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May, 2007

WAL-MART: BOOGEYMAN OR BOON?
by LARRY

To judge by all the controversy swirling about WMT, one's answer to that question would seem to depend on a lot of other criteria than simply how good a company it is.


Lest the reader imagine I am an objective exception to that rule, a little self-disclosure is in order. At one time or another, I have owned shares in Wal-Mart. In addition, if, when visiting Wal-Mart on any typical day, I would need to take off what I had purchased there and prove it had already been bought, I would probably in short order be arrested for nudity. From its hats, underwear, jeans, shirts, belts, casual wear shoes, dress slacks, socks, wrist splints, watches, over-the-counter meds, shampoos, toothpaste, the pens in my pocket, cases of motor oil, greeting cards, deodorant, hair conditioner, vitamins, the latest oil change or tires, a filter for our mower, chew things and fetch balls for our dog, a huge supply of Halloween snacks, all our toilet paper or Kleenex, a chair for our dining room table, carpet stain remover, office supplies, camera batteries, pillows, ink for our printer, electric blankets, fertilizer or grass seed for the yard, dishwashing or bathtub cleansers, videotapes or DVDs, kitchen bowls, knives, and basting brushes, to even a Wal-Mart gift card in my wallet, and on and on, I simply would not be decent or functional without this nearest big box store. For several years, Val, Frisky, and I would also routinely get our exercise by walking a few times around the huge nearby Wal-Mart lot. As yet, we do not have a Wal-Mart superstore in the vicinity. But once the current WMT location is transformed, in a few months, we may be getting many of our grocery items from there as well.

In these buying patterns, we are definitely not alone. While many Yuppies turn up their noses at getting merchandise from such a not cool, plebian establishment, millions upon millions of middle and lower class patrons have saved at least hundreds of billions of dollars via Wal-Mart shopping, thus countering the effects of inflation in other aspects of the economy, such as housing, medical care, or energy, and somewhat offsetting too the fact that the average wage has barely risen over the last few decades, once rising prices are factored in.



At least until recently, investors have averaged rather nicely with WMT's growth record as well. I would be quite pleased, even ecstatic, to have the results from merely sinking everything in this one asset since it began paying dividends, in 1973.

What is more, Wal-Mart has a large workforce, nearly 2 million, who pay their own expenses plus taxes and often can afford to buy homes, further stimulating the economy. Despite attention-grabbing headlines about disgruntled Wal-Mart employees, on average they receive significantly more than minimum wage and equivalent or better hourly wages and health benefits than they would get doing the same type work elsewhere. If this were not so, why would many more job candidates keep applying to WMT for openings than there are positions to be filled? When into the mix are added all the independent contractors who serve WMT and the thousands of big and small businesses who sell to it, each employing other workers, the economic footprint of this one corporation is immense.



Does all this mean that Wal-Mart is God's gift to humanity and ought to be allowed to do whatever it proposes? Absolutely not. There are definitely some big issues with which WMT must deal better than it has, and the company cannot be left unmonitored, anymore than the biggest steel producer or bank or railroad in the so-called "robber baron" days of the 19th Century should have been permitted unfettered control of their markets, communities, and working conditions.

Possible causes for concern with Wal-Mart include:

  • The company's buying policies have often forced suppliers to sell their goods and services for less and less, in many cases to the point they are driven out of business.

  • Fine, established, local stores often cannot cope with the competition from Wal-Mart and so must declare bankruptcy, laying off their workers and losing investments in their own businesses.

  • Wal-Mart superstores are at times placed in areas never intended for such a high-volume commercial enterprise, putting extra stress on neighborhoods, nearby home values, traffic flows, etc.

  • Even much larger businesses, such as Toys-R-Us, Circuit City, Eckert's, or Safeway, suffer greatly or have been forced to restructure or sell out by WMT's competition in toys, electronics, pharmaceuticals, food sales, etc.

  • Wal-Mart is arranging exclusive supplier deals with other countries, the terms of which take advantage of third world labor forces that must operate for long hours under uncompetitive conditions we might regard as criminally exploitative, for instance having entire factories, dedicated only to the production of goods for WMT, employing hundreds or thousands of "sweatshop" workers, each for as low as 15 cents an hour.

  • Wal-Mart has in this country been accused of forcing employees to work unpaid for many extra hours "off the clock," to assure completion of certain management directives or quotas.

  • It has also been accused of widespread discrimination against women and minorities in hiring for and advancement into supervisory and management positions.

  • Wal-Mart had been attempting to break into the banking industry too, which some believed threatened greater monopolistic practices by the company.

  • A Department of Homeland Security proposal to charge $15 per incoming freight container offloaded from merchant ships, to offset the costs of extra surveillance and inspections such as would help assure nuclear devices or material are not offloaded and transported into the American heartland, was successfully lobbied against by Wal-Mart, though the tab would have been miniscule compared with the value of each container shipment and even less significant relative to the cost of a single atomic detonation or dirty bomb carried out here by terrorists.

  • Wal-Mart's operations in other countries often are seen to support coercive regimes which regularly infringe on the needs and human rights of their citizens.

  • Wal-Mart has been cited for keeping many of its employees in an artificial "part-time" status, by circumventing the letter of full-time worker definitions, in order to avoid paying health care benefits.

  • The company has been said to typically take advantage of circumstances in which it had little or no effective competition to force through deals most favorable to it and costly to local communities, countries, or workers.


While each is entitled to her or his own opinion, regardless of one's political leanings and how she or he might come down on each of these and other controversial issues involving Wal-Mart, in my view it is only fair that government entities, investors, courts, citizens, and/or paying customers deal with WMT using the same standards they might apply to other large companies, neither playing favorites with Wal-Mart nor reacting more harshly to this business than they would toward others.

A first step might be to assure there truly is a competitive environment at play. If so, then free market forces will dictate that Wal-Mart tow the line in labor relations and the provision of merchandise in ways that are of real benefit. But if areas are found in which there is, in practice, no free market restraining a company, laws must be enforced to protect employees and others potentially harmed from egregious violations, whether by Wal-Mart or any other mega-company.



Wal-Mart may need to be reigned in to some extent, but its past and continuing success has been a net positive for both our own and the global economy, lowering the average cost of living and raising the average employee output. Workers who have taken advantage of opportunities to buy Wal-Mart shares over the years have also likely reaped huge additional benefits. And communities where there are thriving Wal-Marts tend to have more revenues from taxes and higher percentages of their citizens gainfully employed, adding to local productivity.

So, though I understand the many legitimate concerns that have been expressed and think each must be properly addressed, on balance, I would say Wal-Mart has been a boon.

It is also on a short list of corporations offering excellent value for current investors, meeting criteria used by some of our most respected long-term value gurus.

Sources:

Wal-Mart the Do-Gooder. Roger Lowenstein in SmartMoney, Vol. XVI, No. VI, pages 42-43; June 2007.

What Would Warren Do Now? Anojja Shah in SmartMoney, Vol. XVI, No. VI, page 30; June 2007.



DISCLAIMER

Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)



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