When two employees at the Federal Reserve Bank of Minneapolis released a study in the January issue of the fedgazette called “The Wal-Mart Effect,” its findings — if you can call them that — created a predictable effect in the media. But what the media said had little to do with what the Fed study said.
The mainstream media, especially the business media, is always looking for openings to praise Sam Walton, not to bury him. The Federal Reserve Bank of Minneapolis has given them just what they wanted: a study that appears superficially to vindicate Wal-Mart’s economic impact on communities. The only problem is — the actual content of the study doesn’t support that conclusion at all. In fact, it doesn’t support much of anything. But the pro-Wal-Mart media ran with the Happytalk Headlines anyway.
Forbes magazine ran a story titled “Wal-Mart Is Good For You,” which began: “It may surprise–or even infuriate–critics, but a new study finds Wal-Mart benefits rather than harms the American economy.” The Fed Bank study didn’t conclude anything of the sort. Papers across the country ran the Reuter’s story headline: “Minneapolis Fed study: Wal-Mart demonization off-base.” Reuter’s lead to the story said: “Much of the conventional wisdom about Wal-Mart Stores Inc.’s negative effects on local communities is off-base, according to a study…by the Federal Reserve Bank of Minneapolis.” Typical was the headline in the Winona (MN) Daily News: “Maybe Wal-Mart Isn’t So Terrible.”
Some in the media were more restrained in their praise. Bloomberg News, for example, said the new report illustrated that Wal-Mart “has a negligible economic influence on the small counties where it is located,” but then fabricated the rest: “and doesn’t destroy local businesses.” The more unabashed Wal-Mart sycophants let it all pour out. “Wow,’ whistled a columnist for the Elmira, (NY) Star-Gazette. “Someone actually spoke the unspeakable — the late Sam Walton’s company isn’t that bad after all — and backed the statements up with solid facts.”
I read the entire Fed Bank study, and realized halfway through the piece that the”solid facts” in this study were built on some very fragile assumptions. The authors repeatedly footnote their narrative to caution readers about interpreting the results. They use the euphemism “host of caveats” to temper their findings.
The Fed Bank authors apparently went into the study expecting black and white results. The subtitle of their report was, “Poison or antidote for local communities?” But they went diving into a sock drawer looking for underwear. They examined 40 small counties across six states in the bank’s Ninth District (MI, ND,SD,WI, MT, MN) that had a Wal-Mart come to town between 1986 and 2003, and compared them with 49 similarly sized counties in the same geographic area that didn’t have a Wal-Mart. Researchers chose counties as the economic unit to study, because “various socioeconomic effects from Wal-Mart likely spill over a much larger territory than the home municipality. Though county borders are imperfect at best, they offer a broader and more realistic territory to gauge change.” In fact, county borders are a blunt instrument, and not very useful in searching for the impact of one giant store on one or two small town—which is where most of the damage occurs. In a county–even a small one–the impact is dispersed across many players, and the loss of a couple of key local retailers will not be revealed. In addition, market trade areas and counties have little or nothing to do with one another. A huge store on the edge of one county, may draw shoppers away from another county, but it will never show up in a study that runs along county lines. The former is economic, the latter is political. The Fed Bank further weaken its case by noting that their selection of 49 non-Wal-Mart Counties was “not a truly scientific control group and, as such, cannot be said to represent county outcomes where Wal-Mart is absent.”
The Fed Bank study is similar to one done at the University of Massachusetts at Darmouth in the early 1900s, which received no attention because there was no media interest in the Wal-Mart Effect at the time. The U. Mass study also used counties as its base, and produced similarly unremarkable results. The late economist Tom Muller also used counties to study Wal-Mart, but his work in Iowa for the National Trust For Historic Preservation, came up with much more pronounced results. Muller determined that as much as 80% or more of Wal-Mart’s sales came from existing businesses.
The reason the Fed chose counties as their microscope, is because that’s where the data is. The U.S. Economic Census data on counties is an easier level to use in studies, because at the micro town level, many communities have data suppressed because there are only one or two hardware stores, and their sales figures are proprietary. So the Feds used “familiar benchmarks” of jobs, firms, population, income and poverty—all at the county level. But the authors knew the limitations of their work. “County economies–even small ones–are dynamic entities,” the report notes, “constantly changing and extending well beyond their retail borders. Firms, jobs and people come and go with regularity, and for lots of different reasons.”
The Fed Bank concluded that Wal-Mart can be helpful or harmful, “though which it is depends on the circumstances.” If a community has a rapidly growing population base, it can more easily absorb a giant supercenter. But if the population is stagnant, the retail pie is not growing. In such circumstances, “Wal-Mart is no different from any new business–large or small–coming to town and competing with incumbent businesses for finite spending in a community. Wal-Mart just competes for a larger share of it, and within a bigger geographic area.” The larger the lens you use to study Wal-Mart, the more diffuse the local impacts appear. It’s like gazing at the night sky through sunglasses. The Fed Bank has perceived something, but dimly.
The study concludes that “Firm growth, employment and total earnings were somewhat stronger in Wal-Mart counties and, in some cases, even in the retail sector.” But Wal-Mart has little, or no impact, on decisions made by employers outside the retail sector. In the aggregate, studies have shown that the U.S has lost millions of manufacturing jobs because of outsourcing to China–but such exported jobs will not appear in a county-level study of Minnesota or Montana.
