The term “Wal-Mart effect” is used in reference to the Wal-Mart Corporation, as well as, in the description of the impact of large retailers in general. Most of the studies used to identify the effect of large retail stores use the Wal-Mart Corporation as a basis for their research since it has the biggest impact on the economy (Company Spotlight 68). This paper examines the impact of Wal-Mart on the US and global economy by following a chronological sequence starting with the background of the company as it scaled to an international level.
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Wal-Mart started as a locally owned retail store in a sparsely populated southern town and gradually expanded to a national level over a period of four centuries. The rapid growth of the retail stores is attributed to aggressive expansion and logistical approaches, taking it to the top of the Fortune 500 companies.
The corporation operates hundreds of wholesale stores, discount stores, and neighborhood markets, as well as supercenters. The magnitude of Wal-Mart’s operations makes it a significant influence factor in the economy of the United States, considering that it controls about 35% of the food and drugs in the market (Company Spotlight 69).
At a national level, the Wal-Mart Corporation has influenced various factors including inflation and productivity gains. Studies show that the presence of Wal-Mart has been useful in regulating market prices and limiting inflation. However, the low prices maintained by Wal-Mart have negatively impacted its workforce through poor wages. In addition, studies show that the numerous employment opportunities offered by Wal-Mart in their stores are not as appealing as one would expect from such a large store (Weber 8).
Studies conducted in 2005 by Global Insight revealed that Wal-Mart was able to maintain the low rate of consumer prices by 3.1% from both direct and indirect sources, which forces its competitors to lower their prices, as well.
Another study conducted in the same year by an institute of policies revealed that the hourly wages offered by Wal-Mart were 37% lower than the national requirement (Weber 8). According to Weber (11), the low wages offered by Wal-Mart spark a chain reaction that causes the competitors and suppliers to lower their wages in order to keep up with the market price.
Wal-Mart has perfected its business operations as is evident in its rapid scale from a few local retails stores to a national and international level. Throughout this period, Wal-Mart has enabled the creation of new businesses in the form of suppliers. The global nature of Wal-Mart’s operations means that the suppliers have a wide market for their products.
The low consumer prices imposed by Wal-Mart negatively affect the suppliers, but due to the fear of losing business, suppliers are pressured to seek alternative means of remaining profitable such as cutting costs on both wages, and production processes such as product design and packaging (Holmes and Zelner 4).
For instance, the Dial Soap Corporation provides about 30% of its stock to Wal-Mart. In the event that it lost the contract, it would have to find a way of making its other markets absorb the 30% in order to remain profitable (Holmes and Zelner 4).
Suppliers have also been affected in order to acquire a fraction of the market segment. Some of the measures taken involve partnerships to form supercenters, like the merger between Starbucks and Target stores, in order to draw a different type of client (Holmes and Zelner 3).
For such initiatives to attract customers, they are forced to operate at a higher efficiency that Wal-Mart, which results in reduced wages. Consequently, the reduced household income for employees from Wal-Mart, its competitors, and suppliers lead to economic and social challenges including inadequate healthcare and reliance on state schemes and subsidies (Weber 7).
The operations of Wal-Mart also impact the states, cities, and taxpayers in different ways depending on the environmental, social, and economic factors. Both citizens and localities offer varied opinions regarding the location of a Wal-Mart store in their community.
On the one hand, citizens may appreciate the opening of a Wal-Mart store due to low consumer prices and employment opportunities; however, they may also be weary due to the effect of reduced wages for both suppliers and competitors in order for them to keep up with Wal-Mart. On the other hand, Localities may welcome the store by offering subsidies, or react in apprehension.
A study by Dube and Jacobs (2) revealed that the opening of a Wal-Mart store resulted in increased financial strain to the tax payers in that state. For instance, the entry of Wal-Mart in Bay area of California resulted in the absorption of many unemployed people into the corporation’s work force.
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At the same time, the wage practices of Wal-Mart, as well as, the cost reduction strategies adopted by their competitors resulted in an increased reliance on public programs that cost the San Francisco Bay area taxpayers an annual amount of about $1.46 billion (Dube and Jacobs 2).
In conclusion, this paper shows the mixed reaction and impact of the opening of Wal-Mart stores in communities, which constitutes the Wal-Mart effect. While some communities welcome the stores due to their preference for low wage jobs over unemployment, the gains in consumer savings seem to be absorbed elsewhere in terms of reduced wages, social service provisions, and equity.
Company Spotlight. “Wal-Mart.” Market watch: Global Round-up 5(2), (2006): 66 – 72. Print.
Dube, Arindrajit and Ken Jacobs. Hidden Cost of Wal-Mart Jobs: Use of Safety Net Programs by Wal-Mart Workers in California. 2004. Web.
Holmes, Stanley and Wendy Zelner. “The Costco Way of Higher Wages Mean Higher Profits. But try twlling Wal Street.” Business Week (2004): 3-4. Print.
Weber, Lauren “The debate intensifies: Is the corporate giant good for our communities?” Business and Technology 2(6), (2005): 4-14. Print.