The Myth of the Walmart Effect

(MoneyWatch)  Everybody knows that when Walmart comes in, local small businesses get wiped out. But as is often the case, everybody is wrong.

Recent research shows that while some small businesses do suffer when the Bentonville behemoth builds nearby, others prosper. And when you dig into it, you find that it may not be Walmart that is hurting small retailers and small communities. It may be that they're hurting themselves, by blindly accepting the what-everybody-knows myth of the Walmart effect.

The research in question appeared in 2009 in Economic Geography, a scholarly, peer-reviewed journal from Clark University in Worcester, Massachusetts. The three researchers hailed from the University of Florida, the University of Toronto and Princeton University -- all reputable institutions far removed from Bentonville, Arkansas. Before sharing the details of the results, however, let's discuss the weaknesses in the study.

First, it's restricted to Florida, which means that a study done in, say, California, might find something different. The researchers also looked at just four types of businesses -- antique stores, photo retailers, beauty salons and home furnishings -- so another obvious question is what happens to other small retailers. No doubt additional limitations exist and will be highlighted by later researchers who have grants to spend and posses of grad students to keep busy on future studies. One possibility: The study looked at activity from 1980, three years before Wal-Mart appeared in Florida, until 2004, so things may have changed since then.

Having said that, this appears to be a well-done study. The data came from authoritative sources: the state of Florida for small business openings and closings and Wal-Mart, for its store openings. Anticipating your next objection, the authors explicitly deny that Wal-Mart endorsed or influenced the results.

Among the key findings:

• Walmart probably scares away potential entrepreneurs more often than it forces them to shut down. Certainly some stores do close. But the authors say that declines in net numbers of nearby small retailers are better explained by fewer entries than more closings.
• The stores next door don't take the hardest hit when Walmart arrives. Rather, the most-affected are located outside the immediate ZIP code. Shoppers from neighboring areas drive past their local stores and, once they get near Walmart, go into active shopping mode and patronize those nearby.
• Not all nearby stores get flattened by the Bentonville bulldozer. Those selling products and, especially, services that Walmart doesn't will tend to do well. Again, because shoppers arrive near Walmart ready to spend, they tend to leave their money with whomever nearby is selling what they want.
• Retailers that close near Walmarts tend to be selling the same types of items as Walmart. These authors go on to add that the empty storefronts, over time, tend to be filled up again by businesses such as professional firms, boutiques and restaurants that do not duplicate Wal-Mart's offerings. This tends to diversify and enrich local retail markets, while providing new opportunities to entrepreneurs who might not otherwise have had them. They describe this as an example of Schumpeterian "creative destruction," which is generally held to be a good thing.

The takeaway for would-be entrepreneurs? Consider locating near a Walmart and offering items that it doesn't. The less-obvious takeaway is to definitely avoid opening any place where the only Walmart is in an adjacent ZIP code. The authors found that both business openings and business closings accelerate in these ZIP codes. So, while it appears unjustified for entrepreneurs to avoid being near Walmarts, it's probably regrettable that more entrepreneurs don't avoid being not near Walmarts.

Close examinations of business phenomena can be intimidating. They illustrate that our common understandings are often wrong, and that commercial ecologies are often much more complex than they seem. But, hopefully, they will convince you to look more deeply, ask more questions and not too quickly accept what everybody knows.

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