Frontiers of Entrepreneurship Research, 1995

Frontiers of Entrepreneurship Research
1995 Edition


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    FRONTIERS OF ENTREPRENEURSHIP RESEARCH 1995.


    WHEN WAL-MART COMES TO TOWN:
    A LOOK AT THE RETAILING GIANT'S IMPACT ON RURAL COMMUNITIES

    Jeffrey E. McGee
    University of Nebraska at Omaha

    George G. Gresham
    University of Nebraska at Omaha

    ABSTRACT

    This study examined the economic impact of Wal-Mart's arrival on local retail communities in small midwestern towns. The results of the research revealed that Wal-Mart's entry into local markets was associated with dramatic disruptions in existing retail trade patterns. Specifically, retailing communities in counties containing a newly opened Wal-Mart seemed to flourish while the merchants in surrounding communities tended to experience significantly diminished retailing activity.

    INTRODUCTION

    Virtually unchallenged in rural communities in the South and Midwest for over thirty years, Wal-Mart has grown from a single store in Arkansas, into a chain of nearly 2,000 stores scattered throughout the United States. New stores are opened at a rate of nearly 150 each year. Weekly sales exceed $1 billion and the retail giant's year-end sales are expected to total over $125 billion by the turn of the century (Sullivan, 1993).

    Wal-Mart developed an aggressive expansion strategy as it grew from its initial Arkansas store in 1962, and small-town markets have been the backbone of Wal-Mart's expansion. New stores were located primarily in towns of 5,000 to 25,000 population and were typically greeted with open arms by both community leaders and residents. Initially, most rural towns and cities enthusiastically welcomed the retailing giant since a new Wal-Mart would mean a wider range of products and lower prices. These communities felt that the loss of Main Street life was simply an incidental price to pay for consumer savings and expanded trade (Marsh, 1991; Associated Press, 1988; Carfagno, 1989).

    However, it is becoming increasing apparent that the retailing giant's success often comes at the expense of Main Street mainstays (Smith, 1988). Few local merchants can compete against expansive 40,000 square-foot stores whose cosmetics counters alone dwarf many rural "mom and pop" operations. Nor can many small retailers match Wal-Mart's prices, which are frequently cheaper than the wholesale prices local merchants pay for their merchandise. As a result, downtown business districts begin to empty, hastening the erosion of the commercial identify and very social fabric of many rural towns and cities (Blumenthal, 1989). This study provides a systematic examination of the impact that large mass-merchandisers, such as Wal-Mart, have on retail merchants in rural towns and cities. Specifically, this study examined the trends in retail trade flows of rural communities in three states before and after the arrival of Wal-Mart.

    PRIOR RESEARCH

    Despite increased scrutiny by a coalition of politicians, historic preservationists and small shopkeepers in communities throughout the country, Wal-Mart's impact on local business communities has been the focus of little scholarly research. Moreover, the few empirical studies that have examined Wal-Mart's impact have produced inconsistent results. Carusone's (1976) examination of retailers in 10 small Ohio communities was one of the first studies to address how large mass-merchandisers affect local merchants. He found that the development of shopping centers and large discount stores in rural communities had created highly competitive environments. The number of independent local merchants decreased by approximately eight percent during the ten-year study period, while the number of chain store outlets increased by nearly eleven percent.

    Walzer and Stablein's (1981) follow-up study found that the growth of mass-merchandisers and regional shopping centers in general has had important impacts on existing consumption patterns and retail structures. They concluded that the most successful local merchants have adapted by offering broader selections at lower prices. However, they added that many other small retailers have been forced out of business.

    Ozment and Martin (1990) investigated the impact of large discount retail chain stores on the competitive environments of 164 rural counties in Arkansas, Missouri, and Oklahoma. The results of their study revealed that the structure of retailing in areas that have large discount stores were dramatically affected. Specifically, the per capita retail sales in communities containing a large discounter were significantly higher than communities without a mass-merchandiser. The authors concluded that large discount stores, such as Wal-Mart, generally benefit the host communities. The study focused on existing conditions, however, so the longitudinal impact of mass-merchandisers was not addressed. No attempts were made to examine the economic conditions before and after the arrival of large discounters.

