Oct. 6, 2003, 10:39PM
Teamsters call for ouster from Continental's board
By BILL HENSEL JR.
Continental Airlines' employee-shareholders belonging to the Teamsters on Monday called for the resignation of Continental board member David Bonderman.
The International Brotherhood of Teamsters members alleged Bonderman has a conflict of interest caused by financial investment, interest and control in Continental competitors.
They also cited concern about a recent stock sale involving Bonderman.
The Houston-based carrier immediately issued a statement defending the businessman who has been on the board of directors for about a decade.
Bonderman is founder and president of Texas Pacific Group, which has offices in Fort Worth and San Francisco.
"Texas Pacific Group's David Bonderman has been a valued member of our board since 1993 and has contributed greatly to the company's success," Continental CEO Gordon Bethune said.
But Rodney Rhoades, a Continental mechanic who is president of Teamsters Local 19, said the Teamster employees want directors "who are invested in the success of Continental Airlines, not the success of our competition."
Earlier this year, the Teamsters used the carrier's annual meeting to charge that Bonderman had a conflict of interest because of his supposed intentions to buy stakes in rival airlines.
The union said Texas Pacific Group continues to vie for ownership of other airlines and recently had a bid rejected for Air Canada.
Continental countered Monday by saying that Texas Pacific Group has informed the carrier it is not considering investing in other airlines at this time.
Bonderman reportedly also had expressed interest in investing in United Airlines. Both United and Air Canada have filed for bankruptcy protection.
Texas Pacific Group has a track record of acquiring ownership of struggling airlines and spearheading turnarounds.
Texas Pacific, which holds a controlling interest in America West, continues to claim two board seats at Continental and one at America West, despite selling off 880,000 shares of Continental stock, the union charged.
Documents filed with the Securities & Exchange Commission on Sept. 23 show the Bonderman Family LP sold 704,096 shares of stock.
Shares of Continental closed at a 52-week high of $19.27 Monday, up 51 cents in trading on the New York Stock Exchange.
Shares of most major airlines have risen in recent months after falling to the single digits after the Sept. 11 terrorist attacks and ensuing aftermath. Other factors, including the outbreak of SARS and war in Iraq, also helped drive prices lower.
Bonderman still owns 15,000 shares of Continental stock, according to SEC filings.
Robert Rasch, a Continental mechanic and shareholder, said Bonderman's stock sales have heightened concerns that his primary interest is not necessarily in the best interest of Continental shareholders.
"He should do the responsible thing and resign," Rasch said.
However, Continental indicated Monday that the board of directors engaged outside counsel to look into the matter.
"That outside counsel has determined that Texas Pacific Group's representation on Continental's board does not violate the law," the carrier said.
Copyright 2003 Houston Chronicle
OCTOBER 6, 2003
Is Wal-Mart Too Powerful? Low prices are great. But Wal-Mart's dominance creates problems -- for suppliers, workers, communities, and even American culture
In business, there is big, and there is Wal-Mart. With $245 billion in revenues in 2002, Wal-Mart Stores (WMT ) Inc. is the world's largest company. It is three times the size of the No. 2 retailer, France's Carrefour. Every week, 138 million shoppers visit Wal-Mart's 4,750 stores; last year, 82% of American households made at least one purchase at Wal-Mart. "There's nothing like Wal-Mart," says Ira Kalish, global director of Deloitte Research. "They are so much bigger than any retailer has ever been that it's not possible to compare."
At Wal-Mart, "everyday low prices" is more than a slogan; it is the fundamental tenet of a cult masquerading as a company. Over the years, Wal-Mart has relentlessly wrung tens of billions of dollars in cost efficiencies out of the retail supply chain, passing the larger part of the savings along to shoppers as bargain prices. New England Consulting estimates that Wal-Mart saved its U.S. customers $20 billion last year alone. Factor in the price cuts other retailers must make to compete, and the total annual savings approach $100 billion. It's no wonder that economists refer to a broad "Wal-Mart effect" that has suppressed inflation and rippled productivity gains through the economy year after year.