Looking at the growth of retail establishments (“firm growth”) shows just how slippery such analysis can be. In Kandiyohi County, Minnesota, there were 1,059 retail establishments in 1985, compared to 1,395 in 2005. The number of retail firms grew overall by 31.7%. But inside of that growth number, the number of small businesses with 4 or fewer workers increased from 620 establishments in 1985 to 731 in 2005, a jump of 18%. Large establishments with 100+ workers rose from 14 in 1985 to 27 in 2005, a 92.9% jump. The percentage increases here are not the issue: it’s the number and size of firms that matter. The 111 new small businesses generated at best a total of 404 new jobs, while the 13 large firms with 100+ employees generated at least 1,300 additional jobs. Large companies added three times as many jobs as the smallest companies. The Fed Bank would say that retail establishments grew in Kandiyohi County — but inside that number the big companies were dominating growth in the retail sector. The Fed study found that Wal-Mart had no effect on growth in population and income per person. Why should it? People do not move to live near a Wal-Mart, and if anything, the company has a downward impact on wages. The Fed Bank learned that counties without a Wal-Mart fared better in total compensation–wages plus benefits like health care and retirement contributions–for wage and salary workers. This “fits with the long-term trend of firms offering workers more (and more expensive) benefits over time, while Wal-Mart has been chastised for its employee benefits.”
The Fed Bank found other dark statistics: poverty rates declined in most counties, but poverty rates didn’t improve as much in Wal-Mart counties. Some counties with a Wal-Mart had strong growth, and other Wal-Mart counties had slow growth — but Wal-Mart’s presence explained little of the disparity.
The researchers’ main finding is that “Wal-Mart has a slightly positive effect on counties where the retailer decides to set up shop. But the effects are small; one could call the results mostly a wash. As a result, maybe the most concrete–and surprising–conclusion is that Wal-Mart’s presence (or lack thereof) has little or no predictive power regarding the economic success or failure of a county.”
The Fed expected to find much higher levels of business closures to show up in Wal-Mart counties, “but the data don’t bear that out.” Yet they admit “several limitations prevent any strong conclusions regarding general merchandise stores,” because the number of firms in this category is comparatively small at the county level.” The fact remains, general merchandise stores declined in non-Wal-Mart and Wal-Mart counties, because the giant retailer does not impact, say, car dealerships, but it slams any retailers that sell what it sells–and the impacts don’t fall neatly into county borders.
The “take away” from this new report is that Wal-Mart is, economically speaking, a wash. Tell that to the local officials across America who have memorized the Wal-Mart script which promises new jobs and revenues inside every supercenter, even as they watch the “old” store two miles away being abandoned, or the existing supercenter down the road losing sales to its own parent company. As the authors explain, “The presence or absence of Wal-Mart is neither an obvious anchor nor a hot air balloon for business growth in a county.”
If the media had the patience to read beyond the “hot air balloon” section of this new report, they would have found this statement: “None of these fedgazette findings can be considered the last word on the Wal-Mart effect because they are not ‘causal’ in nature; that is, we cannot say that Wal-Mart is directly responsible for any particular outcome–positive or negative–in the counties investigated.” That stunning disclaimer should have been the opening line of the report. But it gets worse: “This analysis merely offers correlated facts. Proving a causal relationship between Wal-Mart and local economic trends is rife with complications. Indeed, such complexity is one of the reasons controversy continues to swirl around the company.”
Although some in the media were delighted to report that its now safe to go back into Wal-Mart waters (the “Wal-Mart Is Good For You” syndrome), the Fed Bank study amounts to little more than a caveat against such exuberance. As the Fed Bank explains, “Given some positive and some negative outcomes, it’s probably safest to say that Wal-Mart’s net imprint on a county’s health appears to be smaller than most perceive.” The authors admit that other factors—such as education levels, infrastructure investments, local business mix, geographic good fortune–“play a larger role in determining the long-run growth prospects for the 89 counties studied here than whether the bogyman dressed as Wal-Mart showed up at the community door.”
When you cut away the many “confounding factors” in this study, the authors confess that they can’t pin any particular outcome on Wal-Mart. This is one of the more useful non-conclusions of the report: “the findings don’t tell us whether Wal-Mart’s presence (or lack thereof) is responsible for either positive or negative outcomes over the period studied. Proving a causal relationship between Wal-Mart and local economic trends is beyond the scope of this analysis.”
So the Fed Bank has produced a study that delivers no punchline. If you want to see a causal relationship between Wal-Mart and its impact at the micro level, there was another, less noted, bank study released last month by CIBC World Markets, an investment bank in Canada. “Wal-Mart’s Canadian Supercenters: Trade Area Damage” looks exclusively at the retail trade area in Scarborough, Ontario one year after a Wal-Mart supercenter opened there. The purpose of the study was to examine what impact the supercenter had on the seven grocery chain stores and the 17 small independent grocers in the area. According to CIBC, almost all of Wal-Mart’s 10% market share came from existing merchants. Wal-Mart’s $18.2 million in sales came mostly from two sources: $5.2 million from a Wal-Mart discount store that the company shut down when its supercenter opened, and $10.4 million when a Price Chopper grocery store closed. The smaller independent grocers and other local chains all lost sales as well. As the report states, “most of [Wal-Mart] sales come from local chain competitors.” In fact, 94% of the Wal-Mart supercenter sales came from either its own closed Wal-Mart (29%) or other grocery competitors (65%). Wal-Mart’s opening of the supercenter created only 6% new sales for the trade area. $17.1 million in Wal-Mart grocery sales came from other cash registers. “It’s no secret that Wal-Mart will have a huge impact on the Canadian grocery business,” the authors concluded.
As for the Fed Bank study, the pro-Wal-Mart media left the starting gate without a saddle on this one. The Bank had its own warning buried in its statistics. “Hoping for some easy answers to the Wal-Mart effect?” they wrote. “Better shop elsewhere.” The best this new study can produce is the following economic aphorism: Wal-Mart is the absence of good.
Al Norman is the founder of Sprawl-Busters.com. Forbes magazine calls him “Wal-Mart’s #1 Enemy.”