Should Small Businesses Fear Wal-Mart?

Q&A with Russell Sobel of West Virginia University

Related Video: New "Locally Grown" Strategy

Wal-Mart has been on a quest recently to change its image, unveiling a new logo and launching an initiative to promote locally grown food. Perhaps some of the perceptions the company would like to shed are that the superchain is the exact opposite of the local mom-and-pop retailer and that the company has been responsible for the demise of such businesses.

Indeed, some research has suggested that Wal-Mart drives small discount retailers out of communities. But Russell Sobel, a professor of economics at West Virginia University, says that this effect is only half of the picture. In a new study cowritten with Andrea Dean of West Virginia University, forthcoming in Economic Inquiry, Sobel argues that Wal-Mart has not had a negative effect on small businesses, as is often thought. Instead, the company has unleashed forces that have changed the nature of small businesses in this country in unexpected ways. Excerpts:

What got you interested in this issue, and what do you say are the myths about the company and its effects on small businesses?

There are all the accusations that Wal-Mart is hurting the small mom-and-pops, but my personal economics training teaches me about things like creative destruction. What I've witnessed in my own experience in Morgantown is that indeed when Wal-Mart came into town, a couple retailers downtown did close down, and they were the ones in direct competition with the product lines that Wal-Mart carries. But within four or five years, every one of those storefronts was filled again, but with different things—fancy restaurants, a coffee shop, an art gallery. We know that when Wal-Mart comes in, that certain mom-and pop-businesses fail. What I wanted to look at is the question: For a small entrepreneur in today's economy, are there just as many opportunities? Is it harder for them today in a world with Wal-Mart? Previous research has found Wal-Mart to drive out businesses. What more work did you think needed to be done?

Most of the previous studies only count for the failures and never go back and add in the businesses that later started up. If a hardware store closes and an art gallery takes its place, that's a net zero in our data. The data we used is the number of self-employed people, which is the small entrepreneurs, and establishments with one to four employees. One of the drawbacks of previous studies is that they look at the number of all businesses. Kmart has been put out of business around the country by Wal-Mart, but we don't want to count that. We just look at the data for small business.

So what did you find when you looked at the data?

We got data on self-employment rates and the number of establishments. The bottom line is we tortured the data, and they say one thing: There's no effect. Over in the bankruptcy rates, there were one or two specifications where bankruptcy rates were actually lower. Out of the 50 regressions we ran, not a single one was negative. We even pulled out the data for individual states, because there are some states like Arkansas that are full of Wal-Marts, and then there are other states that have tried to actively keep them out. Is there a difference in the number of small businesses between those states? No. The data clearly suggest that if you want to start a small business today, the climate for creating a small business in total is no worse than before. But Wal-Mart did have a negative effect on its competitors. How did the overall effect end up neutral?

To the extent that I save money as a consumer when I shop at Wal-Mart, that gives me more money to spend on other things. Like going out to that fancy restaurant or going to that art gallery. It's possible that the ripple effects on small businesses are created by the savings for consumers that Wal-Mart creates. It also sells things from small businesses. It's the whole process of creative destruction. These storefronts open up and new businesses come in. They probably couldn't have competed for retail space in the old downtown. There is less demand and fewer businesses competing for downtown.

West Virginia University
small business