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The effect of Wal-Mart on local economies from several angles:

I What is the competitive advantage of Wal-Mart? I How does Wal-Mart effect its competitors?

I In turn how does this effect consumers?

I How does Wal-Mart effect labor markets?

Themes

I Economies of scale I Technological innovation and supply chain management I Vertical integration I Entry and Exit decisions I Consumer preferences

Competitive Advantages

The enduring size and fast growth of Wal-Mart points to more than low prices as the competitive advantage:

I Wal-Mart’s sustained source of value comes from its supply chain and information technology

I While it is anti-union and does try to cut labor costs I Its labor practices are easily copied by chains that might want

to imitate its success

Competitive Advantages

Wal-Mart is an early adopter of information technology in retail:

I In 1969 it put a computer in its first distribution center (DC) I By the late 1970s all its stores, DCs, and its headquarters were

connected to a computer network

I Bar code readers were also adopted early Wal-Mart in its distribution centers

I This cut the cost of processing shipments in half

Competitive Advantages

Wal-Mart is an early adopter of information technology in retail:

I In 1983 cash registers were replaced in favor of computerized point of sale systems

I Improving accuracy of transactions, and allowing direct communications of sales to the headquarters

I In 1987 Wal-Mart launched the worlds largest privately owned satellite communications system

I This allowed its entire global supply chain to be directly connected to each other

I Speed was higher than traditional land based communication, and cheaper

Competitive Advantages

Wal-Mart built an extensive and efficient network of distribution centers:

I Wal-Mart distribution centers and its internal fleet are another key source of competitive advantages

I Link-DCs

I This is an example of vertical integration I Wal-Mart integrated back into wholesale I Firm theory implies this was due to a realization that these

business activities were more efficiently provided within the firm

Competitive Advantages

Wal-Mart takes advantage of economies of scale, scope and density:

I One estimate (Basker and Van 2007) found that increasing sales by 10% lowered marginal cost by 2%

I A simple example I 2 specialized retail each with one cashier vs. 1 Wal-Mart with

one cashier

I The technology in the DC’s and supply chain also allow fewer workers to serve the same number of customers

I Fewer manual inventory checks, fewer mid-level decision makers, machines to help process and move goods in the DC

Economy of density

Holmes, Thomas. “The diffusion of Wal-Mart and Economies of Density.” Econometrica, 79 no. 1 (Jan. 2011), 253-302.

Economy of density

Holmes uses a revealed preference approach to estimate a structural model of Wal-mart’s expansion:

I Unobserved: benefit from density I Placing stores nearby allows DC to serve new stores and

increases the efficiency of the distribution network

I Observed: cost of density I Locating stores nearby leads to cannibalization of sales

Economy of density

Holmes uses a revealed preference approach to estimate a structural model of Wal-Mart’s expansion:

I By observing the pattern of expansion we can learn about this trade-off

I Using ACNeilsen survey data sales for stores can be estimated I Demographic data from the Census can be used to control for

other factors influencing the expansion pattern

Economy of density

Holmes uses a revealed preference approach to estimate a structural model of Wal-Mart’s expansion:

I By observing the pattern of expansion we can learn about this trade-off

I Using ACNeilsen survey data sales for stores can be estimated I Demographic data from the Census can be used to control for

other factors influencing the expansion pattern I Each county in the country is considered a market (and one

Wal-Mart may serve multiple markets)

Economy of density

The first step is to estimate the demand for Wal-Mart:

I This is done using a discrete choice approach I Consumers choose to go to Wal-Mart or to go somewhere else I Consumers choose how much to purchase of either food or

goods I Using the data from ACNeilsen these outcomes of these

choices are observed

Economy of density

The first step is to estimate the demand for Wal-Mart:

I This is done using a discrete choice approach I For a given market-store pair these choices are assumed to be

a function of store and market characteristics I

e.g. population density, age of the store, etc

I This allows Holmes to predict the willingness to pay for goods and food at a Wal-Mart store in any hypothetical location

Economy of density

Economy of density

Next to get the profitability of a given location he needs some cost data:

I The margin and margin net of overhead costs are taken from Wal-Mart’s annual reports

I These are 0.24 and 0.17

I Labor costs are measured crudely as the average wage in the market

I Should be an equilibrium outcome as average wages are likely endogenous to Wal-Mart’s entry

I Land costs are measured more accurately using property values in each county

Economy of density

Now to measure the cannibalization there are two approaches:

I Percent difference in sales realized from sales with no new stores

I This is the method that Wal-Mart reports as cannibalization I They report 1%

I The other method is to compare the marginal sales of a store opening as it did with the marginal sales if it opened without any competing Wal-Marts

I Starts to get at the tradeoff if you compare it to the distance the new store is from the relevant DCs

Economy of density

Economy of density

Economy of density

I This places the tradeoff between distance and profits at around 200 miles closer being worth $1 million.

