A common meme around the internets is that high gas prices will spell the end of Walmart sooner or later. Expensive fuel will kill Walmart's business model of importing cheap Chinese goods on fuel-guzzling container ships and then hauling them all over the country on Walmart trucks.
And according to this Bloomburg review of $20 per Gallon (which I haven't read), so does author Christopher Steiner, who imagines how life will change at each $2 jump in gas prices:
At $6 a gallon, Americans will embrace diesel engines. At $8, many airlines will shut down, leaving Southwest Airlines Co. and JetBlue Airways Corp. as the dominant domestic carriers.
At $10, car ownership rates will plummet. At $12, exurbs will start becoming ghost towns. At $14, Wal-Mart Stores Inc. will die; its business model is built on cheap oil.
This a claim I frankly don't understand. Walmart will do just as well -- or no more poorly than anyone else -- when gas prices climb to $10 or $12 or $14 per gallon. Steiner and many others don't understand the Walmart model.
The Walmart model is to ruthlessly minimize a function of product cost and transportation costs. That is the model it has followed since its birth in the 1970s and its rapid expansion in the decades since. Only recently (the last 10 or 12 years) has Walmart shopped in China for the vast quantities of goods it sells. Walmart buys Chinese because it can get the goods to the United States, including the cost of freighting them over, at less than the cost of buying them in the United States. Should labor prices rise in China, or bunker fuel become too expensive to run 1,000 ft container ships profitably, then Walmart will turn to other suppliers who can get its goods to the United States at the lowest possible cost.
And the new suppliers might very well be American producers. If Youngstown Steel Tubing & Toasters becomes the low-cost maker of toasters, Walmart will buy its toasters there. By the truckful. It will carry them off by the truckful to one of its giant distribution centers, which will dispatch truckloads of toasters and coffee pots and other things to other distribution centers around the country. And these in turn will stock the local stores and Sam's Clubs.
Because this is Walmart, Youngstown Steel Tubing & Toasters will quickly feel pressure to cut its prices. Walmart will have helpful suggestions on how to do that. Some good. ("Couldn't you figure out how to use less packaging?) Some a little more sinister. ("Your toaster springs maker sure has a fat contract.") If Youngstown wants to be a long-term supplier, odds are its prices will go down.
Because this is Walmart, goods move from manufacturer to distribution center to distribution center to store efficiently, more efficiently than any other retailer can manage. Walmart is constantly looking for ways to squeeze waste out of its transportation costs. For example, it redesigned the loading bays in its warehouses so outgoing trucks load on one side of the building and incoming trucks offload on the other, which sped up the turnaround time.
What fools people, I think, is the sheer number of Walmart trucks on the highway. So many trucks mean so much fuel. Walmart therefore must be vulnerable to a sustained spike in gas prices.
But every retailer depends on goods delivered via highway. Some retailers (smaller ones, usually) have their goods delivered by a UPS truck (which perhaps took the goods off a UPS plane). Some have their goods delivered -- by truck -- from a regional wholesaler, who restocks its supply of goods . . . by truck. Unless that toy store has its toys handtrucked in by a bunch of elves from a shop around the corner, its toy shipments are moving by road. Walmart uses the highway more efficiently. And -- this is the killer -- Walmart does not have to deliver to 20,000 or 2,000 locations in a city, as UPS or a wholesaler might. Walmart gets the goods to a regional distribution center which gets them to the few dozen stores in the area. All retailers have to worry about the "last mile" of transportation costs, but Walmart has fewer "last miles" to worry about.
If gas prices do become too high for truck-hauling, then Walmart can switch to rail more easily than anyone else. It would be easy for Walmart to build giant distribution systems near rail lines. (Walmart could build its own railroads if it wanted.) Walmart's system of moving huge loads of goods from one large center to another would mesh nicely with rail.
One last point: If Walmart can indeed continue delivering the lowest-priced goods even after gas prices rise, then it will increase its market share. Consumers will effectively be poorer becausethey will be spending a large percentage of their budgets on energy costs. This will make them more price sensitive, and Walmart always benefits when customers get pickier about price. That's why Walmart does well during recessions. High gas prices thus won't kill Walmart; it might even thrive.