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April 25, 2004 1:08 PM   Subscribe

The Wal-Mart Myth (or, why higher wages mean higher profits.)
posted by Blue Stone (28 comments total)
 
Wal-Mart's Magic Numbers.
posted by Gyan at 1:18 PM on April 25, 2004




ilsa, if the rest don't hear the message then, NO, we haven't beat this horse enough.

when something is really really wrong, and not fixing it hurts every one, we don't just say "aw thats a shame" and walk away. Honor and duty DEMAND we do something about it... (if one is honorable that is)
posted by Elim at 1:38 PM on April 25, 2004


when something is really really wrong, and not fixing it hurts every one, we don't just say "aw thats a shame" and walk away. Honor and duty DEMAND we do something about it... (if one is honorable that is)

Honour? Duty?




...



*dons level 7 elf garb*




Oh, you weren't talking about killing orcs? For shame!

posted by The God Complex at 1:43 PM on April 25, 2004


Honor and duty DEMAND we do something about it

By linking a derivative of an article which has already been linked, which provides no insight that couldn't have been previously found elsewhere on the "Evil Walmart-filter"? That's not honor or duty. It's LAME.
posted by dflemingdotorg at 1:51 PM on April 25, 2004



Honor and duty DEMAND we do something about it


this sounds like a 19 year old local boy who was written up in the local birdcage liner this weekend: after getting (literally) his ass shot off and recuperating for months, he wants to go back. it's his duty. it's an honor.

That's not honor or duty. It's LAME.

precisely my reaction to aforementioned young man.
posted by quonsar at 2:04 PM on April 25, 2004


Ilsa: amusing that you cite so many quest from Henry Ford. Todaykl the Ford auto has at least two of its models now assembled in China...more profit for stockholders and no lower price for consumers.
posted by Postroad at 2:18 PM on April 25, 2004


The numbers in the TomPaine.org article suggest that Costco stock should be more profitable per share than Walmart stock. But I've heard that Walmart is more profitable - and Wall Street has priced Costco shares lower than Walmart shares.

Can anyone clarify this for me? Is Walmart really more proftable, oir do the lower share values for Costco stock represent - simply - irrational ideological bias on the part of Wall Street?
posted by troutfishing at 2:35 PM on April 25, 2004


"By linking a derivative of an article which has already been linked [...] That's not honor or duty. It's LAME."

Care to cite? I wasn't aware it was being "derivative" so much as mentioning briefly the matter in Inglewood (which I guess is what you're really referring to) before going on to talk about something far more interesting - something which hasn't been previously so linked ... to my knowledge (I searched but am by no means infallible).

And do you have to be so rude?
posted by Blue Stone at 2:39 PM on April 25, 2004


That probably depends on how you define "profitable", troutfishing. You can use return on assets, return on equity, price/earnings (which doesn't measure "profitability", exactly, but may be germane), or a host of other measures. I'll try to get around to a more thorough answer for you, if no one beats me to it.
posted by trharlan at 2:42 PM on April 25, 2004


according to figures on Yahoo, Costco has a price to earnings ratio of 23, while Walmart is on 29. This reflects different appraisals of expected growth. Apparently Wall St expects that Walmart will offer faster growth.

Speaking as a non-USian, I cannot understand how any retail stock can justify a PE of almost 30, but that's another argument.

Anyway, troutfishing: yes, Costco is being priced lower.
posted by i_am_joe's_spleen at 2:42 PM on April 25, 2004


Can anyone clarify this for me? Is Walmart really more proftable, oir do the lower share values for Costco stock represent - simply - irrational ideological bias on the part of Wall Street?

Costco's higher operating costs scare off a lot of investors. They assume that these niceties cannot be sustained and that the company will eventually succumb to lower profits as a result.

Care to cite?

Here.

And do you have to be so rude?

