The Wal-Mart Effect - Research Paper Example

The Wal-Mart Effect: Valid, but Insufficient in Explaining Dying/Dead Mom-and-Pop Stores Introduction The proverbial Goliath is a scare for any David. When large corporations, such as fast food and retailers, enter communities, they meet two different “welcoming committees,” among other groups with different or no reaction to the former: people and organisations who want them to stay out of their lives because of allegations of killing small stores and creating sprawl, and those who welcome them with loving arms because of the positive economic effects that they are perceived to bring. Due to the double-edged sword that large firms can have on communities, they have been the centre of social and economic criticism (Bianco et al., 2003; Fishman, 2006). Globalisation in terms of expanding and increasing number of multinational corporations, however, cannot be stopped or reversed. Multinational, transnational, and global corporations, all of which will be called big firms/companies/corporations in this paper, are even getting bigger and bigger through mergers and acquisitions and through purchasing small firms. This paper explores if it is a valid criticism that large corporations, such as Wal-Mart and Home Depot, have driven out mom-and-pop shops out of business. It explores other factors that resulted to dying/dead small stores through examining the Wal-Mart effect, which refers not only to the effect of Wal-Mart on communities, but on large companies in general. That large corporations have driven out mom-and-pop shops out of business is a valid criticism because of their economies of scale and scope that allow them to get lower prices from suppliers and to offer attractive promotions to consumers, although some studies would oppose the effects of the former on the demise of the latter. Furthermore, this paper also shows that the American public has a role to play in this situation because they prefer buying from large companies due to lower prices, convenience, and individual preferences, and mom-and-pop businesses must also learn to evolve to respond to competition from big corporations through entrepreneurship. The Wal-Mart Effect Are Wal-Mart and other large corporations preying on small stores by driving them all out of business? This section explores the validity, although limited, of the statement that the Wal-Mart effect is significantly detrimental to small stores. The Death of Mom-and-Pop Shops When large firms such as Wal-Mart enter communities, they have economies of scale and scope that allow them to affect the prices of goods, wages, and demand for different products in these communities. In BusinessWeek, Bianco et al. (2003) studied the pros and cons of Wal-Mart in local and national economic levels, using different studies and reports. They described the positive effects of being large enough to offer low-priced products everyday and to offer increased employment to communities. Fishman (2006) explored the savings effect of Wal-Mart. She described the savings on one product type alone: With 200 million adults in the United States, accounting only for the nickel from the container in their medicine cabinets right now, the savings is $10 million, of which customers got to keep half, $5 million, just for one small change that went unnoticed more than a decade ago. The savings brought about by the change is permanent. American consumers are saving $5 million in nickels five or six times each year on just one product. (Fishman, 2006, pp.6-7). Thought Wal-Mart does not manufacture its products, it attains economies of scope because it has lower average cost in selling one or more products together than separately, thereby offering competitive low-priced products. Some mom-and-pop stores, on the opposite, focus on one type of brand or product alone, which reduces their economies of scope, and they cannot lower their prices without affecting their margins. Moreover, Wal-Mart has large and numerous stores with different product types and brands that allow it to shape critical economic factors that can affect purchasing behaviours. Fishman (2006) depicted the swift expansion of Wal-Mart: “Ten years later, by the end of 2000, Wal-Mart had opened 888 Supercenters, an average of seven new Supercenters per month, 120 months in a row” (p.8). The more shops that Wal-Mart opens, the more it is able to keep its prices lower due to product and sales volume. Hence, economies of scope is a large advantage that small shops cannot easily beat; hence, they can die or have died due to lower competitiveness in pricing and variety. Aside from economies of scope, large companies can gain economies of scope. Wal-Mart and other firms generate cost savings because of their size in the industry. Wal-Mart has economies of scale because the average cost of selling falls as the volume of products sold increases. It can negotiate with, though some critics would call it “force,” suppliers to sell goods to them at a lower price, since they can purchase larger volumes. Singh, Hansen, and Blattberg (2006) studied the impact of Wal-Mart on an incumbent supermarket store of a local community. In order to assess Wal-Mart’s influence on consumer purchase behaviour, they made a joint model of inter-purchase time and basket size. Findings showed that the incumbent supermarket lost 17% of sales