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Wal-Mart’s Costs Can’t Always Be Measured

If Wal-Mart Stores Inc. is famous for anything, it’s the ruthless way it wrings the last few pennies of cost from every transaction.

So last week, when the Los Angeles County Economic Development Corp. released a study finding that the expansion of Wal-Mart’s grocery business into Southern California would be, on balance, a great thing, my first reaction was that the company had purchased the LAEDC’s reputation cheaply for the $65,000 it paid for the study.

But to be fair, LAEDC’s team, headed by Gregory Freeman, its director of policy consulting, did a responsible job with what data it had, much of which was provided by Wal-Mart, and not without a fair amount of tugging.

One can even accept Freeman’s claim to have identified and rectified a flaw in other, alarmist studies of Wal-Mart’s impact on local economies: that while those studies focus on how the downward pressure on retail wages produced by Wal-Mart’s arrival leads to job losses, they don’t explore the converse -- whether the increased purchasing power of shoppers at Wal-Mart and its price-cutting rivals might pump enough money into a local economy to stimulate employment. Freeman argues that over time, the extra cash in Wal-Mart shoppers’ pockets will mean a net gain in Southern California of tens of thousands of jobs. And if someone wants to challenge his math, at least he lays out his calculations in his report’s 40 pages.

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For all that, when it comes to gauging Wal-Mart’s influence on local communities, much of that influence either can’t be measured by standard economics or hasn’t yet generated enough data to allow economists to work their mathematical magic.

It’s hard to ignore the markers of this report’s provenance as the product of a commercial contract. Plenty of it reads as though it was aimed for the ears of Freeman’s exacting client. For example: “Wal-Mart makes a point of always listening to its customers, and focuses on the consumer’s bottom line,” Freeman writes at the close of an admiring section on the corporation’s devotion to frugality. Well, maybe. But this sounds more like the language of PR flackery than of objective economics.

Freeman says every word of the text is his own. He also says he knew his conclusions would be controversial, especially in light of the supermarket labor dispute, and strove to be objective: “I’m not here to defend Wal-Mart or disguise the issues,” he told me.

The LAEDC says Wal-Mart reviewed the report before it was issued to the public. That’s conventional practice with consulting clients, the organization says, whether they’re corporations like Wal-Mart or agencies like the Metropolitan Transportation Authority. The idea is to allow the client to ferret out factual inaccuracies rather than cavil about wording. But it’s also true that Wal-Mart had the contractual right to veto the report’s public release if it didn’t like its conclusions.

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Since the company OKd its publication, no one should be surprised that it lauded the LAEDC’s conclusion that the arrival of Wal-Mart Supercenters, which sell general merchandise along with groceries, would be a net boon for the Southland. “This is a great day for California consumers,” said Wal-Mart spokeswoman Mona Williams, a statement that fills me with the same gratitude I feel when my bank tells me it’s raising its fees in order to serve me better.

The fact is that while the LAEDC report may be fine as far as it goes, it doesn’t go far enough in analyzing the Wal-Mart effect on a community. And by leaving out a few perceptible but unquantifiable consequences of Wal-Mart policies, it makes the overall effect look more favorable than it really is.

Consider an alleged Wal-Mart habit currently being scrutinized in a federal courthouse in San Francisco: pervasive sex discrimination. Lawyers for the plaintiffs in the case say that women in virtually every job classification across the country are paid less than men with the same responsibilities and seniority; women make up two-thirds of the company’s hourly workforce but one-third of its management. Calculating the economic impact of such a trend is difficult, if not impossible, but the accusation hardly portrays Wal-Mart as a force for social enlightenment. (The company has denied that it discriminates, but also says it is trying to make its pay and promotion system less subjective than before.)

On employment practices and benefits in general, the LAEDC report takes Wal-Mart at its word. The company claims to provide such perquisites as profit sharing and a 15% discount on company stock it presents without comment, beyond saying “the value of these benefits varies.” Indeed, Wal-Mart’s critics note that its famously lean management structure means that as few as 10 workers in a store employing 300 to 500 might be eligible for profit sharing, and its low wages mean that few employees have the wherewithal to accumulate a significant investment in its stock at any discount.

The company’s claim to provide health benefits also deserves greater scrutiny. Although the LAEDC report notes that Wal-Mart provides employees with health insurance, it doesn’t explore the implications of how it does so. As this column has pointed out in the past, not only do Wal-Mart workers pay a larger share of their health insurance premiums than the average worker nationwide, but the company also excludes coverage of many routine medical services, such as contraceptives and child vaccinations.

Instead, Wal-Mart focuses on covering such “catastrophic” needs as cancer treatment and organ transplants. This allows the company to release gaudy numbers to make itself seem softhearted, such as by noting that it pays for 60 transplants a year at more than $1 million each. But these are obviously rare events -- 60 transplant patients would be the equivalent of just over one-hundredth of 1% of Wal-Mart’s 500,000 insured employees, for example.

What happens when the child of a Wal-Mart employee on an hourly wage needs a shot for measles, chicken pox or the flu? The worker faces the choice of shelling out, say, $75 to get the shot at a private clinic (that’s more than a day’s pay for many of the workers); or going to a public, tax-supported clinic, which means we all pay; or trusting to luck that the child won’t get sick, which would force the employee to stay home for a couple of days, losing more pay.

Wal-Mart freely, even boastfully, acknowledges that as many as 40% of its employees get their health coverage elsewhere, such as from the employers of spouses or parents or from programs like MediCal and Medicare. This is community-mindedness the Wal-Mart way: Stick the other guy with the responsibility for your own workforce. Wal-Mart ruthlessly prices its health coverage to discourage employees from placing their own spouses and children on its plans, but it’s not above pushing its own workers on other companies. Then it argues smugly that its competitors are only whining because they don’t know to cut costs as efficiently as it does.

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This sheds a different light on the LAEDC report’s contention that other studies have overestimated the wage gap between Wal-Mart grocery employees and unionized supermarket workers. The LAEDC estimates that the overall average difference in Southern California will amount to $2.50 to $3.50 an hour. But it doesn’t calculate the additional advantage the union members have had from their comprehensive company-paid health insurance coverage or, for that matter, from the company-financed pension benefits they have long enjoyed.

Neither benefit is matched by Wal-Mart. Both, as it happens, are mortally threatened today, because the supermarket chains engaged in the labor dispute are determined to move their labor costs closer to the Wal-Mart standard. The full import of this change, Freeman told me, was “outside the scope” of his study, if only because healthcare costs have become a national issue and it’s impossible to tell what company-paid health insurance plans will look like in five or 10 years. That’s true enough, but it looks like a fair bet today that healthcare will be taking a bigger chunk out of most workers’ paychecks tomorrow. Wal-Mart’s influence on that trend can’t be discounted.

Perhaps, then, we should

defer applauding the inevitable arrival of Wal-Mart Supercenters in California. It may be, as the LAEDC concluded, that we’ll all benefit hugely from their relentless price cutting. But we haven’t even begun to learn how to measure the supercenters’ cost.

Golden State appears every Monday and Thursday. You can reach Michael Hiltzik at golden.state@latimes.com and read his past columns at

latimes.com/hiltzik.


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