However, Wal-Mart's seemingly simple and virtuous business model is fraught with complications and perverse consequences. To cite a particularly noteworthy one, this staunchly anti-union company, America's largest private employer, is widely blamed for the sorry state of retail wages in America. On average, Wal-Mart sales clerks -- "associates" in company parlance -- pulled in $8.23 an hour, or $13,861 a year, in 2001, according to documents filed in a lawsuit pending against the company. At the time, the federal poverty line for a family of three was $14,630. Wal-Mart insists that it pays competitively, citing a privately commissioned survey that found that it "meets or exceeds" the total remuneration paid by rival retailers in 50 U.S. markets. "This is a good place to work," says Coleman H. Peterson, executive vice-president for personnel, citing an employee turnover rate that has fallen below 45% from 70% in 1999.
Critics counter that this is evidence not of improving morale but of a lack of employment alternatives in a slow-growth economy. "It's a ticking time bomb," says an executive at one big Wal-Mart supplier. "At some point, do the people stand up and revolt?" Indeed, the company now faces a revolt of sorts in the form of nearly 40 lawsuits charging it with forcing employees to work overtime without pay and a sex-discrimination case that could rank as the largest civil rights class action ever. On Sept. 24, a federal judge in California began considering a plaintiff's petition to include all women who have worked at Wal-Mart since late 1998 -- 1.6 million all told -- in a suit alleging that Wal-Mart systematically denies women equal pay and opportunities for promotion. Wal-Mart is vigorously contesting all of these suits.
Wal-Mart might well be both America's most admired and most hated company. "The world has never known a company with such ambition, capability, and momentum," marvels a Boston Consulting Group report. On Wall Street, Wal-Mart trades at a premium to most every other retailer. But the more size and power that "the Beast of Bentonville" amasses, the greater the backlash it is stirring among competing retailers, vendors, organized labor, community activists, and cultural and political progressives. America has a long history of controversial retailers, notes James E. Hoopes, a history professor at Babson College. "What's new about Wal-Mart is the flak it's drawn from outside the world of its competition," he says. "It's become a social phenomenon that people resent and fear."
Wal-Mart's marketplace clout is hard to overstate. In household staples such as toothpaste, shampoo, and paper towels, the company commands about 30% of the U.S. market, and analysts predict that its share of many such goods could hit 50% before decade's end. Wal-Mart also is Hollywood's biggest outlet, accounting for 15% to 20% of all sales of CDs, videos, and DVDs. The mega-retailer did not add magazines to its mix until the mid-1990s, but it now makes 15% of all single-copy sales in the U.S. In books, too, Wal-Mart has quickly become a force. "They pile up best-sellers like toothpaste," says Stephen Riggio, chief executive of Barnes & Noble (BKS ) Inc., the world's largest bookseller.
Wal-Mart controls a large and rapidly increasing share of the business done by most every major U.S. consumer-products company: 28% of Dial (DL ) total sales, 24% of Del Monte Foods (DLM )', 23% of Clorox', 23% of Revlon (REV )'s, and on down the list. Suppliers' growing dependence on Wal-Mart is "a huge issue" not only for manufacturers but also for the U.S. economy, says Tom Rubel, CEO of consultant Retail Forward Inc. "If [Wal-Mart] ever stumbles, we've got a potential national security problem on our hands. They touch almost everything....If they ever really went into a tailspin, the dislocation would be significant and traumatic."
Even so, Wal-Mart appears to be in no imminent danger of running afoul of federal antitrust statutes. The Robinson-Patman Act of 1936 was passed in large part to protect mom-and-pop grocers from the Great Atlantic & Pacific Tea Co., the Wal-Mart of its day. But contemporary antitrust interpretations eschew such David-and-Goliath populism. Giants like Wal-Mart have wide latitude to do as they wish to rivals and suppliers so long as they deliver lower prices to consumers. "When Wal-Mart comes in and people desert downtown because they like the selection and the low prices, it's hard for people in the antitrust community to say we should not let them do that," says New York University law professor Harry First.
CEO H. Lee Scott Jr. and other Wal-Mart executives are aware of the rising hostility the company faces and are trying to smooth its rough edges in dealing with the outside world. But they have no intention of tampering with its shopper-centric business model. "We don't turn a deaf ear to any criticism. We're most sensitive to what the customer has to say, though," says Vice-Chairman Thomas M. Coughlin. "Your customers will tell you when you're wrong."