after Wal-Mart entered the scene (Singh et al., 2006, p.475). Clearly, Wal-Mart has an effect on stores, not only on small stores. Because of its efficiency and effectiveness in managing a wide array of products, Wal-Mart can have competitive advantages that reduce the sales of other similar stores in its midst. With these advantages, large firms can kill mom-and-pop stores because they have distinct advantages of size and scope, where some of the negative effects are consumers driving out of their way to buy cheaper products at larger stores that can have limited offerings. Bianco et al. (2003) noted the other side of the Wal-Mart effect on consumers: “...more shoppers will have to travel farther from home and will find their buying increasingly restricted to merchandise that Wal-Mart chooses to sell,” where “a growing percentage of which may be the retailer's private-label goods, which now account for nearly 20% of sales” (p.105). It might seem paradoxical that a big box business will offer less, but in a way, Bianco et al. (2003) are right because large firms can choose suppliers who are only willing to sell under their own terms, and they also increasingly sell private labels to boost their revenues further. Instead of being exposed to a variety of products, consumers will find themselves curtailed to private labels, which are generally lower priced than international/national brands. While considering the effect of low prices on consumers, this paper confirms the statement that large firms can have negative effect on wages, which can also kill small stores. Most small shops cannot afford to pay minimum wages or a competitive compensation package to their workers. When Wal-Mart operates in their communities, though it offers minimum or even sometimes lower than minimum nominal wages, many employees are attracted to the idea of working for a large firm like Wal-Mart (Bianco et al., 2003, p.105). The socio-economic effects can be far-reaching, such as depressed wages can lead to more and more people being stuck in these jobs, and since they cannot save money to enter business in the future, large firms can then also affect future entrepreneurial activity through the concentration of revenues and wealth in their hands. Considering these indirect and direct effects of large firms on small shops, it is valid to say that the Wal-Mart effect kills the latter to some effect. The Rise of Convenience and Low Pricing While large firms seem to be competing with small shops directly, one study shows that the former chooses the battle they fight, mostly competing with similar large retailers. Chiou (2009) investigated the effect of Wal-Mart on other retailers through a discrete choice model application on DVD sales. She used dataset which includes the stores that sold them, DVD titles bought, product price, and demographics at the household level for a year (2002 to 2003). Findings showed that Wal-Mart is on competition with mass retailers: “Wal-Mart competes more intensely with mass merchants than with stores of other types” (p.303). In particular, Wal-Mart has already known large firms as competitors: “Wal-Mart competes most intensely in price with Kmart and Target and to a lesser extent with Sam’s Club. If Wal-Mart decreases its price by 1%, then the market shares of Kmart and Target fall by 1.69% and 1.57%, respectively” (Chiou, 2009, p.306). Large firms are competing with similar-sized firms too. If small stores are mass retailers also, however, they will be directly hit with a Wal-Mart/large company entry. However, if they sell a limited range of products, then they may not be greatly affected by large firms. Sobel and Dean (2008) even showed in their empirical study that Wal-Mart does not have a significant killing effect on small shops. Their findings showed that Wal-Mart had no significant effect on small shops, and if it did, it will be offset with new business entries in the economy (Sobel & Dean, 2008, p.691). Indeed, small stores cannot efficiently compete with large firms, if the latter can offer lower priced goods because of their sheer size and scope, but American consumers also have to be blamed in the rise of big box retailers and the like, since they do want convenience in their lives. Though not all Wal-Mart stores are located in community centres or urban areas and many shoppers drive long to reach them, Wal-Mart still offers convenience because it sells different products and services for lower prices. Chiou’s 2009 study supported the need for convenience of consumers, who think that driving far is a small disadvantage compared to the benefits of shopping at a large store with numerous goods. She underscored, however, that this is true for consumers with “average” characteristics, such as average income and marginal cost in travelling to farther places to shop: “The average consumer’s preference for Wal-Mart may reflect the convenience of one-stop shopping, the expectation of lower prices in other items in the consumer’s shopping bundle, or an unobserved Wal-Mart ‘quality’ effect” (Chiou, 2009, p.306). These consumers see that Wal-Mart generally have more advantages than disadvantages. One of these advantages is the price, though other conditions must be present for the price to be compelling enough for one large firm to be preferred over other large and small stores. Chiou’s 2009 study noted important