Lessons from the Wal-Mart Wars

By Epstein, Richard A. | Chief Executive (U.S.), September 2006 | Go to article overview

Lessons from the Wal-Mart Wars


Epstein, Richard A., Chief Executive (U.S.)


Why CEOs should take a hard line against programs that compensate businesses and workers who can't compete.

Most CEOs know that today's labor disputes are just a pale reflection of the huge nationwide strikes and lockouts of 100 years ago. The decline in union membership over the past 50 years shows that modern workers no longer buy into the union movement. Several reasons help account for this change: Steep dues are often spent for political causes that the rank and file opposes; upwardly mobile workers know that union membership places them under a glass ceiling; and educated and diverse workers know that no cookie-cutter standard contract fits their individual needs. In the private sector, unions are the outsiders looking in, as unionized firms flounder against their more efficient and nimble nonunion rivals.

Notwithstanding their sluggish performance, unions remain powerful because of their political clout against nonunion firms. Exhibit A of union influence is the well-greased campaign to keep the big-box retailers like Wal-Mart, K-Mart and Target out of urban markets. Big retailers don't race much resistance from customers, suppliers and employees. But their lean cost structure and low profit margins make them fair game to unionized competitors who hope to cripple them through political action and who now have abundant political support in high circles. As Republican politicians remain squeamishly silent about these new initiatives, prominent Democratic presidential hopefuls such as Joseph Biden and Hilary Clinton happily paint Wal-Mart as the sworn enemy of the embattled middle class.

Nor do these new-age Luddites lack ammunition. The remorseless expansion of the regulatory state lets incumbent firms, backed by their unions, block new entrants under the banner of worker and community protection. They freely conjure up images of the evils of globalization and the return of sweatshop labor to prop up their cozy status quo.

Three-Pronged Attack

The current offensive has at least three prongs: employment law, land use and banking. All these initiatives are put in the service of a single overarching objective-keeping Wal-Mart and similar big-box firms from entering urban retail markets dominated by old-line supermarkets.

So how does the counterattack work? Most notably, by selective regulation. Big-box opponents know they can't succeed under any neutral set of regulations. Wal-Mart and Target are probably more adept at satisfying any general environmental or safety target requirements than their entrenched competitors. So the key move for the opposition is to concoct regulation that hits the big boxes while leaving themselves untouched.

The first tactic of big-box opponents is to push for new laws that force large retailers to increase wages and benefits. For example, Maryland passed a law that would have required all companies with more than 10,000 employees to spend no less than 8 percent of their payroll on health care benefits. The state could have crossed out the number and inserted Wal-Mart by name, because the legislation covers no other firm. (The three other organizations that employ more than 10,000 people in Maryland-Giant Food, Northrop Grumman and Johns Hopkins University-already surpass the 8 percent requirement.) Fortunately, a federal judge recently knocked out the law on the ground that it sought to move into territory that was already covered under the federal ERISA law.

Yet that victory is likely to prove only the first battle in a long war, as other states and cities may pass laws whose stated ground is to protect workers from exploitation and abuse, but whose true intent was to make WalMart and other big-box companies close up shop. Consider these numbers: Wal-Mart earns a profit of only about $6,000 per employee, so raising benefits or wages $3 per hour for the huge cohort of entry-level workers could wipe out the entire per-employee gain. …

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