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Wal-Mart Reconsidered

July 3, 2008 RSS Feed Print

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When I blogged about Wal-Mart last week, I got some nice skepticism in the comments section regarding the suggestion that Wal-Mart is not a ravager of local businesses but could in some instances be a boon to them. For example, "Dan from CA" said, "I have experienced first hand when ever large corporations like Wal-Mart, Costco and Home Depot come into a neighborhood. It always has hurts the small business."

He's definitely expressing the conventional wisdom. And the idea that Wal-Mart, with its severely discounted prices, is a force that few small businesses can compete with makes intuitive sense. But it's often the case that our intuitions don't hold up against evidence.

That might be the case here. Russell Sobel and Andrea Dean of West Virginia University have recently released what they call "the first rigorous econometric investigation" of Wal-Mart and its influence on the small-business sector. They were unable to find any statistically significant impact on the size or profitability of the U.S. small-business sector by Wal-Mart. According to Sobel and Dean, any negative impact on small businesses that compete with Wal-Mart was outweighed by the entry of completely new small businesses into the economy.

This is just my conjecture, but if Sobel and Dean are correct, here's one reason that this could have happened: Wal-Mart's business model has not only made goods available at unprecedented low prices for its shoppers, but it also has had a downward effect on retail prices generally. That gives consumers more money to spend and, as a result, frees up resources that can be used by entrepreneurs to start businesses in completely different sections of the economy that do not compete with Wal-Mart.

Tags:: Walmart,; small business,; economics

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I don't dispute that Walmarts may have a benign effect on the small business sector as new businesses replace competing business. That certainly makes economic sense. But the fact is, businesses which did compete directly with Walmart and other big box stores (Home Depot, Costco, etc.) HAVE gone out of business. LOTS of them. While overall small business may not be hurt, the small businesses effected by the competition certainly were.
What went with them was service, an air of familiarity, even friendliness and the last vestiges of a small-town, community feeling. It's impossible to compete financially as a small business with a big box store, because they rely on volume for profits whereas a small business relies on the profits from individual sales. Volume is obtained by offering the same or similar item for less than the competition, gaining the item wholesale at a better price (Bulk buying is a great way to lower per-unit costs) and undercuts the local competition, reaping less profit per unit but selling more units. With global connections, an integrated delivery system (one of the best in the world), and bulk buying of items, they can outlast any local, small business who tries to compete with them head to head on prices.
Yes, the overall small business sector isn't detrimentally effected, and maybe even flourishes, but it's hell on the businesses it DOES drive out.
And, Bob, I apologize for my reply. It was a bit hard to follow. To answer the question, in part, yes, the Treasury loses revenue because the wages paid to workers manufacturing goods in other countries are not collected by the US. This includes Social Security. But Chris is also correct in that service oriented business have taken up a good deal of the slack. Compare Labor Department statistics between the incomes and number of people working in both the service-sector and manufacturing today with the same stats from about 1985 (or before wholesale outsourcing of manufacturing), factor in inflation and you should get a sense of what revenue was gained or lost in social security and taxes by manufacturing moving overseas.
This, of course, fails to take into account all of the support services manufacturing had such as obtaining raw materials, sub-assembly contractors, support services like catering, janitorial services, accounting, etc (assuming they didn't have their own departments for these things). This means the numbers you get will be only a hazy reflection of the actual differences, especially when you consider most of those support services probably switched to serving different businesses when manufacturing was sent overseas, or went there with them.
Overall, tax revenues have increased, but so has spending, so it's hard to say what, if any, actual net effect a loss of manufacturing has had on US tax revenues.
Again, sorry if my reply confused you. It was way past my bedtime when I wrote it.

Fatesrider of CA 5:37AM July 06, 2008

Fatesrider, that is prerogative to shop at a higher price. However, it isn't Wal-Mart that destroys small business. No, it is consumers and consumers choosing to shop at Wal-Mart that does. Wal-Mart brings convenience, good prices and a variety of goods and services into one area that makes it much easier for the average consumer to shop around. Remember, Wal-Mart's clientele is mostly working class, low to middle income Americans and in today's environment they are providing great value that you cannot find in a small business.
Also, this notion that Wal-Mart sells only cheap products is on its face baseless. Those of you who are making the argument that Wal-Mart only sells "cheap" products, try shopping in the store. They sell many name brand items such as Sony, Panasonic, Hasbro, Verizon Wireless, Dell, HP, Apple, etc. One thing that Wal-Mart has done is forced many businesses to rethink their supply chain models and work out the inefficiencies to become leaner and more adaptive to the ever-changing retail industry.
Speaking of which, there is also empirical evidence that when a Wal-Mart moves into town, other businesses such as restaurants, beauty salons, etc. (many of which are small businesses) move into the area and they benefit from the mass traffic resulting from a Wal-Mart locating into an area.
Bob, to answer your question, manufacturing has been losing many jobs for decades, well before there even was a Wal-Mart. These lost jobs have been slowly replaced by service sector jobs, many more high-paying than those manufacturing jobs that were lost. The loss of manufacturing jobs and the gain of service sector jobs probably has resulted in some negligible losses in Social Security and Medicare revenue, but there is only one way that you can increase Social Security and Medicare revenue over the long run: there need to be more people working than those taking benefits. Right now, that is beginning to invert. What Fatesrider is telling you is exactly what he decries in his parenthesis. Doing that comparison is not going to help you figure out why Social Security is running into a deficit. If you really want to educate yourself on the matter, go directly to the source, www.socialsecurity.gov and www.medicare.gov. Most people who are experts on have already come to the exact conclusion that I have just stated.

Chris of AZ 4:03PM July 04, 2008

Hi Bob. If you're not trusting of government figures (bad news is usually buried in incomprehensible bureaucrat-speak for political reasons) and want to do the research yourself, the disparity between labor revenue spent in the US for goods and services and the revenue from overseas can be deduced by comparing wage statistics, manufacturing profits and the trade deficit between the US and whatever countries you want to compare over a time frame of your choosing. Just looking at the trade deficit overall wont give you an accurate picture.
As to who may have done a study, I'd suggest checking with the US Bureau of Labor statistics and the Department of Commerce. They would be in charge of tracking the kind of data you're looking for. You'll probably have to do some math, but that should at least get you the raw data to do it.
As for Walmart, I can't think of any place on Earth that exemplifies cheap goods better. There's a quality difference between cheap and inexpensive. Walmart is cheap. As such, I'd rather go elsewhere and spend a bit more to get something better quality than the average fare from Walmart.

Fatesrider of CA 12:32AM July 04, 2008

Wal-Mart Reconsidered

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