A truth bomb for Walmart supporters

By Cate Long
November 28, 2012

After workers and labor unions protested Walmart, the world’s largest retailer, last Friday, The New York Times quoted a union organizer describing the effort as “open-source striking.” An alleged 1,000 protests took place across the country. But the real battle was happening on the ideological field between conservative and liberal pundits. Many claims were made to defend the company’s business practices. The least sound of these claims was made by the Reason Foundation’s Peter Suderman:

4. Obama adviser Jason Furman has estimated the welfare boost of Walmart’s low food prices alone is about $50b a year.

— Peter Suderman (@petersuderman) November 24, 2012

The numbers in this claim seem very inflated, seeing as the entire U.S. spending level in grocery stores was $407 billion for 2011, according to the USDA. Suderman’s claim would mean that Walmart saves the entire nation 12.2% on their food costs. Really? Should we ask Walmart to administer Medicaid too?

With a Google search I discovered that Sebastian Mallaby of the Washington Post wrote about about a similar claim made by Jason Furman in 2005. I thought I should investigate this claim more closely, since Furman is the Deputy Director of the National Economic Council and has been nominated to the Obama administration’s fiscal cliff negotiating team. Surely he wasn’t out cheerleading for a private company. According to the Post:

As Jason Furman of New York University puts it, Wal-Mart is “a progressive success story.” Furman advised John “Benedict Arnold” Kerry in the 2004 campaign and has never received any payment from Wal-Mart; he is no corporate apologist. But he points out that Wal-Mart’s discounting on food alone boosts the welfare of American shoppers by at least $50 billion a year. The savings are possibly five times that much if you count all of Wal-Mart’s products.

There are numerous problems with this claim.

First: Walmart stores did 30 percent of their annual U.S. sales on “Grocery, candy and tobacco” (page 9) and 30 percent of Sam’s Club sales on “Food” (page 10).

Second: Total food sales between the two divisions was $74.4 billion for 2005 (page 22).

Third: Furman cited an academic study in a 2005 Slate article that claimed Walmart food shoppers were saving around 25 percent on food costs. This would yield savings of approximately $18 billion for the 2005 shoppers, rather than the $50 billion claimed.

It seems mathematically impossible for Walmart’s pricing policies to have saved the poor (or any class) $50 billion in 2005, when Furman made the claim. Maybe Sebastian Mallaby misquoted Furman, but it is an inflated estimate that has floated down through the years to defend the business practices of Walmart.

But what about today? Is Walmart saving shoppers $50 billion per year on food costs? The big difference between 2005 and 2012 is that Walmart’s competitors have made aggressive efforts to narrow any differences between their food prices and Walmart’s. Bloomberg wrote this on August 23:

Target this month had lower prices than Wal-Mart for the first time since October, according to research conducted by Bloomberg Industries. The Minneapolis-based chain also led by its widest margin since the monthly study began two years ago. The study examined the gap in average price across a basket of 150 like items at stores within five miles of each other.

What was a claimed 25 percent pricing advantage in 2005 is now about zero. I’m sure that the price differentials swing back and forth between the stores, but competition has essentially narrowed pricing differences to nothing.

The Washington Post’s Ezra Klein, usually a numerate guy, ate up the Sunderman claim as he wrote:

Wal-Mart’s low prices do primarily benefit low-income consumers.

It is important that we question such commentary more critically. Bad data is repeated year after year, and it may be used to shape important policy decisions. I hope that Josh Furman has a sharper pencil when he tackles the fiscal cliff.

3 comments

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I think you’ve done a good job of trashing Furman’s comments. However, you are focusing too much on how much consumers save only at Walmart, and any price advantage they gain by shopping there. You are ignoring the effect Walmart has on pricing industry wide. Because Target has had to lower their prices to compete with Walmart, consumers everywhere save. The $50 billion may be closer to the truth than you will allow.

Posted by pahiker6 | Report as abusive

“What was a claimed 25 percent pricing advantage in 2005 is now about zero. I’m sure that the price differentials swing back and forth between the stores, but competition has essentially narrowed pricing differences to nothing.”

Sorry. Wrong. Walmart is an innovator in discounting. They gave “us” $4 prescriptions. Now those are widely available. Why? Match or go out of business. Would we have $4 prescriptions without Walmart’s lead? I don’t think so.

“The Washington Post’s Ezra Klein, usually a numerate guy, ate up the Sunderman claim as he wrote: Wal-Mart’s low prices do primarily benefit low-income consumers.”

Don’t mean to wake you up, but I buy at Walmart regularly, and I get even better savings than those low-income consumers that don’t clip coupons and get competitor price matches. Perhaps he meant that whatever low-income consumers saved by buying at Walmart made limited dollars go further.

Professional journalists have an obligation to say what they mean.

Posted by OneOfTheSheep | Report as abusive

A truth bomb? Where? Cate, your analysis is flawed on so many levels, but the key problem is your failure to understand that Wal-Mart drives prices down across the market. If Target prices now match those of Wal-Mart, Wal-Mart deserves credit for that. Are you really suggesting that if people can get the same prices somewhere else, that Wal-Mart is not saving anyone anything? How do you not understand a concept as simple as price competition? Or are you ignoring it because it fits your desired narrative? You just bombed at telling the truth. Cate, stick to writing about fixed income.

Posted by Truthbomb | Report as abusive