Wal-Mart cites customer preferences as the reason it does not stock CDs or DVDs with parental warning stickers and why it occasionally yanks items from its shelves. In May, it removed the racy "lad" magazines Maxim, Stuff, and FHM. A month later, it began obscuring the covers of Glamour, Redbook, Marie Claire, and Cosmopolitan with binders. Why did Wal-Mart censor these publications and not Rolling Stone, which has featured a nearly naked Britney Spears and Christina Aguilera on two of its recent covers? "There's a lot of subjectivity," concedes Gary Severson, a Wal-Mart general merchandise manager. "There's a line between provocative and pornographic. I don't know exactly where it is."
Wal-Mart was the only one of the top 10 drug chains to refuse to stock Preven when Gynetics Inc. introduced the morning-after contraceptive in 1999. Roderick L. Mackenzie, Gynetics' founder and nonexecutive chairman, says senior Wal-Mart executives told his employees that they did not want their pharmacists grappling with the "moral dilemma" of abortion. Mackenzie was incensed but tried to hide it. "When you speak to God in Bentonville, you speak in hushed tones," says Mackenzie, who explained, to no avail, that Preven did not induce abortion but rather prevented pregnancy. Wal-Mart spokesman Jay Allen says "a number of factors were considered" in making the Preven decision, but he denies that opposition to abortion was one of them. "If anybody of any belief reads any moral decision [into] that, that's not right," he says.
CULTURAL GATEKEEPER There is no question that the company has the legal right to sell only what it chooses to sell, even in the case of First Amendment-protected material such as magazines. By most accounts, though, Wal-Mart's cultural gatekeeping has served to narrow the mainstream for entertainment offerings while imparting to it a rightward tilt. The big music companies have stopped grousing about Wal-Mart and are eagerly supplying the chain with the same sanitized versions of explicit CDs that they provide to radio stations. "You can't have 100% impact when you are taking an artist to a mainstream audience if you don't have the biggest player, Wal-Mart," says EMI Music North America Executive Vice-President Phil Quartararo.
This year alone, Wal-Mart hopes to open as many as 335 new stores in the U.S.: 55 discount stores, 210 supercenters, 45 Sam's Clubs (UBS ), and 25 Neighborhood markets. An additional 130 new stores are on the boards for foreign markets. Wal-Mart currently operates 1,309 stores in 10 countries, ranking as the largest retailer in Mexico and Canada. If the company can maintain its current 15% growth rate, it will double its revenues over the next five years and top $600 billion in 2011.
That's a very big if -- even for Wal-Mart. Vice-Chairman Coughlin's biggest worry is finding enough warm bodies to staff all those new stores. By Wal-Mart's own estimate, about 44% of its 1.4 million employees will leave in 2003, meaning the company will need to hire 616,000 workers just to stay even. In addition, from 2004 to 2008, the company wants to add 800,000 new positions, including 47,000 management slots. "That's what causes me the most sleepless nights," Coughlin says.
At the same time, Wal-Mart will have to cope with intensifying grassroots opposition. The company's hugely ambitious expansion plans hinge on continuing its move out of its stronghold in the rural South and Midwest into urban America. This year, the company opened what it describes as "one of its first truly urban stores" in Los Angeles, not far from Watts. Everyday low prices no doubt appeal to city dwellers no less than to their country cousins. But Wal-Mart's sense of itself as definitively American ("Wal-Mart is America," boasts one top executive) is likely to be severely tested by the metropolis' high land costs, restrictive zoning codes, and combative labor unions -- not to mention its greater economic and cultural diversity.
A ZERO-SUM GAME? Certainly, Wal-Mart will be hard pressed to continue censoring its product lines using the justification of customer preference. The market for profanity-laced hip-hop may be tiny in Bentonville, Ark., but it is big in Los Angeles. Overseas, the company does not presume to impose a small-town, Bible Belt moral agenda on shoppers. "We adopt local standards," says John B. Menzer, CEO of Wal-Mart's international division. Why, then, should Los Angeles be any different?
The fact is, Wal-Mart doesn't know for certain how the majority of its customers feel about Maxim, or any other magazine, for that matter. It appears that the company makes no scientific attempt to survey shoppers about entertainment content but responds in ad hoc fashion to complaints lodged by a relative handful of customers and by outside groups, which are usually but not always of the conservative persuasion.
