Wal-Mart's Memo Blurs Its Message on Benefits

By Abigail Goldman and Lisa Girion

Oct. 27, 2005 12 AM PT

Times Staff Writers

Wal-Mart Stores Inc., which built its reputation -- and a virulent opposition -- on rock-bottom prices, has talked a lot lately about becoming a kinder, more responsible company.

But the retailing giant is finding that convincing the world that it is “committed to change,” and to keeping costs low, is a tough balancing act.

On Monday, Chief Executive H. Lee Scott Jr. pledged to bring health insurance within reach of his 1.3 million U.S. employees. On Wednesday, a leaked company memo revealed “bold steps” to reign in Wal-Mart’s employee benefit costs.

Among the recommendations: using more part-time workers, cutting life-insurance payouts, pushing spouses off health plans through higher premiums and trying to dissuade unhealthy people from seeking jobs by, among other things, requiring cashiers to gather carts in Wal-Mart’s vast parking lots.

To some Wal-Mart watchers, the difference between what Wal-Mart says and what Wal-Mart does makes perfect sense.

“I don’t think the DNA of Wal-Mart has changed at all,” said HSBC Securities analyst Mark Husson, returning Wednesday from an analyst meeting at Wal-Mart headquarters in Bentonville, Ark. “It’s like a religious cult -- it has a low-cost gospel to bring to the country and sees it as a divine duty to do that and nothing is going to get in its way. It will do what it has to do and say what it needs to say to get there.”

In the healthcare memo, whose contents were first reported in the New York Times, Executive Vice President of Benefits Susan Chambers wrote to the company’s board of directors that Wal-Mart workers on average spent 8% of their income on healthcare -- almost double the national average. Last year, Chambers wrote, nearly two-fifths of those enrolled in Wal-Mart health plans spent 16% of the average Wal-Mart income on healthcare.

What’s more, 46% of the children of Wal-Mart employees either are on Medicaid or are uninsured, the memo said. That marked the first time that Wal-Mart has acknowledged that a significant number of employee dependents rely on public assistance. On Wednesday, a Wal-Mart spokeswoman called that figure “unacceptable.”

“We have to do better and we will,” spokeswoman Sarah Clark said. “But ... that challenge isn’t just limited to Wal-Mart.”

Clark said that the memo was not a final list of recommendations and was the result of a six-month study of employee benefits.

“Those are the things that we are looking at -- how do you continue to provide the best benefits to employees and remain competitive?” Clark said. “There is a genuine desire to do just that at Wal-Mart, but we feel like we can certainly improve our offerings today.”

In his speech Monday, Scott announced new benefit options for employees, including health savings accounts and a trial health plan for some workers with premiums as low as $11 a month.

Chambers described Wal-Mart’s problem: a workforce that is older and less healthy than the national average, and a population that overuses the most expensive kinds of care, such as emergency room visits, leading to a 15% annual growth rate in benefit costs. Fewer than half of Wal-Mart’s workers at more than 3,600 stores are covered by the company’s insurance programs.

If not addressed, Chambers said, benefit costs would consume an incremental 12% of total profit by 2011, or $30 billion to $35 billion in market capitalization.

Throughout the 27-page benefit memo, Chambers refers repeatedly to the company’s public reputation and “messages to use in combating critics.” The critics, which the memo said include labor unions and state governments that have attacked Wal-Mart for the number of workers it has on public aid, have grown increasingly vocal about what they consider to be stingy benefits at the world’s biggest retailer.

Chambers recommended “reframing” the Medicaid issue as everyone’s problem, not just Wal-Mart’s, and engaging in a “sustained communication campaign” about the company’s healthcare offerings.

She also posits that the company would have “political cover” for moving employees into health savings accounts because other retailers offer similar options.

Several of Chambers’ proposals are considered progressive, including offering part-time employees health insurance after one year on the job instead of the current two, and adding health clinics to Wal-Mart stores for employees and the public.

Still, the memo concludes that even if all the recommendations are adopted, the company’s healthcare enrollment will drop because of the shift to more part-time workers and that a “significant number” of employees and their children will continue to qualify for Medicaid.

“It’s like an X-ray into the heart of them -- on the one hand they want to portray themselves as family that cares and that is respected,” said Nelson Lichtenstein, a professor of history at UC Santa Barbara and editor of the forthcoming book “Wal-Mart: The Face of 21st Century Capitalism.”

“On the other hand, Wal-Mart’s core mission was low-cost distribution of goods to a huge working-class clientele,” he added.

“These two things are clashing and Wall Street is not stupid, Wall Street understands the contradiction that the company is caught in,” he said.

Wal-Mart, which last year earned nearly $10.3 billion on sales of $285 billion, has seen its stock fall 21% from its 52-week high of $57.89 last November. Shares in Wal-Mart rose 19 cents Wednesday to $45.58.

Sales growth at stores open at least a year, a key measure of strength, has slowed to 3.2% in the first half of the year, compared with 5.2% for the first six months of last year.

Crucial to the company’s growth in the United States is expansion into urban areas most hostile to the company’s business model, including California, the East Coast and Chicago. Wal-Mart’s new public relations bid, analysts and academics have said, is an attempt to win over those new consumers.

The benefit memo, however, may undercut the corporate image that Wal-Mart has sought to promote through its television commercials and public relations efforts.

“The company story is that the workforce is everything,” said David West, executive director of the Center for a Changing Workforce, a Seattle think tank that has studied Wal-Mart’s benefits. In TV ads, “it’s ‘Our people make the difference.’ But, if you read this memo, their people aren’t making the difference. It’s time to get a new, younger workforce that doesn’t go see the doctor.”

Benefit experts also said that Wal-Mart was partially to blame for its rising healthcare bill because expensive health plans discourage healthy workers from participating.

“The people that have health problems buy it and those who don’t, don’t,” said David Style, who heads Corporate Benefit Marketing in Encino and is a board member of the Los Angeles Assn. of Health Underwriters. “They are in a death spiral.”

Wal-Mart is not alone in its struggle to contain healthcare costs. Nationally, such costs have outpaced inflation for several years. That has prompted employers to shift costs onto workers through higher co-pays and deductibles.

“A Wal-Mart world -- low wages, low benefits, stagnant incomes for the working class -- is not actually good for Wal-Mart,” Lichtenstein said. “And now they understand that.”

(BEGIN TEXT OF INFOBOX)

Covering workers

Wal-Mart’s health insurance plan covers fewer than half the company’s employees. About 80% of all employees are eligible to participate, but only 60% sign up for coverage.

Percentage of workers eligible for coverage

Wal Mart: 81%

National employers: 81%

Retailers: 56%

Percentage of eligible workers with insurance

Wal mart: 60%

National employers: 83%

Retailers: 63%

Percentage of all employees with insurance

Wal Mart: 48%

National employers: 68%

Retailers: 36%