The Plural of Anecdote: Does Wal-Mart Hurt "Mom-and-Pop" Businesses?
"The plural of anecdote is data." - Berkeley political scientist Raymond Wolfinger
The aforementioned aphorism is one both true and truly in need of appreciation by Wal-Mart critics. Said critics have, for years now, claimed that when the Wal-Mart juggernaut comes to town it decimates small, family-owned, mom-and-pop, and fledgling local enterprises. Even after setting aside the self-righteous indignation, absolute certitude, and moral superiority with which critics have laid such charges at Wal-Mart's (and only Wal-Mart's) doorstep, I still have serious reservations about the critics' assertions.
The reservations stem from the fact that the "evidence" cited in support of such claims is always anecdotal. That is to say, some critics try to make their point by pointing to one region or county or city where Wal-Mart opened one or more stores and, as they tell it, local businesses were sent to an early grave.
The problem with this line of thinking is that while no thinking person doubts that some or even many local businesses may go under after Wal-Mart's entry, that fact alone in no way establishes either causality or ubiquity. It is an empirical question as to whether there is a Wal-Mart effect and, if so, whether it is the same in all times and climes.
Fortunately, someone has finally addressed this question head-on with a data set covering the entire US and with the application of empirical and econometric methods suited to the task. The someone in question is actually a someones- Professors Russell Sobel and Andrea Dean of West Virginia University. In their recently-released working paper, Sobel and Dean present results of a study whose abstract reads as follows:
Saving traditional small ‘mom and pop’ businesses has been a justification for political and court decisions preventing Wal-Mart from opening new stores virtually everywhere across the United States. We present the first rigorous econometric investigation of how Wal-Mart actually impacts the small business sector. We examine the rate of self- employment and the number of small employer establishments using both time-series and cross-sectional data. Contrary to popular belief, our results suggest that the process of creative destruction unleashed by Wal-Mart has had no statistically significant long-run impact on the overall size and profitability of the small business sector in the United States.
Because my thoughts on the research design and implications of the findings are deserving of an entire post by themselves, I will end this post with excerpts taken from Sobel and Dean's summary and conclusion:
This paper tests the widely-held belief that Wal-Mart has a large negative impact on the size of the small business (‘mom and pop’) sector of the U.S. economy. A series of heavily- popularized applied studies suggests that this negative impact is sizeable, in the case of Iowa amounting to almost a third of all existing small businesses closing as a result of Wal-Mart’s entry in the state. If accurate, given the size and growth of Wal-Mart across the entire United States, this would imply a massive overall impact for the U.S. economy, and should be reflected in significant overall declines in the level of small business activity for the economy as a whole.After examining a battery of different measures of small business activity and growth, employing different geographic levels of data, examining both time series and cross section data, and using different econometric techniques, our conclusion is firmly that there is no evidence for the claim that Wal-Mart has shrunk the size of the small business sector in the U.S. economy. One reason our results differ from the previous applied literature because we expand our data to include more than simply the directly competing retail businesses within the specific county in which Wal-Mart opens.
While the entry of a specific Wal-Mart store might cause some individual small, ‘mom and pop’ businesses to fail, our results suggest that these failures are completely offset by the entry of other new small businesses somewhere else in the economy. This is consistent with Schumpeter’s theory of creative destruction, explaining how business failures, by freeing up resources for alternative uses, result in economic progress. The readjustments caused by Wal-Mart are no different. Anecdotal evidence suggests that this reallocation allows an opportunity for new entrepreneurial ventures, such as coffee shops, art galleries, and high-end restaurants, to emerge. Prior to Wal-Mart these types of firms were at a significant disadvantage in competing for the high-valued downtown retail space occupied by general merchandisers who fail when Wal-Mart comes to town.
While the total number of small businesses is unaffected, due to new firms replacing old ones, a possible criticism is that ‘good’ small businesses are replaced by ‘worse’ small businesses that generate less income for their owners. However, we can find no evidence consistent with this claim either. Average real revenue and net income for small businesses continued to grow substantially throughout the entire period in which new small businesses replaced the old ones who failed.
The widespread belief that Wal-Mart hurts the small business sector has been used repeatedly by politicians and courts as a justification for not allowing the opening of new Wal-Mart stores. However, the results of our study suggest that claims about harm to the small business sector are statistically unfounded, and should be given no weight in future political and court decisions regarding openings of new Wal-Mart stores.
Tags: WalMart
See also: Why Wal-Mart Will Always Have Opposition from the good guys at The Writing on the Wal