If it's rude to call it like it is, call the rude police because I'm shooting up the countryside.
posted by dflemingdotorg at 2:47 PM on April 25, 2004


To clarify a little, this article compares Costco to their direct competitor, Sam's Club. The numbers are comparing profitability of a Sam's Club store to the profitability of a Costco store and don't even touch on the profitability of a regular Wal-mart store, let alone the profitability of the two corporations as a whole.
posted by ulotrichous at 3:06 PM on April 25, 2004


MetaFilter: Call The Rude Police Because We're Shooting Up The Countryside.

I *heart* this thread.
posted by keswick at 3:07 PM on April 25, 2004


How sure are you that it's not irrational ideological bias on Costco's part? As much I applaud Costco's humanity and practices, and as much as I would like to side 110% with Costco on this issue, I'm not that sure. I think we're facing a labor glut. Basic marketplace laws of supply and demand predict a cooresponding fall in price of labor which alone has some pretty far reaching consequences.

There are other factors here, ones that might ulimately make Costco a greater success than WalMart in the long run, but these are not well understood. At least, not by the analysts on Wall Street whose own careers depend on understanding them.
posted by wobh at 3:14 PM on April 25, 2004


Operating profit margin (operating profit/net sales):
Wal-Mart 5%, Costco 3%
Return on assets (earnings after tax/ total assets):
Wal-Mart 10%, Costco 7%
Return on equity (earnings after tax/ shareholder equity):
Wal-Mart 24%, Costco 14%

So by most (maybe all) traditional metrics, Wal-Mart is more profitable. This is likely one reason it trades at a higher price/earnings ratio.

Of course, as others have pointed out, this is still an apples to oranges comparison.

It's also interesting that five years ago all anyone seemed to care about was top-line (sales) growth, and now everyone is worried about bottom-line (profit) growth. The truth is probably somewhere in the middle. Cutting expenses leads to finite and diminishing gains, while sales can grow (theoretically) infinitely.
posted by trharlan at 3:33 PM on April 25, 2004


dflemingdotorg, you're correct, I [essentially] posted a dupe; I searched but didn't see the article you pointed to, and hadn't read it previously. My appologies. Thanks for pointing out my error.
posted by Blue Stone at 3:58 PM on April 25, 2004


I guess the problem with Walmart is in the consumer erroneous perception of value (Walmart wants you to believe cheap is good) combined with declining wages which encourage consumer to go to megastores to save money.

In other words, you think a mega jar of something is excellent value at $10, but you don't know what kind of shit you're buying ; but you believe it is good cause Walmart is always pushing the cost down..... mmmhh

As I said in another message, I went to a Walmart equivalent in my country to buy Cola and stuff. I bought Cola at $1 (example price) just to discover that a little store very close to my home was selling exactly the same Cola at $0.80.

I tought it was a pricing error , but hey ..it was a consistant error lasting at least 3 months ..and the "price error" is still here ! Meaning it's not an error, it's just that I -erroneously- tought megastores offer better price consistently (because they buy in quantities), but it simply is not true.

So from an investor point of view, I was financing a company which was ripping me of. Guess the same applies to Walmart.
posted by elpapacito at 4:35 PM on April 25, 2004


quoting from the source article, "...analysts worry that Costco's operating expenses could get out of hand."

To me, this is the real issue. If you track stocks, the biggest fluctuations come when analysts predict *future earnings*, not present ones. This is where the action is, and where scandals have been--corporations either falsely predicting better or worse future performance for strategic gain. THIS is the reason for the "Safe Harbor" statement that now appears on almost ALL corporate press releases:

"Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995: The statements contained herein, which are not historical, are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those expressed in the forward-looking statements including, but not limited to, certain delays beyond the Company's control with respect to market acceptance of new technologies, products and services, delays in testing and evaluation of products and services, and other risks detailed from time to time in the Company's filings with the Securities and Exchange Commission."

In other words, ANYTHING that Wall Street can use to predict future earnings, including employee pay and benefits, will be one of the strongest influences on stock price.

