Introduction
Wal-Mart is the world’s largest retailer with more than 4,300 stores in the United States and over 8,000 worldwide, with global sales topping $400 billion in 2009. It is the largest retailer in the U.S., where more than half its revenue comes from grocery sales. This paper considers some of the retail giant’s negative impacts.
Since opening its first store in Bentonville, Arkansas in 1962, Wal-Mart has steadily spread from its base in the South and Midwest to dominate the suburban and rural retail market across the U.S. Wal-Mart is addressing the first obstacle – store size – by changing its standard big box model to a more flexible one involving stores of widely varying sizes, perhaps even as small as a few thousand square feet, the size of many local grocery stores. For example, four stores are planned for the Washington, DC area, including multi-story buildings in both central city and suburban settings. Twenty-four new stores are planned for the San Francisco Bay Area. Several years ago the company opened its first store in Chicago and is planning a dozen more.
Policymakers and advocates are increasingly interested in understanding the local economic impact of Wal-Mart —how the company affects jobs, small businesses, community living standards, and local tax revenues. This is also a growing topic of research by economists and social scientists. It is hard to know a complete and final answer about Wal-Mart's economic impact simply because there are not enough studies yet. Still, the studies that do exist offer a useful guide to the core questions that researchers are asking about the company.
This paper has 6 parts. In part 1, we have introduced the context for this paper and the upcoming parts. Part II, we discuss relevant literature. Part III, we introduce the methodology underlying our study. Part IV we describe the data set. In Part V, we discuss the results. Part VI offers a conclusion and draws out some of the implications.
Literature Review
Several rigorous academic studies have considered the economic impact of Wal-Mart store introduction on local communities from a diverse array of perspectives. We shall now turn our discussion to consider some important studies that are relevant to our own analysis. One major question about the impact of Wal-mart into communities is the question of job creation and job destruction. Wal-Mart may introduce new jobs with store creation, but at the same time it commonly is anticipated to put many smaller shops out of business. There is also the added problem that many of these jobs are considered to be of low quality since they pay at are little above minimum wage and leave many workers in dire straits, even while still employed. Economist Ernst Basker (2005) conducted a recent study in 2005 where he found some interesting and significant results. According to Basker, Wal-Mart results in an average of 100 retail jobs in a given county in the year following a store opening of Wal-Mart. Yet, this success was found to be short lives, as roughly 50 percent of these new jobs were found to disappear within the following 5 five years, leaving an aggregate increase of only 50 jobs. This study used a comprehensive data set which looked at over 2,000 Wal-Mart stores which had opened in the years between 1977-1999 in approximately 2,000 counties across the Continental United States. Basker found that both small and large business had closed their doors following the introduction of a Wal-Mart store within proximity to a Wal-Mart store. This effect on local business' ability to survive and subsequent employment was found to be correlated with the introduction of a big box retailer like Wal-Mart within and around the local community, and which was thought to explain the steep decline in county-wide employment effects within the 5 years of a Wal-Mart opening its doors. Basker also found that a typical Wal-Mart store introduction into a community on average would introduce a quantity of jobs greater than 100 in order to staff an entire store, leading Basker to note that this signified the probable exit of many small firms at the time a Wal-Mart store would be created. Basker also looked at employment within the wholesale industry and found that, following Wal-Mart's entry, the county surrounding would lose on average about 20 wholesale jobs with each introduction of a new Wal-Mart store within the local community.
