Monday, July 21, 2008

Freedom and Consumer Greed Are The Keys to Wal-Mart's Success

There was some lively discussion on this recent CD post (featuring the chart above showing a positive relationship between Wal-Mart stores and small businesses) about Cato's Wal-Mart study. Cato's study showed that overall, there was no stasticially significant relationship between the number of Wal-Mart stores per 100,000 residents in a state and the number of small businesses per 100,000 residents. Some of the discussion focused on the statistics of the study and the graph above, the issues of outliers, linear vs. non-linear methods of estimation, etc.

Long-time CD reader Bob Wright offers the following insightful comment:

Statistics is a red herring. Freedom is the issue, not math. Wal-Mart should be free to conduct its business just as mom and pop proprietors are free to conduct their business.

One more thought. The anti-Wal-Mart crowd seem to be arguing that it is acceptable for a mom and pop business to charge high prices - but not the cable company and the oil company. Exactly how small does a business have to be in order to price gouge? I want to keep my business just under this limit. Is there a small business exception to windfall profits?

MP: As Bob points out, freedom is the real issue. Wal-Mart should be free to open stores, and free to compete with other retailers, both large and small. Consumers should be free to shop at retailers of their choice. Small businesses should be free to compete with big box retailers.

If consumers overwhelmingly prefer the low prices of Wal-Mart on the outskirts of small towns to the high prices of mom-and-pop stores downtown and the mom-and-pops go out of business, it's the consumers who ultimately make that decision, not Wal-Mart. Wal-Mart can't force anybody to shop at its stores, it can only open stores and offer consumers a low-priced alternative to the high-priced downtown merchants. "Greedy" consumers do the rest.


At 7/21/2008 9:07 AM, Blogger Unknown said...

In the conclusion of my first post to your original Wal-Mart statistic post I wrote:

"Statistics cannot be used as a weapon against common sense.

However, in some cases, large department stores bring more market efficience, it is true, due to local small cartels that fix prices."

Freedom is also part of common sense and a primitive instinct I should say. Although it is sad that many small stores close when discount chains show up, overal market efficiency improves because economies of scale are put to work.

Even dumping is ok AFAIAK if it works in favor of the consumer. Often, disount retailers may dump products at prices below cost when they open a new storein order to attract customers at the expense of small local stores.

This is fine as long as it works in favor of the consumer over the longer term. It should not be considered illegal if prices remain low over extended periods of time.

One issue become choice. Usually, discount chains will limit choice of brands to whatever gives them good margin.

Local store owners can take advantage of that and offer alternatives at higher cost. These niche type of stores make good profit. But some people insist on selling the same goods with a disount chain at a higher price and then complain about their presence. Silly attitude.

Cato geeks should refresh their statistics by the way, if they know any at all. Their study hardly makes a valid point about anything. Bob Wright is correct provided freedom is not used as an excuse for a conspiracy of any kind.

At 7/21/2008 9:21 AM, Blogger Matt S said...

This certainly makes some sense, and in many ways I can kind of agree. As a musician, I usually shop around to find the best prices for expensive equipment, usually going to ebay or to find cheap stuff. However, I try to buy at least something from local music shops, because musiciansfriend will never be able to help me with my glitchy guitar knob, try something out in-store, or let me post flyers advertising my need for a drummer.

But regarding consumer greed, I think something has happened to our society where we think the cheapest crappiest stuff is the best, and we have to get a lot of it. My fiscally conservative dad rags on me when he sees me buy a Jones Soda, because it's much more expensive than a big K cola. But I don't drink cola much, so I go for what's best, rather than a pallet of carbonated corn syrop.
In the case of my uncle, his selection is rather limited (you try opening a Whole Foods in a town of 100), but the big retailers are stealing many locals' business by importing cheap, crappy Nova Scotia beef, over the slightly pricier but qualitatively better PEI beef.

At any rate, I guess the niche markets will survive. It's just a combination of American traditions - the neighborhood grocer, the local indy record store, the neighborhood pharmacist who knows everyone - versus an increasingly modern world.

At 7/21/2008 10:06 AM, Anonymous Anonymous said...

The construction of shopping malls had the same negative effects on traditional commercial districts long before the media had invented the phrase "the Wallmart effect".

