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Walmart and Canada’s Retail Sector: Some Obvious and Less Obvious Implications

Alice O. Nakamura, Masao Nakamura and Philip Davidson

November 25, 2011

Alice Nakamura and Philip Davidson are with the Univ. of Alberta School of Business. Masao Nakamura is with the Sauder School of Business at the Univ. of British Columbia.

Alice Nakamura is the corresponding author: alice.nakamura@ualberta.ca.

This talk was prepared for the November 25, 2011 Annual Workshop of the ERCA Research Network on the Structure and Performance of Agriculture and Agri-products

Industry (SPAA). The location of the workshop is the Renaissance Room of the Fairmont Chateau Laurier Hotel, 1 Rideau St., Ottawa, Ontario.

This talk is based on a paper that is available from the corresponding author.

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Retail sales, (monthly) (Seasonally adjusted)

Sept.

2010

Aug.

2011r

Sept.

2011p

Aug. 2011 - Sept. 2011

Sept. 2010 - Sept. 2011

$ millions % change

Retail trade 36,661 37,831 38,212 1.0 4.2

Food and beverage stores 8,696 8,699 8,714 0.2 0.2

Supermarkets and other grocery stores 6,210 6,183 6,175 -0.1 -0.6

Convenience stores 546 558 551 -1.3 1.0

General merchandise stores 4,628 4,775 4,808 0.7 3.9

Department stores x 2,259 2,255 -0.2 x

Other general merchandise stores x 2,517 2,553 1.4 x

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Global Top 10 Retailers, 2009 (largest to smallest)

Company Base

country

2009 retail sales

(US$mil)

Net profit

margin (%)

Return on

assets

Retail sales

growth

# of countries

of operation

Walmart US 405,046 3.6 8.7 0.9 16

Carrefour SA France 119,887 0.5 0.8 -11.2 36

Metro AG Germany 90,850 0.8 1.5 -3.2 33

Tesco PLC UK 90,435 4.1 5.1 4.8 13

Schwarz Group Germany 77,221 na na 1.4 25

The Kroger US 76,733 0.1 0.2 1.0 1

Costco US 69,889 1.5 4.9 -1.5 9

Aldi Gmbh Germany 67,709 na na 3.8 18

Home Depot US 66,176 4.0 6.5 -7.2 5

Target US 63,435 3.8 5.6 0.9 1

Top 10 1,127,381 2.6 5.3 0.2

Top 250 3,763,535 3.1 4.9 1.3

Top 10 share of 250 total 30% Source: 2011 Global Powers of Retailing -- Deloitte, pp. G12 and G16.

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Top Canadian Retailers and Top Retailers Selling Food in Canada

Global rank

Company Base

country 2009 2008

2009 retail sales

(US$mil)

2010 food sales

(Can$mil) 1. Loblaw Canada 40 37 20,070 31,609 2. Couche-Tard Canada 48 50 16,440 1,100 3. Empire Company

Canada 58 68 14,228 15,723 (just Sobeys)

4. Metro Canada 87 81 9,525 11,408

Costco Canada US 7

(Costco) 69,889 6,770

Canada Safeway US 24

(Safeway) 6,737

Walmart Canada US 1

(Walmart) 4,960

Co-op’s Switzerland 49

(Coop) 3,350

Overwaites 2,915 5. Shoppers Canada 99 102 8,790 770

6. Canadian Tire Canada 127 112 6,955 Not on

CIBC list Source: 2011 Global Powers of Retailing -- Deloitte, pp. G12 - G14 for all columns except the last which is from CIBC World Markets.

