ArticleRetailer power and supplier welfare: The case of wal-mart
Introduction
There has been considerable debate in the trade press and academic literature over whether a significant shift has taken place in the relative power of retailers and manufacturers of consumer products. In general, the trade press has suggested that retailers are increasing their relative power, using it to extract concessions from manufacturers such as merchandising support, trade deals, and slotting allowances Johnson 1988, Elman and Hughes 1988, Buzzell et al 1990, Bowman 1997. The academic literature, however, has yet to provide conclusive evidence that such a shift has occurred. Several researchers have posed theoretical challenges to the existence of such a shift Kim and Staelin 1998, Lariviere and Padmanabhan 1997, Sullivan 1997.
Moreover, empirical academic work has not shown any significant or consistent improvement in retailer financial performance relative to manufacturers in recent times, which one would expect as a result of a power shift Farris and Ailawadi 1992, Messinger and Narasimhan 1995, Ailawadi et al 1995. In her review of the work on retailer power, appearing concurrently in this journal, Ailawadi (2001) concludes that: “The conventional wisdom that retailers have grown more powerful relative to packaged goods manufacturers in the packaged goods industry has not been supported by empirical analyses of the relative profitability of retailers and manufacturers.”
The empirical studies that have examined this issue have primarily focused on grocery retailers and manufacturers rather than on participants in channels that distribute other types of consumer products. Indeed, the authors of one empirical study addressing this issue stress that nongrocery channels may be different, particularly those where a giant retailer such as Wal-Mart or Toys ‘R’ Us might be present (Ailawadi, Borin & Farris, 1995). In fact, they found evidence that Wal-Mart seems to have become more profitable - and by implication more powerful - in recent years. Unfortunately, their study does not present any evidence about Wal-Mart’s impact on its suppliers.
The title of a recent trade press article poses the question: “Should you just say no to Wal-Mart?” (Bowman, 1997) According to this article, many suppliers are reportedly feeling squeezed and pressured by giant retailers into taking expensive actions such as lowering prices, accelerating delivery times, offering special allowances, or carrying extra inventory. Our research seeks to help consumer goods suppliers find an answer to the article’s title question.
Specifically, the present study tests for empirical evidence that Wal-Mart is wielding power in ways that hurt or help the financial fortunes of its suppliers. In other words, we ask whether Wal-Mart has squeezed its suppliers into making concessions that have hurt their financial performance? Or, have these suppliers benefited from their association with Wal-Mart, achieving financial results that they might not have achieved by collaborating with other less-powerful retailers?
Research on the impact of retailer power could also be helpful to public policy makers. The antitrust enforcement agencies need guidance on whether to pursue more cases like the one the Federal Trade Commission recently decided against Toys ‘R’ Us, where they ruled that the company illegally used its market power to restrict the opportunities of manufacturers to sell to competing retailers (FTC, 1998). The FTC determined that the giant retailer “used its dominant position as a toy distributor to extract agreements from and among toy manufacturers to stop selling to warehouse clubs the same toys that they sold to other toy distributors.”
While the Toys ‘R’ Us case was primarily concerned with the impact of retailer power on competition among retailers, the FTC has more recently shown concern about how to treat situations where retailer power might be impacting competition among manufacturers. At a recent FTC conference, staff members of the FTC displayed great interest in whether agreements between powerful retailers and manufacturers (e.g., slotting allowances, category management programs) could be exclusionary, foreclosing opportunities for many manufacturers to compete for customers at the retail level (Weir, 2000).
Thus, we seek a broader understanding of how the marketing and business practices of this giant retailer affect its suppliers and society. We begin with a brief review of previous research on retailer power and its effects on manufacturers. This is followed by a presentation of the hypotheses examined in our study. The methodologies employed to test the hypotheses are then explained, followed by a report on the results. We conclude with a discussion of the implications of our findings for future marketing practice, academic research, and public policy.
Section snippets
Literature
A number of streams of research are relevant to our study. These streams explain why squeezing by a retailer may or may not occur plus some relevant empirical evidence. These research streams are labeled and reviewed in the following four subsections.
Hypotheses
Our review of the literature finds strongly diverse views with respect to whether power has shifted from large, financially successful retailers, such as Wal-Mart, so as to diminish supplier welfare. Wal-Mart has amassed considerable power and may use this to squeeze less powerful manufacturers into making concessions. However, collaborating with Wal-Mart may have helped the financial fortunes of many manufacturers by providing an impetus for more efficiency and improved marketing strategies.
A
Method
Our analysis utilizes Compustat data on publicly owned firms by primary four-digit SIC code, combining the years 1988 to 1994. Although the data span several years, they are cross-sectional rather than a time-series because the same firms are not represented in each year. The names of firms within an industry change from year to year, perhaps reflecting bankruptcies, mergers, or other changes in ownership. Descriptions of the variables, industries, and firms studied are included in Appendix I,
Results
The results of the regressions are reported in Table 1. Not surprisingly, they reflect higher supplier profits from both greater category market share and from greater scale of operation. This pattern appears strongly across all three of the models.
The coefficients on both WM1 and WM2 are significant and negative. This indicates that when Wal-Mart is a primary customer that profits fall for suppliers regardless of size. Wal-Mart, in other words, takes a bite in exchange for being a major
Discussion
Wal-Mart suppliers in our database are relatively smaller than their counterparts in terms of sales. Table 3 provides descriptive statistics about the Wal-Mart, other, and Unaffiliated Suppliers. As smaller entities, they earn lower profits than larger entities and it may be possible to attribute this poorer performance to their connection to Wal-Mart.
The regression results indicate that the presence of Wal-Mart as a primary customer hurts the financial performance of a supplier, especially
Conclusion
Our results show that it is not possible to identify the impact of Wal-Mart upon supplier profits unambiguously. Ceteris paribus, we find that suppliers that identify Wal-Mart as a primary customer perform more poorly financially than those that do not identify themselves in this way. But, these results do not suggest that suppliers “Should you just say no to Wal-Mart?” While Wal-Mart may be using its power to squeeze suppliers, it is also possible that suppliers are willing to make concessions
Acknowledgements
The views expressed in this paper do not represent the views of Freddie Mac, its management or shareholders. The authors are deeply appreciative of the comments provided by Charlotte Mason, the Journal of Retailing reviewers, and the editor, L. P. Bucklin.
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[email protected] (V.G. Perry).