Saturday, October 31, 2009

Walmart's Shady Economics

One of Walmart's current commercials boldly states that it saves the average American household $3,100, regardless of where they shop. If they had just said that they saved from a price comparison basis, I wouldn't have paid attention, but the "anywhere" part had my brain perked up.

As an economics practicioner, I'm no dummy when it comes to the vagaries of methodology. Sorry, in English: there are lies, damned lies, and statistics. I know better than many that you can make numbers say almost anything you want them to say; it's the analyst's responsibility to both balance the influence their own prejudices are placing on the analysis AND to clearly state the way they're going about the analysis with all of the caveats and cautions (that would be that "methodology" word).

So, let me state my caveats up front. I hate Walmart. I think it's evil and the epitome of a corporation growing at any cost. I understand why people shop there, and I feel fortunate that I can choose not to.  I would seriously rather spend twice as much on paper towels than give them a dime of my money. Some people don't have this luxury.

The claims Walmart makes in its commercial come from this document (Download 2008_Global_Insight_Price_Impa) from their web site. The report looks at how the consumer price index changed in response to there being a Walmart in the metro area. Without getting too much into this, because I don't think most of my readers care for reading my analysis of this, and because my whole point of this is not the structure of the study so much as the point that's being made by it. I think this quotation sums it up nicely:

"Wal-Mart is likely to have had a significant impact on price inflation across the MSAs largely for three main reasons. First, its sophisticated logistics and distribution innovations have increased total factor productivity, lowering its overall cost structure and allowing Wal-Mart to provide its goods at lower prices. Second, Wal-Mart's integrated purchasing system and its sheer size has led its suppliers to offer significant volume discounts, which Wal-Mart in turn has passed along to its consumers. And third, its lower prices have pressured its competitors to adopt more efficient processes and to lower their prices."

Number one goes without saying. Walmart's supply chain is one of its greatest strengths.  

Let me translate number two for you: Walmart has its suppliers by the balls. Selling to Walmart is much like selling your soul to the devil. You become beholden to them. It's obvious why someone would want their stuff sold at Walmart. Uh, about sales! But, what is seldom thought about is that once Walmart gets your product on their shelves, they're going to push you to reduce prices. A lot. And, by this point, so much of your bottom line is dependent upon the quantitiy of sales you get at Walmart, that you have no choice but to continue and do what they say. This is not just the little guys. This is Proctor and Gamble, and other big companies.

Okay, on to number three: this is where the shit hits the fan. What is not covered in this document is the spinoff effect, of how a Walmart drives other companies out of business because of their inability to compete. This is the key data not factored into this "saving households" concept. It doesn't take into account the impact of local businesses going belly up and the spinoff effect on the economy. In short, small, local businesses' typically keep a greater percentage of their expenditures around the same area by buying from other local businesses. 

I just felt the need to point this out because essentially, Walmart is bragging out their ability to bully the rest of the business world. That is what "saving the average household $3,100" means. It's just such a joke and it makes me angry because obviously, not everyone seeing that ad knows economics.  

This $3,100 number leaves so much else out: such as how much induced spending occurs by Walmart shoppers (i.e. someone sees something there that they wouldn't have elsewhere and because the price is so good, decides to buy it...and spends more than originally intended. We've all been there!). Anyway, the point is that you can't trust advertising. And, numbers can lie. But you all knew that!


  1. You are completely on target!
    Most major food and consumer goods companies get ~20% of their net revenues from WalMart.

  2. "I know better than many that you can make numbers say almost anything you want them to say; it's the analyst's responsibility to both balance the influence their own prejudices are placing on the analysis AND to clearly state the way they're going about the analysis with all of the caveats and cautions."
    Beautifully put.
    I have mixed feelings about WalMart--don't shop there in the good times but am there quite often in the bad (like now). I don't have a problem with the PeopleofWalmart website even though I usually cringe when I hear people sneer at WalMart-goers. Healthy criticism of WalMart is deserved but has to be sensitively worded so it doesn't sound too patrician; you've done a good job of this.
    One day I might get so inspired (or so bored) to read the Sam Walton story, or the history of WalMart, because we all have to acknowledge that it started as a mom-and-pop concept and ascended to defeat its neighboring competition in NW Arkansas, only to become the biggest retailer in the world. Driving other companies out of business is almost synonymous with successful business growth, and of course it also requires a lack of consumer loyalty to those dying competitors who might be more appealing but their prices are just a bit higher. My suspicion is WalMart's model has always involved ruthlessness to suppliers, shrewdly buried in "what they're doing to help out ordinary customers" (just as they are with these most recent numbers), and it has continued to be effective. American and global consumers respond to low prices at a greater degree than to good corporate citizenship, an appealing or humane workplace, and loyalty to brands manufactured in their home country. Until that mentality changes, or WalMart's practices become so unpopular that legislation inhibits them, I imagine WalMart will continue to be a staple of any community in America over 10,000 people.


Since you have great taste in blogs, I don't think I have to tell you to be nice to each other...and don't spam me. Thanks!