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Wal-Mart as the American Business Model

Updated on July 1, 2012
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Wal-Mart is the largest public corporation and the largest private employer in the world. Its successful business strategy has transformed the retail industry. Since its founding in 1962, it has captured a huge share of the consumables market.[1] Its unprecedented growth and success has earned Wal-Mart praise in the business community and its big box retail approach has become a common business model. However, it has also been heavily scrutinized for its affects on local communities and individuals. The opening of a Wal-Mart in a community negatively impacts other businesses, especially small ones. Wal-Mart is also criticized for its effects on its employees and the implications for consumers. Not only does the company have economic consequences, but there are also negative social externalities associated with the company. Wal-Mart’s success as a business has both been a consequence of and contributor to the increasing wealth disparity in the United States. This paper seeks to evaluate the extent to which Wal-Mart should be used as an American business model considering its social and economic impacts.

Wal-Mart’s profound effects on other businesses warrant scrutiny and are cause for concern. Wal-Mart has challenged small businesses in metropolitan areas, many of which have been forced out of business. This trend of big box retailers forcing out small business is not new. Beginning in the 1950s, large retailers have captured the business of smaller “mom and pop” stores that cannot compete with the large economies of scale that are possible in large businesses.[2] These small businesses are forced to lower their prices in order to compete, and are often run out of business. What is remarkably about Wal-Mart’s growth is that it has not resulted from corporate mergers; its success can be attributed to capital investments such as building new stores.[3] Local governments frequently provide incentives for big box retailers like Wal-Mart to open within their cities in order to bring in more money without having to raise taxes. However, this generally costs the city social and civic capital as small businesses are forced to close.[4] The centralized control of Wal-Mart’s distribution and management, as well as its overseas outsourcing depresses the local economies in which its stores are located.[5]

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More specifically, Wal-Mart has increasingly influenced the grocery industry. Big box retailers such as Wal-Mart are capturing progressively larger market shares each year. Originally, Wal-Mart was traditional big box retailer, focusing on mass merchandise and sold very few groceries. In the late 1980s, Wal-Mart began transform many of its existing stores into Supercenters. These larger stores now included full grocery stores. Steady growth of these new stores has allowed Wal-Mart to become a leading grocery retailer nationwide.[6] As of 1999, Wal-Mart’s retail food sales rivaled that of Kroger, the nation’s largest grocery chain, with over $45 billion in sales.[7] Analysis has shown that Wal-Mart’s market share in groceries is largest in low income and smaller cities, especially in the South.[8] Typically after Wal-Mart enters an area, the market share of the top four grocery retailers drops and fringe firms exit the market.[9] However, after two years, the effects become less pronounced as the market stabilizes.[10] Wal-Mart’s influence is so widespread in the industry, that Gary Giblen, the managing director of Bank of America Securities, has said, “When Wal-Mart sneezes, the entire retail-food industry goes into conniptions.”[11]

Wal-Mart’s business model has provided some immediate benefits for American consumers, but at a price. Wal-Mart has been able to capitalize on the effects of globalization, including advances in information technology, improved transportation, and trade liberalization. Wal-Mart’s success is due largely to its efficient supply-chain management that builds on these advances. The arrival of products at stores is timed so that they spend as little time as possible in warehouses. This cuts costs enormously.[12] This system has been adapted by other companies and has drastically changed the common practice of product distribution.[13] The company is frequently criticized for its sale of imported products, but this also reduces costs.[14] Critics point to unsafe working conditions oversees that allow for these imported products to be sold cheaply. Also, sending dollars overseas weakens the American economy as it takes money out of the country. Also, Wal-Mart is able to purchase in bulk at discounted rates. These savings allow it to sell to consumers at very low prices. In addition to supply chain management, Wal-Mart also cites its success to convenient one-stop shopping. A customer can come to a Wal-Mart and get general merchandise as well as groceries.[15] These aspects have contributed to the company’s popularity and growth. Wal-Mart allows families to buy more goods at cheaper prices than they can at other retailers. This arguably has improved the standard of living, especially for families with tighter budgets. As income disparity grows in the United States, big box retailers such as Wal-Mart have been able to capture increasingly more business from the lower class.

