11/11/2010

Creative Destruction

Dean and Sobel report that the universal belief that Walmart drives “mom-and-pop” shops out of business is statistically unsupported. Their research suggests, that while Walmart does cause some directly competing small businesses to fail, those particular failures are completely counterbalanced by the entrance of new small businesses through the process of creative destruction. This article presents a different side of how the entrance of Walmart actually affects a community. Walmart’s entrance into an economy actually spurs innovation by driving out old inefficient businesses, leaving newly vacated commercial real estate available at lower prices. More affordable rents decrease the barriers to entry for new and more innovative businesses and these new companies have to be more specialized because of their proximity to Walmart. Overall, with the entrance of a new Walmart store into a community, entrepreneurialship is stimulated, businesses become more efficient, and consumers save more.

10 comments:

Dave said...

I am not surprised by this at all.

Our culture has a real problem with mislabeling big things as bad, and small things as inherently good.

Where is it written that an inefficient small business has the right to rip people off by charging higher prices to cover up their problems?

This is a debate we really need to have in public. What does it mean to be ripped off, and who is doing it? How do we measure ripping off?

Many people like to assert that because an operation is high volume and low margin, that it must be problematic. But this is really focusing on the total profits of the firm, not its rate of return.

It gets worse when you think that anyone who actually thought Walmart was ripping them off, could actually invest in Walmart and get some of the proceeds.

delta said...

Very interesting article. I have never heard this perspective before. I think that the Wal-Mart issue is widely mis-understood, and based on personal emotional opinion and assumptions more than fact and reality.

It is a sad reality that the public in general is not well-informed on major issues, not just Wal-Mart. And sadder still the fact that so much information is available at our fingertips.

DSM said...

Consumers get more out of their dollar due to Walmart's efficiencies. This allows the consumer to have an increase in their disposable income. The increase in disposable income should create an opportunity for other efficient businesses to capitalize. Innovation is what has made America the greatest country in the world. I would recommend those who oppose Walmart to come up with a better more efficient system to provide goods and services to consumers.

denver said...

This is capitalism at its finest.

I am not glad to see any business close their doors because of Wal-Mart, but I am glad to see inefficiencies worked out through specialization.

Businesses can survive in a “Wal-Mart market” if they will specialize and become the expert because Wal-Mart surely isn’t an expert in any one thing, except diversification. This can be a little tricky as “mom-and-pop” are finding out, though. Sometimes a business can’t survive by specializing too far. In reference to capitalism, Adam Smith talks about specializing in the production of pins. No matter how good you are at making pins, there just aren’t that many people who need pins and a retailer might find it very difficult selling just pins.

The question really comes down to the size of the market. If the market is large enough for a Wal-Mart then the market should be large enough to have a specialized shop. “Mom-and-pop” may have to alter their product line a little or even a lot, but there is still a market to tap if they are willing to work out their inefficiencies. If the market isn’t large enough to bring in a Wal-Mart then “mom-and-pop” can continue to offer a more diverse lineup of products and charge a higher margin and continue what they are doing.

walla walla said...

I enjoyed this article. I am of the opinion that Wal-Mart is good for economies as it universally increases disposable income for all. Matter of fact, I have family members who currently live in Mexico who have strong feelings in regard to how Wal-Mart has improved the lives of countless Mexicans.

My family members lived in Mexico prior to NAFTA and they report how during those times necessities were more expensive and thus Mexicans had less disposable income. However, post NAFTA Mexico is extremely different. My family members now report how Wal-Mart is now a strong force in Mexico and how its low process allows Mexicans to purchase necessities lower prices.

With more money in each Mexican’s pocket, the overall economy has been increasing as more citizens have the ability to purchase more. Greater purchases have lead to newer (more efficient) businesses and thus greater wealth countrywide.

Good for NAFTA, good for Wal-Mart!

als22 said...

I agree that Wal-Mart does leave it's footprint wherever it goes. The footprint can be large or small but it will make an impact on all businesses in the area.

Small business can be successful if they find a need that they can fill for their patrons. This is demonstrated by Wal-Marts success oversees. Wal-Mart is not having success, or typical Wal-Mart success, in locations in Asia and Europe. People are choosing to go to the 'mom and pop' businesses because these businesses fulfill their customers cultural and specific needs. In our culture, in the U.S., we seem to expect that because of who we are we should be entitled to success and barriers to our individual success should be taken down by government. I believe that if we want something we need to make our way. If small business wants to be successful, efficiency, service, and great products are the key. In other parts of the world, we see that this is true, even against the 'evil monster' Wal-Mart.

Kimball said...

I guess I will be the bad guy. I am all for being efficient and free markets, and so I am not concerned about the capitalist aspects of how Walmart operates. However, I feel that cultures can really suffer from how Walmart strategizes. I think there is something to say about the culture and atmosphere, and the value thereof, that established mom-and-pop shops contribute to communities, even if they are inefficient. Cheap stuff attracts cheap consumers, entices people to remain cheap and squander over cheap goods, and can keep people prisoner to the mindset of cheap. In the long run is this valuable for communities?

In the articles I have read about why Walmart continues to struggle in Japan, it seems to me that this is the biggest reason. Japanese people are not interested in cheap. They are interested in quality and are willing to pay a larger price for something that is stylish and of good quality. This mindset encourages people to take care of the things they buy and to not be wasteful. "National-brand food product prices have definitely come down, but high-quality merchandise has disappeared from the shelves, and customers have left." It is the effects on culture and the mindset of people that I feel suffers from Walmart.

Articles:

http://money.cnn.com/magazines/fortune/fortune_archive/2007/08/06/100141311/index.htm

Youtube:

http://www.youtube.com/results?search_query=people+in+walmart&aq=f

Alfred said...

I agree that Walmart is not the bad guy. I have found it interesting to hear for years that this company is "terrible". Why does it do so well then? Could it be that Walmart actually produces good business, provides jobs, and stimulates the economy where it is established? U.S. capitalism says that consumers can "vote" with their dollars regarding who it wants to support and keep in business. If you don't like Walmart, then don't shop there and then encourage others to follow suit. The best way to drive a company out of business is to have customers that don't want to shop there.

iPoser said...

Dave, are you suggesting that if a person feels like Walmart has swindled them, then they should but Walmart stock in order to recoop their losses? That would be a tough sell.

Also, how do we measure ripping off? Please elaborate.

Dave said...

My suggestion was more generic ... nobody is keeping anyone from getting "a piece of the action".

I'm suggesting that this would be worthwhile way to hedge your risk if you felt that shopping at a retailer like Wal-Mart was an inherently risky proposition.

The fact that people don't do this is a sign that their complaints should not be taken quite as seriously. It is akin to people who threaten to emigrate in response to U.S. foreign policy, but who never do.