David R. Henderson  

Some Economics of Wal-Mart

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Last month, I received an e-mail from a high school student named Kelsey Stolz and I took some time to reply. I think our correspondence would be of wider interest. Here it is.

Kelsey: I am a junior in high school researching Wal-Mart's impact on United States retail and how they keep their prices low for my AP US History class. My research has lead me to find that the reason why Wal-Mart has been able to maintain their status is by exploiting their staff by violating labor laws and offering few benefits.
David: It is not accurate to say that that is "the" reason. There are many reasons. One of the main ones is that Wal-Mart has an amazing technology that allows it to get information about what items are in short supply quickly to its warehouses and thus gets huge efficiencies from this method. Related to this are large economies of scale. These have nothing to do with wages. It is true that Wal-Mart pays low wages and offers few benefits. This is another reason for their low costs. I doubt that their violations of labor laws are that important in keeping costs down, although your point about "few benefits" is well taken.

Kelsey: Do you believe Wal-Mart will be able to remain successful or will the worker strikes and violation of labor laws cause the corporation to raise their prices?
David: I don't think that violation of labor laws will cause them to raise their prices. If, as you say, violation of labor laws is a factor in keeping prices low, then violating those laws would help them keep prices low. I guess I don't get your reasoning here. Re worker strikes, most of what I have read on this suggests that most Wal-Mart workers, like most U.S. workers in general, do not see themselves as being better off with a union. So, no, I don't see that as being a factor.

Kelsey: Does this mean it is unadvisable to invest in Wal-Mart stock?
David: I can't legally give investment advice. What I can say, though, is that any information that you uncover is likely already to be capitalized in the price of Wal-Mart stock. Therefore I myself would not invest in, or disinvest in, Wal-Mart stock based on public information: the stock price already reflects that information.

Kelsey: In 10 years will Wal-Mart be more successful [or] will they fail to keep their status?
David: My guess is that in 10 years Wal-Mart will be less successful because imitators will chip away at their market share. But that's just a guess.
One thing that you don't mention is the minimum wage. Wal-Mart supported increasing the minimum wage a few years ago. The reason, I believe, is that they want to price out of business their lower-wage, Mom-and-Pop competitors. So if President Obama does succeed in getting the minimum increased, that will help Wal-Mart.


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COMMENTS (33 to date)
Justin Rietz writes:

"One of the main ones is that Wal-Mart has an amazing technology that allows it to get information about what items are in short supply quickly to its warehouses and thus gets huge efficiencies from this method"

Even more amazing: Walmart in some cases doesn't even need to track what is in stock on its shelves. Its suppliers (e.g. Proctor and Gamble) get stock information directly via the computerized systems, and ship products to Wal-Mart. All Wal-Mart does in this case is sell shelf space.

Doug writes:

Prediction: In 20 years when Wal-Mart has been reduced to a faded giant by e-commerce, the left will be viciously attacking Amazon.

They'll assert that the low prices, wide selection and convenient delivery are paid for by the high cost of the job destruction caused by near total automation (by 2030 I expect that the warehouses and delivery trucks will be completely roboticized).

Liberals will be pining for the good ol' days when corporate success was shared with the people through the creation of jobs in the community. They'll lionize Sam Walton's folksy nature and connection with the blue collar class. Bezos' cold demeanor will villanized along with his evil job-destroying robots.

Mark writes:

David,

Good responses.

In 1988, Sam Walton invested $20 million in a satellite uplink system that connected his stores to his suppliers. This is the technology to which you referred, and to which Sam Walton knew was a huge and risky investment. It paid off in the form of far more efficient supply chain management. The average time a product stays on the shelf at Wal-Mart is a fraction of what it used to be prior to 1988. This is a huge savings to Wal-Mart, which worked its way down to consumers in the form of lower prices.

This also meant that Wal-Mart needed far fewer skilled workers to maintain inventory. Now what they need are people who can scan products and take a box out of a truck and, instead of maintaining a more complex warehouse inventory system in each store, move the box to the specified location in the store and place it on the shelves.