    Stone's (1988) examination of 17 rural Iowa towns was the first study to explicitly address Wal-Mart's impact on local small merchants. Using census data, he concluded that per capita sales increased faster in towns with Wal-Mart stores than in the average towns across the state. Stone also reported that Iowa towns within a 20-mile radius felt Wal-Mart's pull. Retail sales in these communities declined by nearly 10 percent after five years. The retailing giant's impact was more ominous for Iowa's smallest hamlets. Newly opened Wal-Mart stores drained as much as $200,000 a year from towns under 1,000 people. Moreover, Stone identified clothing, drug, jewelry, auto-part, variety, and hardware stores as being especially susceptible to severe market share losses. Hardware stores, for example, typically lost over 40 percent of their market share.

    Franz and Robb (1989) surveyed Wal-Mart's impact on local retail employment and wage statistics in 14 rural Missouri counties. They found no evidence of Wal-Mart producing a negative impact on local economies. In fact, measures of income, wages, and salaries increased for all the counties studied. While the number of retail establishments declined over the period of the study, the authors speculated that the remaining establishments were larger and had more employees and larger payrolls than previously. However, Franz and Robb's work is flawed because it failed to compare the changes in these measures to counties without a Wal-Mart; and thus, it is not possible to tell whether the changes occurring were directly attributable to Wal-Mart's arrival. Furthermore, the study is also suspect because it was funded by Wal-Mart (Greer, 1989).

    Finally, Daniels and Keller (1991) investigated the retail sales and tax data from 14 rural Kansas counties over a ten-year period to determine the impact of newly opened Wal-Mart stores. The results of this study found that the presence of a recently opened Wal-Mart store increased per capita sales faster in towns with a Wal-Mart. As one would expect, noncompeting businesses experienced the greatest benefits as a result. However, merchants in direct competition experienced losses in revenues ranging from five to fifty percent. In general, the authors concluded that Wal-Mart stores have had a positive economic impact on the towns in which they located. Income, sales tax revenues, and populations all increased after Wal-Mart's arrival, suggesting that the large discounter helped strengthen a host town's position as a regional retail center. Unfortunately, the focus of this study was limited to the counties containing a Wal-Mart and not the surrounding retailing communities. Consequently, Wal-Mart's impact on adjacent counties was left unexplored.

    It is evident that the impact of Wal-Mart on small-town business communities is not fully understood. The existing literature is largely anecdotal, and the empirical work is inconclusive. Much of the anecdotal evidence does, indeed, suggest a link between the arrival of Wal-Mart and the deterioration of the central business districts of many rural towns and cities (e.g., Marsh, 1991; Sheet, 1989). However, it can also be argued that Wal-Mart's competition gives some local retail merchants a needed jolt, forcing them to develop unique niches and services in order to survive.

    We anticipate that Wal-Mart's entry into a local area disrupts the existing retail trade patterns. Specifically, we expect that the retailing giant pulls retail dollars from surrounding communities. Hence, the following hypotheses:

    H1: The level of retailing activity in a community will increase after Wal-Mart enters the community.

    H2: The level of retailing activity in a community will decrease after Wal-Mart enters an adjacent community.

    METHODOLOGY

    The initial step of this study involved identifying the locations of all Wal-Mart stores opened between 1982 and 1992 in Iowa, Kansas, and Nebraska. These three states were chosen because Wal-Mart actively opened new stores in this region during the last decade. The actual store locations were identified by examining Wal-Mart Annual Reports and other published data (e.g., newspapers, Wal-mart promotional material, and retailing trade journals such as Retailing News).

    Next, the trends in retail trade flows were examined for each geographic region containing a newly opened Wal-Mart. Geographic regions were defined as the counties adjacent to the counties containing a Wal-Mart. The sample was limited to counties that were not adjacent to metropolitan counties or had populations greater than 40,000 people. The examination of retail trade flows focused on the level of retail sales and effective buying income as reported in Sales and Marketing Management's (S&SM) annual "Survey of Buying Power." S&SM provides retail trade data, by county, for 7 different product categories including hardware, clothing, and general merchandise. Effective buying income is defined as personal income less personal taxes, or "disposable personal income." These two economic variables allowed a computation of a "sales conversion index' (SCI) for each retail trade area that contained a Wal-Mart. This index provided an indication of the economic health of a given retail area as compared to similar trade areas (Brockway and Mangold, 1988).