I Amounts to a benefit from density of $5,000 per mile (closer to a DC)

Economy of density

Next Holmes gets a better picture of this tradeoff:

I Assuming that Wal-Mart rationally trades off distance from DCs with cannibalization then its choices of store locations solve an optimization problem

I Comparing the chosen location with ’perturbations’ that were not chosen creates a inequality for each perturbation:

I Sometimes Wal-Mart chose to increase its density, this implies the benefit from density must be at least enough to justify this choice

I Whenever it makes the opposite choice the benefit from density must not have been enough

I Aggregating up these inequality statistically produces bounds on the parameter

Economy of density

Next Holmes gets a better picture of this tradeoff:

I Assuming that Wal-Mart rationally trades off distance from DCs with cannibalization then its choices of store locations solve an optimization problem

I Comparing the chosen location with ’perturbations’ that were not chosen creates a inequality for each perturbation:

I Sometimes Wal-Mart chose to increase its density, this implies the benefit from density must be at least enough to justify this choice

I Whenever it makes the opposite choice the benefit from density must not have been enough

I Aggregating up these inequality statistically produces bounds on the benefit from density

Economy of density

Economy of density

I Holmes takes $3500 ( to be 1 mile closer) to be a representative choice from the range of the bounds

I This implies that increasing the distance of all Wal-Mart stores from their DCs by 100 miles would increase Wal-Marts costs by $1.75 billion dollars

I Each store moving 100 miles away generates a loss of $350,000 I Using industry expert estimates of the trucking costs the

benefit net of trucking costs saved is $2.625 so this represents roughly the portion coming from the ability to manage inventory and respond to changes in demand conditions

I Rough estimates using the timing of DC openings rather than the locations of store openings lead to similar conclusions

I This leads to distribution playing a central role over alternatives like marketing or management as they likely do not reflect these considerations

Economy of density

I Wal-Mart’s growth: link I Target’s growth: link

Economy of density

Some conclusions:

I So we have seen Wal-Mart exploit technology and economies of scale to generate a competitive advantage (in costs)

I Which it at leasts claims to pass on to consumers (we will check this later)

I It is generally held that chain store entry and exit has driven broad improvements in productivity in the retail industry

I Wal-Mart is certainly a leader on this front (growth in sales per work of 54% compared to 35% for industry)

Labor Market Effects

In trying to measure the effect of Wal-Mart entry on labor markets we face a selection problem:

I Wal-Mart may tend to select prosperous growing locations for its new stores

I This also changes its timing of entry

I This makes the simple comparisons biased in favor of a positive impact on employment and earnings

Labor Market Effects

Addressing the selection problem:

I Instrumental variables is used to solve the problem I If we can find a variable that is predicts Wal-Mart entry but is

not related to county economic growth then we have a good instrument

I (Basker 2005) uses planned opening dates and drops small economically declining counties

I Dropping these declining counties reduces the apparently positive impact because growing counties are compared to growing counties

I Planned opening dates should reduce the bias because these planned dates are not correlated with economic conditions years in advance

I Relies on Wal-Mart not being able to forecast economic

conditions in a market

Labor Market Effects

In trying to measure the effect of Wal-Mart entry on labor markets we face a selection problem:

I Controlling for other factors Wal-Mart has a small but positive impact on employment (Basker 2005)

I Adds 100 jobs in the first year and 50 jobs five years later I Wholesale jobs decline by 30 over the long run

Labor Market Effects

Neumark, Zhang and Ciccarella uses a different solution:

I Wal-Mart’s entry decisions are known to follow a pattern (economy of density) which is not related to economic conditions in a given market

I Thus they suggest distance from Bentonville, AR as an instrument

I This strategy relies on economic conditions not being correlated with the distance from Bentonville

I This may be a bad assumption as the region around Bentonville is self-similar

I Most of the more populous cities in the country are between 900 and 1300 miles from Bentonville

Labor Market Effects

Neumark, Zhang and Ciccarella uses a different solution:

