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Where does Wal-Mart put new stores?
Wal-Mart has an incentive to keep its stores close to each other so it can economize on shipping. For example, to make this simple, just think about a delivery truck: If Wal-Mart stores are relatively close together, one truck can make numerous shipments; however, if the stores are spread out, you wouldn't have that benefit. So, I think that the main thing Wal-Mart is getting by having a dense network of stores is to facilitate the logistics of deliveries.
There are other benefits, too. Opening new stores near existing stores makes it easier to transfer experienced managers and other personnel to the new stores. The company routinely emphasizes the importance of instilling in its workers the “Wal-Mart culture.” It would be hard to do this from scratch, opening up a new store 500 miles from any existing stores.
...Wal-Mart waited to get to the plum locations until it could build out its store network to reach them. It never gave up on density.
The placement of Wal-Mart stores has followed a spatial diffusion model. K-Mart, in contrast, scattered its stores across the country. Here is more. Here is a video showing the spread of Wal-Mart, well worth watching and short. It is the best single lesson in economic geography you will receive. Thanks to http://kottke.org for the pointer.
Posted by Tyler Cowen on May 12, 2006 at 08:22 AM in Economics | Permalink
Comments
The explosion throughout the Southeast in 1980-1982 is fascinating. Given interest rates in that era, I assume that was self-financed?
Posted by: Eric H at May 12, 2006 9:31:42 AM
Do advertising buys and word of mouth patterns have something to do with this?
How are they dispersing the 18 new stores due for China this year?
Posted by: Dave Meleney at May 12, 2006 9:53:53 AM
Tyler, I love reading you (from inside China), however, your comments here about Wal-Mart are just plain wrong. As a former member of Wal-Mart store management, I can attest that Wal-Mart stores receive full semi-trailers every night - and often times two full semi-trailers. If they don't have a full truck load, they'll simply wait a day and deliver the goods tomorrow.
Posted by: deananash at May 12, 2006 10:12:49 AM
Wal-Mart's operations in China are a disaster. The company (Wal-Mart of China, a wholly-owned subsidiary) does not adhere to Wal-Mart's core beliefs nor maintain the company's high standards. To add insult to injury, they aren't the low-price on anything. Now, there are a lot of reasons (when I worked for Wal-Mart, we called them excuses) for this. However, having lived here for more than three years I can confirm that they are just that - excuses. Wal-Mart has so few stores here that until they develop more mass, their distribution system isn't all that efficient. I not only worked for Wal-Mart in America, but I also worked for Wal-Mart International, in what was then the largest Wal-Mart in the world (in Mexico City). The real pity is that China is desperate for the Wal-Mart that conquered America. Sam must be turning in his grave.
Posted by: deananash at May 12, 2006 10:19:08 AM
If you want another great contrast of economic geography and better planning, lay a map of Honda dealerships over a map of GM dealerships. It's stunning how much GM competes with itself.
Posted by: Ted Craig at May 12, 2006 10:23:55 AM
Can we coin the term "first mover disadvantage." K-Mart's problem is that it opened most of its locations in urban America years before Wal-Mart decided to enter the urban market. By the time Wal-mart moved into urban areas in the 90s, the K-Mart locations had become almost inner city and Wal-Mart could locate strategically around them.
Similarly with GM, In the 1970s GM had pretty much half of the US auto market. Of course they had dealerships everywhere. Honda arrived in the 1980s. They have a minuscule share of the market. They could be very strategic about dealership location.
Posted by: Robert Schwartz at May 12, 2006 11:26:27 AM
This is very interesting. WalMart is trying to put a super store in my small town. And there are 2 already, about 20 minutes away in 2 different directions.
Posted by: Chris Meisenzahl at May 12, 2006 12:31:09 PM
"If you want another great contrast of economic geography and better planning, lay a map of Honda dealerships over a map of GM dealerships. It's stunning how much GM competes with itself."
GM competes with itself through having six brands in North America (Chevrolet, Saturn, Buick, Pontiac, Cadillac and GMC). To make matters worse, GM sells basically the same vehicle under two or more brands (e.g. Chevrolet Equinox and Pontiac Torrent), a much-derided practice known as "badge engineering." Honda makes do with just two brands (Honda and Acura) with no significant overlap.
Posted by: Peter at May 12, 2006 12:39:17 PM
Note too that a major complaint about Walmarts is that they can be too crowded. Do you know a better solution for long lines/crowds that opening more stores nearby?
Posted by: DK at May 12, 2006 5:30:56 PM
"Wal-Mart has an incentive to keep its stores close to each other so it can economize on shipping. For example, to make this simple, just think about a delivery truck: If Wal-Mart stores are relatively close together, one truck can make numerous shipments; however, if the stores are spread out, you wouldn't have that benefit. So, I think that the main thing Wal-Mart is getting by having a dense network of stores is to facilitate the logistics of deliveries."
Granted, Holmes said it was a simplification, but that argument is very unconvincing. As deananash attests, a single truck making multiple deliveries seems very unlikely. The article says that Homes has a body of work "investigating corporate decision-making based on taxes, location, plant size, trade patterns and other factors" so I assume he's not just guessing, but it would be nice to have a better understanding of what he thinks the benefits are of having a dense network of retail locations. The entire article is about such networks but offers no explanation whatsoever to back up his conclusions.
I could speculate: the standard "economic geography" answer is that transport costs increase with distance. If WalMart had a single distribution center, then the best locations would be the ones closest to that center, so you would add a store at distance X+e rather than X only if the farther location were better than the nearer location by an amount equal to the added transportation costs.