So better employee pay just increases a corporation's risk that its profits will be lower. Too many risks like these, and it lowers the stock price. Just like in gambling, you would prefer betting on a 3:2 house advantage rather than a 5:2, assuming the same payout.
posted by kablam at 4:59 PM on April 25, 2004


I think we're facing a labor glut. Basic marketplace laws of supply and demand predict a cooresponding fall in price of labor which alone has some pretty far reaching consequences.

You're completely and absolutely right. See, a lot of companies have found that they can either hire more intelligent people who they can pay just a bit more, and they'll figure out ways to do the work of two or three people themselves. Companies, instead of squishing this intelligence with beurocracy as in the past, have decided that having a high headcount is no longer desirable in a department and have sat on previously empire-building middle managers to make sure they don't have unnecessary people. So you've got decreased demand due to efficiency increases, and incresed supply due to globalisation... and the only workers that are in demand for decent wages are those who are highly intelligent and have college degrees, because they're the ones that can find and carry out the more efficient processes... and whoops, you've got a jobless economic recovery. Yay!

The difference between Wal-Mart and Costco's employees ... Wal-Mart's employees tend to be less intelligent and tend to steal more. They're like robots; point them at a task and let them go. More intelligent employees either go into management or go ballistic after a short while. They have huge turnover.
Costcos employees tend to be very dedicated to costco, feel that they're getting a good wage and fair benefits, are usually fairly intelligent, and work their asses off. They're EVERYWHERE in the store. They don't steal and have a tendency to make sure their store doesn't suffer losses. They're involved with the management practices and I know several fellow students who are only in college because Costco's paying for it for them, and they'll go into managemnt after college.

It's apples and oranges; different paths to a cheaper workforce. Wal-Mart just gets theirs on the front-end and Costco gets theirs on the long-term. Costco will most likely end up being more profitable in the long-term, but our stockmarket is short-sighted at the moment (ref: The dot-bomb bubble) and their evaluations reflect that. Personally, I'd be more concerned with wal-mart's long-term growth; as the inglewood case shows, they've run out of rural areas to dominate and are having problems penetrating urban areas where people have more money and expect more in the way of service and quality.

If you're really interested in following the whole Wal-Mart saga, and the grocery/CPG industry as a whole, keep an eye over on MorningNewsBeat, which is a daily (weekdays) website that follows the industry and provides some commentary.

(And by the way, I'm a Supply and Logistics / Food Industry Management major at Portland State University. One of my two programs is supported heavily by Wal-Mart; the other is supported heavily by Costco and Target. I've seen and understand both sides.)
posted by SpecialK at 5:39 PM on April 25, 2004


SpecialK: Essentially, were you an investor, you would then be taking the 'long' strategy in your stock pick "bet", a popular and reasonable strategy, as opposed to the 'short' strategy favored by many in their "bets", again, also a popular and reasonable strategy. Ironically, both of the "bets" may be right, theirs in the short run, and yours in the long run. (Or they might both be wrong, which often happens in bets, but que sera.)

So, is employee pay and benefits *the* critical factor in short and long-term performance? While that is what the article implies, it may be only one factor among many.

As a rule of thumb, employees are the #1 expense in most corporations. But (as you might see in K-Mart), cutting your employee numbers to the bone may not be the best strategy. Intelligence and motivation also have diminishing returns in either direction: highly intelligent and motivated box stackers can be as expensive and wasteful as ignorant buffoon floor managers.

Is it best to deter employee theft with heightened security or heightened motivation?

Is the corporation innovative and market sensitive from the bottom up or from the top down?

Is the corporation in the phase of a naive start-up; a smartly running machine; settling down into a single business model; or in decline, stagnant, unable to keep up with the market?

Previous performance. What has happened to businesses that have tried this before? Does the model translate to this business?

