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Wal-Mart And The 'Brave New World Of Business'


This is FRESH AIR. I'm Dave Davies, senior writer for the Philadelphia Daily News, filling in for Terry Gross.

Wal-Mart is the world's largest private employer, with more than two million employees worldwide and 1.4 million in the United States. It just reported second-quarter earnings of $3.44 billion, slightly ahead of projections.

To its critics, Wal-Mart is emblematic of what's wrong with corporate America. It's made a science of cutting costs by building massive distribution centers, squeezing suppliers and pinching the wages and benefits of its employees.

Wal-Mart executives have long argued that the result of its efforts is lower prices for everybody, effectively giving us all a raise, And as the company has come under attack from unions and other activists in recent years, it's focused more on environmental protection and sustainability in its operations, purchasing and corporate giving.

Our guest Nelson Lichtenstein, has written a history of Wal-Mart, beginning with its founding by the late Sam Walton and tracing its phenomenal growth, which Lichtenstein says was linked to the cultural values of Bible-belt America. He says Wal-Mart has transformed retailing, but created a business model that is ultimately unsustainable.

Nelson Lichtenstein is a history professor at the University of California Santa Barbara. His book is called "The Retail Revolution: How Wal-Mart Created a Brave New World of Business."

Nelson Lichtenstein, welcome to FRESH AIR. Tell us about Wal-Mart's headquarters in Bentonville, Arkansas. It's in a fairly rural part of the state, right?

Professor NELSON LICHTENSTEIN (History, University of California Santa Barbara; Author): Yes. It's in the extreme northwest Arkansas. It's a kind of bustling, booming - well, now middle-sized town with all sorts of new construction going on. And there are some 750 of the - at least - of these vendors who've established sort of offices there, including Procter & Gamble in nearby Fayetteville, which is the university town.

And then I was struck - for example, Walt Disney, which, you know, sells lots of cuddly, you know, little dolls and things, you'd assume that Walt Disney would have its retail headquarters in Los Angeles, but no. It's right there next to Wal-Mart in northwest Arkansas.

DAVIES: And, of course, Wal-Mart has enormous power with respect to its vendors, those who supply all the goods on its shelves. And I guess this grew out of the patriarch of the firm, Sam Walton. And in the book, you give a fascinating description of how he made his career in retail. How did he change the relationship between his retail stores and these manufacturers who made the goods?

Prof. LICHTENSTEIN: Well, right. Well, Sam Walton was there in northwest Arkansas, where he had his first set of stores. And he was always irritated and vexed by the fact that getting the goods to his stores was a difficult, complicated thing. There were intermediaries. There were jobbers. There were suppliers. They didn't even want to go to northwest Arkansas. It was out of the way. And therefore, you know, it was expensive to get, you know, goods to his stores.

He wanted to have a discount operation. He wanted to sell stuff cheap. So he said, well, I'll establish my own distribution centers, my own warehouses and thereby, you know, cut out the middleman. And he really couldn't stand salesmen, but his key thing was first setting up his own distribution centers in Arkansas and then in the states around there, and he owned them. The firm owned them.

This was a big innovation that Wal-Mart made - really, the same magnitude as the first assembly line that Henry Ford created in the early 20th century to eliminate as many of these middlemen as possible. And the fact that all the vendors end up in Bentonville, you know, with offices, is a kind of visible indication that he's gotten rid of a lot of those middlemen, middlewomen.

DAVIES: So instead of buying products from some marketing guy who dealt with the manufacturer, he ended up buying a big fleet of trucks and building these huge warehouses and buying direct from manufacturers and just having all that stuff right there to deliver to his stores when they needed them.

Prof. LICHTENSTEIN: Yeah, that's correct. And here's a word we should consider, the word warehouses. They really - they aren't warehouses. They're distribution centers. And here's the difference.

There had been warehouses. Warehouses were places you stored stuff, you know, got off the ship from Europe, stored it for several months or, you know, got off the train from, you know - and you stuck it in a place. And you - when you needed it, you took it out of there. Walton - that's a waste of money. That's a waste of time. That's a waste of space.

Walton built distribution centers so that the truck came in one end of the distribution center, and 12 hours later, the stuff left the other side of the distribution center, repackaged and going to every individual store.

