It truly is a Wally-World. Yikes!

Wal-Mart's influence grows

By Jim Hopkins, USA TODAY

We are a Wal-Mart Nation. Wal-Mart's influence on the U.S. economy has reached levels not seen by a single company since the 19th-century rise of Standard Oil, economists and historians say.

Even if you don't shop at Wal-Mart, the retail powerhouse increasingly is dictating your product choices — and what you pay — as its relentless price cutting helps keep inflation low.

Wal-Mart is the top seller of groceries, jewelry and photo processing. It is creating more of its own brands. Some, such as Ol' Roy dog food and Equate vitamins, quickly became the USA's top sellers. It is moving into banking, used car sales, travel and Internet access. It averages 100 million customers a week. That's 88.5 million more people than U.S. airlines fly in a week.

Anyone whose stocks rose in the late 1990s owes Wal-Mart, the world's biggest company. It alone accounted for as much as 25% of the U.S. productivity gains from 1995-99, says consultant McKinsey & Co. Such gains drove corporate profits, thus stock prices. Wages in retailing, one of the biggest sources of new jobs in the '90s and current decade, are also affected by Wal-Mart. With 1.3 million workers, it is the world's largest private employer. It employs one of every 123 U.S. workers and nearly one of every 20 retail employees.

"I joke we're all going to be working for Wal-Mart someday," says economist Mark Zandi of consultant Economy.com.

That may not be too far off.

Although Wal-Mart is hitting speed bumps because of growing labor challenges, employment lawsuits and higher costs, few doubt it will stop besting competitors as it expands. While other retailers such as Home Depot, tech giants such as Microsoft and manufacturers such as General Electric played big parts in the 1990s productivity gains, Wal-Mart, with its massive buying power and technology advantage, played the biggest role, economists say. As it grows, its influence, largely unknown to consumers, will continue to seep into more parts of the USA and the global economies.

"Everyone knows Wal-Mart," says Jim Hoopes, a business history professor at Babson College, "but nobody has a real sense of how big and how powerful it is."

Wal-Mart, responding to criticism over its growing influence, says it creates thousands of jobs a year and pays competitive wages and benefits. Its push for productivity is meant to keep prices low, benefiting its customers, says spokesman Tom Williams. "We're doing good, but we could do better," he says.

Few companies have moved so far so fast. Founded 40 years ago in rural Arkansas by Sam Walton, Wal-Mart has swelled to 4,300 stores in nine countries and annual revenue near $250 billion. Its computer network, a critical part of its success, rivals the Pentagon's.

It is now the biggest customer for many of the world's leading consumer-products companies, including Kraft, Gillette and Procter & Gamble. At P&G, Wal-Mart accounts for 17% of annual revenue, up from 10% just five years ago. That makes those companies more dependent on Wal-Mart's success, more vulnerable should it stumble and more likely to respond to Wal-Mart's requests for lower prices and product changes.

The chain's buying power is so immense that 450 suppliers have opened offices — many in the 1990s — near Wal-Mart headquarters in tiny Bentonville, Ark. As many as 800 more such offices are expected in the next five years. Sales representatives want to be near Wal-Mart buyers to beat the competition, says Rich Davis, a local economic development official. "I've had them sit here and say, 'Look, if we're not here, our competitor will be,' " Davis says.
As such, Wal-Mart is increasingly affecting:

Product choices. P&G is dumping weak brands, such as Crisco and Jif peanut butter, sold to J.M. Smucker last year. It wants to focus on heavy hitters, such as Tide detergent, most desired by Wal-Mart and other big retailers, P&G says. That strategy helped P&G boost fiscal second-quarter net income 14% year-over-year to $1.5 billion, it said Tuesday.

Other companies have likewise tweaked products so that they pass muster with Wal-Mart. Video game maker Planet Moon Studios two years ago wanted an industry group to give its Giants game a teen rating. Why? So it would be carried by Wal-Mart and others. Planet Moon changed the color of blood in the video to green from red, toned down the language and put a bikini on a topless character, says CEO Bob Stevenson. Without those changes, he says, "The risk to sales was too high."

Wal-Mart is also challenging its suppliers by developing more of its own products, called "private labels." It stepped up that effort in the mid-1990s as it expanded into vitamins, batteries and bathroom tissue. Its Great Value grocery line has 1,475 items, from beans to salsa, up from 194 two years ago.

Wal-Mart says it is committed to keeping shelves full of well-known brands such as Kellogg cereals and Tide. But, in general, private-label profits run as high as 30%, vs. 15% on brand-name items, says Burt Flickinger, managing director of consultant Reach Marketing.

Private-label products also promise Wal-Mart more profit as the chain expands abroad, because U.S. brands don't have the same clout there. In Europe and the United Kingdom, where Wal-Mart is battling for Britain's Safeway grocery chain, private-label goods are 50% of its sales vs. 25% in the USA.

Product prices. Big food companies including Kraft, which gets 10% of its revenue from Wal-Mart, have not been able to raise prices as quickly as they once did because of Wal-Mart's demands, says Jonathan Feeney, a consumer products analyst at investment firm SunTrust Robinson Humphrey. Kraft declined to comment.

