Monday, 01 August 2011 00:00

‘Walmart effect’ on Mexico shows the true price of bargains

Etienne Vlok and Simon Eppel   August 2, 2011

In 2004 the Mexican Federal Competition Commission took the extraordinary step of allowing collusion in the Mexican retail market when it approved the establishment of Sinergia, a buying co-operative comprised of Mexico’s second-, third- and fourth-largest retailers.

Why would a regulator that serves to defend competition endorse anti-competitive behaviour? Simple: Walmart. For Walmart is the undisputed leader in the Mexican retail sector and the commission was trying to correct massive distortions of power between Walmart and its competitors, particularly around pricing.

As the New York Times noted at the time, “the joint purchasing company (Sinergia) is an attempt to match Walmart’s influence over suppliers”.

During South Africa’s Competition Tribunal hearings into the Walmart-Massmart merger, Walmart dismissed concerns about the company’s effect on local competition and employment by referring to its alleged effect in Chile, where it has been operating since 2009. However, fundamental flaws were identified with the Chilean example. We believe a much better indicator of the likely medium- to long-term effect of the company on South Africa can be found with Walmart’s experiences in Mexico.

Walmart entered Mexico in 1991 when it purchased a local retailer, Cifra. For the first few years of its presence, Walmex – as the company is known in Mexico – grew slowly. However, since 2005 when the company had only 488 stores, Walmex has seen spectacular growth, reaching a total of 1 364 stores by December 2010. In comparison its nearest competitor, Soriana, had just 508 stores, and a further 300 convenience stores – many of which are franchises.

Even with the buying co-operative, Walmex’s competitors cannot keep up. Walmart’s financial and buying power are simply too great. The company has invested the equivalent of R8 billion in its Mexican operations in 2011 alone, a trifling amount for a colossus like Walmart – whose sales in 2010 were more than R2.8 trillion. This is difficult for Soriana to match, with sales of only R55bn in 2010 (and would be similarly difficult for South African retailers, whose market leader, Shoprite, had sales of R67bn in 2010). Walmart’s unparalleled financial clout means it is peerless in its power to invest in its operations and grow vis-à-vis its competitors.

What of the effect of Walmart’s pursuit of its low-price strategy? French economist Cedric Durand has linked Walmex to a dramatic increase in imported goods into Mexico in an article published in the Cambridge Journal of Economics:
“After 1997, we observe a faster increase in Walmart’s imports in real terms compared with its competitors’. If we look at the imports-to-purchases ratio, we see that all the enterprises have been significantly increasing the share of imports in their purchases, but also that Walmart has shown a much more dramatic evolution: from 20 percent in 1997 to more than 55 percent in 2002 and 2003.”

Walmart’s pursuit of low prices significantly affected the total levels of imports into Mexico. In this, Durand’s findings echo similar conclusions by the Economic Policy Institute (EPI), which analysed Walmart’s effects on imports and jobs in the US. It concluded that Walmart’s imports alone were responsible for destroying 200 000 jobs – including 130 000 manufacturing jobs – between 2001 and 2006. The destruction of manufacturing jobs is significant: a strong manufacturing industry is a key driver of development.

That Walmart’s massive bargaining power and its importation practices lead to increased job losses is borne out by the Mexican evidence. For instance, Walmart expert and professor at the University of California, Nelson Lichtenstein, has said: “Walmex has had a devastating impact on Mexican manufacturing. Although Wal-mart initially claimed that it would incorporate local Mexican firms into its supply chain, the famous squeeze on profits and labour never let up.”

He quoted an executive of a small clothing manufacturer as saying: “Walmart has driven many suppliers out of business. Walmart maintains its profit margins… They never reduce their margin. They do pass on savings in price, but at the expense of the manufacturer. You can increase efficiency a certain amount, but… for example, they may tell you, ‘We’re going to sell shirts at a 40 percent discount – you, the manufacturer have to cut your price 40 percent.’ So the consumer benefits, but they’re driving out of business the manufacturers that provide jobs.”

Even when Walmex purchases goods locally, it squeezes manufacturers to continuously reduce costs. This usually ends in manufacturers having to import the goods they supply, as they cannot manufacture at such low prices, legally anyhow.

Clothing makers and workers have not been the only casualties of Walmex. Many other sectors have been affected. For instance, while productivity has increased within the soaps, detergents and surfactants industry in Mexico, employment in that industry has decreased by about 20 percent, largely as a result of Walmart.

So, what does Mexico have to teach South Africa about Walmart?

First, the financial power of Walmart is likely to benefit Massmart in South Africa, with significant effects on competition. Massmart will be leveraged into a position of market dominance (both within and beyond the liquor, building material and general merchandise markets where it currently leads) by virtue of Walmart’s unmatched financial power. Concentration and consolidation of the retail industry will occur and barriers to entry for new and smaller competitors will rise.

Second, Walmart is likely to increase the scale of problems facing South Africa, including job losses, unemployment and deindustrialisation. As Durand has shown for Mexico, competitor retailers will mimic Walmart’s practices (the Walmart effect) to better compete with the company. Greater imports will occur as competitors seek the cheapest prices.

In instances where local procurement initially occurs, Walmart and its South African competitors will squeeze local manufacturers even further than they already are squeezed causing many local companies to restructure or fold. Jobs will be lost (both among local manufacturers and among retailers who will struggle to match Walmart’s prices and their growth), offsetting any jobs that Walmart creates.

The possibility of lower prices from Walmart may be attractive, but at what cost? Low prices cannot come at the expense of local manufacturing and retail jobs and increased concentration in the retail sector, among others.

Mexico’s experience of Walmart shows that the company poses real challenges to South Africa, particularly in key socio-economic matters. We should tread with great, great care.

Etienne Vlok and Simon Eppel work for the SA Labour Research Institute, the research arm of the Southern African Clothing and Textile Workers Union.