Pro-WalMart Study Refuted

A new and widely publicized study claims that there is no evidence that Wal-Mart has had a negative impact on the small business sector. A close inspection of the study by the Institute for Local Self-Reliance argues that the report is flawed.

"The study's sensational findings have attracted significant local and national media attention, including featured interviews with Dr. Sobel in U.S. News & World Report and on Fox television, and blog articles on the web sites of Business Week and the Wall Street Journal. A shorter version of the study ran as the cover story in Regulation, the quarterly magazine of the Cato Institute.

Wal-Mart has also leaped on the study, producing a fact sheet that highlights key findings and quotes from the study. The fact sheet is being distributed in communities where the company is proposing new supercenters.

A close inspection of the study by the Institute for Local Self-Reliance, however, found fatal flaws. Most remarkable, the study's authors apparently lack an understanding of the definitions used by the U.S. Census Bureau and are in fact using the wrong dataset."

Thanks to Justin Dahlheimer

Full Story: Major Flaws Uncovered in Study Claiming Wal-Mart Has Not Harmed Small Business

Comments

Comments

Michael Lewyn's picture
Blogger

a few flaws

1. The study points out that the number of small retail firms per 1 million has fallen since 1982. What does earlier data show? It may be that this is a long-run trend predating the rise of "Big Box" stores.
(To find references to 1920s concerns about chain stores, just google "1920s" and "chain stores").

2. As the article concedes, Wal-Mart is a small part of the chain store picture. Of the 22 point gain in chain store market share (from 38 to 60 percent), Wal-Mart represents about 8 points. Or to put it another way, even if every single Wal-Mart dollar went to a single-location retailer, chain stores would still have almost twice the market share of single-location retailers (60% to 32%).

3. The study's emphasis on the decline of "storefront businesses ... that require a high degree of street visibility" doesn't add much. Outside downtowns, most such businesses are set back behind acres of parking just like a Wal-Mart; thus, they no longer depend on street visibility to the extent htat they did in the pre-sprawl era.

4. The study's suggestion that law firms represent an "ailing commercial district" seems beside the point, given the revitalization of many downtowns in the period studied (1982-2002). To the extent suburban big box stores have taken share away from local retail, it seems likely that their primary victims have been suburban local retail.

Having said that, the article is of value insofar as it points out some methological flaws in the Cato study; I look forward to seeing someone try to synthesize the two with additional research.

Wal-Mart And Chains Vs. Independents

Michael, I have to disagree with some of your points.

You say: "it points out some methological flaws in the Cato study." Actually, it points out a fundamental flaw in the Cato study: the Cato study argued that Wal-Mart didn't hurt small businesses by showing that the number of business establishments has not declined since 1982. But "establishment" refers to a single location of a chain store as well as to a small business, so Cato's point is totally irrelevant to the question of whether Wal-Mart hurt small businesses.

Responding to your numbered points:

1. They are arguing that both Wal-Mart and other chains hurt independent businesses. Project the lines on their Figure 3 into the past, and it seems very likely that the trend started before 1982 (as we all know it did), but that doesn't undermine their argument that chains hurt small businesses, including the largest chain, Wal-Mart. This trend certainly does predate big-box stores, but they are talking primarily about chains, and they only mention big-box stores incidentally in parentheses: (Incidentally, the number of small retail establishments also fell relative to population during this period, reflecting the fact that, as Wal-Mart and other “big box” retailers multiplied, the trend has been a shift not only in favor of chains, but also to bigger stores.)

2. Same issue as 1: They are talking about both Wal-Mart and other chains, using Wal-Mart as the largest example of chains in general.

3. They are talking specifically about downtowns: One of the primary resources they discuss is storefront space "Only when these valuable store locations were freed up by the entry of Wal-Mart did they become economically viable locations for many other types of small businesses," they write. Among those businesses that might fill the space left vacant by the closure of a downtown department store or a hardware store, they mention an art gallery, antique mall, or "a new law firm." When a law firm or other office opens in a storefront space downtown, it is a sign, not of the "productive 'recycling' of resources," but rather of a misallocation of resources.

