Wal-Mart’s bribery is sadly unsurprising
The recent New York Times revelation that Wal-Mart paid bribes to grease the skids of rapid expansion in Mexico is not shocking to anyone who has built a retail business in a developing country. It would be shocking if they hadn’t.
Retailers paying bribes is a normal cost of doing business for some in developing markets. I was CEO of a chain of 75 specialty coffee shops around Asia for 10 years. It’s almost impossible to do business in places like the Philippines and Indonesia without someone communicating – usually tacitly – that they could make things hard for your business if you didn’t take care of them. We were smart enough not to try to do business in Indonesia. I wish I could say the same about the Philippines.
Here’s how it works.
We were based in Kuala Lumpur and roasted our coffee there. We saw the huge success of Starbucks in the Philippines and opened an office in Manila in late 2000 to get into the market. Our country manager was an ex-hotel executive, a Filipino, who had lived in Malaysia for many years and wanted to move home. Our Malaysia team was excited about our first expansion abroad.
By July 2001, we were ready to open our first shop, 1,500 square feet in a busy area of greater Manila. Part of our competitive edge was the freshness of our coffee, so shipping by air was part of our plan. We flew a ton to Manila a week before opening.
When it arrived, our freight agent called. Customs was backed up and wouldn’t be able to clear our shipment for a month.
But they could “expedite” that.
Welcome to Manila. Our country manager called me: What to do? In all our years in Kuala Lumpur, we had no problems like this. I told him I had no clue what to do, but what he could not do was pay anyone a bribe. He called our freight agent and remonstrated. “We fly the stuff here. What’s the point of that if it sits on the ground at the airport for weeks? Can’t you do something?”
The next day our agent called again. The customs guys were puncturing our air-tight, fresh-roasted coffee bags to make sure they weren’t filled with, say, heroin or something. Were we sure we didn’t just want to expedite clearance?
At that point, I told our country manager to fix the problem and stopped taking his calls. In Kuala Lumpur, I called FedEx. “We send a ton of freight to Manila every month. We pay our current freight company a dollar a pound, but we don’t like their service. Do you want the business?”
They did. We never had that problem again.
But we had plenty of others.
Cafés needed a “Mayor’s permit” to operate in greater Manila. Run a store without one and your store manager could get dragged off to jail. Store managers don’t like that.
City Hall won’t send an inspector to your café until it’s built. We completed construction in late June and were excited about the scheduled July 2 grand opening, for which we advertised.
Our country manager called again. He had gone to City Hall for the Mayor’s permit. “They can’t send an inspector until late September. But they could ‘expedite’ that. This is ridiculous. I’m calling our lawyers.”
A while later he called back. “Our lawyers say they can take care of it for us, but they want 50,000 pesos, and it’ll take them two weeks.”
That was about $1,000 then, for the lawyers. “Whatever,” I said. “Let’s just get the place open.”
“I’m not paying them 50,000 pesos. That’s outrageous! I’m going to have our store manager see what he can do.”
All right, I said, but don’t bribe anyone. I really thought a local guy talking sense to the local guys at City Hall could persuade them to do the right thing.
He could. As our country manager liked to brag afterward: “9,000 pesos and three days.”
I told him I didn’t want to hear about it.
It was like that everywhere there. Want a good location for your next store? The leasing manager at the mall knows that. He also knows you’ll make a lot of money in the right location. And he knows he makes 15,000 pesos per month. “Lots of people want that space,” he says. He doesn’t have to ask how much you’re going to pay him.
The question is understood. We didn’t play the game, and we were out of the market by 2005, selling our few mediocre locations to a local company for a pittance and a franchising deal.
Corruption is one of the reasons large American retailers use franchisees or licensees in developing markets. A specialty coffee retailer with healthy margins, like Starbucks, can find local companies to pay it franchise fees and a 5-percent royalty and to buy marked-up coffee, store fittings and equipment.
But a discount retailer like Wal-Mart, with the tight margins that come from low prices? Slapping franchise fees, royalties, and product markups on a franchisee takes the discount out of discount retailer. And a big name entering a developing market is like a massive cash cow, with counterparties up and down the business chain searching for a teat. That includes employees. When we opened in a Tesco store in Malaysia I did a double take on seeing guards at the employee exit searching all employees on their way out to make sure they weren’t walking off with the inventory. One of our major coffee competitors thought it was saving labor cost by hiring dropouts at low hourly pay. Their kids were the best paid in the industry, since some were dipping into the cash register.
American companies complain about the Foreign Corrupt Practices Act, saying it puts them at a competitive disadvantage when trying to win business in corrupt markets. But corruption is a societal illness. Fighting it is like the war on drugs. Do you really want your kids growing up in a world where cocaine is legal? Try to find Main Street Americans today who think a little more avarice, a little more cheating by corporate America would be a good thing.
It’ll be interesting to see how this plays out for Wal-Mart, but it’s going to be hard for them to claim they didn’t know what every retailer in developing markets knows. Like them or not, they’re an icon of America. Let’s hope they do the right thing now, and they do it fast.