Why Wal-Mart is Good for America (and Maybe Your Portfolio)

A Rebuttal to the Beast of Bentonville's Critics

Wal-Mart Investment
Critics of Wal-Mart Stores often confuse structural changes in the economy with the Bentonville retailer, not realizing that what we are seeing now has been predicted since the 1960's. Joshua Kennon

Over the past year, I've listened as various sides have weighed in on the issue of Wal-Mart. A few weeks ago, a Federal judge overturned a Maryland law that would have required the company to invest a specific amount of its payroll in medical benefits for employees. Given the fact that this debate seems to grow ever-larger each year and that Wal-Mart is one of the most important stocks in the world as both a member of the Dow Jones Industrial Average and as an economic indicator for the broader market, I thought I would weigh in with my position.

The American Economic System

We have been extraordinarily blessed to live in one of the wealthiest and inclusive societies in the history of the world. Although we still have a tremendous amount of ground to cover, the American civilization has been one of ever-striving for greater equality and, above all, individualism. It was formed, and continues to operate, on the bedrock that a man is responsible for himself and that he, and only he, has the empowerment and ability to build or destroy his own life. The bridge, as we know, is education; the ability to impart knowledge and synthesize it in a way that allows individuals to blossom as a person intellectually and emotionally, and put data to use in a way that results in a greater income for themselves.

Economics has been called the dismal science because in its true, unadulterated form, it doesn't seek to answer what is morally right or wrong; instead, it strives to discover how individuals, groups, and society chooses to allocate scarce resources among themselves.

Today, we use a form of currency that is printed on green paper and has numbers engraved on either side. Likewise, sexual attraction, political connections, etc., are all a form of capital that can be exchanged as a claim check on society to fulfill ones own desires and wishes. The extension of this is the simple, basic truth that the wage situation in any given field is a result of the supply and demand curve.

A cashier, for example, requires far less skill than, say, a neurosurgeon, creating a much larger pool of potential applicants to fill the former position.

The Gap Between the Rich and the Poor

This brings us to the point of transience within a society. At different times throughout our lives we occupy different rungs of the socio-economic ladder. In our early twenties, for example, a young couple with children is going to fall within the lowest levels of wealth. As time goes on, however, they are likely to buy a house, begin building equity by paying down the mortgage, and establishing a retirement fund in the form of a 401k. The traditional statistics, however, don't show this migration through the various layers of wealth and is partly why it is dangerous to rely on the figures espoused from politically interested parties on the nightly news.

The gap between the rich and the poor doesn't bother me in and of itself. What I think we should be concerned about as a society is the absolute well being of the poorest among us - not their relative wealth level (if given the option, I'd gladly double the gap between the rich and the poor if it meant the poorest were to experience a 100 percent increase in their standard of living).

In other words, what really matters in a society is the standard of living experienced by the average citizen (which, for better or worse, is typically measured as Gross Domestic Product [GDP] per capita). In the 1950's, gas, as a percentage of household income, was far more expensive than it is today; middle class automobiles didn't boast things such as air conditioning, let alone CD players, heated seats, and navigation systems. Yet, here we are, lamenting the growing disparity between classes! We're spending so much time envious of the size of the other kid's pizza we fail to realize that in the last fifty years, the pizza has gone from a medium to a large so that in an absolute sense, even the poorest among us is far better off than they were just a short time ago.

People vs. Wal-Mart

That brings us to the philosophical case of People v.

Wal-Mart. The cold, hard fact of the matter is that every occupation has a lifestyle associated with it. Retail clerks serve the social function of a migratory bridge between classes. To work their way through college, young students may choose to take a job at the checkout counter to help pay for textbooks. After retirement, a couple may choose to work together at a local store to generate extra income and become socially engaged in the community. The position also serves as an excellent gateway to move up the management chain. Take, for example, the Wal-Mart district managers who now make hundreds of thousands of dollars a year; virtually all started as an hourly sales associate.