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Wal-Mart’s employment and human resource practices have allowed it to be more efficient economically, but are cause for concern socially. Wal-Mart is frequently credited for creating new jobs when it opens a new store. However, its wage and compensation have come under scrutiny since most of its employees do not receive a living wage. This is especially problematic considering that Wal-Mart has surpassed General Motors as the largest employer in the United States. These employees, with their low wages, cannot maintain the same standard of living that Wal-Mart claims to enhance. The vice president of United Food and Commercial Workers union, William McDonough points out that "Henry Ford made sure he paid his workers enough so that they could afford to buy his cars. Wal-Mart is doing the polar opposite of Henry Ford. Wal-Mart brags about how its low prices help poor Americans, but its low wages are helping increase the number of Americans in poverty."[16] The company argues that retail has never paid as much as companies such as Ford and GM and that paying higher wages would force the company to raise prices, thus betraying its poor clientele. Employees know that they are underpaid, but hard economic times make it difficult to find good jobs. They are happy to have any sort of job, even if its pay is not enough.[17] It is so hard to make ends meet with these wages that many of its employees use anti-poverty transfers from Federal and state government. [18] Although an increase in the retail employment share slightly decreases TANF expenditures, it also increases Medicare expenditures. This increase is about $900 per worker which typical of Medicare expenditures for low-wage workers.[19] Many argue that Wal-Mart has a moral obligation to treat its employees better as it is the largest U.S. employer.[20] The local economies where Wal-Marts are constructed are usually depressed by the new store due to outsourcing and centralized management. Managerial, high-value jobs are not available to the community. Instead, the high-value jobs of small, local businesses are gone, and they are left with lower-value work at Wal-Mart. Low-wage positions such as these are more likely to be held by those less inclined to participate civically. In fact, one study found that opening a Wal-Mart significantly reduces voter turnout and participation in the decennial census.[21] These negative practices are no longer unique to Wal-Mart. The low wages paid by it have far-reaching effects since its competitors have started using many of the same tactics.[22]

As the largest employer in the United States and one of the largest corporations in the world, Wal-Mart’s practices have impacted standard business practices in the retail sector. Although Wal-Mart claims to be the champion of the poor by providing goods at low prices, it has negatively impacted the economy and social welfare of the communities it touches. Small businesses are forced to leave the market and employees are not provided living wages. Although consumers benefit from low prices and investors receive high returns, there is a very high social and economic cost to communities and families. For this reason, Wal-Mart should not be upheld as a model for businesses to emulate.

Sources

[1] Goetz, Stephan J. and Anil Rupasingha. “Wal-Mart and Social Capital.” American Journal of Agricultural Economics 88:5 (Dec 2006) 1304.

[2] Harris, Thomas R. “The economic and social impact of big box retailers: discussion.” American Journal of Agricultural Economics 88:5 (Dec 2006), 1311.

[3] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 107.

[4] Harris, Thomas R. “The economic and social impact of big box retailers: discussion.” American Journal of Agricultural Economics 88:5 (Dec 2006), 1312.

[5] Goetz, Stephan J. and Anil Rupasingha. “Wal-Mart and Social Capital.” American Journal of Agricultural Economics 88:5 (Dec 2006) 1304.

[6] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 107.

[7] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 105.

[8] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 112.

[9] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 111.

[10] Harris, Thomas R. “The economic and social impact of big box retailers: discussion.” American Journal of Agricultural Economics 88:5 (Dec 2006), 1311.

[11] Ghitelman, D. “Refining the neighborhood”. Supermarket News 47(1999), 12.

[12] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 112.

[13] Harris, Thomas R. “The economic and social impact of big box retailers: discussion.” American Journal of Agricultural Economics 88:5 (Dec 2006), 1311-1312.

[14] Hicks, M.J.. “Does Wal-Mart Cause an Increase in Anti-Poverty Program Expenditures.” Unpublished manuscript (2005).

[15] Franklin, Andrew W., 2001. “The impact of Wal-Mart supercenters on supermarket concentration in U.S. metropolitan areas.” Agribusiness 22:2 (2001), 107.

[16] Greenhouse, Steven. “Can't Wal-Mart, a Retail Behemoth, Pay More?” New York Times (4 May 2005).

[17] Greenhouse, Steven. “Can't Wal-Mart, a Retail Behemoth, Pay More?” New York Times (4 May 2005).

[18] Hicks, M.J.. “Does Wal-Mart Cause an Increase in Anti-Poverty Program Expenditures.” Unpublished manuscript (2005).

[19] Hicks, M.J.. “Does Wal-Mart Cause an Increase in Anti-Poverty Program Expenditures.” Unpublished manuscript (2005).

[20] Greenhouse, Steven. “Can't Wal-Mart, a Retail Behemoth, Pay More?” New York Times (4 May 2005).

[21] Goetz, Stephan J. and Anil Rupasingha. “Wal-Mart and Social Capital.” American Journal of Agricultural Economics 88:5 (Dec 2006) 1307.

[22] Greenhouse, Steven. “Can't Wal-Mart, a Retail Behemoth, Pay More?” New York Times (4 May 2005).

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