It is not just about Wallmart but more correctly big box retailers that are challenging shopping malls and commercial districts as customer shopping preferences again shift.

Internet shopping offers yet another option for small businesses giving home-based businesses a huge cost advantage over traditional retailing.

Another factor in the success of Wallmart was that they were the first retailer to analyze customer preferences through inventory barcodes tailoring their offerings to customer preferences. Despite this advantage, Wallmart has not been able to challenge Tesco in the UK which has a far more sophisticated system for understanding customer preferences.

The success or failure of a retail business seems to be a function of how well they understand and respond to the needs of the customer. Price is only one element that the customer considers.

At 7/21/2008 10:18 AM, Blogger Matt S said...

One other thing I just remembered, which a friend of mine at UofM brought up once. When you have large employers like Wal-Mart, they become a large employer in the community. If a large store like Wal-Mart closes, you set loose a significant number of employees into the workforce. When there is a system of a lot of small employers, the workforce losses of any one closing are more easily ameliorated. However, this requires an expansion of small retailers at a rate large enough to hire all the people who hypothetically worked at Wal-Mart in Hypothetical Town.

Learning more about economics - why I read this blog.

At any rate, breaking up large companies would be better in the research community, like here in Ann Arbor, so instead of a big company closing and firing a bunch of folks, one or two research groups might fold and their researchers start up a new lab or get absorbed into new and other startup labs.

At 7/21/2008 11:45 AM, Anonymous Anonymous said...

Matt S,

There is an alternative to being an employee, namely, opening your own business.

At 7/21/2008 11:45 AM, Anonymous Anonymous said...

Matt S,

There is an alternative to being an employee, namely, opening your own business.

At 7/21/2008 1:36 PM, Anonymous Anonymous said...

Consumer greed is great.

Don't assume that smaller stores will not match the big-box-store price if you ask. Also, don't assume that the marked price of a good is the only price that you can pay.

Even if the stores cannot match the price, they will often throw something extra in to sell you their product (such as extra time on a warrranty, free delivery . . .).

Don't be bashful. Ask. It's your money.

At 7/21/2008 2:42 PM, Blogger juandos said...

Good point walt g: "Even if the stores cannot match the price, they will often throw something extra in to sell you their product"...

This is even more important if the smaller store is closer to your domicle today...

If one has to spend $2 more in gasoline to save two or three dollars on the price of a product, isn't it worth shopping at the smaller place?

At 7/21/2008 4:35 PM, Anonymous Anonymous said...

Walt g,

Pricing at box stores is not consistently lower across the board. These retailers have lost leaders like computers, coffee, and orange juice but there are lots of other items that are priced well above the competition like vegetables, pre-prepared food, copier paper, bread, etc.

A recent example was fluorescent T5light bulbs at the local Home Depot box store which were $10.00 more than a specialty lighting store in downtown Toronto.

Most people just don't check the prices. Consumers in my area will go to the supermarket chains with higher prices rather than the independent grocer with excellent prices, and more modest, less fashionable premise.

At 7/21/2008 5:34 PM, Anonymous Anonymous said...


People do not necessarily shop for price alone. It is usually a varying mix of price, quality, and convenience. It is difficult to compete with a business that does all three well.

At 7/21/2008 10:00 PM, Anonymous Anonymous said...

Walt g,

Well put. Must concur with your assessment.

At 7/23/2008 7:18 PM, Anonymous Anonymous said...

Regardless of whether you believe in the deleterious effects of wal-mart coming to town, I don't understand the notion that we must preserve wal-mart's freedom to operate like any other business.

Businesses are sine qua non a creature of the state, duly licensed by the state to operate. The invention of the corporation, allowing the severance of personal from corporate liability, no doubt enhances commerce and is an essential ingredient of any modern economy. But it is not some sort of inherent right possessed by the legal fiction of the corporation, which is at its base of an amalgamation of individuals (investors, employees etc...).

I see nothing wrong with people banding together and using the government apparatus to prevent themselves from acting on their basest urges. Even the staunchest libertarians believe in individuals binding themselves in advance from acting on short-sighted individual self-interest in order to solve collective action problems. Voting for measures which preclude options in the marketplace is itself an act of volition.


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