Any legislation that would make it easier to unionize in the U.S. would be the death knell for retailers, which already are being decimated by a dramatic slowdown in consumer spending. The prospects for these companies, in particular Wal-Mart ( WMT), will dim should the Employee Free Choice bill -- otherwise known as the "Card Check Act" -- become law. I think retail would be particularly ripe for unionization given its wage patterns, employee demographics, and the loss of manufacturing jobs, etc. Card Check essentially would allow employees to unionize simply by signing a card, rather than the present secret ballot. It would surely turn the business of unionizing employees into one of the few growth businesses in an economy declining at an estimated 6% rate in the first quarter of 2009. On Wednesday, a note by Credit Suisse ( CS) retail analyst Gary Balter suggested that any legislation would not be as bad as feared for the following reasons: -- Although supporting Card Check, the Obama Administration might be looking to compromise on the bill. -- Several Democratic senators have recently moderated their positions on the bill. -- Although Balter admits the numbers are rough, he estimates that "unionized labor" could result in anywhere from low single-digit labor cost inflation all the way up to the 30% level seen in the supermarket industry (Balter considers that unlikely). -- In a contrarian or variant viewpoint, Balter thinks the big-box or major retailers could benefit from card-check since it would do the most damage to the small- and medium-sized retail segment, which would allow the larger chains to gain share. (That is one angle or unintended consequence I didn't consider.)
I am especially worried about retail as a sector given the tremendous store growth in the last 10 years, and now it has been severely wounded by the pullback on credit and consumer spending in just the last 12 months. When I listen to the retail conference calls, companies are cutting SG&A expenses (operating margin management), better controlling inventories (gross margin management), and curtailing capital expenditures to protect cash flow and avoid liquidity issues. To be suddenly faced with what would be a somewhat more adversarial labor force (always good for the customer experience) and higher payroll costs, at a time when the sector is just coming to grips with challenging macroeconomic factors, couldn't be construed as a positive. No discussion of retail and unionization would be complete without a discussion of Wal-Mart. In my opinion, Wal-Mart is one of the most successful companies of the Baby Boomer generation, growing from 1 store under Sam Walton to $400 billion in annual sales in the last 40 years, thanks to an emphasis on low-price leadership and a manic focus on cost and productivity. Joe Nocera, the famed New York Times Business section columnist, once speculated that the reason inflation remained contained in the 1980's and 1990's could be due in no small part to Wal-Mart and its retail leadership. Wal-Mart accounts for 10% to 12% of ALL retail sales in the US, and the reason is that people shop at there because they pay less than anywhere else. Wal-Mart is also the single-largest U.S. employer, and the unions want access to those 1. 3 million to 1.5 million "associates" -- and the union dues they would pay -- like you wouldn't believe. Unfortunately, if that should happen, Wal-Mart would founder badly and its cost and price leadership would disappear, if not quickly, certainly over time.
While Credit Suisse's Balter thinks that -- if passed -- unions would focus on smaller, local businesses, since that is where the retail job creation occurs, I don't think the retailers with a national footprint like a Best Buy ( BBY), Kohl's ( KSS), Nordstrom ( JWN), Starbucks ( SBUX) or McDonald's ( MCD) would be exempt. The number of employees would make these retailers inviting targets since -- as Jesse James used to say about banks, that is where the money is (i.e. read number of employees and union dues). At the risk of sounding unduly harsh, let's face it, if you are in your 30s or 40s and working at a retailer like a Best Buy, with no management aspirations, and little ambition, you are going to be ripe for the siren song that the union local will sing, with career prospects about as inviting as your average hedge fund manager or registered investment advisor these days. To conclude, I think this is bad law. To pass it in any form or fashion is another cost on small business at a time when small business and all of the business community is reeling from the worst recession since 1980-1982. However, I think it would be particularly tough on retailers and fast-food merchants and other community employers. Even Warren Buffett, a gentleman not widely known for his conservative political viewpoint, was firmly against the Employee Free Choice Act in his Monday morning interview with Becky Quick on CNBC. If the card check law should pass, line up your retailers for shorting opportunities. There are many that will not survive the crippling blow of collapsing revenues with higher labor costs, and I think that would be the case for other businesses as well. It certainly would be a good opportunity to re-short the stock market as a whole.