The Walmart Effect Explained, With Pros and Cons

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.

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.

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.