On the other hand, the company seldom submits to community groups that oppose its plans to build new stores. The number of such challenges has increased steadily and is now running at about 100 a year. Wal-Mart's "biggest barrier to growth is....opposition at the local level," says Carl Steidtmann, Deloitte Research's retail economist. The Stop Wal-Mart movement has been bolstered of late by a series of academic studies that have debunked the notion that a new big-box store boosts employment and sales and property-tax receipts. "The net increases are minimal as the new big-box stores merely capture sales from existing business in the area," concludes a new study of Wal-Mart's impact in Mississippi. "I see it pretty much as a zero-sum game," says co-author Kenneth E. Stone, an economics professor at Iowa State University.
The most hotly contested battleground at the moment is Contra Costa County, near San Francisco. In June, county supervisors enacted an ordinance that prohibits any retail outlet larger than 90,000 square feet from devoting more than 5% of its floor space to food or other nontaxable goods. Wal-Mart promptly gathered enough signatures to force a referendum, scheduled for March. Complains County Supervisor John Gioia: "Local planning should be done by our locally elected board and not by a corporate office in Bentonville, Arkansas." Robert S. McAdam, Wal-Mart's vice-president for government relations, says corporate-sponsored referenda, which Wal-Mart has promoted elsewhere in California, are "a perfectly legitimate part of the process."
SUPERCENTER NATION Meanwhile, the United Food & Commercial Workers union is stepping up its long-standing attempts to organize Wal-Mart stores, with current campaigns in 45 locations. For UFCW locals that represent grocery workers, the issue is nothing less than survival. The Wal-Mart supercenter -- the principal vehicle of the company's expansion -- is a nonunion dagger aimed at the heart of the traditional American supermarket, nearly 13,000 of which have closed since 1992.
Patterned after the European hypermarket, the supercenter is a combination supermarket and general merchandise discounter built to colossal scale. Wal-Mart didn't introduce the supercenter to America, but it has amassed a 79% share of the category since it moved into food and drug retailing by opening its first such store in 1988. Today, Wal-Mart operates 1,386 supercenters and is the nation's largest grocer, with a 19% market share, and its third-largest pharmacy, with 16%.
Wal-Mart plans to open 1,000 more supercenters in the U.S. alone over the next five years. Retail Forward estimates that this supercenter blitzkrieg will boost Wal-Mart's grocery and related revenues to $162 billion from the current $82 billion, giving it control over 35% of U.S. food sales and 25% of drugstore sales. Market-share gains of such magnitude in a slow-growth business necessarily will come at the expense of established competitors -- especially the unionized ones, which pay their workers 30% more on average than Wal-Mart does, according to the UFCW. Retail Forward predicts that for every new supercenter that Wal-Mart opens, two supermarkets will close, or 2,000 all told.
To the low-price, low-cost operator go the spoils. Isn't that how capitalism is supposed to work? Certainly, the supercentering of America can be expected to result in huge savings at the cash register. On average, a Wal-Mart supercenter offers prices 14% below its rivals', according to a 2002 study by UBS Warburg.
However, those everyday low prices come at a cost. As the number of supermarkets shrinks, more shoppers will have to travel farther from home and will find their buying increasingly restricted to merchandise that Wal-Mart chooses to sell -- a growing percentage of which may be the retailer's private-label goods, which now account for nearly 20% of sales. Meanwhile, the failure of hundreds of stores will cost their owners dearly and put thousands out of work, only some of whom will find jobs at Wal-Mart, most likely at lower pay. "It will be a sad day in this country if we wake up one morning and all we find is a Wal-Mart on every corner," says Gary E. Hawkins, CEO of Green Hills, a family-owned supermarket in Syracuse, N.Y.
For suppliers, too, Wal-Mart's relentless pricing pressure is a mixed blessing. "If you are good with data, are sophisticated, and have scale, Wal-Mart should be one of your most profitable customers," says a retired consumer-products executive. Unlike many retailers, the company does not charge "slotting fees" for access to its shelves and is unusually generous in sharing sales data with manufacturers. In return, though, Wal-Mart not only dictates delivery schedules and inventory levels but also heavily influences product specifications. In the end, many suppliers have to choose between designing goods their way or the Wal-Mart way. "Wal-Mart really is about driving the cost of a product down," says James A. Wier, CEO of Simplicity Manufacturing, a lawn-mower maker that decided to stop selling to Wal-Mart last fall. "When you drive the cost of a product down, you really can't deliver the high-quality product like we have."
