Wal-Mart's Impact on Supplier Profits

Previous academic research on the expansion of dominant retailers such as Wal-Mart has examined implications for incumbent retailers, consumers, and the local community. Little is known, however, about Wal-Mart's influence on suppliers' performance. Manufacturers suggest that Wal-Mart uses its power to squeeze their profits. In this article, the authors study the validity of this claim. They investigate the underlying mechanisms that may cause changes in manufacturer profits following Wal-Mart market entry. The data contain information on supplier interactions with retail stores, including Wal-Mart, for a period of five years. They find that postentry supplier profits increased by 18% on average, whereas profits derived from incumbent retailers decreased only marginally. Their results show that wholesale prices are not the main driver of postentry supplier profit changes; market expansion is. They observe a significant increase in shipments to 50% of markets studied. Furthermore, their analyses demonstrate that 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.

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