WalMart and Economic Growth of Nebraska Counties

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Wal-Mart and Economic Growth of Nebraska
Counties

• Azzeddine Azzam (Professor, Ag Econ)
• Steven Kachman (Professor, Statistics)
• Gibson Nene (M.S. student, Ag Econ)
• Amalia Yiannaka (Assistant Professor, Ag Econ)
• __________________________________________________
  ______
• Presented by Azzeddine Azzam at the 2006 Nebraska
  Rural Institute, September 19-21,
• Ainsworth, NE
• Updated 09/23/2006

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Outline of Presentation

• Research Program
• Raw Facts about Wal-Mart Worldwide
• Raw Facts about Wal-Mart in Nebraska
• Anti and Pro Wal-Mart Claims
• Findings from past studies
• Why another study?
• Our findings
• Conclusions and implications

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Research ProgramIndustrial Organization and
Economic Development

• Economic Concentration
• Do countries, regions, states, communities
  become better off or worse off with higher
  industrial concentration?
• State-Level Economic Policy
• Effectiveness of national versus state economic
  policy, in general, and competition policy, in
  particular.

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Top 25 Retailers in the Food Industry 2005
Source Stores Magazines Top 100 Retailers
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Fortune 500 List
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Some Raw Facts about Wal-Mart Worldwide

• 315 billion dollars in yearly sales
• 1.8 million employees worldwide
• 6131 stores worldwide
• 1617 stores overseas
• 1713 supercenters
• 495 Sams Clubs
• 945 new stores opened in 2005

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• Ranks 1 in grocery sales. 1/5 of grocery
  business
• Third largest pharmacy
• Purchased 35 of dry dog food
• Purchased 24 of tooth paste
• Purchased 18.4 metric tons of gold
• Accounts for 40 of all DVD sales
• 127 million customers weekly
• Imported 10 of US imports from China
• Average household income of shoppers 35,000

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Some Raw Facts about Wal-Mart in Nebraska

• 24 supercenters
• 185,000 sq. ft - 142,000 items
• 3 Sams Clubs
• 130,000 sq. ft - 5500 items
• 1 distribution center (North Platte)
• 10,330 Wal-Mart associates
• 10.04 hourly wage

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• 638 suppliers from Nebraska
• 1.731 billion in purchases from suppliers
• 11.1 million paid in state and local taxes
• 3.99 million to community

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Wal-Mart Locations and Opening Dates in Nebraska
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Whats Behind Wal-Marts Success? source
Chandran and Gupta (2003)

• Procurement and Distribution
• Goods procured directly from manufacturers at the
  lowest price
• 85 of inventory supplied from own warehouses
  (50-65 for competitors)
• Replenish inventories within 2 days (5 days for
  competitors)
• Shipping costs 3 (5 for competitors)
• Barcode and hand-held computer systems allow real
  time access to information on inventory of all
  products

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• Logistics Management
• 34 distribution centers (as of Jan 31, 2005)
  serviced by more than 3500 trucks
• Supercenter located no further than 1 day s
  drive from distribution center
• Cross Docking Shipping goods directly from
  manufacturers to retail customers, thereby
  bypassing warehouses
• Shift from supply chain to demand chain
  management
• Customers pull products rather retailers push
  products

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• Inventory Management
• Network more 10,000 suppliers through the largest
  and most sophisticated computer system in the
  private sectors
• Track sales and inventory of all stores thru IT
  and communication systems.
• Automated re-ordering system (with Procter and
  Gamble for Example)
• Stores can find out level of inventories and
  location of each product any time

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Brief Wal-Mart history

• Mid 1940s Franchise from Ben Franklin in
  Newport, Arkansas
• Nov 62 Wal-Mart Discount City store (16000
  square foot) Rogers, Arkansas
• March 1970 Wal-Mart goes public and offers
  300,000 shares
• 1972 Listed on the New York Stock Exchange
• April 1983 Sams Club in Oklahoma City
• 1987 Hypermarket USA (220,000 square feet), did
  not go well. Wal-Mart Satellite Network
• 1990 Wal-Mart became No. 1 Retailer in US
• 1991 Wal-Mart went international - Mexico

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• 1994 First supercenter, Washington, Missouri
  (Supercenters ranged from 100,000 to 261,000
  square feet
• 1997 Wal-Mart became No.1 employer in US
• 2000 Neighborhood Market Store (38,000 to
  55,000 square feet) in urban areas
• 2001 Thanksgiving- Highest sales day in History
  1.25 billion
• 2003 19 percent market share of supermarket
  industry. Expected to rise to 35 percent in 2008.
• 2004 With supercenter in California, Wal-Mart
  has a supercenter in 45 states.
• Wal-Mart may become the first national grocery
  chain

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What is the issue?

