What Is the Walmart Effect?
The Walmart Effect is a term used to refer to the economic impact felt by local businesses when a large company like Walmart (WMT) opens a location in the area. The Walmart Effect usually manifests itself by forcing smaller retail firms out of business and reducing wages for competitors' employees. Many local businesses oppose the introduction of Walmart stores into their territories for these reasons.
Key Takeaways
- The Walmart Effect is the effect that Walmart has been known to have on the communities in which it builds locations.
- The presence of a Walmart store can hurt the business of smaller companies and lower wages for local workers.
- Much of the Walmart Effect can be attributed to Walmart’s immense buying power.
- The Walmart Effect can also affect suppliers, who must drive their production costs down in order to afford to sell to Walmart.
- Although the term was used in the 90s, “Walmart Effect” became ubiquitous with the release of a Charles Fishman book by the same name.
How the Walmart Effect Works
The Walmart Effect also has its positive benefits; it can curb inflation and help to keep employee productivity at an optimum level. The chain of stores can also save consumers billions of dollars but may also reduce wages and competition in an area.
The Walmart Effect has been shown to not only affect competing companies and suppliers but consumers as well.
Advantages and Disadvantages of the Walmart Effect
Walmart's insistence on procuring products at lower prices from suppliers means that suppliers must find ways to make their products for less money, or else they could be forced to take losses if they choose to sell through Walmart.
The exposure of selling merchandise through Walmart may increase consumers’ awareness of a product; however, the cost of delivering that product to market may be pushed back upon the supplier. This can compel them to seek out lower-cost alternatives to manufacture their product, which could lead to the use of overseas operations or less expensive materials in the production of their goods.
Requirements for the Walmart
The Walmart Effect is driven by the scale and scope of Walmart’s buying power. The company has over 4,700 stores in the U.S., including almost 600 Sam’s Club stores. It’s the largest employer in the U.S. As a retailer of this size, it can dictate the price it pays to wholesalers at a magnitude many other companies cannot.
As a result, Walmart has the capacity to sell its merchandise at lower prices, compared with other businesses in the markets in which it operates. This can have an effect that goes beyond the retail market and into manufacturing and production. In addition to its buying power, Walmart has historically controlled its compensation to employees in such a way that rival companies might feel pressured to reduce salaries or cut benefits to their workers in response.
Once a Walmart location opens, the lower prices, concentration, and selection of merchandise in its stores tend to draw consumers away from local retailers. With less foot traffic and declining sales, local retailers see their profits fall, forcing them to make cost-cutting decisions. Such strategies, however, may not be enough to keep such businesses open as Walmart continues to operate profitably while local retailers' losses mount. In time, Walmart might choose to relocate its store to another location, but the impact of its initial arrival may continue to last well afterward.
The term Walmart Effect was first used in the 1990s, but Charles Fishman wrote a book entitled “The Wal-Mart Effect” in 2006 which details how economies are affected by Walmart. Fishman goes beyond the advantages and disadvantages for local businesses but also includes how Walmart can positively and negatively impact consumers.
FAQs
How the Walmart Effect Works. The Walmart Effect also has its positive benefits; it can curb inflation and help to keep employee productivity at an optimum level. The chain of stores can also save consumers billions of dollars but may also reduce wages and competition in an area.
What are the positive effects of Walmart? ›
Walmart's positive effects on local economies
The store's low prices attract consumers from nearby communities, and when consumers are in the area, they're more likely to spend money at surrounding businesses. Companies flocking to a Walmart mall may draw business from people who might not otherwise be in that area.
How is Walmart effective? ›
Walmart's success can be attributed to having their own supply chain to streamline fulfillment and cut down on costs. It also provides them with more control over their logistics network. In this article, we take a closer look at the Walmart supply chain and why it continues to be so successful decades later.
What are Walmart's pros? ›
Customers of all segments can purchase a variety of products from it for an affordable price. In addition to its diversity, Walmart offers hundreds of product segments, allowing any number of companies to specialize in one of them, often with better products at a lower price.
What is a competitive disadvantage of Walmart? ›
The company may be hesitant to invest in new technologies or innovations because this could increase its costs and, therefore, its prices. Refusal to invest in research and development leads to a lack of innovation, which can put Walmart at a disadvantage compared to its competitors.
