The South African Civil Society Information Service

Risking It all on Walmart's Retail Model

By Khadija Sharife · 20 May 2011

Picture: Brave New Films

If recent media reports are correct, Walmart, both the world's largest private employer and its largest company, has threatened to pull out of the R16.5 billion merger with Massmart if the South African government insists on imposing conditions to protect local manufacturers. According to Massmart’s CEO, “It would be disruptive of the competition process championed under the Competition Act to impose local procurement targets on one retailer to the exclusion of its competitors.” 

There are, of course, blatant contradictions in this statement. For one thing, whatever the Competition Tribunal rules, Walmart's system of “category management” is distinctly anti-competitive and downright collusive. Category management refers to the system where corporate “category captains,” mega-companies like Coca-Cola, manage all issues related to a specific product group in a store. These include shelf space, product selection, promotion and pricing, as well as indirect issues such as cost and source of labour and production.

Not only does the normalised practice of category management provide “category captains” with confidential information about other suppliers, facilitate collusion between manufacturers, promote collusion amongst retailers and hinder the growth of 'rivals', it also ensures that local domestic suppliers don’t stand a chance of competing when major multinationals source the world's cheapest goods made by the world's cheapest bodies. The US Federal Trade Commission’s Bureau of Competition acknowledges all of this.

So if, for example, you're thinking about manufacturing something as simple as apple juice - forget about it.

Walmart, with more than 8000 stores globally, is the largest seller of food in the US, allegedly holding over a fifth of the market. China has upward of 60% of the US market in apple concentrate, sold at 91% below cost and 80% in ascorbic acid or vitamin C - and Walmart’s preference for cheap Chinese products is widely acknowledged. In fact, over 70% of Walmart's goods have a Chinese component. By 2004, more than 80% of Walmart’s factories were Chinese. 

This system of sourcing “lowest cost globally” for “every day lowest prices” will no doubt be integrated in South Africa. South African favourites like Ceres may well have to conform to cheap Chinese concentrates, many of which are loaded with heavy metals, or lose their market position. Minute Maid, under the Coca-Cola captain, sources concentrates from China, as do other “All American” brands such as Mott's.

And while Walmart has claimed that additional jobs will be created through expanding trading space by 20% (Massmart currently has 28,000 employees) we've all read the facts: displacing just one percent of domestic supply to Massmart will cause 4,000 job losses. When it comes down to it, save for a better geopolitical risk profile, South Africa, as a nation, stands to benefit little from the deal if Walmart's existing retail model remains as is.

From an objective standpoint there is nothing illogical about the tendency of our government, eager to protect national strategic interests, to motivate for local procurement policies currently in force by Massmart. After all, the company sources some 60% of goods locally. In fact, many of the so-called 'free market' governments such as France and Germany have engaged in hostile state interventions against foreign takeovers - stances described by former EU Trade Commissioner, Peter Mandelson, as “the emotions of economic nationalism” jeopardising the credibility of the EU's free market position.

While strategic issues are more discretely negotiated in European countries behind doors only slightly ajar to foreign scrutiny, when it comes to developing countries - prescribed the economic medicine of GDP growth and tethered to FDI as the only alternative for said growth - the news of governmental constraints on foreign capital is often received as a sign of something ghastly and short sighted.

To understand our government's position, we must first analyse the value of foreign investment and the context of GDP: the latter, a specialised and narrow tool solely measures overall economic activity. That is, it does not take into account how and where profit is generated; how and where benefits accrue and are distributed (or alternately concentrated); neither how much value is added to economies nor the volume of capital flight. Over 60% of Africa's illicit capital flight is siphoned, after all, through corporate mispricing. 

Similarly, foreign investment represents only one side of the story: how private capital will be utilised for the company's gains, not the consequences to the host country. It is instead the nature of investment and economic activity and even growth that matters, and must be analysed.

To further understand government's position, we must identify the most crucial definition of national competitiveness. In his article 'The Competitive Advantage of Nations' written for the Harvard Business Review, Michael Porter asks the same question, querying whether competitiveness is evidenced in a country with low labour costs and a flexible labour market; a largely positive balance of trade; a nation where the exchange rate makes it goods competitively priced in global markets; and a nation of competitive industry within borders.

