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WAL-MART’S LOW PRICES KEEP POORER CONSUMERS AFLOAT

By Dees Stribling

Wal-Mart, the world’s richest retailer, may also be one of the biggest friends of the poor, recent studies indicate.

Consumers in Los Angeles would save nearly $700 million a year if a Wal-Mart were allowed to capture 20 percent of the city’s retail market, concludes a report commissioned by local officials last year. (So far there is only one Supercenter in the city itself.) And residents of poor neighborhoods, traditionally served by smaller, more expensive local retailers, stand to gain even more by the arrival of Wal-Mart, says Gregory Freeman, vice president of policy consulting at the Los Angeles County Economic Development Corp. (LACED), who prepared the report.

“If you have a small income, even a few hundred dollars a year saved that way is a great benefit,” said Freeman.

There has been no shortage of ink devoted to the sins, real and imagined, of Wal-Mart. A simple Google search will reveal articles, editorials and rants about the chain’s purported hostility to unions and its squeeze on suppliers, mom-and-pop stores and midmarket grocery chains.

Far less has been said and written about the impact of Wal-Mart’s single most important feature, at least as far as shoppers are concerned: the chain’s low prices. Wal-Mart has built its empire by offering an array of goods at price points its competitors cannot sustain.

Nowhere does this matter more than in low-income, inner-city areas, which historically have been shunned by national retailers. Worse, what retailers there are in these areas often charge more than their suburban counterparts, as was made clear in The Price is Wrong, a recent Brookings Institution report that focused on Philadelphia’s inner-city neighborhoods.

“Low-income neighborhoods in Philadelphia are stocked with grocery stores that research suggests charge higher overall prices than the larger stores that are in middle-income neighborhoods,” the report notes, though it did not cite figures.

The lack of competition, combined with high crime rates, helps keep prices high. Scale is another factor; stores in poor areas tend to be smaller than their suburban counterparts.

“Neighborhoods in the city with a median income less than $15,000 have grocery stores that have a median size of about 6,000 square feet,” the report said. By contrast, “neighborhoods with a median income between $75,000 and $90,000 have grocery stores with a median store size of 46,000 square feet.”

The Brookings Institution does not specifically recommend Wal-Mart or any other retailer as a solution to a scarcity of retail in poorer neighborhoods. And Wal-Mart itself says it has no data on its impact on prices in low-income areas.

But other real estate experts do cite Wal-Mart as a solution to the problem of high prices in economically depressed neighborhoods.

“Around 87th and the Dan Ryan Expressway, there wasn’t a lot of other retail,” said John C. Melaniphy III, vice president of Melaniphy & Associates, a retail consulting firm in Chicago, referring to the site of a proposed Wal-Mart on that city’s gritty South Side. His firm was consultant to the would-be developer of the project. In the end the deal failed, largely because of community and labor union opposition.

“It’s the same in a lot of neighborhoods across the country,” Melaniphy said. “Wal-Mart has the potential of providing quality retail in places that don’t have much other choice and [to] help lower prices in the trade area as well. Wal-Mart wants to get into these neighborhoods — some of the demographics are stronger than you’d think — but there are a lot of barriers to entry for them.”

A study by Emek Basker, an assistant professor of economics at the University of Missouri, conducted in 2003 and revised this year, quantifies the effect of Wal-Mart’s famed low prices in trade areas nationwide by comparing before-and-after prices of 10 consumer items in 165 cities with a Wal-Mart. The study looked not at low-income areas specifically, where the impact would probably be greatest, but at the cities as a whole. The results revealed some “robust price decreases for several products, including shampoo, toothpaste and laundry detergent.” Prices declined by between 1.5 percent and 3 percent in the short run “and four times as much in the long run, in the range of 7 percent to 13 percent,” the report said.

The items Basker studied were largely things one would find in a drugstore, the sector that was, until recently, more of a competitor to Wal-Mart than grocery stores.

The effect of a Wal-Mart on prices was more pronounced in smaller cities — that is, in places with less competition before the Wal-Mart’s arrival, much like the competitive situation in low-income neighborhoods.

“The effect I estimate is due to both Wal-Mart’s prices and the reduced prices of competitors,” Basker said. The effect of Wal-Mart’s “edging out the competition — and there isn’t as much of this as people often think — isn’t very large, at least in the time frame the study considers.”

The LACED report assumes a near-future expansion of Wal-Mart in Los Angeles, sufficient to capture 20 percent of the city’s retail market. Were that to happen, the report says, the savings would be unequivocal.

“Total savings for consumers in the City of Los Angeles [would be] at least $668 million annually,” the report notes, based on retail spending estimates from 2000 and 2001 of just over $10 billion a year. “This is a conservation estimate... Potential savings will rise along with the size of the market.”

LACED estimates that savings on food — $537 million a year — would represent most of the $668 million; savings on general merchandise would be $94 million, and savings on apparel would amount to $37 million. These savings, like those in Basker’s basket of goods, are the result of a combination of price points at Wal-Mart itself and the pressure that puts on other retailers to lower their prices, says the report.

“Wal-Mart’s entry into the market is, of course, controversial,” Freeman said. “But even the opponents of Wal-Mart usually don’t bother to deny the benefits of lower prices. Usually, it’s put in terms of, ‘Yes, prices are low, but at what cost to wages, unions and so forth?”

“Those may or may not be legitimate concerns, but they ignore cost considerations, which can be very important to low-income shoppers. You can’t change your rent, for example, or what you pay for utilities, but food is negotiable, so to speak. If you can find somewhere that has the same things for less, that’s to your benefit.”

Meanwhile, the United Food and Commercial Workers (UFCW) joined two teachers’ unions to urge parents not to shop at Wal-Mart during the recent back-to-school period. The local UFCW chapter’s reason: “Low wages mean more poverty.”

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