Contrary to the assertions of Kelsey, Wal-Mart is the largest employer of low-skilled elderly and handicapped, a segment of the labor force that had largely been difficult to employ. As Bryan once correctly argued, Wal-Mart made its workers the best employment offer they obviously received. Why get mad at Wal-Mart for this? If Kelsey wants to find a "culprit," look at all the other businesses that refuse to hire the low-skilled elderly and handicapped.

Ted Levy writes:

First, you may want to direct Kelsey to Art Carden's work on Walmart, some of which may be in the LearnLiberty videos. Second, what do you mean you can't legally give investment advice? Don't you mean you can't legally charge to give investment advice?

Steven writes:

Doug, you probably want to be careful with the term liberal on an economics blog, I don't think it means what you think it means in economics.

egd writes:
My research has lead me to find that the reason why Wal-Mart has been able to maintain their status is by exploiting their staff by violating labor laws and offering few benefits.
Did Kelsey do all of her research at Thinkprogress or some other left-wing blog?

There are a lot of reasons Wal-Mart is successful. Few of them have to do with exploitive or illegal behavior.

J. W. writes:

egd wrote: "Did Kelsey do all of her research at Thinkprogress or some other left-wing blog?"

High schoolers aren't taught to do research, so they google words based on the wording of the assignment and their sources are the links from the first page or two of search results, especially whatever "looks official" (to a high schooler).

So, in other words, yes.

Becky Hargrove writes:

The only reason discount chains such as Wal-Mart present a problem in the larger sense: their product offerings are the primary consumer choices for lower to middle income. Otherwise, any consumption choice that can be tied to specific locations (healthcare, residential and commercial buildings, bundled services in media and communications offerings) are free to charge whatever they wish, leaving many customers hostage to high localized prices on Wal-Mart incomes. Odd to think that the main rewards of globalization are mostly limited to nations serving the lower to middle classes of other nations through true production efficiencies.

Scott Miller writes:

Another advantage, Wal-Mart requires its suppliers to lower their costs every yearby as much as 5%. This, and Clinton's trade agreements with China, have added to some of the reasons for the offshoring of manufacturing to China over the past twenty years.

David R. Henderson writes:

@Becky Hargrove,
The only reason discount chains such as Wal-Mart present a problem in the larger sense: their product offerings are the primary consumer choices for lower to middle income.
So Wal-Mart's charging low prices on goods that lower income people buy "present a problem in the larger sense"? We should have more such problems.

Ted Levy writes:

Here are 5 papers over the last 4 years in professional journals Art Carden has done dealing with aspects of Walmart...

Becky Hargrove writes:

@ David,
Yep!

Did Kelsey do all of her research at Thinkprogress or some other left-wing blog?
My guess would be that she's just saying what her teacher told her.
Hazel Meade writes:

The only thing I find surprising is that this high school student somehow decided to write this letter to a relatively obscure libertarian economist, despite having gotten most of her information from lefty agit-prop.

Let's Be Free writes:

There are still no AP Economics course in HS, indeed no economics courses at all.

Wal-Mart's long term fate depends on how able it is to modernize and re-invent itself, which is imponderable over periods extending more than 5 years. K-Mart should have been Wal-Mart and it went splat when it didn't evolve from its original marketing and business model. Sears became inward looking and became a shadow of its former self. Penny's did a decent job of reforming every ten years of so for decades, but has now self-inflicted a fatal blow, turning its backs on its markets and customers.

Sooner or later Wal-Mart will splat too, but we don't know when.

Doug writes:

"Doug, you probably want to be careful with the term liberal on an economics blog, I don't think it means what you think it means in economics."

s/liberal/progressive/

Steve writes:

Kelsey might find this econtalk episode useful:


"Charles Platt, author and journalist, talks with EconTalk host Russ Roberts what it was like to apply for a job at Wal-Mart, get one, and work there. He discusses the hiring process, the training process, and the degree of autonomy Wal-Mart employees have to change prices. The conversation concludes with a discussion of attitudes toward Wal-Mart."

http://www.econtalk.org/archives/2009/06/platt_on_workin.html

Ken P writes:

Another reason for the low prices is slim margins. Their profit to labor cost ratio is quite low compared to competitors like Costco.