• Wal-Mart has been criticized regarding its
  socio-economic impact on communities
• Complaints are emanating from
• Consumers, suppliers, competitors, community
  leaders and labor unions
• Anti-Wal-Mart websites
• Wal-Martsucks.com
• Wal-Mart defense
• Wal-Martfacts.com

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• Anti Wal-Mart claims
• Wal-Mart is Anti-union
• Contributes to unemployment
• Spends 30 per employee on health care
• Pays low wages
• Forces rivals to close
• Dominates suppliers
• Income of associates below poverty line
• Massive turnover (44)
• Outsources jobs

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• PRO Wal-Mart claims
• Wal-Mart benefits immigrants, old people with
  employment
• Saves shoppers more 200 billion a year
• accounted for 13 percent of productivity gains in
  the second half of the 1990s.
• Shoppers save 17 percent on groceries
• Wal-Mart countervails local retail monopoly
• Stores dont kill economies, consumers do

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What non-academic reports say about Wal-Mart

• More than 200 communities have rejected Wal-Mart,
  Rosen(2003)
• Wal-Mart success comes at the expense of society,
  Miller(2004)
• Wal-Mart is partly to blame for the ailing US
  economy, Wilson (2004)
• Wal-Mart destroys communities, Freeman (2003)

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What academic studies say about Wal-Mart

• Stone (1988, 1997),Artz and McConnon (2001) , and
  McGee and Gresham (1995)
• Wal-Mart increases sales in host towns and
  decreases sales in surrounding communities.
• Stone, Artz and Myles (2002)
• The impact of Wal-Mart on incumbents is a zero
  sum game

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• Basker (2004)
• Wal-Mart has a positive impact on job creation
• Hicks and Wilburn (2001)
• Wal-Mart brings employment and wage net benefits
  to counties where it is located - West Virginia
  study

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• Franklin (2000)
• Wal-Marts impact on supermarket concentration
  and grocery retailing performance to date has
  been minimal. U.S. metro areas
• Ketchum and Hughes (1997)
• Wal-Mart had no effect on either lack of growth
  in retail employment or relative wage growth
  Maine study

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• Mattera and Purinton (2004),
• Wal-Mart received 1 billion benefit in form of
  subsidies from communities.
• Doubt on whether Wal-Mart should get subsidies
  with all the controversy that surrounds it
• Dube and Jacobs (2004)
• Wal-Mart receives indirect subsidies
• Its employees rely heavily on social welfare and
  taxpayer funded healthcare
• This is hidden cost to society

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• Goetz and Swaminthan (2004)
• Communities which attracted more Wal-Mart stores
  between 1990 and 1999 registered the highest
  poverty levels.
• Wal-Mart stores destroy civic capacity iin the
  communities ini which they locate by driving out
  local entreprenours and community leaders
• Bernstein and Bivens (2006)
• Wal-Mart drives wages down faster that it does
  prices

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Why another study?

• Granted that Wal-Mart may have positive and/or
  negative impacts, WHAT MATTERS IS THE NET EFFECT.

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• If the net effect is positive, then the presence
  of Wal-Mart should contribute positively to the
  standard of living
• If the net effect is negative, then the presence
  of Wal-Mart should contribute negatively to the
  standard of living
• If the net effect is neutral, then the presence
  of Wal-Mart should not make any difference in the
  standard of living

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What is the major determinant of the standard of
living?

• Economic Growth

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The Mystery of Economic GrowthSource Van Den
Berg (2001)

• Graph traces economic growth worldwide

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Income per Capita Around the World. Source Van
Den Berg (2001)
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• For an accessible explanation of what drives
  economic growth according to Joseph Schumpeter,
  open this hyperlink

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Income per Household in Nebraska 2002(Average
33,808)
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Observed Average Growth of Household Income in
counties with a Wal-Mart between the 1979 and
2002 census years
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OBJECTIVE

• To test whether or not the average economic
  growth in counties with a Wal-Mart is the same,
  higher, or lower than counties without Wal-Mart,
  after accounting for other variables that
  influence economic growth.
• Economic growth is measured by growth in median
  household income.

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Observed Average Growth of Household Income in
counties with a Wal-Mart between the 1979 and
2002 census years
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• Household income is the sum of money income
  received in a calendar year by all household
  members 15 years old and over, including
  household members not related to the householder,
  people living alone, and other nonfamily
  household members. Included are in the total are
  amounts reported separately for wage or salary
  income net self-employment income interest,
  dividends, or net rental or royalty income or
  income from estates and trusts Social Security
  or Railroad Retirement income Supplemental
  Security Income (SSI) public assistance or
  welfare payments retirement, survivor, or
  disability pensions and all other income.

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Model specification

• I 1, 2, , 93
• Shaffer (firm size and economic growth Economic
  Letters 76(2002)195-203.

