How Wal-Mart Works

Power and Controversy
Sometimes Wal-Mart alters the standard store design to fit into a community, such as with this discount store in Baldwin Park, CA.
Sometimes Wal-Mart alters the standard store design to fit into a community, such as with this discount store in Baldwin Park, CA.
Image © 2006

Because of Wal-Mart's massive size, it wields incredible power. It has driven smaller retailers out of business; forced manufacturers to be more efficient, often leading these suppliers to move manufacturing jobs overseas; and changed the way that even large and established industries do business.

There is plenty of anecdotal evidence that a new Wal-Mart in town spells doom for local pharmacies, grocery stores, sporting goods stores, et cetera. Economist Emek Basker, Ph.D., attempted to quantify the impact. Her study found that in a typical United States county, when a Wal-Mart opens, three other retailers close within two years and four close within five years. While the Wal-Mart might employ 300 people, another 250 people working in retail lose their jobs within five years in that county.

Suppliers are also heavily impacted by Wal-Mart. Gary Gereffi, a Duke professor who studies global supply chains, put it this way in a PBS interview:

Wal-Mart has life or death decisions over (almost) all the consumer goods industries that exist in the United States, because it is the number-one supplier-retailer of most of our consumer goods -- not just clothes, shoes, toys, but home appliances, electronic products, sporting goods, bicycles, groceries, food.
A Wal-Mart distribution center
Image © 2006

The stories of how Wal-Mart pushes manufacturers into selling the same product at lower and lower prices are legendary. One example is Lakewood Engineering & Manufacturing Co. in Chicago, a fan manufacturer. In the early 1990s, a 20-inch box fan costs $20. Wal-Mart pushed the manufacturer to lower the price, and Lakewood responded by automating the production process, which meant layoffs. Lakewood also badgered it own suppliers to knock down the prices of parts. Then, in 2000, Lakewood opened a factory in China, where workers earn 25 cents an hour. By 2003, the price on the fan in a Wal-Mart store had dropped to about $10.

So what is the deal with Wal-Mart and outsourcing? You may have heard that Wal-Mart sends manufacturing jobs overseas, but also remember that Wal-Mart once touted a "Buy America" campaign. Here's how the discrepancy sorts out.

In 1985, Walton launched a "Bring it Home to the USA" program, offering to pay suppliers as much as 5 percent more for products made in the United States. However, that philosophy quietly faded in the 1990s, as Wal-Mart joined other retailers in a quest to find the cheapest sources of production around the world. In 1995, Wal-Mart said that 6 percent of its total merchandise was imported. A decade later, experts estimated that Wal-Mart imported about 60 percent of its merchandise.

Wal-Mart's impact extends beyond just small suppliers. It also affects how even major, established companies like Coca-Cola and Pepsico do business. At Wal-Mart's request, Coke and its largest bottler Coca-Cola Enterprises announced that they are changing the way they deliver PowerAde in the United States, altering a basic distribution method for drinks that has been in place for more than a century. Coke also now allows Wal-Mart in on the research-and-development process. In 2005, Coke planned to launch one new diet cola called Coke Zero. At Wal-Mart's request, it changed the name to Diet Coke with Splenda and launched a separate product called Coke Zero. This kind of retailer involvement was unheard of at Coke a decade ago. Pepsi also came up with a line of diet drinks, called Slice One, to initially be sold exclusively in Wal-Mart.

The Controversy

Wal-Mart is a polarizing force. The controversies have involved a broad rage of topics from Wal-Mart selling guns, to the company's environmental policies, to the kind of health care Wal-Mart offers employees, to outsourcing of jobs. In this section, we will explore two of the biggest areas of controversies -- labor practices at the company and Wal-Mart's impact on the American economy.

Wal-Mart has come under fire on a number of labor issues. There may be a dark side to the frugal culture. At the end of 2005, the company faced dozens of lawsuits across the country for allegedly not paying workers overtime. Women have also accused Wal-Mart of discrimination, and employees have said that it squashes efforts to unionize and doesn't provide decent healthcare.

