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“ALL WE WANT
TO DO IS GROW”:
WAL-MART LOOKS FOR NEW WORLDS TO CONQUER
By Philip
Mattera
“All we want
to do is grow.” This is the way Wal-Mart
chief executive H. Lee Scott, Jr. has summed
up his company’s mission. And grow it has,
becoming the world’s largest corporation in
terms of revenue. Of its $285 billion in
sales last year, some $10 billion reached
the bottom line—a level of profit attained
by only a handful of business giants.
Yet all is not
well at the Arkansas-based firm. There are
signs that the company’s 3,500 domestic
outlets are beginning to saturate the U.S.
retail landscape. Same-store sales have been
increasing at a much slower rate than at
rival Target Corp., which is only one-sixth
its size. High energy prices and low
blue-collar wage growth are depressing the
disposable income of its core customer base.
At the same time, Wal-Mart is facing
significant opposition to its move into the
big-city market, and the labor movement is
mobilizing unprecedented resources to
confront the company. A string of
controversies—the use of undocumented
workers, alleged child labor violations,
employees forced to depend on Medicaid for
health coverage, etc.—has forced Wal-Mart to
spend large sums trying to repair its public
image.
As part of its
strategy to regain momentum, Wal-Mart is
escalating its movement into new lines of
business. Over the past decade the company
has had stunning success grafting huge
supermarkets onto many of its
general-merchandise outlets, revolutionizing
the food business in the process. Now
Wal-Mart is seeking to replicate that
success in other areas. Not only does the
company want to be your grocery, it wants to
be your bank, your gas station, your
pharmacy and probably any other service it
can adapt to its high-volume, low-price
model.
Wal-Mart’s
aspirations are not just a corporate
strategy story. Given the company’s enormous
size, any move into a new field has dramatic
consequences for the existing players,
especially smaller businesses. It is a
question, as a story on
Forbes.com put it, of who will be
“Wal-Mart’s next victims.”
BANKING AT THE CASH REGISTER
One of the
longstanding complaints about Wal-Mart is
that the huge sums of money passing into its
coffers each day are quickly transferred to
corporate headquarters, with little or no
business given to local banks in the
communities where stores are located. If
Wal-Mart accomplishes one of its goals, the
impact on local financial institutions will
be even worse.
Since the late
1990s the company has been seeking to get
into the banking business itself. It is not
unprecedented for a large retailer to move
into financial services. Sears Roebuck
pursued such a strategy in the 1980s with
the purchase of the Dean Witter brokerage
house and the introduction of the Discover
credit card--both of which were acquired by
Morgan Stanley in 1997. Yet the prospect of
a company as large as Wal-Mart entering the
field, particularly retail banking, has
generated intense opposition.
The battle
erupted in 1999, when Wal-Mart filed an
application to acquire Federal BankCentre, a
small federal savings bank in Broken Arrow,
Oklahoma. Community bankers lobbied Congress
intensively and won passage of a bill that
barred commercial firms from acquiring
thrift institutions.
Wal-Mart
responded in 2001 with an announcement that
it would offer banking services to its
customers through a joint venture with TD
Bank USA, a subsidiary of Canada’s
Toronto-Dominion Bank. Such a partnership
was said to face lower regulatory hurdles
than an outright acquisition of a bank. Yet
the federal Office of Thrift Supervision
reacted negatively to the plan, especially
the idea that store employees would also
work as bank personnel.
The next
skirmish occurred in California in 2002,
when Wal-Mart took a different approach and
announced plans to purchase Franklin
Industrial Bank. Although the Arkansas
company claimed it was seeking only to
reduce its costs in handling more than 35
million debit-card transactions a month, the
California legislature promptly enacted a
law barring non-financial companies from
purchasing state-chartered banks, including
industrial loan companies (ILCs) like
Franklin that provide limited banking
services.
Recently, a
trade publication reported that Wal-Mart is
preparing to apply for the right to open an
ILC in Utah, one of a handful of states that
allow non-financial corporations to own such
institutions. “It’s not a question of if
Wal-Mart’s going to be a bank,” a University
of North Carolina finance professor told
Business Week (February 7, 2005), “it’s a
question of when.”
In the
meantime, Wal-Mart has been expanding its
offerings of other non-bank financial
services. After resisting the idea for many
years, in 1996 it introduced its first
co-branded credit card—a MasterCard issued
by Chase Manhattan—but the product was later
dropped. In 1999 Wal-Mart teamed up with GE
Capital to bring out its own private label
card, which was aimed at its lower-income
customers. Earlier this year, the retailer
again joined with GE as well as Morgan
Stanley to introduce a Wal-Mart Discover
card.
For those
customers who probably cannot qualify for
any kind of plastic, Wal-Mart has been
making a big push into services such as
money transfers, money orders and check
cashing. This includes an arrangement with
SunTrust Banks under which several dozen
Wal-Mart Money Centers by SunTrust have been
opened.
In all these
activities, Wal-Mart is shrewdly continuing
its focus on low-income consumers, many of
whom are shunned by commercial banks and are
exploited by high-fee financial-service
providers such as neighborhood check-cashing
outlets.
PRESCRIPTION FOR GROWTH
Wal-Mart has
long been in the drugstore pharmacy
business; it celebrated the opening of its
1,000th pharmacy back in 1990.