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Variables

• Dependent variable Growth
• Measured by the difference between
  inflation-adjusted median household income in
  the census years 2002 and 1979.
• Independent variables
• Initial personal per capita income (pre-tax
  income including wages and salaries, proprietors
  income, investment income, govt transfer
  payments, and employer payment for employee
  insurance)
• Education stock of human capital (percentage of
  the population 25 years and older who have
  attained 4 years of college education)
• Population density (persons per square mile)
  agglomeration effects
• Population market size

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Model- variables

• Independent variables (continued)
• Total local government expenditure (thousands of
  dollars) government size
• Highway expenditure ( spent on road
  construction and maintenance)- infrastructure
  public investment
• Unemployment rate ( of the total labor force in
  a community) economic health of a geographical
  area
• Interstate isolation or accessibility of a
  county
• Rural versus Urban
• Farm dependent versus nonfarm dependent
• Adjacency to I-80 - If any point of a county is
  within 25 miles of I-80 that county is considered
  near I-80

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Urban1-7 Rural8 and 9
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Counties adjacent to I-80
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Wal-Mart variables

• WalMart1
• indicator variable 1 for counties with a
  Wal-Mart and zero otherwise
• WalMart2
• Indicator variable for counties with more than
  one Wal-Mart store (Douglas and Sarpy, as of
  2002) and zero otherwise
• WalAdjacent
• Indicator variable for counties which are
  adjacent to counties with a Wal-Mart store
• Walyear number of years Wal-Mart has been in a
  county

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Descriptive Statistics
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Data

• 93 Nebraska counties
• 19 counties have a Wal-Mart
• 47 counties are adjacent to Wal-Mart counties
• County and City Data Book by the US Bureau of
  Census, 1988, 1994, and 2000 and the Bureau of
  Economic Analysis.
• Information on Wal-Mart location and opening
  dates was obtained from Wal-Mart.

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RURURAL URURBAN FDFARM DEPENDENT,
NFDNONFARM DEPENDENT ADJ ADJACENT TO A
COUNTY WITH A WAL-MART NW COUNTIES WITHOUT A
WAL-MART W COUNTIES WITH A WAL-MART
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RURURAL URURBAN FDFARM DEPENDENT,
NFDNONFARM DEPENDENT AD ADJACENT TO A
COUNTY WITH A WAL-MART NW COUNTIES WITHOUT A
WAL-MART W COUNTIES WITH A WAL-MART
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FindingsRural farm-dependent counties(RFDCs)

• 1. RFDCs without a Wal-Mart, not adjacent to
  country with a Wal-Mart, and adjacent (not
  adjacent) to I-80 have positive (negative) growth
  on average.
• 2. RFDCs without a Wal-Mart that are adjacent to
  counties with a Wal-Mart have positive growth and
  their growth is higher if they are adjacent to
  I-80.

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Findings (continued)Urban Farm- and
Nonfarm-dependent counties

• Urban farm- and non-farm dependent counties
  without a Wal-Mart, and not adjacent to a county
  with a Wal-Mart, have positive growth with higher
  growth when a county is adjacent to I-80
• Urban farm- and non-farm dependent counties
  without a Wal-Mart, and adjacent to a county with
  a Wal-Mart, have positive growth with higher
  growth when a county is adjacent to I-80

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Findings (continued)Urban Farm- and
Nonfarm-dependent counties

• 1. Urban non-farm dependent counties with a
  Wal-Mart have negative growth on average, but
  growth is less negative when counties are
  adjacent to I-80.
• 2. Growth in Urban non-farm dependent counties
  with older Wal-Marts is more negative than growth
  in similar counties with more recently opened
  Wal-Marts.
• 3. Note Rural counties, by they farm- or
  non-farm dependent did not have a Wal-Mart as of
  2002.

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Preliminary Conclusion

• After controlling for key determinants of
  economic growth, counties on average were better
  off if they are adjacent to I-80, do not have a
  Wal-Mart, but are adjacent to counties that have
  one.

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Possible explanations of some of the findings

• Wal-Mart belongs to the non-basic sector where
  firms are strongly tied to the local economy.
• Non-basic sectors may not contribute much to
  economic growth as do basic sectors.

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Suggestion from a member of the audience as to
why growth in household income is positive in
counties without a Wal-Mart but are adjacent to
counties with a Wal-Mart

• Wal-Mart attracts other businesses. Residents in
  adjacent counties seek employment in those
  businesses in additional to Wal-Mart and take
  payroll back to their counties.

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• If the price-lowering effect of Wal-Mart is
  smaller than the wage-lowering effect (Bernstein
  and Bivens)
• and
• Wal-Mart wages drive wages down elsewhere, real
  household income (income corrected for inflation)
  in the relevant retail market will also decline.

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Caveat

• A negative and robust average predicted growth
  for counties with a Wal-Mart does not mean
  Wal-Mart is the cause. It is simply an
  interesting empirical regularity the value of
  which is to generate interest in developing
  theories that could explain that regularity.

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• Partial funding for the research was provided by
• Agricultural Research Division, Institute of
  Agricultural and Natural Resources
• Nebraska Rural Initiative

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• THANK YOU

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• Questions, insights, comments, suggestions, ..

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