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The Economic Impact of Walmart - Reurbanist

The Economic Impact of Walmart

Written by  //  September 16, 2012  //  Posts  //  4 Comments

A recent article in Atlantic Cities titled “Radiating Death: How Walmart Displaces Nearby Small Businesses”  discusses an interesting debate on the economic impacts of Walmart’s opening in Chicago’s Austin neighbourhood. The conversation revolves mostly around the two factors; job growth and sales tax revenues. I think this is a very important debate to be having and I’m not going to wade in with a full study, but I will throw in my two cents to say that I would have approached the analysis differently.

How many jobs?
Retailers buy merchandise from suppliers / producers and then attempt to deliver them to the end customer as efficiently as possible. Every time a worker is involved in this transfer from origin to customer, it adds cost to the retailer’s operating budget. It also creates jobs. Theoretically, the less jobs you have to create, the more profitable you will be as a retailer. The easiest way to conceptualize this is by dividing the revenue of a retailer by the number of employees. According to the National Retail Federation, the average general merchandise retailer produces $205,000 in revenue per employee, with most other retailer types varying between $150,000 and $250,000. The lower the number, the more jobs created per dollar of spending. Walmart falls the middle of that range with $203,000 in sales per employee. A far more frightening prospect for cities, in my opinion, is the impact of online retail. Amazon for example generates $696,000 in revenue per employee! Overall, I don’t see Walmart being a net creator or sub-tractor of jobs on a macro level. I should also add that some economists would argue that a more efficient transfer of retail goods (i.e. less retail employees) would actually be a positive from a capitalist macro economics perspective over the long term.

Where are the jobs?
I don’t believe Walmart has a net macro impact on jobs, but I do believe it has one hell of an impact on the transfer of jobs, both geographically and between businesses. The average store does $75 million in sales, which is very roughly equivalent to every single resident in a town of 8,500 spending every single dollar there. Even in a big city, $75 million is a pretty sizable vortex of retail spending that is certainly going to shift consumer dynamics in an established community. That alone doesn’t make Walmart inherently positive or negative, but it is something to consider with care.

Transfer of jobs to Walmart: Retail spending is a finite market that grows at an incremental rate. Whether it be a 1,000 sq. ft. independent store, or a 200,000 sq. ft. Walmart SuperCentre, increasing retail floorspace supply faster than the growth in spending will inevitably cannibalize (steal) sales from the competition. Walmart just happens to come in clunky chunks of floorspace that are large enough to cause a visible transfer of jobs.

Spending Inflow: Walmart draws from a sizable catchment area, sometimes as much as a 30 minute drive in certain communities. For an individual community, particularly those in the US that receive a percentage of sales tax revenue, a local Walmart may in fact have a positive financial impact. However, it will have a negative financial impact for the community on the other side of the municipal boundary that wasn’t able to attract Walmart.

Profit Outflow: Unlike locally owned retailers, Walmart has financial obligations to meet outside of its communities, including management expenses and dividend payments to shareholders. I previously said on a macro level Walmart appears neutral in terms of job growth, but in some cases these jobs may be occurring outside of the local community.

Neighbourhood Changes: Walmart’s economic scale is sufficient enough to seriously disrupt the retail market status quo in a community, even in larger cities. The authors of the original study showed that a higher than average percentage of businesses near to the new Walmart in Chicago closed after its opening. I am not at all surprised by these results, but unfortunately we are lacking some key information on the number of businesses that opened during the same time period. Major neighbourhood change is to be expected by the entrance of a Walmart, including the clearing out of weaker retailers that compete directly.

What kind of jobs?
A major criticism of Walmart is that the types of jobs it creates are of poor quality and do not offer a liveable wage. This is not my area of expertise, but I would suggest one way to measure this would be to record not only job gains and losses, but also the relative income levels associated with these jobs. A net “wash” of jobs may in fact be a negative thing if those new jobs are of lower quality than the ones that are being lost.

Who is right?
I think both competing sides have respective valid points. In my opinion, Persky is totally correct in his assertion that economic development should not be a reason to pursue a Walmart. Except in rare circumstances, retail is not a driver of economic growth. I also have to agree with Walmart’s commissioned study that asserts not including new businesses in Persky’s analysis was an oversight. What Persky may have been measuring is simply a community in transition rather than one in decline. At the end of the day, we need to keep in mind this debate is oriented around 1 Walmart location out of a total store count of 8,700 and be wary of broadly generalizing results without further research.

Final thoughts… why are we always picking on Walmart?
Well I can answer this myself: Walmart is the world’s largest private sector employer and has decimated its fair share of small towns. Now that Walmart seems intent on entering the hearts of major cities, there is some urgency to have an informed conversation about potential impacts. At the same time, there are many other players to consider. In Canada, Shoppers Drug Mart has quietly wrecked havoc on many small retailers by introducing grocery products. What will the impact of Target and Nordstrom’s entrance be? What about ecommerce? The “bricks & mortar” retail industry is truly frightened about the impacts of online retail – although they valiantly claim not to be. Why aren’t we talking about the impacts of online retail on cities? Focusing the conversation on one individual and highly contentious retailer leads to polarized debates driven by emotion rather than reason, and misses a lot of serious issues that are currently flying under the radar.