4. This is a good point and needs more research. To what extent are Wal-Mart and chains hurting downtowns, and to what extent are they hurting local neighborhood retail (which includes older neighborhoods as well as suburbs)? Note, however, that even if a downtown is thriving, some of its traditional function may have been undermined by Wal-Mart and chains. Downtown Berkeley, near where I live, used to have a couple of department stores where you could buy ordinary things like bedsheets and kitchen utensils; now it is thriving pretty well as a location for drama, movies, and restaurants, but you have to go to a mall to buy a new sheet for your bed.

Charles Siegel

Correlation and Causation

Although mentioned, but not highligted in the study, is that although the increase in chain stores is correlated with the decline in small businesses, it is not necessarily the cause of the decline. You can basically look at any period in US history and find a "chain" store dominating low-margin, high volume retailing in some way or another... A&P, Woolworth's, Tower Records (all gone for the most part I believe). It is the nature of basic consumer retail products that the low cost provider is usually going to win, and "chains" have advantages in that arena from their size. Unfortunately (or fortunately), it's reality. Given that "chains" have been around, and usually have dominated retail, for the lasy 125 years or so in the US, why are small businesses suddnely only in decline over the last 25 years? Have they been declining at this rate the whole time (I don't know the history, nor do I have the data set)?

I would think the decline in small businesses (however you'd like to define the term) is due more to the ever increasing difficulty of starting a small business this day in age (especially a consumer retail products business). There's more permitting and licensing necessary, employee costs are up (health care is much more expensive then it used to be, plus the increase in the social security tax to 6.2% correlates nicely to the 1982 timeframe), insurance costs and mandates are up, real estate prices-and therefore rents- are still up in inflation-adjusted terms, etc., etc. I saw a study somewhere detailing the necessary start-up costs for a small biz in fees and licenses alone in San Francisco (where I live)... and the costs are pretty high (plus they're spent before you can even make a dime). Like it or not, much of this burden didn't exist in previous generations, so the hurdle one had to climb to be a successful small business owner was much smaller, and therefore more available to the general population, than it is today. "Chains" have a much easier time absorbing these costs.

I know many of these issues are all intertwined, but I definitely think that a study showing the a correlation between the amount of chains and the amount of small businesses (and both sides of the argument) doens't really take into account what is going on in the economy as a whole that may be affecting the numbers for a completely unrelated reason than the one purpotedly being studied.

Causation, Correlation, and Common Sense

They are considering data since 1982 because that is when Wal-Mart became important, but they are not claiming the decline started in 1982. As I say below: "Project the lines on their Figure 3 into the past, and it seems very likely that the trend started before 1982 (as we all know it did), but that doesn't undermine their argument that chains hurt small businesses, including the largest chain, Wal-Mart."

Of course, it is true that the lower-cost business will win in the market place, but I shouldn't have to walk you through the usual economic argument that the business that charges the lowest costs to its customers could have external costs borne by the public. Likewise, I shouldn't have to walk you through the usual list of external costs caused by Wal-Mart, such as sprawl and auto-dependency.

I don't think we could prove causation without a randomized controlled trial, which is obviously impossible in this case. You can't prove causation for most social issues, so you have to go with correlation and common sense.

Charles Siegel

Wal-Mart and Common Sense

So Wal-Mart is now the cause of sprawl and auto-dependency...amazing, is there nothing that Wal-mart can't do? Wal-Mart is simply a creation of the marketplace in which it functions... the entire country has been zoned for sprawl and auto dependency since the 1950s (at least). Wal-Mart has simply taken advantage of that fact and optimized it's performance within those bounds. Wal-Mart did not create sprawl or auto-dependency. Sprawl and auto-dependency existed before Wal-Mart...Wal-Mart may stretch those concepts to it's advantage, but the crappy zoning and auto-oriented growth plans were there before it came about. The fact that these conditions may or may not create costs borne by the public is not Wal-Mart's fault any more than it's John Q. Public's fault that he drives to work on a freeway when the government has basically paid him to do just that (he is simply maximizing his economic situation within the bounds presented). You could then tun the whole argument and around and say that sprawl zoning has essentially hurt small businesses by producing Wal-Mart (because, honestly, could Wal-Mart in its present form actually exisit without those policies?).

