Pride Is Costing Wal-Mart and Washington

NEW YORK (TheStreet) -- defines pride as "an inordinate opinion of one's own dignity, importance, merit, or superiority." And nowhere was pride more evident than last week in the confrontation between the Washington, D.C., City Council and Wal-Mart (WMT). Pride got in the way of both sides, turning what was at least three years of hard work and promise for Washington redevelopment into a political fiasco.

Wal-Mart has a reputation of using its size and economic power to get its way. Today we call that "bullying." Ask any vendor about margin squeeze. Ask any community banker with a Wal-Mart account about negative float.

Until recently, Wal-Mart's business model kept its stores in rural and suburban areas. But over the past few years, sales growth in the U.S. has stalled. So Wal-Mart has sought to put stores in urban areas. The governing councils in large cities, however, tend to have more liberal-minded majorities with ties to unions and sympathy toward small business.

Wal-Mart is non-union and has a track record of driving out small business when it arrives in a market. It has been rejected by the New York City Council and apparently gave up on stores in the Boston area last year.

When it came to Washington, however, Wal-Mart appeared to have turned over a new leaf. Working closely with Mayor Vincent Gray, Wal-Mart established the "Community Partnership Initiative" to help the city. Last year, through its foundations, Wal-Mart contributed $3.8 million to charitable organizations in Washington, including those helping the poor and homeless.

"This agreement represents an unprecedented citywide commitment from a retailer... Wal-Mart is showing what it means to be a good corporate neighbor," Gray said.

With the blessing of the city, Wal-Mart decided to build six stores in Washington -- three stores under construction and three in planning. The stores would mean 1,800 direct new jobs, and 3,000 jobs when multiplier effects are added, plus 1,000 temporary construction jobs. At least three of the stores are crucial to economic redevelopment and renewal in the Washington neighborhoods of Sykland, Capitol Gateway, and New York Avenue.

Last week, the council, caving to political pressure, passed an ordinance aimed at Wal-Mart. It requires companies operating in spaces of more than 75,000 square feet and whose sales are more than $1 billion annually to pay a minimum wage of $12.50 an hour. The current minimum wage in Washington is $8.25 an hour. And for unionized businesses, the ordinance doesn't apply.

The accompanying rhetoric was laughable. For example, $12.50 an hour is called a "living wage" by its proponents, which ignores the obvious -- if it is a "living wage" for Wal-Mart, then why doesn't it apply to fast-food chains or other retailers?

When Wal-Mart got wind that the council was likely to pass the ordinance, it returned to its proud and bullying ways, and threatened publicly to abandon the three stores in planning and reconsider whether to open the three stores under construction.

The council became defensive and stubborn. Councilman Vincent Orange said the council should not condone "poverty wages" and kowtow to such threats.

Councilman Marion Barry, perhaps not the best spokesman for honesty and integrity -- he's an ex-felon who faces sanctions from the council for not disclosing payments from constituents, said, "They have held us hostage, we're not going to take it."

In the end, pride on both sides has turned the win/win into a lose/lose. For Wal-Mart, six profitable stores are now in limbo. But for the residents of certain neighborhoods in Washington, it is much worse.

One blogger wrote, "1,800 jobs at $8.25/hour is still superior to 0 jobs at $12.50/hour," and Wal-Mart has said that its average U.S. hourly wage is $12.57.

So for now, no jobs, no economic redevelopment, no charitable contributions, and Washington consumers must drive to Maryland or Virginia to benefit from Wal-Mart's low prices.

It isn't too late. The mayor has yet to sign the bill or veto it. Both sides could swallow their pride and compromise, turning the current lose/lose back into a win/win.

Robert Barone's firm, Universal Value Advisors, has a position in Wal-Mart.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Robert Barone is a partner, economist and portfolio manager at Universal Value Advisors, an investment advisory firm in Reno, NV.

He previously held positions as an economist for Cleveland Trust Company and as professor of finance at the University of Nevada. During his tenure at Comstock Bancorp in 1996 he became a Director of the Federal Home Loan Bank of San Francisco, serving as its Chair in 2004.

Barone also served as Director of AAA of Northern California, Nevada and Utah and a Director of its associated insurance company. He currently serves on AAA's Finance and Investment Committee. Along with his son Joshua, he founded Adagio Trust Company in 2000. Barone received a Ph.D. in Economics from Georgetown University.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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