The Tuskegee Experiment Part II: Wal-Mart Moves into Washington D.C. and Chicago

Wal-Mart. We’ve talked about this company before (Black Friday twice, cheaper prices for unwanted goods, braving the back of the line, PA announcements gone awry, and worse, who represents the real peopleofwalmart.com) and must now discuss how this store is attempting to penetrate into new, exotic markets within foreign nations.

Wal-Mart attempted a real Tuskegee Experiment with unsurprising results

If Detroit can claim that vehicles made there are “imported” to the United States, then Wal-mart’s bid to open stores in metropolitan areas that have similar demographics to the Motor City can only be construed as attempts to offer their services to a developing (nation) marketplace.

Wal-mart is about to open a store in Washington D.C., an area seemingly ill-equipped for a store that operates under strict guidelines of maintaining a high profit margin. Thievery – either organized or by a desperate individual – cuts deep into a retailers ability to turn a profit, a problem Wal-Mart has traditionally avoided:

Wal-Mart declined to offer any explanations for the rise in losses but denied it has cut security staff and said employee morale is rising rather than falling.


Although Wal-Mart declined to reveal any details, analysts suspect Wal-Mart -- which for years had a theft loss rate that was half that of its peers -- is getting closer to the industrywide average.
Theft is a big problem for all retailers, costing them $41.6 billion last year, according to a joint study released this week by the National Retail Federation and the University of Florida. The study found that the theft rate as a percentage of sales ticked upward slightly to 1.61% of sales in 2006 from 1.60% in 2005. 

Whatever the cause, such theft -- which late founder Sam Walton once called one of retailers' top profit killers -- adds one more challenge when Wal-Mart is already struggling with sluggish sales at its established stores due to an overall economic slowdown as well as its own stumbles in its home- and apparel-merchandising strategies.

Eduardo Castro-Wright, president and CEO of Wal-Mart's U.S. store division, briefly acknowledged the theft problem in a mid-May conference call with analysts. He cited shrinkage as well as increased markdowns and higher inventory for dragging down first-quarter profit margins.

"We are concerned about shrinkage and are investigating the cause and are taking steps to correct it," Castro-Wright said. Company officials won't comment on those countermeasures.

To maintain healthy profits, Wal-Mart must continue to have high profit margins. Opening a new store in an area prone to high rates of crime is not conducive to this business model. Is this one reason why the new store in Washington D.C. is becoming such an interesting debate?:

When politicians, agency officials and other establishment types discuss the pros and cons of Wal-Mart opening stores in poor, retail-starved neighborhoods in the District, they often talk about pretty high-minded stuff. Fair pay. Job training. Environmental safeguards…

First, would a new Wal-Mart there really stock the same quality of food and products as its stores do in better-off, suburban communities?

"I'll believe it when I see it," Mya Harris, 24, said skeptically. "Sure, you can put the store here, but what are they going to put inside it?"

Second, and I was amazed when this anxiety was aired in fully half the interviews, residents worry that the store would suffer severely or even fail because of petty theft.

 "There'll probably be a lot of shoplifting going on. They'll need a lot of security," Terriea Sutton, 35, said.

Brenda Speaks, a Ward 4 ANC commissioner, actually urged blocking construction of the planned store in her ward at Georgia and Missouri avenues NW partly because of that risk. Addressing a small, anti-Wal-Mart rally at City Hall on Monday, Speaks said young people would get criminal records when they couldn't resist the temptation to steal.

Wal-Mart said District residents needn't be so self-critical. Although security is "always a concern and a focal point for all stores, there is no more concern over these District locations than any other store locations," company spokesman Steven Restivo said.

It's sad that people have such a low opinion of their own community. Happily, with prudent oversight from the city, Wal-Mart's arrival should be a significant step forward for the neighborhood and the District as a whole.

When white flight from major cities began 40-50 years ago, the major stores fled with them. In a bid to seek new profits and enlarge its market share, Wal-Mart is expanding to areas where gentrification is slowly taking place:

 Starting with its new big-box store under construction in Chicago, Wal-Mart Stores Inc. said it will build 50 stores in urban neighborhoods distressed by high unemployment and other social problems in cities around the country.

    Lee Scott, the company's chief executive, made the announcement Tuesday at the Austin neighborhood construction site of Chicago's first Wal-Mart store.

    He said the new stores planned for inner-city neighborhoods over the next two years would create 15,000 to 20,000 jobs.