And so when you - if you go to one of the 120 giant distribution centers that Wal-Mart has right now, the goods never stand still. What they're composed of are hundreds of miles of conveyer belts, which take the goods from trucks coming from the supplier, from the factory, and then moving it around and resorting it and then going off to the stores.

DAVIES: To move all this stuff efficiently, you'd need a really sophisticated information system which balances the needs of the stores and what the manufacturers can deliver. And you point out that Walton was among the first to use the barcodes to develop that kind of information, and that that was critical in transforming his relationship with these suppliers. How did it work?

Prof. LICHTENSTEIN: Yes. The barcode was actually invented, came out of the grocery industry in the very early '70s, '60s and '70s. There was a - they thought that they would, you know, eliminate a lot of clerks and checkout people and speed it up by having - you know, everyone knows what these barcodes are, this electronic system of registering the price. And it did do that to some extent, although it turned out it wasn't quite as much labor-saving as they thought.

But they didn't understand - the grocery people didn't understand, but Walton did - that the real advantage of the bar code was the question of the information it contained about where and when sales were made and how much the cost of the item was.

And so Walton began to install these barcode scanners in his discount stores, which were selling not necessarily groceries, but selling other things. That was considered a great innovation. And then he captured the information about, you know, how many tubes of toothpaste were sold in the morning versus the afternoon, versus at this price or that price.

For years, for decades, it had been the manufacturer, Procter & Gamble, Colgate, etcetera, which jealously guarded that kind of information. And then they, you know, they took surveys. Procter & Gamble invented the soap opera as a way of, you know, of selling this stuff.

They were the ones who would go the merchant and say, look. Here's - you know, we know exactly how much you're going to sell. We want you to take these five boxes of toothpaste because we've made the surveys.

Well, Walton upended that relationship entirely. After he put all the barcode scanners in and built a gigantic data warehouse in Bentonville - it looks like something out of the Pentagon. There are no windows. It's a huge building. There are guards all around it. Anyway, this was a mechanism for him to gain the knowledge, to assemble it, to slice it, to dice it, and as we know, knowledge is power.

DAVIES: Give us an example of how the leverage that all this information gave Wal-Mart allowed them to dictate to suppliers.

Prof. LICHTENSTEIN: Well, for example, with - Procter & Gamble is a good example. It's a huge company. It has an office in - near Bentonville with 250 people in it. It sells billions and billions to Wal-Mart each year. But when it comes to, you know, the sales of its various products, Tide or the toothpaste or soap, Walton - I mean, and Wal-Mart today - can tell Procter & Gamble precisely the kind of products that sell better in Florida versus Minnesota versus some other place, and can direct, literally direct, the factories that Procter & Gamble has, either in the U.S. or abroad, where to send this material. And they don't have to - it's such a big supplier, it doesn't even go through the warehouses anymore. It goes directly from the factories, directly to the various stores because they put that entirely computerized.

In fact, they don't even order material from Procter & Gamble anymore. The computers are interlaced, are interconnected, so that when a sale takes place, you know, in California for a tube of toothpaste, the electronic impulse goes directly to Procter & Gamble, and then they produce more toothpaste.

So it's a much more efficient system. And, of course, they've wrung out a lot of the overhead. And Procter & Gamble's making money, and Wal-Mart's definitely making money.

DAVIES: Tell us about the internal culture of Wal-Mart.

Prof. LICHTENSTEIN: Well, Wal-Mart was founded in the rural South in the 1950s and '60s. It was one of the last places in the country that the agricultural revolution really hit - that is, the depopulation of the rural areas, the elimination of the family farm.

The Ozarks were an area of small farming and subsistence farming, really. So you had a terrific surplus population of ex-farmers. Some of them went to California and the north and Chicago. But many of them wanted to stay in the Ozarks, and they also wanted to stay in a kind of small-town environment in which they, you know, their friends and neighbors were right there.

So the rise of the discount stores that Walton was now creating in this area sort of took the place of the farmstead. And often, you would have people who'd lost their farm would now move into the role of a manager - this would be for the men - the manager of a store. And then the clerks were the women, who had been, you know, the helpers on the farm, you know. And so you sort of replicated that rural, patriarchal kind of culture in the store.