I They find that Wal-Mart leads to about 146 jobs lost in retail in a county

I This means a Wal-Mart worker takes the place of 1.4 retail workers on average

I 2.7% loss of employment in the average county

I There is a small gain in employment by general merchandisers I Wal-Mart is in this category, but the gain is smaller than the

mechanical gain from a new Wal-Mart I This means Wal-Mart must displace jobs in this sector as well

as retail in general

I There is an insignificant (0) change in earnings per worker (potentially due to elastic supply of retail labor)

Labor Market Effects

There are a couple other studies worth mentioning:

I With different data (Dube et al 2007) finds a decrease in state level average retail earnings of 2% after 10 Wal-Marts enter

I Controlling for the economic history of a county over a long period of time and several variables is another way to try to solve the problem

I This leads to positive impacts on jobs

I Given the conflicting results it is likely the true result is a small net change which may be more likely negative

Labor Market Effects

Data limitations make several anecdotal effects on labor markets difficult to measure:

I It is unclear how employment shifts across demographics and between part-time and full-time

I Wal-Mart and other box stores are known for favoring part-time work and variable hours

I The key issue in labor disputes recently has been predictability of hours

I It is also not known to what extent Wal-Mart increases the burden on Medicaid and other welfare programs

I Also Wal-Mart’s effect on unionization and labor practices across the industry is not known

I Any effect is probably driven more by norms than union breaking because the retail sector is relatively un-unionized

Consumers

A pew survey showed 50% of people valued Wal-Mart for its low prices, but does it really have low prices?

I (Basker and Noel, 2006) use store level price data to estimate the difference between Wal-Mart’s prices and other stores

I They find on average prices are 10% lower at Wal-Mart I Interestingly the difference has increased from 5% to 15%

from 2001 to 2004 potentially signaling shifts in pricing strategies or costs

I Some items like chicken and frozen corn are marked down 25-30%, other items like milk and soda only 4%

I Chicken is marked down because Tyson is headquartered in Springdale (20 minutes from Wal-Mart HQ)

Consumers

A pew survey showed 50% of people valued Wal-Mart for its low prices, but does it really have low prices?

I Houseman and Leibtag (2004) use ACNielsen homescan data to get even better granularity

I They look at non-traditional food retail’s (hyper-markets and clubs) effect on traditional super-markets and grocers

I They find an average price difference of 27%

Consumers

It is also possible that competition with Wal-Mart would reduce the prices competitors charge:

I There is an endogeneity problem as these prices are the result of an equilibrium in entry/exit and pricing games between Wal-Mart and competitors

I Basker and Noel (2006) use the instrument Basker used previously for labor markets and find a 1-2% decrease in prices

I Houseman and Leibtag (2004) using their data find a decrease of 3%

I Ellickson and Misra (2008) find that stores tend to cluster on pricing strategies which suggests that Wal-Marts EDLP strategy will be adopted where it enters

Consumers

Consumers may also value production selection:

I There is strong evidence the consumers value one-stop shopping, and there is evidence the average consumer would be willing to pay a premium to shop at Wal-Mart

I However, Wal-Mart focuses on product category variety but not selection within a category

I This means some consumers will be hurt by Wal-Mart entering and pushing out retailers with more within category selection

Competitors

One of the most commonly cited effects of Wal-Mart is its effect on local business:

I Basker (2005) finds (using her IV approach) that around 4 small retailer close within 5 years of Wal-Marts entry

I The average number of retailers in a county is 200 so this is a small effect

I Anecdotally what happens within counties is two things I First Wal-Mart (especially a non-supercenter) can act like a

mall anchor store to drive traffic to a shopping area I Second Wal-Mart may not lower the number of retailers by

much but it may alter the composition of the retail sector

Competitors

Jia, Panle. “What happens when Wal-Mart comes to town: an empirical analysis of the discount retailing industry.” Econometrica 76 no. 6 (Nov. 2008), 1263-1316.

Competitors

Jia estimates another structural model of Wal-Mart’s entry decision:

I This model focuses on competitive (rather than cost effects) I Wal-Mart and K-Mart play a market entry-exit game

I She models their joint decisions across the U.S.

