"All We Want to Do Is Grow"

Corporate Research E-Letter No. 52, March-April 2005



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.”


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.


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.


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.


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