Sam Walton - I mean, I don't know how self-conscious he was about that, but clearly he embodied that himself. He was proud and advertised the fact that he was sort of a good old boy - although he'd gone to college - but he loved to hunt and shoot and he had a very stable marriage and his kids went into the business. And he was, you know, sort of the pater familias. He was Mr. Sam. And there was, I think, a genuine loyalty to him and veneration of Sam Walton in the early years of the firm.

DAVIES: And so there was a sense of family, right? I mean, you don't call your workers employees. You call them associates, right?

Prof. LICHTENSTEIN: That's right, associates. I mean, this was - right, the associates. They created a whole variety of names, of different names for traditional things in, you know, in industrial relations. They weren't workers. They were associates. The managers were not managers. They were coaches. The, you know, meetings they had, their annual stockholder meeting was not a staid affair with people with suits. There was country music and canoe trips and barbecues and all sorts of stuff like that.

So they tried, successfully, to create this sense of family. And there was a kind of - in the early years - it's changed since them, of course - in the early years, a sense of identification between the - Sam Walton living in northwest Arkansas himself and the many, many associates that he hired, many of whom came right off the farm.

DAVIES: Our guest is Nelson Lichtenstein. His book is called "The Retail Revolution: How Wal-Mart Created a Brave New World of Business." We'll talk more after a break. This is FRESH AIR.

(Soundbite of music)

DAVIES: If you're just joining us, our guest is Nelson Lichtenstein. He's written a new book about Wal-Mart called "The Retail Revolution."

So what are some of the ways that Wal-Mart today holds down its labor costs?

Prof. LICHTENSTEIN: Well, one is no overtime, certainly for those who are on hourly. But at the same time, when it comes to people who are on salary, assistant managers who don't make - who make maybe $45,000 a year, there they work 50, 60, 70 hours a week regularly.

Furthermore, Wal-Mart is a company which has sort of abolished the weekend, or done a lot - they have Saturday morning meetings for many executives and lower-level folk in and around Bentonville, and also out in the field to some extent. And so the weekend, which we thought was completely established, has now been sort of shaved back. And so Saturday morning for many Wal-Mart workers is a regular day of work. Now that really returns us to the situation in the 1920s.

Because of the bonus that these managers receive, based in part on keeping labor costs low, for many years - and to some extent still today - they were under great pressure to shave those costs. And sometimes that meant doing illegal things in the stores, like literally going into the computer program and cutting out hours that people had actually worked.

DAVIES: And they tend to keep - leaves a lot of part-timers, right? They run stores, a lot of these stores, around the clock, so people are on odd schedules and often don't get the 34 hours a week that make them full-time, right?

Prof. LICHTENSTEIN: Well, that's right. When Wal-Mart - especially after it went to selling groceries, which meant that it went 24/7 - it had a - it hired a lot of part-timers. About a third of the workforce is part time, but full time is defined as 34 hours a week. So that's less than a 40-hour week.

What that means is that everyone who works at Wal-Mart is desperate to get more hours, and that gives terrific sort of power to the manager, who can then play one worker off against the other or give rewards, you know, or penalties by cutting back hours.

DAVIES: Wal-Mart prides itself on offering health insurance to its employees. What kind of health insurance does it offer?

Prof. LICHTENSTEIN: Well, it solves this problem in two ways. Health insurance is very expensive, and it's been very assiduous in trying to keep this cost down. One is they hire a lot of people who get their health insurance from somewhere else: older people, young people, people who's spouse works somewhere else.

So Wal-Mart claims that 90 percent of all its workers have health insurance, and they do, but only about 51 percent now have their health insurance from Wal-Mart itself.

Now with the Wal-Mart insurance, they've really adopted the Republican, conservative solution to the health care crisis in America, and it's this: You offer health insurance policies with very low premiums and very high deductibles, as much as $3,000 or more. And then you give a health security account to each individual, which they can put money in themselves, or the company can put some money in, which they can use for regular office visits.

Now the problem with this system is that when you have any serious illness, you have to pay out of pocket up to $3,000, plus your premiums plus co-pays, before, you know, the insurance kicks in. And for, say, a mother, a single mother with two kids earning $22,000 a year at Wal-Mart, it means that 25 or even 30 percent of their income can easily go to health insurance if their kids just have ear infections and the normal kind of things that lots of kids get, which is one reason that lots of Wal-Mart employees don't even sign up for the Wal-Mart health insurance.

