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Demanufacturing Wal-Mart: Profiting From Prison Labor

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One thing you can say about Wal-Mart chain stores: at every link in the chain, someone is being exploited, from head to tail. The public knows next to nothing about the exploitation which takes place at the tail end of the business cycle -- something called "demanufacturing."

Every year, Wal-Mart has to dispose of millions of dollars worth of customer returns, buy-backs, over-stocks, shelf-pulls, scratch-and-dent, and excess inventories. The giant retailer sells this merchandise to liquidators, who scrub the products of any Wal-Mart serial numbers, UPC bar codes -- and then resell them to after-market retailers, who re-sell them to the public.

The workers used to strip these Wal-Mart products clean are often prisoner laborers, under a program made possible by the federal government. In effect, the liquidators are partially subsidized by federal taxpayers, who provide the 'demanufacturing' facilities, and cheap, captive labor -- usually female prisoners. This form of corporate welfare allows salvage companies to offer Wal-Mart a low price for their cast-off products.

According to a confidential agreement between Wal-Mart and one of its major salvage buyers, the Jacob's Trading Company, "demanufacturing" means "to remove all of the identifying marks, including, but not limited to, manufacturer's or retailer's names, logos, serial numbers, UPC numbers, RA numbers, and other identifying marks... from the packaging, or to clearly and conspicuously mark the packaging so that it is readily apparent and obvious that the Merchandise has been through a salvage process. Contractor agrees to further demanufacture the Merchandise by making a vertical mark through the bar code of the Merchandise."

Jacob's Trading Company (JTC) was founded by Wall Street Icon Irwin Jacobs, once described by Forbes as "Irv the Operator," a "corporate raider (who) terrorized chief executives" by purchasing shares in companies like Walt Disney.

According to Minnesota-based Jacobs Trading, when Irwin Jacobs was 18 years old he "stumbled into" the closeout merchandise business when he bought and sold a pile of skis from the U.S. Customs Service. In 1996, JTC became a prime liquidator for 'a major retailer' (Wal-Mart). JTC was purchased in 2011 by Liquidator's Supply for $140 million.

Over the years, Irwin Jacobs has had to do some salvage on his own reputation. In 2010 he was prominently featured in an ugly bankruptcy process when Jacobs Trading had to take a $20 million loss on investments it made in another company that Jacobs headed at the time, the now-bankrupt Genmar boatmaker.

In 2007 Jacobs was ensnared in lawsuits between Wal-Mart and a fired SVP of Marketing at the Arkansas retailer, who charged that while Jacobs held exclusive rights to purchase unsold Wal-Mart merchandise, Wal-Mart CEO Lee Scott had purchased from Jacobs' boat companies "a number of yachts at preferential prices" and "a large pink diamond for his wife at a preferential price." Scott was also accused of accepting "jet aircraft travel (for his own personal use) on private airplanes provided by Mr. Jacobs... for Mr. Scott and his wife to travel to their residences in Longboat Key, Florida and Las Vega, Nevada." Jacobs also reportedly hired Lee Scott's son, Eric to work at Jacob's Trading and in his boat company. Jacobs told the Wall Street Journal that these accusations were "totally outrageous," and that he had never shown any favoritism to Lee Scott or his son. "I swear to God Lee never called me about... putting Eric to work." The lawsuits were eventually dismissed.

But Irwin Jacobs put prisoners to work to help make his fortune. JTC built its reputation on selling customer returns from the "nation's most well-known retailers" and offering "closeout prices" by the truckload. The company maintains a network of 9 distribution centers in states like Minnesota, New York, North Carolina, Oklahoma and Texas.

In Taft, Oklahoma, for example, JTC's purchases from Wal-Mart are "demanufactured" at the Eddie Warrior Correctional Center. According to the Oklahoma Department of Corrections, JTC delivers semi loads of merchandise to the prison weekly, which are cleaned of any identifying bar codes and company specific labeling, repackaged, palletized and shipped nationwide for resale. "This operation employs approximately 18 female offenders," the ODOC says.

In Nevada, the entire JTC operation is housed inside the Southern Nevada Women's Correctional Facility in North Las Vegas. Jacobs is the only private employer of female prisoners in Nevada. In 2000, a female prison laborer working 40 hours a week kept just over half of what she earns. After several deductions mandated by the state prison department, she took in about $460 per month. That's net pay of $2.67 an hour. Even updated to today's wages, this pay is not comparable to private sector wage levels. These women strip original store labels and price tags off surplus wholesale items, and repackage the compressors, ceiling fans, yard lights and other products that originally did not sell. "It's physically demanding," one worker said. "It requires cognitive and motor skills and problem-solving abilities."

The federal law that makes this prison labor possible, the Prison Industry Enhancement Certification Program (PIECP) was created by Congress in 1979 "to establish employment opportunities for inmates that approximate private-sector work... to place inmates in a realistic work environment, pay them the prevailing local wage for similar work, and enable them to acquire marketable skills..."

It's not clear what kind of prevailing wage or marketable skills these women inmates get from removing Wal-Mart labels from returned products, but it has provided a very clear subsidy to Wal-Mart and to its wealthy partners in liquidation.

Not bad for a retailer that says in its Standards for Suppliers: "Forced or prison labor will not be tolerated by Wal-Mart."

Al Norman is the founder of Sprawl-Busters. His latest book is Occupy Walmart. He has been helping communities fight big box stores for nearly 20 years.