Since then it has made its way toward the
top of the field and now trails only the
industry giants: Walgreens, CVS and Rite
Aid.
Wal-Mart did
not get where it is today by settling for
fourth place. Last year the company sought
to improve its position by testing 24-hour
pharmacy service at some of its stores. It
also created a system called Easy Pay that
allows pharmacy customers to pre-register a
credit card to expedite the filling of
prescriptions.
Analysts
question the extent to which Wal-Mart can
apply its usual business model to a field
largely dictated by fixed reimbursement
arrangements with public and private
third-party payers. But that hasn’t stopped
the bean-counters of Bentonville from trying
to cut corners.
In fact, the
company got itself in trouble with the feds
for doing so. In June 2004, the U.S.
Department of Justice announced that
Wal-Mart had agreed to pay $2,866,904 to
settle allegations that the company had
submitted false prescription claims to
federal health insurance programs such as
Medicaid. The company’s pharmacies were
alleged to have dispensed partial or “short”
prescriptions due to insufficient stock,
while it billed the government programs for
the full quantities. The settlement amount
in the case, which began as a whistleblower
complaint, was to be divided up among the
federal government, the District of
Columbia, the states participating in the
suit and a whistleblower. The company also
agreed to enter into a Corporate Integrity
Agreement with the Office of the Inspector
General of the Department of Health and
Human Services.
Wal-Mart
has also fought against state efforts to
control the amounts paid to the company for
filling prescriptions for Medicaid
participants. In 2000 Arkansas moved to
reduce those payments to Wal-Mart and other
large drugstores, arguing that the cuts were
in line with the discounts that the chain
pharmacies gave to HMOs. Wal-Mart protested
the move and brought suit in federal court,
claiming the policy violated the equal
protection clause of the 14th
Amendment. According to press reports, the
company also quietly asked its employees to
call the governor’s office to protest. A
federal judge in Little Rock ended up ruling
in favor of Wal-Mart and Walgreens, which
had also joined the suit.
Another
aspect of the pharmacy business in which
Wal-Mart has generated controversy is the
issue of overtime pay for druggists. The
company has insisted on treating pharmacists
as salaried employees who are not eligible
for premium pay for extra hours. A federal
court in Colorado had ruled against the
company, but last month the 10th
Circuit Court of Appeals ordered a new
hearing in the case.
STEPPING ON THE GAS
In 1996
Wal-Mart entered into an with agreement
Murphy Oil (also based in Arkansas) to begin
installing gas stations in the parking lots
of Wal-Mart stores, mainly in the southeast.
Before long there were allegations that the
operations, which used the Murphy USA name,
were selling fuel at artificially low
prices. Wal-Mart and Murphy found themselves
being sued under little-known laws in about
nine states that prohibited gas from being
sold at below cost.
The companies
fought back, painting themselves as friends
of consumers. In Florida, for instance, they
bankrolled a group called the Coalition for
Lower Gas Prices. They also kept expanding
the number of gas stations operated by
Murphy via leases with Wal-Mart, reaching
500 across some 20 states by 2002.
This, in turn,
has sparked efforts by legislators in states
without prohibitions on low-cost gasoline
sales to adopt such restrictions. Last year,
a state representative in Kentucky accused
companies such as Wal-Mart of using gasoline
as a loss leader to attract customers for
other products. The head of the Michigan
Association of Convenience Stores warned:
“If you drive the little guys out of the
marketplace, there’s no one to compete with
the big guys.”
Now Wal-Mart
has apparently decided that the gasoline
business is so attractive that it wants to
sell fuel under its own name. In recent
weeks, the company has begun installing its
own pumps outside several Supercenters and
Sam’s Club outlets in states such as
Virginia and Missouri. Earlier this month a
trade publication called Oil Express
reported that Wal-Mart intended to have “up
to 200 or 300 more within a year or so” and
“could exceed 500 later this decade.” Given
the recent rise in energy prices, Wal-Mart
may see an opening for an even more rapid
move into the field, making independent gas
stations in some parts of the country an
endangered species.
NO LIMITS TO GROWTH
As dismaying
as these facts may be to those concerned
about Wal-Mart’s size and power, it’s
crucial to remember that the wizards of
Bentonville are not infallible. One
significant failure came in the area of auto
sales. In 2002 Wal-Mart joined with Asbury
Automotive Group in a pilot program called
Price 1 to sell used cars in lots adjacent
to Supercenters. After a year the initiative
was terminated after it became clear that
Wal-Mart did not have the expected drawing
power.
Wal-Mart is
willing to abandon ideas that do not pan out
in the marketplace, but it is loath to give
in to its opponents, whether from small
business, labor unions, environmental groups
or community organizations. “There’s no
limit to Wal-Mart’s growth,” CEO Lee Scott
once said. That’s not just a projection but
a warning that the colossus of retailing
will not be deterred in its campaign to
transform the business world.
Links to some small-business advocacy
groups concerned about Wal-Mart
American
Independent Business Alliance
American
Small Business Alliance
Hometown Merchants Association of America
Independent
Community Bankers of America
National
Association of Convenience Stores
National
Community Pharmacists Association
National Grocers Association
National Trust for Historic Preservation
and its
Main Street Center
New Rules Project of the Institute for Local
Self-Reliance
Petroleum
Marketers Association of America
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