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DEFINITION of 'Walmart Effect'

The Walmart Effect is a term used to refer to the economic impact felt by local businesses when a large company like Wal-Mart Stores (WMT) opens a location in the area. The Walmart Effect usually manifests itself by forcing smaller retail firms out of business and reducing wages for competitors' employees. Many local businesses oppose the introduction of Walmart stores into their territories for this reason.

BREAKING DOWN 'Walmart Effect'

The Walmart Effect may have its positive benefits; it can also curb inflation and help to keep employee productivity at an optimum level. The chain of stores can save consumers billions of dollars but may also reduce wages and competition in an area.

How the Walmart Effect Reaches Multiple Industries

The scale and scope of Walmart’s buying power as a retail entity means that it can dictate the price it pays to wholesalers at a magnitude many other companies cannot. As a result, Walmart has the capacity to sell its merchandise at lower prices at retail, compared with other businesses in the markets in which it operates. This can have a cascading effect beyond the retail market and into manufacturing and production.

Walmart's insistence on procuring products at lower prices from suppliers means that suppliers must find ways to make their products for less money, or else they could be forced to take losses if they choose to sell through Walmart. The exposure of selling merchandise through Walmart may increase consumers’ awareness of a product; however, the cost of delivering that product to market may be pushed back upon the supplier. This can compel them to seek out lower cost alternatives to manufacture their product, which could lead to the use of overseas operations or the use of less expensive materials in the production of their goods.

In addition to its buying power, Walmart has historically controlled its compensation to employees in such a way that rival companies might feel pressured to reduce salaries or cut benefits to their workers in response.

Once a Walmart location opens, the lower prices, concentration, and selection of merchandise in its stores tend to draw consumers away from local retailers. With less foot traffic and declining sales, local retailers see their profits fall, forcing them to make cost-cutting decisions. Such strategies, however, may not be enough to keep such businesses open, as Walmart continues to operate profitably while local retailers' losses mount.

In time, Walmart might choose to relocate its store to another location, but the impact of its initial arrival may continue to last well afterward.

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