Who profits from rock-bottom pricing?

They pay low wages and force local shops to close. But discount chains help the poor make ends meet. Do they belong in your portfolio?

In the early 1990s, business owners on the island of Kodiak, Alaska, hired a consultant to analyze how much they'd be hurt by a proposed Wal-Mart. But in gathering data at their request, Kenneth Stone also discovered how the store was apt to help another local group: the poor.

"A lot of low-income people were practically begging the city to let Wal-Mart in," says Dr. Stone, an Iowa State University emeritus economist and 20-year researcher on Wal-Mart's national impact. "They were saying, 'We have to do something to lower our cost of living....' I believe that the lower prices do allow for a higher standard of living for low-income people."

Dr. Stone is far from a Wal-Mart cheerleader. His research documents at length how the world's biggest retailer has put countless shopkeepers out of business and thereby eliminated as many jobs as it has created. But he has found what other economic researchers have seen as well: Discount retail is a complex business with more winners, losers, and tough ethical tradeoffs than public debate routinely acknowledges.

Ethically minded investors are already familiar with discounters, the high-volume, low-price chains such as Target and Costco, who rank among the 10 largest retailers in America. But it is Wal-Mart, which tops the list with $258 billion in sales in 2003, that sets off the sharpest disputes. Shunned by some investors concerned about its antiunion attitudes and environmental impact, the chain nevertheless appeared in the portfolios of 33 socially responsible investment (SRI) funds in that same year, according to a study by the Natural Capital Institute.

For some, the discount domain is a place to make a statement as well as a profit. Christian Brothers Investment Services, for instance, includes Wal-Mart, Target, and Costco among holdings that pass its screening criteria for the firms' 1,100 Roman Catholic institutional clients. On behalf of shareholders, Christian Brothers urges discounters to select sites with sensitivity to local concerns, to promote women to top positions, and to monitor working conditions of overseas suppliers.

"We try to raise another perspective and get them to think about some of the things that they aren't necessarily attuned to because the market isn't attuned to it," says John Wilson, director of SRI at Christian Brothers.

Others see discounters forcing investors to ask tough questions of themselves. For instance, what is the social value of keeping prices low for essential items as food and clothing? Should employees get better compensation, even if it means higher costs for those who can't afford to shop elsewhere? When one group has to make a sacrifice, should it be employees, customers, shareholders, or local communities? Shareholders have a say on such issues, but reading the moral compass takes time and thought.

"The real question is, 'What kind of world do we really want to create?' " says Ruth Rosenbaum, executive director of the Center for Reflection, Education and Action, an advocacy center in Hartford, Conn., with a focus on low-income issues. "Are we designing a world that is economically beneficial for those who are able to hold shares in companies [by keeping labor costs low and stock prices high]? Or are we designing a world that is economically beneficial and therefore sustainable for most people?"

As Dr. Rosenbaum suggests, the moral task at hand might be to seek prosperity for all involved. But whether better pay and benefits for discount employees is a rising tide to lift all boats is a matter of debate, even among economists committed to reducing poverty.

Some recent research suggests the low prices and job opportunities offered at a new Wal-Mart store don't alleviate a community's struggles with poverty over the long term. Wal-Mart workers in California, for example, annually seek $86 million worth of public assistance, according to a 2004 study by the Labor Center at the University of California at Berkeley. If other big retailers in the state follow suit, the study projected, California taxpayers would have to foot another $410 million in healthcare services, food stamps, and other public costs.

This "race to the bottom" in labor costs also seems to rub off on a surrounding area, according to research from economists Stephan Goetz and Hema Swaminathan at the Northeast Regional Center for Rural Development at Penn State University. While the national poverty rate dropped 2.4 percent between 1990 and 2000, the rate fell by just 0.2 percent on average in counties that added a Wal-Mart. One theory: Although Wal-Mart creates jobs, the company also eliminates jobs by putting others out of business.

"We didn't expect Wal-Mart would be able to affect poverty on a countywide basis, but lo and behold it did," says Dr. Goetz. Even so, he adds, discounting poses dilemmas. "It's hard to quibble with saving money, unless you're creating costs to society that you are not bearing."

Such findings seem to demand that ethical investors use their clout to insist that discounters compensate their workers better and perhaps set off a positive ripple effect in a geographic area or industry. But Wall Street notoriously punishes firms that raise labor costs, an outcome no investor would appreciate. Even if short-term returns weren't a concern, some wonder if higher prices at the cash register would truly serve the common good.

Goetz, for instance, acknowledges that low prices on goods from food to hardware bring a valuable social benefit: "The standard of living is up for poverty-stricken people. Critics of Wal-Mart haven't looked at that." For Bruce Weber, codirector of the Rural Poverty Research Center at Oregon State University, research on discounters' social impact is still too scant to warrant firm conclusions. Still, he believes the issues are broader than they have been framed in public debate thus far.

"A whole bunch of consumers are better off from the low prices, but a few workers are worse off. That's the way economists soothe themselves about all of this," Professor Weber says. "I think it's an empirical argument. How many people benefit and how many people pay? Most economists believe keeping prices down offers a benefit.... For an individual consumer who doesn't depend on [a discounter's] wages, how could it not be better to have a Wal-Mart?"

Where ethical investors might test their mettle, however, is in weighing the immediate benefits for individual consumers - even the poorest ones - against other long-term goals. If saving American jobs in textiles and other labor-intensive industries is a top priority, discounters who rely on outsourcing to overseas manufacturers might not offer the best investment option. Similarly, those who care deeply about preserving American communities that reinvest locally might not favor the Wal-Mart model, in which Goetz says "all the profits are siphoned off to [corporate headquarters in] Bentonville, Ark."

In the view of the United Food and Commercial Workers Union (UFCW), which represents 1.4 million workers, discounters present a moral challenge to every investor.

"It comes to what kind of human being you are," says Jim Papian, a spokesman for the union, which has found Wal-Mart nearly impossible to organize. "If you're someone with enough money to invest, that means that you've probably been able to take advantage of some opportunities you've had, you have extra cash or whatever. And it means you've probably had good employment opportunities, good working conditions. Why shouldn't the businesses you invest in provide those same conditions for their employees?"

For better or worse, discounting seems poised for a long run in the American economy. That means that diversified investors with an interest in ethics will have no choice but to grapple with the complexities posed by this sector. Doing so means probing lots of gray areas, since researchers readily admit they're just beginning to learn how discounting is affecting society at home and abroad.

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