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March 2005 · Volume 87 · Number 2

Cover Story

how do you deal with the entry of a new wal-mart supercenter into your town?

by kenneth stone

Should you or should you not support the location of a Wal-Mart store in or near your community? This is a question that has been asked and answered by some 3,000 communities in the United States since Sam Walton opened the first Wal-Mart in 1962. It is a question that has caused strong public reaction, debate, demonstrations, boycotts, and lawsuits. I use Wal-Mart as the store in this article but any big-box store could be named.

Issues of concern to local governments such as job creation or loss, land use policy, and environmental and economic impact have raised many questions. Wal-Mart's customers and local government residents, however, have answered these controversial questions by opening their pursestrings and making Wal-Mart the number-one retailer in the world, with annual sales in 2005 predicted to be nearly $300 billion.

So why is there so much controversy about Wal-Mart? This question could be answered in several ways. First, nearly everyone likes a winner. Wal-Mart's financial success has definitely shown the retailer to be a winner. Sometimes, however, winners can be bullies. And some people view Wal-Mart's power as a bit, or a lot, too much.

This article will outline some of the strategies that have made Wal-Mart a winner and comment on the almost certain economic and social outcomes of the addition of a Wal-Mart to the economic mix in a community that has not had such a store previously.

When Wal-Mart opens a store in a new location, both positive and negative changes occur in this community, as well as in surrounding jurisdictions. Furthermore, the same changes that appear to be positive in some ways for some groups or businesses may be negative for others.

What Is Wal-Mart's Winning Strategy?

Anyone who has missed the point of the bouncing yellow smiley face in Wal-Mart's TV advertising, promising "Everyday low prices-Always," must be living on another planet. Wal-Mart has aimed to create an unfailing image of low prices for consumers every day, and while this is not strictly true for all items on all days, it comes close enough so that few customers dispute this carefully constructed image.

By continually emphasizing the concept of everyday low prices and never featuring "sales," Wal-Mart has reduced its advertising costs. Most Wal-Mart stores send out 13 circulars per year, compared with 53 or more for their competitors. Wal-Mart's main advertising medium is television. By advertising on one TV station, the company can cover the trade areas of many of its stores.

Consequently, ad revenues for many local newspapers and radio stations are reduced, as Wal-Mart causes some competing businesses to fail, with a subsequent loss of advertising for local media. Wal-Mart's expenditures on advertising have been around 0.4 percent of sales in the past, compared with 2 to 4 percent of sales for most local businesses.

How does the number-one retailer maintain an image of low prices? First, by actually making sure its prices are lower than its competitors, at least on key items. These items are called "price-sensitive" items in the industry, and it is commonly believed that the average consumer knows the "going price" of fewer than 100 items. These tend to be commodities that are purchased frequently.

A mid-size Wal-Mart supercenter may offer for sale 100,000 separate items, or stock-keeping units (skus). Wal-Mart and other major retailers believe that the general public knows the going price of only 1 to 2 percent of these items. Therefore, each Wal-Mart store shops for the prices of only about 1,500 items in their competitors' stores. If it is ever found that a competitor has a lower price on one of these items than Wal-Mart, the store manager will immediately lower his or her price to be the lowest in the area.

Local officials face somewhat of a Hobson's choice in deciding whether to allow new big-box stores to locate in their communities. On the one hand, most of us in the developed world profess to believe in the capitalist economic system, which holds that few roadblocks should be thrown in the way of new businesses. On the other hand, most of us value the current business and cultural heritage in our communities and do not desire to see this culture harmed by outside forces like big-box stores.

Price-sensitive merchandise is displayed in prominent places such as the kiosk at the entrance to the store, as well as on end caps, in dump bins, and in gondolas down the main aisles. Consequently, when Wal-Mart customers see the items of which they know the price, the ones always priced lower in Wal-Mart, they start assuming that everything else is also priced lower than at competing stores. This assumption is simply not true.

My barber has offered me a simple example. He sells a nonbreakable pocket comb for 25 cents that he procures from his vendor for eight cents. Wal-Mart sells a lower-quality comb for 98 cents, and one would assume that Wal-Mart pays less for it than the barber does. People keep buying Wal-Mart combs, however, because the average person does not know the going price of a pocket comb, and it is automatically assumed that the Wal-Mart price is the lowest.

