Download The United States of Walmart: Economics 226 Module 4

The United States of Wal-Mart
Andrew Dahlem
[email protected]
E226 Module 4
Computer Applications for Economics
November 25, 2007
The object of this study is to analyze the depth of Wal-Mart’s penetration into the United
States’ Economy. It examines Wal-Mart as a corporate entity and its effects on the
macro-economy and labor force. A cost/benefit analysis is used to indicate whether
Wal-Mart has a positive or negative impact on the economy.
I.
Introduction
Wal-Mart: the retail giant. Everyone knows it. Some people love it, some hate it. More than
85% of Americans use it. To American culture, Wal-Mart has become a staple. Synonymous with low
prices and savings, it has risen from a single store in the late 1940’s to the largest retailer in the United
States. But what is the real Wal-Mart? How entrenched in the United States’ Economy has it become?
And is Wal-Mart’s existence a positive or negative influence on the United States’ Economy?
II.
Wal-Mart as a corporate entity.
The initial question that must be answered is: How did Wal-Mart become the giant it is today?
This can be answered through a brief history of the corporation’s beginnings and expansion. Sam Walton
created the Wal-Mart discount outlet chain in Arkansas during the 1950’s.1 His goal was to provide low
priced quality merchandise to rural areas often ignored by larger retail discount stores (i.e. Woolco and
Figure1
Correlation between Total Stores and Total Sales
Total Stores
4000
Total Wal-Mart /
Sam's Club Stores
3500
3000
Linear (Total WalMart / Sam's Club
Stores)
2500
2000
0
100
200
300
Total Sales (Billions)
Data retrieved from Wal-Mart Annual Reports
1
The first Wal-Mart was actually called Walton’s Five and Dime.
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Kmart stores.) As Walton expanded the number of stores, he set up distribution centers allowing him to
buy in bulk from his suppliers (lowering both cost of goods thru economies of scale, and the cost of
storing excess inventories.) As a rule, during the expansion of Wal-Mart, no store was placed more than
a day’s drive of a distribution center. This allowed for the speedy replenishment of low inventories. As
suppliers had only to deliver to the distribution center and not each individual store, this lowered input
costs, which combined with the already established savings, allowed Wal-Mart discount outlets to pass on
savings to the consumer. The belief in outward expansion also helped Wal-Mart’s growth. Rather than
jump to the farthest location from a center and fill back in, Wal-Mart grew from the inside out. The chain
relied on its reputation and word of mouth to act in place of costly advertising (Vance & Scott, 1992).
It relied on these methods of expansion and supply chain management to swell its growth to over
3,400 stores by early 2007. As can be observed in Figure 1, there is a directly increasing
correspondence between net total sales for Wal-Mart Stores and the increase in number of stores.
Between 1997 and 2006, Wal-Mart / Sam’s Club opened 1,016 stores and garnered an increase of over
$155 billion. This amounts to an increase of approximately $152 million per new store opened.
III.
Wal-Mart and the United States’ Economy.
Wal-Mart as an entity accounts for an immense portion of the American Economy. In 2006, Wal-
Mart’s net sales for the U.S. topped $200 billion. To demonstrate the depth of Wal-Mart’s penetration into
the U.S. economy, I took a measurement of net sales against Non-Durable Goods Expenditures and
against overall Personal Consumption Expenditures. Personal Consumption Expenditures (PCE) is the
aggregate measure of all consumer spending on goods and services as a part of United States Gross
Domestic Product. Non-Durable Goods Expenditures (NGE) is the portion of PCE spent by consumers
on all goods other than consumer durables (i.e. vehicles, home appliances, etc.). My findings, as
displayed in Figure 2, were quite surprising. Wal-Mart sales account for more than two percent of
Personal Consumption Expenditures, and almost ten percent of Non-Durable Goods Spending in the
United States (Bureau of Economic Analysis, SEPTEMBER 27, 2007; Wal-Mart, March 28,2007). No
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other retailer commands near that amount of revenue.2 What does this mean to American consumers? It
Figure 2
WalMart Sales as a Percentage of NGE* and PCE**
10.00%
8.00%
Walmart Sales as
a Percent of NGE*
6.00%
Walmart Sales as
a Percent of PCE**
4.00%
2.00%
20
05
20
03
20
01
19
99
19
97
0.00%
* Non-Durable Goods Expenditures
** Personal Consumption Expenditures
Data retrieved from Bureau of Economic Analysis and Wal-Mart Annual Reports
means that on average, two cents of every dollar spent by consumers is spent at Wal-Mart.
