The Walmart Effect Explained, With Pros and Cons

By
Will Kenton
Full Bio
Will Kenton is an expert on the economy and investing laws and regulations. He previously held senior editorial roles at Investopedia and Kapitall Wire and holds a MA in Economics from The New School for Social Research and Doctor of Philosophy in English literature from NYU.
Learn about our editorial policies
Updated April 28, 2022
Reviewed by
Janet Berry-Johnson
Janet Berry-Johnson Headshot
Reviewed by Janet Berry-Johnson
Full Bio
Janet Berry-Johnson is a CPA with 10 years of experience in public accounting and writes about income taxes and small business accounting.
Learn about our Financial Review Board
Fact checked by
Suzanne Kvilhaug
Suzanne Kvilhaug
Fact checked by Suzanne Kvilhaug
Full Bio
Suzanne is a content marketer, writer, and fact-checker. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies for financial brands.
Learn about our editorial policies

What Is the Walmart Effect?

The Walmart Effect is a term used to refer to the economic impact felt by local businesses when a large company like Walmart (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 these reasons.

Key Takeaways

  • The Walmart Effect is the effect that Walmart has been known to have on the communities in which it builds locations. 
  • The presence of a Walmart store can hurt the business of smaller companies and lower wages for local workers.
  • Much of the Walmart Effect can be attributed to Walmart’s immense buying power. 
  • The Walmart Effect can also affect suppliers, who must drive their production costs down in order to afford to sell to Walmart. 
  • Although the term was used in the 90s, “Walmart Effect” became ubiquitous with the release of a Charles Fishman book by the same name.
Two shoppers push a Target shopping cart past a Walmart storefront.

VIEW press / Getty Images

How the Walmart Effect Works 

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

The Walmart Effect has been shown to not only affect competing companies and suppliers but consumers as well.

Advantages and Disadvantages of the Walmart Effect

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 less expensive materials in the production of their goods.

Requirements for the Walmart

The Walmart Effect is driven by the scale and scope of Walmart’s buying power. The company has over 4,700 stores in the U.S., including almost 600 Sam’s Club stores. It’s the largest employer in the U.S. As a retailer of this size, 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, compared with other businesses in the markets in which it operates. This can have an effect that goes beyond the retail market and into manufacturing and production. 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.

The term Walmart Effect was first used in the 1990s, but Charles Fishman wrote a book entitled “The Wal-Mart Effect” in 2006 which details how economies are affected by Walmart. Fishman goes beyond the advantages and disadvantages for local businesses but also includes how Walmart can positively and negatively impact consumers.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Walmart. "Location Facts."

  2. Charles Fishman. "The Wal-Mart Effect." Penguin Random House, 2006.

Open a New Bank Account
×
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.