Tuesday, 10 January 2012

Teaching note: Why is there no Wal-Mart in the UK?( Or, Regulation and productivity: evidence from retailing )

How regulation affects productivity is surprisingly hard to pin down: indices of regulation are hard to come by, other things are going on that distort various effects etc.  Here is some work with Raffaella Sadun (and the published version, September 2011, $) that tries to take a stab at it.

We look at retailing.  This is of interest since a lot of US post-1995 productivity growth was due to retailing/wholesaling, WalMart in particular.  In the UK, post-1995 retail productivity growth slowed down.  

What’s the story?

First, in 1996 there was a change in retailing planning regulations in the UK making it much harder for retailers to build large out-of-town stores.  

Second, after this change retailers stopped expanding into big box stores.  WalMart, who bought a UK supermarket called Asda, for example, stopped opening new big box stores altogether  Here’s a picture.

Figure 1: Changes in the Employment Distribution of Small Shops within National Supermarket Chains (vertical lines mark the 10th, 50th and 90th percentiles of the distribution)

Note: figures are histograms of shop employment for each shop within a national supermarket chain in 1997/8 (top panel) and 2002/3 (bottom panel). A national chain operates in all 11 UK regions. SIC521 is “non-specialised stores”, mostly supermarkets. Source: ARD data at ONS.

The Figure compares the histogram of store sizes in UK national supermarket chains in 1997/8 and 2002/3. The histogram shows that over the relatively short time period of four years the median size of a store belonging to a large supermarket chain has fallen from 75 employees to 56 employees.

This tendancy to smaller stores is remarkably different from happened in countries with different planning policies, where retail chains have chosen large store formats to drive their expansion, notably the US.  A 1998 McKinsey report documents that “a typical UK (grocery) store is roughly half the size of a typical US store and two thirds the size of a typical French store”. 
The paper studies statistically the effect of having smaller stores on the (loss) of economies of scale in UK retaling. It finds that the trend to smaller stores within chains over this period is associated with lowered productivity (TFP) growth in retailing of 0.2% pa. This is about 20% of the post-1995 slowdown in UK retail TFP growth (which was about 1% pa).

The recent failure of Best Buy in the UK seems an interesting case study. This BBC report here suggests that they were not able to get many big box formats in the UK.  Equally, in the era of the internet, is geographic location a competitive advantage any more? 

And some more papers from Rachel Griffith and Heike Harmgart, setting out effects on openings and prices.