The Wal-Mart Effect

Elena Irwin, a community economist with Ohio State, reviewed research findings about the impact that Wal-Mart and similar stores have on communities nationwide. Her study, The Local Costs and Benefits of Wal-Mart, co-authored with Jill Clark, program manager with Ohio State?s Retail Market Analysis Program, showed, "There are definite costs and benefits associated with Wal-Mart, and they are not evenly distributed."

Irwin said the clear winners are consumers; losers include smaller retailers attempting to compete head-to-head with Wal-Mart and, to a lesser extent, wholesalers; and, often, Wal-Mart workers.

Wal-Mart provides consumers low prices. For example, studies show that Wal-Mart Supercenter's food prices can be anywhere from 8 percent to 27 percent lower than large supermarket chains for an identical shopping cart of goods. One study estimates that the average savings on groceries alone from a Wal-Mart or other food retail supercenter is about 20 percent of the average household?s food budget - an average annual savings of $1,335 for a household of four.

Irwin said it's important to remember that lower food prices are especially beneficial for low-income consumers, who spend a higher percentage of their income on necessities such as food. "When communities try to keep a Wal-Mart out, it hurts all consumers, but, in particular, lower income households," Irwin said.

In addition, prices at neighboring stores - grocery stores, drug stores or variety stores - tend to decline when a Wal-Mart enters the local economy. "So, even if you never shop at Wal-Mart, your budget will likely benefit from having one nearby," Irwin said. One study examin-ing store prices in 165 communities showed immediate price declines of 1.5 percent to 3 percent, and long-term reductions reaching up to 13 percent.

Another study showed food costs at traditional grocery stores drop an average of about 5 percent after a Wal-Mart opens nearby. Some economists theorize that Wal-Mart's low prices have had a large enough effect on the American economy to deserve some credit for keeping inflation at bay in recent years, Irwin said.

Wal-Mart is often accused of paying workers low wages and not offering affordable health care plans. A paper presented at a social sciences conference earlier this year showed average retail wages per person decline by about 7.5 percent countywide after Wal-Mart arrives, with wages in the South suffering the most.

Another study showed Wal-Mart workers earn an average of 31 percent less than the industry average for large retail store jobs, and that 23 percent fewer Wal-Mart workers are covered by employer-sponsored health insurance. While these findings are sobering, Irwin said, a Wal-Mart job may be a blessing to previously unemployed workers. "The suggestion is that workers are worse off, but that depends on where, or if, they were employed before the Wal-Mart opened,"she said.

"Small retailers get driven out of business when Wal-Mart moves into town." One national study showed that five years after a Wal-Mart or Kmart opening, an average of four small retailers shut their doors. Another researcher estimates that Wal-Mart's expansion in the late 1980s to late 1990s accounts for 50 percent to 70 percent of the decrease in number of small retailers across the United States.

The research findings on the overall effect of a Wal-Mart on total retail jobs in a community are mixed, Irwin said. One study found a community loses between 180-270 retail jobs after Wal-Mart settles in; another showed an initial increase of 100 retail jobs. Five years later, however, the job gain dropped.

Jobs in the wholesale sector tend to decline because Wal-Mart, in effect, acts as its own wholesaler. One study estimated counties could expect a decline of 20 wholesale jobs after Wal-Mart moves in. "It's reasonable to look at this as a range of what a community might expect - possibly a significant loss of jobs, or possibly a very modest increase," Irwin said. Based on the research results, communities shouldn't expect a large net increase in jobs because a Wal-Mart moves to town, she said.

In the early years, Wal-Mart made innovative uses of technology and transportation to lower its costs and pass low prices on to consumers. Consumers responded, which increased Wal-Mart's market position. "At that point, they could take advantage of their size to back suppliers, saying "We're not going to pay more than X amount for your product." Now, instead a producer-driven supply chain, we have a retailer-driven supply chain," Irwin said.

"This trend is larger than Wal-Mart - every large retailer has that kind of bargaining position now - but Wal-Mart has been a leader in this area. And it has meant lower prices for consumers," as well as a loss of manufacturing jobs to overseas.

Many communities hope a new local Wal-Mart store will stimulate retail sales and add to the local government budget through higher sales tax revenues. By attracting consumers from across county lines, they hope for budget growth without relying solely on expenditures - or tax increases - from local residents. However, one study of Iowa communities showed such increases to be short-lived. Total sales in these towns increased by 6 percent two years after a Wal-Mart opening, and that figure held steady through year seven, Irwin said. By year eight, sales began to decline, and by year 10, sales were 4 percent below pre-Wal-Mart levels. The author of the study speculated that as more big-box retailers opened in nearby communities, the benefit of drawing out-of-town consumers diminished.

Irwin said some studies establish a link between Wal-Mart stores in a community and increased poverty and reliance on public assistance programs. A California study estimated that Wal-Mart employees use an estimated 38 percent more in public assistance programs than the average large-store retail employee. Another study showed a correlation between higher poverty rates in a county in 1999 and the number of Wal-Mart stores in that county from 1987-1998. Irwin calls these studies suggestive, but not definitive: "While they imply that the presence of a Wal-Mart store in a community generates added social costs, these studies have not rigorously demonstrated such casual links."

Given all of this data, Irwin said communities face complex choices when a Wal-Mart or other big-box retailer sets its sights nearby. Should a community try to keep Wal-Mart out? Maybe that's not a good idea," she said. "In the first place, you're not likely to be successful in those efforts. And if you are, chances are Wal-Mart will go to a neighboring community and drain retail sales out of yours. And your local residents won't get the benefit of lower prices without driving far away."

Possibly the best thing a community can do is to minimize effects on those likely to lose in the big-box battles, Irwin said. For example: Communities can be proactive with zoning and development standards to address big box retail before it comes to town. Such standards should consider the optimal timing and placement of large retail development so that it utilizes existing infrastructure, is consistent with the community's master plan and generates potential benefits to the community. This includes identifying locations and designing structures that are the most likely to attract people to other businesses and community assets.

Communities can help smaller retailers promote what they offer consumers that the big-box store on the edge of town cannot: customer service, special ordering or distinct types of merchandise. In addition, road signs and promotional campaigns should be designed to attract out-of-town big-box shoppers to other retail centers in the community.

Consumers vote with their dollars, but often the larger costs of low prices aren't clear to them. Communities should consider public education campaigns to make them aware of the economic impact of their shopping decisions.

County News 4/24/06

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