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Walmart Always Low Prices (And Low Wages) - Always

WALMART: ALWAYS LOW PRICES

(AND LOW WAGES) – ALWAYS

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CHAPTER OUTLINE

The Market Form
Who Is Affected?
Summary

LEARNING OBJECTIVES

LO1: Describe the importance of Walmart in the U.S. economy.

LO2: Demonstrate that the grocery sector continues to have a variety of competitors with monopolist competition being an adequate model to explain it.

LO3: Show that consumers tend to benefit when Walmart enters a community but that labor may win or lose, that other businesses may win or lose, and that the net impact is not always easy to compute.

DISCUSSION QUESTIONS

  1. Which market structure best describes the grocery business? What are the four types of stores that compete with one another in the grocery business?
  1. What proportion of total U.S. grocery sales are made by the topten grocery chains?What percent of total U.S. grocery sales are sold by Walmart? What percent of sales by the topten grocery chains are sold by Walmart?
  1. What company is Walmart’s largest competitor in the grocery business, and what are its annual sales? What are Walmart’s annual grocery sales? How many times larger isWalmart than its next largest competitor in the grocery business?
  1. What are the consequenceswhen a company produces a good more cheaply in order to keep Walmart as its client?
  1. If Walmart pressures a supplier for lower prices, what impact can this have on the U.S. balance of trade? (See Chapter 17 for a discussion on the balance of trade.)
  1. Who are the stakeholders and how are they affectedwhen a WalmartSupercenter moves into a community?
  1. How much does an average WalmartSupercenter sell in a year?How much lower are Walmart prices than the national average? Estimate the savings to consumers (per store) from shopping at a WalmartSupercenter. How are consumers negatively affected when a WalmartSupercenter moves into a community?
  1. How much lower are Walmart’s wages than the wages from a typical unionized grocery store? What percentage of local jobs is displacedwhen a WalmartSupercenter moves into the neighborhood? How does this affect the income of workers in the community?
  1. How are local businesses hurt when a WalmartSupercenter is built? How might a new WalmartSupercenter help local business?
  1. How can a WalmartSupercenter affect the local social fabric of a community?
  1. Why do you think Walmart has been so successful in keeping its workers non-union?
  1. If you have a WalmartSupercenter in your community, do you think your community would be better or worse off without it?

THE WEB-BASED QUESTION

In November of 2004, the PBS Network aired a program on Frontline, “Is Walmart Good for America?” The Frontlinewebsite for this programis show examines how Walmart has profited from information technology and the growth of the global economy to become one of the most powerful companies in the word today. Through interviews with retail executives, product manufacturers, economists, and trade experts, Frontline examines how Walmart has altered the economic balance of power between the retailer and its suppliers.By insisting on lower and lower prices from its suppliers, Walmart has forced many manufacturers to cut labor costs and shift production overseas.ThisFrontline program is available in its entirety online at the following website:

Walmart has encouraged its suppliers to shift their production to China, and the goods are then imported into the United States. This has contributed to the loss of U.S. manufacturing jobs and the deepeningof the U.S.trade deficit with China. A comment from the Frontline producer, Rick Young, and an interviewon Walmart’s “China Connection” with Alan Tonelson are available through links at the following website:

Rick Young is the Frontline producer and director of “Is Walmart Good for America?” Link to the Producer’s Notebook, “The View from Long Beach,” and read his description of the parade of huge container ships and the enormous cranes that unload millions of tons of cargo in the ports of Long Beach and Los Angeles.

  • How have imports from China increased through the Port of Long Beach since 1990?
  • How do the imports from Hong Kong, Japan, Taiwan, and South Korea compare with the imports from China through the Port of Long Beach?

Alan Tonelson is a fellow at the United States Business and Industry Council and author of The Race to the Bottom: Why a Global Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards. Follow the link to Tonelson’sinterviewfor the Frontline program and answer the following questions:

  • Why is production in China such a good deal for Walmart?
  • By seeking goods with the lowest prices for the American consumer, Walmart imports products from China. What does Tonelson say is wrong with Walmart going to China?
  • In Tonelson’s opinion, is Walmart good for America?