demographic differences among consumers who shop at Wal-Mart. Family factors, age, income levels impact the choice for large discount retailers: “Consumers with a higher education place a lower value on shopping at Wal-Mart, whereas consumers with children place a higher value. Also, older consumers tend to dislike Wal-Mart relative to online stores” (Chiou, 2009, p.307). To be more specific, the “average” shopper can prefer Wal-Mart to other shops, where this shopper has the following characteristics: For instance, a typical male consumer with the average characteristics of the sample (35-year-old, with kids under the age of 18, has a college education, lives in an urban area, and has income of $40,000) favors Wal-Mart over all other mass merchants; he is willing to pay $7.09, $4.70, $2.61, and $2.37 to shop at Wal-Mart instead of Kmart, Sam’s Club, Costco, and Target for a $15 DVD, assuming the stores are located 5 miles away. (Chiou, 2009, p.307). Chiou (2009) learned that families with children prefer Wal-Mart, most likely because Wal-Mart can offer wide and cheap selections for different family members. With these factors of price, convenience, and quality considered, American consumers do have an effect on the support for large firms like Wal-Mart, where the Wal-Mart effect has a component of consumer effect. Other sources disagree that large firms directly affected small stores. Sobel and Dean (2008) showed that Wal-Mart do not significantly affect small stores. Hicks (2006) stressed that it is hard to measure Wal-Mart’s effect on small communities because of the absence of valid baseline and comparative data (pp.23-24). Nevertheless, he aimed to use the best possible valid research by criticising studies that directly blamed Wal-Mart for its effects on small stores. He mentioned the study of Ken Stone in the 1980s, which showed that Wal-Mart had negative effects on small shops. Hicks (2006) pointed out that these studies had a large weakness of not considering other factors that are not related to Wal-Mart’s entry in Iowa, specifically the distinctive drop in population rate during the same time of the study (p.24). Other factors that can affect small shops are not always considered in the studies, which argue that Wal-Mart kills these small stores. Moreover, Hicks (2006) noted that many studies assume “endogeneity,” where they mistakenly take it for granted that Wal-Mart is not timing and placing locations rationally (p.24). He asserted that Wal-Mart also studies its timing and location decisions, which can impact the validity of past studies on the Wal-Mart effect (Hicks, 2006, p.25). These studies stress that large corporations per se are not to be blamed for the demise of small shops. The Tale of the New David and Goliath If not all small shops are affected by large firms, those that are can either surrender or fight back. Those businesspeople, who surrender, close shop and join people who complain that Wal-Mart has killed their business. Those who fight believe that Wal-Mart is just another company, among many other large firms, who cannot be removed in or prevented from entering their communities. Sobel and Dean (2008) noted that if Wal-Mart kills some small stores, it also encourages entry in the business. Wal-Mart’s entry means that consumers are going to a certain place, and this can offer opportunity for new businesses. David might be too small to fight Goliath directly, but entrepreneurs find opportunities in these cases. They can create niche markets or offer new products and services in ways that large firms can. Entrepreneurs will find the competition with large firms real, but not something that will stop them from opening businesses. Conclusion The Wal-Mart effect can kill some small shops, though not all the time, and large firms are not the only factors too that affect small businesses. Furthermore, the American public has a role to play in the death of small stores because they prefer lower prices and convenience that large corporations can usually provide more than small business establishments. As small firms become more creative and innovative, this paper believes that they can fight back through their own business strategies. The Wal-Mart effect, after all, is here and cannot be changed. The only way for small businesses to thrive is to exist with the giant. The new David does not kill Goliath, but works alongside him. References Bianco, A., Zellner, W., Brady, D., France, M., Lowry, T,M. Byrnes, N., Zegel, S., Arndt, M., Berner, R., & Palmer, A.T. (2003, October 6). Is Wal-Mart too powerful? BusinessWeek 3852, 100-110. Chiou, L. (2009). Empirical analysis of competition between Wal-Mart and other retail channels. Journal of Economics & Management Strategy, 18(2), 285-322. Fishman, C. (2006). The Wal-Mart effect and a decent society: Who knew shopping was so important? Academy of Management Perspectives, 20(3), 6-25. 2 Hicks, M.J. (2006). What is the local Wal-Mart effect? Economic Development Journal, 5(3), 23-31. Singh, V.P., Hansen, K.T., & Blattberg, R.C. (2006). Market entry and consumer behavior: An investigation of a Wal-Mart supercenter. Marketing Science, 25(5), 457-476. Sobel, R.S., & Dean, A.M. (2008). Has Wal-Mart buried mom and pop?: The impact of Wal-Mart on self-employment and small establishments in the United States. Economic Inquiry, 46(4), 676-695. Read More