Does Wal-Mart Really Hurt Small Business?

Last week Business Week online posted an article with this title.  The article cites research done by Russell S. Sobel and Andrea M. Dean of the University of West Virginia.  Their conclusion? 

“Contrary to popular belief, our results suggest that the process of creative destruction unleashed by Wal-Mart has had no statistically significant long-run impact on the overall size and profitability of the small business sector in the United States.”

Always willing to take one for the team, your intrepid blogger has read the twenty-two page study so you don’t have to.  However, if you care to, you can find it here

To make a long story short, Sobel and Dean suggest that we must look at the big picture before we decide whether Wal-Mart has had a negative impact.  They fault earlier studies that looked at the data on a county-by-county basis.  This, they say, doesn’t give us an overall perspective of the issue.  In other words, if a hot dog stand opens up in Seattle, that cancels out the loss of a 100-year-old independent hardware store in a small town in Georgia.  One business opened, one business closed = no impact on small business.  Tell that to the third-generation owners of the hardware store.

They also point out that other businesses often take over the locations of the businesses that have closed with the arrival of the “world’s largest retailer.”  Their example is an art gallery that moves into that hardware store’s formal diggs.  That’s supposed to be an equal swap. 

Here’s where I believe their argument breaks down.  For the sake of round numbers, let’s say a small grocery store had been employing five people, including the owner.  Let’s say that they generated $100,000 in pre-tax profit on $1,000,000 of sales their last year in business, which included $200,000 of locally grown produce, locally produced bakery goods, and locally grown meat.

When Wal-Mart comes to town the grocery store goes out of business and is replaced by Sobel and Dean’s art gallery.  The art gallery owner is the only employee and he generates $100,000 in pre-tax profit by selling paintings that he painted himself.  He doesn’t pay himself a salary, so the $100,000 is his total income from the business. 

What’s the difference?  The difference is $900,000 in local economic activity, four jobs, and $200,000 not spent with local farmers and bakers.  The art gallery does minimal advertising where the grocery store was in the paper every week.   Because of the exodus from downtown, the art gallery pays only 60% of the rent that the hardware store paid and one out of every four store fronts on main street is empty meaning rents will probably go down even more.

While the grocer had dozens of regular customers who would come downtown each week to shop, often visiting the other stores in the area and eating lunch, the art gallery has a few high-end regular customers, but they may only come into the gallery two or three times a year.  According to the study, the two businesses are equal. 

Of course people don’t stop eating.  Those grocery dollars are still being spent and jobs are being created.  But a self-service grocery “super center” doesn’t create the same number of jobs relative to their sales volume. And, at the end of the day, the receipts are forwarded to Bentonville, AR, not to the local bank account of a local owner.

Academics may be able to generate charts and graphs to prove that local economies do just fine when all the business goes to out-of-town corporations, but real people in real towns know better.

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One Response

  1. You got it, Michael! Great post. Thanks.

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