posted on 06-06-2019

Walmart Effect

Updated July 14, 2020
Written By
Paul Tracy

What is the Walmart Effect?

The Walmart effect refers to the economic impact of a large discount retailer on a local market. Named after the large discount retailer, it is used to describe the crowding out and shuttering of smaller, local businesses that attempt to operate in the same market as a big box store.

Example of the Walmart Effect

By virtue of their ability to leverage extremely high volumes of merchandise, large retailers like Walmart are generally able to offer much lower prices. In other words, large retailers can buy goods from suppliers at lower per-unit prices than smaller local stores due to their comparatively higher volume of inventory.

For example, let's assume a small town has three stores, MomandPopA, MomandPopB, and MomandPopC. All three are small, family-owned stores that have been in the community for decades.

BigBox Store notices that the small 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 the Walmart Effect Matters

Despite the low-cost benefits to the individual consumer, the Wal-Mart effect is widely criticized for its social repercussions. 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.