I agree, Causation for social issues can't be exactly proven, but subsituting correlation at least takes the common sense to see what other variables may also be at work. Plus, I still maintain that it is much harder to start a small business today (in anything that involves physical goods anyways) than it was in 1982, or even 1952 for that matter (insurance, health care, pointless regulations and fees are up in addition to the always present risk of failure).

Wal-Mart, Sprawl, And Chains

No one has ever said that Wal-Mart is the sole cause of sprawl and that the market and poor zoning have nothing to do with it, as your straw-man argument claims.

In fact, my post was not about the cause of sprawl. It said that Wal-Mart costs less to the customer but has greater social costs than main-street retailing, including more auto-dependency and sprawl. Whether or not the cause of that sprawl is bad zoning, the fact remains that the cost of Wal-Mart to the consumer does not reflect its total costs because of its greater social costs.

Likewise, I wasn't "blaming John Q. Public" for driving to "work on a freeway when the government has basically paid him to do just that." I do think we should change government policy so we no longer force John Q. Public to be auto-dependent - but you ignore the policy issue when you spew vitriol about who to blame.

You should try to get a bit less angry about blame and to think a bit more about the issues. Ignore the anger about who to blame, and your post seems to generally agree with me that sprawl zoning, government policies promoting auto-dependency, and Wal-Mart all make for less viable cities.

Charles Siegel

Today's News About Wal-Mart

EASTON, Pa. – A supermarket is defending itself for refusing to a write out 3-year-old Adolf Hitler Campbell's name on his birthday cake. Karen Meleta, a ShopRite spokeswoman, said the store denied similar requests from the Campbells the last two years, including a request for a swastika.

The Campbells ultimately got their cake decorated at a Wal-Mart in Pennsylvania, Deborah Campbell said Tuesday.

PS: This post does not mean that I think Wal-Mart caused the rise of Nazism.

Charles Siegel

Cause and Effect

I definitely agree with you that Wal-Mart has several societal costs associated with it that are not entirely reflected in the cost to the consumer. However, attirbuting those costs to Wal-Mart (and other chains) is misplaced as those retailers are simply operating within the rules given to them. Wal-Mart, and chains in general are simply the retailing manifestation of those causal policies (including sprawl zoning, as well as a host of other things like US trade policy, monetary policy, private property rights, state nsurance and health care rules...etc.). The same thing was true for A&P and Woolworth's, and Wal-Mart will eventually fade away just as those two did when the rules change. Wal-Mart is an effect, not the cause....and Wal-Mart could not exist as it presently does without the current rules in place.

In relating this back to the study above, the study is simply comparing to the number or chains to the number of small businesses are drawing a conclusion from that correlation. Even the authors cite, on page 5, that "?None of the data presented here is causal: the fact that independent retail businesses declined in numbers and market share at the same time that Wal-Mart and other large-format retailers grew does not prove that one caused the other." Again, correlation does not equal causation. I think a much broader array of causes are affecting the decline in small businesses (primarily that the rules they must operate by are being increasing stacked against them) and that Wal-Mart, and other chains, are simply a manifestation of those circumstances and not the cause.

Re: Cause and Effect

My point all along has been that the rules should change to take externalities into account, and apparently you agree with me that "Wal-Mart could not exist as it presently does without the current rules in place."

The study by the Institute For Local Self Reliance is meant to refute the Cato study, and it does a very good job. Look at the following quotes from the summary at the top of this item, and you will see that the the ILSR study simply pointed out blatant flaws in the Cato study:

Pro-WalMart Study Refuted

A new and widely publicized study claims that there is no evidence that Wal-Mart has had a negative impact on the small business sector. A close inspection of the study by the Institute for Local Self-Reliance argues that the report is flawed.

A close inspection of the study by the Institute for Local Self-Reliance, however, found fatal flaws. Most remarkable, the study's authors apparently lack an understanding of the definitions used by the U.S. Census Bureau and are in fact using the wrong dataset."

Charles Siegel

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