In 2004, the Mexican Federal Competition Commission took the peculiar step of allowing collusion in the Mexican retail market. It did so when it approved the establishment of Sinergia, a buying cooperative comprised of Mexico’s second, third and fourth largest retailers. Why would a regulator, which serves to defend/promote competition, endorse such seemingly anti-competitive behaviour? According to the New York Times at the time, ‘the joint purchasing company [Sinergia] is an attempt to match Wal-Mart’s influence over suppliers’. The Commission was effectively trying to correct the massive distortions of power, particularly with regards to pricing, between Walmart and its competitors
In 2011, during South Africa’s Competition Tribunal hearings into the Walmart/Massmart merger, Walmart dismissed concerns about the company’s impact on local competition and employment by referring to its alleged impact in Chile, where it has been operating since 2009. However, fundamental flaws were identified with the Chilean example. Walmart attempted to allay concerns at the hearings by pointing to its alleged ‘positive’ impact in Chile, where it had been operating since 2009, but numerous fundamental flaws can be identified by this example. As the South African Labour Research Institute of SACTWU, we believe a more suited example of the likely medium- to long-term impact of Walmart on the South African economy, and in particular its textile industry, can be found in its experiences in Mexico.

Walmart entered Mexico in 1991, when it purchased a local retailer, Cifra. For the first few years of its presence, Walmex – as the company is known in Mexico – grew slowly. However, since 2005, when the company had only 488 stores, Walmex has seen spectacular growth, reaching a total of 1 364 stores by December 2010. In comparison, its nearest competitor, Soriana, has just 508 stores, and 300 further convenience stores – many of which are franchises. 

Even with the buying cooperative, Walmex’s competitors cannot keep up. Walmart’s financial and buying powers are simply too great. The company has invested the equivalent of R8 billion in its Mexican operations in 2011 alone, a trifling amount for a colossus like Walmart – whose sales in 2010 were over R2.8 trillion. This is difficult to match for Soriana, with sales of only R55 billion in 2010 (and would be similarly difficult for South African retailers, whose market leader, Shoprite, had sales of R67 billion in 2010). Walmart’s unparalleled financial clout means it is peerless in its power to invest in its operations and grow vis-à-vis its competitors.

What is the impact of Wal-Mart’s pursuit of its low price strategy in Mexico?
French economist Cedric Durand argues that there is a direct link to a dramatic increase in imported goods into Mexico and Walmex. In an article published in the Cambridge Journal of Economics Durand forwards that

After 1997, we observe a faster increase in Wal-Mart’s imports in real terms compared with its competitors’. If we look at the imports/purchases ratio, we see that all the enterprises have been significantly increasing the share of imports in their purchases, but also that Wal-Mart has shown a much more dramatic evolution: from 20% in 1997 to more than 55% in 2002 and 2003 …

This dramatic evolution within a period of only five years demonstrates that Walmart’s pursuit of low prices significantly affected the total levels of imports into Mexico. Durand’s findings echo similar conclusions by the Economic Policy Institute (EPI), which analysed Walmart’s effects on imports and jobs in the US. The report concluded that Walmart’s imports alone were responsible for destroying 200 000 jobs – including 130 000 manufacturing jobs – between 2001 and 2006 (in the US?).  The destruction of manufacturing jobs is significant: a strong manufacturing industry is a key driver of development, but Walmart is an obstacle to this. It doesn’t buy what the company sells from local producers. They buy what they sell in countries paying the lowest wages.

That Walmart’s massive bargaining power and its importation practices have lead to increased job losses is borne out by the Mexican evidence. Walmart expert and professor at the University of California, Nelson Lichtenstein, has commented that:

Walmex has had a devastating impact on Mexican manufacturing. Although Wal-Mart initially claimed that it would incorporate local Mexican firms into its supply chain, the famous squeeze on profits and labor never let up. According to an executive of a small clothing manufacturer: ‘Wal-Mart has driven many suppliers out of business. Wal-Mart maintains its profit margins… They never reduce their margin. They do pass on savings in price, but at the expense of the manufacturer. You can increase efficiency a certain amount, but… For example, they may tell you, “We’re going to sell shirts at a discount of 40 percent – you, the manufacturer have to cut your price 40 percent.” So the consumer benefits, but they’re driving out of business the manufacturers that provide jobs.’

Even when Walmex does purchase goods locally, it squeezes manufacturers to continuously reduce costs. This usually ends in manufacturers having to import the goods they supply, as they cannot manufacture at such low prices, legally anyhow. Clothing manufacturers and workers have not been the only casualties of Walmex. Many other sectors have been affected. For instance, while productivity has increased within the soaps, detergents and surfactants industry in Mexico, employment in that industry has decreased by about 20%, largely as a result of Walmart.

What does Mexico have to teach South Africa about Walmart?
Firstly, the financial power of Walmart is likely to benefit Massmart in South Africa, with significant effects on competition. Massmart will be leveraged into a position of market dominance (both within and beyond the liquor, building material and general merchandise markets where it currently leads) by virtue of Walmart’s unmatched financial power. Concentration and consolidation of the retail industry will occur and barriers to entry for new and smaller competitors will rise.

Secondly, Walmart is likely to increase the scale of problems facing South Africa, including job losses, unemployment and deindustrialisation. As Durand has shown for Mexico, competitor retailers will mimic Walmart’s practices (‘the Walmart Effect’) in order to better compete with the company. Greater imports will occur as competitors seek the cheapest prices. In instances where local procurement initially occurs, Walmart and its South African competitors will squeeze local manufacturers even further than they already are squeezed, causing many local companies to restructure or fold. Jobs will be lost (both among local manufacturers and among retailers who will struggle to match Walmart’s prices and their growth), offsetting any jobs that Walmart creates.

The possibility of lower prices from Walmart may be attractive, but at what cost? Low prices cannot come at the expense of local manufacturing, retail jobs and increased concentration in the retail sector, amongst others.

Mexico’s experience of Walmart shows that the company poses real challenges to South Africa, particularly in key socioeconomic matters. We should tread with great, great care.

Etienne Vlok and Simon Eppel work for the SA Labour Research Institute, the research arm of the SA Clothing and Textile Workers’ Union (SACTWU).