    "We will be bringing back about 400 jobs in this store," Scott said. He said the Austin store, like some urban stores elsewhere in the country, will have special programs to benefit local businesses, such as help with selling to Wal-Mart.

    Local minority and women-owned businesses will be sought out for construction work on the new stores, Scott said. The general contractor for the Austin store is an African-American woman, and minorities and women were among those hired as subcontractors. The store is to open this summer.

    Wal-Mart said it has not decided where it would locate the new stores.
    "We have been approached in the past by Detroit," said John Bisio, spokesman for Wal-Mart. "You could also look at communities in parts of Houston."
    He said Philadelphia might also be a candidate.

    Economists say an increasing number of businesses are recognizing that while residents of some urban neighborhoods may be poor, the density of population makes for substantial buying power.     

   Critics say small merchants cannot compete with Wal-Mart's prices, and that many of its employees end up on Medicaid because of low incomes and high insurance costs.
    Until recently, Wal-Mart stores more likely were to be found in rural areas or suburbs than in the heart of major cities. But analysts say the company is intent on locating in densely populated city neighborhoods, even those where household incomes are low and crime is high.

    Joseph Beaulieu, stock analyst with Morningstar, said Wal-Mart realizes it must remake its image if it is to be welcomed by cities.

    "They have had a hard time working with municipalities," Beaulieu said. "Over the past year and a half, they have shown increasing flexibility. They are going to have to change their reputation."

Wal-Mart’s business model that helped it grow into one of the largest companies in the world was to bypass heavily populated cities filled with crime (and, well, Black people) and instead open stores in suburbs and rural areas heavily populated by white people.

This business model of avoiding minority areas served Wal-Mart quite nicely, with high profit margins and selling in bulk making it possible to offer products at lower prices.

It should be noted that Wal-Mart did participate in a minority outreach program before, opening a store in Tuskegee, Alabama. A heavily Black town on the verge of financial ruin, Tuskegee was home to an infamous experiment that preyed heavily upon its Black population.

Wal-Mart opened a store in Tuskegee back in 1981, and Wal-Mart accountants quickly found that opening stores for the positive, charitable publicity it would generated wasn’t economically viable. Rumors have persisted that losses from theft exceeded store revenues and that this Tuskegee Wal-Mart was closed one day, its inventory surreptitiously removed thanks to the cover of night and an army of trucks, and that the store was boarded up and empty the next day.

These might be apocryphal stories, but one thing is crystal clear: The Tuskegee Experiment failed by Tuskegee's Black citizenry pillaged the store with an intensity rarely seen at Wal-Mart.  

The Wal-Mart Tuskegee Experiment was a failure. Opening a store in a heavily minority area (next to a school that has produced 70 percent of all of America’s Black veterinarians) was a financial burden Wal-Mart wasn’t prepared to force stock holders to endure.

Wal-Mart’s hope of opening new stores in untapped markets is to be commended, but even the customer base of the new Washington D.C. store worries about shoplifting and an augmenting of police files. The Tuskegee Experiment was a monumental mistake that few people seem willing to talk about anymore, and one is left to wonder if Wal-Mart learned any lessons.

A company that has pioneered data-mining, revenue management and tracking purchases to predict consumer habits seem bent on disregarding the lessons of the Tuskegee Experiment. One can only wonder these Wal-Mart stores will look like at the end of every month:

Bill Simon is head of Wal-Mart’s American operations. At a conference on September 15 put on by Goldman Sachs, he said that there is a big jump in sales at the beginning of the month, when welfare payments arrive, with an “ever-increasing amount of transactions being paid for with government assistance.”

As he explained:
“And you need not go further than one of our stores on midnight at the end of the month. And it’s real interesting to watch, about 11 p.m., customers start to come in and shop, fill their grocery basket with basic items, baby formula, milk, bread, eggs, and continue to shop and mill about the store until midni

ght, when . . . government electronic benefits cards get activated and then the checkout starts and occurs. And our sales for those first few hours on the first of the month are substantially and significantly higher.

“And if you really think about it, the only reason somebody gets out in the middle of the night and buys baby formula is that they need it, and they’ve been waiting for it. Otherwise, we are open 24 hours—come at 5 a.m., come at 7 a.m., come at 10 a.m. But if you are there at midnight, you are there for a reason.

Will the book section of Wal-Mart stay segregated in these new stores? It’s safe to say that Wal-Mart learned absolutely no lessons from the Tuskegee Experiment and, in fact, buried that mistake deep in corporate red tape.

The lessons extrapolated from this tale should be obvious to all. It should be noted that this story smells of Mall Envy.