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Combined Hypermarket/Supermarket Percentage Share of Food Retail Industry Revenue in Canada

Top Grocers 2008 2009 2010 Loblaw 24.8 24.0 23.9 Sobeys 13.7 13.6 13.4 Metro 9.6 9.7 9.5 Safeway 6.7 6.3 6.2 Walmart Canada

4.3 6.0 6.7

Souche-Tard 1.8 2.0 2.1 Total for Top Grocers

60.9 61.6 61.8

Source: New Zealand Trade and Enterprise (2011)

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Walmart to Open 40 Supercenters with Grocery in Canada 2011-2012

By Marcus Cyganiak – January 29, 2011

This week Walmart Canada announced that it plans to open 40 new Supercenters with Grocery sections across the country between February 1, 2011 and January 31, 2012. This will ... result in over a billion dollars of investments into Canadian communities.

Target Canada: Retailer Plans To Hire 'Thousands' Ahead Of Canadian Expansion

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Statistics Canada keeps bringing out reports purporting to show that overall productivity for Canada is poor compared to the US.

However, Erwin Diewert of the University of British Columbia gets very different results for Canada versus the US.

New Estimates of Canadian TFP Growth and the Contribution of Changes in Real Export and Import Prices to Real Income Growth

May 7, 2009W. Erwin Diewert and Emily YuDepartment of EconomicsUniversity of British ColumbiaEmail: diewert@econ.ubc.ca Using new data from Statistics Canada, the paper shows that the

productivity performance of the business sector of the Canadian economy has been reasonably satisfactory over the past 47 years. In particular, traditional gross income Total Factor Productivity (TFP) growth averaged 1.01 percentage points per year over the period 1961-2007 and when a net income framework was used, TFP growth averaged 1.04 percentage points per year.

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Table 1. Canada-US Relative Labor Productivity

and TFP by Industry (US=1)

1995 to 2004 changec

Relative Canada/U.S.

GDP per worker

Relative Canada/U.S.

TFP Sector or Industry GDP/worker TFP 1995 2000 2004 1995 2000 2004

(1) (2) (4) (5) (6) (7) (8) (9)

Primary +.17 -.08 0.81 0.83 0.98 0.84 0.74 0.76

Manufacturing -.30 -.27 0.88 0.74 0.58 0.93 0.77 0.66

Services -.07 -.04 0.62 0.61 0.55 0.65 0.65 0.61

Total Business -.09 -.06 0.72 0.70 0.63 0.72 0.71 0.66

Wholesale trade

-.15 -.17 0.77 0.74 0.62 1.07 1.00 0.90

Retail trade -.04 -.06 0.64 0.70 0.60 0.79 0.83 0.73 Source: Derived using the results reported in table 1 of Rao, Tang and Wang (2006a) who base their calculations on Statistics Canada and U.S. Bureau of Economic Analysis (BEA) data..

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Table 2. Canada-U.S. M&E Capital

Intensity Gap by Industry (U.S.=1) Relative

M&E Capital Intensity

Relative M&E Capital

Intensity

Industry 1995 to 2004

changeb 1995

2000

2004

(1) (3) (4) (5)

Primary +.22 0.30 0.37 0.52

Manufacturing

-.20 0.74 0.62 0.54

Services -.02 0.51 0.52 0.49

Total Business

-.04 0.60 0.59 0.56

Wholesale +.02 0.15 0.19 0.17

Retail trade +.12 0.39 0.50 0.51

FIRE, management

+.04 0.55 0.59 0.59

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Management matters in retail

Working paper 13, APRIL 2010 • In this Working Paper, we further extend this

management research to our retail businesses. • In the summer of 2009, a team of analysts at the Institute

interviewed senior managers at 661 retail outlets in total – 409 in Canada, 152 in the US, and 100 in the UK....

• [T]he productivity of Canada and the US retail industries differs – sales per employee are 33 percent higher in the US and average wages are 35 percent higher.28 We are able to determine that our retail industries are very similar in their make-up (i.e., the percentage of industry sales in each sub-sector like clothing or furniture).” (p. 25)

• Bloom et al. find that “the presence of multinationals within a region serves to assist in the transfer of best practice to local firms… possibly through the migration of employees and knowledge and through commercial interactions between the two groups.” p. 32

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“Across all countries in the manufacturing sector, Bloom et al. find that “the presence of multinationals within a

region serves to assist in the transfer of best practice to local firms… possibly through the migration of

employees and knowledge and through commercial interactions between the two groups.” p. 32

• This result is reinforced in the retail sector across the three countries sampled.

