Affects on Local Businesses

Introduction to Negative Impacts

• Wal-Mart is the largest private sector employer in the United States. There is constant controversy over whether Wal-Mart makes positive or negative contributions to the US economy or society in general. Although critics propose many arguments that show Wal-Mart's negative effects, there are three main points that they continuously bring up:

1. Poor treatment of employees
2. Affect it has on small businesses in the area
3. Use of foreign products

• "First theres the clobbering of Main Street: Wal-Mart moves in onthe edges of towns, and the smaller downtown merchants soon go under. Second, there;s the miserable wage and benefits package offered by Sam Walton's creation. And third, there's Wal-Mart's purchasing strategy, which seems to be about buying American -made products only as a last resort --"

Leo Hindry Jr. BusinessWeek

• Focusing on Wal-Marts effects on small businesses or local markets, popular belief says that because of Wal-Marts, “everyday low prices” it forces small “mom and pop” type businesses into bankruptcy. 99% of businesses in the US are considered small businesses. Small businesses are usually defined as an independent business that has less than 500 employees. They are responsible for providing anywhere between 60 and 80% of the net new jobs in the US and small business share of employment remains at about 50%. In other words, in many ways business in the US is centered on small firms and institutions like Wal-Mart are a threat to their existence.

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How Wal- Mart Affects Local Businesses

Popular Arguments

Economic Cons on Local Economy

• Drives competitors out of Business
• Forces small business owners and employees out of a job or to work for lower wages

Economic Pros on Local Economy

• Increases comsumer purchasing powering which increases sales tax revenue in the area

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Specific Case Studies

The Economic Impact of Wal-Mart Supercenters on Exsisting Businesses in Mississippi

Research was performed by Kenneth E. Stone, Professor of Economics, Iowa State University Georgeanne Artz Extension Program Specialist, Iowa State University Albert Myles, Extension Professor, Mississippi State University

• This study examined the impact of Wal-Mart supercenters on the sales of existing businesses Mississippi. Data from sales tax reports in Mississippi were used to analyze changes in the sales of food stores, general merchandise stores, furniture stores, building materials stores, miscellaneous retail stores and the total county. The Mississippi data have two main advantages. First, unlike most states, all food items are subject to the sales tax in Mississippi; therefore this data set allows us to account fully for food store sales. Also, since food items sold in supercenters are reported in general merchandise store sales and not in food stores sales, we have a unique opportunity to identify changes in market structure that have occurred with the addition of a supercenter. Second, supercenters have been open in Mississippi for several years, sufficiently long to observe market changes.

• Methods

• The resultant sample consisted of 18 stores in counties with an average population of 45,45 after eliminating counties with 2 or more supercenters and counties with a population of greater than 100,000
• The study compared sales tax data from fiscal years 1990 through 2001 which was received from the Mississippi State Tax Commission.
• The study was set up to determine the change in sales for various types of businesses in the supercenter trade area for each succeeding year after the opening of the supercenter.
• Results were concluded by comparing sales or pull factors for host and non host counties

• Results

• There are both positive and negative effects on stores in the area where the new supercenters are located.
• The following are a few charts showing the difference between host and non host counties in Mississippi.

General Merchandise Stores

File:General merchandise1.png

The average pull factor for general merchandise stores in the host counties was from 0.99 to 1.03 for the four years preceding the opening of a Wal-Mart supercenter. That means that sales of general merchandise stores amounted to selling to slightly morethan the county population. The average county pull factor rose quickly after the supercenter opening, rising to 1.57 in the fourth year. This means that, on average, the host counties general merchandise stores were selling to the equivalent of 1.57 times the county population, in full-time customer equivalents.

File:Snapshot 2.png

Annual sales (pull factors) for the general merchandise category in host counties increased substantially, from 40.2 percent the first year to a peak of 41.6 percent three years after the opening of a Wal-Mart supercenter.

File:Ughh.pdf

This figure shows the average change in general merchandise pull factors for the non-host counties in Mississippi. Although there were some supercenters other than walmart in very few of these areas, the steady decrease began when the first Wal-mart supercenters were opening up in Mississippi.

• Conclusions

• Annual sales or pull factors for the general merchandise category in host counties increased substantially, from 40.2 percent the first year to a peak of 41.6 percent three years after the opening of a Wal-Mart supercenter. Since food sales are taxed in Mississippi, this increase includes the sales of both general merchandise and food by the supercenter. Conversely, average general merchandise sales in the 52 non-host counties decreased nearly annually from the time of the opening of the first supercenters in Mississippi.
• Wal-Mart supercenters took a lot of the food sales away from local food markets. Consequently, host county food stores experienced average annual declines in sales from 10.1 percent after the first year to over 19 percent after five years. Counties that did not have a Wal-Mart kept their grocery store sales at a fairly steady level after the opening of a supercenter in an adjacent county.
• Furniture stores in host counties were found to have an increase in sales for the first 3 years following the opening of a supercenter, but decreased in years 4 and 5. Building materials stores in host counties experienced average losses of 8.2 percent to 14.9 percent for the first five years after the opening of a Wal-Mart supercenter. Meanwhile, non-host counties experienced a nearly continual reduction of building materials sales.

