Wal-Mart’s impact on supplier profits

Previous academic research on the expansion of dominant retailers such as Wal-Mart has looked at implications for incumbent retailers, consumers, and the local community. Little is known, however, about Wal-Mart’s influence on suppliers’ performance. Manufacturers suggest Wal-Mart uses its power to squeeze their profits. In this paper we study the validity of that claim. We investigate the underlying mechanisms that may cause changes in manufacturer profits following Wal-Mart market entry. Our data contains information on supplier interactions with retail stores, including Wal-Mart, for a period of five years. We find that post-entry supplier profits increased by almost 18% on average, whereas profits derived from incumbent retailers decreased only marginally. Contrary to predictions from analytical work our results show wholesale prices are not the main driver of post-entry supplier profit changes; market expansion is. We observe a significant increase in shipments to 45% of markets studied. Furthermore, our analysis demonstrates supplier shipment and profit increases are highest for markets in which incumbents offer a wide variety of products and carry items that Wal-Mart does not sell.