History has shown that suppliers suffer if they run afoul of Wal-Mart. Rubbermaid raised the prices it charged Wal-Mart in the mid-1990s because of an 80% jump in the cost of a key ingredient in its plastic containers. The retailer responded by giving more shelf space to lower-priced competitors, helping drive Rubbermaid into a 1999 merger with rival Newell, says John Mariotti, a former Rubbermaid executive. "Rubbermaid earned Wal-Mart's wrath by not giving it the best deal," he says.

Employment. Wal-Mart's impact on wages was first felt in rural towns in the South and Midwest where Wal-Mart got its start. Often, it became the biggest employer overnight, setting wage rates for all retailers, experts say.

Now, its impact on retail employment has spread nationwide, contributing to slower wage growth throughout the sector, economist Zandi says.

Pay for retail workers rose 43% from 1990 to 2001, vs. 50% for non-retail workers, according to Bureau of Economic Analysis data. No one knows exactly how big a part Wal-Mart played, Zandi says. But its influence is "undeniable" because it created more jobs in the 1990s than any other company, he says. More retail jobs are on the way. Wal-Mart plans to add 800,000 workers in the next five years. U.S. retailers are expected to add 3.1 million jobs by 2010, the government says.

Manufacturers, which pay more, will add fewer than 600,000 jobs in the same period. Labor unions that represent factory workers are alarmed. They say Wal-Mart, in demanding ever-lower prices from suppliers, has helped drive thousands of U.S. manufacturing jobs abroad, where labor costs are lower.

Now they worry about Wal-Mart's push into the unionized supermarket industry. Wal-Mart has no unions. That means its employees earn less than those at competing supermarkets, says the United Food and Commercial Workers (UFCW).

Wal-Mart's hourly pay averages $7 to $8 an hour, vs. $11 at Kroger, Safeway and other competitors with unions, says UFCW spokesman Greg Denier.

Not true, says Williams, the Wal-Mart spokesman. While he would not disclose wages, which vary by market, he says Wal-Mart pay is close to or equal to union wages.

Productivity. Wal-Mart's key role in the 1995-99 economic boom came partly because of its legendary use of technology to analyze costs and speed delivery of goods from its 30,000 suppliers to dozens of sprawling warehouses, say retail and financial analysts.

Wal-Mart says it has the USA's biggest private satellite communications network, one that links stores to Bentonville by voice, data and video. Suppliers tap directly into Wal-Mart's computers to track sales of everything from soup to nuts, which improves inventory controls and cuts costs.
Other retailers, including Kmart, tried matching Wal-Mart's tech prowess but failed. Kmart filed for bankruptcy-court protection last year and is cutting 67,000 jobs and closing nearly 30% of its stores.

Wal-Mart also teaches manufacturers to be more cost effective so product prices can stay down. For example, Wal-Mart might suggest that a supplier cut its labor costs by shipping toasters in their cartons, rather than packing them in bigger boxes and shrink-wrapping them onto shipping pallets, says James Champy, chairman of Perot Systems' consulting unit, which advises Wal-Mart suppliers.

Such close communication between a retailer and supplier is unusual. But it's being adopted by more companies, including Dell Computer, as U.S. businesses seek more productivity to better compete globally.

"It's where the future of business has to be," Champy says.

That future may also include fewer companies. To achieve economies of scale, more consumer products companies are merging. Wal-Mart's demand for low-cost products partly influenced Kellogg's purchase of Keebler in 2001, and the merger of Kraft and Nabisco in 2000, analyst Feeney says.

Speed bumps ahead?
Meanwhile, Wal-Mart's productivity continues driving its bottom line. The retailer is expected to report nearly $250 billion in annual revenue for the fiscal year ending Friday — a 15% gain from the previous year, despite the so-so holiday shopping period.

Expected earnings of $1.78 a share would be 19.5% higher than fiscal 2002, say analysts surveyed by Thomson First Call.

The chain has 8% of all U.S. retail sales, excluding restaurants and auto dealers. That's up from 6% just five years ago, an "incredibly significant" gain, Zandi says.

Still, that's not big enough to impose unjustified price increases, as some monopolies have done in the past, Zandi says. And Wal-Mart would likely need to be much bigger before it could stifle product innovation, retail analysts say.

If Wal-Mart suddenly imploded like an Enron or WorldCom, no doubt stock markets would react. Consumer confidence would fall. Big Wal-Mart suppliers would be hurt. But other retailers would quickly grab Wal-Mart executives, customers and suppliers. Any disruption to the flow of goods would be temporary, retail experts say.

A more likely scenario is that Wal-Mart's growth could be pinched as it digs deeper into urban areas, where wages are higher, competitors more numerous and scarce land more expensive. That's one reason the chain is rolling out smaller Neighborhood Markets grocery stores that are better suited for urban areas.

Slower Wal-Mart growth could, though, muffle the still-tepid economic recovery. "If only one company is adding 25% of our productivity," Hoopes says, "it means a lot of other companies are not growing fast enough."