Wal-Mart also commands a large share of the labor market. It is the second largest employer in
the United States surpassed only by the United States government (Irwin & Clark, 2006). Although WalMart does not disclose its actual employment total, the company reported on its latest annual financial
statement that it employs over 1.36 million people nationwide (Wal-Mart, March 28,2007). “To put this in
perspective, the Wal-Mart workforce represents just under 1 percent of total employment and just under
10 percent of retail employment in the United States. It exceeds the number of high school teachers or
middle school teachers, and is just under the size of the elementary school teacher workforce.”(Irwin &
Clark, 2006)
Wal-Mart claims that the median pay for an associate was $10.65 per hour in 2007, well above
federal minimum wage (Wal-Mart, March 28,2007).This would mean that Wal-Mart paid between twentyone and forty-two billion dollars in wages (assuming that Wal-Mart associates work between twenty and
forty hours per week). The problem with this wage is that this includes everyone counted as an
“associate.” As far as Wal-Mart is concerned, all employees are considered “associates.” Also involved
Even Wal-Mart’s closest competitors combined, Target Corp. and Sears Holdings Co. have half the
sales of Wal-Mart.
2
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is the fact that Wal-Mart stores hire a majority of part-time workers so as to avoid paying overtime and
benefits such as healthcare. (Neumark, Zhang, & Ciccarella, 2005) The effect of this is to push down
wage price.
According to some studies, Wal-Mart dictates control over prices so as to affect the United States
Consumer Price Index as a whole. As stated by Global Insight, “We found that the expansion of Wal-Mart
over the period 1985-2004 can be associated with a cumulative decline of 9.1% in food-at-home prices, a
4.2% decline in commodities (goods) prices, and a 3.1% decline in overall consumer prices as measured
by the Consumer Price Index - All Items, which includes both goods and services. These estimates are in
line with other researchers' estimates of Wal-Mart's price effects.” (Global Insight, 2005) In the case just
referenced, Global Insight determined that consumer savings for the year 2004 amounted to $895 per
person in the United States, or just under $2,500 per household.
Another impact Wal-Mart has had on the United States’ economy has been to stimulate trade with
countries such as China. Approximately ten percent of United States’ imports from China go directly to
Wal-Mart. This is mainly due to the fact that China’s production costs are well below those available in
the United States. In the early 1990’s, Wal-Mart abandoned its “buy American” philosophy because input
costs were so high. American suppliers could not produce goods as efficiently as other countries thus
creating higher prices. Wal-Mart was forced to look overseas for alternatives and found Chinese
suppliers to purchase from, allowing Wal-Mart to continue holding prices low. Wal-Mart imported $18
billion worth of goods from China in 2004. (Irwin & Clark, 2006) Though this accounts for ten percent of
total United States’ imports from China in 2004, it amounts to less than ten percent of Wal-Mart’s total
cost of sales for the fiscal year. “Goodman and Pan (2004) estimate that 80% of Wal-Mart’s global
suppliers are located in China.”(Irwin & Clark, 2006) If this is the case, Wal-Mart’s total cost of goods
from imports probably does not exceed twenty percent of Wal-Mart’s total cost of sales, meaning at least
eighty percent of cost of goods sold goes to United States’ suppliers. Interpreting this would mean that
for 2004, approximately $159 billion in cost of sales went back to United States suppliers and
manufacturers. Sixty-two percent of total sales went back into the United States’ Economy through WalMart’s suppliers.
IV.
Wal-Mart in decline
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Even giants must one day fall. This line refers to the inevitable decline and demise of everything
in the universe. We know that the law of diminishing marginal returns applies to all things in the world of
economics. Sooner or later a point of saturation is reached, and while there may be a gain by increasing
the level produced, the amount gained becomes less until loss is experienced. This may be the case with
Wal-Mart stores. In an effort to continue expanding at a constant rate, Wal-Mart has begun to put stores
increasingly closer together. This saturation has produced the effect of individual Wal-Mart stores
actually cannibalizing each other. This is evidenced in an article which appeared in the April 2007
BusinessWeek. The article referenced slowing sales in stores five years old or older. Subsequently,
many of the stores experiencing slower growth rates than average were adjacent to stores that had
opened in the last five years (Bianco, 2007).