A second study by Georgeanne Artz and James McConnon (2006) looked at Wal-Mart's effects on retail markets in Maine between the years 1992 and 1995. Townships who hosted the opening of new Wal-Mart stores saw increased sales in general merchandise categories compared to towns who did not see an opening of a Wal-Mart. On average, the researchers found a net increase of 60% in general merchandise categories in towns who experienced an opening of a Wal-Mart. General merchandise categories furthermore were found to have increased by approximately 95% in the five years following the opening of a new Wal-Mart store. In towns who did not experience a new opening of a Wal-Mart, sales of general merchandise were found to only have increased by 11% by comparison.(Artz et al. 2006) That said, the authors of the study found a point of caution. For over 80% of the communities they studied, the businesses already in existence were found to have lost sales in the years following the introduction of a Wal-Mart into a local or surrounding community. They also found that this impact of Wal-Mart had severe effects in just over 30% of local businesses in existence at this time, resulting in a market share loss of approximately 10% or greater for businesses on average..(Artz et al. 2006)
Another interesting study, conducted at Mississippi State University (Panle 2008) and focusing on 18 super-centers dotted across small counties within the state confirmed the findings from the previous study that the introduction of Wal-Mart stores resulted in increased sales at local Wal-Mart's and decreased sales for local businesses in existence. This study used data from sales taxes reported between 1990 to 2000 over a range of product categories that included furniture, supplies for buildings, general merchandise, and other miscellaneous product categories. This study made a point to show that the biggest product category that they found in decline between small businesses and Wal-Mart was food. In the year immediately following the opening of a Wal-Mart super-center, food sales at existing retail outlets were found to decline by an average of 10% and this level would increase to 17% in the five years following the Wal-Mart's opening. For other stores which carried either general merchandise or miscellaneous products, sales declines were found to be somewhat smaller, at 3% but which increased to 9% after a period of at least give years. Researchers of this study additionally found that general merchandise sales decreased by approximately 10% after a period of five years. Furthermore, in counties which did not have a Wal-Mart super-center open, sales declined even further and more significantly. For counties which did not have a Wal-Mart, sales declined by an average of 25%. This finding was further corroborated by a recent study in the field of marketing which considered the purchases of approximately100.000 single unit families at a supermarket grocery retail chain that existed in an East Coast town. When a Wal-Mart super center opened in this same town, the grocery store supermarket experienced a sales decline of over 17%. Researchers believed that the one-stop-shopping atmosphere of the Wal-Mart contributed to this effect, because it enabled consumers to make fewer trips to different stores, since now they were able to make all their purchases in one place.
One of the most direct studies of Wal-Mart's impact on economic development in local neighborhoods was by Kenneth Stone (1998). Using a data set which collected tax data from retail locations, Stone analyzed the impact of Wal-Mart on growth in small townships in Iowa between the years of 1983 and 1993. Stone broke the data down into two-digit SIC codes and then computed "pull factors" which were equal to per capita sales by community and divided by the per capita sales by state. He computed these factors according to nominal dollars for communities and industries. He then measured the percentage of change in these factors over time relative to a common base year, which was equal to one year before each Wal-Mart opened in a given area. Stone's results showed evidence that Wal-Mart played an impact in local communities which showed PF significant declines in all sectors of General Merchandise except for Home Furnishings and Eat and Drink. It also showed larger PF declines in retail categories except for Food, which was not a product sold by Wal-Mart during this period. Across categories, Wal-Mart had a 6% increase in PF for sales in Wal-Mart towns compared to a -10.5% decline in Non-Wal-Mart towns. There was a larger market share for losses for towns that did not have a Wal-Mart but that were within 20 miles of Wal-Mart towns compared to non-Wal-Mart towns farther away. Stone also found an overall decline in the value of retail sales over the 1983 to 1993 period in Iowa in addition to this large effect. In later works, Stone has made more general observations about this Wal-Mart effect by extending his analysis to rural communities and has shown results for Wal-Mart Supercenters in Mississippi. There are other recent studies using econometrics using national level data over 20 year time periods that have had mixed results. Some studies have corroborated the analysis by Stone by showing that retail employment and payroll losses occurred in countries where a Wal-Mart store had opened relative to counties with no Wal-Mart, but other studies have shown that retail and wholesale gains in employment in these counties to outweigh the negative effects (Basker 2005). These studies use time-series and regression with an instrumental variable that controls for the impact of endogenous site selection effects.
