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Fri Feb 24 10:55:06 PST 2006

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WAL-MART
Feb 23rd 2006  

Measuring the Wal-Mart effect

THE Clintons are only the second-biggest phenomenon to emerge from
Arkansas. The Waltons, the founding family of Wal-Mart, opened their
first store in the state in 1962. Wal-Mart now has 3,800 shops
nationwide. The discount retailer is the world's biggest company by
sales: a record $312.4 billion in the last fiscal year, according to
figures released this week.

Wal-Mart has been quick to generate controversy, slower to attract
serious study. In his engaging book, "The Wal-Mart Effect" (see
article[1]), Charles Fishman notes that he could read all of the
significant academic papers on the company's impact on prices, jobs,
suppliers and competitors in a couple of afternoons at the library.
This was partly due to a "paucity of data", writes Emek Basker, an
economist at the University of Missouri, whose requests for numbers
from the company were denied. But Wal-Mart is now more forthcoming with
figures. It commissioned its own study of the Wal-Mart effect from
Global Insight, a research company, and held a conference on the
subject last November*[2]. Enough new studies are circulating to extend
one's stint in the library by another afternoon at least.

America is home to more Wal-Mart employees (1.3m) than high-school
teachers. A typical store is manned by 150-350 people; the bigger
"supercentres", which sell groceries, employ 400-500. But even as
Wal-Mart creates some jobs, it displaces others. What is the net
effect? According to the company, "new businesses spring up near
Wal-Marts and existing stores flourish as they take advantage of the
increased customer flow to and from our stores." Global Insight reckons
that a 100,000 square-foot (9,300 square-metre) Wal-Mart creates 97
retail jobs, after the dust has settled, but destroys 30 in wholesale.
This is a happier finding than some of the retailer's critics would
allege.

This result may, however, be flawed--for the familiar reason that
correlation does not prove causation. Wal-Mart, after all, does not set
up shop at random. All else equal, it is presumably attracted to
relatively thriving retail markets, with robust sales and hence strong
employment. Its entry into a neighbourhood may be the result, not the
cause, of high retail employment there.

The Global Insight authors reckon this is a problem only in principle,
not practice. Not so, argues another paper presented at the November
conference, and since updated, by David Neumark, Junfu Zhang and
Stephen Ciccarella, of the Public Policy Institute of California, a
think-tank. Like Global Insight, they are interested in measuring the
impact of one thing (exposure to Wal-Mart) on another (the health of
local retailing). But unlike Global Insight, they use a proxy for the
first variable that is not itself affected by the second.

 That proxy is distance, measured in miles from Bentonville, the
company's place of origin. Wal-Mart, they point out, spread like a
"wave", rippling outwards from its Arkansas epicentre in a widening
circle. It reached California only in 1990 and New England a year
later. The greater a county's distance from Bentonville, the later
Wal-Mart's arrival there, regardless of the county's retailing appeal.

The authors track Wal-Mart's progress through 3,032 counties from 1977
to 1995. The arrival of a store in a typical county destroys about
180-270 retail jobs, they conclude, which suggests that each Wal-Mart
associate does the job of 1.5-1.75 people at a rival. However, this
does not imply a rise in overall joblessness: those displaced by
Wal-Mart will tend to find work elsewhere.

What about wages? Mr Neumark and his colleagues could not measure wages
directly. But they did estimate Wal-Mart's impact on retail payrolls,
which averaged $13,860 per worker in their sample. The opening of a
Wal-Mart store reduces these by only about 1%. Whether this was because
hours shorten, wages fall or low-paid jobs displace well-paid jobs,
they could not tell.

THE OTHER SIDE OF THE COIN
Wal-Mart may shave payrolls, but it slashes shopping bills--even for
people who never shop there. Ms Basker estimates that the prices of
goods such as toothpaste, shampoo, aspirin and laundry detergent fall
by 7-13% five years after Wal-Mart's arrival in a city. Some analysts
think the company has to offer lower prices to compensate customers for
a less pleasant shopping experience. Robert Gordon, of Northwestern
University, describes how Europeans "recoil with distaste from the
ubiquitous and cheerless American strip malls and big-box retailers".

But such delicate sensibilities should not be imputed to everyone,
argue Jerry Hausman, of the Massachusetts Institute of Technology, and
Ephraim Leibtag, of America's Department of Agriculture, who study
Wal-Mart's deep incursions into the grocery market. Yes, a shopper
cares about where he shops, as well as what he buys. But they see the
entry of Wal-Mart and similar retailers as akin to the introduction of
a new good or brand. It gives consumers another option to ponder.
Whether it is better, worse or just different they leave to consumers'
choices to reveal.

Those choices do not show much recoiling. Supercentres claimed a
growing share of household spending on groceries, from 10.9% in January
1998 to 16.9% in December 2001 (although planning and geographical
constraints have probably begun to limit growth since then). Messrs
Hausman and Leibtag reckon the existence of big-box retailers, such as
Wal-Mart, is a substantial boon to shoppers--equivalent to offering
households 25 cents back for every dollar they spend on groceries, or
about $450 a year on average. Were the calculation repeated for other
merchandise, the figure would be bigger still.

Some of Wal-Mart's detractors think it "cheerless", others mean. But
what Wal-Mart saves on its payrolls it passes on to consumers. There
are two sides to every penny it pinches.

*All the papers are available at: www.globalinsight.com/walmart[3]

-----
[1] http://www.economist.com/displayStory.cfm?story_ID=5545325
[2] http://www.economist.com/#footnote1

See this article with graphics and related items at http://www.economist.com/research/articlesBySubject/displayStory.cfm?story_id=5545888&subjectID=348918&fsrc=nwl&emailauth=%2527%2529%2520%252A3%2524L471PRD%250A

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