ANSWERS TO STUDY QUESTIONS

SUGGESTED ANSWERS TO THE DISCUSSION QUESTIONS

  1. The market structure that best describes the grocery business is monopolistic competition. The four types of stores that competein the grocery business are:
  • Warehouse stores and “Supers.”
  • National grocery chains.
  • National holding companies with regional grocery stores.
  • Regional grocery chains.
  1. The top ten grocery chains account for 75% ($796 billion) of total U.S. grocery sales. Walmart sells 29.71% of total U.S. grocery sales and 42.75% of sales by the top ten grocery chains.
  1. Kroger Company is Walmart’s largest competitor with annual sales of $67 billion. Walmart annual sales are $233 billion.Walmart sales are nearly three times ($233 billion / $67 billion) as large as its next largest competitor is.
  1. When a company produces a good more cheaply in order to maintain Walmart as its client, it often lowers costs by outsourcing production to another country with lower wages, reduces wages and benefits at its U.S. facilities, or makes a product of lower quality with less expensive and less durable materials.
  1. If Walmart pressures a supplier for lower prices, the company may outsource production to another country with lower wages and then import the product into the United States. This will increase U.S. imports, and as a result, the U.S. balance of trade deficit will worsen. (See Chapter 17 for a discussion on the balance of trade.)
  1. Consumers, workers, taxpayers, owners of small businesses, and corporate retailers with stores in the area are all stakeholders.When a WalmartSupercenter moves into a community,
  • Consumers save money due to cheaper groceries, but lose the option of shopping at the local stores that went out of business.
  • Workers gain from the addition ofthe new low-paying jobs at Walmart, but lose from the loss of jobs at Walmart’s competitors.
  • Taxpayers may gain or lose depending on whether there is a net increase or decease in the sales of taxable items in the state.
  • Local small businesses and corporate retailers that compete with Walmart will lose sales, but other complimentary businesses, such as restaurants or other large retailers that are located near the WalmartSupercenter, will benefit.
  1. Annual sales at an average WalmartSupercenterarebetween $75 million and $125 million.Walmart prices are between 15% and 22% lower than the national average.The savings to consumers from shopping at a WalmartSupercenter are between $11.25 (15% of $75) and $27.5 (22% of $125) millionper store.

Consumers,who preferred the personal service that they had received at the smaller stores that were driven out of business after a WalmartSupercenter moved into the community, areaffected negatively.

  1. Walmart wages are $5 to $10 per hour (including benefits) less than the wages from a typical unionized grocery store.When a WalmartSupercenter moves into the community, between 75% and 133% of the local jobs are displaced. There will be a loss of between $4 million and $10 million in the earned income of the workers in the community.
  1. Many local businesses will have lower sales and lose business to Walmart, and some will be driven out of business.A new WalmartSupercenterwill help restaurants and non-competing retailers that locate nearby the supercenter. Shoppers from other neighboring communities can be drawn to the area by the WalmartSupercenter.
  1. AWalmartSupercentercan affect the local social fabric of a community,when the local stores are driven out of business, and their owners, who were often leaders in the community, move out of the area. These businesses often formed the hub of a neighborhood, and they supported local charities and sponsored the children’s athletic teams in the community.
  1. At first glance, it is difficult to understand why Walmart is not unionized because they pay much lower wages than unionized stores. ButWalmart also offers employment opportunities to workers who might not otherwise be able to find a job, especially during a recession. In addition, Walmart management is willing to take extraordinary measures, even closing a store, to prevent unionization.
  1. One cannot argue with the success of the Walmart business model, but that does not necessarily mean that a WalmartSupercenter makes a community better off. A Walmart store may attract shoppers from a large geographical area than smaller stores, but it also takes business away from the smaller stores, often forcing them out of business. So, there will be some losers and winners. How each student answers this question may depend, in part, on whether they view themselves as winners or losers.

SUGGESTED ANSWER TO THE WEB-BASED QUESTION

In the Producer’s Notebook, “The View from Long Beach,” Rick Young, the Frontline producer and directorof “Is Walmart Good for America?”comments on his impressions of TerminalIsland in the SanPedroBay andthe ports of Los Angeles and Long Beach.

  • Since 1990, imports from Chinathrough the Port of Long Beach have increased from 2 million tons of cargo to nearly 28 million tons. Much of this increase has occurred in the last five years.
  • The imports from China through the Port of Long Beachare 7 million tons greater than the imports from Hong Kong, Japan, Taiwan, and South Koreacombined.

Alan Tonelson , a fellow at the United States Business and Industry Council and author of The Race to the Bottom: Why a Global Worker Surplus and Uncontrolled Free Trade are Sinking American Living Standards,answers many questions on the Walmart/China connection in his interview on Frontline.

  • Production in Chinais a good deal for Walmartbecausethe low Chinese production costs allow it to widen its profit margin. Given the competition from other retailers, Walmart can not raise its prices to its customers by very much. Thus, the lower production costs of goods from China increases Walmart’s profits.
  • By seeking goods with the lowest prices for the American consumer, Walmart imports products from China. Tonelson says that the problem is that most American companies are now looking outside the United Statesfor the lowest prices. When production moves overseas, the U.S. workers lose their jobs, wages fall in the United States, and the U.S. standard of living is lowered.
  • In Tonelson’s opinion, Walmartis not good for America.Its drive for higher profits has caused many U.S. manufacturing companies to move production outside the United Sates, and the U.S. workers have lost their jobs. Thejob flight has caused wagesto fall, and lowered the standard of living. Even at low prices, the individual American worker cannot afford to buy the products they had purchased in the past, and many will have to go deeper into debt. As a nation, our debt is also affected, since Walmart’s imports from China contribute to the U.S. trade deficit and our escalating debt to China.