If a man or woman chooses to become a cashier and expects to maintain that position his or her entire life, he or she is delusional for thinking they are going to be able to afford a new car every few years or a plasma television. What's more, their resentment is unjust and unfair to those who have put themselves through school to work their way up the management chain. To blame the corporation for their conscious decision to cease improving themselves effectively castrates them of all responsibility and humanity.

It turns them into victims, instead of empowering them. If Rose Blumkin, founder of Nebraska Furniture Mart, (now a subsidiary of Berkshire Hathaway) can come to the United States penniless and die with a hundred-million-dollar fortune without the ability to read and write, it is anathema to the American spirit to decry the lack of opportunity.

Outsourcing and Globalization

Regarding the so-called high cost of low prices: In essence, asking for the company to support wage increases by slightly increasing prices is asking the other 298.4 million Americans to subsidize the 1.6 million that are employed by Wal-Mart. For me, that's fine. I've been extraordinarily blessed, had the privilege of attending a private university, have a job I am passionate about, invest virtually all of my excess capital, live well, and love what I do. If the question comes down to increasing my checkout price by two percent to improve someone else's standard of living, I'm happy to oblige as I believe we are all in this together.

On the other hand, it must be recognized that very few of us have the blessing of occupying the top quintile of wealth.

For a single mother working full time to support her children, however, you are talking about hundreds, if not thousands, of dollars each year in additional expense that will cut directly into her discretionary income. When Wal-Mart can offer her glue at $0.20 per bottle, or notebooks at $0.10 each for back to school, there is something good going on for society.

If a factory in Mexico can produce it for cheaper, I would argue the company has a moral obligation to its customers - which typically are the poorest demographic in the United States - to buy from it. Consciously choosing to buy the more expensive American notebook and put it on the shelves is, in effect, supporting someone else's inefficiency and forcing that mother to have less disposable income for her family.

Competitors and Wal-Mart

This brings us to a vital, often misunderstood point: Wal-Mart has never - not once - put another company out of business. We, the consumers, bear total and complete responsibility. I grew up in a small farm town in the Midwest. On the town square, there were small shops and other retail boutiques that offered everything from antiques to coffee. If one of these stores were to offer crest toothpaste at $4.90, a price that guaranteed they made their necessary margin for maintaining the business, yet I could go to the edge of town to get Crest for $1.39 at the local Wal-Mart, my decision to choose the store that is going to leave more money in my pocket is what made the small business close its doors. Wal-Mart offered a product at a price that allowed it to generate a decent profit margin, and did it so that my cost was lower than I could get it anywhere else. They made me an offer and I, along with hundreds of millions of people each week throughout the world, chose to take them up on it. No one has a constitutional right to remain in business; if the small retailer were supporting its customers and focusing on what was best for them, they would be able to effectively compete.

Somehow, people seem to forget that the so-called Beast of Bentonville originated as a small five-and-dime store with huge disadvantages relative to its competitors. I also find it puzzling how most commentators seem to forget that since its initial public offering, the company's stock is up 100,000 percent (plus you've received huge cash dividends along the way!). The original associates, whose retirement account was invested in the stock, have done extraordinarily well.

Many others who had the good sense to invest on their own are now also rich beyond their expectations. How can someone blame the Walton family for exploitation when it was they who risked their entire family's livelihood and dedicated every waking hour for decades to build a company from nothing?

In the final analysis, I believe that the Wal-Mart is good for America, good for its citizens, and good for the World. I believe that cashiers make a choice when they take a job and to get angry at the company for not paying them more is unacceptable as they are perfectly free to work their way through college, move up in the company, start their own business, or invest even a small amount (if someone were to graduate from high school, work at the company and save only $5,000 per year, earning the long-term rate of return on equities, they would retire with $8.53 +/- million dollars.

That is not a typo; they simply don't understand the almost unfathomable power of compounding). In fact, I believe it so much, that at the time of publication, I owned shares of the retailer in my personal portfolio.