• We saw a picture of two solitudes of Canadian retailing. We saw Canadian-owned, domestically focused retailers, with dramatically inferior management teams to international firms competing in Canada.

• We need to ensure that our small business policies are aimed at encouraging growth, and not simply owner lifestyle.” (p. 45)

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Experts differ on how the spread of Walmart (and other US retailers including Target) in Canada will affect prices, employment and wages.

Many experts claim that Canadian consumers will benefit from the US influx no matter how this works out for the incumbent retailers and the producers and services providers that make up their supply chains.

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Roger L. Martin, Chairman of the Institute for

Competitiveness & Prosperityand Dean of the Rotman School of

Management, University of Toronto

“[T]he productivity of Canada and the US retail industries differs – sales per employee are 33 percent higher in the US and average wages are 35 percent higher.

We are able to determine that our retail industries are very similar in their make-up (i.e., the percentage of industry sales in each sub-sector like clothing or furniture).” (p. 25)

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What we foresee:

More competition will not result in the Canadian-based firms doing better and starting to export more.

The competition will not make it more likely that Canada will spawn a new firm that will have Walmart-like success – indeed we foresee almost no chance of this.

We believe changes are needed in transportation, means of payment, EI and data regulations and practices for Canadian retailers and other businesses to be able to do better.

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Transportation Issues

Transportation and grocery retail issues are intermingled in the North American history of measures to control price discrimination: a history briefly reviewed here.

Price discrimination control laws were introduced in the US as part of the 1887 Interstate Commerce Act. The objective was to stop railroads from giving rebates to large shippers that were not available to others.

The term price discrimination means that the same products are offered to different parties at the same point in time for different unit prices, with the price differences being unrelated to the costs of supply.

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Anti-A&P Act In 1936, the US Congress further strengthened the prohibitions against

price discrimination with the passage of the Robinson-Patman Act, also known as the “Anti-A&P Act.” Understanding the reasons for the association of this Act with the Atlantic & Pacific (A&P) grocery store chain requires a little historical background. In 1920 A&P had 4,000 stores. The company grew rapidly.

A&P claimed this growth was based upon “greater efficiencies” -- that is, upon productivity growth. However, a 1936 investigation by a US House Judiciary Committee concluded that the growth was due primarily to the company’s success in extracting lower prices from suppliers than what competitors were able to obtain.

In the US Congressional records, the specter of “a few great economic overlords” was raised and actions were recommended to prevent a drift back toward “economic feudalism.” Preserving democracy in governance was said to depend on preserving “democracy in opportunity.” It was stated too that sometimes the public may have to pay more to keep markets competitive and to protect a level playing field (Tedlow, 1990).

Yet the evidence on which the House Judiciary Committee had to base its decisions suffered from a lack of price data with store identifiers for the observations: the same lack that is responsible for Canada having no studies of the direct or the indirect price effects of the growth of Walmart here. ] US Congressional Record 27th May 1936

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What happened for transport:

• Subsequently, however, the anti-price discrimination rules for freight shipping were abandoned. Arguments were made that permission to engage in joint pricing activity was needed to stabilize rates and service.

• With the passage of the 1984 Shipping Act, shipping lines regained the right to offer different rates to different customers, though the terms of contracts still had to be made public.

• Four years later, the Ocean Shipping Reform Act of 1998 got rid of the requirement of public access to contract terms. Similar changes were enacted for trucking.

• Hence the post 1998 shipping cost information is mostly anecdotal because there no longer is a requirement for shipping rates to be reported.

