Walmart - What do they really do for the economy?

I just read Brian Cuban's blog post on Walmart (http://tinyurl.com/ya2odmk), and it brought me back to the same old discussion. Does Walmart add or take away from the economy?

I read (scratch that - "listened to...") Sam Walton's book, "Made in America" (http://bit.ly/6pDx4b) quite a few years ago, when travelling frequently. His ideas were not new, he was just a very astute business man. Instead of pricing for what people will pay, he always priced for the lowest price he could sell it for -- no "loss leaders" no gimmicks, just low prices. Several other "big box" stores offered discount items. Less quality in the name of low price - K-Mart, for example. For eons, grocery stores have offered "store brands" for a cheaper alternative. For those of us that have tried "store brand" soda, when we really wanted a "Coke" know that they are not the same, they are just cheaper. While K-Mart generally concentrated on big markets, Walmart moved into smaller towns. I was living in Moscow Idaho (population ~ 20k + 8k university students) when they opened, and I saw a few of the business that went under because of Walmart. There was the typical outrage-mostly from the same people that are outraged by all big business. I actually knew someone who worked at one of the stores, and later went to work for Walmart. Actually she still works for Walmart - some 15yrs later.

When she worked for the "mom & pop" store, she made minimum wage. Even less than that, actually, as she was subject to a state minimum wage that was less than the federal minimum wage because the business employed fewer than 10 people (or close - I can't remember). She didn't have health coverage, or retirement. The "mom & pop" had its good aspects -- poor pay or not, they were a close knit family -- they had Christmas parties at the owner's house, and knew the families of all employees. Straight out of "A Wonderful Life" less the afore mentioned really bad wages, and lack of health care or retirement packages. The sad part was that the "Mom & Pops" didn't pay better, offer healthcare or retirement not because they were hoarding money for themselves, but because they couldn't afford to. They had no secret formula to riches that Walmart took from them, they had a small store, made enough money to get by, and it required a few minimum wage employees so they didn't have to work every waking hour at the store - that's it.

Walmart had the advantage of economies of scale. Purchasing power, group rate healthcare plans allowed them to sell the same things much cheaper, and offer better benefits. They could stream line their delivery to minimize shipping charges, negotiate contracts that allowed them to return any unsold items (if they got bad products). They could also sell lesser quality items, similar to the items that the "mom & pop" were selling much cheaper (this is where the China items came to play). All in all, Walmart actually had a plan, and stuck to it. The only plan most "mom & pops" have is to open a store & sell things. Walmart not only wanted to sell things, their plan involved what to sell, how to sell, how to get what to sell, how to get what not in the who now -- understand?

There is no denying the purchasing power that was given to the nation's "poor" by Walmart. The question is "Does it really hurt the local economy to buy from China (as opposed to American vendors)?"

How could it hurt the local economy? Those mom & pop shops were not buying anything from the local economies - they were buying from distributors who were buying from wherever the products were produced. Look on the back of the tongue of your Nikes, or the tags on your shirts/pants and see if they say "Made in America." More likely "Hencho in Mexico," China, Tawain, or Vietnam The employees now have health care, and retirement (available - most minimum wage employees do not take advantage of what is offered). The huge monstrosities are now a great source of property tax revenue for the local economies without the local face (that local assessors felt guilty about sticking it to). The increased sales offer more sales tax revenue. Not to mention the local services that they require (landscaping, snow removal, utilities, etc).

Fundamentally, if you want to support "Buy American", you can find them at Walmart. You just won't buy them if you buy the cheapest things on the shelf. I'm just waiting for Walmart to start offering health care (insert Dr. Nick reference from the Simpsons)...I'm sure I want the best doctor, when I have a major illness, but when I need my prescription renewed for allergies, or an anti inflammatory for an injured knee (other than ibuprofen) -- I'm sick of paying for a $180 office visit, when Dr. Nick would suffice.

Executive Compensation - or Comp In General

Here’s an interesting essay about executive pay at Bear Stearns and Lehman, written by several Harvard Law Professors (Lucian A. Bebchuk, Alma Cohen, and Holger Spamann) -- The Wages of Failure

I wonder about all pay – not just executive pay. I work for a fairly large company as a tax manager (and have my own small practice on the side-hence this blog). It is an agricultural manufacturing facility, structured as a cooperative, to allow ownership by the growers. In lemans terms, we have a couple thousand owners, and their individual activity determines their share of the profits/losses.

These “owners” do not manage the manufacturing facilities. We have a CEO, and 4 senior VPs. Each individual location (three active factories, two inactive/processing factories and several warehousing facilities scattered in several states) has a management structure. We are big enough to be publicly traded, and in fact were, until an investor bought us off the marked and delisted us (quite a while ago). Our growers, then bought the company from that investor (sort of – they are still owners, technically, until the long-term sale is complete). Our corporate HQ has a management structure. All in all, I would estimate at least 100 manager and above level employees.

Their pay is (for the most part) fully deductible. With exception of two employees (CEO & a SR VP), all are under the lowest of our nexus state deductibility thresholds (300k) – and they aren’t over by much, and I would say a vast majority of managers are in the 60-80k range.

Some would attribute this to being cheap, or not making money. While both of these aspects have their merit, I believe the culprit belongs to the transparency to our owners (the growers), and our Board of Directors (who are active and paid minimally ~ the Chairman made 12k last year, most directors made 5-6k). This is something that (in my opinion) that needs to be a major issue of reform for publicly traded companies, investment houses, banks, etc.

Why stop at executives? Why are ANY compensation figures off limits? As the owner of a stock certificate, you (and several million of your closest friends) are the owner of a company. All compensation information should be available for you to review. Can I be the first to say that I want to know financials and compensation information for everyone that handles my money and investments.

A wise corporate buyer once told me that “buyers” should be the highest paid individuals in the company (retail), as if they can’t negotiate their own salary effectively, how do you expect them to negotiate the best deals with vendors? While humorous (and self-serving), the element of truth is that everyone contributes a good to the company, and determining their worth is very difficult.

In the public accounting world, we live to a higher standard. While safeguarding independence, (auditors) have to not only have independence, they have to look like they are independent. This is to prevent auditors from altering their opinion, because of their own financial stake. While there is much debate on the merits of it, what it amounts to is accountants (Managers and above) can’t own stock in companies that are audited by their firm. If they work on an audit, and they quit and are hired by the company they audited – they cannot work on anything related to the financial statements for a year. So if you’re a tax manager at KPMG, and your wife buys Albertson’s (Supervalue) stock, you’re likely in violation of independence guidelines – even if you do not work on any Albertson’s jobs. Yet CEOs and senior executives of the same companies (who are direct participants in management decisions of the company) can buy and sell their own stock freely? While stock options, and sales by corporate officers are disclosed in notes – they aren’t really regulated. Bear Stearns and Lehman, for the benefit of 10 people, reduced the equity of the companies by 2.5 billion through equity sales and bonuses from 2000-2008. The company I work for has total compensation of around 65 million. This is for ~ 1200 employees. This would fund the entire compensation of 5 companies this size for 8 years. To pull a childish reference, I call bull$hit. How can anyone with a logical mind think that pay of that magnitude could be good for a company?