Better With Wal-Mart Than Without

Nearly a quarter of a century ago, Kenneth Stone did one of the first studies on the economic effects of Wal-Mart on rural towns. He has revisited that study and again found that the coming of a Wal-Mart increases a town's overall retail sales.

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Editor’s Note: In 1988, Iowa economist Kenneth Stone conducted the first study of the impact of Wal-Mart stores that were then springing up across rural America

Stone’s original conclusion was that, yes, Wal-Mart took business from local retailers. But, he found, if local retailers could differentiate themselves from the selection of goods found at the huge retailer, they could benefit from the increased shopping traffic brought to town. The retailers who competed directly with Wal-Mart were hurt. Overall, Wal-Mart helped stabilize or increase local retail sales. 

Ken Stone last year revisited his initial study, looking at the impact of Wal-Mart on small Iowa towns over a much longer period. Below are excerpts from the conclusion of his report. The full report can be found here.

Consistent with previous studies, this analysis shows that Wal-Mart’s entry into smaller trade centers in Iowa had a big initial impact on host town retail sales, with some categories experiencing large significant increases while others saw declines in retail sales. 

Over time, the impact declined, but in general towns hosting a Wal-Mart store appeared to have fared better, in terms of total retail sales, compared to similar towns in which Wal-Mart did not locate. This analysis supports the idea that Wal-Mart’s presence helped to stabilize or even expand the local retail sector of most rural host communities.

It is important to note that these findings are derived from a relatively small sample, Iowa towns with less than 20,000 population in which Wal-Mart opened prior to 1994. Therefore, these results reflect the impacts of discount stores, which are a smaller format store without the full line of grocery items found in the more recent supercenter format. 

Wal-Mart’s impact may vary by location and across time… Some firms may close while others open, resulting in small, or no, net impacts. Finally, this study is focused quite narrowly on one measure of Wal-Mart’s impact: retail sales in the communities in which it locates. But clearly the debate surrounding Wal-Mart’s impacts (both positive and negative) extends far beyond the impacts on other local retailers.

Policy Implications

When Wal-Mart opened its first stores in Iowa in the mid-1980s, it generated considerable concern among business people and chambers of commerce across the state. Part of the controversy may have been fear of the unknown; people simply didn’t know what to expect, or how to adjust, to such a significant change in the local retail market. 

Twenty-five years later, there is much less controversy when Wal-Mart does establish a new store. While some retail businesses did lose trade, and some did ultimately go out of business, many others adopted new strategies to compete effectively with Wal-Mart. As demonstrated in this analysis, having a Wal-Mart store stabilized the retail sector of smaller trade centers, helping to curtail the out-migration of shoppers to the larger cities. 

A robust local retail district provides residents with more convenient shopping options and the higher level of competition introduced by a store like Wal-Mart forces other local businesses to improve efficiency whereby they can offer lower prices or else compete on quality and service. As a result, consumers benefit.

So what should a local economic developer do with this information? Does it make sense to recruit large retailers, potentially offering financial incentives, or is it better to discourage it? 

Unfortunately, it’s not an easy question. In previous years potential host town economic development officials fell into three camps; 1) most local governments simply welcomed the introduction of a Wal-Mart store, 2) some were adamantly against it or 3) a minority of local officials wanted a Wal-Mart store so badly that they offered the company financial incentives to come to their towns. 

Kenneth Stone
Stone looked at retail sales in communities before and after the coming of a Wal-Mart and compared those figures to similar towns that did not get a Wal-Mart. Sales in Wal-Mart towns tended to increase after the store’s arrival.

Generally, economists agree that incentives should only be used when they do not compromise the competitive position of other local firms. J. I. Stallmann and D. A. Ball (2002) state:

To maintain competitive conditions, the public sector should avoid actions that directly favor one firm over another, often referred to as maintaining a level playing field. When the public sector takes actions that relax the rules or lower the costs of doing business specifically to benefit one firm, but not for all, it is adding a noncompetitive element to the business climate.

The empirical results from this analysis suggest that the practice of offering financial incentives to a company like Wal-Mart fails this level playing field test because it captures a substantial amount of sales from existing local merchants. Some would further caution against the use of economic development incentives when one local economy benefits at others’ expense, contributing little to overall economic growth, and leading to greater economic disparity among communities. As noted above, in the case of retail, incentives may merely move sales from one community to another.

From the community’s point of view, however, offering incentives to retailers may make sense. One major factor in the decision to offer incentives is the fact that communities are increasingly dependent on revenues from sales taxes. Thus more retail means greater tax revenues. 

And, most local officials don’t consider the effects on neighboring towns in their decision-making process. (Some economists) argue that as long as the incremental tax revenue from a proposed project exceeds the cost of subsidizing a retail development, it is in a city’s best interest to offer incentives.

Perhaps a more regional approach to retail development in rural areas could alleviate some of these concerns. 

Encouraging retail development can benefit rural consumers by offering greater convenience, variety and lower prices. Off-setting negative impacts within the region might be identified and, where appropriate addressed. 

For example, Wal-Mart could be encouraged to extend the geographic distribution of its local donations to smaller surrounding towns whose residents are likely shop in the host communities, or host town officials might find ways to share the increased tax revenue generated by higher retail sales in the host community across impacted communities.

Kenneth Stone a professor of economics at Iowa State University.

 

 

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