Why does Wal-Mart want to expand into inner-city neighborhoods?

Great Debates
41

[QUOTE=John Mace]
They must have some suppliers or they wouldn’t have anything on their shelves.

WalMart is tough at the bargaining table with their suppliers. What is your proposal to change that practice? Do you have some legislation in mind? If so, what? Or are you thinking of boycotts?
[/QUOTE]

I have no proposal, and I don’t have to, because I don’t work for Wal-Mart, or Congress. Whatever my “solution” might be is irrelevant.

The problem I have is that Wal-Mart has in the past put out feel-good ads about having American-made products, then they go put the screws to them till they break, then turn right around and use Chinese suppliers, or whatever. They are two-faced, conniving, lying sacks of shit who treat their employees like crap and destroy the societal fabric of the communities they occupy. It’s would take a severe paucity of concern for your fellow citizens to think that’s just hunky-dory.

If you’re talking about pure, textbook business, then it doesn’t seem all that bad. When you’re talking about real people and real jobs right here in America and the socio-economic affect on American communities, Wal-Mart is a dirty bomb.

42

[QUOTE=Ludovic]
Actually, like I said before IMO the only way to have Wal*Mart in the inner city is through government intervention, which I oppose.
[/QUOTE]

That’s an excellent point, and I wonder if there is any evidence that that is happening in this case.

even sven: I agree with you 100% that it would be a crying shame if all the small shops that make certain places unique disappeared in favor of WalMart. And if the planning council in Oakland gave WalMart a sweeetheart deal in the hopes of pocketing some juicy property taxes, then shame on them. If, OTOH, it’s a simple business decision, then let the best businessperson win. I think most city dwellers do value the richness and diversity that city life brings (or at least most who can afford to do so), and I’m not so sure that WalMart can kill that. But if my Chinese friends, and those who love Chinese food, can find good quality produce and specialty items like baby bok choi and chicken feet or unique Aisan spices at WalMart, then what’s the harm? Frankly, I don’t see that happening, but if it did-- so what?

43

[QUOTE=even sven]
Mostly I’m talking about Oakland, because thats what I know. All inner cities are not the same, and I think it’s kind of silly to talk about them as if they were. Furthermore, I think it’s kind of silly to talk about the economics of a particular place if you’ve never been there (and I’m not saying this is you, but I’m sure plenty of these poster’s experience with the inner city comes from newscasts and movies),

I do exactly what I do now- expect my city planners to do their job and vote for people with an interest in keeping this city a wonderful place to live. If they build a toxic waste factory or high-security prison downtown, it’s not my responsibility to boycott it- it’s my responsibility to keep that from happening in the first place. I’ve read that in many cities, it’s become profitable from a tax perspective to tear down buildings and turn them in to parking lots- I’m not gonna support that, even if that does happen to be the most economically successful model for the property owners. Once again, it’s not about tastes, it’s about economics. The city will never compete with the suburbs playing the suburb’s games. If it is to succeed, it has to embrace what makes it special. And that is not WalMart.
[/QUOTE]

If you’re making an economic argument you need something more than “I really like Oakland the way it is now.” Most people it seems are opposed to change in general, so your gut-feelings in opposition to change don’t really make an economic argument. Talking about how inner cities have suffered from poor planning in the past is also not an economic argument in this situation because you’ve not demonstrated that allowing Wal-Mart into downtown is bad economically. Economics isn’t feelings or opinions, if Wal-Marts in the inner city is bad economically you should be able to find some sort of cite to support that claim.

44

[QUOTE=BrainGlutton]
But, that’s just my point. It’s not obvious it will be profitable expanding into a market where they might sometimes have to accept payment in food stamps. They’re going just because it’s there. Good attitude for a mountain climber, not for a business enterprise. In any case, what gets me is the “desperately needs” thing. Why does Wal-Mart “desperately need” to open a store in the 'hood? What bad thing will happen to them if they don’t? There’ll still be Wal-Mart stores in every 'burb and strip mall 10 years from now.
[/QUOTE]

You know the “desperately needs” in your own words were the statements of NPR. I think NPR should be the focus of your questions in this case, Wal-Mart hasn’t said, to my knowledge that they “desperately need” to expand into the inner city.

