Who
profits from rock-bottom pricing?
They pay low wages and force local shops to close. But discount chains
help the poor make ends meet. Do they belong in your portfolio?
By G. Jeffrey MacDonald | Correspondent of The Christian Science Monitor
May 16, 2005
In the early 1990s,
business owners on the island of Kodiak, Alaska, hired a consultant to
analyze how much they'd be hurt by a proposed Wal-Mart. But in
gathering data at their request, Kenneth Stone also discovered how the
store was apt to help another local group: the poor.
"A lot of low-income people were practically begging the city to
let Wal-Mart in," says Dr. Stone, an Iowa State University emeritus
economist and 20-year researcher on Wal-Mart's national impact. "They
were saying, 'We have to do something to lower our cost of living....'
I believe that the lower prices do allow for a higher standard of
living for low-income people."
Dr. Stone is far from a Wal-Mart cheerleader. His research documents at
length how the world's biggest retailer has put countless shopkeepers
out of business and thereby eliminated as many jobs as it has created.
But he has found what other economic researchers have seen as well:
Discount retail is a complex business with more winners, losers, and
tough ethical tradeoffs than public debate routinely acknowledges.
Ethically minded investors are already familiar with discounters, the
high-volume, low-price chains such as Target and Costco, who rank among
the 10 largest retailers in America. But it is Wal-Mart, which tops the
list with $258 billion in sales in 2003, that sets off the sharpest
disputes. Shunned by some investors concerned about its antiunion
attitudes and environmental impact, the chain nevertheless appeared in
the portfolios of 33 socially responsible investment (SRI) funds in
that same year, according to a study by the Natural Capital Institute.
For some, the discount domain is a place to make a statement as well as
a profit. Christian Brothers Investment Services, for instance,
includes Wal-Mart, Target, and Costco among holdings that pass its
screening criteria for the firms' 1,100 Roman Catholic institutional
clients. On behalf of shareholders, Christian Brothers urges
discounters to select sites with sensitivity to local concerns, to
promote women to top positions, and to monitor working conditions of
overseas suppliers.
"We try to raise another perspective and get them to think about some
of the things that they aren't necessarily attuned to because the
market isn't attuned to it," says John Wilson, director of SRI at
Christian Brothers.
Others see discounters forcing investors to ask tough questions of
themselves. For instance, what is the social value of keeping prices
low for essential items as food and clothing? Should employees get
better compensation, even if it means higher costs for those who can't
afford to shop elsewhere? When one group has to make a sacrifice,
should it be employees, customers, shareholders, or local communities?
Shareholders have a say on such issues, but reading the moral compass
takes time and thought.
"The real question is, 'What kind of world do we really want to
create?' " says Ruth Rosenbaum, executive director of the Center for
Reflection, Education and Action, an advocacy center in Hartford,
Conn., with a focus on low-income issues. "Are we designing a world
that is economically beneficial for those who are able to hold shares
in companies [by keeping labor costs low and stock prices high]? Or are
we designing a world that is economically beneficial and therefore
sustainable for most people?"
As Dr. Rosenbaum suggests, the moral task at hand might be to seek
prosperity for all involved. But whether better pay and benefits for
discount employees is a rising tide to lift all boats is a matter of
debate, even among economists committed to reducing poverty.
Some recent research suggests the low prices and job opportunities
offered at a new Wal-Mart store don't alleviate a community's struggles
with poverty over the long term. Wal-Mart workers in California, for
example, annually seek $86 million worth of public assistance,
according to a 2004 study by the Labor Center at the University of
California at Berkeley. If other big retailers in the state follow
suit, the study projected, California taxpayers would have to foot
another $410 million in healthcare services, food stamps, and other
public costs.
This "race to the bottom" in labor costs also seems to rub off on a
surrounding area, according to research from economists Stephan Goetz
and Hema Swaminathan at the Northeast Regional Center for Rural
Development at Penn State University. While the national poverty rate
dropped 2.4 percent between 1990 and 2000, the rate fell by just 0.2
percent on average in counties that added a Wal-Mart. One theory:
Although Wal-Mart creates jobs, the company also eliminates jobs by
putting others out of business.
"We didn't expect Wal-Mart would be able to affect poverty on a
countywide basis, but lo and behold it did," says Dr. Goetz. Even so,
he adds, discounting poses dilemmas. "It's hard to quibble with saving
money, unless you're creating costs to society that you are not
bearing."
Such findings seem to demand that ethical investors use their clout to
insist that discounters compensate their workers better and perhaps set
off a positive ripple effect in a geographic area or industry. But Wall
Street notoriously punishes firms that raise labor costs, an outcome no
investor would appreciate. Even if short-term returns weren't a
concern, some wonder if higher prices at the cash register would truly
serve the common good.
Goetz, for instance, acknowledges that low prices on goods from food to
hardware bring a valuable social benefit: "The standard of living is up
for poverty-stricken people. Critics of Wal-Mart haven't looked at
that." For Bruce Weber, codirector of the Rural Poverty Research Center
at Oregon State University, research on discounters' social impact is
still too scant to warrant firm conclusions. Still, he believes the
issues are broader than they have been framed in public debate thus far.
"A whole bunch of consumers are better off from the low prices, but a
few workers are worse off. That's the way economists soothe themselves
about all of this," Professor Weber says. "I think it's an empirical
argument. How many people benefit and how many people pay? Most
economists believe keeping prices down offers a benefit.... For an
individual consumer who doesn't depend on [a discounter's] wages, how
could it not be better to have a Wal-Mart?"
Where ethical investors might test their mettle, however, is in
weighing the immediate benefits for individual consumers - even the
poorest ones - against other long-term goals. If saving American jobs
in textiles and other labor-intensive industries is a top priority,
discounters who rely on outsourcing to overseas manufacturers might not
offer the best investment option. Similarly, those who care deeply
about preserving American communities that reinvest locally might not
favor the Wal-Mart model, in which Goetz says "all the profits are
siphoned off to [corporate headquarters in] Bentonville, Ark."
In the view of the United Food and Commercial Workers Union (UFCW),
which represents 1.4 million workers, discounters present a moral
challenge to every investor.
"It comes to what kind of human being you are," says Jim Papian, a
spokesman for the union, which has found Wal-Mart nearly impossible to
organize. "If you're someone with enough money to invest, that means
that you've probably been able to take advantage of some opportunities
you've had, you have extra cash or whatever. And it means you've
probably had good employment opportunities, good working conditions.
Why shouldn't the businesses you invest in provide those same
conditions for their employees?"
For better or worse, discounting seems poised for a long run in the
American economy. That means that diversified investors with an
interest in ethics will have no choice but to grapple with the
complexities posed by this sector. Doing so means probing lots of gray
areas, since researchers readily admit they're just beginning to learn
how discounting is affecting society at home and abroad.
http://www.csmonitor.com/2005/0516/p13s01-wmgn.html
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