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The WalMart Prices: Implications and Explanation

Alice Nakamura (University of Alberta) Leonard Nakamura (Federal Reserve Bank of Philadelphia) Marc Prudhomme (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 WalMarts 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-Marts 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 1977 1987 0.7 % 8.3 % WalMart, Percent of General Merchandise payroll employment 0.54 % 4.26 %

1997
2007

29.4 %
39.2 %

18.1 %
NA

Retail productivity, US, real retail sales per worker: General Merchandise Stores and WalMart, 1982-2002 Basker data GM, WalMart GM ex Ratio WalMart WalMart to GM ex WalMart, 134.1 161.4 0.9 % 1.11 1.59

1982 2002 growth rate

134.4 191.4

148.5 256.2

1.7 % 2.7%

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, WalMarts 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 WalMarts entry. Regressing year of WalMart entry on centroid distance from Arkansas has an adjusted Rsq of .87.

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)
95 year 70 75 80 85 90

500

1000

1500 dist_mile

2000

2500

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
120

100

80

60

40

AL AR IA KS KY MD MI MS SC TN

20

19 62

19 64

19 66

19 68

19 70

19 72

19 74

19 76

19 78

19 80

19 82

19 84

19 86

19 88

19 90

19 92

19 94

19 96

19 98

20 00

20 02

20 04

20 06

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

100

120

140

20

40

60

80

Instruments for some states

19 75 19 76 19 77 19 78 19 79 19 80 19 81 19 82 19 83 19 84 19 85 19 86 19 87 19 88 19 89 19 90 19 91 19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03 20 04 20 05 20 06

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 results
US iv regressions: WalMart store openings reduce retail labor productivity! state retail state retail labor labor productivity productivity stores(i,t)/jobs(i,1977) -.475 .488 (.267) (.792) .077 .538 stores(i,t-1)/ -.942 jobs(i,1977) (.727) .195 Joint significance .073 year dummies Y Y fixed effects Y Y Bootstrap standard Y Y errors Within R Sq .695 .695 Observations 987 940 instrument predicted predicted stores stores First stage within R.82 .81 sq

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. Havent come up with good instrument, using lags of store openings as instruments

1993 1994 Prince Edward Island 0 0 Alberta 0 16 Manitoba 0 9 New Brunswick 0 4 Newfoundland 0 7 Nova Scotia 0 6 Ontario 0 46 Quebec 0 23 Saskatchewan 0 8 British Columbia 0 13 Total 0 133

WalMart openings by year 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 0 0 0 0 1 1 2 2 2 2 2 2 16 16 18 20 22 24 26 30 32 34 34 38 9 9 9 9 10 10 10 11 11 12 13 13 4 4 4 4 4 4 4 6 6 8 9 10 7 7 7 7 7 7 9 9 9 9 11 11 6 7 7 7 7 7 9 9 11 12 14 15 51 51 53 58 63 65 69 70 74 84 88 94 24 25 29 31 32 32 36 39 42 45 48 51 8 8 8 8 10 11 11 11 12 12 12 12 13 13 13 14 15 16 20 22 24 27 28 29 139 141 149 159 172 178 198 211 225 247 261 277

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 province retail labor retail labor productivity productivity stores(i,t)/hours(i,1993) .0287 .135 (.0182) (.135) .116 .316 stores(i,t-1)/ -.084 hours(i,1977) (.094) .374 Joint significance .266 year dummies Y Y fixed effects Y Y Bootstrap standard Y Y errors Within R Sq .886 .753 Observations 52 44 instrument lagged lagged stores 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