45

Oh, and with regards to legislation, etc. I am not really well-versed that sort of thing, but I do know in the past we have indeed enacted legislation to curtail/prohibit predatory and anticompetitive business practices, like against the monopolies of the robber barons, and we’re beginning to come around to the fact that Wal-Mart’s business practices are reprehensible and things are beginning to be done about it. Someday we’ll look back on Wal-Mart as a malevolent organization that nearly got away with derailing the fabric of American society, but that we thankfully wised up and kicked their sorry asses to the curb. [/wishful thinking].

46

even sven I hate to deflate your ballon, but we have a Walmart. It opened up October 2005. It was built on the site of a movie theater that had sat abandoned for at least 10 years. Not only did they not drive out local businesses, quite the opposite, nearly a dozen businesses open up around it including a chain retaurant (In N’ Out Burgers) which until now had no store in Oakland. It’s not one of their superstores, which means the only food they sell is frozen, which I’m almost sure is due to the nearby Pac N Save. Nearly all their emplyees are nearby residents. It’s right off 880 at Hegenberger if you’d like to take a look.

Personally I’d love for Walmart to open a one of their Superstores. The inner city neighborhoods have almost no supermarkets. Albertson’s has closed up two nearby stores, I can’t recall if there is a Safeway anywhere between downtown Oakland and 105th. You might be interested to know that Safeway was succesful in using the city council to block Walmart for nearly five years, all the while closing stores here. I happen to live very near an independent grocer, but I’m one of the lucky. Most people choices involve a car trip, or over priced “Mom and Pops*”
*Most of the Mom and Pop store here are increasingly owned by imigrants who don’t live in the neighborhood either.

47

Dear armchair investors: Shareholder value is not limited to increase in the stock price and does not necessarily depend on growth of the company. This mindset is purely a product of the mass amateur investing culture that has sprung up in which “derrrrr… me want stocks go up” is the usual investing strategy. The stock price can do just peachy as long as a company can pay dividends (anybody remember those?) while also maintaining a healthy balance sheet. Companies do NOT need to expand, expand, expand in order to provide shareholder value. Companies only need to expand when it is a solution to a competitive problem, and not all competitive problems require expansion.

I can’t really say whether Wal-Mart’s existence is at risk if it doesn’t expand (I suspect probably not) but I do want to make it clear that increasing revenues is not necessarily a requirement for shareholder value.

48

[QUOTE=BrainGlutton]
I got it from living three years in downtown Baltimore. Which, I understand, is a paradise compared to, say, Detroit.

[/QUOTE]

And having lived there are you seriously contending that the people of downtown Baltimore don’t have the money to shop at Walmart?? I’m sorry if I sound stunned by your revelation but…you aren’t serious are you?

On a related question, where do you suppose the good folks in downtown Baltimare (or Detroit) CURRENTLY shop? Or are you under the impression that they don’t?

-XT

49

[QUOTE=Brain Wreck]
Dear armchair investors: Shareholder value is not limited to increase in the stock price and does not necessarily depend on growth of the company. This mindset is purely a product of the mass amateur investing culture that has sprung up in which “derrrrr… me want stocks go up” is the usual investing strategy. The stock price can do just peachy as long as a company can pay dividends (anybody remember those?) while also maintaining a healthy balance sheet. Companies do NOT need to expand, expand, expand in order to provide shareholder value. Companies only need to expand when it is a solution to a competitive problem, and not all competitive problems require expansion.

I can’t really say whether Wal-Mart’s existence is at risk if it doesn’t expand (I suspect probably not) but I do want to make it clear that increasing revenues is not necessarily a requirement for shareholder value.
[/QUOTE]

You couldn’t be more wrong.

Companies need to grow income, as very, very few pay out a significant portion of their income as dividends (utilities being a notable exception). Best way to grow income are to increase revenues while controlling and/or reducing incremental costs.

