The Walmart Effect is a term used to describe the economic impact that is felt by local businesses when a large company like Walmart opens a location in their area. This phenomenon often forces smaller retail firms out of business and reduces wages for employees of competing instores. Due to these outcomes, many local businesses are opposed to the introduction of Walmart stores into their territories.
Key Insights
- The Walmart Effect impacts communities where Walmart builds stores, affecting local businesses and wages.
- The presence of a Walmart store can hurt smaller companies and reduce competition.
- Walmart’s immense buying power is a significant contributor to this effect.
- Suppliers must reduce production costs to maintain business with Walmart.
- Although the term emerged in the 90s, the concept gained popularity with Charles Fishman’s book, “The Wal-Mart Effect.”
Understanding the Walmart Effect
While the Walmart Effect can displace local businesses and decrease wages, it also has potential benefits like curbing inflation and optimizing employee productivity. These stores can save consumers billions of dollars annually while influencing market dynamics positively and negatively.
Benefits and Drawbacks of the Walmart Effect
Advantages
- Savings for Consumers: Walmart’s lower prices save billions for shoppers every year.
- Increased Product Awareness: Selling through Walmart enhances visibility for supplier products.
- Curbing Inflation: Massive procurement power can keep overall pricing in check.
- Enhanced Productivity: Competitive pressures can drive productivity improvements.
Disadvantages
- Pressure on Suppliers: Suppliers often need to cut production costs, which can lead to the use of cheaper materials or offshore manufacturing.
- Impact on Local Wages: Competitors may lower employee wages in response to Walmart’s cost structures.
- Business Closures: Many small businesses can’t compete with Walmart’s pricing, forcing them to shut down.
- Long-Term Economic Effects: The initial opening of a local Walmart can create lasting economic downturns even after the store relocates.
What Drives the Walmart Effect?
The Walmart Effect is greatly driven by the company’s scale and scope in buying power. With over 4,700 stores in the U.S., it’s the largest employer in the nation. Walmart’s capacity to dictate prices to wholesalers allows it to sell merchandise at lower prices than other businesses.
As a result, these competitive prices draw consumers away from local retailers, which eventually see declining sales and profit margins. Businesses often attempt various cost-cutting measures but may still fail to stay afloat. Additionally, local wages can suffer as market competitors strive to match Walmart’s low compensation costs.
Legacy of the Walmart Effect
When a Walmart location opens, it often permanently reshapes local markets. The long-term effects may continue even if Walmart eventually relocates. The term “Walmart Effect” originated in the 1990s but skyrocketed into common parlance with Charles Fishman’s 2006 book, “The Wal-Mart Effect,” which dives deep into cases of Walmart’s impact on both local businesses and consumers.
Related Terms: buying power, inflation, employee productivity, supplier costs, consumer awareness.
References
- Walmart. “Location Facts”.
- Charles Fishman. “The Wal-Mart Effect”. Penguin Random House, 2006.