I Before and after the Wal-Mart/K-Mart game small retailers choose whether to enter or exit

I These small retailers are dollar stores and other general discount retailers

Competitors

Jia estimates another structural model of Wal-Mart’s entry decision:

I Her data set includes Wal-Mart and K-Mart store locations and county level data

I The identification strategy is similar I the actual choices of the stores reveal the profitability of the

actions the stores took

Competitors

Jia estimates another structural model of Wal-Mart’s entry decision:

I Consistent with the historical narrative of K-Mart and Wal-Mart she finds that

I In 1988 had K-Mart not existed Wal-Mart would have entered 94.5% more markets

I In 1997 had K-Mart not existed Wal-Mart would only have entered 28.8% more markets

I The opposite pattern held for K-Mart I In general the effect of Wal-Mart on other stores is larger than

the effect of other stores on Wal-Mart

Competitors

Jia estimates another structural model of Wal-Mart’s entry decision:

I She also finds evidence of economies of density playing a much bigger role for Wal-Mart than K-Mart especially early in the sample where the effect is almost three times larger

I Wal-Mart accounted for 37-55% of the net change in small discount stores over the period from 1988-1997

I Wal-Mart and K-Mart also push the profitability of stores down (at similar rates)

I Without the two stores 99% of stores would have been profitable

I With both only 72% were profitable

Competitors

Jia estimates another structural model of Wal-Mart’s entry decision:

I Lastly she studies using direct subsidies to try to create jobs: I Subsidizing Wal-Mart at 10% of its profits only creates 6 jobs

on average per county I Subsidizing the smaller discount stores at 100% of their profits

only creates 10 jobs I Subsidizing the other larger discount stores at 100% of profits

creates 34

I She concludes that it is unlikely direct subsidies (for example tax breaks) will be a good policy response

I These are stores that face more direct competition

Suppliers

Wal-Mart is well-known for attempting to use its market share to negotiate better deals with suppliers:

I First it vertically integrates into wholesale so that it directly negotiates with manufacturers

I If these manufacturers are earning rents (economic profit) then Wal-Mart almost certainly has taken its share of rents

I However, if the manufacturers are in a perfectly competitive market this would not be possible

I It is possible that it could have a negative effect on these suppliers if it forces them to compete with imported goods

Suppliers

Wal-Mart imports a lot of what it sells:

I In the late 1980s Wal-Mart got a lot of publicity for its campaign to “buy american”

I Even at the time many of its goods were imported

I However, today it accounts for 15.4% of U.S. imports from China

I 100% of its apparel is made in low cost countries

Government Policy

Wal-Mart has become an active lobbyist at state, local, and federal levels:

I At the federal level Wal-Mart tends to lobby largely for freer trade

I Wal-Mart was the 20th biggest contributor to political campaigns in 2004

I The share of its contributions going to republicans has traditionally been high, but has declined overtime

Government Policy

Wal-Mart has become an active lobbyist at state, local, and federal levels:

I At the state level Wal-Mart has worked to prevent laws related to labor issues

I Maryland tried to pass a law that would have essentially singled out Wal-Mart and placed a requirement on its healthcare spending

I The law was overturned by a judge before it could take effect

Government Policy

Wal-Mart has become an active lobbyist at state, local, and federal levels:

I At the local level Wal-Mart looks largely for assistance paying the fixed costs of building a new store

I This kind of development incentive is common for local communities to give

I There is a perception that it is better to have a Wal-Mart open in your community than in a neighboring one

I This is a perception that is not confirmed I If you look at consumers this probably makes sense, if you look

at labor it does not

I However this allows Wal-Mart to pit cities against each other to get subsidies

Subsidy Data

I Good Jobs First I Organization tracking corporate subsidies I Goal is to improve accountability of economic development I Webpage

Conclusions

Some conclusions:

I It seems that the negative effects may not outweigh the positive effects

I Labor decreased but only by a small amount and the actual effect is unclear

I Consumers benefited from lower prices I Society benefits from more efficient distribution of goods

Conclusions

Some conclusions:

I There are lots of unknowns that need research I It is unclear how Wal-Marts labor practice change those of its

competitors I It is also unclear how the labor shifts between types of work

and types of workers after Wal-Mart enters I The effect on poverty and on enrollment in poverty fighting

government programs has also not be pinned down I There is also not a consensus on what instruments can be used

to pin down causality

Conclusions

Some conclusions:

I Issues concerning Wal-Mart’s relationships with suppliers is unknown

I Partly this is due to secrecy on Wal-Mart’s part I It is also partly due to a general lack of good data the farther

up the supply chain one goes

I Issues concerning international trade are another topic altogether, and one where there is no clear consensus at least where Wal-Marts role is concerned