The Economic Impact of Wal Mart: An Assessment of the Wal - Mart Store Proposed for Chicago's West Side

Research was performed by Chirag Mehta, research associate at the UIC Center for Urban Economic Development, Dr. Ron Baiman, research associate at the UIC-CUED and Dr. Joe Persky, Department of Economics at University of Illinois at Chicago

• The prospect of the opening of a new Wal-Mart store on the west side of Chicago has raised concerns about its potential impact on existing retailers. While Wal-Mart suggests that the store will have a positive impact by adding jobs and income to the local economy, this case study proposed a more careful analysis of the development.

Who are Wal - Marts competitors and will it draw in suburban Consumers to Chicago?

File:Snapshot 2006.pdf

This image shows the 763 retail businesses that will compete directly for Wal-Mart's customers within a three mile service area of the proposed Wal-Mart site.

• Wal-Mart indicates that it will create 250 jobs, and it further suggests that the store will add $600,000 in annual tax revenue to the City of Chicago. These claims suggest that the new Wal-Mart store at the proposed location will result in net employment, income and fiscal gains for the City of Chicago and its residents.

• The econmic impact of the proposed Wal-Mart store was derived using and innput- output analysis, customer survery data, publicly availabe business sales and tax data.

Impact:

• If Wal-Mart opens, it is expected that while it will create 200 jobs for Chicago residents, 254 jobs held by Chicago residents will be lost by other competing general merchandise stores in Chicago and an additional 11 jobs will be lost mostly in other sectors of the retail industry.
• Overall, the opening of Wal-Mart at the proposed location would directly eliminate 65 net jobs

File:Job.pdf

• Estimates indicate that there will be a net annual tax revenue gain from the new Wal-Mart of $197,000, considerably lower than the estimate of $600,000 provided by Wal-Mart.

File:Tax.pdf

Interview with Jon Lehman

• Jon Lehman worked for Wal-mart for 17 years, managing 6 stores in 4 different locations.

• In an interview with PBS he shared his thoughts on almost all the controversies surrounding Wal-Mart

• Specifically, he shared one way that Wal-Mart is able to keep its prices so low. He answers to a question reguarding Wal-marts relationship with suppliers,

"Wal-Mart puts the pressure on these manufacturers to: "Come in here and sell me the same merchandise you sold me last year, but sell it at a reduced cost. And we know you can sell it to us at a reduced cost, because we've been to your factory. We've seen your books. We've seen your cost of product, cost of shipping," so on and so forth, "your wage cost." They look at all that, and they call it "partnership."

• He goes on to say that Wal-Mart can get away with this because, "they drive out local competition" and this is simply "arrogance."

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Where to take the debate in future

• Like most debates, the debate over Wal-marts effects on local businesses is a continuous circle of no definite right or wrong answer.

• There is evidence that shows that Wal-Mart is going to drive out some competition when it opens in a new area and that it is going to force small business employees out of work.

• There is also evidence that shows that Wal-Mart increases consumer spending which may have positive impacts on our economy.

• It is difficult to measure what is more beneficial in the long run. Instead of continuing to repeat the same issue, the debate should be shifted to measure if Wal-Mart could still survive if it raises its employee wages and offers them bennefits.

• Although studies have shown that Wal-mart could increase the pay it gives its employees without raising its prices, little action has been taken to make this the case.

• If small businesses are still being forced to close, at least people have a better option to turn to . Or Wal-mart may have to raise its prices a little which may help to level the playing field.

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Sources

• Stone, K, Artz, G, Myles, A "The Economic Impact of Wal-Mart supercenters on exsisting Businesses in Mississippi," Mississippi State University Extension Service (Fall 2002).

• Bernstein, J andBivens, J. L Wrestling With Wal-Mart: Tradeoffs Between Profits, Prices, and Wages, Economic Policy Institute, June 15, 2006 EPI Issue Brief 223

• Sobel, R and Dean, A. M. "Has Wal-Mart Buried Mom and Pop?: The Impact of Wal-Mart on Self Employment and Small Establishments in the United States" West Virginia Univerity 2006

• Mehta, C, Baiman, R, Persky, J "The Economic Impact of Wal-Mart: An Assessment of the Wal-Mart Store Proposed for Chicago's West Side" Center for Urban Economic DevelopmentUniversity of Illinois at Chicago March 2004

• Leo Hindry Jr."Wal-marts Giant Sucking Sound" October 7, 2005 BusinessWeek

• www.sba.gov