Thursday, January 16, 2014

Walmart, Oligopoly and Community Economy

We wish to estimate the effects of a Walmart on a community economy. Some of the general considerations of: are here made more concrete.

 Figures for Walmart are taken or calculated from:  We will see Walmart has about 3200 stores in the US, approximately one store per 100,000 people, which we will consider the size of the community we are interested in. It’s a size most people can relate to.

We have, for 2012  $328,704,000    US Sales for Walmart.
USA % of total Sales is 70%, from 4570 Stores Worldwide
So we estimate the number of US stores at about 3200. 
That’s about 1 store per 100,000 people.

Walmart has 1.4 Million employees in the US, so we can estimate about 300 employees per store.  (We’re including the employees at the 158 distribution centers and the Headquarters.  It won’t affect the main conclusions. If anything, it will lead to them being understated.)

We have: sales (revenue) per person at $1100, or $110,000,000 per our community of 100,000 people.
(Walmart makes $236,000 in revenue per employee. Keep that in mind when we talk about employee pay.)

From the table here: we find that in the retail trade, the average owner makes about $63,000 on just over $3,000,000 in sales.
We go over to:  Statistics about Business Size (including Small Business) from the US Census Bureau, (data for 2007) and page:  It seems to be the latest figures, so we’re going to assume that the relevant figures have not changed all that much since then.  (They have, but in ways which won’t affect the argument much.)

From the Excel spreadsheet ‘US all industries,’ downloaded from that page, line 19464 etc, we have data in a different form.  We take the bin that contains the average receipts for retail establishments, line 19469: firms whose receipts are between $2.5 Million and $4,999,999, and use the figures from that bin.  We estimate the average retail establishment has somewhere around 12 employees, with average pay of around $25,000, or a payroll per firm of about $300,000.  Ballpark figures, and on the conservative side, I think.  

which quotes, puts the average at about $18,000 for a sales associate at Walmart   From the Excel spreadsheet, line 19482, we get an average salary for employees in retail firms with receipts over $100,000,000, of which Walmart is one, of a little over $22,000.  We’ll use that figure instead, though it includes the salaries of the bosses in Bentonville, Arkansas, and so is  higher than the average store worker makes. It’s bad enough.

So that’s the data we’ll use.  What can we conclude?

First, how many small businesses are wiped out when a Walmart moves in?  Well, as we see, average receipt for a small retailer is $3 Million, so $110,000,000* would support, say 35 such businesses.  That’s most of a downtown. Since small businessmen are much of a community’s leadership, the social consequences are far beyond the mere economic consequences. Indeed, this destruction of these leadership opportunities in a community is perhaps the most pernicious effect of a Walmart moving in.

Walmart says they provide jobs.  However, we estimated the average small retailer employs 12 people, which times 35 retail establishments gives a total of 420 jobs.  Walmart provides about 300 jobs for a net loss of 120 jobs. 

What about payroll? Our local retailers provide 420 times $25,000, or a payroll of $10.5 Million.  Walmart provides 300 jobs at $22,000, for payroll of $6.6 Million.  Or about $4 Million less. This $4 Million is taken out of the community, which money would otherwise remain.  That $4 Million is enough to support another 40 jobs at $100,000 per job. (This is the average capital required to support jobs of all types.)   So the total loss in employment is about 160 jobs, which if we consider about 50,000 persons of our community of 100,000 to be in the labor force, adds almost 1/3 of 1% to the unemployment rate in our community.

(Admittedly, this calculation is hugely sensitive to the number we take as the average number of employees in the average retail firm. If we instead take 10 as the average number, the displaced payroll is only 350, for a net of only 50 lost jobs, 70 lost jobs if we include the effect of loss of capital.  If 14 it is 490, for a net of 190 lost jobs, over 240 counting the loss of capital effect.)

Of course, Walmart provides income and employment to Bentonville, Arkansas and the surrounding area, but this is small compensation to the thousands of communities which are not Bentonville.   And similarly for other large corporations.  Their headquarters are surrounded by islands of prosperity, created by the extraction of money from other communities, which are materially poorer for their efforts.  