And it’s not amateur investors that I’m talking about. The investors who matter are the Walton heirs, who hold significant ownership percentages. The investors who matter are the hedge funds and mutual funds whose eyes are always on the quarterly numbers. These investors don’t want to see dividends, they want to see true growth. All the grey-haired investment clubs with 10,000 shares each won’t match the holdings of a Fidelity or a Vanguard or a Gabelli.

Let me throw some simple numbers out to illustrate why a Wal Mart needs to expand just to keep up:

Your company is worth $1,000,000. You clear, at the end of the year, 2% of your value, or $20,000. Let’s say that you pay out 1/2 in dividends, leaving $10,000 to be reinvested into the company.

Year two, your company is worth $1,010,000. If you stay stagnant and still clear $20,000, your return has reduced to 1.98%. In order to achieve your 2%, you need to generate income of $20,200.

If you are Wal Mart (or Macy’s or Sears or whomever), you are probably already pulling in as much as you can in each of your stores, barring a demographic shift in the surrounding neighborhoods. To increase your sales, you need to look outside your existing stores. You need to build new stores where hopefully they will not cannabilize sales of existing stores.

50

[QUOTE=BrainGlutton]
It’s not obvious it will be profitable expanding into a market where they might sometimes have to accept payment in food stamps.
[/QUOTE]

People use food stamps in rural areas, too. In a big way.

If there’s one thing I appreciate about Walmart it’s that they’ll take a risk (very calculated, I’m sure) and build where no one else will.

Look at Target - they could do the same thing, but most Targets I’m aware of are attached to shopping centers. Walmart will build in the middle of nowhere, relatively speaking.

If Walmart did well in downscale rural areas, it stands to reason they’ll do well in downscale urban areas. The money’s just as green one way or the other.

51

[QUOTE=D_Odds]
You couldn’t be more wrong.

Companies need to grow income, as very, very few pay out a significant portion of their income as dividends (utilities being a notable exception).
[/quote]

“Very few?” Surely you’re joking. There are many companies that pay significant dividends. Please take a moment and scan through the 30 companies on the DJIA and tell us which ones don’t pay dividends.

Dividend yield of 1%. If I own the whole company, then my 1 share of stock gets me a dividend of $10,000. OK, not the best yield in the world, but we’ll continue.

OK, wait a second, going from 1% to 1.98% is an increase, not a reduction. So I’ll give you the benefit of the doubt and assume that the dividend payout is just like last year, half of earnings. So with the corrected numbers of $10,000 dividend against a company of $1,010,000, we’ll continue.

So our dividend yield is now 0.99% (and some decimal places). Yikes, looks like our percentage yield down! I’m only going to receive… let’s see… 0.99% (with the truncated decmals) of $1,010,000 comes to… hey, $10,000, exactly what I got last year. And what’s more, my 1 share of stock has increased by 1%. I’ve gained value without even growing my revenues.

Although this is a gross simplification, and I wouldn’t argue that you can really survive on no growth at all, I hope it illustrates why the current obsession with growth is not all it’s cracked up to be.

52

[QUOTE=Stuffy]
even sven I hate to deflate your ballon, but we have a Walmart. It opened up October 2005. It was built on the site of a movie theater that had sat abandoned for at least 10 years. Not only did they not drive out local businesses, quite the opposite, nearly a dozen businesses open up around it including a chain retaurant (In N’ Out Burgers) which until now had no store in Oakland. It’s not one of their superstores, which means the only food they sell is frozen, which I’m almost sure is due to the nearby Pac N Save. Nearly all their emplyees are nearby residents. It’s right off 880 at Hegenberger if you’d like to take a look.
[/QUOTE]

I know that- I go out there for In’N’Out now and then. And that is totally reasonable- it’s in an appropriate place for a city of this size- someplace where they are not going to be putting local stores out of business, but are still pretty accessable. Someplace where their characeristic architecture and giant parking lots arn’t going to take up blocks of prime space. WalMart is not a neighborhood store. It doesn’t belong in neighborhoods. It belongs off freeways onramps with the rest of the big boxes.