Business cycle. Policies for success vary, based on: a booming, stable, or declining economy; inflation or the lack thereof; trade deficits (depending on products made); politics and the legal environment (Wal-Mart is sued, what, three times every hour every day?); taxes; transport and supplier costs, etc. And of course, employment.

Place your bets.
posted by kablam at 6:30 PM on April 25, 2004


I see Honor and Duty are foreign concepts to some... Hmmm

Honor is simply understanding you actions reflect upon YOU positively or negatively.

Duty is doing what you must to fulfill your reponsibilities to your self/family/friends/community/humanity.

Some here have compared my use of honor to the military. fair move I guess, saving that in the military they are bound by a code of justice that will punish those who fail to live up to it, in the 'real' world the conciquences of a dishnorable act may in fact boaster the perp of the action.

And many shurk what duty ir required by a social contract (cheat on taxes, speed, even little things like under tipping and such)

It Scares me that some here thing these things belong in a fantasy world or only exist in a war film....

And they call me a cynic....
posted by Elim at 6:38 PM on April 25, 2004


My appologies. Thanks for pointing out my error.

No worries : ) I'm not quite sure how you could have avioded it; my comment was more directed at the "honor" comment anyways.

Also Kablam, that's a thought provoking comment. Response will follow sleep.
posted by dflemingdotorg at 7:56 PM on April 25, 2004


While its important to look at the investors side of things, in reality where each of lives, we have a choice about where to shop. At a company that mistreats their employees, works every possible angle to pay as little as possible in benefits and demands special treatment by suppliers simply because they can.

Or a company that treats its employees well, has excellent customer service (exchanged three phone systems with nary a question or reciept) and sells a pretty good high quality product instead.

I'll go with the good guys and I hope everyone else does too. Because, if that happens, the investors will have no choice but to recognize that its possible to succeed and be good for people too.

WalMart has replaced Microsoft as the Evil Empire (though Word still routinely makes me want to drive to Redmond and kick Bill Gates square in the nuts).
posted by fenriq at 10:32 PM on April 25, 2004


Kablam -

No, that's not what I was implying. I was attempting to point out the philosophical differences with the way Wal-Mart and Coscto (and for that matter, Target) have been solving problems. Wal-mart's solution is to always do things cheaper, just as K-Mart attempted -- a strategy that has been known to fail, as you pointed out. Costco and Target have taken the point of view that people are an investment to them and by paying them more and otherwise taking care of their employees, they can get more productivity from them, less turnover, and more loyalty ... which in turn produces fewer thefts and higher 'class' stores where people don't care so much about lowest price.
posted by SpecialK at 12:37 AM on April 26, 2004


Two observations (and thanks to everyone who offered answers to my question) - I've heard Costco has (per comparable size store, I assume) twice the gross sales per store as Sam's Club.

BUT.......Is the clientele the same? Probably not. Costco sells higher end, higher quality products - luxury products at bargain basement prices (and with an honest smile). But not everyone can afford luxury. WalMart/Sam's Club shopper's are merely getting by, jumbo size mystery brand, and with no frills expected - or offered by haggered and impoverished employees.

Anyway, to really do an ideological Linda Blair, consider this :

The famous Paul Ehrlich/Julian Simon debate - Ehrlich's claims about limits to growth (Malthusian at least) vs. Simon's repudiation of those supposed Malthusian limits - is significant here, and in a counterintuitive/counterideological fashion :

The Julian Simon school of thought would suggest that - by investing more employee pay to foster workplace creativity - CostCo is tapping (at quite favorable rates of return, it is likely) the greatest resource known to humankind :

The creative power of the human mind.
posted by troutfishing at 12:53 AM on April 26, 2004


But someone - sooner or later - will solve that equation and provide a metric for an optimal balance, I fear.

Then......God help us.
posted by troutfishing at 12:58 AM on April 26, 2004


If it's rude to call it like it is, call the rude police because I'm shooting up the countryside.

A fine, fine lot, the new users are shaping up to be...
posted by mkultra at 8:03 AM on April 26, 2004


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