Methodology
In this paper, we investigate the differential impact of Wal-Mart on low income communities. Grocery retail in low-income areas is characterized by fewer available stores and a higher portion of lower sized stores compared to bigger stores that are vertically integrated and exist in a retail chain format. One way to understand this is that lower income areas tend to show a good fraction of consumers who have very strict travel costs, who are unwilling or unable to frequent the larger chain grocers. We find some evidence that Wal-Mart’s impact on these communities is larger than on higher income areas, although it is again focused exclusively on large chains, leaving the small stores essentially unaffected. This suggests that the same features that insulate small stores from chain supermarkets in poor areas also protect them from competition with Wal-Mart. At the same time, the competition in between the major grocery store chains with Wal-Mart looks like it has greater intensity in lower income areas where the substitutes are closer.
In this paper we use a methodological framework that follows Ellickson's (2006) derived model that considers how retail competition works in the presence of fixed investments which are endogenous. This model uses an earlier model from Sutton (1991) which looks specifically at the natural oligopoly within the retail context. To account for these investments which become sunk, firms are forced to cover a big portion of the existing market and thereby they trade their own specialization for economies of scale. The result is an oligopoly in which a small
group of firms which dominate the market still exist and are earning economic profits (which is because the fixed investments are not visible at this point). Following Sutton's excellent work in his later (1998) study, this model also finds that there is room for a second group of lower quality stores in this group, which may include several mom-and-pop stores who actively elect to not compete with the more dominating firms and which instead focus their target on a group of smaller customer base who are conscious of value but loyal to the independent store front. At the same time consumers who are not price sensitive and live in low income areas gives the implication that grocers of chains will face greater competition from the narrow variety of the big box retail store which Wal-Mart follows. Using this analysis allows us to understand why Wal-Mart has an impact that finds its concentration mostly on chains which are larger, since they serve identical consumer bases, and also why its presence tends to be larger in bases where incomes are on the lower end of the spectrum. For, in these areas, consumers tend to view big box retailers as close substitutes to other large grocery retailers. This analysis also helps explain why the structure tells us that further entry can bring down economic profits.
The research presented here makes the suggestion that Wal-Mart's impact plays a distinct role in the grocery retail consumer market which is decisively different from earlier impacts on other parts of the store industry. Wal-Mart is not seen to greatly change the competitive nature of the grocery store industry as some think, but rather it might just represent a supermarket chain
Data
We collected the name of firms, their locations and their counts of employment from the National Establishment Time Series (NETS) for California. Our sample consisted of the years between 1992 and 2009. NETS is a proprietary database from the Dun and Brastreet register of businesses and includes almost all United State business establishments. It is also geocoded for address. This data set includes all of the four main metropolitan areas of California. (Los Angeles, Sacramento, San Diego, and San Francisco-San Jose).
Model
In this study we use the model employed by Haltiwanger et al. (2010). We specify employment growth at the store level for company i at time t as
git=(Eit−Eit−1)Xit,
where
Xit=(Eit+Eit−1)2
Xit is the mean of employment (E) across two consecutive times. ( the average level of employment (E) across two consecutive periods and git the weight of the change in employment with respect to this mean. If firm i enter’s the market in period t, git = 2. If the same firm exist the market, them the equation is , git = −2 for an exiting firm.
Result
Here we examine the extent of the impact of Wal-Mart's entry on growth in employment in regions surrounding Wal-Mart supercenters. We found that outside of a narrow 2 mile circle, the impact is not measurable. The statistically significant effects of Wal-Mart's entry is only readily apparent within the 2 mile radius. Employment growth declines by approximately 5% and stays that way every year after the entry. We cannot see any real effects from 6-8 miles away.
