September 24, 2007
Truth in Advertising at Wal-Mart
Economists usually don’t follow marketing slogans, but Wal-Mart’s shift from its “Always Low Prices” slogan to “Save Money, Live Better" caught my eye.
The slogan is based on a study by the national consultancy firm Global Insight. During a 2005 Conference on Wal-Mart, Global Insight’s economists released a study showing the average American family saved a little over $2,300 annually by shopping at Wal-Mart. The current marketing campaign uses updated estimates of Wal-Mart’s savings at about $2,500 per year for the average family. But, are these numbers to be believed?
Critics of the giant retailer were quick to pounce on the Global Insight study. It was, after all, sponsored by Wal-Mart. But the evidence that Wal-Mart saves consumers money, and the reasons it does are pretty well established by academics.
Perhaps the best known pricing study was performed by MIT professor Jerry Hausman who found pricing savings in excess of 15% on a large number of items. This very widely respected economist went so far as to criticize the computation of inflation estimates because they don’t take Wal-Mart into account. University of Missouri economist Emek Basker found prices were significantly lower across a wide set of items using data collected for the local cost of living studies (like the one we sponsor at Ball State University).
In my recent book on Wal-Mart’s local impact I compiled a number of local pricing studies and found consistent evidence that Wal-Mart is the low cost retailer for both food and dry goods. I also estimated the cost of living impact of Wal-Mart in Florida (where they have a long history of county level cost of living indices). I found that having Wal-Mart in a county cut the cost of living by about a half a point in total. All our findings are consistent with the Global Insight results.
So, whatever you think about Wal-Mart, you must concede that their prices are far lower than the competitors. Indeed, Wal-Mart’s in effect provides 10 weeks of free meals to the average American family. To place this in context, the savings from shopping at Wal-Mart provide more nutrition supplement than the entire Food Stamps program nationwide. But how does Wal-Mart wring those cost savings?
Critics claim that Wal-Mart can offer lower prices because it offers lower wages and poorer benefits than other retailers. This is simply unsupported by facts and common sense. (In the spirit of full disclosure, I presented three papers at the Wal-Mart conference, all of which dealt with labor costs). Wal-Mart’s wage and benefit packages are quite similar to other big box stores, and there’s at least some evidence that they pay better than their competitors at K-Mart. More importantly, common sense tells us they pay better than the competition, otherwise where would they get their workers at a new store?
Wal-Mart can charge lower prices because it is more efficient. It buys goods less expensively from producers, requiring them to cut costs (like excess boxes on deodorant), moves goods quickly from the factory to the store (slashing inventory and financing costs) and prices goods to be sold to consumers.
Think what you will of Wal-Mart, but their slogan to “Save Money, Live better” is certainly truth in advertising.
About the Author
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