53

[QUOTE=elmwood]
he collective disposable income of … oh, 100,000 poor inner city residents may be about the same as that of 30,000 middle class residents. There are also many middle-class African-Americans that live in the inner city; some out of a sense of duty or obligation, some because they feel comfortable there. There are few retail outlets available to serve them, aside from small bodegas (often owned by families that don’t live in the area, and employing few who really do live in the community) and specialty retail businesses that won’t be in competition with Wal-Mart (urban clothing stores, etc.) If someone living in the 'hood wants a Chinese DVD player, a Chinese desk lamp, or a set of Chinese bed sheets, and they can afford it, they usually won’t go without. They just now schlep to the suburbs.

[/QUOTE]

I think that this sums it up right here. Right now, DC doesn’t really have any big stores like a Target or a Wal-Mart. There are quite a few in the Metro DC area but they are generally located in the suburbs with the future exception of a Target that is going to be built in the City. So if someone in the City wants to buy towels or something of that nature, they just drive out to most likely the Target at Route 1 where they buy what they need.

What is interesting to me is that Target has done well in Northern VA and has quite a few locations but Wal-Mart does not. Most of the Wal-Marts tend to be in the outer suburbs outside of the beltway.

54

Also, whats wrong with my tastes, anyway? Isn’t that why indvidual cities have their own planning commisions- so that they people of that city can live in a city they find tasteful? If they want to paint everything in town pink, I’m going to find that distateful and vote against it. If they want to drain Lake Merritt and build a theme park, I’m going to oppose that because I find it distasteful. If they want to turn the Albertsons that just closed down by my house (no loss, BTW, there is a cheaper and cleaner Safeway three blocks away) in to a go-kart course I’m going to oppose it because I don’t want to live next to a go-kart course and there are things I’d rather see there.

55

Personally, I suspect that Wal-Mart may be wagering on gentrification in some cases. In a lot of urban areas with good housing stock, a Home Depot and a Wal-Mart can be sufficient impetus for hordes of renovating yuppies to set up camp, eventually creating a more lucrative market.

I once lived in such a neighborhood myself, and I have a number of acquaintances who still do. The areas experienced a lot of residential turnover unil the commerce and services arrived, and when they finally did, those companies enjoyed an affluent captive market where I’m sure they did well.

56

[QUOTE=Brain Wreck]
“Very few?” Surely you’re joking. There are many companies that pay significant dividends. Please take a moment and scan through the 30 companies on the DJIA and tell us which ones don’t pay dividends.
[/quote]

Emphasis added for clarity.*

A company that earns the same net income on greater assets is doing worse. You didn’t go from 1% to 1.98%. You went from 2% to 1.98%. Your dividend yield also went down (although you are correct that your stock, as valued on price/book value, went up - however you have a declining price/earnings and that has a much greater effect on stock price). And if you don’t do something to increase your Net Income, next year it goes down more. Your assets are performing worse, year over year. I simplified all the things that go into producing Net Income, basing it only on company size. Sometimes, the additional sales needed simply to get the same return on larger assets can be accomplished via advertising and marketing. Perhaps you can realize cost advantages or increased operational efficiencies. When a Wal Mart or Dell, however, get to the points that they are at, there is little left to squeeze via these avenues. They need to find new markets.

*You could argue that even companies losing money pay dividends. Given the way I’ve simplified it would be a good argument. However, given the way capital markets work, your GEs, Duponts, and Honeywells would be punished in the marketplace for lowering or dismissing a dividend more than they are punished on paying a dividend despite adequate earnings. The thinking is (and remember, I’m not talking amateurs, I’m talking professionals) that a company can recoup the dividend expense through continuing and hopefully improving operations, but if it is missed it augurs a long-term performance slide. Continuity of dividends, despite immediate situation, is considered a good thing.

57

AFAICT, the chief incentive for WalMart or other superstores to move into inner cities is that there’s more money to be made there than people think:

I would speculate that WalMart is noticing two other incentives:

  1. Tax breaks offered by city governments;

  2. Rising costs of gasoline.

A lot of municipalities offer quite sweet deals to businesses able to provide employment and economic growth in devitalized downtown areas, and WalMart doesn’t disdain government subsidies. Moreover, as fuel costs go higher, it becomes more expensive for customers to drive 20–30 minutes to get to a suburban/rural WalMart, besides costing WalMart more to stock all its sprawling suburban/rural stores. Doing business in the middle of major urban centers saves fuel.