People tend to underestimate the value of lower pricing. The extra money in consumer pockets allows for the purchase of other goods or services.

Bob Robertson writes:

[Comment removed for supplying false email address. This is your final notice. Email the webmaster@econlib.org to request restoring your comment privileges. We'd be happy to publish your comments. A valid email address is nevertheless required to post comments on EconLog and EconTalk.--Econlib Ed.]

David R. Henderson writes:

@Hazel Meade,
The only thing I find surprising is that this high school student somehow decided to write this letter to a relatively obscure libertarian economist, despite having gotten most of her information from lefty agit-prop.
"Relatively obscure?" I wouldn't have used that term. Editor of the only reader-friendly Encyclopedia of economics, author of almost 50 articles in the WSJ; appeared on Stossel at least 6 times. If she wanted to contact a libertarian economist, I was probably on a relatively short list.

RPLong writes:

Doug's point got me thinking... I hope he isn't correct, because what i know about leftists is that they place a high value on pristine natural landscapes. A world of direct-shipment e-commerce is a world with fewer large retail centers and massive parking lots. Wouldn't it be great if we could store retail products in large warehouses on the most worthless land in a given area, and ship it to customers' homes in driverless cars, tuned to operate at exactly the most fuel-efficient speeds? Our air would be cleaner, our landscapes more beautiful, and our retail needs better-met.

The world of the future looks like a great place to me.

Lance writes:

@Let's Be Free,

Actually, there is AP Macro and AP Micro. I'm not sure of the pervasiveness of the two courses, but College Board does offer the test and I know many high school districts in my area offer them.

Often times, the school will make it a year-long AP Economics course and do Micro in the first semester and Macro in the second semester. Certainly, much to the chagrin of Ed Prescott!

The problem is finding teachers qualified to teach the course. There are plenty of high school teacher's with MA's in History for AP American History, but how many equivalently qualified teachers are there for AP Econ courses (with the exception of Arnold Kling!).

Certainly an odd topic for an AP American History paper (sounds like an AP Government paper). But, good for her for reaching out to get an opposing opinion.

Pravin writes:

for those imagining the demise of walmart at the hands of amazon,it might surprise you that walmart is now almost a technology company with a retail shell.not much different from amazon.

technology will remain the key.and it is getting cheaper and easily available to more companies everywhere.

Dan Carroll writes:

Economies of scale and scope, advance logistics and distribution (though not the advantage they once had, still at the top of the pack), and platform model pushing high volumes per square foot are the key elements of their success. Wages, adjusted for skills, are not a point of differentiation (their wages in many cases are actually higher than competitors).

Re: online competition - large basket size and low value/weight ratio limit online encroachment due to shipping costs, except in electronics, toys and small appliances. But Wal-Mart is shifting their mix towards more commodities.

Seth writes:

"My research has lead me to find that the reason why Wal-Mart has been able to maintain their status is by exploiting their staff by violating labor laws and offering few benefits." -Kelsey

I wonder if Kelsey has any thoughts as to why Walmart's competitors haven't copied this tactic.

Dan Drechsel writes:

Econ is now required of all high school graduates in the state of Georgia. It is offered in a one semester standard class or as AP micro and macro.

Mark Bahner writes:
Do you believe Wal-Mart will be able to remain successful or will the worker strikes and violation of labor laws cause the corporation to raise their prices?

I don't know whether Walmart the corporation will remain successful. There are currently over 4300 Walmart stores in the U.S. I predict that they will have less than half that many in 30 years. In fact, they might have as few as a couple hundred.

Why? Because retail stores will be unnecessary with computer-driven vehicles. Instead, groceries, clothes, tools, etc. will be delivered to homes by computer-driven vehicles. A customer will call in an order, and the self-driven vehicle will pick up the goods from an incredibly compact warehouse...an unlit warehouse, which also will be unheated and uncooled for items that can't be damaged by heat or cold. Items will be retrieved from the warehouse by robots/machines. The computer-driven vehicles that deliver will determine their routes by finding the best way to make all deliveries in that particular day.