What are the disadvantages of the Walmart effect? ›
The presence of a Walmart store can hurt the business of smaller companies and lower wages for local workers. Much of the Walmart Effect can be attributed to Walmart's immense buying power. The Walmart Effect can also affect suppliers, who must drive their production costs down in order to afford to sell to Walmart.
Does Walmart have good benefits? ›
Walmart Benefits
Live Better U: Walmart employees get 100% of their college tuition and books covered for college degrees or professional certificates. Discounts: Associates receive 10% off Walmart's produce and general merchandise. Associates also get discounts on gym memberships and phone plans.
What is the Walmart effect summary? ›
The Wal-Mart Effect by Charles Fishman explores the impact of the retail giant on the global economy, consumer behavior, and the environment. Fishman delves into the company's business practices and supply chain management to reveal how Wal-Mart has transformed the way we shop and the way products are made and sold.
How does Walmart impact the community? ›
Each year, our U.S. stores and clubs award local cash grants ranging from $250 to $5,000. These local grants are designed to address the unique needs of communities where we operate. They include a variety of organizations, such as animal shelters, elder services and community cleanup projects.
What are the competitive advantages of Walmart? ›
Everyday Low Prices
Leveraging Economies of Scale, Walmart capitalizes on its vast size and purchasing power to negotiate favorable deals with suppliers, enabling the company to pass on cost savings to consumers. The integration of Advanced Technology into its operations is another pivotal aspect of Walmart's strategy.
There can be no place in a sustainable economy for a corporation like today's Walmart that advances a business model riddled with negative repurcussions—from its low-wage, environmentally destructive factories in developing countries, to shuttered local businesses all across America.
Is Walmart environmentally friendly? ›
We power around 36% of our operations with renewable energy. Zeroing out emissions from all of our vehicles, including long-haul trucks, by 2040. Transitioning to low-impact refrigerants for cooling and electrified equipment for heating in our stores, clubs, data centers and distribution centers by 2040.
How is Walmart so cheap? ›
How does Walmart stay in business with their low prices? Volume. They sell so much, they can buy at larger quantities for less, or make things for less, yet still make profit. Since they use their own distribution centers, the cost of delivery to store is also lower.
What is Walmart's weakness? ›
Dependence on Low Prices: While Walmart's low-price strategy has successfully attracted customers, it also means the company has thin profit margins. This can limit its ability to invest in innovation and technology, which could put it at a disadvantage against competitors.
What is Walmart's strategic problem? ›
Walmart encounters several problems that include stiff competition, a negative reputation, constraints in business acquisitions and joint ventures, and stringent cultural values in foreign markets (Kneer 25). There is stiff competition from other retail stores that have adopted a low-price strategy.
What are Walmart's major challenges? ›
Here are four major Walmart challenges to watch in 2023.
- Trying to 'enter the new year clean' without much excess inventory. ...
- Continuing e-commerce savings growth while mitigating costs. ...
- Expanding clinic presence is a 'must' to create major healthcare gains. ...
- Rolling out new customer banking services.
We're proud to be a part of thousands of communities worldwide and support them, whether that's through local giving and associate volunteering, providing emergency relief when disasters strike, providing access to healthy food and services or relieving hunger through food donations and our philanthropic work to ...
What are the main successes of Walmart? ›
Walmart became the world's largest retailer primarily because they were able to offer a broad range of products, were able to efficaciously leverage their ample potent competitive advantages, were able to rapidly expand into an exorbitant amount of international retail markets, were able to offer an exorbitant amount ...
What are some advantages of Walmart purchasing? ›
Walmart Marketplace's advantage at the surface
Walmart Marketplace serves customers by offering a top-quality product selection and a world-class shopping experience. In fact, Walmart.com is home to 170 MM SKUS with additional SKUS added daily.
How is Walmart good for the environment? ›
Walmart is a founding member of the Midwest Row Crop Collaborative (MRCC), which brings together retailers, suppliers and conservation organizations to help farmers in the U.S. heartland adopt farming practices that can reduce greenhouse emissions, improve soil health and water quality and lower costs.
