Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Walmart Effect

What it is:

The Walmart Effect is a book by Charles Fishman that examines how small businesses behave after a Walmart opens in their markets. It is also a phrase used to describe situations in which small businesses close when larger national retailers enter a market.

How it works (Example):

Let's assume XYZ Town has three grocery stores, MomandPopA, MomandPopB, and MomandPopC. All three are small, family-owned stores that have been in the community for decades.

BigBox Store notices that XYZ Town is an attractive place to do business, so it opens a grocery store there. The store is larger than the MomandPop stores and offers lower prices because it is able to buy in larger quantities from its suppliers. Soon, customers start shopping at BigBox and business at MomandPop stores drops off. Because the smaller stores do not buy as much from their suppliers, they charge customers more, and customers notice this, hastening their switch to BigBox. Soon, the MomandPop stores close.

Why it Matters:

The Walmart Effect is a very controversial economic argument. Some argue that larger stores with more efficient operations benefit consumers by lowering prices. Others argue that larger stores disrupt communities' social fabric and damage their welfare in the long run.