Personally, although I don’t much care for WalMart’s Chinese-sweatshop-and-poverty-wages business model or its pesticides-and-PVC product line, I think some of its impacts might be less harmful in inner cities than in suburban areas. At least putting high-volume business where there’s already high population density makes more sense from a sustainability point of view.

58

[QUOTE=D_Odds]
Emphasis added for clarity.*
[/quote]

Oh, you said “significant.” That’s the old “no true Scotsman” fallacy, you know. No matter what figure I name, you can just say it isn’t “significant”.

No, it’s neither of those. Actually we went from 1% to 1% (I’m talking dividend yield here). The cost of my initial outlay didn’t change. The actual percentage went down but I gained value on the books.

And like I said, this is due to amateur investors… those who say “Oh, the PE is lower” but completely ignore that the company’s book value has increased. This isn’t due to any change in the value of the company, it’s just a consequence of ignorant herd mentality in an age where most people in the market can’t be bothered to read a balance sheet or annual report.

Simply wrong. I make $10,000 every year. It isn’t going down. My initial outlay was $1,000,000, and that figure doesn’t change. I make 1%, year over year. The only thing that’s gone down is the yield I can advertise if I’m selling any of my stake in the company, which would be 0.99%. But value-wise it’s a wash because the book value is higher.

59

[QUOTE=Brain Wreck]
Oh, you said “significant.” That’s the old “no true Scotsman” fallacy, you know. No matter what figure I name, you can just say it isn’t “significant”.
[/quote]

GE: Dividend $1.00 (yield 2.9%)/ Earnings per Share $1.54 (keeping more than they are paying out)
HON: Dividend $0.91 (yield 2.1%)/EPS $1.94
DD: Dividend $1.48 (yield 3.4%)/EPS $2.07
MSFT: Dividend $0.36 (yield 1.3%)/EPS $1.21
and just for fun
GM: Dividend $1.00 (yield 5.1%)/EPS ($18.70)

Except Microsoft, these companies consider themselves ‘value’ companies…eh, GE is probably value / growth hybrid. Most of the Dow 30 blue chips are. The expectation of these companies is a high dividend yield (if you want to consider 3.4% high).

We can debate level of significance. I would say that Dupont is a significant portion of income and Microsoft isn’t. Honeywell and GE are open to interpretation. I would not be surprised if GM suspended dividends in the next year.

And I’m not talking dividend yield. I’m talking company ROI.

PLUS, if you are talking dividend yield (annual dividends per share/price per share), the only way it remains 1% is if your stock holdings stay static. So, if your belief is that your holdings should be appreciating due to PB ratio, your dividend yield is falling.

PE is a much better indicator than PB. Expected PE even better. Stock valuation, in its basest form, is nothing more than discounting the future earnings flow. That’s Capital Markets 101. So unless you consider professional hedge/mutual/pension fund portfolio managers (the people I work with) amateurs, you are really off base with that statement.

$10,000 earned yearly does go down, because you lose earning power - at least until we get into a negative inflation environment.

60

[QUOTE=D_Odds]
PLUS, if you are talking dividend yield (annual dividends per share/price per share), the only way it remains 1% is if your stock holdings stay static.
[/quote]

If they don’t, you’renot talking about my origininal holdinst, you’re talking about new holdings. My original holdings earn the same rate year over year. If I own the whole company then there’s nothing more to own.

No, that’s bond valuation. Bonds are evaluated purely as an income stream because as a creditor rather than an owner, the book value is irrelevant to you. The problem these days is that people value stocks as if they were bonds, which is often an error.

Yes, I’ll agree with that statement to an extent. Many professional fund managers behave with an amateurish mindset in part because they serve amateurs. The idea of static holdings horrifies them because they make a significant part of their money through commissions and trading activity, not by actually building wealth. If they know what they’re doing, then why do their returns often not beat the market?

Granted, but that really wasn’t part of this model.