Monday, September 27, 2010

Walmart's Small Business Impact: The Need for Review

With debate raging over whether it is a good idea for Wal-Mart to locate at the Gateway Mall, it is a good idea to take a look at the academic study that was done on the first Chicago Walmonster. Here's the underlying rationale: "However, Wal-Mart’s big city urban expansion plans have roused strong local political opposition. As of October 2007, there were only two big-city Wal-Mart’s among the
three largest cities, one in Los Angeles and one in Chicago (Wal-Mart Store Locator, 2008). New York City has not yet allowed any Wal-Mart stores within its city limits (Jones 2007). These economic policy debates have centered on Wal-Mart’s impact on local jobs and wages, as well as consumer prices and community retail development needs."

The big question here is, what kind of impact will the retail giant have on the viability of neighborhood shopping, as well as the overall impact of Wal-Mart on employment? Studies by Professor Ken Stone on the rural and suburban Wal-Marts indicate that there is a serious zero-sum game at work:

"Stone’s results show clear evidence of a very large localized and specialized Wal-Mart impact causing: a) PF declines in all non-General Merchandise sectors except for Home Furnishings and Eat and Drink in Wal-Mart towns, b) generally larger PF declines in all retail categories with the exception of “Food” (not sold by Wal-Mart during this period) in non-Wal-Mart towns, c) Across all categories, a five year 6.0% increase in the PF for total sales in Wal-Mart towns versus a -10.4% decline in Non-Wal-Mart towns, d) Larger market share losses for non-Wal-Mart towns that were within 20 miles of Wal-Mart towns than for non-Wal-Mart towns that were farther away, e) An estimated 23% decline in the number of retail stores in Iowa, based on PF losses by store category and average sales per store by retail category in 19932, and f) In addition to this large substitution effect, an overall decline in the value of retail sales, over the 1983 to 1993 period in Iowa." (PF indicates "pull factor")

Stone's study of Iowa has been replicated, with similar results found in other areas: "Stone has generalized his work to rural communities (1997) and shown similar results for Wal-Mart Supercenters in Mississippi (Stone, Artz and Myles 2002). Other regional studies of Wal-Mart’s impact (all looking at rural areas) have come to similar conclusion."

Since there are so few urban stores, there is of course less data to use to determine what the impact might be in the more dense city environment-hence the study in question. But Stone's work is suggestive-and in particular, the extent to which the economies of scale and the concomitant cannibalization of existing retail sales, lead to a net loss of employment in an area when the Walmonster comes a calling: "

And it appears that Chicago isn't much different then Ames, Iowa: "Our analyses of data on taxable sales in Wal-Mart’s home and adjacent zip codes are consistent with the hypothesis that Wal-Mart’s sales displace a significant amount of sales from its home zip code. There is some evidence that Wal-Mart’s sales also reduce sales in some adjacent zip codes, but this effect seems to be small and

Inevitably, this means store closings and bankruptcies; at a time when they are already at an all time high in NYC. Using Dunn and Bradstreet data, the Chicago academics found this dismal picture: "Using the D&B data, we find additional evidence that proximity to Wal-Mart may have increased the probability that a businesses closed during the first year of Wal-Mart’s operation. This evidence is consistent with and, in fact, stronger than the results from our own survey. We also find some evidence that being in an SIC code that directly competes with Wal-Mart increased the probability that area businesses failed."

As the study concludes-as we have pointed out in other big box site fights-oasis in one area, desert everywhere else: "Thus far, our study of Chicago’s West Side Wal-Mart has provided preliminary evidence that, in an urban setting, proximity to Wal-Mart is associated with a higher probability of going out of business for local retail establishments."

What does this do the job creation? The employment factor is directly related to the economies of scale that Wal-Mart utilizes-a key source of its profitability. But there isn't enough data for any determination on this issue from the Chicago store: "We have not yet fully explored Wal-Mart’s impact on local employment. Is the Wal-Mart adding to the overall number of jobs in the area, simply replacing other forms of local employment, or actually contributing to an overall decline in the number of jobs? Neumark, Zhang, and Ciccarella (2007) found that every Wal-Mart worker replaces at least 1.4 non-Wal-Mart workers."

The results of the Chicago Wal-Mart study provides us with a cautionary tale. For all those who promote the Walmonster in the name of economic development, these results indicate that the retail giant-unlike almost any other retailer-generates the kind of collateral damages that yield a net loss for the host community. And this analysis doesn't take into consideration what Stacy Mitchell calls, "the big box swindle;" the fact that these box stores like Wal-Mart generate much fewer local dollars than do the local competitors that they so often replace.

But even if you are a skeptic about the nature of this net loss, the fact remains that a box store like Wal-Mart is unique-and its impact should be studied before it is allowed to enter into any market area.Which brings us the potential Gateway Wal-Mart in East New York.

The fact that an environmental review was conducted and the application for the mall's expansion was approved, does not negate that any analysis that was done, sans Wal-Mart, is fatally flawed-and offers little insight, on both a socio-economic as well as an environmental level, as to the impacts that the mall's expansion will have on the local community and neighboring ones. Before any final determination of whether the Walmonster is to be allowed into East New York, a full and comprehensive study should be a minimal precondition.