    The sales conversion index is based on the idea that the percentage of effective buying income relative to retail sales varies across retail trade areas. This percentage is influenced by the level of income and such non-retail expenditures as housing, utilities, insurance, and local taxes. The SCI compares a subject area to a benchmark area in terms of its ability to convert effective buying income into retail sales. Trade areas similar in terms of income and non-retail expenditures would be expected to have approximately the same ratio of retail sales to effective buying income. Therefore, an SCI of 100 indicates the retail area in question has a ratio of retail sales to effective buying income equal to the benchmark.

    Computation of the SCI involved the following steps. First, conversion factors were computed for both the subject areas and the benchmark areas. The subject areas included counties containing a Wal-Mart and all adjacent counties. The benchmark areas reflected all non-metropolitan counties. Next, a Sales Conversion Index was calculated for each subject area. Again, the subject area were all counties containing a newly opened Wal-Mart and all adjacent counties. The following formula was used to calculate the SCI for each area. SCIs were calculated for each of the retail categories listed in the "Survey of Buying Power": apparel and accessories, building materials and hardware, drugstores, furniture and appliances, and general merchandise.

    Of particular interest for this study were those retail areas that had a Wal-Mart with SCIs substantially above or below 100. A high ratio indicated the retail trade area was benefiting from a net inflow of consumer dollars, or inshopping, most likely from nearby areas. A low ratio, on the other hand, revealed a retail area experiencing a net outflow of retail trade.

    RESULTS

    Table 1 contains the number of counties from each state used in the study. 52 Wal-Mart stores were opened in rural communities between 1982 and 1992 in Kansas, Iowa, and Nebraska. A total of 246 counties were adjacent to the counties containing the newly opened Wal-Mart.

    In 44 of the 52 counties containing a Wal-Mart, the Sales Conversion Index (SCI) increased after the mass-merchandiser's entry. In other words, the data indicated that newly opened Wal-Mart stores were consistently attracting retail dollars from surrounding communities (i.g., roughly 85 percent of the locations). Moreover, 29 counties experienced SCI increases by as much as 25 percent after Wal-Mart's arrival. SCIs calculated for individual store types indicated that Wal-Mart stores attracted hardware and general merchandise retail dollars, in particular, from surrounding communities.

    Not surprisingly, the communities surrounding the newly opened Wal-Mart stores experienced declining SCIs. In other words, the retail dollars were being pulled from the local merchants of nearby towns and cities. Specifically, 78 percent of the surrounding counties saw their SCIs decline, on average, by as much as 55 percent. General merchandise and hardware stores seemed to be especially susceptible to Wal-Mart's pull.

    Table 2 provides support for the two hypotheses. The table contains information indicating statistically significant differences in the 3-year average SCI of counties before and after Wal-Mart's arrival. On average, counties containing a Wal-Mart experienced a 6.4 percent increase in their SCI after the retailing giant entered the area. Conversely, the SCIs of surrounding counties declined by over 8 percent, on average, after Wal-Mart's entry into an adjacent county.

    Table 3 provides information on difference in SCIs associated with the various store types. For counties containing a Wal-Mart store, SCIs increased for every store type. However, the only significant differences occurred in the hardware and general merchandise store types. On the other hand, significant differences were detected in every store type category except furniture and appliances for surrounding counties.

    Finally, the retail trade flows of regions containing newly opened Wal-Mart stores were graphed. The SCIs of every county in the region containing a Wal-Mart were plotted for the six years surrounding the mass-merchandiser's arrival (i.e., three years prior to Wal-Mart's arrival and three years after). These graphs illustrate how the existing retail trade patterns were altered after Wal-Mart's entry into the area. Space limitations hinder the presentation of every graph but the following figures depict the general patterns consistently detected. The flags indicate when and where Wal-Mart entered the area. The remaining lines represent the surrounding counties. For example, Figure 1 depicts the retail trade pattern of Hall County, Nebraska, and the adjacent counties. Wal-Mart opened a store in Grand Island in 1989. As expected, the SCI for Hall county increased after 1989, the year Wal-Mart arrived. Moreover, the SCI's for every adjacent county decreased after 1989 indicating that retail dollars were being from "pulled" from the county. Figures 2 through 5 reveal similar patterns for four additional regions in Nebraska.

