How Incumbent Retailers React and How This Affects Their Sales Outcomes



When Wal-Mart comes to town, how do incumbent retailers adjust their merchandising activities in response to the entry, and how do their reactions affect the incumbents’ sales outcomes? These are the focal research questions that the authors address in this large-scale empirical study. They compile a unique dataset representing a natural experiment, which consists of 40 incumbent supermarket, drug, and mass stores in the vicinity of seven Wal-Mart entries and 50 control stores not exposed to the entries. The 40 experimental stores include 25 stores that experienced a Wal-Mart entry for the first time and 15 stores that experienced a Wal-Mart entry after five or more years since the previous one.  The dataset includes weekly store movement data for 46 categories of food, health-and-beauty, and general household products, in a time period spanning before and after each Wal-Mart entry. This dataset allows them to measure reactions and sales outcomes using a before-and-after-with-control-group analysis and obtain cleaner measures of the “Wal-Mart effect” than many previous studies on related topics.
Their empirical analysis consists of three stages. In the first stage, the authors quantify incumbents’ reactions in seven marketing mix variables (regular price, promotion breadth, promotion depth, assortment size, % SKUs of top-tier national brands, % SKUs of bottom-tier national brands, $ SKUs of private labels) and the impact of the Wal-Mart entry on their sales revenue. In the second stage, they attempt to explain the variations in incumbent reactions across retail format, stores, and categories using store and category characteristics derived from the competitive response literature. In the third stage, they link incumbents’ reactions to their sales outcomes while controlling for the impact of store and category characteristics.
This study provides a rich body of empirical findings. The authors find that, overall, incumbents suffer significant sales losses due to Wal-Mart entry, but the magnitude varies greatly by retail format, with a median sales loss of 40% for mass stores, 17% for supermarkets, and 6% for drug stores. There is also substantial variation in incumbent reactions across retail formats, stores, and categories. Theoretically relevant store and category characteristics have limited ability to explain this variation but they are significant predictors of the entry’s impact on incumbents’ sales.  Thus, it appears that incumbents are not fine-tuning their reactions, especially across categories, as much as they should.  This is important because reactions do matter -- the authors find that a retailer’s sales outcomes are significantly affected by its reactions.  Thus, retailers can proactively adjust their marketing mix offerings to mitigate the negative impact of Wal-Mart entry.  The relationship between reactions and sales outcomes varies across retail formats, so sensible reaction strategies also vary by format. The findings imply that supermarket retailers should try to differentiate from Wal-Mart by increasing their promotion depth, and altering their assortment composition to give more emphasis to top-tier national brands, bottom-tier nation brands, and private labels. Drug stores should also try to differentiate, but their focus should be on increasing promotion breadth and assortment size. Mass stores are in a dire situation. They have to lower regular prices, but cannot use assortment reduction as a way to cut costs because it would hurt its sales.
Contact information:
Dr. S. Puntoni