Ambassador Andrew Young with Lawrence Jackson, executive vice president of Wal-Mart's people division, Lee Scott, president and CEO of Wal-Mart Stores, Inc.
Image © 2006

Not everyone is down on Wal-Mart. Andrew Young, a former United Nations ambassador and former mayor of Atlanta, heads up a group backed by Wal-Mart that is supposed to spread a positive message about the company. "You need to look at who's complaining about Wal-Mart," Young told USA Today in March 2006. "If it's not 100 million people shopping there every week and it's not 8,000 people competing for 500 jobs [at a new Atlanta store], who is it? They're complaining because they're wrong and they don't understand that ending poverty means generating wealth and not just fighting to redistribute the existing wealth."

There is heated debate about whether Wal-Mart is good for the American economy, and well-respected economists come down firmly on both sides of this debate. Some experts say it is good for the economy because it keeps prices low, both at its stores and at other retailers. Other experts argue that Wal-Mart is bad for the economy because it drives competing retailers out of business and forces manufacturers to move jobs overseas to keep expenses down.

Wal-Mart's annual income shows no signs of slowing down.

Critics say that Wal-Mart can only push prices so low, and that the company may have already reached that threshold. They also say that the country is saturated with Wal-Mart stores. Ninety percent of the U.S. population already lives within 15 miles of a Wal-Mart, according to "The Wal-Mart Effect."

Also, Wal-Mart's growth in same-stores sales has slowed considerably in recent years. Same-store sales, a key measure in the retail industry, measure the sales versus the year before in stores open at least one year.

Target, while much smaller, is currently growing its same-store sales more than Wal-Mart. Target doesn't just compete on price. Instead, it sells style as well as a good price. Sales at Wal-Mart stores open for at least one year grew, on average, 3.6 percent a month in fiscal year 2005, compared with a 5.8 percent gain for Target, according to the International Council of Shopping Centers(as reported in the New York Times).

Wal-Mart Supercenter in China
Image © 2006

Some experts disagree that Wal-Mart has peaked, arguing that Wal-Mart can always enter new retail segments. After all, it didn't sell groceries originally and now that is a huge part of the company's business. Wal-Mart also has plenty of growth opportunity in the international market.

For more information on Wal-Mart and related topics, check out the links below.

Related HowStuffWorks Articles

More Great Links


  • Barbaro, Michael. "Wal-Mart Tries to Find Its Customer." New York Times, February 2, 2006.
  • Basker, Emek. "Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion." University of Michigan, 2004.
  • Cleeland, Nancy and Abigail Goldman. "An Empire Built on Bargains Remakes the Working World." Los Angeles Times, November 23, 2003.
  • Cleeland, Nancy and Abigail Goldman. "Grocery Unions Battle to Stop Invasion of the Giant Stores." Los Angeles Times, November 25, 2003.
  • Cleeland, Nancy, et al. "Scouring the Globe to Give Shoppers an $8.63 Polo Shirt." Los Angeles Times, November 24, 2003.
  • Cleeland, Nancy. "Seams Start to Unravel." Los Angeles Times, November 24, 2003.
  • Copeland, Larry. "Wal-Mart's Hired Advocate Takes Flak." USA Today, March 16, 2006.
  • Fishman, Charles. "The Wal-Mart Effect." Penguin Press, 2006.ISBN 1594200769.
  • Goldman, Abigail. "Proud to Be at the Top." Los Angeles Times, November 23, 2003.
  • Home Depot Web Site
  • Iritani, Evelyn and Nancy Cleeland. "Audit Stance Generates Controversy." Los Angeles Times, November 24, 2003.
  • "Is Wal-Mart Good for America?" PBS Frontline, November 16, 2004.
  • Wal-MartWeb Site
  • Wal-Mart Watch Web Site
  • Warner, Melanie. "When Wal-Mart Shops for Groceries, it Gets Whatever it Wants." New York Times, March 6, 2006.
  • "Wireless Grapes; Seeking new sales to Wal-Mart, a produce supplier goes high tech," Fortune Small Buisness, March 6, 2006.