PHILADELPHIA - As you’ve doubtless heard, over the weekend, the New York Times broke a major story about retail giant Wal-Mart and its alleged misbehaviour in Mexico. According to the Times, internal company documents reveal that, over the years, Wal-Mart executives in Mexico have paid millions of dollars in bribes in order to speed up store growth, using kickbacks to ensure that permits were issued at record speed, that environmental issues were quietly (and cheaply) resolved, and that community leaders supported the opening of Wal-Mart stores.
The Times also alleged that top management at Wal-Mart was aware of the bribery as early as 2005, but failed to thoroughly investigate the matter, to punish any of the Mexico-based executives involved, or to report the allegations to US authorities as required by law.
Unsurprisingly, these revelations have caused quite the ruckus. American politicians and officials immediately began calling for an in-depth probe into the allegations, and the Justice Department has reportedly begun to look at Wal-Mart’s Mexican adventures with a view to determining whether or not the company has contravened the Foreign Corrupt Practices Act, which makes it illegal for US businesses to pay bribes overseas. If the Justice Department finds that Wal-Mart has violated the FCPA, the retailer could face steep penalties; back in 2008, Siemens paid around $1.6bn to German and US authorities when it was caught greasing the wheels overseas, and Wal-Mart is a bigger fish – its fines could approach as much as $10bn. Against this backdrop, Wal-Mart shares fell by about 5% this week, effectively erasing all the stock’s gains for the year so far.
Now this all seems pretty serious, but Wal-Mart’s response to the allegations has been rather underwhelming. It released a statement saying that it takes compliance with the FCPA very seriously (especially now, I suppose), and pointing out that the Times’ allegations concern payments made several years ago (without explaining why it didn’t go to the authorities back then, as it was legally required to); in the same statement, it also announced the creation of a new position for a global compliance officer to ensure that all its branches are in compliance with the FCPA – a move that might have been more helpful earlier. So far, that’s it, response-wise.
But perhaps Wal-Mart’s lukewarm response should come as no surprise. After all, the company has dealt with a whole lot of scandals in its time, including a massive sex-discrimination class action lawsuit, endless problems with unions, problems with anti-sprawl activists, and a host of other issues. Maybe Wal-Mart just figures it can ride out this scandal the way it has others, and perhaps it’s right. After all, even a really stiff fine won’t bring down the company, and otherwise, Wal-Mart’s prospects look pretty good – its business in China is thriving, and its acquisition of Massmart promises potentially lucrative access to growth markets in Africa.
So perhaps the more interesting question is why does Wal-Mart seem to lurch from scandal to scandal, and what does this suggest for its operations in South Africa?
The problem, it seems to me, is Wal-Mart’s business model: the company operates on a very thin margin, and therefore focuses intensely on cost control (to maintain its razor-thin margins) and expansion (to generate the growth that Wall Street wants).
The focus on cost control often brings the company into conflict with unions, suppliers, and government. Wal-Mart tries to keep wages low, to squeeze discounts from suppliers by virtue of its massive purchasing power, and to avoid paying more in the way of taxes or other fees than it absolutely must. This benefits consumers, who get goods at much lower prices, but it also creates a lot of tension with other stakeholders, which can spill over into confrontations like the class action lawsuit.
The pursuit of growth can also have negative consequences. In Mexico, for example, Wal-Mart de Mexico was under huge pressure to open new stores as rapidly as possible to deliver on growth promises made by the parent company. This pressure seems to have driven Mexican executives to look for creative ways to speed things up (in particular, passing around envelopes full of cash).
When it comes to Wal-Mart in South Africa, then, the lesson is clear: Wal-Mart will always relentlessly pursue rapid growth and low costs, and stakeholders should therefore approach it with appropriate caution.
On the plus side, Wal-Mart’s strategy is great news for South African consumers, who will see falling prices and expanded access to retail stores. This is reason to celebrate Wal-Mart’s presence in SA, even as the Mexico scandal suggests that stakeholders should be vigilant to ensure Wal-Mart’s good behaviour.