Executive Summary
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 data set representing a natural experiment, which consists of 40 incumbent supermarkets, drugstores, and mass stores in the vicinity of seven Wal-Mart entries, as well as 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 data set includes weekly store movement data for 46 categories of food, health-and-beauty, and general household products, across a period spanning before and after each Wal-Mart entry. This data set enables the authors 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.
The 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, % stokkeeping units [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 drugstores. 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 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. Drugstores 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 need to lower regular prices but cannot use assortment reduction as a way to cut costs, because it would hurt its sales.
Biography
Kusum L. Ailawadi is Charles Jordan 1911TU’12 Professor of Marketing in the Tuck School of Business at Dartmouth College. She received her BSc and MBA from Delhi University and the Indian Institute of Management, respectively, and her PhD from the University of Virginia. Kusum’s current research focuses on the impact of marketing spending decisions on category and brand performance, retail strategy, and the strategic interaction and balance of power between manufacturers and retailers. Her work has been published in journals such as Journal of Marketing, Journal of Marketing Research, Marketing Science, Sloan Management Review, International Journal of Research in Marketing, and Journal of Retailing. Kusum is a past winner of the Journal of Retailing’s William Davidson Award, the Journal of Marketing’s Harold Maynard Award, and the John D.C. Little Award. She serves on the editorial boards of International Journal of Research in Marketing, Journal of Marketing, Journal of Marketing Research, Journal of Retailing, and Marketing Science.
Jie Zhang is Associate Professor of Marketing and Harvey Sanders Fellow of Retail Management in the Robert H. Smith School of Business at the University of Maryland. She obtained her PhD from the Kellogg Graduate School of Management at Northwestern University. Her general research interest is to apply econometric and statistical models to study consumers’ purchase behavior and response to various promotion programs and then to design innovative decision support tools for marketers on the basis of these models. She is particularly interested in their applications in the Internet shopping environment. Her recent research projects focus on online promotion customizations and shopping behavior and various topics that aim at improving decision making for retail management in general. Her research has won the Procter & Gamble Marketing Innovation Research Award and has been sponsored by the Marketing Science Institute. She has published articles in leading marketing and management journals, such as Marketing Science, Journal of Marketing Research, and Management Science.
Aradhna Krishna conducts research on pricing and promotion policies, sensory marketing, and socially relevant marketing. Her work within the area of pricing and promotion focuses on both consumer promotions and trade promotions (e.g., bundling issues, loyalty programs, coupons, price cuts, trade deals). She examines consumer response to promotions, consumers’ perceptions of promotions, and behavioral pricing issues (e.g., reference price formation, promotion presentation effects) and also builds analytical models for managerial (retailer and manufacturer) promotion policies. Within the area of sensory marketing, she has conducted much work on visual stimuli (package design, mall layout, store layout, shelf allocation), haptics (e.g., how the feel of product can affect perceived taste), smell (e.g., whether smell enhances long-term memory for a brand), and taste (e.g., if an advertisement can affect perceived taste). Her research on socially relevant marketing mostly concerns cause marketing. Her research methodology combines experimental techniques with quantitative modeling approaches. She has written numerous articles, and her work is cited on National Public Radio, the New York Times, the Wall Street Journal, and other publications. She is on the editorial boards of Journal of Marketing Research, Marketing Science, International Journal of Research in Marketing, and Marketing Letters.
Michael W. Kruger is Executive Vice President, Strategic Initiatives, at Information Resources Inc. (IRI) and Adjunct Assistant Professor of Marketing Science at Dominican University in River Forest, IL. Mike joined IRI in 1989 after working at Quaker Oats, Beatrice, and SAMI/Burke. He has developed or improved algorithms for syndicated products that use point-of-sale and consumer panel data that touch every piece of IRI’s data, including baselining, special pack, projection, deterministic probabilistic imputation, sample-census integration, NBD panel adjustment, product change recognition, hundreds of measures, and others too obscure to mention. He received a PhD in 1984 from the University of Michigan and has published articles in Journal of Marketing Research and Marketing Science.
Journal of Marketing Research, Volume 47, Number 4, August 2010
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