DAVIES: You know, Wal-Mart obviously is aware that its labor policies have created an image issue, and it's made an effort in recent years to reach out to some liberal constituencies. I mean, it's promoted the Al Gore film, "An Inconvenient Truth." It's undertaken some important sustainability efforts in its own buildings and practices, and I think even made some efforts to kind of get organic foods on its shelves. Some have been impressed by these. How do you regard these initiatives?

Prof. LICHTENSTEIN: Well, many of these efforts in the environmental fields, sustainability, are - they're kind of a win-win. You know, Wal-Mart does want to run its trucks with - using less fuel. That saves money, and it's good for the environment. And, you know, in the entire supply chain - that's the phrase they use for how to get the suppliers' goods to the store - there's, you know, many, many places where you can save money, and you can also do good things for the environment.

So I think there's a lot of genuine activity here that's good for everyone. And you know, if it's good for Wal-Mart's public relations, that's fine, as well. I think the big box itself is a problem. A lot of people find that a kind of environmental and urban-planning problem, and Wal-Mart has not been as successful at putting smaller stores in urban areas, for example.

Another side of this, though, which I think is more significant, is that Wal-Mart was very aware that it was subject to many, many lawsuits, lots of bad public relations for its - not just its low wages, but its illegal payment of low wages, its failure to adhere to the standard variety law governing wages, hours, etcetera. And so after the election of Barack Obama in November, Wal-Mart clearly made a decision that they wanted to solve that problem.

So on December 23rd, while everyone else was thinking about Christmas, Wal-Mart announced that it would settle 63 wage and hour class-action lawsuits against it at a price of, you know, upwards of $600 million.

Now, Wal-Mart had a terrific reputation, a fearsome reputation for never settling class-action lawsuits. I mean, they just said, you know, these are just people trying to come after us and get some of our money. But they agreed to settle them.

It's because Obama was elected. Hilda Solis was the new secretary of labor, who would a little later say there's a new sheriff in town. We're going to enforce these laws. And I think this is as significant as the environmental activities. And if Wal-Mart does continue to settle these kind of suits and agree to obey the law, that will be significant.

DAVIES: Nelson Lichtenstein will be back in the second half of the show. He's a history professor at the University of California Santa Barbara. His new book is "The Retail Revolution: How Wal-Mart Created a Brave New World of Business." I'm Dave Davies, and this is FRESH AIR.

(Soundbite of laughter)

DAVIES: This is FRESH AIR. I'm Dave Davies, filling in for Terry Gross.

We're speaking with Nelson Lichtenstein, who's written the history of Wal-Mart, which is the world's largest private employer. Lichtenstein says Wal-Mart founder Sam Walton made an obsession of cutting costs by building massive distribution centers, squeezing suppliers, and scrimping on employee's wages and benefits.

Lichtenstein says Wal-Mart has created a business model others have tried to replicate, but he says it's a model that's ultimately unsustainable. His book is called "The Retail Revolution: How Wal-Mart Created a Brave New World of Business."

You know, in the debate in the past about the Wal-Mart business model, the company has admitted at times that its wages are lower than some, that some of its employees aren't raising families on them. But they also have another argument, which is that their low prices and the pressure that they exert on their competitors to lower prices amount, in effect, to raising everybody's standard of living, giving everybody else a raise. What about that argument?

Prof. LICHTENSTEIN: Well, there's truth to it as far, as it goes. That is, there has been a reduction in the price of groceries, of clothing, the kind of things that you buy at a Wal-Mart store. And the company's estimated it, you know, is up to, you know, as much as $2,000 a year will be saved by a typical family buying at Wal-Mart. And that's true, and I celebrate that. I think that's terrific. It's good to have stuff that's inexpensive.

The problem is this: The kind of things you buy at Wal-Mart only represent about 20 percent of the typical family budget, and it's actually been declining in recent years. The things you can't buy at Wal-Mart, which really are eating up and are pressuring families: health care, housing, transportation, education, you can't buy those at Wal-Mart yet. You can buy them with higher wages.

