The Walmart Effect

This was originally posted to my LJ (January 22, 2008). It appears here with minor edits and changes, but is essentially the same entry. All discussions of time-measurement will assume that as the date, though.

I went to Wal-Mart's home page the other day and noticed a strange number. If you go and look yourself, you will see a similar number. As of the time of this writing, this number states that Wal-Mart has saved America 16.5 billion US dollars since January 1st. This number gives me pause. Now, I have no problem with Wal-Mart claiming it saves people money. This seems true.

But 16.5 billion dollars in 21 days? This seems to suggest that Wal-Mart not only has done a huge amount of business in the past 21 days, but has done so much business that the 10% savings here and the 25% savings there add up to something on the order of 800 million dollars per day. That seems a lot. And then I looked up some other numbers. At best guess, it seems that Wal-Mart makes a worldwide sale total of about 370 billion dollars per year. Which means about 1.1 billion dollars per day (if someone has better numbers, let me know, this has been hard to find) if you fail account for the slowdown that occurs around January versus the speed-up around December.

Hmm. They sell 1.1 billion dollars worth of goods world wide and save 4/5 a billion dollars per day in America alone? I mean, that suggests that Wal-mart prices are half or less than that of their competitors on average, and that doesn't seem true. Individual sales aside, we are looking at Wal-mart prices being staggeringly below the national average.

Digging deeper, I found out that the number quoted is not about Wal-Mart's prices, but is about the concept that Wal-Mart has driven the prices of every business down by a factor of about 3.1%. Meaning that, presumably, the 0.8 billion dollars per day is 3.1% of what the prices should be if people were paying for them in a world without Wal-Mart. In other words, the price of goods bought daily (am I doing this right?) should be about 26 billion but instead is about 25 billion? And this .8 billion dollar shift is due, indirectly but indisputably to Wal-Mart? Ok.

I have no idea if I buy that or not. I'm not trained in Economics except the biggest sense of the word. The best I can say is that in principle it sounds plausible if (and only if) you assume that Wal-Mart as a company decides prices on its own and every other company rushes to follow. Of course, the true answer is that Wal-Mart competes with other companies and so, it could be said, that Wal-Mart's competition is why the prices are so much lower, especially considering that Wal-mart only directly equates about 1/20th the total business (meaning their savings are predicted at being 150% their entire market share).

But, on an anecdotal level, I have seen the "Wal-Mart Effect" in action. I remember when canned drinks were about 75 cents a can and getting higher in the early 90s. Didn't some movie (Demolition Man or Robocop maybe) make a joke about drinks costing a couple of dollars of pocket change per can in the near future? And then I remember that cheap 25 cent Sam's Choice brand coming out and I saw both Coke and Pepsi plunge their prices to about 40 cents. In that sense, the Wal-Mart effect was nearly 50% the price. The principle of a competitor making prices is lower is valid, and no doubt Wal-mart has effected other things as well.

Except it takes a big leap to go from showing the definite drop in one product, and claiming the drop in every product (albeit a smaller one). I can think of no other way to say it that doesn't sound paranoid, but it seems weird that we should believe that a single company that is strongly in control of every product it carries would be a bigger defender of low prices than the rest of market forces combined.

But, one other thought occurs to me. What are the opportunity costs? This can get sticky and I don't want to ask "What about the tax payer money that Wal-Mart gets in subsidies? What about the jobs that Wal-mart transferred overseas? What about the farmers and companies that have been forced to sell to Wal-Mart cheaper? What about reduction in benefits to keep prices low?" because I can't in good conscious scapegoat Wal-Mart alone for general business practices. Poor, marginally "evil" practices by many people's standards? Sure. Unique. Nope and never will be. Because not only do prices have to be kept low, but stock prices have to be kept high. Increasing profits while dropping prices can be tricky. I understand.

If you are a corporation, you will probably have to do things that seem distasteful to the rest of us to make profits. This is maybe not a good thing, but it is a true thing.

But I can ask this. If you note the fact that the race for cheaper goods has seemingly lead to a decline to the quality of individual goods, how much of this is also Wal-Mart's fault? How often have other companies lowered the quality of goods and services so they can better compete? How many companies have went overseas and gotten inferior goods to be competitive?

If you were to take the average life of shirts you buy now versus shirts you bought 10 years ago. If you were to take and compare appliances. Televisions. Toys. If you were to compare all these things, whose prices Wal-Mart claims are 96.9% of the price they would have been in a world without Wal-Mart, would you find they last 96.9% as long or 96.9% as satisfactory? I really don't know. This is a hypothetical. A proposed way of looking into it. But I will say that if you find the average good doesn't last 95% as long, then the Wal-Mart Effect, if a single company can claim to have such an effect (even to the point of implying that it's directly saved in their own stores) then it seems they must take responsibility for the negative sides (the retardation of wage increases, the retardation of benefits, the decrease in quality to keep prices low, etc).

And when you tally up the cost, does the 3.1% savings really fall in Wal-Mart's favor? Or does this come out to be "The Competition Effect" the whole time and wordplay is getting used?

Written by W Doug Bolden

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