But I seriously doubt that's what's going on with WalMart. First off, just how much of a differential in shipping costs can there be? Second, WalMart has lots of distribution centers, so it should be growing radially from lots of points, not just Bentonville. And finally, the products don't come from the distribution centers anyway... they arrive at various ports (most of them on the West Coast). So if anything, WalMart should be growing radially from Los Angeles and Seattle.
So if it's not trucking that encourages density and thus radial development, what does?
Posted by: eddie at May 12, 2006 5:36:03 PM
In general, chain retailing is about depots and truck routes: the logistics of keeping stores supplied with the stuff that's selling RIGHT NOW before it stops selling. Different chains do it differently. Specialty stores run a single truck route past several stores (the model posited in the original post); big boxes run a truck a store. But the principle is the same: merchandise from the depot. And the growth pattern is one of establishing depots and building stores out around them.
Posted by: jim at May 12, 2006 6:15:27 PM
Speaking of geographic diversity, why is there a reserve bank in minnesota? The US would not miss the SF, Minnesota, St. Louis, Dallas, etc. banks if they were to disappear. How long before we should expect a reserve bank economist to make that argument?
Posted by: smilus@bj.com at May 12, 2006 9:00:40 PM
Wal-mart management often refers to this as "back-filling" to investors. If you look at return on investment of these fill in stores they are much higher since investment in logistics/distribution centers have already been made. This is rather simple... focus on returns in an industry run by marketing and fashion gurus. Oh yes... "green is the new pink"... right?
Posted by: dee hopton at May 13, 2006 1:31:37 AM
I don't buy the "Wal-Mart culture" story; the "central depot" story seems to make more sense. Looking at the video, Wal-Mart's expansion into new areas seems to have been more a matter of suddenly opening up large numbers of stores in a given region than of slowly expanding out. Stores open across South Carolina in 1981; across New Mexico in '88, across North Dakota in '89, and across California during '92-'94. Florida and Georgia both get taken over in the same year: 1983.
Posted by: empiricist at May 13, 2006 1:48:03 AM
It looks like mold growing on bread, which is apt.
Posted by: lee at May 13, 2006 12:03:21 PM
Is it diffusion, really? Is the number of new stores related to the length of the 'edge' or is it related to the number of old stores? I'd call the first possibility 'growth', and the second 'diffusion'. Not obvious to me which it is.
Posted by: Matt at May 13, 2006 12:25:13 PM
Interesting too how closely the Wal Mart map in 2000 corresponds to the population density map:
http://www.census.gov/geo/www/mapGallery/images/2k_night.jpg
I know you'd generally expect this correlation, but they're pretty much identical.
Posted by: radek at May 13, 2006 10:27:17 PM
Wal-Mart's location practice not only minimizes delivery costs, but also presents a barrier to entry for competing low-cost retailers. First, with so many Wal-Marts around, new competitors to an area will be at a disadvantage in terms of customer convenience. Second, Wal-Mart will be in the existing big box locations, whereas the new competitors will probably have to build new stores. Third, until a new competitor manages to soak a market with a critical mass of stores, it will have higher delivery costs than the surrounding Wal-Marts. Hence, incoming competitors in markets with heavy Wal-Mart presence will face higher customer acquisition costs (the first and second barriers) as well as higher merchandise acquisition costs (the third barrier).
chsw
Posted by: chsw at May 13, 2006 10:46:11 PM
It obviously doesn't apply today, but at least the early spread pattern could be efficient marketing. If you open a store 'near' another store, then you 'seed' it with people who go to the other store, would have gone more often if only it were closer. You also get customers who have friends/coworkers/relatives who go to the nearby branch, who would go also. Your current marketing for the old store has at least some overlap to the new. If you open a store in a new market clear across the country, you have to start from scratch. (Think if Braum's Dairy opened a new store in New York state. No one knows who they are up there. A new store in Waco, or western Arkansas, however, would draw people who know who they are.) (Substitute a Trader Joe's in Dallas, Texas vs. Salem, Oregon, or a Kerr Drugs in southern Virginia vs. Denver.) 25 years ago, a new Wal-Mart in New York state would have been greeted with a 'who?' not a protest. A new Wal Mart in Frankfurt, Ky, on the other hand, would draw a crowd.
Interesting event in 1981 - Wal-Mart colonized South Carolina with what looks like a dozen or more stores more or less simultaneously. Was this a buyout? Or did they save on marketing costs by blitzing a relatively small set of interrelated media markets all at once?
Posted by: rvman at May 15, 2006 1:24:50 PM
In "Competition Demystified" Bruce Greenwald argues that geographic concentration is one of the key strategic decisions that causes firms to be succesful. Prof. Greenwald uses Walmart as an example of a company that exhibited substantial competitive advantage when they focused on their geographical concentration but started to lose its edge when it strayed from that policy.
Posted by: Gary Newman at May 15, 2006 6:12:59 PM
The 1981 event in South Carolina was a buyout. Wal-Mart bought a company called Kuhn's Big K.
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Posted by: iknowall at Jun 1, 2007 12:38:58 PM
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Posted by: iknowall at Jun 1, 2007 2:13:37 PM
Walmart puts stores in residential neighborhoods where people do not want them. Instead of a flat piece of land that would be easier to build on they want to destroy the beauty of a neighborhood and fill in canyons that will get rid of beautiful scenery and wildlife. Walmart comes where people do not want them. One Walmart in a town of approximately 60,000 is plenty. We do not need or want another one.
Posted by: kim m at Sep 5, 2007 10:06:28 PM