Wal-Mart also negotiates the lowest possible prices from its vendors. Vendors often respond by having their merchandise manufactured in countries where wages are lower, especially if the items are labor-intensive to make. While Wal-Mart established its "Good Old Boy, Supporting the USA" reputation by advertising that much of its merchandise was American-made, it has steadily squeezed vendors on price so hard that much of its merchandise is now imported, or outsourced, from developing countries with low wage scales.

Wal-Mart's superior distribution system has also helped the company to sell at lower prices. Its cost of getting merchandise from the producer to the retail floor is reputedly less than that of any of its competitors. This was accomplished by the company's early adoption of a scanner checkout tied into a satellite communications system.

As each item is scanned at the checkout counter, the relevant data are nearly instantaneously sent by satellite to Wal-Mart's home office, to its distribution centers, and perhaps most important, to its vendors. Therefore, everyone in the supply chain knows the status of inventory in every store at any given moment, which allows a substantial portion of resupply to be accomplished with little or no human intervention.

What Are the Impacts of a Wal-Mart to a Community?

My studies of Wal-Mart supercenters in Iowa and Mississippi have shown that total local sales usually increase after the opening of a supercenter. This is because a huge store like this one will keep a lot of residents shopping at home, rather than outshopping to other localities, and it will also attract more residents from outlying areas.

This effect can be observed in most communities of up to 50,000 or so in population. In larger places, the impact of one store is hard to measure; however, larger communities usually get more than one supercenter.

I have two intuitive rules of thumb I use in determining which merchants get hurt and which ones get helped. Rule of thumb No. 1 is that merchants in a host town that are selling something different from the supercenter often experience an increase in sales, as they benefit from the spillover of Wal-Mart's high-traffic draw. Examples of these businesses are furniture stores, restaurants, various service businesses, upscale stores, and so forth.

Rule of thumb No. 2 is not so pleasant for existing merchants. It is that anyone selling the same merchandise as a supercenter is in jeopardy and will probably lose sales unless the store is repositioned to capitalize on its own strengths and the supercenter's weaknesses. Local grocery stores are usually the hardest hit, with sales declines of some independent stores reaching 25 percent or more per year.

An earlier study of Wal-Mart supercenters in Texas showed that drugstores in the host town suffered a substantial loss of sales after the opening of a supercenter. An ongoing study in Iowa reveals that there also are sales losses to several other types of stores in the host town, including those selling apparel, jewelry, sporting goods, tire and lube services, eyewear, photo services, and any other, similar merchandise to Wal-Mart's.

In summary, a new supercenter makes the host place more of a regional trade center. In larger communities, it sometimes forms a critical mass that attracts such other chain stores as home improvement and office supply retailers and restaurants. Conversely, a new supercenter usually captures enough sales from competing firms that at least some businesses in the host city or county and surrounding areas will fail.

My studies of Wal-Mart supercenters in Iowa and Mississippi have shown that total local sales usually increase after the opening of a supercenter. This is because a huge store like this one will keep a lot of residents shopping at home, rather than outshopping to other localities, and it will also attract more residents from outlying areas.

What Is the Basic Dilemma for Local Officials?

Local officials face somewhat of a Hobson's choice in deciding whether to allow new big-box stores to locate in their communities. On the one hand, most of us in the developed world profess to believe in the capitalist economic system, which holds that few roadblocks should be thrown in the way of new businesses.

On the other hand, most of us value the current business and cultural heritage in our communities and do not desire to see this culture harmed by outside forces like big-box stores. The dilemma is further complicated by the desire for more revenue for the jurisdiction, which tilts many local officials toward favoring the entry of new big-box stores.

Should Local Officials Offer Financial Incentives?

Some local officials are so desperate for new tax revenues that they recruit big-box stores and offer substantial financial incentives to attract them. Usually, the financial incentives take the form of tax abatements, tax-increment financing, extension of infrastructure to the site and other preferments, but occasionally outright cash payments are made.

