The growth and dominance of Wal-Mart over the years has indeed turned it into an economy all its own. Expanding on the “buying cheap” concept, Wal-Mart has been successful in creating supply and demand on its own. There is no single corporation in the world that has as much impact as Wal-Mart has, save perhaps for oil corporations, on any single domestic or even international economy. The volume of sales which Wal-Mart generates is enough to keep the rest of the world happily employed and is also enough to keep the consumerist population of the United States happy in their spending habits.
Every single commodity manufacturer who is interested in surviving must be able to gain the good graces of Wal-Mart. The impact of Wal-Mart is such that it “has life-or-death decision over [almost] all the consumer goods industries that exist in the United States (Gereffi 2006). ” In terms of currency denomination, Wal-Mart has succeeded in taking advantage of exchange rate differences in order to source from cheaper places. As the dollar strengthens against other currencies, Wal-Mart uses this purchasing power advantage to buy more raw materials or inputs that are needed.
Since majority of the sales of Wal-Mart are in the United States, it provides an economic advantage when one is able to buy inputs at a lower price per dollar due to the exchange rate differences and sell them for dollars in the local market. Another impact that Wal-Mart has upon the economy of the United States is the boost that it provides by improving the productivity and efficiency of the domestic retail sector. This effect has been shown in a study conducted by Global Insight (2005) that while Wal-Mart has been the cause for the drop in nominal wages, with wage rates dropping by nearly 2.
2 percent in 2004, it has also contributed to an overall reduction in consumer prices over the same time period, with a 3. 1 percent decline in consumer prices. As previously mentioned, this in effect translates to an increased level of disposable income for the consumers of 0. 9 percent (Global Insight 1). In dollars and cents, this 0. 9 percent increase in disposable income translates into nearly US$ 263 billion in added spending dollars or nearly US$ 895 per person (Global Insight 1).
The impact of Wal-Mart is not only felt in the economy of the United States but it also felt on a global scale. Since much of the sourcing that Wal-Mart currently does is based on retail price advantages, Wal-Mart has been a great contributor to the movement of jobs to cheaper countries (Hausman, J. & Leibtag, E. 205). Low-wage countries such as China and much of Asia have become ideal relocation centers for super retailers such as Wal-Mart.
As such, this has created the effect of opening up the American market to non-domestic firms. Studies have shown that in the past five (5) years, Wal-Mart has more than doubled its imports from Asia (Hausman, J. & Leibtag, E. 205). It has purchased over US$ 12 billion in merchandise in 2002 alone and this figure has increased steadily over the years. From an economic perspective, this has increased the total level of Chinese exports into the American economy by over 10 percent since 2002 (Hausman, J. & Leibtag, E. 205).
Essentially, the main market feature that Wal-Mart takes advantage of is the strength of the dollar in relation to other currencies. Since Wal-Mart uses the power of the dollar and outsourcing quite effectively, it is able to purchase low cost inputs (as determined by strong currency exchange) and sell it for higher prices per dollar in other markets. Another aspect in which Wal-Mart uses the exchange rate fluctuations in order to increase its profitability is in outsourcing certain aspects of its services department.
As previously mentioned, the advantage in currency strength do not only mean that a company is able to buy inputs at a lower cost but also that a company is able to outsource certain aspects of its operation to other countries where the standard of living is lower. A perfect example of this is the transfer of the customer service hotline to business process outsourcing centers in India and the Philippines. Due to the cost of living in the United States, Wal-Mart spends more dollars per hour to maintain the service center in the United States.
By outsourcing to other countries, Wal-Mart is able to hire people for approximately US$ 12 a day to do the same service that costs US$ 12 an hour in the United States. As the currency of the United States strengthens as compared to other currencies, it makes more sense, economically, to outsource certain aspects of the operations to countries where the exchange rate is more favorable. This purchasing power is, therefore, not only applicable in terms of input or raw materials but also with regard to the operations of certain services.