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http://www.thestar.com/business/companies/walmart/article/823669--wal-mart-canada-issues-rewards-based-mastercard

Published Tue Jun 15 2010 Dana Flavelle • Walmart Canada announced on June 15, 2010 its new

rewards-based credit card.• This Wal-Mart Rewards MasterCard is the first of

several financial service products that will be issued by the new federally licensed Wal-Mart Canada Bank, the retailer said.

• Cardholders will earn 1.25 per cent of the value of all their purchases in Wal-Mart stores and 1 per cent on purchases in all other stores that accept MasterCard, the retailer said.

• The rewards can be redeemed at a Wal-Mart cash register.

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EI Issues

• Failure to control intentional repeat use is especially hard on retailers and their workers.

• Lower wage retail workers pay on every dollar earned and relatively rarely collect benefits.

• Canada-based retailers trying to compete with companies have very thin profit margins.

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The Data Problem: Big Retailers Have Lots of Data for Information Based Decision Making,

but Now Smaller Ones or the Public or Government

In the Statistics Act, companies are given privacy with respect to official statistics data collection, making reliable research on impacts of particular companies nearly impossible.

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A Price Transparency Solution Approach: Treat the right to convenient price

information as basic to free markets.Grocers are required by law in virtually all jurisdictions

of the United States and Canada to display product prices either with stickers on the product items or on the store shelves.

However, these laws pre-date the electronic information revolution, and lawmakers so far have failed to update them. Hence the laws do not require grocers to publish their prices in electronic forms.

All grocers over some minimum size could be required, by law, to publish their prices online daily.

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Transport Solutions

The old rules requiring transport prices to be public would help smaller retailers better manage their transport costs and inventory levels.

Smaller Canadian businesses would be much more likely to begin participating in international trade if getting information on the costs of alternative shipping services were easier and the services were more dependable for smaller shippers.

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Means of Payment SolutionsThe Retail Council of Canada (RCC) argues for flat

merchant fees for debit card transactions, the elimination of higher merchant fees for premium credit card transactions, real competition for merchant acceptance and a formal stakeholder-driven mechanism for all elements of the Canadian payments system, including new and emerging technologies.

More specifically, RCC argues for a regulated made-in-Canada framework that preserves Canada’s low-cost debit system and allows for enhanced competition and greater transparency and accountability; RCC argues also that there should be cost certainty and clarity about the underlying principles of Canada’s payments system so that merchants can better manage costs associated with debit and credit card transactions.

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EI Solutions

• Get rid of the regional variable entrance requirements and extended benefits. Don’t pay for regional redistribution through the EI fund.

• Make EI a separate fund. The biggest program abuse comes from using EI funds to pay non-EI costs of government because it is far easier to raise the EI premiums than it is to raise the personal or corporate income tax rates.

• Bring back the Intensity Rule.

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Data solutions:Give the Competition Bureau and academics who

obtain special certification access to confidential official statistics data for Canada, much the way that medical doctors are given access to confidential patient information because that is necessary for them to play their needed roles.

Require retail prices for large retailers, including grocers, to be fully public in electronic form on a daily basis.

Require all transportation prices and contract details to be public for businesses operating in Canada as either providers or purchasers of tranportation services.

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Quotes to keep in mind:

Wen (2001) writes on the state of the data available to the Canadian competition authorities:

“It will be evident to the reader that there are comparatively few empirical studies on food retailing, still fewer that look at Canada. Taken as a whole, the existing studies often make conflicting assumptions, suffer from econometric identification problems, and do not arrive at a fixed conclusion. Any policy advice is therefore rather tentative, unfortunately.”

The Canadian economist John Kenneth Galbraith (1967, p. 217) was right, we think, when he wrote of the practice of “protecting” merchant price information from disclosure: “It is not the individual’s right to buy that is being protected. Rather, it is the seller’s right to manage the individual.”