeing seven stores from
Barstow to Palmdale.

Larry Allen had his own dreams of climbing the Wal-Mart ladder.

In the fall of 2001, he and his wife, Jacque, left Portland, Ore., where the
economy was sputtering, and headed to Las Vegas. He was an executive chef
and she worked in catering. They looked forward to a fresh start in
unionized casino jobs, making more than $15 an hour, with health insurance
and pensions.

But their timing was lousy. Recession and terrorism were hitting the gaming
industry hard, and work of any kind was scarce.

Just before their money ran out, the Allens lowered their expectations and
took jobs at the Serene Avenue Wal-Mart. Jacque, then 43, worked the counter
at the in-store restaurant, Radio Grill. Larry, 46, stocked produce. They
each earned $8 an hour.

Despite the letdown, Larry Allen said he attacked the job with enthusiasm.
Inspired by tales of well-paid Wal-Mart managers who had started out as
hourly employees, such as his manager Aaron Rios, he figured on working his
way up. That was Sam's way, he said.

"I've been following Sam Walton since the 1970s," he said. "He's the
American dream."

The glow faded quickly. At his 90-day review, Allen said, he received an
unenthusiastic write-up and an hourly raise of 35 cents. His supervisor told
him that if he continued working hard, in two years he might make his way up
to $10 an hour.

Allen thinks he knows why he received such mediocre marks. For one thing, he
was prone to question company policy. Then, Allen committed the ultimate act
of disloyalty: He openly promoted unionization.

West Coast Ambitions

For decades, Wal-Mart has tantalized and frustrated union organizers. But
the company's move into the grocery business < a labor stronghold < has
raised the stakes dramatically.

Union organizers say the high wages and benefits of their members are at
risk, as Wal-Mart expands its Supercenters beyond the South and Midwest. The
company recently established a beachhead in Las Vegas, with five centers.

Next stop: California, where Wal-Mart plans to open 40 Supercenters starting
early next year. In a sense, it has already arrived. Wal-Mart's low wages
are a central factor in the labor dispute between California's three major
supermarket chains and the United Food and Commercial Workers.

"They are the third party now that comes to every bargaining situation,"
said Mike Leonard, director of strategic programs for the UFCW.

Over many years of hard negotiating, the union has won and maintained
premier contracts for its 800,000 grocery workers. But with the opening of
each new Supercenter, the union's clout erodes.

Every one of the giant stores sucks away about 200 UFCW jobs, said retail
consultant Burt P. Flickinger III, who runs Strategic Resource Group in New
York. That means less power at the bargaining table and less money to hire
organizers.

On average, Flickinger says, Wal-Mart's wage-and-benefit package is about
$10 an hour less than those offered by unionized supermarkets.

For shoppers, that makes a big difference. A cartful of groceries is 17% to
39% cheaper at a Wal-Mart Supercenter than at a unionized supermarket,
according to a survey last year in Las Vegas, Dallas and Tampa, Fla., by
investment bank UBS Warburg.

Wal-Mart's move into groceries has led 25 regional supermarket chains around
the nation to close or file for bankruptcy protection, eliminating 12,000
mostly union jobs, Flickinger said.

With this in mind, Safeway Inc. recently aired a videotaped message to
employees, whose contract in Las Vegas expires next fall.

"Wal-Mart wants our customers and your jobs," said Safeway executive Larree
Renda. Total wage and benefit costs represent 15% of sales at Safeway, Renda
said. At Wal-Mart, they account for 9%.

"If we don't change," Renda said, "you bet we'll lose jobs < and it will be
in the thousands."

Staying Unorganized

>From their first day on the job, Wal-Mart employees are advised to avoid
unions and to report any organizing activities to their supervisors.

"If a union got in here, every benefit we've got could go on the negotiating
table, every one of them," says a man identified as Russell, a veteran
employee, in a video shown to new hires. "Unions will negotiate just about
anything to get the right to have dues deducted out of paychecks. You see,
they need big money to pay union bigwigs and their lawyers."

Company policy prohibits any union talk in work areas, and organizers say
they routinely are asked to leave stores. The retailer sought, and last year
received, a court order keeping organizers out of all of its stores in
Arkansas. The state Supreme Court nullified the order in July.

At the first hint of union activity, Wal-Mart managers are supposed to call
a hotline, usually prompting a team visit from Bentonville.

Wal-Mart spokeswoman Mona Williams said the intervention was meant to help
store managers respond effectively and legally.

"Our philosophy is that only an unhappy associate would be interested in
joining a union," she said, "so that's why Wal-Mart does everything it can
to make sure that we are providing our associates what they want and need."

But dozens of times in the last four years, attorneys for the National Labor
Relations Board have claimed that the company infringed on the supermarket
union's legal right to organize.

