The WalMart Prices: Implications and Explanation

Alice Nakamura (University of Alberta)Leonard Nakamura (Federal Reserve Bank of Philadelphia)

Marc Prud’homme (Statistics Canada)

Disclaimer: The views expressed here are those of the authors and do not necessarily reflect those of the Federal Reserve Bank of Philadelphia, the

Federal Reserve System,or Statistics Canada.

Overview

• This reports a preliminary stage in the investigation of WalMart's impact on measured retail prices and productivity in US and Canadian economy

• There has been a spate of work done on WalMart (more than 20 academic papers)

• Can state and provincial data permit us to discern productivity impacts of WalMart on the retail sector as a whole?

What is WalMart’s impact on productivity?

• What has been the impact of the impressive success of WalMart stores on overall retail productivity?

• Measured retail productivity growing briskly in US and Canada– Particularly for general merchandise retailers– Not for grocery stores

• Is this due to WalMart?

McKinsey: Yes, WalMart is crucial

• According to the 2001 McKinsey Global productivity

report, “From 1995-2000, general merchandise retailers

doubled their productivity growth rates (10.1 percent per

year from an already high 4.8 percent per year) and

contributed 16 percent of the total retail productivity

growth jump. The productivity jump in this sub sector

was primarily due to heightened competitive intensity

(due to the continued growth of WalMart) and increased

consumer substitution toward higher-valued goods.”

Hausman and Leibtag: Wal-Mart's productivity is under-measured

• Wal-Mart’s goods are not considered the same as predecessor retailers– Wal-Mart's prices may be 20 to 25 % below prices of

other general merchandise retailers– Hausman and Leibtag discern big price differentials

between WalMart and competitors in grocery items• Are these price differentials due to lower quality?• Basker data suggests that WalMart forces competitor prices

lower

• Perhaps retail productivity has risen for other reasons– Rapidly rising quality of electronics is attributed to

retailers as well

US Data on WalMart and General Merchandise Retail Employment and Sales

WalMart Percent of General Merchandise retail sales

WalMart, Percent of General Merchandise payroll employment

1977 0.7 % 0.54 %

1987 8.3 % 4.26 %

1997 29.4 % 18.1 %

2007 39.2 % NA

Retail productivity, US, real retail sales per worker:General Merchandise Stores and WalMart, 1982-2002

 Basker data GM, WalMart GM ex WalMart

Ratio WalMart to GM ex WalMart,

1982 134.4 148.5 134.1 1.11

2002 191.4 256.2 161.4 1.59

growthrate

1.7 % 2.7% 0.9 %

Our preliminary work

• Begins with state and provincial retail data– Our data are for all of retailers, not just general merchandisers

• What is impact of WalMart stores on state and provincial retail productivity

• Use fixed effects regressions with year dummies• Number of stores in operation (S) is our independent

variable of interest– Problem with endogeneity– Instruments constructed

• Scale “stores” variable by inverse of size of state or provincial retail employment in base year (to reduce heterogeneity)

Distance and WalMart store openings

• As Holmes has shown, WalMart’s success depended on economies of density.

• These economies provided a strong incentive to minimize costs by gradually building out stores in a diffusion process that originated in Arkansas.

• This provides a potential instrument: distance from Arkansas.

• We used state centroids to estimate the date of WalMart’s entry. Regressing year of WalMart entry on centroid distance from Arkansas has an adjusted Rsq of .87.

70

75

80

85

90

95

ye

ar

500 1000 1500 2000 2500dist_mile

Distance From Arkansas (in miles) by Year of First Walmart Store Opening

(a set of coordinates for each of the contiguous United States, except for Arkansas)

Cumulative WalMart store openings usually plateau in a state after about 15 years:

Create an average WalMart time profile of entry for instruments

Store openings of ten states

0

20

40

60

80

100

120

1962

1964

1966

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

AL

AR

IA

KS

KY

MD

MI

MS

SC

TN

Create an instrument for each state

• Based on – Distance from Arkansas (determines date of

first entry)– Average cumulative stores open – Assume store entry into the state is complete

15 years after entry– Profile is constant thereafter

Instruments for some states

0

20

40

60

80

100

120

140

1975

1976

1977

1978

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

FL

GA

IA

IL

IN

MI

MN

ND

US result

• WalMart openings have a small negative impact on measured US retail productivity– Not capturing WalMart impact on productivity

very well in state data– State level retail GDP allocated to states

based on employment– Also, perhaps not capturing dynamics very

well (perhaps need spatial lag model)

Estimation resultsUS iv regressions: WalMart store openings reduce retail labor productivity! state retail

labor productivity

state retail labor productivity

stores(i,t)/jobs(i,1977) -.475 (.267) .077

.488 (.792) .538

stores(i,t-1)/ jobs(i,1977)

-.942 (.727) .195

Joint significance .073 year dummies Y Y fixed effects Y Y Bootstrap standard errors

Y Y

Within R Sq .695 .695 Observations 987 940 instrument predicted

stores predicted

stores First stage within R-sq

.82 .81

In Canada, WalMart entered by acquisition

• Canada entered WalMart in 1994 after purchasing the Woolco chain and reopening 133 stores, with an immediate presence in 9 of the 10 provinces.

• Haven’t come up with good instrument, using lags of store openings as instruments

WalMart openings by year 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Prince Edward Island 0 0 0 0 0 0 1 1 2 2 2 2 2 2 Alberta 0 16 16 16 18 20 22 24 26 30 32 34 34 38 Manitoba 0 9 9 9 9 9 10 10 10 11 11 12 13 13 New Brunswick 0 4 4 4 4 4 4 4 4 6 6 8 9 10 Newfoundland 0 7 7 7 7 7 7 7 9 9 9 9 11 11 Nova Scotia 0 6 6 7 7 7 7 7 9 9 11 12 14 15 Ontario 0 46 51 51 53 58 63 65 69 70 74 84 88 94 Quebec 0 23 24 25 29 31 32 32 36 39 42 45 48 51 Saskatchewan 0 8 8 8 8 8 10 11 11 11 12 12 12 12 British Columbia 0 13 13 13 13 14 15 16 20 22 24 27 28 29 Total 0 133 139 141 149 159 172 178 198 211 225 247 261 277

Canada

• Reasonably sizeable WalMart impact on retail productivity– Estimate that WalMart entry resulted in 10 percent

increase in retail productivity over 12 year period– Use only lags as instruments– Not tightly estimated (with bootstrap standard errors

just insignificant at 10 percent level)– Timing of WalMart entry may be a problem– Based only on 4 largest provinces (Ontario, Quebec,

British Columbia, Alberta) – 83 percent of total population

Canada iv regressions: WalMart store openings raise retail labor productivity as expected, but insignificant coefficients province

retail labor productivity

province retail labor productivity

stores(i,t)/hours(i,1993) .0287 (.0182)

.116

.135 (.135) .316

stores(i,t-1)/ hours(i,1977)

-.084 (.094) .374

Joint significance .266 year dummies Y Y fixed effects Y Y Bootstrap standard errors

Y Y

Within R Sq .886 .753 Observations 52 44 instrument lagged

stores lagged stores

First stage, within R-sq .98 .98

Conclusion

• Preliminary work suggests that this methodology may be useful in uncovering the impact of WalMart on measured productivity– WalMart has raised productivity in fact, but

possibly not as we measure it– Suggestions welcome