Health Care

ECONOMIC ANALYSIS: Rethinking Wal-Mart from an economic view

February 21, 2005

It is said America loves an underdog. If that's true, so is the reverse. No one, it seems, loves the Goliath, the big kid on the block, the frontrunner. And in the world of retail mass merchandizing, they don't get any bigger than Wal-Mart.

The Bentonville, Ark.-based company has been a force to be reckoned with in almost every corner of the country, including all parts of Indiana, for almost two decades. Its sprawling superstores employ more than 1-1/2 million people, selling $285 billion worth of food and merchandise in cities large and small. It is one of the largest companies in America, bigger than Exxon Mobil Corp., General Motors Corp. or IBM Corp.

That success makes it an inviting target for criticism. To hear some of its detractors talk, Wal-Mart is responsible for the death of small towns at home, the success of sweatshops abroad, the health care crisis and the trade deficit. The negative rhetoric surrounding its business practices and its wage and benefits policies has risen to the point that the company felt obligated to spend millions of dollars in a recent spate of full-page newspaper ads to tell its side of the story.

Yet there is one stubborn fact about Wal-Mart that no critic has been able to face down: people love to shop there. No one forces its customers to walk through its doors or, for that matter, its vendors to stock its warehouses or its employees to work in its stores. When we criticize Wal-Mart for its focus on low-priced, imported goods of all kinds, we are really criticizing ourselves. We have voted with our dollars and the results are overwhelming. We like lower prices, even if they come at a cost of less personalized service, a non-union work force, or a Made in USA label.

But just because Wal-Mart is popular doesn't mean we can't think critically about the implications of its success.

For an economist, criticism of Wal-Mart's relentless pursuit of lower costs through its scale and distribution expertise cuts very close to the bone. These are Patrick Barkey

exactly the benefits of competition that we preach about in our classrooms every day. Wal-Mart's presence in the marketplace forces its competitors to respond, and that process, we have always argued, is good for the customer. Even the customer who doesn't shop there.

The darker side of competition, of course, is that not all competitors survive. It's the dollar votes that count in the marketplace and warm feelings for your corner grocery or clothing store won't be enough to keep them in business. The same can be said for many of the domestic manufacturers who once made the products on those shelves. If they haven't been able to meet the price of the off-shore competition-often by outsourcing the work abroad themselves-they won't survive, either.

Then there is the other side of the equation to consider. As a buyer of goods and services, Wal-Mart flexes its muscle without hesitation. Its strict standards on terms and delivery of goods, and its abhorrence of unionized labor are legend in the industry, and win it few friends in some circles.

But do we really expect a profitoriented business to behave any differently? After all, domestic automakers regularly ram price cuts down their suppliers' throats. And companies of all sizes and types demand tax breaks from the communities that house their facilities. I would venture to say that, for every business that complains about Wal-Mart's behavior, there are 10 more who wish they could do the same thing.

We should also remember that Wal-Mart's success in the future is far from assured. The history of the retail industry is dotted with Goliaths, like the once-dominant A&P grocery chain, who have since faded from view. But even if Wal-Mart's star doesn't shine forever, we can be assured the forces that led to its success will be much longer-lasting.



Barkey is an economist and director of economic and policy studies at the College of Business, Ball State University. His column appears weekly. He can be reached by e-mail at pbarkey@ibj.com.
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