What Is the Walmart Effect?
The Walmart Effect is a term used to refer to the economic impact felt by local businesses when a large company like Walmart (WMT) opens a location in the area. The Walmart Effect usually manifests itself by forcing smaller retail firms out of business and reducing wages for competitors' employees. Many local businesses oppose the introduction of Walmart stores into their territories for these reasons.
Key Takeaways
- The Walmart Effect is the effect that Walmart has been known to have on the communities in which it builds locations.
- The presence of a Walmart store can hurt the business of smaller companies and lower wages for local workers.
- Much of the Walmart Effect can be attributed to Walmart’s immense buying power.
- The Walmart Effect can also affect suppliers, who must drive their production costs down in order to afford to sell to Walmart.
- Although the term was used in the 90s, “Walmart Effect” became ubiquitous with the release of a Charles Fishman book by the same name.
How the Walmart Effect Works
The Walmart Effect also has its positive benefits; it can curb inflation and help to keep employee productivity at an optimum level. The chain of stores can also save consumers billions of dollars but may also reduce wages and competition in an area.
The Walmart Effect has been shown to not only affect competing companies and suppliers but consumers as well.
Advantages and Disadvantages of the Walmart Effect
Walmart's insistence on procuring products at lower prices from suppliers means that suppliers must find ways to make their products for less money, or else they could be forced to take losses if they choose to sell through Walmart.
The exposure of selling merchandise through Walmart may increase consumers’ awareness of a product; however, the cost of delivering that product to market may be pushed back upon the supplier. This can compel them to seek out lower-cost alternatives to manufacture their product, which could lead to the use of overseas operations or less expensive materials in the production of their goods.
Requirements for the Walmart
The Walmart Effect is driven by the scale and scope of Walmart’s buying power. The company has over 4,700 stores in the U.S., including almost 600 Sam’s Club stores. It’s the largest employer in the U.S. As a retailer of this size, it can dictate the price it pays to wholesalers at a magnitude many other companies cannot.
As a result, Walmart has the capacity to sell its merchandise at lower prices, compared with other businesses in the markets in which it operates. This can have an effect that goes beyond the retail market and into manufacturing and production. In addition to its buying power, Walmart has historically controlled its compensation to employees in such a way that rival companies might feel pressured to reduce salaries or cut benefits to their workers in response.
Once a Walmart location opens, the lower prices, concentration, and selection of merchandise in its stores tend to draw consumers away from local retailers. With less foot traffic and declining sales, local retailers see their profits fall, forcing them to make cost-cutting decisions. Such strategies, however, may not be enough to keep such businesses open as Walmart continues to operate profitably while local retailers' losses mount. In time, Walmart might choose to relocate its store to another location, but the impact of its initial arrival may continue to last well afterward.
The term Walmart Effect was first used in the 1990s, but Charles Fishman wrote a book entitled “The Wal-Mart Effect” in 2006 which details how economies are affected by Walmart. Fishman goes beyond the advantages and disadvantages for local businesses but also includes how Walmart can positively and negatively impact consumers.
FAQs
The presence of a Walmart store can hurt the business of smaller companies and lower wages for local workers. Much of the Walmart Effect can be attributed to Walmart's immense buying power. The Walmart Effect can also affect suppliers, who must drive their production costs down in order to afford to sell to Walmart.
What are the positive effects of Walmart? ›
Walmart's positive effects on local economies
The store's low prices attract consumers from nearby communities, and when consumers are in the area, they're more likely to spend money at surrounding businesses. Companies flocking to a Walmart mall may draw business from people who might not otherwise be in that area.
Is Walmart a positive or negative for our communities? ›
In sum, fedgazette findings suggest that Wal-Mart has a slightly positive effect on counties where the retailer decides to set up shop. But the effects are small; one could call the results mostly a wash.
What negative effects does Walmart have on communities' property values? ›
Their findings suggest that a new Wal-Mart store increases housing prices for the closest homes by two to three percent, and that the effect dissipates with distance.
What are some weaknesses of Walmart? ›
Weaknesses
- Dependence on Low Prices: While Walmart's low-price strategy has successfully attracted customers, it also means the company has thin profit margins. ...
- Limited International Growth: Despite its global presence, Walmart has had limited success in some international markets.
Waste: Walmart generates a significant amount of waste throughout its supply chain, from unsold merchandise to packaging materials. The company has made efforts to reduce waste, such as by encouraging suppliers to use more sustainable packaging and by implementing recycling programs in its stores.
How is Walmart effective? ›
Walmart's success can be attributed to having their own supply chain to streamline fulfillment and cut down on costs. It also provides them with more control over their logistics network. In this article, we take a closer look at the Walmart supply chain and why it continues to be so successful decades later.
What is the Walmart effect research? ›
The employment results indicate that a Wal-Mart store opening reduces county-level retail employment by about 150 workers, implying that each Wal-Mart worker replaces approximately 1.4 retail workers. This represents a 2.7 percent reduction in average retail employment.
Does Walmart have good benefits? ›
Popular Walmart benefits include 100% paid tuition and books for college, paid parental leave, and employee discounts. Most applicants who land interviews apply for the jobs online, and 63% report a positive interview experience.
What are the negative sides of Walmart? ›
Opponents cite concerns such as traffic congestion, environmental problems, public safety, absentee landlordism, bad public relations, low wages and benefits, and predatory pricing.
We aim to create value for communities in many ways including through local grant programs, providing access to safer, healthier food and products, disaster preparedness and relief and supporting veterans and military families.
Who has benefited from Walmart? ›
- Low income families have benefited from Walmart because they are able to just go to one.
- place and find the cheapest food and clothing all at the same time. ...
- factories have not benefited because having a Walmart in the area will give them less business.
- and high profits for shareholders?
More specifically, we employ a difference-in-differences analysis that compares housing prices before and after a Walmart opens for areas very close to a newly built Walmart, to areas slightly farther away. The results from this analysis suggest that a new Walmart store increases nearby housing prices.
What risks does Walmart have? ›
- Demand – risks related to the demand of the company's goods and services including seasonality, reliance on key customers.
- Competition – risks related to the company's competition including substitutes.
- Sales & Marketing – risks related to sales, marketing, and distribution channels, pricing, and market penetration.
While Wal-Mart Stores as a corporate legal name is rarely used in public-facing materials or in stores themselves, CEO Doug McMillon said in a statement that he felt the name change was needed to be “consistent with the idea that you can shop us however you like as a customer.”
What are the major issues Walmart faces? ›
Here are four major Walmart challenges to watch in 2023.
- Trying to 'enter the new year clean' without much excess inventory. ...
- Continuing e-commerce savings growth while mitigating costs. ...
- Expanding clinic presence is a 'must' to create major healthcare gains. ...
- Rolling out new customer banking services.
The individual departments may create conflict over products or services priorities (e.g product or service scheduling), and each department could also make decisions that only benefit themselves rather than the company Dividing employees into different departments and levels can lead to a lack of communication.
What risks does Walmart face? ›
The risks are divided into internal and external risks where they are identified as legal, political, business environment, financial, strategic, operational and integrity risks.
What is a competitive disadvantage of Walmart? ›
Refusal to invest in research and development leads to a lack of innovation, which can put Walmart at a disadvantage compared to its competitors. Finally, Walmart's dependence on low prices can also impact its relationships with suppliers.