On examining and contrasting different nations, he comes to the conclusion that what best constitutes the competitiveness of nations is productivity, defined as the “value of the output produced by a unit of labour or capital,” in nations where the principal goal is to facilitate a high and rising standard of living for its citizens, and whose ability to do so depends on the productivity with which a nation uses and develops labour and capital.

We all understand why Walmart's position is opposed to that of the government: maximum private profits, minimum private costs. It is to this end, for instance, that Walmart seeks to artificially cheapen labour. Walmart's manager's toolkit even guides administration on “how to remain union free in the event union organizers choose your facility as their next target.”

But while cheapened labour is often the focus, it is the value of “exported jobs” through imported goods that remains the biggest threat. Even in the US where Walmart preaches all things “All American,” over 200 000 jobs were lost between 2001-2006. These days 15% of all Chinese imports are earmarked for Walmart.

These twin reasons - cheapened labour and cheap goods - comprised the singular reason Walmart started operating in Shenzhen, China's most famous 'special economic zone' (read: tax free and slave wages) less than one year after its establishment in 1980. 

Though the Cold War was raging at the time, Walmart's best corporate supplier was the product of China's most famed Communist leader, Deng Xiaoping, and the success of the “global procurement model” that gave Walmart its “every day low prices” advantage, sourcing exports from China - as much as 40% from day one - was sustained through the deprivation of civil and political rights.

Not even the Chinese Communist Party's slaughter at Tiananmen Square dissuaded Walmart, which attempted to distance itself by creating the exclusive buying agency called the Pacific Resources Export Limited (PREL), which rehired Walmart's Asia staff. And while Walmart aggressively preached the policy of the “Buy American” campaign, too many of the products peddled were Asian. 

These days Walmart games the corporate social responsibility process through factory managers who, informed prior to the visit of auditors, coach workers on the “correct” responses. And of course, Walmart does not care much for corporate tax and the rest of that jazz.

The company was incorporated and maintains multiple entities in Delaware (one of the world's leading tax havens) essentially tax free for profits earned out of state; and gained notoriety for manipulating its books, for example, by paying 'rent' to itself through the Delaware-based real-estate investment trust scheme, disguised as 'expenses' deducted from taxes owed to numerous states.

Walmart is not the only company to engage in category management, use tax havens and source cheapened labour to reduce costs. But it is certainly the largest and arguably the most powerful. Presently the Company controls as much as 30% or more of specific sectors in the US.

Does Walmart add real value to the economies in which they operate, at least in its current form?

Many domestic industries in the US, such as the domestic apple industry stagnate or decline when “Wal-Mao” enters the picture.

It is not for Walmart to care about South Africa's manufacturing industry, labour laws, employment and more broadly, national competitiveness. But can we deny our government, whose very purpose is to serve the public interest, the right to establish a protective framework?

South Africa, losing almost a quarter of a million manufacturing jobs during the recession, has little chance of competing. And with Massmart's bases in at least 12 other sub-Saharan African countries, the issue is not simply a domestic one.

Like the British East India Company, the colonial-style mega-corporation that “administered” large tracts of colonised resource-rich nations for the purpose of trade, Walmart's operations, generating daily sales higher than the GNP of more than 52 developing countries, are comparable to a private quasi-government. In fact, were it a government, it would be one of China's top ten trading partners. 

Walmart claims that a hundred million Rand local supplier fund or just above R33 million annually, expended over three years, if the transaction is approved, is a better substitute than having conditions imposed on it.

Many would beg to differ.

It is a concession that constitutes a drop in the bucket for the company, estimated to lose three billion dollars to theft alone, annually. On Monday, the Competition Tribunal concluded its hearings. Its ruling is due to be delivered ten days from the conclusion of the hearings.

Certainly, Walmart's goods may be cheaper for South Africans, but is Walmart the solution? If so, at what cost and who pays the price?

Sharife is a journalist and contributing author to the Tax Justice Network, currently completing a masters in law in international business. She is the author of Tax Us If You Can (Africa).

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