In my opinion, these practices are not fair in most cases. More than one local business person has characterized these procedures as "taking taxpayers' money to give to a big company (that really doesn't need it) that will use it to help put local firms out of business." I believe that the only time when subsidies to big retailers are legitimate is when they will entice a developer to build in a blighted area or another district desperately needing new retail facilities.

The key question then is: Is there a net increase in tax revenues to the local government after the big-box store opens? The answer varies according to location, the incentives offered, and the competition. Property taxes collected from the new store are often partially offset by reduced collections of property taxes from competing merchants that go out of business.

The initial surge in local sales taxes also may decline after some of the local competing firms go out of business. My studies of regular Wal-Mart stores in Iowa showed that, on average, total town sales rose for the first few years after a Wal-Mart store opened, but after 10 years total sales fell below the pre-Wal-Mart opening level. This occurs primarily because of the saturation effect of Wal-Mart's placing its own stores ever closer together and thus "robbing Peter to pay Paul."

Is Retailing a Zero-Sum Game?

Many economists believe that in the majority of the United States-with the exception of several rapidly growing metropolitan areas-retailing is essentially a zero-sum game. In other words, the population is at best stable, and when a big-box store comes into a community, its sales are captured from existing businesses.

For example, if a new Wal-Mart supercenter opens in a town with no population growth and generates sales of $70 million per year, the $70 million doesn't come out of thin air; it comes out of the cash registers of competing businesses in the host town and surrounding areas.

Some of the host-town businesses, like grocery stores, may suffer huge losses and be forced to close, but even businesses suffering smaller losses can become nonviable as a result. Perhaps, the most tragic impact of a supercenter is upon businesses in outlying, smaller towns. The owners of these stores have absolutely no say in the decision to allow the supercenter to build but often are severely affected.

What to Do with Abandoned Stores?

When a supercenter is built in a jurisdiction that already has a regular Wal-Mart, the old Wal-Mart store is often abandoned. Wal-Mart leases the great majority of its stores and typically still owes lease payments on them when they are abandoned. In recent years, approximately 400 old Wal-Mart stores sat vacant at any one time.

These vacant stores present a big problem for the host community. Sometimes, although they occupy prime property, there is little demand for such a large store there. A few old Wal-Marts have been converted into antique malls or Hobby Lobbys or warehouses, and a few have even been converted into churches. The problem is that most of these structures-the ones not converted-become eyesores, as they are minimally maintained after abandonment.

There is no easy solution to the abandoned-store problem. One possible solution, however, is for the host locality to negotiate an agreement with Wal-Mart that, after a reasonable time (three years, for example), the building must be torn down and the property restored to a developable site, all at the expense of Wal-Mart or the landlord.

So why is there so much controversy about Wal-Mart? This question could be answered in several ways. First, nearly everyone likes a winner. Wal-Mart's financial success has definitely shown the retailer to be a winner. Sometimes, however, winners can be bullies. And some people view Wal-Mart's power as a bit, or a lot, too much.

What Can Local Officials Do to Arrive at the Best Decision?

One of the worst things that local officials can do is give the public the impression that they are operating in secrecy and without community input. Wal-Mart usually "plays its cards close to the chest" when it is laying its groundwork for building a new store in a community. As soon as local officials become aware of Wal-Mart's intentions, the public should be advised.

I offer these tips to arrive at an equitable decision. Local officials should:

1. Educate themselves about the economic and social impacts of a new Wal-Mart store. Several studies are available online at www.seta.iastate.edu/library.aspx?lmode=1<opic=6.

2. Hold hearings to collect public input.

3. Have independent experts analyze Wal-Mart's marketing plan.

4. Be assertive with Wal-Mart about meeting the locality's sign ordinances and harmonizing with building styles.

5. Offer financial incentives only in cases of developing blighted areas.

6. Make sure that there are minimal environmental impacts.

7. Negotiate with Wal-Mart on the disposition of an old Wal-Mart store when it is replaced by a supercenter.

8. Provide educational programs to help existing merchants to compete after a building permit has been given to Wal-Mart.

Kenneth Stone is a professor emeritus of economics at Iowa State University, Ames, Iowa (kstone@iastate.edu).





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