Virtually no humans will touch the items from when they leave the factory (where probably few humans will touch them) to when they come to your door.

That's just *one* impact from computer-driven vehicles:

The Future of Transportation

Mark Bahner writes:
for those imagining the demise of walmart at the hands of amazon,it might surprise you that walmart is now almost a technology company with a retail shell.not much different from amazon.

The thing that gets me about shopping at Walmart (or any other store) is that I'll see shirts and pants I want, but not in my size.

Or I go to buy a food item or a drug item, and they're out of stock for that particular item. There's a space for it on the shelf, but it's empty. It seems like it should be a trivial thing for them to know my clothes/shoe sizes, and for me to make sure they have it in stock before I even bother going to the store.

That's where I see the real benefit of totally eliminating retail stores.

Cliff writes:

Dan,

You might be surprised. Lots of stuff is cheaper shipped 2-day from Amazon than I can get it if I drive to a brick and mortar store myself. And a lot of times those "2-day" shipments get to me in a single day. And I'm not talking about electronics. A heavy box of 24 cans of black bean soup is cheaper to have shipped to me in 2 days from Amazon than it is to buy at the grocery store! Add driverless cars to the equation and forget about it.

Michael writes:

OK .... I see everyone is missing the really obvious question here. Why is this assignment even remotely relevant to AP history?

Hernan writes:

Wal-Mart keeps prices low mainly because they buy cheap products in bulk. These products are so cheap because they are produced and shipped from foreign countries where costs of production are extremely low. Many Wal-Mart suppliers run operations akin to sweatshops. The working conditions in their factories are deplorable. It goes without saying that working conditions that bad would never be tolerated in the United States. Furthermore, in those foreign countries, such as China, wages are very low. Another way Wal-Mart keeps prices down is by paying minimum wage. They strive to limit the number of full time employees to avoid giving benefits. Hours are constantly cut and redistributed. It has been said that new hires are handed welfare applications immediately. This is infuriating because on top of all of the tax breaks Wal-Mart's generally receive(many towns across America ask Wal-Mart's to come to them), we the taxpayers are in essence subsidizing their employee costs. I believe that a company that has annual revenues in excess of 400 billion dollars , and profits of almost 20 billion dollars, should more evenly distribute the wealth the company generates. After all, the CEO of Wal-Mart makes more PER HOUR than a Wal-Mart associate makes ALL YEAR. In conclusion, Wal-Mart keeps prices low by buying merchandise from overseas sweatshops, receiving extremely generous tax breaks(thanks to all their lobbying and political contributions), and not distributing the wealth more fairly with their employees.

John Fast writes:

@Hernan:
1. Do you think that unskilled workers in poor foreign countries *currently* have any alternatives other than either working in a sweatshop, or having no job at all and literally starving in the street? (I don't see any other alternatives, unless you want to count criminal activity.)

2. Which do you think is better: to work in a sweatshop, or to have no job at all and literally starve in the street?

3. What do you think would happen if the legal minimum wage were lowered to $3.00 per hour? What would happen if it were lowered to $1.00 per hour? What do you think would happen if minimum wage laws were eliminated? How would this affect employees who are already being paid more than minimum wage? (Also, why are any employees -- not counting management and union members -- paid more than minimum wage? For example: computer programmers, paralegals, accountants, truck drivers.)

4. I share your outrage that the CEO of Walmart makes $18 million a year. Do you share my outrage that Oprah Winfrey makes over nine times that much? And since she is worth almost 3 billion dollars, shouldn't she be forced to share her wealth more evenly with the rest of us, or at least with her employees?

5. I completely agree that Walmart shouldn't get any special tax breaks. In fact, I believe that *no one* should get any special treatment from government, including tax breaks, subsidies, regulations, exemptions, or anything else. (The only exception I would tolerate is programs which give more benefits to the poor.) Do you agree? If not, whom do you think should get special treatment (either better or worse) from the government?

6. What is your definition of "distributing the wealth more fairly"? And at what point is it not necessary to distribute wealth more fairly, and why?

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