Critics also argue that Wal-Mart's intensifying global pursuit of low-cost goods is partly to blame for the accelerating loss of U.S. manufacturing jobs to China and other low-wage nations. "It's hard to tease out, but Wal-Mart is definitely part of the dynamic, and given its market share and power, probably a significant part," says Jared Bernstein, a labor economist at the liberal Economic Policy Institute. The $12 billion worth of Chinese goods Wal-Mart bought in 2002 represented 10% of all U.S. imports from China.
For obvious reasons, Wal-Mart has de-emphasized the "Made in America" campaign that founder Sam Walton started in the mid-1980s to great promotional effect. "Where we have the option to source domestically we do," says Ken Eaton, Wal-Mart's senior vice-president for global procurement. However, he adds, "there are certain businesses, particularly in the U.S., where you just can't buy domestically anymore to the scale and value we need." In recent years, Wal-Mart increasingly has sought additional cost advantages by bypassing middlemen and buying finished goods and raw materials from foreign manufacturers. By contracting directly with a handful of denim manufacturers in Southeast Asia, the company has driven down the retail price of the George brand jeans it sells in Britain and Germany to $7.85 from $26.67. Says Eaton: "The mind-set around here is, we're agents for our customers."
"THE WAL-MART PHENOMENON" Wal-Mart's philosophy doesn't cut any ice with Wilbur L. Ross Jr., a financier and steel tycoon who soon will close on the purchase of beleaguered textile manufacturer Burlington Industries Inc. Ross contends that Wal-Mart is costing Americans jobs "not only as a business strategy, but as a lobbying strategy" -- that is, by using its influence in Washington to oppose import tariffs and quotas and promote free-trade pacts with Third World countries, including the Southeast Asian countries that supply Wal-Mart with denim. "Everybody is now scurrying around trying to find the lowest price points," Ross complains. "It's the Wal-Mart phenomenon."
High on a wall inside Wal-Mart headquarters is a paper banner with a provocative question in big block letters: "Who's taking your customers?" Beneath it, "Wanted" poster style, hang photos of the CEOs of two dozen of America's largest retailers -- Target (TGT ) Kroger (KR ) Winn-Dixie Stores (WIN ) Walgreen (WAG ), and so on. None looks very happy, perhaps because they know that the only way to get off the wall is to fail utterly. Although Kmart (KMRT ) is reorganizing under the federal bankruptcy code, a photo of its CEO continues to hang in Wal-Mart's rogues' gallery and no doubt will remain there for as long as Kmart operates even a single store.
Growth will only add to the clout that the Bentonville colossus now wields. There might well come a time, though, when Wal-Mart's size poses as much of a threat to the company itself as it does to outsiders. "Their biggest danger is just managing size," observes a longtime supplier. Adds Babson College's Hoopes: "The history of the last 150 years in retailing would say that if you don't like Wal-Mart, be patient. There will be new models eventually that will do Wal-Mart in, and Wal-Mart won't see it coming." Right now, though, Wal-Mart's day of reckoning seems a very long way off.
By Anthony Bianco and Wendy Zellner With Diane Brady, Mike France, Tom Lowry, Nanette Byrnes, and Susan Zegel in New York; Michael Arndt, Robert Berner, and Ann Therese Palmer in Chicago; and bureau reports
Copyright 2003 BUSINESSWEEK|ONLINE
Oct. 7, 2003, 7:40PM
Why we shouldn't extend NAFTA with a `C'
By TOM RICKER and DAVID MICHAEL SMITH
For the past nine months, the governments of the United States, Costa Rica, El Salvador, Guatemala, Honduras and Nicaragua have been working on the details of a proposed Central America Free Trade Agreement, or CAFTA. Although the negotiations are being conducted behind closed doors, it is widely known that the United States is pushing the other countries to remove tariffs on U.S. imports and other trade barriers while insisting on the maintenance of subsidies and other protections for U.S. producers.
