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ECONOMIC ANALYSIS: How Wal-Mart fulfills the promise of its new slogan

September 24, 2007

Economists usually don't follow marketing slogans, but Wal-Mart's shift from its "Always Low Prices" slogan to "Save Money, Live Better" caught my eye.

The slogan is based on a study by the national consultancy firm Global Insight. During a 2005 conference on Wal-Mart, Global Insight's economists released a study showing the average American family saved a little more than $2,300 annually by shopping at Wal-Mart. The current marketing campaign uses updated estimates of Wal-Mart's savings at about $2,500 per year for the average family. But are these numbers to be believed?

Critics of the giant retailer were quick to pounce on the Global Insight study. It was, after all, sponsored by Wal-Mart. But the evidence that Wal-Mart saves consumers money, and the reasons it does, are pretty well established by academics.

Perhaps the best-known pricing study was performed by MIT professor Jerry Hausman. He found pricing savings in excess of 15 percent on a large number of items. University of Missouri economist Emek Basker found prices were significantly lower across a wide set of items using data collected for the local cost-ofliving studies (like the one we sponsor at Ball State University).

In my recent book on Wal-Mart's local impact, I compiled a number of local pricing studies and found consistent evidence that Wal-Mart is the low-cost retailer for both food and dry goods. I also estimated the cost-of-living impact of Wal-Mart in Florida. I found that having Wal-Mart in a county cut the cost of living about a half percentage point in total.

So, whatever you think about Wal-Mart, you must concede that its prices are far lower than its competitors'. Indeed, Wal-Mart in effect provides 10 weeks of free meals to the average American family. To place this in context, the savings from shopping at Wal-Mart provide more nutrition supplement than the entire food stamps program nationwide. But how does Wal-Mart wring those cost savings?

Critics claim Wal-Mart can offer lower prices because it offers lower wages and poorer benefits than other retailers. This is simply unsupported by facts and common sense. (In the spirit of full disclosure, I presented three papers at the Wal-Mart conference, all of which dealt with labor costs.) Wal-Mart's wage-and-benefit packages are quite similar to other big-box stores. Common sense tells us the company must pay competitive wages; otherwise, where would it find workers for a new store?

Wal-Mart can charge lower prices because it is more efficient. It buys goods less expensively from producers, requiring them to cut costs (like excess boxes on deodorant), and moves goods quickly from the factory to the store (slashing inventory and financing costs). That allows it to price goods cheaply.

Think what you will of Wal-Mart, but its slogan to "Save Money, Live Better" is certainly truth in advertising.



Hicks is director of the Bureau of Business Research at Ball State University. His column appears weekly. He can be reached at bbr@bsu.edu.
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