    DISCUSSION

    The implications gained from this study are twofold. First, Wal-Mart's ability to attract retail dollars from surrounding communities can help stabilize the overall retailing community of towns possessing a Wal-Mart. The retailing giant's entry into a market surely intensifies the level of rivalry but more potential consumers are attracted from surrounding areas. Therefore, competing around -- not against -- Wal-Mart would seem to be the best approach for small retail businesses facing local competition from mass-merchandisers.

    The implications for retailing communities in surrounding communities are not nearly so positive. Wal-Mart definitely has very strong drawing power, and consumers seem willing to travel some distance to patronize a Wal-Mart store. Consequently, the local merchants have to fight even harder for a smaller retail customer base. The good news is that the local retail communities of counties adjacent to Wal-Mart's county have been able to make up some lost ground after the apparent "newness" of a recently opened Wal-Mart store dissipates.

    Overall, it appears that Wal-Mart's entry into rural communities disrupts the existing retail trade patterns. However, additional research is needed to fully understand the impact Wal-Mart, and other large mass-merchandisers, have on rural economies. Studies involving specific communities instead of entire counties is warranted. Finally, research designs using primary data would be extremely beneficial. Individual small businesspersons could provide valuable information on how they were impacted by Wal-Mart's arrival.

    REFERENCES

    Associated Press, (1988) Wal-Mart Changing Rural Texas. Arkansas Gazette, Mar 15, 1C.

    Blumenthal, K. (1987) Arrival of Discounter Tears the Civic Fabric of Small Town Life. Wall Street Journal, Apr 14, 1.

    Brockway, G, & Mangold, W. (1988) The Sales Conversion Index: A Method for Analyzing Small Business Market Opportunities. Journal of Small Business Management Apr, 38-48.

    Carfagno, J. (1989) Good or Bad: Wal-Mart's Presence Felt by Small Towns. Arkansas Gazette, Sep 3, 1A.

    Carusome, P.S. (1976) Institutional Change and Adaptive Behavior in Small City Retailing. In E,M. Rams (ed.) Analysis and Valuation of Retail Locations. Restin, Virginia: Restin Publishing.

    Daniels, T.L., & Keller, J.W. (1991) What Do You Do When Wal-Mart Comes to Town? Small Towns, 22, 14-18.

    Franz, L., & Robb, E. (1988) Effects of Wal-Mart on the economic environment of rural communities. Unpublished paper, University of Missouri, Columbia.

    Greer, J. (1989) Sellout or not for sell: Universities defend trend toward private research projects. The Kansas City Star, Dec 31, IJ, 77J, 10J.

    Marsh, B. (1991) Merchants mobilize to battle Wal-Mart in a small community. The Wall Street Journal, Jun 5, nat. ed., sec. 1: 1. Ozment, J., & Martin, G. (1990) Changes in the competitive environment of rural retail trade areas. Journal of Business Research, 21, 277-287.

    Padgett, T. (1989) Just saying no to Wal-Mart. Newsweek, Nov 13, 65.

    Sheets, K. (1989) How Wal-Mart hits main street. U.S. News & World Report, 13 Mar, 53-55.

    Smith, D.L. (1989) Ready to Fight Goliath: Small-Town Stores Brace for Wal-Mart's Arrival. The Detroit News, Jun 12, 1D.

    Stone, K.E. (1988) The effects of Wal-Mart stores on businesses in host towns and surrounding towns in Iowa. Unpublished paper, Iowa State University, Ames.

    Sullivan, C. (1993) Wal-Mart's Expanding Empire Encounters Barriers. Omaha World-Herald, Aug 9, sec. 1: 13.

    Walzer, N., & Stablein, R. (1981) Small Towns and Regional Centers. Growth and Change, July, 2-8.

    Welles, E.O. (1993) When Wal-Mart Comes to Town. Inc, July, 76-88.


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