So to the extent that Wal-Mart lowers the wage level for its own employees and everyone else, it's making it much more difficult for people to buy the 80 percent of the things they need to sustain the family budget which you can't buy at Wal-Mart. And that's the problem.

DAVIES: You know, there are a lot of retailers that have seen Wal-Mart's success and are copying some of its methods, Target and others. And you say at the end of this book Wal-Mart and its clones face a day of reckoning. Their relentless growth and Darwinian competitiveness have created a world that is increasingly inhospitable to their own success. What do you mean?

Prof. LICHTENSTEIN: Well, by that I mean is - to the extent that wages remain stagnant and there's a political backlash against the benefit levels, it means that the day of reckoning is coming, that they can't continue with that model. And I think that was shown both with the recent recession. Although Wal-Mart did pretty well, lots and lots of retailers went bankrupt in that recession.

And it's also true politically. Wal-Mart has been stymied in its effort to expand throughout the rest of the United States. In fact, it cut the number of stores that it would open by one third two years ago. So it faces that sort of political and even cultural resistance. And I think it's trying now to get out from under that burden, and we'll see whether that takes place. But I think there is a kind of recognition in the firm that the model set up by Sam Walton 40 years ago can't continue today.

DAVIES: Give us a sense of what it was like to deal with Wal-Mart as a researcher and writer. I mean, would their executives talk to you? Did you get access to information you needed?

Prof. LICHTENSTEIN: Well, I mean, I did talk to some of them, you know. But I could read what they said on their very elaborate Web page. And then I could, you know, they would much rather talk to The New York Times than to some obscure historian - at least as far as they were concerned - on the West Coast.

However, I found it far better and more rewarding not to talk to current Wal-Mart managers, but to talk to retired Wal-Mart managers and workers, of which there are a lot because there's a kind burnout at the firm and lots of people retire in their 50s if they can.

Also, there've been all these lawsuits against Wal-Mart. Well, these lawyers became kind of my research assistants. That is, they would be deposing Wal-Mart executives. They would be ferreting out various documents and things. And many - much of this became in the part of the public record, so I was able to use that.

Furthermore, there was an amazing archive of videos that turned up in Kansas. There'd been a firm in Kansas - Flagler Productions, for 25 years, had been doing videos of all of Wal-Mart's meetings, many of them not open to the public, and they had a huge archive there. Well, then Wal-Mart fired the firm about two or three years ago. And, you know, the firm, thinking well, we got to make money. You know, we got to - you know let's open this to the public. And so I went down there and I saw many of these videos and I, and the transcripts, and that was terrific.

DAVIES: Can you share a moment from one of those videos that you found particularly revealing?

Prof. LICHTENSTEIN: Yes. Well, one of the most remarkable was a fellow by the name of John Tate. John Tate was Sam Walton's age, same generation. And Sam Walton hired him in the early 70s to handle the company's labor relations. John Tate had got his start in North Carolina. He'd been a right-wing activist in Nebraska. He was a lawyer, and he pioneered many, many of the techniques that today are standard in stopping unions, some legal - many legal but some a little not legal - the kind of demonization of unionism which takes place in the retail industry.

Well, Tate, this amazing speech he gave in the year 2004, kind of a valedictory in which he told you know 500 cheering Wal-Mart managers that, you know, I've been fighting unions all my life. Unions are bloodsucking institutions. Your job is to go out there and, you know, help me complete my life's work. This was genuine. It was emotional. He got a cheer. And it completely contradicted the official Wal-Mart line.

DAVIES: Do you shop at Wal-Mart?

Prof. LICHTENSTEIN: Yes, when I can. I have no objection to shopping at a big firm like that. I buy cars through some assembly of the lines, and I buy products sold at the most efficient form of retailing. And I'd like the change the company, but I see no problem with, you know, shopping there.

DAVIES: Well, Nelson Lichtenstein, it's been really interesting. Thanks so much for spending some time with us.

Prof. LICHTENSTEIN: Delighted to do so.

DAVIES: Nelson Lichtenstein's book is called "The Retail Revolution: How Wal-Mart Created a Brave New World of Business."

Coming up, Dr. Lisa Sanders explains why doctors are misdiagnosing illnesses more than you think.

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