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Wal-Mart’s Tough Times

| published October 19, 2015 |

By Thursday Review staff

 

WalMart is warning investors and Wall Street that it is going to be facing tough times in the months ahead. Last week it said a variety of market factors were nudging the massive company—the largest retailer in the world—into difficulties: rising wages, an across-the-board pay increase for most of its half million employees, and increasingly fierce competition from online retailers like Amazon, eBay and Craigslist.

WalMart announced a pay increase which would impact almost two thirds of its employees—this, after years of pressure from labor unions, public interest groups, political organizations and consumer groups concerned about WalMart’s low pay and minimalist benefits. Some business analysts also suggest that WalMart is hedging its bets about the federal minimum wage, for which there has been much discussion in the political arena this year. If that minimum wage goes up after 2016, Wal-Mart could see a massive impact to its bottom line.

The wage adjustment by WalMart will surely impact its profits for the foreseeable future, but it may also trigger an avalanche of similar moves by companies under pressure from consumers and labor groups to step up to the plate when it comes to wages. McDonalds indicates that it may follow WalMart’s lead, raising the hourly wage for many of its mostly minimum wage workers. Analysts suggest that as WalMart goes, so goes other retail and fast-food giants.

Clearly WalMart is not happy about the decision, even as its employees look forward to making more than minimum wage. Investors and Wall Street analysts worry that if WalMart is openly bracing for a bad quarter—followed likely by an even worse spring 2016—the retail sector of the economy may see some dramatic changes, including higher prices in thousands of WalMart stores in the U.S.

But WalMart is most concerned with what it senses will be a tough holiday season. Christmas will begin in earnest within days of Halloween, and WalMart says its own studies and its own numbers say that Americans will perform more of their holiday shopping online than ever before. It is bracing Wall Street for what it fears will be poor numbers. Target, too, is facing the same demons, and some business analysts suspect that Target may have its weakest holiday quarter since its 2013 fiasco after hackers breached its computer system and stole the personal information of tens of millions of customers.

But for WalMart, a bad holiday shopping season is unusual. The discount retailer has not seen a serious slump in its fourth quarter earnings since the Great Recession, but it worries that it will lose too many buys to Amazon this year to overcome even modest improvements in economy.

Despite these worries by the Bentonville, Arkansas giant, WalMart executives are breathing a slight sigh of relief over the news, first reported in the Wall Street Journal and later by Reuters, that a massive federal probe into corruption in WalMart operations in Mexico will produce fewer—and less-serious—charges than originally thought. A three-year investigation by the U.S. Justice Department, in cooperation with Mexican authorities, has produced only minor violations, and could result in only a few hefty fines levied against the company.

At issue were bribes allegedly used to procure special treatment and expedite the expansion of WalMart operations south of the border, as first reported in a series of 2012 investigative reports by the New York Times. Among the possible criminal charges against WalMart: bribes were paid to Mexican politicians and regulators to pave the way for retail expansion in Mexico, and to insure there would be little intervention by Mexican regulators into its wage and work safety operations, including thise in warehouses and distribution centers.

According to that original NYT report, as far back as 2005 and 2006, WalMart was aware of some $24 million in the bribes (or unaccounted-for cash payments to suspect recipients) paid out by its own employees. The company even sent its own team of company accountants and private investigators to examine the books. But WalMart corporate officials failed to report the matter to law enforcement. WalMart only contacted the Justice Department after being contacted by the Times for interviews and comments in 2012.

The Times report, coupled with the initial findings by the U.S. and Mexican authorities, gave WalMart a black eye and damaged it on Wall Street. Among other problems, it forced WalMart into suspending any further expansion of its operations in Mexico.

The U.S. Justice Department investigation has concluded that although bribes were paid and some corruption existed in WalMart’s expansions in Mexico, it could not find any systemic pattern of corporate corruption. Sources say that few, if any, WalMart executives will serve any jail time, and that the company will face standard fines by the governments of Mexico and the U.S.

In the meantime, WalMart still faces a tough road ahead. Like Target, it has suspended or reined-in its robust overseas expansion plans. Target’s once ambitious north-of-the-border expansion was a disaster, and early this year the company said it would begin shutting down its most of Canadian stores.

Meanwhile, WalMart has only a limited reason to celebrate avoiding harsher punishment for its corruption troubles in Mexico. In the meantime, it must juggle a complex and potentially difficult challenge for the holiday season—seeking to remain profitable in the face of intense competition from online sales, while also convincing Wall Street that it can maintain its business model while paying higher wages to 500,000 employees.

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