As Wal-Mart’s growth slows, its competition is waiting in the wings. Target, Best Buy, and other
retailers are steadily posting consistent growth rates using strategies Wal-Mart developed. While their
prices might not be quite as low as Wal-Mart, they have innovative and trendy wares to sell. The term for
the merchandise offered in these outlets is “cheap-chic,” and gives the consumer high fashion choices at
near Wal-Mart prices (Bianco, 2007). Although Wal-Mart has seen this trend, it has made weak attempts
to respond in order to keep prices low.3
V.
Wal-Mart a Cost / Benefit Analysis
As we have seen, Wal-Mart has become an integral part of life in the United States. The only
question remaining is that of Wal-Mart’s influence. To determine this, we must take a final look at the
costs and benefits of Wal-Mart’s presence in the economy. Wal-Mart supplies low prices, a high level of
employment, and increased international trade to the economy. The worst drawback to corporate WalMart is its propensity to push down wage prices and cut costs on its associates. All things considered,
the opportunity cost of Wal-Mart would be higher prices and lower employment. Imagine the United
States without Wal-Mart. Would you want to live there?
For example, the sheer volume of lava lamps and bean bags in Wal-Mart’s Furniture section, or Wal-Mart’s
“trendy” new screened tees.
3
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References
Bianco, A. (2007, April 30, 2007). Wal-mart's midlife crisis. Business Week, (4032) 46-47-49,52-56.
Article regarding the decline in growth of Wal-Mart stores. Also cites problems of Wal-Mart and what
the company is currently doing to fix them.
Bureau of Economic Analysis. (SEPTEMBER 27, 2007).
GROSS DOMESTIC PRODUCT: SECOND QUARTER 2007 (FINAL)
CORPORATE PROFITS: SECOND QUARTER 2007 (FINAL. Retrieved 10/8, 2007, from
http://www.bea.gov/newsreleases/national/gdp/2007/pdf/gdp207f.pdf
This source contained GDP for the current year as well as revised data for 2006.
Global Insight. (2005). The economic impact of wal-martGlobal Insight. 10/02/2007, from
http://www.globalinsight.com/publicDownload/genericContent/11-03-05_walmart.pdf
Report abstract not included.
Notes: The Global Insight report provided a comprehensive analysis of Wal-Mart's effects on the
American Economy. The company completed detailed research and analysis on Wal-Mart's overall
effect on prices at the county, metropolitan, and national levels. It was very helpful in tying Wal-Mart
to the National Economy.
Irwin, E., & Clark, J. (2006). The local costs and benefits of wal-mart. [Electronic version]. Dept.of
Agricultural, Environmental and Development Economics, The Ohio State University.[On-line],
Available at: http://www-agecon.ag.ohio-state.edu/programs/ComRegEcon/walmart/Irwin_ClarkWalMart_Final_03_06.pdf,
Notes: This journal article helped me understand some concepts of Wal-Mart's supply chain
management theory. It also gives insight into Wal-Mart's connections with the labor markets and its
import strategies.
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Neumark, D., Zhang, J., & Ciccarella, S. (2005). The effects of wal-mart on local labor markets.
Unpublished manuscript. Retrieved 10/02/2007, from http://ftp.iza.org/dp2545.pdf
This work was least related to my subject matter of Wal-Mart's effects on the U.S. Economy,
however it allowed me to understand Wal-Mart's effect on the local level. I believe that it is important
to understand the effects on micro-economies to garner the true nature of the aggregated effect on
the entire economy.
Vance, S. S., & Scott, R. V. (1992). Sam walton and wal-mart stores, inc.: A study in modern southern
entrepreneurship. [Electronic version]. The Journal of Southern History, 58(2), 231-252. from
http://links.jstor.org/sici?sici=00224642%28199205%2958%3A2%3C231%3ASWAWSI%3E2.0.CO%3B2-Q
Notes: This article gives the history of Wal-Mart from its inception. It was essential to my research
in that it divulged the steps taken by Sam Walton to create his retail empire.
Wal-Mart. (March 28,2007). 2007 annual report. Retrieved 10/08, 2007, from
http://walmartstores.com/Files/2007_annual_report.pdf
This was the source of 2007 Financial Statistics for Wal-Mart.
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