Given the fact that in small firms may be able to handle Wal-Mart's introduction even given technological lack or disadvantage relative to a firm that is integrated in a vertical structure points to the fact that the structure of certain businesses in the grocery sector may allow the small mom and pop retailers to retain a measure of resilience. Certain specialty and niche stores also arrive which make themselves different from other supermarkets as a way to prolong their self sufficiency and durability over time. Less mobile consumers also may be less likely to switch to another retail outlet for their needs following the entry of a location if the switching costs are too great.
Conclusion
Many people in urban markets such as New York City have gained increase concern over the entry of Wal-Mart into their areas. Several studies have been found which document the negative impact the store has on local communities, and in particular on the presence of sole proprietorships and small businesses, such as small food stores. Advocates in New York City cite these various studies and other effects in order to keep Wal-Mart's growth from infecting their city. According to our study, this is a wise a decision. While Wal-Mart may not have the deleterious effects on local businesses in other Metropolitan and Suburban areas, given the findings that the impact may be limited to just a few miles (suggesting that earlier studies may be affected by other endogenous factors). In New York City, a 2 mile radius would be especially significant given the land size as well as the strong small business presence of local mom and pop shops which give the region its particular and distinct flavor.
These concerns pose backlash against the strategic expansion efforts of Wal-Mart's executive management today. Wal-Mart faces a unique situation at the brink of its expansion phase, having grown to a point where many suburban and rural markets are close to being over saturated. Now, their next goal is to seek to expand into higher density inner city and urban neighborhoods with high populations in order to continue its patters of economic development. As it stands today, the major opposing force to Wal-Mart's expanding into inner cities is the strong and vocal resistance of local community advocates as well as metropolitan governments. Wal-Mart to date has experienced moderate success in penetrating the urban markets of several southern states, as well as Chicago, Washington D.C. to date it has not yet been able to enter to the markets of New York, as well as Boston, Seattle and San Francisco. Wal-Mart, by not expanding into these urban markets, faces the potential sales loss of some of the largest urban markets available in the United States. In order for the company to maintain its historical growth levels over the long run, it will need to expand into these urban markets. In order for Wal-Mart to actually be attractive to these cities and not face significant backlash, Wal-Mart needs to revise its company policies and employ a reinvestment campaign into its employees as well as the local communities in which it serves in order to not receive such hostile opposition from the community activists and local city governments. Low wage jobs and hurting the local businesses that are already in existence are two of the most important issues for resistors and factors that executive management should consider. .
References
Artz, Georgeanne M, and Kenneth E Stone. “Analyzing the Impact of Wal-Mart Supercenters on
Local Food Store Sales.” American journal of agricultural economics 88.5 (2006): 1296–
1303. Print.
Basker, Emek. “Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion.”
Review of Economics and Statistics 87.1 (2005): 174–183. Print.
Davis, Julie et al. “The Impact of an Urban Wal-Mart Store on Area Businesses: An Evaluation
of One Chicago Neighborhood’s Experience.” (2009): n. pag. Print.
Ellickson, Paul B. “The Evolution of the Supermarket Industry: From A&P to Wal-Mart.”
(2011): n. pag. Print.
Haltiwanger, John, Ron Jarmin, and Cornell John Krizan. “Mom-and-Pop Meet Big-Box:
Complements or Substitutes?” Journal of Urban Economics 67.1 (2010): 116–134. Print.
Holmes, Thomas J. “The Diffusion of Wal-Mart and Economies of Density.” Econometrica 79.1
(2011): 253–302. Print.
Jia, Panle. “What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the
Discount Retailing Industry.” Econometrica 76.6 (2008): 1263–1316. Print.
Neumark, David, Junfu Zhang, and Stephen Ciccarella. “The Effects of Wal-Mart on Local
Labor Markets.” Journal of Urban Economics 63.2 (2008): 405–430. Print.
Sutton, John. Sunk Costs and Market Structure: Price Competition, Advertising, and the
Evolution of Concentration. MIT press, 1991. Print.
Appendix