Although some of those claims have been thrown out, others have been upheld
by administrative law judges, who have ruled that Wal-Mart illegally
influenced employees with offers of raises, promotions and improved working
conditions just before they were to vote on whether to join a union.

Judges also have found that Wal-Mart illegally implied that workers could
lose benefits such as insurance and profit sharing if they unionized.

What's more, managers illegally confiscated union literature, threatened to
close down a store if workers voted to join the union, fired several union
supporters and failed to promote others, according to rulings from Minnesota
to Florida.

Stymied in their previous attempts to organize Wal-Mart workers, UFCW
leaders adopted a new strategy in 2000. They decided to marshal their
resources for a concerted organizing effort in one place: Las Vegas.

The union reached out to workers with a Web site and a weekly radio talk
show, and posted organizers outside Wal-Mart stores at all hours. When they
could, UFCW members would leave union literature inside stores, hoping that
workers would see it before managers ordered the material thrown away.

Larry Allen got his first glimpse at a union pamphlet last year as he
carried it to the garbage at the Serene Avenue Supercenter. He was hooked,
and began advocating for an election to bring in the union.

"Somebody has got to step up and fight for what is right," Allen said.

Ripple Effect

Less than a mile away from the Serene Avenue store, another shopping center
stands deserted, in desperate need of an anchor.

A year ago, the Raley's grocery store here drew thousands of shoppers who
spilled out to neighboring businesses, buying flowers, mailing packages,
getting their nails done. Today, the store is gone. The remaining shops are
struggling.

"I'm probably down 45%," said Bonnie Neisius, who owns a UPS Store franchise
in the center. "I just don't get the foot traffic anymore."

A few doors away, Windmill Flowers owner Diana I. Murphy leaned on a table
where she would have been arranging bouquets < had there been customers.

"There are a couple of things in play," Murphy said. "The recession,
terrorism. And Wal-Mart. It's had a direct effect on me, because they sell
flowers, tooS. They even deliver."

Unlike small towns with boarded-up commercial centers, fast-growing Vegas
quickly loses track of its Wal-Mart victims.

Wal-Mart's costs to the community tend to show up in subtler ways.

In an informal survey in the late 1990s of people who used Las Vegas
emergency rooms for routine medical care, patients who said they were
employed but uninsured were asked where they worked.

"Wal-Mart came up more than any other," said Dr. Raj Chanderraj, a Las Vegas
cardiologist and chairman of the Clark County Health Care Access Consortium,
a group that works to provide medical services to the uninsured.

The reason, say critics: Because Wal-Mart pays such low wages, many
employees can't afford the health insurance the company offers. And those
who do have health coverage through the company often can't afford
deductibles that run as high as $3,000 a year.

"Their employees are ending up at the county hospital and become the burden
of the county," said Clark County Manager Thom Reilly.

Wal-Mart disputes that. Williams, the company spokeswoman, said that 48% of
employees are covered by Wal-Mart's health insurance plan. Among those who
aren't, 26% have coverage from another source such as a spouse's employer or
Medicare, Williams said.

The notion that Wal-Mart doesn't provide adequate health coverage is "just
rhetoric," she said. "It's simply not true."

According to the Employee Benefit Research Institute in Washington, nearly
44% of workers in the retail sector as a whole have employer-provided health
coverage. Among big companies in all industries, the figure is 66%.

Those who accuse Wal-Mart of shortchanging its employees, Williams
suggested, don't understand the modern service economy. "Retail and service
wages are what they are," she said, "whether you look at a department store,
a discount store, the local dry cleaners, the bakery or whatever.

"Wal-Mart is a great match for a lot of people," Williams added. "But if you
are the sole provider for your family and do not have the time or the skills
to move up the ladder, then maybe it's not the right place for you."

'I Still Believe in Wal-Mart'

Larry Allen spent about a year advocating for the supermarket union while
working at Wal-Mart.

In the parking lot and in the break room, he passed out fliers and talked up
the benefits of unionizing. But he and his fellow union backers didn't get
as far as they hoped. About 42% of workers in the grocery department at
Serene Avenue signed UFCW cards < not enough for the union to feel confident
about winning an election.

In August, Allen was fired. NLRB attorneys said it was because of his union
activities and filed a complaint against Wal-Mart, seeking his
reinstatement.

On a recent afternoon outside the Supercenter, dozens of union members
rallied to support Allen. "Larry, Larry, Larry," they chanted. Over at the
store entrance, the demonstration was a muffled, distant bit of noise. Store
managers watched on a screen as surveillance cameras scanned the crowd.

Asked about the commotion, a gray-haired Wal-Mart greeter named Robert just
smiled. "They want to make the store union," he said. "But that would make
the prices go up for our customers. We can't let that happen."

On some level, even Larry Allen understands. "I still believe in Wal-Mart,"
said Allen, who now is on the union payroll as an organizer. "I like the
idea of it < give a quality product at a low price. It's what the American
public wants."