Wal-Mart has marked effect on retail prices

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By: Wise Marketer Staff |

Posted on November 8, 2005

The expansion of Wal-Mart coincides with significant reductions in food-at-home prices and consumer goods prices from 1985 to 2004, according to a new study by Global Insight, analysing the national and regional impact of the retail giant on the US economy.

The study, entitled 'The Economic Impact of Wal-Mart', was sponsored by Wal-Mart, and the retailer provided the data on sales, employment, and wages at Wal-Mart stores and supercentres going back to the mid-1980s. Global Insight started by reviewing earlier studies that indicated that the efficiencies that Wal-Mart has fostered in the retail sector have led to lower prices for the US consumer.

The conclusion that a single retailer could significantly influence national market prices in this way was supported by statistical analysis which found that the expansion of Wal-Mart over the 1985 to 2004 period correlates well with a cumulative decline of 9.1% in food-at-home prices, a 4.2% decline in commodities (consumer 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).

National effects
The main driver of this impact was a 0.75% improvement in the overall efficiency of the economy. Increased capital intensity and lower import prices were secondary drivers. The 3.1% decline in the price level was partially offset by a 2.2% decline in nominal wages, so that the net effect was to increase real disposable income by 0.9% by 2004.

Consumer savings for Wal-Mart shoppers were generated through Wal-Mart's higher levels of capital investment in distribution and inventory control, lower import prices, and greater efficiency of the overall economy through the application of improved technology and processes. With the estimated 3.1% CPI impact, total cumulative savings to consumers amounted to some US$263 billion by 2004 - or US$895 per person.

According to the study, Wal-Mart had a positive impact on employment nationwide over the period examined, generating 210,000 jobs by 2004 (a 0.15% increase relative to the number of jobs that would have existed without Wal-Mart). According to the study, although consumers actually earned less in actual dollars, their income bought them more because of real disposable income gains.

Expansion update
Wal-Mart Stores Inc. has also recently announced plans to continue unit growth for the fiscal year beginning 1st February 2006. Globally, the company expects to add over 60 million square feet of gross retail space, which is more than an 8% increase from the retailer's estimated current fiscal year-end square footage. The company expects open some 555 new units.

The company also plans to construct two new regional general merchandise distribution centres and three new food distribution centres during the year. Combined, the five new distribution centers are expected to add more than 5 million square feet of distribution space.

Regional effects
To supplement the national analysis, the study included an examination of the Dallas-Fort Worth area (where Wal-Mart has a significant presence). Consumer cost savings in the area are estimated at 4.0% by 2004. The impact of the cost savings in conjunction with other direct, indirect and induced impacts has led to 6,300 more jobs and a 2.6% increase in real disposable income in the area, the study concluded.

The study also included an analysis of the effects on the structure of county-level retail employment when Wal-Mart enters or expands in any given market. The researchers found that, with the opening of a typical 150-350 person Wal-Mart store, retail employment increases by an average of 137 jobs in the near-term and levels off at a 97-job increase in the long-term. But it also leads to net job losses in food stores, and apparel and accessory stores, and net job gains in building materials and garden supply stores, and general merchandise stores. In other words, while Wal-Mart does appear to displace other retail establishments in a county, it also serves to stimulate the overall development of the retail sector.

The study
The study was conducted using the data provided by Wal-Mart, as well as other publicly available data, and Global Insight's proprietary models of the US national and regional economies. The scope of the study did not include social and qualitative urban planning issues, the impact on federal and state government assistance funds and programmes, the impact on specific segments of the population (such as lower income vs. higher income consumers), or unionised vs. non-unionised workers.

The Global Insight study and other selected research papers have been made available for download from the Global Insight web site - click here.

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