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DEFINITION of 'Wal-Mart Effect'

The Wal-Mart effect is the economic impact felt by local businesses when a large company such as Wal-Mart opens a location in the area. The Wal-Mart 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 Wal-Marts into their territories for this reason.

BREAKING DOWN 'Wal-Mart Effect'

The Wal-Mart 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 Wal-Mart Effect Reaches Multiple Industries

The scale and scope of Wal-Mart’s buying power as a retail entity means it can dictate the price it pays to wholesalers at a magnitude many other companies cannot. As a result, Wal-Mart has the capacity to sell its merchandise at lower prices at retail compared with other businesses in the markets it operates in. This can have a cascading effect beyond the retail market and into manufacturing and production. The insistence of Wal-Mart to procure products at lower prices from suppliers means they must find ways to make their products for less money, or they may be forced to take losses if they choose to sell through Wal-Mart. The exposure of selling merchandise through Wal-Mart 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 use of overseas operations or the use of less expensive materials in the production of their goods.

In addition to its buying power, Wal-Mart historically has 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 Wal-Mart location opens, the lower prices, concentration and selection of merchandise in its stores tends to draw consumers away from local retailers. With less foot traffic and sales declining, the local retailers see their profits also fall, forcing them to make cost-cutting decisions. Such strategies however may not be enough to keep the business open as Wal-Mart continues to operate profitably while the local retailer’s losses mount.

In time, Wal-Mart might choose to relocate the store to another location, but the impact of its initial arrival may last well afterwards.

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