That’s just Walmart.  If we consider the top 30 retailers, their combined total revenue is $1320 Billion, about 4 times that of Walmart alone, or say about $4,400 per capita.  That is 1/3 of all retail business in the US is done by the top 30 firms. (The total revenue of all retail firms is about $13,000 per capita. Of course, all the top 30 retailers are not present in all communities. But this is still the average effect, though the reality is ‘lumpier.’)  This indicates that organization, that is, the organization of the retail industry into oligopoly, accounts for over 1% of the unemployment rate, or about 600 jobs in our community of 100,000.  About ¾ % is direct reduction in payroll, and ¼ %, or 160 jobs, is due to $16 Million capital being taken out of the community by combined reduction in payroll in the community by the largest 30 retailers.

Finally, we note that the 30 largest retailers combine to eliminate, and replace, about 140 local retailers from our community of 100,000, (about $440,000,000 divided by $3,000,000.) 

Since retail is about 6% of the economy, we might think that if the entire economy were organized into similar oligopolistic structure,** the unemployment rate would be about 16 to 20% greater than- what?-  minus 10%? This seems impossible. Clearly, some oligopolistic organization is required to maintain the output of the economy at its current level. Indeed, in the absence of large corporations, labor would not be sufficiently organized to produce enough to sustain our current level of consumption. (Actually, we would expect the increase in unemployment to be much greater than 20%, since we are only figuring the contribution of the very largest firms, and not, say, the 20,000 largest firms in the US, all of which are over $100,000,000 in receipts.)  However, increasing the degree of oligopoly beyond a point will increase the unemployment rate while at the same time creating an excess of supply.  (This increase in degree of oligopoly is one change from the 2007 data we might expect.) Note this is a purely a structural effect.  So we would expect greater scale of organization, to a point, the point of diminishing returns, to increase supply.  Beyond that point, increasing scale will result in a decrease in supply.  Ordinarily, we would expect negative feedback about that point.  That is, we would expect a tendency for scale of organization to settle at that point.   

However, it is the tendency of oligopoly, unchecked, to concentrate into fewer and fewer firms. This is because, as we have noted elsewhere, the tendency for oligopolies to collect extra-normal profits, or rents.  An oligopolistic company thus expands, and accumulates power, at a rate greater than companies in more competitive industries.  There is thus external pressure on industries to organize as oligopolies, since an industry which fails to do so will lose power and influence relative to those industries which do concentrate.   

 Now we have not discussed the increase in consumer's surplus, brought by the lower prices, which motivates, for a community, the intrusion of a Walmart into that community.  That we will discuss in a subsequent post.    

*The fact that the average single Walmart store has receipts greater than the lowest margin of the top bin in the table ($100,000,000 receipts) highlights the limits of the Census data presentation, and so the limits of its usefulness.  
**The data from the table seems to imply at least a comparable degree of oligopoly through out the economy.  In retail, firms over $100,000,000 account for 62% of all retail receipts.  For all private industry, the comparable figure for receipts for all firms over $100,000,000 is 68%.  So, if anything, the rest of the economy would seem to be, on average, more oligopolistic than retail.   However, for the entire economy, the average pay for the average firm seems to be about $35,000, whereas the average pay for firms over $100,000,000 is $50,000.   We can still have it both ways, though.  Consider, the $22,000 average pay for retail.  Included in this average is the salary of the bosses at the corporate HQ, so the average in a given store is much less.  Similarly, we can consider the average of large corporations in other industries, in the communities in which they operate, ie get their receipts, as opposed to the communities in which they have their headquarters, to be less than the average for that industry. Or, more precisely, to be less than, or at least comparable to, the average of the average sized firm.  This is so in order for them to compete, locally, despite the larger corporate overhead.  Of course, there are other savings, but these can all be considered as reductions in compensation to operational employees, along the chains of supply.  For instance, a large corporation will have its own warehousing, but the cost of labor for this warehousing must be less than the local competition. Increases in efficiency can only save so much, and will eventually be copied. (Referring to the previous post, efficiency is a multiplicative factor. It is necessarily less than 1, and can only be increased at ever increasing expense.)  Other things being equal, then, this means its compensation for its warehouse employees must be less. (But consider Costco. It pays its employees more, so we  must consider that it employs them more efficiently.)  Similarly for its factories and transport, on average.   Where research and product development are also involved, the savings in overhead for production must be even greater. 

Thus a large corporation will (almost) always take more, in the case of stores, or in the case of factories, add less, than a locally run business, to a local economy. In fact, consider a corporation purchasing a local business.  It is the belief of the purchasing corporation that the local business is undervalued by its local owners, else it wouldn’t buy it.  That is, that more can be extracted from the local business’ community, in the case of a store, or, in the case of a factory, less put into the community, than is currently being done by the local owners.