CAFTA is widely viewed as the extension of the North America Free Trade Agreement, or NAFTA, to Central America. As such, this prospective pact has met with sizeable, spirited protests in several countries. Central American labor unions strongly oppose it, and tens of thousands of people have marched and rallied against it in Costa Rica, El Salvador, Honduras and Nicaragua. When the eighth round of CAFTA negotiations are held at Houston's Westin Galleria Hotel on Oct. 20-24, similar expressions of popular dissent are likely.
As the breakdown of recent World Trade Organization talks in Cancun, Mexico, made clear, much of the world has deep concerns about the so-called free trade agenda of the United States and the European Union.
Most nations and governments support the expansion of trade and economic relations, and this is especially true for the poorer, investment-starved countries. But many people in Central America and the United States oppose CAFTA for good reasons.
The experience of NAFTA reveals that while the free trade agenda promotes capital mobility and profits for the giant transnational corporations, workers and small farmers in all the affected nations suffer as a result. Robert E. Scott of the Economic Policy Institute has estimated that NAFTA has already cost the United States almost 800,000 jobs. Scott has found that NAFTA has also contributed to rising income inequality, suppressed real wages for production workers, weakened collective bargaining powers and ability to organize unions, and reduced fringe benefits.
The jobs in Mexican maquilas generated by NAFTA have hardly been a blessing. According to the Institute for Policy Studies, the real value of the average manufacturing wage in Mexico has dropped more than 20 percent since NAFTA went into effect. The percentage of Mexicans living in poverty has increased from 50.97 percent to 58.40 percent during this period. More than 800,000 jobs have been lost in Mexico during the last three years alone. As researcher Carlos Salas has concluded, NAFTA has increased inequality and reduced incomes and job quality for the vast majority of workers in Mexico.
Based on this experience, critics reasonably fear that CAFTA will produce more job losses in the United States, more sweatshop labor in Central America and expanded corporate control over people's lives throughout the region. As Thea M. Lee, assistant director for International Economics, AFL-CIO, has pointed out, "The standard free trade agreement model will not work for working families in Central America and the United States." Karen Hansen-Kuhn of The Development Gap, a Washington advocacy group, has warned that CAFTA will be disastrous to many Central American nations.
CAFTA may be especially devastating to small farmers in Central America. The headline on Chronicle reporter Dudley Althaus' excellent article in the Sept. 8 issue of this newspaper was very clear: "Free trade sows ruin for Mexico' farmers." More than 1.5 million farmers have been forced off the land there in the last decade. The article noted that competition with U.S. agricultural exports and the elimination of government subsidies have doomed the peasants. As the Institute for Agriculture and Trade Policy has documented, U.S. subsidies enable American corn to sell at 33 percent below the cost of production and American rice to sell at 22 percent below the cost of production. Mexican farmers have simply been unable to compete.
The elimination of tariffs through CAFTA could prove even more destructive in Central America.
An estimated 1.3 million people living in rural areas in Central America are already facing starvation and malnutrition. In no small part, this is due to the liberalization of international coffee markets and the ensuing drastic decline in international coffee prices over the past three years. Tariff reductions on import sensitive crops will make a bad situation worse in rural Central America. Many analysts and activists in Central America have warned that CAFTA could displace large numbers of farmers, exacerbate food insecurity and increase poverty.
Underselling Central American producers will not necessarily help small or medium-size farmers in the United States, either. Under NAFTA, most of the benefits on the U.S. side of the border have gone to huge agribusinesses such as Archer Daniels Midland and Conagra, whose profits have nearly tripled since 1994. In contrast, the loss of small family farms in the United States has actually accelerated -- not declined -- during this period. Alabama alone has lost as many as 2,000 farms in the past nine years.
The protests against the CAFTA negotiations in Houston during Oct. 20-24 may not be as large or as loud as the recent anti-WTO demonstrations in Cancun. But local activists hope to encourage the public to question the costs and benefits of free trade and the broader process of corporate-led globalization.
As growing protests from Seattle to Genoa to Cancun have made clear during the last four years, substantial numbers of people around the world believe that trade is too important to leave to the giant corporations and the politicians.
Ricker is director of the Quixote Center, a faith-based social justice center in Hyattsville, Md. Smith is professor of government at College of the Mainland in Texas City.
Copyright 2003 Houston Chronicle