Bring on Wal-Mart!

When I was young, my parents would occasionally pile us into their old station wagon and drive us some 40 kilometres to Makro. On the way we would pass a number of shops filled with perfectly functioning goods. In fact, many of these shops contained some of the very same goods that we would purchase within the next hour. At the time I didn’t understand the price mechanism or the intricacies of the market. All I knew was that Makro was huge and contained lots of stuff!

Nowadays, when I go to Makro, I am still struck with awe as I walk around the shop – albeit for slightly different reasons. The shop is still huge and still contains a lot of stuff but I now have a better understanding of how the market works. Makro is able to charge lower prices than all the other little shops that are more conveniently located closer to my family home because Makro buys in bulk from the cheapest sources that are scattered across the globe. Makro’s buyers travel throughout SA and to many other countries where they negotiate special prices with foreign and local producers of goods, and, because they are buying huge quantities of these goods, they can secure lower prices.

Needless to say we didn’t shop exclusively at Makro. When we needed bread, milk and other daily necessities we would go to the local café or to a shop nearby. My parents were never forced to travel the extra distance to Makro, passing all of those smaller, more conveniently located stores along the way. The reason they did so, was because the savings from Makro outweighed the extra petrol they would incur getting us there. Similarly, millions of other South African consumers benefit from the lower prices and the great variety of goods on offer at Makro and other mass retailers. Therefore, I was delighted when I heard that the global retail giant Wal-Mart, the biggest company in the world, was considering buying 51 per cent of Massmart (the company which owns Makro and other retail stores). An overwhelming majority of Massmart’s shareholders voted in favour of the offer and the deal now only requires the approval of the Competition Commission and the High Court. It is encouraging to see that large multilateral companies can freely enter our market, and that freedom of contract between privately contracting parties is, by comparison with other countries, not excessively constrained.

Like Massmart, Wal-Mart buys in bulk from the cheapest sources across the globe. But Wal-Mart’s buying power is much greater than Massmart’s because Wal-Mart is a global company. Outside of the United States, Walmart International has 4,434 stores in 15 countries and employs over 700,000 people. It has operations in Chile, China, Brazil, India, the United Kingdom, Japan and Canada, just to name a few. And it is pleasing to know that the biggest company in the world considers SA to be a worthy investment option. South Africans should be jumping up and down with glee because Wal-Mart intends to invest in our country’s future.

Of course, certain vested interests are opposed to the proposed deal. Indeed, according to the anti-Wal-Mart coalition that comprises COSATU, social movements and civil society organisations, the deal is not in the best interests of SA. Moreover, they claim that the deal is anti-transformation, economic growth, job creation, poverty alleviation, the New Growth Path and the Buy SA campaign. But, no one is going to be forced to shop at Wal-mart and no one is going to be forced to work there either.

Wal-Mart’s slogan is, “Save money, live better”. I couldn’t agree more. People buy from Wal-Mart because they save money. This then allows them to have some money to invest in productive assets or to buy those other things that will make their lives more comfortable and enjoyable. A 2005 Washington Post story reported that "Wal-Mart's discounting on food alone boosts the welfare of American shoppers by at least $50 billion per year." And a study conducted the same year by the Massachusetts Institute of Technology (MIT), which measured the effect on consumer welfare, found that “the poorest segment of the population benefits the most from the existence of discount retailers”.

Harvard University business professor, Pankaj Ghemawat, and business consultant, Ken Mark, have measured the savings conferred on consumers when Wal-Mart arrives. They state, “When Wal-Mart enters a market, prices decrease by 8 per cent in rural areas and 5 per cent in urban areas”. Research conducted by Global Insights over the period 1985-2004 demonstrate that “Wal-Mart’s expansion of sales resulted in a 9.1 per cent drop in the price of food in the United States, a 4.2 per cent drop in the price of other goods and commodities, and a 3.1 per cent decline in consumer prices overall, saving the average working family about $2,329 (R16,300) per year”.

The people who work for Wal-Mart, choose to do so. According to John Tierney of the New York Times, “Wal-Mart has been one of the most successful anti-poverty programmes in America. It provides entry-level jobs that unskilled workers badly want – there are often 5 or 10 applicants for each position”. In a labour surplus economy such as SA, where there is over 25 per cent unemployment (the majority of which are young unskilled individuals that have never worked before), the prospect of having the world’s biggest company arrive on our doorstep should have us jumping over the moon.

It is easy to understand the motives of some of Wal-Mart's critics. Local competitors do not want to sacrifice margins by cutting their prices. Labour unions know that they stand to lose members and dues if unionised stores suffer. But why would anyone who claims to be fighting for social justice be so determined to take money out of the pockets of the poor? Those who oppose the arrival of Wal-Mart in SA cannot care about ordinary South Africans who would definitely benefit.

Author: Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author's and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 18 January 2011